2015 AEGIS annual report

Transcription

m
aegis 2015 Annual Report
pointing in the Right direction
Five-Year financial highlights
Associated Electric & Gas Insurance Services Limited
f o r th e y e a r s ended december 31 (Expressed in thousands of U.S. dollars)
2011
2012
2013
2014
2015
$1,140,260
$1,244,704
$1,280,125
$1,348,493
$1,250,510
Net premiums written
827,915
763,257
878,492
943,102
860,121
Net premiums earned
Net investment (loss) income
Change in fair value of insurance and reinsurance contracts
810,437
104,797
(38,110)
802,689
146,472
(17,291)
805,473
111,064
38,420
897,966
83,037
(42,587)
892,685
(16,791)
28,642
877,124
931,870
954,957
938,416
904,536
583,139
116,675
116,161
628,139
113,382
127,436
572,215
97,773
114,812
579,749
110,272
118,150
535,092
97,077
95,087
815,975
868,957
784,800
808,171
727,256
Income before continuity and other premium credits and income taxes
Continuity and other premium credits
61,149
18,982
62,913
34,163
170,157
35,544
130,245
20,796
177,280
19,964
Income before income taxes
Income tax provision (benefit)
42,167
(4,894)
28,750
9,155
134,613
44,981
109,449
42,581
157,316
70,162
revenue:
Gross premiums written
Total revenue
expenses:
Losses and loss expenses incurred
Commission expense
Other underwriting expenses
Total expenses
Net income
$
Other comprehensive (loss) income, net of income tax (benefit) expense
Total surplus, beginning of year
1,846
$1,001,034
30,654
$1,049,941
(33,639)
$1,100,190
(1,504)
$1,156,183
(18,596)
$1,221,547
Total surplus, end of year
$1,049,941
$1,100,190
$1,156,183
$1,221,547
$1,290,105
Total assets
$5,290,224
$5,599,079
$5,757,767
$6,037,151
$5,718,282
Reserve for losses and loss expenses
$2,904,281
$2,993,698
$3,104,771
$3,165,788
$2,879,855
47,061
$
19,595
$
89,632
$
66,868
$
87,154
Products
Member support
Mission
Strategy
Financials
aegis
People
Board support
Infrastructure
letter to our Membership
We are pleased to report that AEGIS had another successful year in 2015.
Most importantly, our member and broker support, as always, was terrific.
Our bottom-line measure of financial success is surplus growth, and we increased
our surplus by $68 million, to a record level of $1,290 million. This growth
was entirely due to positive underwriting results, as investment opportunities
were poor.
Our overall combined ratio was 81%, the best we have had in 28 years. Both
our U.S. and London operations contributed to this strong result. Our U.S.
operations produced a combined ratio of 86%, and similarly, our London operations had an excellent combined ratio of 76%. It was comforting to see that our
prior year reserves ran off favorably in both the U.S. and London with favorable
developments of $39 million and $52 million, respectively.
Perhaps the most rewarding aspect of these favorable ratios was our improved
excess liability combined ratio, which for the most recent three policy years was
93%. This is a very positive (and necessary) improvement and reflects the
efforts of AEGIS, as well as our members and brokers, to put our excess liability
business on a more sustainable footing.
Our overall premiums for the year were $1,251 million, which was $97 million
less than last year. This reflects the soft insurance market conditions and the
lack of substantial opportunities to write new business at sustainable premium
levels, both in the U.S. and London. We do not consider this shortfall problematic, as we are much more concerned with the bottom-line result of our underwriting rather than topline premium volume.
As detailed later in this report, our investment portfolio is comprised of
approximately 90% fixed-income and 10% equity investments. Equity returns
for the year were -9.5%, reflecting overall capital market trends. Our fixedincome assets returned 0.7%, and this produced an overall net total return
of -1.2%. This lack of positive investment returns really highlights the need
for AEGIS to have our underwriting correctly priced as we can’t count on
investment income to make up for underwriting shortfall. We sincerely thank
you for your support of our underwriting efforts to accomplish this.
Following our successful 2015, we believe your Company is better prepared
than ever to continue to fulfill its mission for you in 2016 and beyond. Why?
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financial Strength
AEGIS is at a record surplus level and has strong reinsurance programs and
reinsurers to support that capital and manage the volatility of results. A.M. Best
affirmed our “A (Excellent)” rating in 2015 and commented favorably on our
responsiveness to industry trends, our strong enterprise risk management and,
most importantly, our bond with the energy industry and our unique expertise
in your business.
refreshed Strategy
As you are aware, we reexamined our mission and strategy during 2015 with
great contributions from many of you. This work resulted in a reaffirmation
of the continuing importance of our core mission for our members with the
recognition that AEGIS must continue to evolve in how it fulfills that mission
for a changing energy industry. This refreshed strategy is set out later in this
report and includes our new “execution themes” to accomplish it. They provide
guidelines AEGIS can use to fulfill its mission over the coming years, and
respond to the emerging needs of our members in an evolving energy industry.
We also examined our strategy for our London operations to ensure that we
can continue to operate successfully in that very competitive and changing
market, and that, too, is discussed later in this report. We are confident it charts
a path where our Syndicate can continue to contribute diversification and profit
to our overall results.
the mission of aegis is to serve the energy industry
by providing consistently superior insurance and
risk management products and services, through a
secure and stable company, enabling our members to
achieve the lowest overall long-term cost of risk.
alan j.maguire
President and CEO
wesley w. von schack
Chairman of the Board
Total surplus
d e ce m b e r 31 (millions of U.S. dollars)
1,500
1,290
1,222
1,200
903
835
826
900
929
920
971
1,026
1,081
1,001
950
1,050
1,100
1,156
862
821
758
702
576
600
300
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
3
letter continued
great products and services
AEGIS continues to offer policies especially tailored to your risks. Our $35
million excess liability and D&O policies set the standards for the industry.
Our property policies now provide the cornerstone of property programs for
70% of the members, with limits available up to $350 million. We continue
to develop new products and services as your risks evolve, as evidenced in 2015
by our new cyber insurance and drone coverage offerings. Our Loss Control and
Claims Divisions have unique expertise in your industry and are unmatched by
any other insurer. The programs and services we offer throughout the year can
truly help reduce your long-term cost of risk. We and our Board of Directors
heartily encourage you to take full advantage of these services.
member-focused Culture
From the Board of Directors to the Risk Management Advisory Committee
(RMAC), comprised of member company representatives, and throughout AEGIS
and its management, there is a consistent culture of being committed 100%
to member satisfaction. This devotion to providing long-term benefit to our
owner-members, rather than third-party shareholders, is what sets apart all of
our underwriting, claims and loss control activities from the commercial market.
great People
The staff at AEGIS is unparalleled in its experience and knowledge of your
industry. We continued to add talent during 2015 to support our newer
business initiatives, and to help provide for the smooth, efficient succession
of our most experienced employees. The most important thing for our new
people is to understand and adopt the member-focused culture established by
those before them.
More than 100 member companies participated, and the results are posted
on our website. We are grateful for this input because it will help us develop
training and information that will assist members with ERM, and help guide
the ERM program at AEGIS.
member and broker Support
AEGIS is only able to fulfill its mission by being deeply connected with our
members and brokers and obtaining your thoughts and guidance on virtually
everything we do. Our members have supported us through good times and
bad over the past 40 years, and as a result, your industry has this strong vehicle
to support it. We are extremely grateful to our members who participate on the
RMAC and our Claims and Loss Control Task Forces. In addition, we currently
have task forces comprised of experts from our member companies working
on ERM and evolving utility industry risks. In all, 59 member companies are
currently advising AEGIS through these groups.
board of directors Support
Lastly, AEGIS would be unable to deliver on its mission for the industry without the contributions and guidance of our Board of Directors. These Directors
are industry leaders who appreciate the value a vibrant AEGIS provides the
energy industry. Their oversight ensures that AEGIS continues to be financially
strong, fair to the membership and continually adapting to assist the industry
in its long-term risk management efforts. In sum, we have everything we need
to be successful in 2016 and beyond. As you read this report, we hope you will
share our confidence and energy.
infrastructure
Besides investments in people, AEGIS has continually invested in the infrastructure necessary to support our mission. We have put state-of-the art IT systems
in place to support the underwriting and claims management processes, and
we’re currently replacing our financial management systems. We also have a
robust enterprise risk management (ERM) program, which guides all of our
efforts on your behalf. In addition to our own ERM program, we worked last
year with members and the St. John’s University School of Risk Management,
Insurance and Actuarial Science to conduct an ERM survey and assessment of
energy companies in North America.
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wesley w. von schack
alan j.maguire
President and CEO
transitions
productive retirement. We were pleased to welcome David Santoro, Associate
General Counsel at Consolidated Edison, to the task force and look forward to
his contributions.
corbin mcneill
mary ellen lenahan
On the AEGIS Board, Corbin McNeill chose not to stand for reelection last year.
Corbin served on the Board since 1999 and as Chairman of its Loss Control
Committee since 2007. He was Chairman and Co-CEO of Exelon, and prior to
the merger, Chairman, President & CEO of PECO Energy. We thank Corbin for
the significant contributions he made to AEGIS over the years, and wish him
all the best in the future.
On the Risk Management Advisory Committee (RMAC), six members stepped
down and three members joined. Justin Lee Brown, Vice President, Pricing
at Southwest Gas, stepped down after taking on a new role at Southwest Gas.
Cindy Fee, Senior Risk Management Analyst at SMUD, stepped down upon
joining Aon as a Vice President. John Ireland, Director, Claims & Insurance at
Eversource Energy, retired from Eversource after serving with distinction on
the RMAC for many years. Tom McDonnell, Manager, Insurance & Operational
Risk at FirstEnergy, joined AEGIS as Vice President, Member Relations. Cheri
Murray, Director, Risk Management at CenterPoint Energy, stepped down upon
joining McGriff as a Vice President. Maureen Sammon, Sr. Vice President & Chief
Administrative Officer at Berkshire Hathaway Energy, stepped down from the
RMAC and was promoted to President & CEO of HomeServices Mortgage at
Berkshire’s HomeServices of America.We thank Justin, Cindy, John, Tom, Cheri
and Maureen for their many contributions to the RMAC, and wish them well
with their new pursuits. We were pleased to welcome Debbie Gaffney, Director,
Risk Management at Southern Company, Bob Miller, Director, Hazard Insurance
at Xcel, and Jerry Rhoades, Risk Manager, Insurance and Claims Risk Management at Portland General Electric, to the RMAC and we look forward to working with them.
On the Claims Task Force, Bill Frese, General Litigation Counsel at Public
Service Enterprise Group, retired from PSEG and stepped down from the
task force. Bill was one of the longest-serving members of the task force, and
he made many valuable contributions to AEGIS. We wish him a happy and
On the Loss Control Task Force, five members stepped down and three
members joined. Josh Fleischer, Manager, Fire & Risk Engineering at PG&E,
stepped down from the task force and joined AEGIS as Vice President, Loss
Control Property Operations. Dave Nalepka, Director, Insurance Services at We
Energies, stepped down after leaving We Energies. John Reiter, Vice President,
Loss Control at AES Global Insurance, retired from AES and stepped down from
the task force. Richard Stevens, Director, Corporate Risk Management at Avista
Corporation, stepped down and took on a new role at Avista. Karl Zimmel,
Director, Risk Management at Tucson Electric Power, stepped down from the
task force after accepting additional job responsibilities. We thank Josh, Dave,
John, Richard and Karl for their dedicated service on the task force and
wish them well in the future. We welcomed Angela Cool, Manager, Corporate
Insurance at Westar Energy, Lisa Hough, Manager, Risk Management at
Omaha Public Power District, and Mariya Fedorchenko, Manager, Insurance
at NV Energy, to the task force and look forward to their contributions.
In London, David Croom-Johnson was appointed to the role of Managing
Director at AEGIS London. David is a longtime member of the AEGIS London
senior management team, and he served as the Chief Underwriting Officer
during the period when AEGIS London grew into one of the most respected and
successful syndicates at Lloyd’s. David is supported by a capable and experienced
team, many of whom have worked together at AEGIS London for a number
of years. John Chambers took on the newly created role of Director of Underwriting. Alex Powell was named the new Active Underwriter, succeeding David.
Two new directors joined the AEGIS London Board: Thomas Busher, former
Executive Director/Chairman at Montpelier at Lloyd’s, and Jonathan Gray,
former Director of the Property Department at Beazley Group.
At AEGIS, Mary Ellen Lenahan retired after serving 26 years as our Vice
President and Legal Division Head, and Assistant Secretary for the AEGIS
Board of Directors. Mary Ellen led the Legal Division with great professionalism, wisdom, kindness and patience. Never once did she raise her voice, or seek
to put herself in the spotlight, but she commanded the respect and won the
affection of her colleagues inside and outside AEGIS. We will never be able to
thank Mary Ellen enough for her countless contributions to AEGIS, and we
are grateful for the fine example she set for us all. We wish “MEL” all the best
in her retirement.
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making sure our mission and strategy are pointing in the right direction
During the past 40 years, AEGIS has grown from a small company writing
excess liability policies for a handful of natural gas utilities to a multi-line,
property and casualty insurer that provides insurance and risk management
services for virtually the entire energy infrastructure in North America.
Although AEGIS has evolved with the energy industry over the past 20 years,
we had not formally examined our strategy since 1996. That 1996 strategy
process resulted in a mission statement with six strategic components that have
guided operations ever since.
AEGIS is in its best financial position ever, with a record-high level of policyholder surplus; a much more diversified book of business that now includes
D&O, property, cyber and London; and a well-developed investment strategy
that’s managed as part of a comprehensive enterprise risk management strategy.
At the same time, there are potential challenges ahead – many of our most
experienced risk managers, brokers and AEGIS staff are retiring, the energy
industry is consolidating, insurance market competition is placing downward
pressure on premiums, and investment markets are volatile.
Some minor updates were made to the mission statement, most notably replacing
the phrase “to assure the utility and related energy industry” with “to serve the
energy industry” to reflect the breadth of the current membership. The definition of the energy industry was enhanced to describe those companies that
take a long-term approach to managing their cost of risk and related insurance
programs, and that value stability and partnership in structuring those programs. Companies eligible for AEGIS membership include investor-owned,
customer-owned or government-chartered entities. Related energy companies
include, for example, renewables, distributed generation, energy storage and
independent transmission companies.
The strategic process also yielded these execution themes, which will guide
our efforts going forward:
1)
provide energy industry insurance market
leadership and expertise through superior
products and services.
Coming from our position of financial strength, we felt it was a good time
to look ahead. We want to be sure we maintain the strength required
to serve member needs and to thrive despite the macro trends in the energy
industry, insurance industry and capital markets.
2)
through underwriting that is consistent with
With the guidance of Deloitte Consulting, we looked at the various trends in
the insurance and energy industries, considered how these trends might present
threats and opportunities for AEGIS, assessed the competitive insurance landscape, and met with RMAC members, brokers and key management and staff
at AEGIS and AEGIS London.
The consensus was that AEGIS continues to fulfill a very valuable role by
providing superior underwriting, claims and loss control services. The stability
AEGIS has demonstrated through the years is of great value, and AEGIS
continues to form the core of almost every member’s risk management program.
The original 1996 mission statement and strategic components remain generally in line with what members and brokers would like to see going forward.
Potential opportunities for the expansion of AEGIS products and markets were
also identified for review and consideration.
6
maximize the long-term benefit to our members
our mission and execution themes, and responsive to the needs of an evolving energy industry.
3)
maintain appropriate capital requirements by
incrementally growing surplus to meet current
and future member needs.
4)
continually explore and pursue growth opportu-
9)
maintain transparent relationships within the
nities within our mission which provide operat-
brokerage and reinsurance communities in order
ing economies of scale and/or diversification.
to promote long-term partnership, value and
growth.
5)
enhance our differentiated market position by
continuing to improve our underwriting, claims
10) continue to use our london syndicate to assist
and loss control offerings in order to deliver
members where needed, and contribute to the
optimum value to members.
financial stability of aegis by providing risk
diversification and contributing to income for
6)
maintain consistent, coordinated and collaborasurplus growth.
tive communication with the membership, at all
necessary levels within their organizations, in
order to continually strengthen the long-term
partnership.
7)
Looking ahead, we will continue to be focused on, above all else, the needs
of the membership, while remaining sensitive to the dynamic nature of the
energy industry. We will be committed to maintaining and strengthening
our core business for the benefit of members in North America. And we will
remain committed to our London syndicate, supplying the capital and resources
it needs to continue its mission to offer quality coverage to members when
needed, provide underwriting diversification, and contribute to the capital
growth of AEGIS.
continue to share our analysis of aggregated
industry data to benefit the membership.
8)
manage risk aggregation through educated
underwriting and strategic reinsurance to
ensure financial strength and stability.
7
the best Underwriting results point down
Our underwriters like to say that AEGIS insures every light switch and burner
tip in North America, and they’re not far off. In 2015, we wrote policies for
98% of the investor-owned utilities in the United States, as well as the largest
natural gas, pipeline and power generation facilities in Canada, plus a growing
number of public power and cooperative providers. AEGIS members comprise
virtually the entire energy infrastructure in North America, ranging from electric and natural gas utilities to oil and gas exploration & production companies.
As a member-owned mutual, our financial goal is to balance the inflow of
premium and investment income with the outflow of claims, expenses and
continuity credits. This balance tips constantly, and in 2015, the outflows were
larger than usual – our U.S. operations paid out $702 million in claims to
members and we sustained a $45 million loss on investments. As always, though,
our underwriters worked closely with members and brokers throughout the
year to collect the premiums needed to balance the mutual’s financial equation.
The support from members and brokers was exceptional, and helped generate
the best combined ratio for U.S. operations we’ve had in 28 years – 86%.
excess Liability is trending favorably
Our flagship line of business is finally trending favorably after years of persistently high loss ratios. Thanks to widespread support from our members and
brokers for the premium increases required to balance their loss experience,
the three-year policy year combined ratio for this core coverage is now 93%.
We appreciate this strong support, and we are hopeful that this positive trend
will continue.
The AEGIS excess liability policy provides the foundation of the casualty insurance program at most member companies. Our broad $35 million coverage,
our willingness to attach at lower points, and our collaborative claims process set
the standard for the commercial market. In turn, this standard creates a base for
each member program that works to their advantage. Premium revenues totaled
$459 million for the year, about 1% higher than 2014. These revenues reflected
the willingness of members to pay premiums that are aligned with their loss
experience and underwriting profile, in addition to the revenues from 18 new
excess policies we wrote during the year, including eight new constructionrelated policies.
support from members and brokers was exceptional,
and helped generate the best combined ratio for u.s.
operations we’ve had in
28
years –
86%.
When the balance is right, the mutual is financially strong. We’re able to
pay claims fairly and efficiently, make measured contributions to policyholder
surplus and, as was the case this year, absorb investment losses when they occur.
A strong financial base also makes it possible to offer the same broad core coverages, year after year, as well as to develop new products and services such as
our U.S.-based cyber program, drone coverage and the expansion of the capacity
available through our property consortium. These benefits of the mutual differentiate us from the commercial market, and this translates into an uncommon
level of loyalty among AEGIS members. In 2015, putting aside the effects
of merger activity in the energy industry, every core utility member company
renewed its coverage with us.
8
Combined ratios
For the years ended December 31
200%
150
100
50
’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15
aegis u.s.
aegis london
combined
linear (combined)
Excess liability
D&O
Property
Premiums
Claims
AEGIS London
Investments
Expenses
Balance
9
underwriting continued
We were pleased to introduce our new drone coverage at the 2015 Policyholders’
Conference. Our policy offers the full $35 million limit, and we attach at the
corporate retention rather than the previous $10 million minimum requirement.
All drones up to the FAA maximum of 55 pounds are covered, and when a
member obtains approval to operate its drones beyond the visual line of sight,
we can extend the coverage accordingly.
d&o is staying the course
Premium revenues for our D&O line of business were $78 million in 2015,
about 1% higher than 2014. We wrote 14 new D&O policies, including nine
new Side A policies that were delivered through our alliance with Endurance
Risk Solutions–U.S. AEGIS members have remained loyal to our D&O coverage
despite the highly competitive commercial market. Our broad $35 million
coverage, our continuity credit program and our consistent track record of
paying the industry’s D&O claims are ultimately more important to most
members than any short-term savings available in the commercial market.
We are publishing an updated edition of our popular D&O handbook – What
Every Director and Officer Should Know – which has offered valuable corporate
governance and risk management guidance to AEGIS member companies since
it was first published in 2003. Now in its third printing, the handbook is
one of the best examples of how we share the experience we’ve gained during
the 40 years we’ve helped the energy industry to manage its unique and everevolving risks.
property consortium increases its capacity to $350 million
After Superstorm Sandy and some other large losses worked their way through
the system, and in the absence of significant natural disasters, our property
business enjoyed a relatively quiet year in 2015.
Property premiums totaled $164 million, about 3% lower than 2014 due
to competitive pressures, but most members supported our sustainable and
responsible pricing. We wrote policies for 200 members, covering a wide
variety of operational and construction risks. More than a third of our members
took advantage of the property engineering services offered by AEGIS Loss
Control to prepare their underwriting submissions and to help improve the
safety and reliability of their systems.
10
A number of our members embarked on aggressive pipeline and plant construction projects in the U.S. and Canada, and we wrote a total of 42 new policies
in 2015 – 15 for construction risk and 27 for operational risk. To keep pace, and
looking ahead to the future, we added underwriting talent in our New Jersey
office to serve the membership’s growing needs in the areas of construction and
renewables, including a deputy lead underwriter, a senior underwriter and an
associate underwriter.
Members and brokers also took advantage of the property consortium we
launched in cooperation with Nuclear Electric Insurance Limited (NEIL) and
Berkshire Hathaway Specialty Insurance. By year-end, we welcomed SCOR to
the consortium, expanding our total property capacity for certain risks to $350
million. This new consortium responds directly to the interest many members
have expressed in reliable, long-term property programs with higher limits,
and we hope to eventually increase the program’s capacity by adding more
consortium underwriting participants. So far, we have bound property consortium policies for 36 member companies, and we expect this number will
increase as members begin new construction projects and when existing
property policies expire.
new u.s. cyber underwriting team is up and running
Our cyber business evolved and expanded in many ways during 2015. In July,
we successfully moved the cyber underwriting function from AEGIS London to
our New Jersey headquarters, where our two new senior underwriting professionals focus exclusively on the cyber needs of our members. Since their arrival,
they’ve helped improve the cyber product itself, as well as the assessment and
underwriting process that supports it.
With many Boards of Directors focused on cybersecurity, and with the number
of high-profile cyberattacks on the rise, interest in our cyber coverage and
related services was strong, and we have bound 33 policies since the inception
of the program.
Our enhanced CyberResilience product provides up to a $50 million limit, and
features broad operational technology and data privacy coverage that protects
plant equipment and customer records from cyberattacks. Like all AEGIS coverages, the cyber policy is tailored to the specific needs of each member company,
and it also provides access to our energy cybersecurity consultants at Cylance on
matters of risk management, loss control and incident response.
ae gi s u . s . n et investment Return
For the years ended December 31 (millions of U.S. dollars)
Available limits were expanded in 2015 through our new alliance with Nuclear
Electric Insurance Limited (NEIL) that provides additional cyber capacity
for NEIL members that purchase the AEGIS CyberResilience policy. The NEIL
coverage follows the AEGIS form and provides up to $25 million in additional
capacity, subject to a NEIL membership aggregate limit of $100 million.
The underwriting process is conducted without any additional assessment or
evaluation beyond what is already performed for the AEGIS CyberResilience policy.
194
200
150
108
100
new underwriting alliance is launched with everest
81
59
50
(45)
0
-50
2011
2012
2013
2014
2015
ae gi s u . s . i nvestm ent allocation by type
As of December 31, 2015 (percent of U.S. dollars)
• U.S. corporate debt securities – 40%
• Mortgage- and asset-backed securities – 21%
• Equity and debt mutual funds – 11%
• Foreign debt securities – 8%
• Equities – 6%
• Bank loans – 5%
• Other – 5%
• U.S. Treasury securities – 4%
We launched a new underwriting alliance in 2015 with Everest National
Insurance Company to provide primary admitted coverages for AEGIS members
and non-member energy companies. The new AEGIS-Everest alliance replaced
our previous alliance with Liberty Mutual, and provides a more efficient and
viable long-term structure for AEGIS and the membership.
Everest has a fully admitted product offering that includes primary and excess
workers’ compensation, general liability and automobile coverage. Limits
are available up to statutory for workers’ compensation, up to $2 million for
automobile and general liability, and up to $10 million for railroad protective
liability. Everest also offers other services previously provided by Liberty
Mutual, such as the certificate of insurance program. Everest is part of Everest
Re Group, a world leader in property and casualty reinsurance and insurance,
with an A.M. Best rating of A+ (Superior) with a stable outlook.
lower underwriting ratios balance negative investment results
Improved underwriting ratios are crucial to maintaining the mutual’s financial
balance, especially at times like these, when investment results are negative.
In keeping with our conservative investment philosophy, our equity holdings
are relatively modest, but they were nonetheless a drag on the portfolio this
year. Over the long term, however, this careful approach, which reflects our
enterprise risk management strategy, helps us supplement premium income,
protect surplus and generate measured surplus growth so we remain prepared
to handle the membership’s volatile underwriting risks.
Like many insurers and reinsurers, we experienced negative returns on equity
investments and felt the impact of the strong U.S. dollar on our regulatory
required non-dollar investments in 2015. Our net loss on investments for the
year was -1.2%, or $45 million. This underperformance was mainly the result
of the -9.5% return on the equity portion of the portfolio and negative returns
on our non-dollar investments. Low interest rates, low investment returns and
ongoing volatility have challenged institutional investors around the globe,
and our investment advisors expect more of the same in 2016.
11
Paid
Collaboration
Energy expertise
Large limits
Gas explosions
Electric contacts
Environmental
losses
Natural disasters
12
Sound reserves
more than $10 billion in claims paid over the long haul
The true measure of any insurer is how it responds to claims, and this is where
AEGIS clearly differs from the commercial market. Rather than approaching
claims from an adversarial perspective, we work with our members as partners
to manage claims together. We succeed by balancing our desire to pay each
claim efficiently and fairly with our responsibility to all of our members to
maintain the mutual’s financial strength. This approach helps members manage
risk effectively while preserving our ability to provide stable and sustainable
coverage over the long term.
cl ai m s Paid a egis u.s. property & casualty opera t i ons
For the years ended December 31 (millions of U.S. dollars)
800
$702
$616
600
$519
$507
Our U.S. operations received 979 new property and casualty claim reports in
2015, bringing the number of active claims we managed together during the
year to more than 4,200. For both excess liability and property, these new
claims continued to come from all segments of the business. More than 1,200
property and casualty claims were settled and closed in 2015, so we ended
the year with about 3,000 active claims.
$502
400
200
0
2011
2012
2013
2014
We paid $702 million in claims to members from our U.S. operations in 2015,
including two particularly large property claims. This was the second largest
annual claims payout in our history. We have managed more than 46,500
claims since the mutual was formed, paying more than $10.8 billion and
responding to nearly every large loss the energy industry has experienced in
North America.
2015
Having managed more than 46,500 claims, we’ve learned a few things about
energy industry losses, and we readily share this knowledge with members.
The AEGIS Claims Roundtable program, now in its 27th year, is one of the
best examples of how we share information with the membership. In 2015,
the Roundtables attracted more than 200 attendees from 71 member companies,
and the topics discussed were The Art of Recovery and the Transfer of Risk,
Evaluating and Managing Litigation and Litigating Catastrophic Injury Cases.
Our Roundtables are also offered as webinars, and participants are eligible for
Continuing Legal Education (CLE) credits. We encourage you and your colleagues to take advantage of these educational opportunities, not only for your
own professional benefit but because they also help the membership manage
its loss experience and conserve policyholder surplus in the long run.
13
Loss Control looks up, down and all around
Our Loss Control Division offers members an abundance of energy industry
information and training. The risk assessments it conducts help members
maintain safe and reliable operations, and they improve the quality of the
information that supports the underwriting process, which helps us price
policies correctly and fairly across the membership. In 2015, our Loss Control
experts conducted more than 700 risk assessments at member companies,
covering either utility or property operations.
There was no risk management topic of greater interest to our members in
2015 than the rapidly growing use of drones in the energy industry. AEGIS Loss
Control helped members stay ahead of this emerging risk with essential safety
and operational information about the creative new applications of this technology. Loss Control added a drone session to its monthly webinar program,
which reached more than 250 participants from 145 member companies.
The drone breakout sessions at our Policyholders’ Conference also broke attendance records, with more than 200 members and brokers participating.
The monthly Loss Control webinars have quickly become some of our most
popular educational events. During 2015, more than 1,000 member-company
employees attended one of these one-hour webinars. They cover a wide variety
of topics ranging from handling emergency calls at utility call centers to the
unique risks of rooftop solar panel installations. AEGIS members, AEGIS Loss
Control professionals and other industry experts lead these live discussions, and
each webinar is recorded and posted on our website for viewing at a later date.
Loss Control also hosted several “in person” events in 2015. Building on the
highly rated physical security presentations at the Policyholders’ Conference,
Loss Control hosted a Physical Security Seminar that covered topics ranging
from homeland security and next-generation terrorist threats to drones and theft
of service. Our fifth annual Fire Protection Training Class provided membercompany employees with classroom and hands-on instruction about the fire
protection systems used at electric facilities. Attendees literally rolled up their
sleeves and got wet working directly with water-based fire extinguishing
systems, and 100% of the class rated the experience as outstanding or exceeding
expectations.
14
On the AEGIS website, members took full advantage of numerous Loss Control
on-demand videos, publications and specialized services. One of the newest
additions to the website was the Loss Control products and services video,
which provides an overview of everything that’s available from AEGIS Loss
Control, including risk assessments, the Focused ServicesSM program, assessment
guides, on-site training and workshops, publications, consulting and
presentations, videos, training materials, and property engineering services.
over the course of
2015, 266
representing more than
member companies,
90%
of the entire aegis
membership, took advantage of the products and
services offered by aegis loss control.
Videos
Website
Webinars
Risk assessments
Training
Focused Services
Knowledge
Seminars
Publications
15
Profitable growth
Underwriting
discipline
Customer focus
Industry expertise
Distribution
Diversification
Strategy
Mission
16
Market leadership
aegis London is positioned for profitable growth
The mission of AEGIS London dovetails with the mission of the mutual because
its portfolio of non-energy risks helps diversify the volatile business we write
for members in North America, and it provides an additional stream of income
that helps build and preserve policyholder surplus.
excellent underwriting results help build surplus
ae gi s London c lasses of business
As of December 31, 2015 (rounded to nearest percent)
30% Global Property
10% U.S. General Liability
7% Terrorism
7% International Casualty
6% Marine & Offshore Liability
6% Energy Exploration & Production
5% Professional Liability
4% Energy Offshore Casualty
4% Marine Cargo
4% Marine Hull & War
4% Utility Property
3% Specie
3% Accident & Health
3% Property Treaty Reinsurance
1% Cyber
1% Crop Reinsurance
1% Aviation & Satellites
1% Contingency
1% Livestock
Like many Lloyd’s syndicates in 2015, the loss experience at AEGIS London was
much better than expected. The combined ratio for our London operations was
a very favorable 76%, which helped lower our overall combined ratio to 81%,
the best we’ve had in 28 years. This impressively bested the overall Lloyd’s
market combined ratio of 90%. The timing of these exceptional underwriting
results was particularly beneficial. They more than offset the $14 million loss
on the London investment portfolio that resulted from the most challenging
markets institutional investors have faced in recent years.
Premium income was $508 million, $103 million less than 2014 due to
prevailing global insurance market conditions that have been softened further
by the influx of opportunistic, non-traditional sources of capital, such as hedge
funds and pension funds. While the absolute level of premium was lower,
we are less concerned with topline premium growth than we are with sound
underwriting practices and the profitability that results from them. Our
London operations contributed $35 million to surplus in 2015. In the years
since the worldwide financial crisis in 2008, AEGIS London has contributed
almost $300 million toward rebuilding policyholder surplus.
diverse portfolio brings balance and stability
The diversity of the AEGIS London portfolio brings balance and stability to
our London operations and to the Company as a whole. The range of classes
we underwrite in London is one of the most diverse at Lloyd’s, and it includes
17
aegis london continued
Global Property, Terrorism, Utility Property, Marine Hull & War, Marine
Cargo, Aviation & Satellites, Energy Exploration & Production, U.S. General
Liability, International Casualty, Professional Liability, Marine Liability, Energy
Offshore Casualty, Contingency, Livestock, Accident & Health, Specie (fine art),
Property Treaty Reinsurance and Crop Reinsurance. Our underwriters in
London can adjust their participation in these classes with relative ease as
market conditions warrant, and this helps maximize profitability, maintain
diversification and reduce volatility.
AEGIS London has grown and diversified dramatically since it was formed
in 1999. It began by writing three classes of business for AEGIS members in
North America. Today it writes a diverse portfolio of 18 classes in 182 countries. AEGIS London is now among the top-performing syndicates at Lloyd’s,
and its success continues to be recognized by external ratings agencies and
regulators, including A.M. Best, which reaffirmed its “A (Excellent)” financial
strength rating for AEGIS London.
refreshed strategy positions aegis london for the future
As part of the Company-wide strategy refresh in 2015, we reexamined our
London strategy to make sure it remains true to its mission and relevant to its
stakeholders. The recent performance of the Lloyd’s market has been strong,
and loss experience has been generally favorable. Like many syndicates, AEGIS
London has prospered. The future, however, is likely to be more challenging.
We expect soft market conditions to continue, competition from traditional
and non-traditional sources to increase, investment markets to remain volatile,
and London brokers to consolidate and reduce the number of insurers they work
with to help bolster their own efficiencies. With these macro challenges ahead,
and with the benefit of our recent successes, this was a good time to take a fresh
look at our strategy to make sure that our London operations are positioned for
success in the future.
18
aegis london Contribution to total surplus
December 31 (millions of U.S. dollars)
59
60
53
50
50
46
40
35
31
30
23
20
10
0
2009
2010
2011
2012
2013
2014
2015
After in-depth discussions with key AEGIS London stakeholders, including
London brokers, reinsurers, the AEGIS London Board of Directors and the senior
management team, we concluded that in order to thrive in this environment,
the Syndicate must maintain a laser-like focus on the needs of its customers
who, in this case, are London wholesale brokers, representing insureds from
around the world. At the same time, we must remain true to our own mission
in London, which is maintaining the financial and underwriting discipline
necessary to deliver responsible and sustainable profits, minimize volatility and
strengthen our capital base.
looking ahead to
2016
and beyond, we expect the
challenging global insurance market conditions to
continue, but with the right team and strategy in
place, we are indeed pointing in the right direction.
How will we do it? We will remain London-centric and broker-friendly.
We will continue to meet daily with like-minded brokers to discuss a shared
strategy and paths to success. We will focus on the classes of business where
we have deep industry expertise and market leadership. We will make strategic
investments in people and technology. We will put our customers first, communicate our capabilities clearly, and deliver the products our customers need with
great personal service. If this sounds familiar, it should. These are many of the
same ingredients that have made AEGIS successful for more than 40 years.
Our refreshed strategy has been endorsed by our London stakeholders, six work
groups have been assigned to execute various pieces of the strategy, and we’re
making significant progress already. As part of our refreshed strategy, we will
continue to leverage innovation in infrastructure and technology, such as the
newly launched OPAL online quote and bind platform. This new method of
distributing AEGIS London coverages to a wider group of brokers helps make
everyone more efficient and profitable.
Looking ahead to 2016 and beyond, we expect the challenging global insurance
market conditions to continue, but with the right team and strategy in place,
we are indeed pointing in the right direction.
19
regional member and broker meetings
We meet with small groups of members and brokers throughout the year to
discuss trends in the energy and insurance industries, and to explore ways
AEGIS can help. Alan Maguire, our CEO, and our senior management team
spend a day with each group at convenient locations throughout the country.
These discussions are always fruitful, and there’s no other forum like it in the
insurance business.
Many of our new products and services, including our U.S.-based cyber
program, drone coverage, the expansion of limits for our property consortium
and our alliance with Everest National Insurance Company, have been conceived
and refined with the help of members and brokers at the regional meetings.
In 2015, we held regional member and broker meetings in Dallas, Seattle,
East Rutherford, Washington, D.C. and Atlanta. More than 150 members and
brokers attended from 61 companies. The dates and locations for the regional
meetings in 2016 will be published in the AEGIS News e-mails and posted on
our website at aegislink.com.
20
our regional meetings give members and brokers
an opportunity to tell us about the issues that
matter most to them, what they need from aegis,
and how we ’ re doing.
21
2015 policyholders’ conference in Nashville
Our annual Policyholders’ Conference is one of the best examples of what we
do for members and brokers. Over the course of four days each July, we share
information about the energy and insurance industries, focus on the products
and services that members need most, and forge strong working relationships.
The conference in Nashville marked the 40th anniversary of the founding of
AEGIS. We paused briefly to reflect on the success we have enjoyed together,
but the program content focused firmly on the future. The presentations on
cyber risk management and the risks associated with the rapidly growing use
of drones in the energy industry were particularly well attended. More than
200 people attended the breakout sessions on these topics, setting an all-time
record for the conference.
Members and brokers are welcome to bring their families and guests.
In Nashville, more than 1,000 conference-goers enjoyed a fun-filled evening
of country music and Southern BBQ at the Grand Ole Opry. In July 2016,
we will gather in Boston at the Westin Boston Waterfront.
22
the first annual aegis policyholders ’ conference
was held in toronto in
1979 ,
and about
100
members
and brokers attended. the conference has grown
dramatically over the years to the point where it is
now the premier event of its kind.
23
products and services
aegis products
on-site training and workshops
Excess Liability
Directors & Officers Liability
Property
Cyber Coverage & Services
Construction
Renewable Energy
Side A Directors & Officers Liability
General Partners Liability
Excess Workers’ Compensation
Professional Liability
Employment Practices Liability
Fiduciary & Employee Benefits Liability
Railroad Protective Liability
Financial Products
Electrical Incident Investigation Workshop
Natural Gas Incident Investigation Workshop
Fire Protection System Training Program
One-day seminars
Natural gas operator training
For more information, please contact George Keefe, Senior Vice President –
Member Relations, at [email protected] or 201.508.2797.
webinars, publications and guides
Monthly webinars
Electric Utility Inspection Forms
Water Utility Operations Security Checklist
Quick Start – Public Safety Communication Guides
Natural Gas Emergency Response Tip Cards
Transformer Contingency Planning Guide
Review of Major Liability Losses (RMLL)
Contractor Selection and Evaluation Guide
consulting and presentations for member companies
loss control products & services
utility risk assessments, services and guides
Electric risk assessments
Natural gas risk assessments
Water risk assessments
Call center reviews
Focused ServicesSM
Self-Administered Risk Assessment (SARA) guides
Occupational safety & workers’ compensation program assessments
24
Technical consultations
Member company and industry presentations
videos and safety and training materials
Lessons Learned® Video Series
Employee Public Safety Awareness Program
Emergency Exercises: A Look in the Mirror
Hazard Awareness Training for Emergency Response Personnel
Surviving the Wires Environment
property engineering services
aegis london products
Comprehensive Property Risk Assessment Surveys
Comprehensive Machinery Breakdown Risk Assessment Surveys
Comprehensive Builders Risk Assessment Surveys
Focused ServicesSM and consulting
Property
Global Property
Terrorism
Utility Property
For more information, please contact Howard Somers, Vice President –
Loss Control, at [email protected] or 201.508.2734.
Marine & Aviation
Marine Hull & War
Marine Cargo
Aviation & Satellites
claims products & services
Biennial AEGIS Claims Seminar
Electric Litigation Service
Employment Practices Litigation Service
Gas Litigation Service
Litigation Cost Control Service
AEGIS Structured Settlements
AEGIS Claims Roundtables
For more information, please contact Jeff Schupack, Senior Vice President –
Claims, at [email protected] or 201.508.2658.
Energy
Exploration & Production
Casualty
U.S. General Liability
International Casualty
Professional Liability
Marine Liability
Energy Offshore Casualty
Specialty
Contingency
Livestock
Accident & Health
Specie
Reinsurance
Property Treaty Reinsurance
Crop Reinsurance
For more information, please contact Nigel Roberts, Head of Broker Relations,
at [email protected] or +44 (0)207 265 2199.
25
leadership
Our mutual efforts are guided by
these experienced executives and
professionals drawn primarily from
the member companies we serve.
They generously contribute their
time and expertise, and they are
essential to our success.
Christopher M. Crane
President & CEO
Exelon Corporation
Ronald L. Litzinger
President
Edison Energy Group
W.R.P. Dalton
Executive Director, Retired
HSBC Holdings plc
George L. Mazanec
Vice Chairman, Retired
PanEnergy (now Spectra Energy)
Timothy C. Faries
Partner
Appleby (Bermuda) Limited
Eugene R. McGrath
Chairman & CEO, Retired
Consolidated Edison, Inc.
board of directors
Wesley W. von Schack
Chairman
Associated Electric & Gas Insurance
Services Limited
Alan J. Maguire
President & CEO
AEGIS Insurance Services, Inc.
Gregory E. Abel
Chairman, President & CEO
Berkshire Hathaway Energy
Philip C. Ackerman
Chairman, Retired
National Fuel Gas Company
Keith E. Bailey
Chairman, President & CEO, Retired
Williams
Robert W. Best
Chairman
Atmos Energy Corporation
R. Don Cash
Chairman Emeritus & Director
Questar Corporation
26
Thomas F. Farrell II
Chairman, President & CEO
Dominion Resources, Inc.
Stephen E. Frank
Retired Director
NV Energy, Inc.
Walter M. Higgins
President & CEO
Ascendant Group Limited
Christopher P. Johns
Vice Chairman & President, Retired
Pacific Gas and Electric Company
James J. Jura
CEO & General Manager
Associated Electric Cooperative, Inc.
Constance H. Lau
President & CEO
Hawaiian Electric Industries, Inc.
Jane L. Peverett
Past President & CEO
British Columbia Transmission
Corporation
Richard G. Reiten
NW Natural
Charles A. Schrock
Former Chairman & CEO
Integrys Energy Group, Inc.
William B. Timmerman
SCANA Corporation
emeritus board positions
vice chairmen emeritus
Donald J. Greene
Chairman Emeritus
Dewey & LeBoeuf LLP
William H. Grigg
Chairman Emeritus
Duke Energy Corporation
directors emeritus
Thos. E. Capps
Chairman, Retired
John W. Ellis
Chairman, Retired
Puget Sound Energy, Inc.
Don D. Jordan
Reliant Energy
Corbin A. McNeill, Jr.
Chairman & Co-CEO, Retired
Exelon Corporation
officers
committees
executive committee
Alan J. Maguire
President & CEO
Richard G. Reiten
Vice Chairman & Vice President
William P. Cullen
Assistant Vice President
Committee Chairman
Robert W. Best
Walter M. Higgins
James J. Jura
Charles A. Schrock
Linda F. Barnett
Dominion Resources Services, Inc.
Johan G. Bramer
TransCanada Corporation
underwriting committee
R. Don Cash
Alan J. Maguire
George L. Mazanec
Eugene R. McGrath
Richard G. Reiten
audit & finance
committee
Constance H. Lau
Committee Chairman
Walter M. Higgins
Vice Chairman
Katherine Carbon
Sempra Energy
John Frank
Basin Electric Power Cooperative
Deborah S. Gaffney
Southern Company
W.R.P. Dalton
Committee Chairman
Robert W. Best
Eugene R. McGrath
Jane L. Peverett
Wesley W. von Schack, Ex-Officio
Christopher P. Johns
Vice Chairman
aegis london
board of directors
David A. Layne
The Empire District Electric Company
Simon Day
Actuary
Philip C. Ackerman
R. Don Cash
Stephen E. Frank
Alan J. Maguire
Chairman
Erica A. McNabb
NextEra Energy, Inc.
Joseph T. Meaney, Jr.
The AES Corporation
Rip Reeves
Treasurer
investment committee
Thomas Busher
John Chambers
David Croom-Johnson
W.R.P. Dalton
Christopher Forbes
Jonathan Gray
James Halley
Paul Kedney
Michael Onslow
Alex Powell
Matthew C. Yeldham
risk management advisory
committee (rmac)
H. Wayne Soza
El Paso Electric Company
William Hillman
Assistant Vice President
Michael S. Johnson
Controller
Patricia L. McKenna
Assistant Treasurer
Timothy C. Faries
Secretary
Mark A. Walsh
Assistant Secretary
Stephen P. Byrne
Assistant Secretary
George L. Mazanec
Committee Chairman
Keith E. Bailey
Vice Chairman
Richard G. Reiten
William B. Timmerman
loss control committee
Christopher M. Crane
Committee Chairman
Ronald L. Litzinger
Vice Chairman
Michael S. Kaminski
We Energy Group, Inc.
Michael A. Mee
Exelon Corporation
Robert L. Miller
Xcel Energy
Robert Moussaid
Energy Future Holdings Corp.
Jerry Rhoades
Portland General Electric Company
Committee Chairman
27
leadership continued
rmac – evolving utility
industry risk task force
J.P. Agnesse
Portland General Electric Company
George W. Marget III, Esq.
Dominion Resources Services, Inc.
Ronald D. Rispoli
Entergy Services, Inc.
Richard Sayette
Exelon Corporation
directors & officers
handbook task force
Michael S. Kaminski
Robert Moussaid
enterprise risk
management (erm)
task force
Felicia Brown
Iberdrola USA Management Corporation
Ken M. Dolan
Basin Electric Power Cooperative
Christopher Eaton
Enbridge Inc.
Stephan T. Haynes
American Electric Power
Richard G. Muzikar
Consolidated Edison Company
of New York, Inc.
H. Wayne Soza
Anil K. Suri
PG&E Corporation
claims task force
loss control task force
David P. Abernathy, Esq.
Laclede Gas Company
Mark Boone
Keith Bone
Duke Energy Corporation
Angela Cool
Westar Energy
Derek Boyd
Atmos Energy Corporation
Mariya Fedorchenko
NV Energy, Inc.
C. Larry Davis, Esq.
San Diego Gas & Electric Company
Stephen P. Ford
Mississippi Power Company
Deborah L. Edwards, Esq.
Piedmont Natural Gas Company, Inc.
Robert A. Green
PSEG Services Corporation
Bryony Hodges, Esq.
SCANA Corporation
Lisa Hough
Omaha Public Power District
Judy Y. Liu, Esq.
CenterPoint Energy Service
Company, LLC
John Mellette
SCANA Corporation
George W. Marget III, Esq.
David M. Santoro, Esq.
Consolidated Edison Company
of New York, Inc.
Sandy Meyers
City Utilities of Springfield
John C. Norman
Iberdrola USA Management Corporation
Ronald D. Rispoli
Timothy J. Saviano, Esq.
We Energies
Mark J. Sweeney, Esq.
Pacific Gas & Electric Company
28
Cindy Stevens
Colorado Springs Utilities
m
financial Section contents
Consolidated Balance Sheets
30
Consolidated Statements of Income and Comprehensive Income
31
Consolidated Statements of Changes in Surplus
32
Consolidated Statements of Cash Flows
33
Notes to the Consolidated Financial Statements
34
Independent Auditors’ Report
53
Corporate Information
54
29
consolidated Balance Sheets
as o f d e c e m b e r 31 , 2015 and 2014
(Expressed in thousands of U.S. dollars)
2015
2014
Cash and cash equivalents
Investments
$ 256,538
3,619,425
$ 713,318
3,129,476
Total cash and investments
3,875,963
3,842,794
940,443
21,869
170,283
2,806
16,260
17,175
208,420
156,619
55,547
117,333
135,564
1,211,877
19,943
201,597
2,579
18,876
10,804
195,885
203,342
67,148
115,981
146,325
$5,718,282
$6,037,151
$2,879,855
719,937
397,837
6,056
117,038
11,714
117,333
178,407
$3,165,788
747,717
418,464
10,523
118,474
24,823
115,981
213,834
4,428,177
4,815,604
250
1,269,990
19,865
250
1,182,836
38,461
1,290,105
1,221,547
$5,718,282
$6,037,151
assets:
Due from reinsurers
Accrued interest
Premiums receivable
Receivable for securities sold
Current income taxes receivable (1)
Unearned continuity and other premium credits
Prepaid reinsurance premiums (1)
Net deferred tax asset
Deferred acquisition costs
Deposit assets
Other assets
Total assets
liabilities and surplus:
liabilities:
Unearned premiums
Fair value of insurance and reinsurance contracts
Deposits from insureds
Due to reinsurers (1)
Payable for securities purchased
Deposit liabilities
Accrued expenses and other liabilities (1)
Total liabilities
commitments and contingencies
surplus:
Statutory surplus fund
Policyholders’ surplus
Accumulated other comprehensive income
Total surplus
Total liabilities and surplus
(1) See Note 5 for details of balances associated with variable interest entities.
See notes to the consolidated financial statements.
30
consolidated Statements of Income and Comprehensive Income
f o r y e a r s e nded december 31 , 2015 and 2014
2015
2014
$1,250,510
$1,348,493
860,121
943,102
Net premiums earned
892,685
(16,791)
28,642
897,966
83,037
(42,587)
904,536
938,416
535,092
97,077
95,087
579,749
110,272
118,150
727,256
808,171
177,280
19,964
130,245
20,796
157,316
109,449
13,695
56,467
5,504
37,077
70,162
42,581
revenue:
Total revenue
expenses:
Commission expenses
Total expenses
Income taxes:
Current provision
Deferred provision
Total income tax provision
Net income
$
87,154
$
66,868
other comprehensive income (loss):
Unrealized (losses) gains on securities:
Unrealized holding losses arising during the year from available-for-sale securities
(net of income tax benefit of $39,823 and $1,163, respectively)
Unrealized holding losses, on held-to-maturity securities reclassified from available-for-sale,
arising during year (net of income tax benefit of $5,545 and $0, respectively)
Reclassification adjustment for amounts included in net income (net of income tax expense
of $35,355 and $355, respectively)
Other comprehensive loss
Comprehensive income
$
(73,957)
(2,164)
(10,299)
—
65,660
660
(18,596)
(1,504)
68,558
$
65,364
31
consolidated Statements of Changes in Surplus
f o r y e ar s e n d ed decem ber 31 , 2015 and 2014
statutory surplus fund
2015
$
250
2014
$
250
policyholders’ surplus:
Balance at January 1
Net income
1,182,836
87,154
1,115,968
66,868
Balance at December 31
1,269,990
1,182,836
38,461
(18,596)
39,965
(1,504)
accumulated other comprehensive income:
Balance at January 1
Balance at December 31
Total surplus at December 31
32
19,865
38,461
$1,290,105
$ 1,221,547
consolidated Statements of Cash Flows
For years ended December 31, 2015 and 2014
2015
2014
cash flows from operating activities:
Premiums collected
Reinsurance premiums paid
Losses and loss expenses paid
Losses and loss expenses recovered from reinsurers
Other underwriting expenses paid
Interest and dividends received
Income taxes paid
$1,146,810
(329,713)
(1,021,842)
461,271
(151,997)
98,924
(9,612)
$1,194,709
(332,662)
(894,599)
247,362
(129,783)
106,045
(7,877)
193,841
183,195
(2,502,753)
(502,139)
2,201,970
152,657
(2,106,860)
—
2,210,424
—
(650,265)
103,564
Net cash provided by operating activities
cash flows from investing activities:
Purchases of available-for-sale and other investments
Purchases of held-to-maturity investments
Proceeds from sales or redemptions of available-for-sale and other investments
Proceeds from maturities and mandatory redemptions of held-to-maturity investments
Net cash (utilized in) provided by investing activities
Effect of exchange rate changes on cash
(356)
(2,070)
(456,780)
713,318
284,689
428,629
$ 256,538
$ 713,318
Net income
Net investment gains (losses) on securities
Net investment foreign exchange losses
Amortization of securities
Depreciation and other charges
Deferred income tax expense
Changes in assets and liabilities:
Due from reinsurers
Accrued interest
Premiums receivable
Current income taxes receivable
Unearned continuity and other premium credits
Prepaid reinsurance premiums
Deferred acquisition costs
Deposit assets
Other assets
Unearned premiums
Deposits from insureds
Due to reinsurers
Deposit liabilities
Accrued expenses and other liabilities
$
$
271,434
(1,926)
31,314
2,616
(6,371)
(12,535)
11,601
(1,352)
8,175
(285,933)
(27,780)
(20,627)
(4,467)
(1,436)
1,352
(32,374)
(103,503)
(1,675)
(14,941)
481
2,364
(3,334)
(7,555)
(10,752)
(25,281)
61,017
48,251
54,832
3,677
11,878
10,204
23,783
Net cash provided by operating activities
$ 193,841
$ 183,195
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
reconciliation of net income to net cash provided by operating activities:
87,154
73,837
28,512
12,126
4,054
56,467
66,868
(8,441)
8,469
22,491
7,285
37,077
33
notes to the Consolidated Financial Statements
f o r th e y e a r s ended december 31, 2015 and 2014
1. the company and its principal activity
Associated Electric & Gas Insurance Services Limited (“AEGIS” or the
“Company”) was incorporated in Bermuda in 1971 and commenced
underwriting activities in 1975. AEGIS is registered as a non-assessable mutual
insurance company in Bermuda, is regulated under that country’s Insurance Act
of 1978, and is a Class 3 insurer under the Insurance Amendment Act of 1995.
The Bermuda Monetary Authority approved AEGIS’s change in designation
from a Class 2 insurer to a Class 3 insurer, effective January 1, 2015.
The principal activity of the Company is to provide, directly and through
alliances and affiliates, a full array of liability and property coverages. AEGIS
writes Excess Liability, Employers Liability, Employment Practices Liability,
Professional Liability, Property, Boiler and Machinery and Cyber coverage.
AEGIS also writes Directors and Officers Liability, Fiduciary and Employee
Benefits Liability, and Excess Workers’ Compensation coverages. Through
strategic alliance participants, which it reinsures, AEGIS offers General Liability,
Commercial Automobile Liability, Directors and Officers Liability, Umbrella
Liability and Workers’ Compensation coverages. The Company operates a
federally licensed Canadian branch offering Excess Liability, Directors and
Officers Liability, Property, and Boiler and Machinery coverages.
AEGIS Electric & Gas International Services Limited (“AISL”) is the capital
provider for Syndicate 1225 (“AEGIS London”) at Lloyd’s of London (“Lloyd’s”).
AISL underwrites primarily Property, Casualty, Specialty Lines, Marine and
Energy insurance. AISL is wholly owned by AEGIS through its subsidiary,
AEGIS London Holding Limited (“AEGIS London Holding”). Effective January
1, 2012, and continuing through December 31, 2015, the Company, and
affiliates, provided
provide 9393percent
percentofofthe
thenet
netcapacity
capacityfor
forAEGIS
AEGISLondon.
London.
2. significant accounting policies
a. basis of presentation
The consolidated financial statements include the accounts of AEGIS, its wholly
owned subsidiaries, and entities over which the Company exercises control and
where the Company is considered the primary beneficiary of the entities’
activities (these entities are known as variable interest entities (“VIE”)). See Note
5 for more information on the Company’s consolidated VIEs. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). All
significant inter-company transactions are eliminated in consolidation.
34
b. reclassifications
Certain deferred tax amounts in prior periods have been reclassified to conform
to current period presentation in order to provide greater clarification.
c. estimates
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, in particular investments, reserves for losses and loss
expenses, the allowance for uncollectible reinsurance, the fair value of excess
workers’ compensation direct insurance and related reinsurance contracts, deferred
tax assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
d. cash and cash equivalents
Cash and cash equivalents include demand deposits, money market funds and
short-term investments with an original maturity of less than three months. Cash
and cash equivalents are carried at amortized cost, which approximates fair value.
e. investments
The Company invests in a variety of financial instruments and vehicles,
including debt and equity securities, mutual funds, syndicated bank loans, fund
of fund investments, convertible debt securities, limited partnerships and real
estate investment trusts (“REIT”). The Company records its purchases and sales
of securities and mutual funds on a trade date basis, and all other investments
on the contractual effective date.
During 2015, debt securities held in certain of the Company’s investment
portfolios were redesignated from available-for-sale (“AFS”) to the held-tomaturity (“HTM”) classification. Upon redesignation the cost basis of the
securities was adjusted to reflect the securities’ fair value as of effective date of
redesignation, and any related unrealized gains and losses, and changes thereof,
associated with the investments, net of income taxes, continue to be reported in
accumulated other comprehensive income and other comprehensive income,
respectively, while those unrealized gains and losses will be amortized over the
remaining life of the security until maturity using the effective yield method.
The Company’s intent is to hold its HTM securities to maturity. Securities
classified as HTM are carried at amortized cost.
Securities carried at amortized cost are adjusted for the amortization of
premiums and accretion of discounts to maturity using the effective yield
method. This amortization and accretion is included in net investment income.
The HTM portfolio is comprised of various types of securities, including
mortgage- and asset-backed securities (“MBS” and “ABS”, respectively),
corporate debt instruments and private placement issuances.
The Company’s AFS securities are carried at fair value, with unrealized holding
gains and losses, net of income tax effects, included in accumulated other
comprehensive income and the related changes in unrealized gains and losses
included in other comprehensive income. The amortized cost of debt securities
includes both the amortization of premium and the accretion of discounts,
for which the accounting treatment is described above.
AFS securities include MBS and ABS securities. Amortization of the premium
or accretion of the discount from the purchase of these securities is recognized
after considering the estimated timing and amount of prepayments of the
underlying loans. Actual prepayment experience is periodically reviewed and
effective yields are recalculated when differences arise between the prepayments
originally anticipated and the actual prepayments received and currently
anticipated.
The Company invests in syndicated bank loans. The initial investment in
a bank loan is inclusive of the value of the loans plus or minus any fees paid
or received that are directly attributable to the investment. The difference
between the initial investment and the related loans’ principal amount at the
date of purchase is recognized as an adjustment to yield over the life of the loan.
All other costs incurred in committing to purchase and acquire the loans are
expensed as incurred. Syndicated bank loans are classified and treated as AFS
securities. As of December 31, 2015 and 2014, the Company’s net traded
but unsettled syndicated bank loans totaled $1,430 and $6,997, respectively,
with a corresponding payable for securities purchased.
The Company invests in convertible debt securities, and in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 825, Financial Instruments, has elected to apply the fair
value option (“FVO”) to its portfolio of convertible debt securities. Management
elected the FVO as a practical expedient, in order to eliminate the requirement
to bifurcate and value the embedded options separately from the host contracts.
Convertible securities are carried at fair value and are classified as other invested
assets, and reported in the consolidated balance sheets as investments. The
changes in fair value of these securities are recorded in net investment income
and other comprehensive income in the period the change occurs. As of
December 31, 2015 and 2014, the fair value of convertible securities was
$34,748 and $29,596, respectively.
When the Company does not have a controlling financial interest in an entity
but can exert what is deemed as significant influence, generally based on
percentage of ownership, the entity is accounted for under the equity method
of accounting.
The Company invests in fund of fund investments, and these investments are
accounted for using the equity method of accounting. Under the equity method
of accounting, the carrying value of these holdings approximates fair value.
Fund of fund investments are classified as other invested assets and are included
in investments in the consolidated balance sheets. The Company’s share of
distributed and undistributed net income from fund of fund investments is
included in net investment income.
The Company invests in a limited partnership, where the ownership interest
exceeds 5% but was less than 25% at December 31, 2015. Based on its
percentage of ownership, the Company is accounting for this investment using
the equity method of accounting, in accordance with ASC 323, Investments –
Equity Method and Joint Ventures. Limited partnerships are classified as other
invested assets and are included in investments in the consolidated balance
sheets. The Company records its share of earnings in the limited partnership
interest in net investment income. As of December 31, 2015 and 2014,
the limited partnership investment had a fair value of $66,787 and $55,426,
respectively. The unfunded commitment associated with this limited
partnership investment totaled $8,551.
The Company invests in both publically traded and privately issued REIT
investments. Publically traded REITs are considered AFS equity securities
and are classified and accounted for accordingly. Privately issued REITs lack
liquidity and as such are treated as private issuances, accounted for under
the cost method. Privately issued REITs are classified as other invested assets
and are reported in the consolidated balance sheets as investments.
The Company participates in securities lending arrangements whereby specific
securities are loaned to other institutions, primarily banks and brokerage firms,
for short periods of time. Securities loaned are recorded in accrued expenses and
other liabilities, while cash collateral held by our custodian and monitored and
maintained by the lending agent is recorded in other assets. Company policy
requires the borrower to provide collateral in an amount equal to or greater
than the fair value of the domestic and foreign securities loaned. The Company
receives interest income on the invested collateral, which is included in net
investment income. The Company monitors the fair value of the underlying
securities to ensure such transactions are adequately collateralized.
35
The Company periodically reviews its AFS investment portfolios for impairment,
which describes a condition where individual holdings have experienced a
decline in fair value below their respective amortized costs. The Company
considers a number of factors in evaluating whether a decline in fair value below
amortized cost is other-than-temporary, including: (a) the present value of
expected future cash flows; (b) the financial condition and near-term prospects
of the issuer; (c) the period and degree to which the fair value has been below
amortized cost; (d) with respect to equity securities, the Company’s ability and
intent to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value; and (e) with respect to AFS debt securities,
whether the Company has the intent to sell or will more likely than not be
required to sell a particular security before the decline in estimated fair value
below its cost or amortized cost recovers. A security is considered other-thantemporarily impaired when it becomes apparent that the present value of the
expected cash flows over the expected holding period is less than its amortized
cost basis. HTM securities are also periodically reviewed for impairment. Future
cash flows and the financial condition of the issuer are the key elements in
determining HTM impairment. As of and for the year ended December 31,
2015, no HTM securities were impaired.
Where the decline in fair value of an AFS debt security is deemed to be otherthan-temporary and the Company neither intends to sell, nor is it more likely
than not that the Company will be required to sell the security, a charge is
recorded to net investment income for the credit-related impairments and a
new cost basis is established. A decline in fair value for non-credit-related
impairments is recorded as an other comprehensive loss. In periods subsequent
to the recognition of an other-than-temporarily impaired loss for debt securities,
the discount or reduced premium recorded for the debt security, based on the
new cost basis, is amortized over the remaining life of the debt security in a
prospective manner based on the amount and timing of future estimated cash
flows at the balance sheet date.
The Company’s investments are externally managed by professional investment
managers who have the discretion to buy and sell securities subject to certain
Company-imposed guidelines. Management does not assess, on a security-bysecurity basis, whether our investment managers had the intent to sell impaired
debt securities, or the intent to hold impaired equity securities, as of and for the
years ended December 31, 2015 and 2014. Therefore, all impairments of AFS
securities are considered other-than-temporary and recorded as a charge to net
investment income.
Investment income, net of investment-related expenses, is recognized when
earned. Realized investment gains or losses on sales of investments, generally
determined on a first-in, first-out basis, are included in net investment income.
36
Net investment income also includes unrealized gains and losses from
convertible debt securities and the change in reported asset value for
investments accounted for under the equity method of accounting.
The recognition of income on MBS and ABS is dependent upon market conditions,
which could result in prepayments and changes in amounts to be earned.
f. concentration of credit risk
Financial instruments that potentially subject the Company to concentrations
of credit risk include cash balances in excess of government-insured limits,
amounts due from reinsurers and marketable debt securities. Although the
Company places its temporary cash investments with creditworthy financial
institutions and purchases reinsurance contracts from highly rated reinsurers,
the Company is exposed to a concentration of credit risk with respect to cash
and temporary cash investments held at financial institutions and amounts due
from its reinsurers. Management monitors the credit standing of the relevant
financial institutions and the financial condition of the Company’s reinsurers.
The Company holds bonds and notes issued by U.S. and foreign corporations,
the United States government and foreign governments. By policy, these
investments are kept within limits designed to prevent risks caused by
concentration. As of December 31, 2015 and 2014, there are no known
significant concentrations of credit risk with regard to invested assets.
g. deferred acquisition costs
The Company incurs brokers’ commissions and premium taxes in acquiring
insurance premiums for executed contracts. These costs are deferred and
amortized over the lives of the policies to which they relate, excluding contracts
measured at fair value, where such costs are included in commission expense in
the year incepted. The amortization of deferred acquisition costs is included
in commission expenses. The recoverability of these deferred costs is reviewed
periodically and includes the consideration of future investment income.
h. derivative financial instruments
The Company uses foreign currency forward contracts and index futures
contracts, generally with terms of 90 days or less. The primary objective of
investing in foreign currency forward contracts is to protect the U.S. dollar
value of foreign currency-denominated monetary assets and liabilities from the
effects of volatility in foreign exchange rates that might occur prior to their
receipt or settlement in U.S. dollars. These forward contracts are not designated
as hedges and are marked to fair value through net investment income and
substantially offset the change in spot value of the underlying foreign currencydenominated monetary asset or liability.
Furthermore, the Company periodically uses bond futures contracts to offset
return differentials in its fixed-income portfolio that arise due to the inability to
fully invest all assets directly in securities. These contracts are not designated
as hedges; therefore, changes in the fair value of these derivatives are recognized
in net investment income as they occur.
As of December 31, 2015, the Company had foreign currency forward contracts
with notional amounts totaling $115,000 and a fair value of gain of $1,468,
which is reported in other assets in the consolidated balance sheets and included
in net investment income in the income statement. There were no outstanding
derivative contracts as of December 31, 2014.
i. foreign operations and
foreign currency translation
The functional and reporting currency of the Company is U.S. dollars. Monetary
assets and liabilities denominated in foreign currencies are translated at the
rate of exchange in effect at the balance sheet date. Revenues and expenses are
translated at the average rate prevailing during the year. Any resulting operating
foreign exchange gain or loss is included in underwriting expenses. The Company
recorded net operating foreign exchange gains of $20,137 and $2,441 for the
years ended December 31, 2015 and 2014, respectively. Unrealized gains and
losses resulting from changes in the foreign currency exchange rates on AFS
securities are recorded in the consolidated balance sheets in accumulated other
comprehensive income. Realized foreign currency gains and losses resulting
from the sale of securities are recorded in net investment income.
Deferred tax assets and liabilities resulting from temporary differences between
the financial reporting and tax bases of assets and liabilities are measured at the
balance sheet date using enacted tax rates expected to apply to taxable income
in the years the temporary differences are expected to reverse. A valuation
allowance is established when it is more likely than not that some portion of
the Company’s deferred tax assets will not be realized.
Significant judgment is required in evaluating the Company’s tax positions
and determining its provision for income taxes as there are many transactions
and calculations for which the ultimate tax determination is uncertain.
The assessment to determine whether a valuation allowance is required and
the amount of any allowance requires significant judgment and includes the
long-range forecast of future taxable income and the evaluation of tax planning
initiatives. Adjustments to the deferred tax valuation allowances are made to
earnings in the period such management assessments are made.
The Company recognizes a tax benefit relating to uncertain tax positions
only where the position is more likely than not to be sustained assuming
examination by tax authorities. The Company establishes reserves for tax-related
uncertainties based on estimates of whether, and the extent to which, additional
taxes will be due. These reserves are established when the Company believes
that certain positions might be challenged despite its belief that the Company’s
tax return positions are fully supportable. The Company adjusts these reserves
in light of changing facts and circumstances, such as the outcome of tax audits.
k. premiums
AISL’s assets, liabilities, revenues and expenses are recorded after making certain
adjustments to convert U.K. GAAP accounting to U.S. GAAP. The most
significant U.S. GAAP adjustments relate to investment income recognition
and loss reserve estimates. The Canadian Branch files statutory financial
statements based upon International Financial Reporting Standards. The most
significant U.S. GAAP adjustments to the Canadian branch relate to the
method of estimation of loss reserves.
Premiums are earned as income ratably over the period covered by the policies.
Unearned premium reserves are established relative to the unexpired contract
period. It is the Company’s practice to price certain of its policies at amounts
that are not expected to fully recover anticipated losses, loss expenses and
underwriting expenses. Such practice anticipates that sufficient investment
income will be earned over the period in which underwriting losses are settled.
l. losses
j. income taxes
The Company’s provision for income taxes represents management’s best
estimate of various events and transactions and includes the impact of reserve
provisions and changes to reserves that are considered appropriate. The
Company reflects interest and penalties attributable to income taxes, to the
extent they arise, as a component of its income tax provision or benefit as
well as its outstanding income tax assets and liabilities.
The reserve for losses and loss expenses represents the Company’s best estimate,
based on its latest studies, of the gross amount of losses and loss expenses to be
paid on ultimate settlement of all incurred losses, reported and unreported, as of
the respective balance sheet dates. These estimates are periodically reviewed by
the Company’s management and independent actuaries, and are adjusted in
accordance with the latest available information. Any adjustments in estimates
are reflected in earnings in the period the adjustment is made. Management
believes that an adequate provision has been made for the Company’s losses and
loss expenses.
37
m. fair value measurements
The Company measures certain assets and liabilities using fair value. Fair value
is a market-based measurement and not an entity-specific measurement, and
requires the use of a fair value hierarchy with the highest priority given to
quoted prices in active markets. In determining fair value, the Company uses
various valuation approaches. Assets and liabilities measured and reported at
fair value are classified and disclosed in one of the following categories:
level 1 – Quoted prices available in active markets for identical investments
as of the reporting date are used to determine fair value. Assets measured at
fair value and classified as Level 1 include publicly traded equity securities and
money market funds.
level
2 – Pricing inputs other than quoted prices in active markets, which
are either directly or indirectly observable as of the reporting date, are used to
determine fair value through the use of models or other valuation methodologies.
Assets measured at fair value and classified as Level 2 include certain domestic
and foreign government and agency securities, domestic and foreign corporate
bonds, MBS, ABS, syndicated bank loans, commercial paper and secured notes.
Because many debt securities do not trade on a daily basis, independent pricing
services estimate fair value through processes such as bid evaluation using
observable inputs and matrix pricing of similar securities to calculate the fair
value of domestic and foreign government and agency securities. For domestic
and foreign corporate bonds and commercial paper, the pricing provider
considers credit spreads, interest rate data and market news in the valuation of
each security. For MBS and ABS, the pricing provider applies models including
observable inputs such as dealer quotes and other available trade information
as well as prepayment speeds, yield curves and credit spreads. Syndicated bank
loans are priced using dealer quotes relying on available market data. The
Company’s foreign currency forward contracts are traded in the over-the-counter
(“OTC”) derivative market and are classified within Level 2. These contracts
are classified as Level 2 because they are valued by models that utilize actively
quoted or observable market input values from external market data providers,
third-party pricing vendors and/or recent trading activity.
level
3 – Significant pricing inputs are unobservable and include situations
where there is little, if any, observable market activity for the investment, asset
or obligation. The liability for the fair value of excess workers’ compensation
insurance and reinsurance contracts is classified as Level 3. Management must
make assumptions about inputs that a market participant would use to value
the liability. If quoted market prices are not available, fair value is based upon
vendor or internally developed valuation models that use, where possible,
current market-based or independently sourced market parameters. In certain
cases, the inputs used to measure fair value may fall into different levels of the
38
fair value hierarchy. In such cases, the level in the fair value hierarchy is
determined based on the lowest-level input that is significant to the fair value
measurement in its entirety. There have been no material changes in the
Company’s valuation techniques during the periods presented.
The Company also considers its own nonperformance risk when measuring the
fair value of liability positions and the counterparty’s nonperformance risk when
measuring the fair value of asset positions.
fair value option for insurance and
reinsurance contracts
Effective January 1, 2008, the Company elected the FVO for all direct insurance
contracts classified as excess workers’ compensation, as well as the related
reinsurance contracts.
The Company records these contracts at fair value to reflect the significant
elapsed time between the issuance of the contracts and final settlement of the
obligations, adjusted for the risk of variation in the amount and timing of
future cash flows. These contracts are recorded at fair value, with changes in fair
value recorded in the consolidated statements of income and comprehensive
income in the period of change. As such, reported premiums and incurred losses
do not include activity related to the Company’s excess workers’ compensation
insurance and reinsurance contracts.
Cash flows from the underlying insurance and reinsurance contracts are reported
in cash flows from operating activities. Management reevaluates, on an annual
basis, its fair value election for future insurance and reinsurance contracts.
n. continuity and other premium credits
Continuity credits are based on each respective member’s proportionate share of
premiums and total surplus. Other premium credits are based on each eligible
policyholder’s proportionate share of its contribution to the underwriting results
for the given measurement period. Continuity and other premium credits are
declared by the Company’s Board of Directors. Such credits are provided only to
eligible members and other policyholders renewing coverage with the Company
and are subject to certain restrictions. The application of continuity and other
premium credits to policy renewal premiums is limited to the amount of
premium charged. Excess credits are carried forward for potential use in future
periods; such credits are forfeited when a member chooses not to renew its
policy with the Company. Issued credits are earned over the periods covered by
the underlying policies.
o. deposit assets and liabilities
q. retirement benefit plans
The Company enters into certain contracts that do not meet U.S. GAAP risk
transfer provisions requiring that a transaction contain a significant assumption
of insurance risk and a reasonable possibility that the Company may realize a
significant loss from the contract. These contracts are accounted for using the
deposit accounting method. For these contracts, the Company records deposit
liabilities for an amount equivalent to the assets received with any differences
due to the timing of receipts and payments. In some cases, the Company
transfers assets to another insurer or reinsurer and records a deposit asset for
the amount paid.
Prior to January 1, 1998, the Company maintained a qualified defined benefit
pension plan for eligible employees of AEGIS Insurance Services, Inc. through
membership in the Pension Plan for Employees of AEGIS Insurance Services,
Inc. (the “Pension Plan”). Benefits are based on a participant’s credited service
ending no later than December 31, 2011, as defined by the Pension Plan.
On January 1, 1998, the Pension Plan was frozen to new participants.
p. property and equipment
Property and equipment are stated at cost less accumulated depreciation and are
included in other assets. Depreciation and amortization are provided, beginning
at the inception of the asset’s use, under the straight-line method based upon
the following estimated useful lives:
Estimated Life (Years)
Property and leasehold improvements
Furniture and fixtures
Information technology equipment and software
*
5 – 15
3–5
* Amortized over the lesser of the useful life or the remaining life of the lease from the date placed
in service
Effective December 31, 2011, the Plan was amended to discontinue the accrual
of additional participant benefits after December 31, 2011. On July 15, 2012,
the Plan was amended for a one-time adjustment, which increased frozen
participant’s accrued benefit base by 10% provided the participant was an active
employee on July 31, 2012. The Company also has a non-qualified supplemental
defined benefit plan for certain employees. The non-qualified plan is funded
from the general assets of the Company, including corporate-owned life
insurance policies purchased to provide for the benefits earned by eligible
employees; however, these policies cannot be considered in the determination
of the funded status of the non-qualified plan.
The Company’s funding policy is to contribute funds to the Pension Plan,
as necessary, to provide for any unfunded projected benefit obligation over a
reasonable period. To the extent that these requirements are fully covered
by assets in the Pension Plan, the Company may elect not to make any
contributions in a particular year.
A summary of property and equipment at December 31, 2015 and 2014
is as follows:
As of December 31, 2015 and 2014, the total projected benefit obligation
for the Pension Plan and the non-qualified plan was $37,193 and $40,323,
respectively, based on discount rates of 4.00% for the Pension Plan and 3.75%
2015
2014
for the non-qualified plan for 2015 and 4.75% for the Pension Plan and 4.50%
Property and leasehold improvements
$ 8,156
$ 11,516 for the non-qualified plan in 2014, with a 3.00% rate of compensation increase
Furniture and fixtures
5,546
6,054 for the non-qualified Plan as of December 31, 2015 and 2014. The fair value
Information technology equipment and software
31,413
31,476 of Pension Plan assets as of December 31, 2015 and 2014 was $25,260 and
45,115
49,046 $26,019, respectively, and the total unfunded status was $11,933 and $14,304,
Total cost
Accumulated depreciation
(37,218)
(36,288) respectively. The expected rate of return on Pension Plan assets was 3.50% for
Net property and equipment
$ 7,897
$ 12,758 2015 and 7.50% for 2014, and is determined based on historical and expected
future returns of the Pension Plan’s asset classes.
Depreciation expense amounted to $4,054 and $4,809 for the years ended
December 31, 2015 and 2014, respectively. In 2015, the Company amended
The Company currently maintains a post-retirement medical benefit plan for
its lease agreement, reducing its rental space in New Jersey, which resulted
eligible employees of the Company, and benefits are based on a participant’s
in $1,186 of write-offs related to leasehold improvements and furniture and
age and credited service. In 2012, the Plan was amended to reduce the
fixtures, which were not fully depreciated. There were no gains related to
Company’s share of the costs if the annual premium increase exceeds 3.00%.
the disposal of the Company’s furniture and fixtures.
The Plan benefits are funded from the general assets of the Company,
including corporate-owned life insurance policies purchased to provide for
the benefits earned by eligible employees. These policies cannot be
considered in the determination of the funded status of the plan.
39
As of December 31, 2015 and 2014, the unfunded balance related to this
plan was $10,227 and $11,161, respectively, based upon a discount rate of
4.50% for 2015 and 4.25% for 2014.
All unfunded balances for the plans above are recorded within accrued expenses
and other liabilities within the consolidated balance sheets.
r. new accounting pronouncements
In February 2015, Accounting Standard Update (“ASU”) 2015-02
Consolidation (Topic 810): Consolidation Amendments to the Consolidation Analysis
was issued by the FASB. This guidance is effective for nonpublic entities for
fiscal years beginning after December 15, 2016, with early adoption permitted.
The changes resulting from this ASU will affect the consolidation evaluation
process for reporting units, as the intention of this guidance is to simplify and
improve the current process by ultimately reducing the number of consolidation
models required. This ASU makes several modifications to the consolidation
guidance for VIEs and general partners’ investments in limited partnerships, as
well as modifications to the evaluation of whether limited partnerships are VIEs
or voting interest entities. ASU 2015-02 will have no material impact on the
Company’s financial condition, results of operations or cash flows once adopted.
In April 2015, FASB issued new guidance on accounting for fees paid in a
cloud computing arrangement ASU 2015-05, Intangibles – Goodwill and Other –
Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a
Cloud Computing Arrangement. The provisions of this guidance are effective for
nonpublic entities for fiscal years beginning after December 15, 2016, however
early adoption is permitted. The new guidance provides that all software
licenses included in cloud computing arrangements be accounted for consistent
with other licenses of intangible assets. However, if a cloud computing
arrangement does not include a software license, the arrangement should be
accounted for as a service contract, the accounting for which did not change.
Implementing this guidance will not have a material impact on the Company’s
consolidated financial statements.
In May 2015, FASB issued new guidance on short-duration insurance contracts
ASU 2015-09 Financial Services – Insurance (Topic 944): Disclosures About ShortDuration Contracts. The new guidance is effective for nonpublic entities for annual
periods beginning after December 15, 2016, with early adoption permitted.
The guidance should be applied retrospectively for comparative disclosures for
periods presented in the financial statements, with the exception of disclosures
that only apply to current periods. The new guidance requires insurance entities
to provide users of financial statements with more transparent information about
initial claim estimates and subsequent adjustments to these estimates, including
40
information on: (i) reconciling from the claim development table to the balance
sheet liability, (ii) methodologies and judgments in estimating claims, and (iii)
the timing and frequency of claims. The Company is currently evaluating the
impact of this guidance on its consolidated financial statements.
In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement
(Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent). The guidance is effective for nonpublic entities
for annual reporting periods beginning after December 15, 2016, with early
adoption permitted. ASU No. 2015-07 requires that investments for which
the fair value is measured at net asset value using the practical expedient
(investments in funds measured at NAV) under Fair Value Measurements and
Disclosures (Topic 820) are excluded from the fair value hierarchy. ASU No.
2015-07 is required to be applied retrospectively to all periods presented. This
will impact disclosures presented in Footnote 4 as investments valued using a
NAV will be removed from the fair value measurements tables once adopted.
In January 2016, the FASB issued updated guidance ASU 2016-01, Financial
Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities on the recognition and measurement of financial
assets and financial liabilities. This guidance changes an entity’s accounting
related to the classification and measurement of certain equity investments and
the presentation of certain fair value changes for financial liabilities measured at
fair value. The guidance also amends certain disclosure requirements associated
with the fair value of financial instruments. The new guidance is effective for
annual periods beginning after December 15, 2017. Early adoption is not
permitted except for the provisions related to the presentation of certain fair
value changes for financial liabilities measured at fair value. The Company
is currently assessing the impact this guidance will have on the Company’s
In February 2016, the FASB issued updated guidance ASU 2016-02,
Leases (Topic 825-10). This guidance supersedes existing guidance on lease
accounting. FASB’s intent is to increase transparency and comparability of
organizations by recognizing lease assets and liabilities on the balance sheet of
operating leases and disclosing key information about leasing arrangements.
The new guidance is effective for annual periods beginning after December 15,
2019. The Company is currently assessing the impact of the guidance on the
Company’s consolidated financial statements.
3. investments
The fair value of the Company's AFS investments compared with their cost or amortized cost at December 31, 2015 and 2014 were:
2015:
Gross Unrealized
Gains
Cost/Amortized Cost
Debt securities:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies
Debt securities issued by foreign governments
U.S. corporate debt securities
Foreign corporate debt securities
Agency MBS
Non-agency MBS
ABS
Syndicated bank loans
Total debt securities
$ 140,582
183,692
726,282
102,608
161,182
37,728
64,397
170,269
Equity securities
Mutual funds:
Equity
Bonds
Total mutual funds
Total AFS investments
$ 140,583
183,777
728,134
102,746
164,082
37,777
64,403
170,490
—
1,591,992
9,396
—
220,284
115,287
289,716
31
—
—
—
115,318
289,716
405,003
$2,202,631
31
$
$
82,537
187,099
1,276,644
112,169
472,418
130,285
68,335
191,263
14,679
$
Gross Unrealized
Gains
Cost/Amortized Cost
—
—
—
—
—
—
—
—
5,252
Total mutual funds
Debt securities:
Agency MBS
Non-agency MBS
ABS
$
210,888
Mutual funds:
Equity
Bonds
2014:
1
85
1,852
138
2,900
49
6
221
Fair Value
1,586,740
Equity securities
Total AFS investments
$
Losses*
$
46
216
12,822
348
15,247
906
83
112
$
—
405,034
—
$2,217,310
Losses*
—
—
—
—
—
—
—
—
Fair Value
$
82,583
187,315
1,289,466
112,517
487,665
131,191
68,418
191,375
2,520,750
29,780
—
2,550,530
166,391
26,110
—
192,501
105,429
188,595
2,689
590
—
—
108,118
189,185
294,024
$2,981,165
3,279
$
59,169
$
—
297,303
—
$ 3,040,334
* As of December 31, 2015 and 2014, no gross unrealized losses are reported, as all unrealized losses are treated as other-than-temporary impairment adjustments and are recorded as a deduction in net investment
income and the amortized cost of investments.
41
Purchases of AFS investments were $2,413,052 and $2,000,794 in 2015 and
2014, respectively. Proceeds from sales of AFS investments were $1,497,919
and $1,860,126 in 2015 and 2014, respectively. In 2015, gross gains of
$35,303 and gross losses of $109,364 (including $95,697 of other-thantemporary impairments) were recognized during the year. In 2014, gross gains
of $55,387 and gross losses of $47,503 (including $41,016 of other-thantemporary impairments) were recognized during the year.
2015:
The fair value of the Company’s HTM investments compared with their costs at
December 31, 2015 are presented below. The Company had no securities
designated as HTM at December 31, 2014.
Cost/Amortized Cost
Gross Unrealized
Gains
Losses
Fair Value
Debt securities:
Private placements *
Agency MBS
Non-agency MBS
ABS
$ 706,240
30,471
7,017
364,755
134,429
5,139
$172
1
—
140
19
—
$ (20,985)
(20)
(23)
(4,461)
(5,784)
(109)
$ 685,427
30,452
6,994
360,434
128,664
5,030
Total HTM investments securities
$1,248,051
$332
$ (31,382)
$1,217,001
*Private placement debt issuances are 144A registered bonds issued by limited liability corporations, which are backed by assets providing essential services.
Proceeds from maturities of HTM investments were $107,051 for the year ended
December 31, 2015. As these proceeds resulted from the maturity of the securities,
there were no gains or losses recognized related to these HTM investments.
The carrying value of other invested assets was $154,064 and $89,142 at
December 31, 2015 and 2014, respectively. The Company purchased $89,702
and $106,065 of other invested assets for the years ended December 31, 2015
and 2014, respectively, which included convertible securities, a limited
partnership interest accounted for using the equity method of accounting,
and in 2015 REIT investments carried at cost. The Company’s other invested
assets redemptions and proceeds were $25,066 and $24,210 for the years
ended December 31, 2015 and 2014, respectively. The Company recognized
gains of $66 and $227 on these investments for the same respective periods.
42
The evaluation for other-than-temporary impairments is a quantitative and
qualitative process that is subject to risks and uncertainties in the determination
of whether declines in the fair value of investments are other-than-temporary.
The risks and uncertainties include changes in general economic conditions,
the issuer’s financial condition or near-term recovery prospects, and the effects
of changes in interest rates over the period of time the investment is expected
to be held. As of December 31, 2015, the Company evaluated all securities for
credit-related impairment and concluded all significant unrealized losses were
included in the other-than-temporary impairment charge for AFS securities. As
of December 31, 2015, none of the Company’s HTM securities were impaired.
The amortized cost and fair value of AFS and HTM debt securities at December
31, 2015, by contractual maturity, are shown in the following table. As MBS
and ABS are generally more likely to be prepaid than other fixed maturity
securities, MBS and ABS are shown separately.
Available-for-sale
Amortized
Cost
Due in one year or less
Due after one year
through five years
Due after five years
through ten years
Due after ten years
Subtotal
Agency MBS
Non-agency MBS
ABS
Held-to-maturity
Fair
Value
Amortized
Cost
Fair
Value
$ 166,207 $ 166,359 $ 111,075 $ 110,888
993,872
995,843
532,473
524,310
111,695
51,659
111,812
51,716
51,802
48,378
47,120
40,555
1,323,433
1,325,730
743,728
722,873
161,182
37,728
64,397
164,082
37,777
64,403
364,755
134,429
5,139
360,434
128,664
5,030
$1,586,740 $1,591,992 $1,248,051 $1,217,001
Expected maturities will differ from stated maturities because underlying
borrowers have the right to call or prepay certain obligations with or without
prepayment penalties.
Net investment (loss) income for the years ended December 31, 2015 and 2014
consists of the following:
2015
Interest and dividend income
Net realized investment (losses) gains
Net realized foreign currency losses
Net unrealized convertible asset (losses) gains
Net unrealized gains on foreign currency
forward contracts
Net fund of funds and other (losses) gains
2014
$106,452
(72,502)
(29,980)
(1,287)
$103,538
7,454
(8,476)
426
1,468
(47)
7
561
Total investment income
Investment expenses
4,104
(20,895)
103,310
(20,473)
$ (16,791)
$ 83,037
At December 31, 2015, the Company has securities on deposit of $633,285
in order to comply with various U.S., Canadian and U.K. insurance and tax
regulatory requirements. The Company has also entered letter of credit facilities
with four financial institutions totaling $408,000, of which $352,238 was
committed at December 31, 2015. At December 31, 2015, the Company has
pledged cash and debt securities valued at $964,269 as collateral to secure
these letters of credit.
The Company participates in securities lending arrangements whereby specific
securities are loaned to other institutions, primarily banks and brokerage firms,
for short periods of time. Collateral is held by our custodian and is monitored
and maintained by the lending agent. Company policy requires the borrower to
provide a minimum of 102% and 105% of the fair value of the domestic and
foreign loaned securities, respectively, as collateral. As of December 31, 2015
and 2014, investment securities on loan had a fair value of $27,275 and
$43,975, respectively, while the cash collateral from borrowers was $27,994
and $45,125 for the same respective periods. The Company receives interest
income on the invested collateral, which is included in net investment income.
43
4. fair value measurements
The following tables present information about those assets and liabilities carried at fair value at December 31, 2015 and 2014:
2015:
Level 1
Level 2
Level 3
Total
—
—
—
—
—
—
—
—
$ 140,583
183,777
728,134
102,746
164,082
37,777
64,403
170,490
—
—
—
—
—
—
—
—
$ 140,583
183,777
728,134
102,746
164,082
37,777
64,403
170,490
—
220,284
1,591,992
—
—
—
1,591,992
220,284
—
—
115,318
289,716
—
—
115,318
289,716
—
405,034
—
405,034
220,284
—
12,117
1,997,026
1,468
151,779
—
2,217,310
1,468
163,896
$232,401
$2,150,273
$
—
$2,382,674
$
—
$
—
$397,837
$ 397,837
Total liabilities
$
—
$
—
$397,837
$ 397,837
assets:
Investments:
Debt securities:
Agency MBS
Non-agency MBS
ABS
$
Equity securities
Mutual funds:
Equity funds
Bond funds
Total mutual funds
Total investments
Foreign currency forward contracts
Cash equivalents including money market funds and short-term debt securities
Total assets
$
liabilities:
44
2014:
Level 1
Level 2
Level 3
Total
assets:
Investments:
Debt securities:
Agency MBS
Non-agency MBS
ABS
$
Equity securities
—
—
—
—
—
—
—
—
$
82,583
187,315
1,289,466
112,517
487,665
131,191
68,418
191,375
$
—
—
—
—
—
—
—
—
$
82,583
187,315
1,289,466
112,517
487,665
131,191
68,418
191,375
—
192,501
2,550,530
—
—
—
2,550,530
192,501
Mutual funds:
Equity funds
Bond funds
—
—
108,118
189,185
—
—
108,118
189,185
Total mutual funds
—
297,303
—
297,303
192,501
33,271
2,847,833
573,292
—
—
3,040,334
606,563
$225,772
$3,421,125
$
—
$3,646,897
$
—
$
—
$418,464
$ 418,464
Total liabilities
$
—
$
—
$418,464
$ 418,464
Total investments
Cash equivalents including money market funds and short-term debt securities
Total assets
liabilities:
45
Investments in the Fair Value Measurement tables above exclude HTM
securities and other invested assets. Other invested assets are comprised of
investments accounted for in accordance with the equity method of accounting,
namely fund of fund and limited partnership interests, as well as convertible
securities, which are carried at fair value, and privately issued REITS, which
are carried at cost. The privately issued REITs are not subjected to fair value
measurement since they are carried at cost. Convertible securities utilize the
same valuation techniques as corporate debt securities, and therefore would be
classified as a Level 2 security. As of December 31, 2015, privately issued REITS
carried at cost totaled $50,140 and had a fair value of approximately $50,427.
The Company’s policy is to transfer assets and liabilities from Level 1 to Level 2
and from Level 2 to Level 1 at their fair values at the end of each reporting
period, consistent with the date of the determination of fair value. Investments
are transferred from Level 1 to Level 2 when they are no longer transacted with
sufficient frequency and volume to indicate an active market. Conversely, assets
are transferred from Level 2 to Level 1 when transaction volume and frequency
are indicative of an active market. The Company had no transfers between
Levels 1 and 2 during the years ended December 31, 2015 and 2014.
The following tables present additional information about Level 3 liabilities
measured at fair value on a recurring basis at December 31, 2015 or 2014.
The Company did not hold any Level 3 assets at December 31, 2015 and 2014.
Insurance and Reinsurance Contracts:
2015
$(418,464)
Balance, December 31
$(397,837)
$(418,464)
Changes in unrealized losses included in earnings
related to obligations still held at reporting date
$ 28,642
$ (42,587)
(35,791)
7,541
20,235
7,628
13,587
The Company’s policy is to transfer assets and liabilities into and out of Level 3
at their fair values at the end of each reporting period, consistent with the date
of the determination of fair value.
46
3
fair value
The table below presents information about the significant unobservable inputs
used for recurring fair value measurements for insurance and reinsurance
contracts:
Fair Value at
Valuation
December 31, 2015 Technique
Unobservable
Input
$397,837
Nominal net value
of contracts
Risk-adjusted discounted
cash flows
$544,400
Effective average
discount rate*
63.04%
Risk margin**
13.55%
Fair Value at
Valuation
December 31, 2014 Technique
Unobservable
Input
$418,464
Nominal net value
of contracts
Risk-adjusted discounted
cash flows
Selected
Estimate
Selected
Estimate
$536,805
Effective average
discount rate*
62.33%
Risk margin**
23.85%
* The effective average discount rate reflects the ratio of discounted future obligations over undiscounted
payment patterns until final settlement. A decrease in interest rates increases both the effective average
2014
discount rate and the fair value of insurance and reinsurance contracts, with a corresponding reduction
$(363,632) in net income. Should interest rates rise, both the discount rate and the fair value of the insurance and
reinsurance contracts would decline with a corresponding increase to net income.
**Risk reserve margin is expressed as a percentage of discounted loss liabilities and reflects the risk
(42,587) associated with the timing and amount of future loss payments. The main driver resulting in the
change between risk margin percentages from December 31, 2014 to December 31, 2015 is a decrease
(33,460) in insurer default rates, which are reviewed as part of the annual actuarial loss reserve study.
Balance, January 1
Total gains (losses), realized/unrealized
Included in earnings
Issuances, purchases, and settlements:
Issuances
Purchases
Settlements
28,642
quantitative information for level
measurements
The Company’s insurance and reinsurance contracts do not have observable
market prices. The fair value of insurance and reinsurance contracts represents
the Company’s estimate of the cost to completely transfer its obligations and
related reinsurance assets to another party of comparable creditworthiness.
The fair value of insurance and reinsurance contracts is based on the present
value of expected future cash flows and a risk margin that would be payable
to transfer the obligation to a third party. Expected future cash flows are
comprised primarily of estimated payments to be made by the Company under
the insurance contracts net of anticipated future recoveries under the related
reinsurance contracts. The Company estimates future cash flows based on
expected loss and loss expense payments estimated using accepted actuarial
techniques, the timing of related future cash receipts or payments from these
contracts and risk-free discount rates. A risk margin is calculated for potential
deviations in the amount and timing of those estimated cash flows given the
credit rating of the Company as well as additional return on capital a purchaser
would require. These estimates are not observable in any marketplace, and actual
future cash flows or other inputs could differ materially from these estimates.
The table below reflects the carrying amount and balance sheet caption in which
the assets and liabilities of the consolidated VIEs are reported as of December
31, 2015 and 2014.
5. variable interest entities
In December 2015, the Company entered into a $65,000 contractual
commitment to fund a newly established limited partnership investment.
As of December 31, 2015, the Company was not invested in the partnership.
However, based on the Company’s contractual commitment, its economic
interest in the partnership and its span of control, the investment was treated
as a VIE and consolidated in the Company’s financial statements.
The Company, through its subsidiary, AEGIS London Holding, holds
investments in two entities that are variable interest entities (“VIEs”). Each of
these VIEs provides 3.5% of the underwriting capacity of AEGIS London and
maintains whole account quota share reinsurance contracts with third parties.
The Company holds the power to direct the most significant activities of the
entities, as well as an economic interest in the entities and, as such, is the
primary beneficiary. Therefore, these VIEs are consolidated in the Company’s
financial statements.
2015
2014
Prepaid reinsurance premiums
Current income taxes receivable
$16,839
67
6,124
$19,287
61
3,540
Total assets of consolidated VIEs
$23,030
$22,888
Due to reinsurers
Accrued expenses and other liabilities
22,616
9
26,111
10
Total liabilities of consolidated VIEs
$22,625
$26,121
6. premiums
Written and earned premiums are comprised of the following:
2015
The determination of a VIE’s primary beneficiary requires an evaluation of the
Company’s obligations in relation to other parties’ relationship or involvement
with the entity, as well as a determination of the allocation of expected residual
returns or expected losses to each party involved in the transaction. While a
qualitative approach is applied, for VIEs that are investment companies, the
primary beneficiary is considered to be the party absorbing a majority of the
VIE’s expected losses or receiving a majority of the VIE’s expected returns.
Written Premiums:
Direct
Assumed
Subtotal
Ceded
2014
$ 1,217,678 $1,312,451
32,832
36,042
1,250,510
390,389
1,348,493
405,391
Net
$ 860,121 $ 943,102
Earned Premiums:
Direct
Assumed
$ 1,235,412 $1,264,839
34,744
35,381
Subtotal
Ceded
Net
1,270,156
377,471
1,300,220
402,254
$ 892,685 $ 897,966
47
environmental-related claims
7. reserve for losses, loss expenses and reinsurance
Activity in the reserve for losses and loss expenses is summarized as follows:
2015:
Reserve at January 1
Gross
Ceded
Net
$3,165,788 $ 1,175,588 $1,990,200
Included in the reserve for losses and loss expenses are amounts held for losses
relating to manufactured gas plant cleanup costs and losses related to exposure
to asbestos. In estimating amounts to be provided, management considers
various information, including the number of reported claims, the continually
evolving legal environment in each jurisdiction and the trends in remediation
and medical costs. Management believes that the reserve for such losses is
adequate; however, uncertainties exist as to the extent of coverage, the existence
of other potentially responsible parties, the likelihood of the Company being
liable, and the share of the ultimate cost, if any, that the Company will bear.
Management periodically reviews this reserve as new information becomes
available and as the legal environment changes, however these exposures are
difficult to predict.
Incurred losses and loss expenses:
Current year
Prior years
936,386
(203,072)
309,819
(111,597)
626,567
(91,475)
Total incurred losses and loss expenses
733,314
198,222
535,092
Paid losses and loss expenses:
Current year
Prior years
126,029
874,100
35,318
447,068
90,711
427,032
1,000,129
482,386
517,743
reinsurance
(19,118)
(2,771)
(16,347)
The Company cedes a portion of its risk by utilizing various reinsurance
contracts in order to provide additional capacity for future growth and limit
the maximum net loss potential arising from large risks. These contracts do
not relieve the Company from its obligation to policyholders. The amounts
recoverable from reinsurers are estimated in a manner consistent with the
reserve for losses associated with the related reinsurance contract.
Total paid losses and loss expenses
Effects of foreign exchange rate changes
Reserve at December 31
$2,879,855
Amounts currently due from reinsurers
51,790
Due from reinsurers
2014:
Reserve at January 1
Incurred losses and loss expenses:
Current year
Prior years
888,653 $1,991,202
$ 940,443
Gross
Ceded
Net
$3,104,771 $ 1,075,433 $2,029,338
1,114,064
(157,954)
399,554
(23,193)
714,510
(134,761)
Total incurred losses and loss expenses
956,110
376,361
579,749
Paid losses and loss expenses:
Current year
Prior years
161,442
718,494
41,404
232,726
120,038
485,768
Total paid losses and loss expenses
879,936
274,130
605,806
(15,157)
(2,076)
(13,081)
Reserve at December 31
Amounts currently due from reinsurers
Due from reinsurers
$3,165,788
1,175,588 $1,990,200
36,289
$ 1,211,877
For the years ended December 31, 2015 and 2014, changes in actuarial estimates
of insured events in prior years have resulted in a net decrease to the reserve for
losses and loss expenses of $91,475 and $134,761, respectively. The net decrease
in 2015 was largely driven by a decrease in prior year losses across the Company’s
property and London lines of business. The net decrease in 2014 was primarily
attributable to favorable loss development in the casualty lines of business.
48
The Company regularly evaluates the financial condition of its reinsurers and
monitors credit risk with respect to amounts recoverable under these contracts.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. In order to minimize this credit risk, the Company seeks to cede
business to reinsurers generally rated “A-” or better by accredited rating
agencies such as A.M. Best. The Company considers reinsurers that are not rated
or do not fall within the prescribed rating categories and may grant exceptions
to the general policy on a case-by-case basis. As of December 31, 2015 and
2014, 97 and 96 percent, respectively, of the total reinsurance exposure was due
from reinsurers rated “A-” or better.
To estimate the allowances for uncollectible reinsurance, the Company performs
a default analysis consisting of a number of factors, including the amounts of
ceded losses recoverable from the reinsurer and the credit rating of the reinsurer.
As of December 31, 2015 and 2014, such allowances were approximately
$23,123 and $31,026, respectively. There were no write-offs of ceded losses for
the years ended December 31, 2015 or 2014. As of December 31, 2015 and
2014, current reinsurance recoverables had $724 and $1,128, respectively,
overdue from reinsurers for 90 days or more, for which a general allowance has
been established.
At December 31, 2015, the Company’s largest ceded loss recoverable
exposures resided with three reinsurers, the largest having a carrying value of
approximately $162,575, which was an increase of $74,420 from December 31,
2014. This reinsurer had a “A-“rating for both 2015 and 2014, and provided
collateral that totaled $75,976 and $56,428 at December 31, 2015 and 2014,
respectively. The Company also had ceded losses recoverable of $154,490 and
$301,599 at December 31, 2015 and 2014, respectively, associated with
Underwriters at Lloyd’s. The third reinsurer, with an “A” rating in both 2015
and 2014, had recoverables of $153,703 and $166,553 at December 31, 2015
and 2014, respectively.
8. income taxes
The Company has received an undertaking from Bermuda that it will be
exempt from any local profits, income or capital gains taxes until the year 2035.
No such taxes are presently imposed in Bermuda. As a consolidated group
however, the Company and its subsidiaries are subject to such taxes in other tax
jurisdictions. The Company files U.S. and Canadian federal income tax returns.
Furthermore, certain U.K. subsidiaries are required to file U.K. income tax
returns, while certain business sourced in the U.K. are subject to U.S. tax under
an Internal Revenue Code Section 953(d) election.
The Company files a U.S. tax return pursuant to Internal Revenue Code Section
953(d) status. Section 953(d) status was elected in September 2015 and was
applied retroactively to January 1, 2014. The Company filed its 2014 U.S.
tax return as a Section 953(d) filer, and the tax amounts presented in these
consolidated financial statements have been prepared based on this status.
The Company had determined that it would be prudent to elect Section 953(d)
status in order to enhance the ability of the Company to utilize its existing
tax net operating loss carryforwards before they expire. Electing Section 953(d)
status allows the Company to combine its taxable income with certain
subsidiary taxable income in a consolidated U.S tax return, which provides
the opportunity to more effectively utilize the Company’s net operating losses.
The Company anticipates receiving and signing a Closing Agreement with
the Internal Revenue Service (“IRS”) in 2016, thus completing the Section
953(d) election process. Given the high likelihood of approval by the IRS,
these consolidated financial statements reflect the Company as if it had Section
953(d) status.
The provision for income taxes for the years ended December 31, 2015 and
2014 is as follows:
Current provision (benefit)
2015
2014
$13,695
$ 5,504
Deferred provision (benefit) relating to:
Loss reserves
Net operating loss carryforwards
Change in fair value of insurance and
Unearned premiums
Tax credit carryforwards
Basis difference in investments
Change in valuation allowance
Deferred foreign earnings
Policy acquisition costs
U.S. tax impact of branch operations
Fixed assets basis difference
Other expenses
Claims equalization reserve
U.K. profit commission
Effects of foreign exchange rates
4,026
68,792
2,314
48,217
10,165
843
6,076
(22,012)
4,776
(7,777)
(1,274)
(414)
(1,604)
2,140
2,139
(8,477)
(932)
(17,435)
(5,202)
(9,746)
(2,717)
5,063
(47)
5,140
13,889
(1,424)
(1,556)
1,785
(778)
(426)
Total deferred provision
56,467
37,077
$70,162
$42,581
The reconciliation between the Company’s effective tax rate and the statutory
tax rate is as follows:
Tax Effect
2015
U.S. federal income tax
at statutory rate
Adjustments:
Tax-exempt interest
Deferred tax true-up
Tax effect on deferred
foreign income
Foreign tax credits
Change in valuation
allowances
Return-to-provision
adjustments
Other permanent items
Percent of
pre-tax income
Tax Effect
2014
Percent of
pre-tax income
$55,060
35.0%
$38,308
35.0%
—
—
0.0%
0.0%
(2)
(15,092)
(0.0%)
(13.8%)
(325)
14,403
(0.2%)
9.2%
13,504
2,665
12.4%
2.4%
4,776
3.0%
5,063
4.6%
(2,078)
(1,674)
(1.3%)
(1.1%)
(2,935)
1,070
(2.7%)
1.0%
$70,162
44.6%
$42,581
38.9%
49
Deferred income taxes as of December 31, 2015 and 2014 relate to the
following:
2015
2014
$ 54,228
95,401
24
24,347
22,602
33,858
9,238
14,249
44,516
$ 58,254
164,193
24
25,190
28,678
11,846
8,824
5,772
46,656
Gross deferred tax assets
Less: Valuation allowance
298,463
(13,839)
349,437
(9,063)
Deferred tax assets
284,624
340,374
10,697
20,710
51,584
46,332
2,566
2,649
14,906
41,419
54,109
4,170
3,923
12,767
128,734
729
137,098
66
$156,619
$203,342
Deferred tax assets:
Loss reserves
Net operating loss carryforwards
Capital loss carryforwards
Unearned premiums
Tax credits
Basis difference in investments
U.S. tax impact of branch operations
U.K. profit commission
Other
Deferred tax liabilities:
Unrealized investment gains on securities, net
Deferred foreign earnings
Fixed asset basis difference
Policy acquisition costs
Claims equalization reserve
Deferred tax liabilities
50
The Company has $272,574 of net operating losses that are available to offset
taxable income in future years. These net operating losses will begin to expire in
2028 and will fully expire in 2034. The Company has $18,963 of alternative
minimum tax credits, which will not expire, and $3,639 and $11,909 of foreign
tax credits as of December 31, 2015 and 2014, respectively. The foreign tax
credits will expire between 2017 and 2023.
Management believes that based on its historical pattern of taxable income, the
Company will more likely than not produce sufficient taxable income in the future
to realize its deferred tax assets, after consideration of the valuation allowance.
The change in the valuation allowance of $4,776 from 2014 is primarily
attributable to the recording of a full valuation allowance on the deferred tax
assets in the Canada Branch due to uncertainty associated with generating
future taxable income needed to utilize these deferred tax assets.
At December 31, 2015 and 2014, the Company had no uncertain tax positions
for which it is reasonably possible that the total amounts of unrecognized tax
benefits will significantly increase or decrease within the next 12 months.
9. policyholders’ liability
The liability of each policyholder of the Company is limited to any unpaid
premiums due to the Company from such policyholders and for premiums,
if any, relating to the Company’s retrospective premium plans.
Retrospective premium plans were retroactively discontinued for all policies
incepting on or after January 1, 1988. Management is unaware of any events
that would cause the application of any of the retrospective premium plans
remaining in effect.
10. contingencies
12. dividend restrictions and margin of solvency
The Company has established reserves for losses and loss expenses for claims that
arise in the ordinary course of business. The Company is also subject to legal
proceedings and regulatory inquiries, for which there is currently no provision
established as management does not believe that the outcome of any of these
matters will have a material adverse effect on the Company’s financial position,
operating results or cash flows.
In 2015, AISL transferred $30 million of cash to AEGIS London Holding,
which, in turn, transferred the $30 million to AEGIS. A similar transfer
occurred in 2014, however instead of cash, $80 million of securities were
transferred in an “in kind” dividend transfer between the same entities.
No other dividend transfers occurred in 2015 or 2014. Both transfers were
intercompany transactions, with no impact on the Company’s consolidated
financial statements. At December 31, 2015 and 2014, there were no significant
restrictions on the payment of dividends from AISL to AEGIS London Holding.
The Company leases office space and equipment under various operating lease
arrangements, which expire at various dates through 2027. Rent expense for the
years ended December 31, 2015 and 2014 was $4,730 and $4,361, respectively.
The Company’s aggregate minimum rental commitments as of December 31,
are approximately $3,436 for 2016, $3,551 for each of years 2017, 2018, 2019,
$3,182 in 2020 and $16,288 for all years thereafter until 2027. Rental
commitments for London offices are reflected through the end of the lease
term, which is 2020.
The Company is registered under the Bermuda Insurance Act of 1978 and
related regulations, which require that the Company maintain a minimum
solvency margin of approximately $303 million for solvency and liquidity.
As a Class 3 insurer, the policyholders’ surplus at December 31, 2015 provided
an excess margin of solvency of approximately $743 million.
13. operating results by line of business
In October 2015, the Company amended its lease and sublease agreements
reducing its space in New Jersey from 93,000 to 69,335 square feet. The lease
amendments also terminated the Company’s November 2014 sublease
agreement. Sublease income prior to the termination of the sublease totaled
$279 in 2015 and was $51 in 2014. In August 2015, the annual rent increased
for London offices while leased space remained the same.
11. subsequent events
AEGIS has evaluated all events subsequent to December 31, 2015 through
the consolidated financial statements issuance date of March 22, 2016, and has
noted the following:
On January 26, 2016, the Company was notified that a group of its subsidiaries
that file a consolidated U.S. tax return would be audited by the Internal
Revenue Service for the 2013 tax year. Although the outcomes of examinations
by taxing authorities are always uncertain, it is the opinion of management that
the resolution of these audits will not have a material effect on the Company’s
Management has elected to segment its operating results into two lines of
business: General Liability and Directors and Officers Liability. General
Liability includes excess liability, fiduciary and employee benefits liability,
professional liability and excess workers’ compensation insurance. Directors &
Officers Liability includes directors and officers liability and general partner
liability insurance. Operating expenses directly attributable to a given line of
business are charged correspondingly; the remainder is allocated based upon
each segment’s respective share of gross written premiums. Investment results
and the results from all other lines of business are allocated to each line of
business based upon its proportionate share of unearned premiums, reserve for
losses and loss expenses, and total surplus. The business segmentation is utilized
to determine continuity credits, when declared by the Board of Directors of
AEGIS, as they are earned by members based upon their individual proportionate
shares of premiums and surplus attributable to the Company’s General Liability
and Directors & Officers Liability lines of business, as defined in the Company’s
bylaws.
51
Total surplus supports all insurance policies issued by the Company, regardless of type. The amounts of total surplus allocated by line of business are presented
solely for informational purposes.
General Liability
2015
Revenue:
Net premiums earned
Total revenue
Expenses:
Commission expenses
Total expenses
2014
Directors & Officers Liability
2015
2014
Total
2015
2014
$619,394
(9,315)
$663,606
54,292
$273,291
(7,476)
$234,360
28,745
$ 892,685
(16,791)
$ 897,966
83,037
28,642
(42,587)
—
—
28,642
(42,587)
638,721
675,311
265,815
263,105
904,536
938,416
444,040
54,829
64,059
464,329
72,658
84,876
91,052
42,248
31,028
115,420
37,614
33,274
535,092
97,077
95,087
579,749
110,272
118,150
562,928
621,863
164,328
186,308
727,256
808,171
Income before continuity and other premium
credits and income taxes
75,793
1,195
53,448
2,391
101,487
18,769
76,797
18,405
177,280
19,964
130,245
20,796
Income tax provision
74,598
33,271
51,057
23,738
82,718
36,891
58,392
18,843
157,316
70,162
109,449
42,581
Net income
$ 41,327
$ 27,319
$ 45,827
$ 39,549
$
(11,821)
$309,813
(978)
$283,472
(6,775)
$911,734
(526)
$872,711
(18,596)
$1,221,547
(1,504)
$1,156,183
$339,319
$309,813
$950,786
$911,734
$1,290,105
$1,221,547
52
87,154
$
66,868
independent auditors’ report
To the Members of Associated Electric & Gas Insurance Services Limited:
We have audited the accompanying consolidated financial statements of Associated Electric & Gas Insurance Services Limited (the “Company”), which comprise the
consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, changes in surplus,
and cash flows for the years then ended, and the related notes to the consolidated financial statements.
management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
auditor’s responsibility
auditors’
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Associated Electric & Gas
Insurance Services Limited as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance
with accounting principles generally accepted in the United States of America.
March 22, 2016
Parsippany, New Jersey
53
offices
2016 aegis Meetings
aegis
annual meeting
Associated Electric & Gas
Insurance Services Limited
The Maxwell Roberts Building
Fourth Floor
One Church Street
Hamilton, Bermuda HM11
Telephone: 441.296.2131
aegis insurance
services, inc.
1 Meadowlands Plaza
East Rutherford, NJ 07073
Telephone: 201.508.2600
Fax: 201.896.6638
Claims fax: 201.508.1451
Website: aegislink.com
E-mail: [email protected]
aegis london
AEGIS Managing Agency Limited
33 Gracechurch Street
London EC3V 0BT England
Telephone: 44.207.265.2100
Fax: 44.207.265.2101
Website: aegislondon.co.uk
E-mail: [email protected]
54
The Annual General Meeting of
Members of the Company will be held
in Chicago, IL, on October 27, 2016.
Notice of the Meeting and the form
of proxy will be issued to voting
Members in late September 2016.
policyholders’
conference
The annual AEGIS Policyholders’
Conference will be held July 25
to 28, 2016, in Boston, MA.
Registration information will be
e-mailed and posted on our website
in May 2016.
other meetings and
seminars
AEGIS will also host a series of
regional member and broker meetings, Claims Roundtable seminars,
and a number of underwriting,
claims and loss control seminars
and webinars throughout 2016.
Please visit aegislink.com for details.
Associated Electric & Gas Insurance Services Limited (“AEGIS”) was incorporated in Bermuda in 1971 and
commenced underwriting activities in 1975. Effective January 1, 2015, AEGIS is registered as a Class 3 nonassessable mutual insurance company in Bermuda.
AEGIS is an eligible surplus lines insurer in all jurisdictions of the United States. It is subject to United States
federal income taxes, files the required tax returns and maintains a United States trust fund in excess of
$150,000,000. AEGIS is also a licensed foreign insurance company in all provinces and territories of Canada
and on the general register of foreign reinsurers in Mexico.
AEGIS’ operations are supported by its wholly owned managing general agent, AEGIS Insurance Services, Inc.
(“AEGIS Services”), which provides AEGIS and its affiliates with professional staff and services.
The AEGIS Syndicate at Lloyd’s of London, number 1225, (“AEGIS London”) commenced operations in
1999. AEGIS London’s operations are supported by AEGIS Managing Agency Limited (“AMAL”), which
provides professional staff and services for AEGIS London. AEGIS Electric & Gas International Services Limited
(“AEGIS International”) is a corporate member of Lloyd’s and the principal capital provider of AEGIS London.
Both AMAL and AEGIS International are subsidiaries of AEGIS through AEGIS Holding Inc.
In the U.S., AEGIS; AEGIS & Design; the AEGIS Logo (hereafter any reference to “Logo” or “Design” are
references to the AEGIS Diamonds Design); AEGISLINK; HOW SAFE; PEOPLE DON’T KNOW WHAT
THEY DON’T KNOW; LESSONS LEARNED; AEGIS LONDON and AEGIS LONDON & Design are
registered trademarks of AEGIS.
In the U.K., AEGIS; AEGIS LONDON; AEGIS LONDON & Design and AEGIS SYNDICATE 1225 &
Design are registered trademarks of AEGIS.
In the E.U., AEGIS; AEGIS & Design; the AEGIS Logo; AEGIS ENERGY; AEGIS ENERGY & Design;
AEGIS SYNDICATE 1225 & Design; AEGISLINK; AEGIS LONDON and AEGIS LONDON & Design
are registered Community trademarks of AEGIS.
In Bermuda, AEGIS and the AEGIS Logo are registered trademarks of AEGIS.
In New Zealand, AEGIS is a registered trademark of AEGIS.
In Canada, AEGIS; AEGIS & Design; AEGIS CANADA; the AEGIS Logo and AEGIS LONDON &
Design are registered trademarks of AEGIS.
©
2016 Associated Electric & Gas Insurance Services Limited and AEGIS Insurance Services, Inc.
All rights reserved.
Five-Year financial highlights
f o r th e y e a r s ended december 31 (Expressed in thousands of U.S. dollars)
2011
2012
2013
2014
2015
$1,140,260
$1,244,704
$1,280,125
$1,348,493
$1,250,510
827,915
763,257
878,492
943,102
860,121
Net premiums earned
810,437
104,797
(38,110)
802,689
146,472
(17,291)
805,473
111,064
38,420
897,966
83,037
(42,587)
892,685
(16,791)
28,642
877,124
931,870
954,957
938,416
904,536
583,139
116,675
116,161
628,139
113,382
127,436
572,215
97,773
114,812
579,749
110,272
118,150
535,092
97,077
95,087
815,975
868,957
784,800
808,171
727,256
61,149
18,982
62,913
34,163
170,157
35,544
130,245
20,796
177,280
19,964
Income tax provision (benefit)
42,167
(4,894)
28,750
9,155
134,613
44,981
109,449
42,581
157,316
70,162
revenue:
Total revenue
expenses:
Commission expense
Total expenses
Net income
$
Other comprehensive (loss) income, net of income tax (benefit) expense
1,846
$1,001,034
30,654
$1,049,941
(33,639)
$1,100,190
(1,504)
$1,156,183
(18,596)
$1,221,547
$1,049,941
$1,100,190
$1,156,183
$1,221,547
$1,290,105
Total assets
$5,290,224
$5,599,079
$5,757,767
$6,037,151
$5,718,282
$2,904,281
$2,993,698
$3,104,771
$3,165,788
$2,879,855
47,061
$
19,595
$
89,632
$
66,868
$
87,154
m
aegis 2015 Annual Report
pointing in the Right direction

2015 AEGIS annual report

Transcription

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