Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion and analysis of our results of operations and financial condition. It should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, "Financial Statements and Supplementary Data".

Industry Conditions.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As such, financial results tend to fluctuate with periods of constrained availability, higher rates and stronger profits followed by periods of abundant capacity, lower rates and constrained profitability. Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor's, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies, domestic and international underwriting operations, including underwriting syndicates at Lloyd's of London and certain government sponsored risk transfer vehicles. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and recently, the securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the property catastrophe and casualty reinsurance lines of business. Generally, there was ample insurance and reinsurance capacity relative to demand, as well as, additional capital from the capital markets through insurance linked financial instruments. These financial instruments such as side cars, catastrophe bonds and collateralized reinsurance funds, provide capital markets with access to insurance and reinsurance risk exposure. The capital markets demand for these products is being primarily driven by the current low interest environment and the desire to achieve greater risk diversification and potentially higher returns on their investments. This increased competition is generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage.

Rates tend to fluctuate by specific region and products, particularly areas recently impacted by large catastrophic events. There was an unprecedented series of catastrophes in the third quarter of 2017 with Hurricanes Harvey, Irma and Maria, as well as a significant earthquake in Mexico City. Additional catastrophe events occurred in the fourth quarter of 2017 with the wild fires in California and Hurricanes Nate and Ophelia. The total industry losses for all of these events could exceed $100 billion. This is the second consecutive year with higher than average catastrophe losses. During 2016, catastrophe losses included the Fort McMurray Canadian wildfire, Hurricane Matthew which affected a large area of the Caribbean and southeastern United States, storms and an earthquake in Ecuador. There are industry reports that the catastrophe losses for 2016 reached their highest level in four years and the United States experienced the most loss events since 1980 and the highest total losses since 2012. While the future impact on market conditions from these catastrophes cannot be determined at this time, there was some firming in the markets impacted by the 2016 catastrophes and as catastrophe losses increased in 2017, there is a growing industry consensus that there will be a general firming of the (re)insurance markets resulting in rate increases, not only for catastrophe exposures, but also potentially for most other lines of business.

Commencing in 2015, we initiated a strategic build out of our insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving our insurance program strategic goals of increased premium volume and improved underwriting results. Recent growth is coming from highly diversified areas including newly launched lines of business, as well as, product and geographic expansion in existing lines of business. We are building a world-class insurance platform capable of offering products across lines and geographies, complementing our leading global reinsurance franchise. As part of this initiative, we launched a new syndicate through Lloyd's of London and formed Ireland Insurance, providing us access to additional international business and new product opportunities to further diversify and broaden our insurance portfolio.

Overall, we believe that given our size, strong ratings, distribution system, reputation, expertise and capital market vehicle activity the current marketplace conditions provide profit opportunities. We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.

Financial Summary.

We monitor and evaluate our overall performance based upon financial results. The following table displays a summary of the consolidated net income (loss), ratios and shareholders' equity for the periods indicated.

Years Ended December 31,Percentage Increase/(Decrease)
(Dollars in millions)2017201620152017/20162016/2015
Gross written premiums$7,173.9$6,033.9$5,891.718.9%2.4%
Net written premiums6,244.75,270.95,182.318.5%1.7%
REVENUES:
Premiums earned$5,937.8$5,320.5$5,292.811.6%0.5%
Net investment income542.9473.1473.514.8%-0.1%
Net realized capital gains (losses)153.2(7.2)(184.1)NM-96.1%
Net derivative gain (loss)9.618.66.3-48.6%195.2%
Other income (expense)(35.4)(10.6)88.3233.2%-112.0%
Total revenues6,608.15,794.35,676.814.0%2.1%
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses4,522.63,139.63,064.744.0%2.4%
Commission, brokerage, taxes and fees1,304.01,188.71,183.69.7%0.4%
Other underwriting expenses318.8302.7257.15.3%17.8%
Corporate expenses25.927.223.3-4.8%17.1%
Interest, fees and bond issue cost amortization expense31.636.236.2-12.8%0.1%
Total claims and expenses6,202.94,694.54,564.932.1%2.8%
INCOME (LOSS) BEFORE TAXES405.21,099.81,111.9-63.2%-1.1%
Income tax expense (benefit)(63.8)103.5134.0-161.6%-22.8%
NET INCOME (LOSS)$469.0$996.3$977.9-52.9%1.9%
RATIOS:Point Change
Loss ratio76.2%59.0%57.9%17.21.1
Commission and brokerage ratio22.0%22.3%22.4%(0.3)(0.1)
Other underwriting expense ratio5.3%5.7%4.8%(0.4)0.9
Combined ratio103.5%87.0%85.1%16.51.9
At December 31,Percentage Increase/(Decrease)
(Dollars in millions, except per share amounts)2017201620152017/20162016/2015
Balance sheet data:
Total investments and cash$18,626.5$17,483.1$16,676.46.5%4.8%
Total assets23,591.821,321.520,545.410.6%3.8%
Loss and loss adjustment expense reserves11,884.310,312.39,951.815.2%3.6%
Total debt633.4633.2633.00.0%0.0%
Total liabilities15,222.613,246.112,936.814.9%2.4%
Shareholders' equity8,369.28,075.47,608.63.6%6.1%
Book value per share204.95197.45178.213.8%10.8%
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)

Revenues.

Premiums. Gross written premiums increased by 18.9% to $7,173.9 million in 2017, compared to $6,033.9 million in 2016, reflecting a $867.8 million, or 20.4%, increase in our reinsurance business and a $272.2 million, or 15.2%, increase in our insurance business. The increase in reinsurance premiums was mainly due to new crop reinsurance transactions, increases in treaty property and financial lines of business and the influx of reinstatement premiums related to multiple catastrophe events in the third quarter. The rise in insurance premiums was primarily due to increases in many lines of business, including property, retail casualty, accident and health and business written through the Lloyd's Syndicate, partially offset by the impact of the sale of Heartland. Net written premiums increased by 18.5% to $6,244.7 million in 2017, compared to $5,270.9 million in 2016. These changes are consistent with the changes in gross written premiums. Premiums earned increased by 11.6% to $5,937.8 million in 2017, compared to $5,320.5 million in 2016. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 2.4% to $6,033.9 million in 2016, compared to $5,891.7 million in 2015, reflecting a $254.7 million, or 16.6%, increase in our insurance business, partially offset by a $112.6 million, or 2.6%, decrease in our reinsurance business. The rise in insurance premiums was primarily due to increases in most lines of business, as we have focused on expanding the insurance operations. The decline in reinsurance premiums was mainly due to a decrease in treaty property business, a decline in international premiums related to quota share agreements and a negative impact of $74.0 million from the year over year movement in foreign exchange rates. Net written premiums increased by 1.7% to $5,270.9 million in 2016, compared to $5,182.3 million in 2015. The changes are consistent with the changes in gross written premiums. Premiums earned increased by 0.5% to $5,320.5 million in 2016, compared to $5,292.8 million in 2015. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Net Investment Income. Net investment income increased by 14.8% to $542.9 million in 2017 compared with investment income of $473.1 million in 2016. Net pre-tax investment income, as a percentage of average invested assets, was 3.1% in 2017 compared to 2.8% in 2016. The increases in income and yield were primarily the result of higher income from our limited partnerships and higher income from the growing fixed income portfolio, partially offset by lower dividend income from our equity portfolio.

Net investment income decreased by 0.1% to $473.1 million in 2016 compared with investment income of $473.5 million in 2015. Net pre-tax investment income, as a percentage of average invested assets, was 2.8% in 2016, compared to 2.9% in 2015. The slight decline in income and yield was primarily the result of lower reinvestment rates for the fixed income portfolios and lower dividends from equity securities, partially offset by higher income from our limited partnerships.

Net Realized Capital Gains (Losses). Net realized capital gains were $153.2 million in 2017 and net realized capital losses were $7.2 million and $184.1 million in 2016 and 2015, respectively. The net realized capital gains of $153.2 million in 2017 were comprised of $139.0 million of net gains from fair value re-measurements on our equity portfolio and $21.3 million of net realized capital gains from sales on our fixed maturity and equity securities, partially offset by $7.1 million of other-than-temporary impairments. The net realized capital losses of $7.2 million in 2016 were comprised of $31.6 million of other-than-temporary impairments, realized capital loss of $28.0 million from the sale of our Heartland subsidiary and $6.7 million of net realized capital losses from sales on our fixed maturity and equity securities, partially offset by $59.1 million of net gains from fair value re-measurements. The net realized capital losses of $184.1 million in 2015 were comprised of $102.2 million of other-than-temporary impairments, $45.6 million of net losses from fair value re-measurements and $36.3 million of net realized capital losses from sales on our fixed maturity and equity securities.

Net Derivative Gain (Loss). In 2005 and prior, we sold seven equity index put option contracts, six of which remain outstanding. These contracts meet the definition of a derivative in accordance with FASB guidance and as such, are fair valued each quarter with the change recorded as net derivative gain or loss in the consolidated statements of operations and comprehensive income (loss). As a result of these adjustments in value, we recognized net derivative gains of $9.6 million, 18.6 million and $6.3 million in 2017, 2016 and

2015, respectively. The change in the fair value of these equity index put option contracts is generally indicative of the change in the equity markets and interest rates over the same periods.

Other Income (Expense). We recorded other expense of $35.4 million and $10.6 million in 2017 and 2016, respectively, and we recorded other income of $88.3 million in 2015. The changes were primarily the result of fluctuations in foreign currency exchange rates and other income related to Mt. Logan Re for the corresponding periods. We incurred foreign currency exchange expense of $25.5 million, $21.2 million in 2017 and 2016, respectively and foreign currency exchange income of $61.5 million in 2015. The increase in expenses in 2017 mainly related to the impact on loss reserves from the strengthening of various currencies against the U.S. dollar. The foreign exchange losses in 2016 were primarily generated from our United Kingdom operations as a result of the decline in the Great British Pound (Sterling) in relation to other major currencies resulting from the United Kingdom vote to leave the European Union. Although we have foreign currency investments to mitigate the impact of foreign exchange movements, the offsetting foreign exchange impacts on the investments is reflected through Other Comprehensive Income.

Claims and Expenses.

Incurred Losses and Loss Adjustment Expenses. The following table presents our incurred losses and loss adjustment expenses ("LAE") for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2017
Attritional$3,313.555.8%$(263.4)-4.4%$3,050.051.4%
Catastrophes1,502.525.3%(30.0)-0.5%1,472.624.8%
Total segment$4,816.081.1%$(293.4)-4.9%$4,522.676.2%
2016
Attritional$3,047.157.2%$(208.7)-3.9%$2,838.453.3%
Catastrophes387.97.3%(86.6)-1.6%301.25.7%
Total segment$3,435.064.5%$(295.3)-5.5%$3,139.659.0%
2015
Attritional$3,042.557.5%$(31.6)-0.6%$3,010.956.9%
Catastrophes87.21.6%(33.4)-0.6%53.81.0%
Total segment$3,129.759.1%$(65.0)-1.2%$3,064.757.9%
Variance 2017/2016
Attritional$266.4(1.4)pts$(54.7)(0.5)pts$211.6(1.9)pts
Catastrophes1,114.618.0pts56.61.1pts1,171.419.1pts
Total segment$1,381.016.6pts$1.90.6pts$1,383.017.2pts
Variance 2016/2015
Attritional$4.6(0.3)pts$(177.1)(3.3)pts$(172.5)(3.6)pts
Catastrophes300.75.7pts(53.2)(1.0)pts247.44.7pts
Total segment$305.35.4pts$(230.3)(4.3)pts$74.91.1pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by 44.0% to $4,522.6 million in 2017, compared to $3,139.6 million in 2016, primarily due to an increase of $1,114.6 million in current year catastrophe losses, an increase in current year attritional losses of $266.4 million, mainly due to the impact of the increase in premiums earned and $56.6 million of less favorable development on prior years catastrophe losses in 2017 compared to 2016. These increases were partially offset by an additional $54.7 million of favorable development on prior years attritional losses in 2017 compared to 2016. The $263.4 million of favorable development on prior years attritional losses in 2017 was mainly comprised of $207.1 million of favorable development on reinsurance business, primarily related to property and short tail business in the United States and Bermuda, and $56.4 million of favorable development on insurance business, mainly related to workers compensation business. The $1,502.5 million of current year catastrophe losses in 2017 related to Hurricane Irma ($558.1 million), Hurricane Maria ($361.7 million), Hurricane Harvey ($316.7 million), the Northern California wildfires ($149.9 million), the Mexico City earthquake ($31.0 million), the South Africa Knysna fires ($23.7 million), Cyclone Debbie in Australia ($22.1 million), the Peru storms ($14.9 million), the 2017 US Midwest storms ($12.9 million) and the Southern California wildfires ($11.6 million). The $387.9 million of current year catastrophe losses in 2016 related to Hurricane Matthew ($135.0 million), the Fort McMurray Canada wildfire ($115.8 million), 2016 U.S. storms ($51.6 million), the Ecuador earthquake

($23.2 million), the 2016 New Zealand earthquake ($18.9 million), the 2016 Taiwan earthquake ($15.1 million), the Tennessee wildfire ($14.7 million) and Hurricane Hermine ($13.5 million).

Incurred losses and LAE increased by 2.4% to $3,139.6 million in 2016, compared to $3,064.7 million in 2015, primarily due to an increase of $300.7 million in current year catastrophe losses, partially offset by higher favorable prior years attritional development of $177.1 million and prior years catastrophe development of $53.2 million in 2016 compared to 2015. The $208.7 million of favorable prior years attritional loss development in 2016 was comprised of $382.4 million of favorable development on reinsurance business mainly related in the reinsurance segments, partially offset by $173.6 million in the insurance segment. The favorable development in the reinsurance segments is primarily due to property and short-tail business in the U.S., as well as, property business in Canada, Latin America, the Middle East and Africa, partially offset by $53.9 million of adverse development on A&E. Part of the favorable development in the reinsurance segments related to the 2015 loss from the explosion at the Chinese port of Tianjin. In 2015, this loss was originally estimated to be $60.0 million. At December 31, 2016, this loss was projected to be $16.7 million resulting in $43.3 million of favorable development. The adverse development in the insurance segment is primarily attributable to run-off construction liability and umbrella program business. The $86.6 million of prior years' catastrophe development mainly related to the 2015 Chile earthquake, the 2011 Japan earthquake and the 2015 U.S. storms. The $387.9 million of current year catastrophe losses in 2016 are outlined above. The $87.2 million of current year catastrophe losses in 2015 related to the 2015 Chilean earthquake ($34.8 million), the Northern Chile storms ($19.5 million), the New South Wales storms ($16.7 million) and the 2015 U.S. storms ($16.2 million).

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 9.7% to $1,304.0 million for the year ended December 31, 2017 compared to $1,188.7 million for the year ended December 31, 2016. The change was primarily due to the impact of the increases in premiums earned and changes in the mix of business.

Commission, brokerage, taxes and fees increased by 0.4% to $1,188.7 million for the year ended December 31, 2016 compared to $1,183.6 million for the year ended December 31, 2015. The change was primarily due to the impact of the increase in premiums earned.

Other Underwriting Expenses. Other underwriting expenses were $318.8 million, $302.7 million and $257.1 million in 2017, 2016 and 2015, respectively. The increase in other underwriting expenses for 2017 compared to 2016 was mainly due to the impact of the increase in premiums earned and costs incurred to support the continued expansion of the insurance business. The increase in other underwriting expenses for 2016 compared to 2015 was mainly due to costs incurred related to the expansion of the insurance business.

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $25.9 million, $27.2 million and $23.3 million for the years ended December 31, 2017, 2016 and 2015. The changes between years were mainly due to fluctuations in variable compensation costs.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $31.6 million, $36.2 million and $36.2 million in 2017, 2016 and 2015, respectively. The decreases in expense for 2017 was primarily due to the conversion of the long term subordinated notes from a fixed rate of 6.6% to a floating rate, which is reset quarterly per the note agreement. The floating rate was 3.8% as of December 31, 2017.

Income Tax Expense (Benefit). We had an income tax benefit of $63.8 million in 2017, which includes $8.2 million of tax expense related to the enactment of the TCJA, and income tax expenses of $103.5 million and $134.0 million for December 31, 2016 and 2015, respectively. Income tax expense is primarily a function of the geographic location of the Company's pre-tax income and the statutory tax rates in those jurisdictions, as affected by tax-exempt investment income and foreign tax credits. Variations in taxes generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The change in income tax expense (benefit) for 2017 compared to 2016 was primarily due to the significant catastrophe losses incurred in 2017.

The TCJA, which was enacted on December 22, 2017, caused the Company to record income tax expense of $8.2 million in 2017. This income tax expense reflects the lower 21% tax benefit to be realized by the Company under the TCJA upon the reversal of the temporary differences in its deferred tax inventory account versus the 35% tax benefit that had been expected before the TCJA. In 2018, the Company expects to record adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts are finalized. The adjustments are not expected to be significant to the Company's results.

Net Income (Loss).

Our net income was $469.0 million, $996.3 million and $977.9 million in 2017, 2016 and 2015, respectively. The changes were primarily driven by the financial component fluctuations explained above.

Ratios.

Our combined ratio increased by 16.5 points to 103.5% in 2017, compared to 87.0% in 2016. The loss ratio component increased 17.2 points in 2017 over the same period last year. The change was mainly due to the increases in current year catastrophe losses. The commission and brokerage ratio components decreased to 22.0% in 2017 from 22.3% in 2016, reflecting changes in the mix of business and the impact from reinstatement premiums. The other underwriting expense ratios decreased to 5.3% in 2017 from 5.7% in 2016, mainly due to a reduction in variable compensation combined with the growth in premiums earned.

Our combined ratio increased by 1.9 points to 87.0% in 2016, compared to 85.1% in 2015. The loss ratio component increased 1.1 points in 2016 over the same periods last year. The change was mainly due to the increase in current year catastrophes in 2016 compared to 2015, partially offset by more favorable development on prior years attritional losses year over year. The commission and brokerage ratio components were comparable at 22.3% in 2016 and 22.4% in 2015. The other underwriting expense ratio components increased by 0.9 points in 2016 over the same periods last year due primarily to the increased focus on the expansion of the insurance business.

Shareholders' Equity.

Shareholders' equity increased by $293.8 million to $8,369.2 million at December 31, 2017 from $8,075.4 million at December 31, 2016, principally as a result of $469.0 million of net income, $121.9 million of net foreign currency translation adjustments, $25.0 million of share-based compensation transactions and $6.5 million of net benefit plan obligation adjustments, partially offset by $207.2 million of shareholder dividends, $71.3 million of unrealized depreciation on investments, net of tax and repurchases of 0.2 million common shares for $50.0 million.

Shareholders' equity increased by $466.8 million to $8,075.4 million at December 31, 2016 from $7,608.6 million at December 31, 2015, principally as a result of $996.3 million of net income, $72.7 million of unrealized appreciation on investments, net of tax and $37.1 million of share-based compensation transactions, partially offset by repurchases of 2.1 million common shares for $386.3 million, $195.4 million of shareholder dividends, $55.3 million of net foreign currency translation adjustments and $2.4 million of net benefit plan obligation adjustments

Consolidated Investment Results

Net Investment Income.

Net investment income increased by 14.8% to $542.9 million in 2017, compared with investment income of $473.1 million in 2016. The increase was primarily due to an increase in limited partnership income and higher income from the growing fixed income portfolio, partially offset by lower dividend income from our equity portfolio.

Net investment income decreased by 0.1% to $473.1 million in 2016 compared to $473.5 million in 2015, primarily due to a decline in income from our fixed maturities, reflective of lower reinvestment rates and a decline in dividend income from equity securities, partially offset by an increase in limited partnership income.

The following table shows the components of net investment income for the periods indicated.

Years Ended December 31,
(Dollars in millions)201720162015
Fixed maturities$427.4$410.3$433.1
Equity securities34.540.745.6
Short-term investments and cash4.21.81.2
Other invested assets
Limited partnerships83.638.614.4
Other10.12.91.8
Gross investment income before adjustments559.8494.3496.2
Funds held interest income (expense)11.97.910.8
Future policy benefit reserve income (expense)(1.3)(1.6)(1.9)
Gross investment income570.4500.5505.0
Investment expenses(27.5)(27.4)(31.6)
Net investment income$542.9$473.1$473.5
.
(Some amounts may not reconcile due to rounding.)

The following tables show a comparison of various investment yields for the periods indicated.

201720162015
Imbedded pre-tax yield of cash and invested assets at December 313.0%2.9%3.0%
Imbedded after-tax yield of cash and invested assets at December 312.8%2.4%2.6%
Annualized pre-tax yield on average cash and invested assets3.1%2.8%2.9%
Annualized after-tax yield on average cash and invested assets2.5%2.3%2.4%
201720162015
Fixed income portfolio total return2.5%3.1%1.1%
Barclay's Capital - U.S. aggregate index3.5%2.7%0.6%
Common equity portfolio total return14.6%8.4%-0.9%
S&P 500 index21.8%12.0%1.4%
Other invested asset portfolio total return8.4%4.3%4.1%

The pre-tax equivalent total return for the bond portfolio was approximately 4.3%, 5.0% and 1.4%, respectively, in 2017, 2016 and 2015. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.

Our fixed income and equity portfolios have different compositions than the benchmark indexes. Our fixed income portfolios have a shorter duration because we align our investment portfolio with our liabilities. We also hold foreign securities to match our foreign liabilities while the index is comprised of only U.S. securities. Our equity portfolios reflect an emphasis on dividend yield and growth equities, while the index is comprised of the largest 500 equities by market capitalization.

Net Realized Capital Gains (Losses).

The following table presents the composition of our net realized capital gains (losses) for the periods indicated.

Years Ended December 31,2017/20162016/2015
(Dollars in millions)201720162015VarianceVariance
Gains (losses) from sales:
Fixed maturity securities, market value:
Gains$58.6$52.8$47.9$5.8$4.9
Losses(40.9)(45.9)(70.2)5.024.3
Total17.76.9(22.3)10.829.2
Fixed maturity securities, fair value:
Gains-0.3-(0.3)0.3
Losses-(1.9)-1.9(1.9)
Total-(1.6)-1.6(1.6)
Equity securities, market value:
Gains-1.4-(1.4)1.4
Losses(3.4)-(6.7)(3.4)6.7
Total(3.4)1.4(6.7)(4.8)8.1
Equity securities, fair value:
Gains24.817.027.77.8(10.7)
Losses(17.8)(30.5)(35.0)12.74.5
Total7.0(13.4)(7.3)20.4(6.1)
Total net realized capital gains (losses) from sales:
Gains83.471.675.611.8(4.1)
Losses(62.1)(78.3)(111.9)16.233.6
Total21.3(6.7)(36.3)28.029.6
Loss on sale of subsidiary:-(28.0)-28.0(28.0)
Other-than-temporary impairments:(7.1)(31.6)(102.2)24.570.6
Gains (losses) from fair value adjustments:
Fixed maturities, fair value-1.4-(1.4)1.4
Equity securities, fair value139.057.7(45.6)81.3103.3
Total139.059.1(45.6)79.9104.7
Total net realized capital gains (losses)$153.2$(7.2)$(184.1)$160.4$176.9
(Some amounts may not reconcile due to rounding.)

Net realized capital gains were $153.2 million in 2017 and net realized capital losses were $7.2 million and $184.1 million in 2016 and 2015, respectively. In 2017, we recorded $139.0 million of net gains from fair value re-measurements and $21.3 million of net realized capital gains from sales on our fixed maturity and equity securities, partially offset by $7.1 million of other-than-temporary impairments. In 2016, we recorded $31.6 million of other-than-temporary impairments, $28.0 million of realized capital loss from the sale of our Heartland subsidiary and $6.7 million of net realized capital losses from sales on our fixed maturity and equity securities, partially offset by $59.1 million of net gains from fair value re-measurements. In 2015, we recorded $102.2 million of other-than-temporary impairments, $45.6 million of net losses from fair value re-measurements and $36.3 million of net realized capital losses from sales on our fixed maturity and equity securities. The fixed maturity and equity sales related primarily to adjusting the portfolios for overall market changes and individual credit shifts.

Segment Results.

The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and Accident and Health ("A&H") business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The International operation writes non-U.S. property and casualty reinsurance through Everest Re's branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly

with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re. The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within the U.S., Canada and Europe.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and loss adjustment expenses ("LAE") incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

For inter-affiliate reinsurance and business written through the Lloyd's Syndicate, business is generally reported within the segment in which the business was first produced, consistent with how the business is managed.

The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

Our loss and LAE reserves are management's best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods. Such re-evaluations are recorded in incurred losses in the period in which re-evaluation is made.

The following discusses the underwriting results for each of our segments for the periods indicated.

U.S. Reinsurance.

The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.

Years Ended December 31,2017/20162016/2015
(Dollars in millions)201720162015Variance% ChangeVariance% Change
Gross written premiums$2,593.0$2,125.8$2,147.9$467.222.0%$(22.1)-1.0%
Net written premiums2,245.41,970.61,855.9274.813.9%114.76.2%
Premiums earned$2,181.2$2,072.2$1,952.7$109.05.3%$119.56.1%
Incurred losses and LAE1,632.81,068.5825.1564.352.8%243.429.5%
Commission and brokerage462.5466.0493.3(3.5)-0.7%(27.3)-5.5%
Other underwriting expenses55.954.150.11.83.3%4.08.0%
Underwriting gain (loss)$30.0$483.6$584.3$(453.6)-93.8%$(100.6)-17.2%
Point ChgPoint Chg
Loss ratio74.9%51.6%42.3%23.39.3
Commission and brokerage ratio21.2%22.5%25.3%(1.3)(2.8)
Other underwriting expense ratio2.5%2.6%2.5%(0.1)0.1
Combined ratio98.6%76.7%70.1%21.96.6
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 22.0% to $2,593.0 million in 2017 from $2,125.8 million in 2016, primarily due to an increase in the new crop reinsurance business, an increase in treaty property business and the influx of reinstatement premiums due to the catastrophe losses and an increase in mortgage business. Net written premiums increased by 13.9% to $2,245.4 million in 2017 compared to $1,970.6 million in 2016. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to varying utilization of reinsurance. Premiums earned increased by 5.3% to $2,181.2 million in 2017, compared to $2,072.2 million in 2016. The change in premiums earned relative to net written premiums is primarily the result of changes in the mix of business and timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums decreased by 1.0% to $2,125.8 million in 2016 from $2,147.9 million in 2015, primarily due to a decrease in treaty property business, partially offset by an increase in treaty casualty business. Net written premiums increased by 6.2% to $1,970.6 million in 2016 compared to $1,855.9 million in 2015. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the assumption of the crop business due to the sale of Heartland and a concurrent new crop reinsurance contract. Premiums earned increased 6.1% to $2,072.2 million in 2016, compared to $1,952.7 million in 2015. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2017
Attritional$1,103.750.6%$(165.5)-7.5%$938.343.1%
Catastrophes715.732.8%(21.2)-1.0%694.531.8%
Total segment$1,819.483.4%$(186.6)-8.5%$1,632.874.9%
2016
Attritional$1,096.052.9%$(126.4)-6.1%$969.746.8%
Catastrophes134.16.5%(35.3)-1.7%98.84.8%
Total segment$1,230.159.4%$(161.6)-7.8%$1,068.551.6%
2015
Attritional$940.648.2%$(123.1)-6.3%$817.541.9%
Catastrophes16.70.9%(9.2)-0.5%7.60.4%
Total segment$957.449.1%$(132.3)-6.8%$825.142.3%
Variance 2017/2016
Attritional$7.7(2.3)pts$(39.1)(1.4)pts$(31.4)(3.7)pts
Catastrophes581.626.3pts14.10.7pts595.727.0pts
Total segment$589.324.0pts$(25.1)(0.7)pts$564.323.3pts
Variance 2016/2015
Attritional$155.44.7pts$(3.3)0.2pts$152.24.9pts
Catastrophes117.45.6pts(26.1)(1.2)pts91.24.4pts
Total segment$272.810.3pts$(29.4)(1.0)pts$243.49.3pts
(Some amounts may not reconcile due to rounding.)

Incurred losses increased by 52.8% to $1,632.8 million in 2017, compared to $1,068.5 million in 2016, primarily due to an increase of $581.6 million in current year catastrophe losses, partially offset by $39.1 million of more favorable development on prior years attritional losses in 2017 compared to 2016. The $165.5 million of favorable development on prior years attritional losses in 2017 was mainly related to property and short tail business. The $715.7 million of current year catastrophe losses in 2017 related to Hurricane Irma ($331.8 million), Hurricane Harvey ($204.3 million), the Northern California wildfires ($132.9 million), Hurricane Maria ($31.2 million), the Southern California wildfires ($9.6 million), and the 2017 US Midwest storms ($6.9 million). The $134.1 million of current year catastrophe losses in 2016 related to Hurricane Matthew ($86.2 million), the 2016 U.S. storms ($20.4 million), 2016 Tennessee wildfire ($14.7 million) and Hurricane Hermine ($13.5 million).

Incurred losses increased by 29.5% to $1,068.5 million in 2016 compared to $825.1 million in 2015, primarily due to an increase of $155.4 million in current year attritional losses, resulting mainly from the impact of the increase in premiums earned and the impact of the new crop reinsurance contract effective upon the sale of Heartland, and $117.4 million in current year catastrophe losses. The $126.4 million of favorable prior years attritional loss development in 2016 is primarily due to U.S property and marine business, partially offset by $47.1 million of adverse development on A&E reserves. There was also an increase in favorable development of $26.1 million on prior years' catastrophe losses in 2016 compared to 2015. The $35.3 million of favorable development on prior years catastrophes in 2016 mainly related to the 2011 Japan earthquake ($15.5 million), the 2015 U.S. storms ($11.6 million) and the 2013 U.S. storms ($9.6 million). The $134.1 million of current year catastrophe losses in 2016 are outlined above. The $16.7 million of current year catastrophe losses in 2015 were mainly due to the US storms ($16.2 million).

Segment Expenses. Commission and brokerage expenses decreased by 0.7% to $462.5 million in 2017 compared to $466.0 million in 2016. The decrease is mainly due to the impact of the new crop reinsurance contract which generally has a lower expense ratio and other changes in the mix of business. Segment other underwriting expenses increased slightly to $55.9 million in 2017 from $54.1 million in 2016.

Commission and brokerage expenses decreased by 5.5% to $466.0 million in 2016 compared to $493.3 million in 2015. The decrease is mainly due to the impact of the new crop reinsurance contract effective upon the sale of Heartland, the impact of quota share contracts and changes in the mix of business. Segment other underwriting expenses increased to $54.1 million in 2016 from $50.1 million in 2015. The increase was primarily due to the impact of changes in the mix of business and higher compensation costs.

International.

The following table presents the underwriting results and ratios for the International segment for the periods indicated.

Years Ended December 31,2017/20162016/2015
(Dollars in millions)201720162015Variance% ChangeVariance% Change
Gross written premiums$1,316.7$1,230.7$1,334.2$86.07.0%$(103.5)-7.8%
Net written premiums1,229.61,082.71,209.0146.913.6%(126.3)-10.4%
Premiums earned$1,202.0$1,119.1$1,251.1$82.97.4%$(132.0)-10.6%
Incurred losses and LAE1,059.6486.6749.9573.1117.8%(263.3)-35.1%
Commission and brokerage287.7283.4298.24.21.5%(14.7)-4.9%
Other underwriting expenses38.835.534.33.39.4%1.23.5%
Underwriting gain (loss)$(184.1)$313.6$168.7$(497.7)-158.7%$144.985.9%
Point ChgPoint Chg
Loss ratio88.2%43.5%60.0%44.7(16.5)
Commission and brokerage ratio23.9%25.3%23.8%(1.4)1.5
Other underwriting expense ratio3.2%3.2%2.7%-0.5
Combined ratio115.3%72.0%86.5%43.3(14.5)
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 7.0% to $1,316.7 million in 2017 compared to $1,230.7 million in 2016, primarily due to the increases in Middle East and Asian business and a positive impact of $22.0 million from the movement of foreign exchange rates, partially offset by a decline in Latin American business. Net written premiums increased by 13.6% to $1,229.6 million in 2017 compared to $1,082.7 million in 2016. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to varying utilization of reinsurance related to the quota share contracts. Premiums earned increased 7.4% to $1,202.0 million in 2017 compared to $1,119.1 million in 2016. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums decreased by 7.8% to $1,230.7 million in 2016 compared to $1,334.2 million in 2015, primarily due to declines in Latin American, Middle East and Asian business and the negative impact of $40.7 million from the movement of foreign exchange rates. Net written premiums decreased by 10.4% to $1,082.7 million in 2016 compared to $1,209.0 million in 2015. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to varying utilization of reinsurance related to the quota share contracts. Premiums earned decreased 10.6% to $1,119.1 million in 2016 compared to $1,251.1 million in 2015. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the International segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2017
Attritional$605.350.4%$0.20.0%$605.650.4%
Catastrophes456.338.0%(2.3)-0.2%454.037.8%
Total segment$1,061.688.4%$(2.1)-0.2%$1,059.688.2%
2016
Attritional$576.251.5%$(224.8)-20.1%$351.431.4%
Catastrophes178.816.0%(43.7)-3.9%135.212.1%
Total segment$755.067.5%$(268.5)-24.0%$486.643.5%
2015
Attritional$721.357.7%$(31.4)-2.5%$689.955.2%
Catastrophes70.55.6%(10.5)-0.8%60.04.8%
Total segment$791.863.3%$(41.9)-3.3%$749.960.0%
Variance 2017/2016
Attritional$29.1(1.1)pts$225.020.1pts$254.219.0pts
Catastrophes277.522.0pts41.43.7pts318.825.7pts
Total segment$306.620.9pts$266.423.8pts$573.144.7pts
Variance 2016/2015
Attritional$(145.1)(6.2)pts$(193.4)(17.6)pts$(338.5)(23.8)pts
Catastrophes108.310.4pts(33.2)(3.1)pts75.27.3pts
Total segment$(36.8)4.2pts$(226.6)(20.7)pts$(263.3)(16.5)pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by 117.8% to $1,059.6 million in 2017 compared to $486.6 million in 2016, primarily due to an increase of $277.5 million in current year catastrophe losses, favorable development of $224.8 million on prior years attritional losses in 2016 mainly related to property business which did not recur in 2017 and favorable development of $43.7 million on prior years catastrophe losses in 2016 which did not recur in 2017. The $456.3 million of current year catastrophe losses in 2017 related to Hurricane Maria ($263.2 million), Hurricane Irma ($107.6 million), the Mexico City earthquake ($25.6 million), the South Africa Knysna fires ($24.0 million), Cyclone Debbie in Australia ($17.1 million), the Peru storms ($15.2 million) and Hurricane Harvey ($3.7 million). The $178.8 million of current year catastrophe losses in 2016 were due to the Fort McMurray Canada wildfire ($97.5 million), Hurricane Matthew ($27.4 million), the Ecuador earthquake ($23.6 million), the 2016 Taiwan earthquake ($15.2 million) and the New Zealand earthquake ($14.0 million).

Incurred losses and LAE decreased by 35.1% to $486.6 million in 2016 compared to $749.9 million in 2015, primarily due to more favorable development on prior year attritional losses of $193.4 million, a decrease in current year attritional losses of $145.1 million, mainly due to lower Canadian, Latin American, Middle Eastern and African losses in 2016 and the impact of the decrease in premiums earned, as well as more favorable development of prior year catastrophe losses of $33.2 million, partially offset by an increase of $108.3 million in current year catastrophe losses. The $224.8 million of favorable development on prior years attritional losses was mainly related to property business. The $178.8 million of current year catastrophe losses in 2016 are outlined above. The $70.5 million of current year catastrophe losses in 2015 were due to the Chilean earthquake ($34.8 million), Northern Chile storms ($19.5 million) and the

New South Wales storms ($16.2 million). The 2016 favorable development on prior years catastrophe losses related primarily to the 2015 Chilean earthquake.

Segment Expenses. Commission and brokerage increased by 1.5% to $287.7 million in 2017 compared to $283.4 million in 2016. Segment other underwriting expenses increased to $38.8 million in 2017 compared to $35.5 million in 2016. The increases were mainly due to the impact of the increase in premiums earned.

Commission and brokerage decreased by 4.9% to $283.4 million in 2016 compared to $298.2 million in 2015. The year over year decrease was mainly due to the impact of the decrease in premiums earned. Segment other underwriting expenses increased slightly to $35.5 million in 2016 compared to $34.3 million in 2015.

Bermuda.

The following table presents the underwriting results and ratios for the Bermuda segment for the periods indicated.

Years Ended December 31,2017/20162016/2015
(Dollars in millions)201720162015Variance% ChangeVariance% Change
Gross written premiums$1,205.0$890.4$877.3$314.635.3%$13.01.5%
Net written premiums1,139.1831.9791.6307.236.9%40.35.1%
Premiums earned$1,093.3$838.0$822.4$255.330.5%$15.61.9%
Incurred losses and LAE735.3461.9456.4273.459.2%5.51.2%
Commission and brokerage303.7234.0216.069.729.8%18.08.3%
Other underwriting expenses38.036.336.01.74.6%0.30.8%
Underwriting gain (loss)$16.2$105.7$113.9$(89.5)-84.6%$(8.2)-7.2%
Point ChgPoint Chg
Loss ratio67.3%55.1%55.4%12.2(0.3)
Commission and brokerage ratio27.8%27.9%26.3%(0.1)1.6
Other underwriting expense ratio3.4%4.4%4.4%(1.0)-
Combined ratio98.5%87.4%86.1%11.11.3
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 35.3% to $1,205.0 million in 2017 compared to $890.4 million in 2016, primarily due to increased casualty and financial lines of business written through the Bermuda office and increased production from the U.K. and Ireland offices, partially offset by a negative impact of $6.5 million from the movement of foreign exchange rates. Net written premiums increased by 36.9% to $1,139.1 million in 2017 compared to $831.9 million in 2016, which is consistent with the change in gross written premiums. Premiums earned increased 30.5% to $1,093.3 million in 2017 compared to $838.0 million in 2016. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 1.5% to $890.4 million in 2016 compared to $877.3 million in 2015, primarily due to an increased casualty writings through the Bermuda office, partially offset by lower casualty writings through the Ireland office and the negative impact of $31.1 million from the movement of foreign exchange rates. Net written premiums increased by 5.1% to $831.9 million in 2016 compared to $791.6 million in 2015. The difference between the change in gross written premiums compared to the change in net written premiums was due to varying utilization of reinsurance. Premiums earned increased 1.9% to $838.0 million in 2016 compared to $822.4 million in 2015. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Bermuda segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2017
Attritional$625.157.2%$(41.8)-3.8%$583.353.4%
Catastrophes159.914.6%(7.9)-0.7%152.013.9%
Total segment$785.071.8%$(49.7)-4.5%$735.367.3%
2016
Attritional$475.156.7%$(31.2)-3.7%$443.853.0%
Catastrophes25.53.0%(7.5)-0.9%18.12.1%
Total segment$500.659.7%$(38.7)-4.6%$461.955.1%
2015
Attritional$499.460.7%$(29.2)-3.6%$470.257.1%
Catastrophes-0.0%(13.8)-1.7%(13.8)-1.7%
Total segment$499.460.7%$(43.0)-5.3%$456.455.4%
Variance 2017/2016
Attritional$150.00.5pts$(10.6)(0.1)pts$139.50.4pts
Catastrophes134.411.6pts(0.4)0.2pts133.911.8pts
Total segment$284.412.1pts$(11.0)0.1pts$273.412.2pts
Variance 2016/2015
Attritional$(24.3)(4.0)pts$(2.0)(0.1)pts$(26.4)(4.1)pts
Catastrophes25.53.0pts6.30.8pts31.93.8pts
Total segment$1.2(1.0)pts$4.30.7pts$5.5(0.3)pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by 59.2% to $735.3 million in 2017 compared to $461.9 million in 2016, primarily due to an increase of $150.0 million in current year attritional losses related primarily to the impact of the increase in premiums earned and an increase of $134.4 million in current year catastrophe losses. The $159.9 million of current year catastrophe losses in 2017 primarily related to Hurricane Maria ($53.4 million), Hurricane Irma ($43.6 million), Hurricane Harvey ($40.7 million), the Northern California wildfires ($14.0 million), the Mexico City earthquake ($4.9 million) and Cyclone Debbie in Australia ($3.3 million). The $25.5 million of current year catastrophe losses in 2016 were due to Hurricane Matthew ($10.3 million), the Fort McMurray Canada wildfire ($10.0 million) and the 2016 New Zealand earthquake ($5.0 million).

Incurred losses and LAE increased by 1.2% to $461.9 million in 2016 compared to $456.4 million in 2015, primarily due to an increase of $25.5 million in current year catastrophe losses, partially offset by a decrease of $24.3 million in current year attritional losses mainly related to changes in the mix of business and the higher losses in 2015 due to the explosion at the Chinese port of Tianjin. The $25.5 million of current year catastrophe losses in 2016 are outlined above. There were no current year catastrophe losses in 2015.

Segment Expenses. Commission and brokerage increased by 29.8% to $303.7 million in 2017 compared to $234.0 million in 2016. The increase was mainly due to the impact of the increase in premiums earned and higher contingent commissions. Segment other underwriting expenses increased slightly to $38.0 million in 2017 compared to $36.3 million in 2016.

Commission and brokerage increased by 8.3% to $234.0 million in 2016 compared to $216.0 million in 2015. The increase was mainly due to the impact of the increase in premiums earned and changes in the mix of business. Segment other underwriting expenses increased slightly to $36.3 million in 2016 compared to $36.0 million in 2015.

Insurance.

The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.

Years Ended December 31,2017/20162016/2015
(Dollars in millions)201720162015Variance% ChangeVariance% Change
Gross written premiums$2,059.2$1,787.0$1,532.3$272.215.2%$254.716.6%
Net written premiums1,630.61,385.71,325.9244.917.7%59.84.5%
Premiums earned$1,461.4$1,291.2$1,266.7$170.213.2%$24.61.9%
Incurred losses and LAE1,094.91,122.71,033.3(27.8)-2.5%89.48.7%
Commission and brokerage250.1205.3176.244.821.8%29.116.5%
Other underwriting expenses186.1176.8136.79.35.3%40.129.4%
Underwriting gain (loss)$(69.6)$(213.5)$(79.5)$143.9-67.4%$(134.0)168.6%
Point ChgPoint Chg
Loss ratio74.9%86.9%81.6%(12.0)5.3
Commission and brokerage ratio17.1%15.9%13.9%1.22.0
Other underwriting expense ratio12.8%13.7%10.8%(0.9)2.9
Combined ratio104.8%116.5%106.3%(11.7)10.2
(Some amounts may not reconcile due to rounding.)

Premiums. Gross written premiums increased by 15.2% to $2,059.2 million in 2017 compared to $1,787.0 million in 2016. Excluding the impact of the sale of Heartland, which accounted for $230.4 million of gross written premiums in 2016, gross written premiums increased $502.1 million. This increase was driven by expansion of various insurance lines of business including retail casualty, retail property, accident and health and premiums written through the Lloyd's Syndicate. Net written premiums increased by 17.7% to $1,630.6 million in 2017 compared to $1,385.7 million in 2016 which is consistent with the change in gross written premiums. Premiums earned increased 13.2% to $1,461.4 million in 2017 compared to $1,291.2 million in 2016. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period, as well as changes in the mix of business.

Gross written premiums increased by 16.6% to $1,787.0 million in 2016 compared to $1,532.3 million in 2015. This increase was primarily driven by expansion of various insurance lines of business, increases in accident and health business and premium from the start-up of the Lloyd's Syndicate. Net written premiums increased by 4.5% to $1,385.7 million in 2016 compared to $1,325.9 million in 2015. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the transfer of the crop business to the U.S. Reinsurance segment as a result of the Heartland sale. Premiums earned increased 1.9% to $1,291.2 million in 2016 compared to $1,266.7 million in 2015. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.

Years Ended December 31,
CurrentRatio %/PriorRatio %/TotalRatio %/
(Dollars in millions)YearPt ChangeYearsPt ChangeIncurredPt Change
2017
Attritional$979.367.0%$(56.4)-3.9%$922.963.1%
Catastrophes170.611.7%1.40.1%172.011.8%
Total segment$1,149.978.7%$(55.0)-3.8%$1,094.974.9%
2016
Attritional$899.969.7%$173.613.4%$1,073.583.1%
Catastrophes49.43.8%(0.2)0.0%49.23.8%
Total segment$949.373.5%$173.413.4%$1,122.786.9%
2015
Attritional$881.269.6%$152.112.0%$1,033.281.6%
Catastrophes-0.0%0.10.0%0.10.0%
Total segment$881.269.6%$152.212.0%$1,033.381.6%
Variance 2017/2016
Attritional$79.4(2.7)pts$(230.0)(17.3)pts$(150.6)(20.0)pts
Catastrophes121.27.9pts1.60.1pts122.88.0pts
Total segment$200.65.2pts$(228.4)(17.2)pts$(27.8)(12.0)pts
Variance 2016/2015
Attritional$18.70.1pts$21.51.4pts$40.31.5pts
Catastrophes49.43.8pts(0.3)-pts49.13.8pts
Total segment$68.13.9pts$21.21.4pts$89.45.3pts
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE decreased by 2.5% to $1,094.9 million in 2017 compared to $1,122.7 million in 2016, mainly due to $230.0 million of more favorable development on prior years attritional losses in 2017 compared to 2016, partially offset by an increase of $121.2 million in current year catastrophe losses and an increase of $79.4 million in current year attritional losses, primarily related to the increase in premiums earned. The $56.4 million of favorable development on prior years attritional losses in 2017 mainly related to workers compensation business. The $170.6 million of current year catastrophe losses in 2017 were due to Hurricane Irma ($75.1 million), Hurricane Harvey ($68.0 million), Hurricane Maria ($14.0 million), the 2017 US Midwest storms ($6.0 million), the Northern California wildfires ($3.0 million), the Southern California wildfires ($2.0 million), the Mexico City earthquake ($1.4 million) and Cyclone Debbie in Australia ($1.1 million). The $49.4 million of current year catastrophe losses in 2016 were due to the 2016 U.S. storms ($30.0 million), Hurricane Matthew ($11.0 million) and the Fort McMurray Canada wildfire ($8.4 million).

Incurred losses and LAE increased by 8.7% to $1,122.7 million in 2016 compared to $1,033.3 million in 2015 mainly due to an increase of $49.4 million in current year catastrophe losses, an increase of $21.5 million in prior years' attritional losses mainly related to run-off construction liability and umbrella program business and an increase of $18.7 million in current year attritional losses primarily related to the impact of the increase in premiums earned. The $49.4 million of current year catastrophe losses in 2016 are outlined above. There were no current year catastrophe losses in 2015.

Segment Expenses. Commission and brokerage increased by 21.8% to $250.1 million in 2017 compared to $205.3 million in 2016. The increase was mainly due to the impact of the increase in premiums earned and changes in the mix of business. Segment other underwriting expenses increased to $186.1 million in 2017 compared to $176.8 million in 2016. The increase was mainly due to the impact of the increase in premiums earned and increased expenses related to the continued build out of the insurance business.

Commission and brokerage increased by 16.5% to $205.3 million in 2016 compared to $176.2 million in 2015. The increase was mainly due to the impact of the increase in premiums earned and changes in the mix of business. Segment other underwriting expenses increased to $176.8 million in 2016 compared to $136.7 million in 2015. The increase was primarily due to increased expenses due to the build out of our insurance platform.

Critical Accounting Policies

The following is a summary of the critical accounting policies related to accounting estimates that (1) require management to make assumptions about highly uncertain matters and (2) could materially impact the consolidated financial statements if management made different assumptions.

Loss and LAE Reserves. Our most critical accounting policy is the determination of our loss and LAE reserves. We maintain reserves equal to our estimated ultimate liability for losses and LAE for reported and unreported claims for our insurance and reinsurance businesses. Because reserves are based on estimates of ultimate losses and LAE by underwriting or accident year, we use a variety of statistical and actuarial techniques to monitor reserve adequacy over time, evaluate new information as it becomes known and adjust reserves whenever an adjustment appears warranted. We consider many factors when setting reserves including: (1) our exposure base and projected ultimate premiums earned; (2) our expected loss ratios by product and class of business, which are developed collaboratively by underwriters and actuaries; (3) actuarial methodologies which analyze our loss reporting and payment experience, reports from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (4) current legal interpretations of coverage and liability; (5) economic conditions; and (6) uncertainties discussed below regarding our liability for A&E claims. Our insurance and reinsurance loss and LAE reserves represent management's best estimate of our ultimate liability. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves. Our net income (loss) will be impacted in a period in which the change in estimated ultimate losses and LAE is recorded. See also ITEM 8, "Financial Statements and Supplementary Data" - Note 1 of Notes to the Consolidated Financial Statements.

It is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2017, we had reinsurance reserves of $8,763.4 million and insurance loss reserves of $3,121.0 million, of which $331.2 million and $117.8 million, respectively, were loss reserves for A&E liabilities. A detailed discussion of additional considerations related to A&E exposures follows later in this section.

The detailed data required to evaluate ultimate losses for our insurance business is accumulated from our underwriting and claim systems. Reserving for reinsurance requires evaluation of loss information received from ceding companies. Ceding companies report losses to us in many forms dependent on the type of contract and the agreed or contractual reporting requirements. Generally, proportional/quota share contracts require the submission of a monthly/quarterly account, which includes premium and loss activity for the period with corresponding reserves as established by the ceding company. This information is recorded into our records. For certain proportional contracts, we may require a detailed loss report for claims that exceed a certain dollar threshold or relate to a particular type of loss. Excess of loss and facultative contracts generally require individual loss reporting with precautionary notices provided when a loss reaches a significant percentage of the attachment point of the contract or when certain causes of loss or types of injury occur. Our experienced claims staff handles individual loss reports and supporting claim information. Based on our evaluation of a claim, we may establish additional case reserves (ACRs) in addition to the case reserves reported by the ceding company. To ensure ceding companies are submitting required and accurate data, the Underwriting, Claim, Reinsurance Accounting and Internal Audit departments of the Company perform various reviews of our ceding companies, particularly larger ceding companies, including on-site audits.

We sort both our reinsurance and insurance reserves into exposure groupings for actuarial analysis. We assign our business to exposure groupings so that the underlying exposures have reasonably homogeneous loss development characteristics and are large enough to facilitate credible estimation of ultimate losses. We periodically review our exposure groupings and we may change our groupings over time as our business changes. We currently use over 200 exposure groupings to develop our reserve estimates. One of the key selection characteristics for the exposure groupings is the historical duration of the claims settlement process. Business in which claims are reported and settled relatively quickly are commonly referred to as short tail lines, principally property lines. On the other hand, casualty claims tend to take longer to be reported and settled and casualty lines are generally referred to as long tail lines. Our estimates of ultimate losses for shorter tail lines, with the exception of loss estimates for large catastrophic events, generally exhibit less volatility than those for the longer tail lines.

We use similar actuarial methodologies, such as expected loss ratio, chain ladder reserving methods and Borhuetter Ferguson, supplemented by judgment where appropriate, to estimate our ultimate losses and LAE for each exposure group. Although we use similar actuarial methodologies for both short tail and long tail lines, the faster reporting of experience for the short tail lines allows us to have greater confidence in our estimates of ultimate losses for short tail lines at an earlier stage than for long tail lines. As a result, we utilize, as well, exposure-based methods to estimate our ultimate losses for longer tail lines, especially for immature accident years. For both short and long tail lines, we supplement these general approaches with analytically based judgments. We cannot estimate losses from widespread catastrophic events, such as hurricanes and earthquakes, using traditional actuarial methods. We estimate losses for these types of events based on information derived from catastrophe models, quantitative and qualitative exposure analyses, reports and communications from ceding companies and development patterns for historically similar events. Due to the inherent uncertainty in estimating such losses, these estimates are subject to variability, which increases with the severity and complexity of the underlying event.

Our key actuarial assumptions contain no explicit provisions for reserve uncertainty nor do we supplement the actuarially determined reserves for uncertainty.

Our carried reserves at each reporting date are management's best estimate of ultimate unpaid losses and LAE at that date. We complete detailed reserve studies for each exposure group annually for our reinsurance and insurance operations. The completed annual reinsurance reserve studies are "rolled forward" for each accounting period until the subsequent reserve study is completed. Analyzing the roll-forward process involves comparing actual reported losses to expected losses based on the most recent reserve study. We analyze significant variances between actual and expected losses and also consider recent market, underwriting and management criteria to determine management's best estimate of ultimate unpaid losses and LAE. As a result of these additional factors, in some instances the selected reserve level may be higher or lower than the actuarial indicated estimate.

Given the inherent variability in our loss reserves, we have developed an estimated range of possible gross reserve levels. A table of ranges by segment, accompanied by commentary on potential and historical variability, is included in "Financial Condition - Loss and LAE Reserves". The ranges are statistically developed using the exposure groups used in the reserve estimation process and aggregated to the segment level. For each exposure group, our actuaries calculate a range for each accident year based principally on two variables. The first is the historical changes in losses and LAE incurred but not reported ("IBNR") for each accident year over time; the second is volatility of each accident year's held reserves related to estimated ultimate losses, also over time. Both are measured at various ages from the end of the accident year through the final payout of the year's losses. Ranges are developed for the exposure groups using statistical methods to adjust for diversification; the ranges for the exposure groups are aggregated to the segment level, likewise, with an adjustment for diversification. Our estimates of our reserve variability may not be comparable to those of other companies because there are no consistently applied actuarial or accounting standards governing such presentations. Our recorded reserves reflect our best point estimate of our liabilities and our actuarial methodologies focus on developing such point estimates. We calculate the ranges subsequently, based on the historical variability of such reserves.

Asbestos and Environmental Exposures. We continue to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. Environmental claims typically assert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.

Our reserves include an estimate of our ultimate liability for A&E claims. Our A&E liabilities emanate from Everest Re's assumed reinsurance business. Liabilities related to Mt. McKinley's direct business, which had been ceded to Bermuda Re previously, were retroceded to an affiliate of Clearwater Insurance Company in July, 2015, concurrent with the sale of Mt. McKinley to Clearwater Insurance Company. There are significant uncertainties surrounding our estimates of our potential losses from A&E claims. Among the uncertainties are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in

properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning interpretation and application of insurance and reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.

Due to the uncertainties discussed above, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation could have a material adverse effect on our financial condition, results of operations and/or cash flows. See also ITEM 8, "Financial Statements and Supplementary Data" - Notes 1 and 3 of Notes to the Consolidated Financial Statements.

Reinsurance Receivables. We have purchased reinsurance to reduce our exposure to adverse claim experience, large claims and catastrophic loss occurrences. Our ceded reinsurance provides for recovery from reinsurers of a portion of losses and loss expenses under certain circumstances. Such reinsurance does not relieve us of our obligation to our policyholders. In the event our reinsurers are unable to meet their obligations under these agreements or are able to successfully challenge losses ceded by us under the contracts, we will not be able to realize the full value of the reinsurance receivable balance. To minimize exposure from uncollectible reinsurance receivables, we have a reinsurance security committee that evaluates the financial strength of each reinsurer prior to our entering into a reinsurance arrangement. In some cases, we may hold full or partial collateral for the receivable, including letters of credit, trust assets and cash. Additionally, creditworthy foreign reinsurers of business written in the U.S., as well as capital markets' reinsurance mechanisms, are generally required to secure their obligations. We have established reserves for uncollectible balances based on our assessment of the collectability of the outstanding balances. As of December 31, 2017 and 2016, the reserve for uncollectible balances was $15.0 million. Actual uncollectible amounts may vary, perhaps substantially, from such reserves, impacting income (loss) in the period in which the change in reserves is made. See also ITEM 8, "Financial Statements and Supplementary Data" - Note 11 of Notes to the Consolidated Financial Statements and "Financial Condition – Reinsurance Receivables" below.

Premiums Written and Earned. Premiums written by us are earned ratably over the coverage periods of the related insurance and reinsurance contracts. We establish unearned premium reserves to cover the unexpired portion of each contract. Such reserves, for assumed reinsurance, are computed using pro rata methods based on statistical data received from ceding companies. Premiums earned, and the related costs, which have not yet been reported to us, are estimated and accrued. Because of the inherent lag in the reporting of written and earned premiums by our ceding companies, we use standard accepted actuarial methodologies to estimate earned but not reported premium at each financial reporting date. These earned but not reported premiums are combined with reported earned premiums to comprise our total premiums earned for determination of our incurred losses and loss and LAE reserves. Commission expense and incurred losses related to the change in earned but not reported premium are included in current period company and segment financial results. See also ITEM 8, "Financial Statements and Supplementary Data" - Note 1 of Notes to the Consolidated Financial Statements.

The following table displays the estimated components of net earned but not reported premiums by segment for the periods indicated.

At December 31,
(Dollars in millions)201720162015
U.S. Reinsurance$354.3$385.5$372.5
International275.2235.4243.9
Bermuda270.3258.4253.4
Total$899.8$879.3$869.8
(Some amounts may not reconcile due to rounding.)

Investment Valuation. Our fixed income investments are classified for accounting purposes as available for sale and are carried at market value or fair value in our consolidated balance sheets. Our equity securities are also held as available for sale and are carried at market or fair value. Most securities we own are traded on national exchanges where market values are readily available. Some of our commercial mortgage-backed securities ("CMBS") are valued using cash flow models and risk-adjusted discount rates. We hold some privately placed securities, less than 1.5% of the portfolio, that are either valued by brokers or an investment advisor. In most instances, values provided by an investment advisor are supported with opinions from qualified independent third parties. In limited circumstances when broker prices are not available for a private placement, we will value the securities using comparable market information. At December 31, 2017 and 2016, our investment portfolio included $1,074.6 million and $917.0 million, respectively, of limited partnership investments whose values are reported pursuant to the equity method of accounting. We carry these investments at values provided by the managements of the limited partnerships and due to inherent reporting lags, the carrying values are based on values with "as of" dates from one month to one quarter prior to our financial statement date.

At December 31, 2017, we had net unrealized gains, net of tax, of $44.3 million compared to $115.6 million at December 31, 2016. Gains and losses from market fluctuations for investments held at market value are reflected as comprehensive income (loss) in the consolidated balance sheets. Gains and losses from market fluctuations for investments held at fair value are reflected as net realized capital gains and losses in the consolidated statements of operations and comprehensive income (loss). Market value declines for the fixed income portfolio, which are considered credit other-than-temporary impairments, are reflected in our consolidated statements of operations and comprehensive income (loss), as realized capital losses. We consider many factors when determining whether a market value decline is other-than-temporary, including: (1) we have no intent to sell and, more likely than not, will not be required to sell prior to recovery, (2) the length of time the market value has been below book value, (3) the credit strength of the issuer, (4) the issuer's market sector, (5) the length of time to maturity and (6) for asset-backed securities, changes in prepayments, credit enhancements and underlying default rates. If management's assessments change in the future, we may ultimately record a realized loss after management originally concluded that the decline in value was temporary. See also ITEM 8, "Financial Statements and Supplementary Data" - Note 1 of Notes to the Consolidated Financial Statements.

FINANCIAL CONDITION

Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were $18,626.5 million at December 31, 2017, an increase of $1,143.4 million compared to $17,483.1 million at December 31, 2016. This increase was primarily the result of $1,162.7 million of cash flows from operations, $242.0 million due to fluctuations in foreign currencies, $82.7 million in equity adjustments of our limited partnership investments and $49.3 million in fair value re-measurements, partially offset by $207.2 million paid out in dividends to shareholders, $94.8 million of pre-tax unrealized depreciation, $45.9 million of amortization bond premium, $30.2 million of unsettled securities and $7.1 million of other-than-temporary impairments.

Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities (our core fixed maturities portfolio) and 2) investments funded by our shareholders' equity.

For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3. For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by internal management.

Over the past several years, we have expanded the allocation of our investments funded by shareholders' equity to include: 1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, as well as individual holdings, 3) high yield fixed maturities, 4) bank and private loan securities and 5) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes, which are also less subject to changes in value with movements in interest rates. We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. We use investment managers experienced in these markets and adjust our allocation to these investments based upon market conditions. At December 31, 2017, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 48.5% of shareholders' equity.

The Company's limited partnership investments are comprised of limited partnerships that invest in private equities. Generally, the limited partnerships are reported on a quarter lag. We receive annual audited financial statements for all of the limited partnerships which are prepared using fair value accounting in accordance with FASB guidance. For the quarterly reports, the Company's staff performs reviews of the financial reports for any unusual changes in carrying value. If the Company becomes aware of a significant decline in value during the lag reporting period, the loss will be recorded in the period in which the Company identifies the decline.

The tables below summarize the composition and characteristics of our investment portfolio as of the dates indicated.

At December 31,
(Dollars in millions)20172016
Fixed maturities, market value$14,756.879.2%$14,107.480.7%
Equity securities, market value129.50.7%119.10.7%
Equity securities, fair value963.65.2%1,010.15.8%
Short-term investments509.72.7%431.52.5%
Other invested assets1,631.98.8%1,333.17.6%
Cash635.13.4%481.92.7%
Total investments and cash$18,626.5100.0%$17,483.1100.0%
(Some amounts may not reconcile due to rounding.)
At December 31,
20172016
Fixed income portfolio duration (years)3.13.3
Fixed income composite credit qualityAa3Aa3
Imbedded end of period yield, pre-tax3.0%2.9%
Imbedded end of period yield, after-tax2.8%2.4%

Reinsurance Receivables.

Reinsurance receivables for both paid and recoverable on unpaid losses totaled $1,348.2 million at December 31, 2017 and $1,018.3 million at December 31, 2016. At December 31, 2017, $356.6 million, or 26.4%, was receivable from Mt. Logan Re collateralized segregated accounts; $153.8 million, or 11.4%, was receivable from Resolution Group; $113.9 million, or 8.4%, was receivable from Zurich; $98.1 million, or 7.3%, was receivable from C.V. Starr; and $82.2 million, or 6.1%, was receivable from Munich Re. The receivables from Resolution Group and C.V. Starr are fully collateralized by individual trust agreements. No other retrocessionaire accounted for more than 5% of our receivables.

Loss and LAE Reserves. Gross loss and LAE reserves totaled $11,884.3 million and $10,312.3 million at December 31, 2017 and 2016, respectively.

The following tables summarize gross outstanding loss and LAE reserves by segment, classified by case reserves and IBNR reserves, for the periods indicated.

At December 31, 2017
CaseIBNRTotal% of
(Dollars in millions)ReservesReservesReservesTotal
U.S. Reinsurance$1,719.6$2,041.0$3,760.631.6%
International1,147.61,022.92,170.518.3%
Bermuda1,037.81,417.02,454.820.7%
Insurance1,049.42,000.03,049.425.7%
Total excluding A&E4,954.36,481.011,435.396.2%
A&E306.0143.0449.03.8%
Total including A&E$5,260.4$6,623.9$11,884.3100.0%
(Some amounts may not reconcile due to rounding.)
At December 31, 2016
CaseIBNRTotal% of
(Dollars in millions)ReservesReservesReservesTotal
U.S. Reinsurance$1,316.3$2,033.9$3,350.332.5%
International893.5850.31,743.816.9%
Bermuda770.01,189.01,959.119.0%
Insurance1,018.51,799.52,818.127.3%
Total excluding A&E3,998.45,872.89,871.295.7%
A&E293.5147.6441.14.3%
Total including A&E$4,291.9$6,020.4$10,312.3100.0%
(Some amounts may not reconcile due to rounding.)

Changes in premiums earned and business mix, reserve re-estimations, catastrophe losses and changes in catastrophe loss reserves and claim settlement activity all impact loss and LAE reserves by segment and in total.

Our loss and LAE reserves represent management's best estimate of our ultimate liability for unpaid claims. We continuously re-evaluate our reserves, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. Changes in reserves resulting from such re-evaluations are reflected in incurred losses in the period when the re-evaluation is made. Our analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. In order to set appropriate reserves, we make qualitative and quantitative analyses and judgments at these various levels. Additionally, the attribution of reserves, changes in reserves and incurred losses among accident years requires qualitative and quantitative adjustments and allocations at these various levels. We utilize actuarial science, business expertise and management judgment in a manner intended to ensure the accuracy and consistency of our reserving practices. Nevertheless, our reserves are estimates, which are subject to variation, which may be significant.

There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future, possibly by a material amount. However, we believe that our existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on our financial condition, results of operations or cash flows.

We have included ranges for loss reserve estimates determined by our actuaries, which have been developed through a combination of objective and subjective criteria. Our presentation of this information may not be directly comparable to similar presentations of other companies as there are no consistently applied actuarial or accounting standards governing such presentations. Our recorded reserves are an aggregation of our best point estimates for approximately 200 reserve groups and reflect our best point estimate of our liabilities. Our actuarial methodologies develop point estimates rather than ranges and the ranges are developed subsequently based upon historical and prospective variability measures.

The following table below represents the reserve levels and ranges for each of our business segments for the period indicated.

Outstanding Reserves and Ranges By Segment (1)
At December 31, 2017
AsLowLowHighHigh
(Dollars in millions)ReportedRange % (2)Range (2)Range % (2)Range (2)
Gross Reserves By Segment
U.S. Reinsurance$3,760.6-16.7%$3,131.016.7%$4,390.3
International2,170.5-10.3%1,946.810.3%2,394.2
Bermuda2,454.8-10.1%2,206.410.1%2,703.2
Insurance3,049.4-14.1%2,618.214.1%3,480.6
Total Gross Reserves (excluding A&E)11,435.3-10.6%10,224.810.6%12,645.9
A&E (All Segments)449.0-13.7%387.513.7%510.5
Total Gross Reserves$11,884.3-10.5%10,639.110.5%13,129.5
(Some amounts may not reconcile due to rounding.)
(1)There can be no assurance that reserves will not ultimately exceed the indicated ranges requiring additional income (loss) statement expense.
(2)Although totals are displayed for both the low and high range amounts, it should be noted that statistically the range of the total is not equal to the sum of the ranges of the segments.

Depending on the specific segment, the range derived for the loss reserves, excluding reserves for A&E exposures, ranges from minus 10.1% to minus 16.7% for the low range and from plus 10.1% to plus 16.7% for the high range. Both the higher and lower ranges are associated with the U.S. Reinsurance segment. The size of the range is dependent upon the level of confidence associated with the outcome. Within each range, management's best estimate of loss reserves is based upon the point estimate derived by our actuaries in detailed reserve studies. Such ranges are necessarily subjective due to the lack of generally accepted actuarial standards with respect to their development. For the above presentation, we have assumed what we believe is a reasonable confidence level but note that there can be no assurance that our claim obligations will not vary outside of these ranges.

Additional losses, including those relating to latent injuries, and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by us or the reinsurance and insurance industry generally, may emerge in the future. Such future emergence, to the extent not covered by existing retrocessional contracts, could have material adverse effects on our future financial condition, results of operations and cash flows.

Asbestos and Environmental Exposures. A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes the outstanding loss reserves with respect to A&E reserves on both a gross and net of retrocessions basis for the periods indicated.

Years Ended December 31,
(Dollars in millions)201720162015
Gross reserves$449.0$441.1$433.1
Reinsurance receivable(130.9)(122.0)(113.5)
Net reserves$318.1$319.1$319.6
(Some amounts may not reconcile due to rounding.)

With respect to asbestos only, at December 31, 2017, we had net asbestos loss reserves of $306.1 million, or 96.2%, of total net A&E reserves, all of which was for assumed business.

On July 13, 2015, we sold Mt. McKinley to Clearwater Insurance Company. Concurrently with the closing, we entered into a retrocession treaty with an affiliate of Clearwater. Per the retrocession treaty, we retroceded 100% of the liabilities associated with certain Mt. McKinley policies, which had been reinsured by Bermuda Re. As consideration for entering into the retrocession treaty, Bermuda Re transferred cash of $140.3 million, an amount equal to the net loss reserves as of the closing date. Of the $140.3 million of net loss reserves retroceded, $100.5 million were related to A&E business. The maximum liability retroceded under the retrocession treaty will be $440.3 million, equal to the retrocession payment plus $300.0 million. We will retain liability for any amounts exceeding the maximum liability retroceded under the retrocession treaty.

Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. We believe that our A&E reserves represent management's best estimate of the ultimate liability; however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount.

Industry analysts use the "survival ratio" to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company's current net reserves by the three year average of annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels. Using this measurement, our net three year asbestos survival ratio was 6.2 years at December 31, 2017. These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments.

Shareholders' Equity. Our shareholders' equity increased to $8,369.2 million as of December 31, 2017 from $8,075.4 million as of December 31, 2016. This increase was the result of $469.0 million of net income, $121.9 million of net foreign currency translation adjustments, $25.0 million of share-based compensation transactions and $6.5 million of net benefit plan obligation adjustments, partially offset by $207.2 million of shareholder dividends, $71.3 million of unrealized appreciation on investments, net of tax and repurchases of 0.2 million common shares for $50.0 million.

Our shareholders' equity increased to $8,075.4 million as of December 31, 2016 from $7,608.6 million as of December 31, 2015. This increase was the result of $996.3 million of net income, $72.7 million of unrealized appreciation on investments, net of tax and $37.1 million of share-based compensation transactions, partially offset by repurchases of 2.1 million common shares for $386.3 million, $195.4 million of shareholder dividends, $55.3 million of net foreign currency translation adjustments and $2.4 million of net benefit plan obligation adjustments.

LIQUIDITY AND CAPITAL RESOURCES

Capital. Shareholders' equity at December 31, 2017 and December 31, 2016 was $8,369.2 million and $8,075.4 million, respectively. Management's objective in managing capital is to ensure its overall capital level, as well as the capital levels of its operating subsidiaries, exceed the amounts required by regulators, the amount needed to support our current financial strength ratings from rating agencies and our own economic capital models. The Company's capital has historically exceeded these benchmark levels.

Our two main operating companies Bermuda Re and Everest Re are regulated by the Bermuda Monetary Authority ("BMA") and the State of Delaware, Department of Insurance, respectively. Both regulatory bodies have their own capital adequacy models based on statutory capital as opposed to GAAP basis equity. Failure to meet the required statutory capital levels could result in various regulatory restrictions, including business activity and the payment of dividends to their parent companies.

Commencing in 2017, the regulatory targeted capital required by the State of Delaware, Department of Insurance was expanded to include a provision for catastrophe exposure. This additional requirement added $759.8 million of regulatory targeted capital for Everest Re as of December 31, 2017.

The regulatory targeted capital and the actual statutory capital for Bermuda Re and Everest Re were as follows:

Bermuda Re (1)Everest Re (2)
At December 31,At December 31,
(Dollars in millions)2017 (3)2016 (3)20172016
Regulatory targeted capital$-$2,025.7$2,076.9$1,411.4
Actual capital$3,085.9$2,950.5$3,391.9$3,635.1

(1) Regulatory targeted capital represents the target capital level from the applicable year's BSCR calculation.

(2) Regulatory targeted capital represents 200% of the RBC authorized control level calculation for the applicable year.

(3) The 2017 BSCR calculation is not yet due to be completed; however, the Company anticipates that Bermuda Re's December 31, 2017 actual capital will exceed the targeted capital level.

Our financial strength ratings as determined by A.M. Best, Standard & Poor's and Moody's are important as they provide our customers and investors with an independent assessment of our financial strength using a rating scale that provides for relative comparisons. We continue to possess significant financial flexibility and access to debt and equity markets as a result of our financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies. See also ITEM 1, Business – "Financial Strength Ratings".

We maintain our own economic capital models to monitor and project our overall capital, as well as, the capital at our operating subsidiaries. A key input to the economic models is projected income and this input is continually compared to actual results, which may require a change in the capital strategy.

During 2017, we repurchased 0.2 million shares for $50.0 million in the open market and paid $207.2 million in dividends to adjust our capital position and enhance long term expected returns to our shareholders. During 2016, we repurchased 2.1 million shares for $386.3 million in the open market and paid $195.4 million in dividends. We may at times enter into a Rule 10b5-1 repurchase plan agreement to facilitate the repurchase of shares. On November 19, 2014, our existing Board authorization to purchase up to 25 million of our shares was amended to authorize the purchase of up to 30 million shares. As of December 31, 2017, we had repurchased 28.2 million shares under this authorization.

Liquidity. Our liquidity requirements are generally met from positive cash flow from operations. Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides additional funding for loss payments. Our net cash flows from operating activities were $1,162.7 million, $1,383.6 million and $1,108.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. Additionally, these cash flows reflected net tax payments of $53.7 million, $42.6 million and $164.9 million for the years ended December 31, 2017, 2016 and 2015, respectively, and net catastrophe loss payments of $745.0 million, $206.0 million and $167.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from reinsurance and insurance operations would be negative. The effect on cash flow from insurance operations would be partially offset by cash flow from investment income. Additionally, cash inflows from investment maturities and dispositions, both short-term investments and longer term maturities are available to supplement other operating cash flows.

As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims. At December 31, 2017 and December 31, 2016, we held cash and short-term investments of $1,144.7 million and $913.4 million, respectively. Our short-term investments are generally readily marketable and can be converted to cash. Starting in the first quarter of 2016, we implemented a new liquidity sweep facility with investments in short maturity, investment grade, U.S. dollar denominated fixed income securities. The facility is structured as a limited liability corporation so it is classified on our balance sheet as part of other invested assets. This facility had $447.9 million of available liquidity at December 31, 2017. In addition to these cash and short-term investments, at December 31, 2017, we had $1,050.1 million of available for sale fixed maturity securities maturing within one year or less, $7,554.2 million maturing within one to five years and $3,175.7 million maturing after five years. Our $1,093.1 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated. We believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future. We do not anticipate selling a significant amount of securities or using available credit facilities to pay losses and LAE but have the ability to do so. Sales of securities might result in realized capital gains or losses. At December 31, 2017 we had $66.5 million of net pre-tax unrealized appreciation related to fixed maturity and equity securities, comprised of $249.0 million of pre-tax unrealized appreciation and $182.6 million of pre-tax unrealized depreciation.

Management generally expects annual positive cash flow from operations, which reflects the strength of overall pricing. However, given the recent set of catastrophic events, cash flow from operations will probably decline and could become negative in the near term as significant claim payments are made related to the catastrophes. However, as indicated above, the Company has ample liquidity to settle its catastrophe claims.

In addition to our cash flows from operations and liquid investments, we also have multiple credit facilities that provide up to $200.0 million of unsecured revolving credit for liquidity but more importantly provide for up to $600.0 million and £145.0 million of collateralized standby letters of credit to support business written by our Bermuda operating subsidiaries.

Effective May 26, 2016, Group, Bermuda Re and Everest International entered into a five year, $800.0 million senior credit facility with a syndicate of lenders, which amended and restated in its entirety the June 22, 2012, four year, $800.0 million senior credit facility. Both the May 26, 2016 and June 22, 2012 senior credit facilities, which have similar terms, are referred to as the "Group Credit Facility". Wells Fargo Corporation ("Wells Fargo Bank") is the administrative agent for the Group Credit Facility, which consists of two tranches. Tranche one provides up to $200.0 million of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit. The interest on the revolving loans shall, at the Company's option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of (a) the prime commercial lending rate established by Wells Fargo Bank, (b) the Federal Funds Rate plus 0.5% per annum or (c) the one month LIBOR Rate plus 1.0% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on Group's senior unsecured debt rating. Tranche two exclusively provides up to $600.0 million for the issuance of standby letters of credit on a collateralized basis.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $5,371.0 million plus 25% of consolidated net income for each of Group's fiscal quarters, for which statements are available ending on or after March 31, 2016 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2017, was $5,867.7 million. As of December 31, 2017, the Company was in compliance with all Group Credit Facility covenants.

At December 31, 2017 and 2016, the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. At December 31, 2017, the Group Credit Facility had no outstanding letters of credit under tranche one and $538.2 million outstanding letters of credit under tranche two. At December 31, 2016, the Group Credit Facility had no outstanding letters of credit under tranche one and $478.2 million outstanding letters of credit under tranche two.

Effective November 9, 2016, Everest International renewed its credit facility with Lloyds Bank plc ("Everest International Credit Facility"). The current renewal of the Everest International Credit Facility, along with a May 17, 2017 amendment, has a four year term and provides up to £145.0 million for the issuance of standby letters of credit on a collateralized basis. The Company pays a commitment fee of 0.1% per annum on the average daily amount of the remainder of (1) the aggregate amount available under the facility and (2) the aggregate amount of drawings outstanding under the facility. The Company pays a credit commission fee of 0.35% per annum on drawings outstanding under the facility.

The Everest International Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $5,326.0 million (70% of consolidated net worth as of December 31, 2015), plus 25% of consolidated net income for each of Group's fiscal quarters, for which statements are available ending on or after January 1, 2015 and for which net income is positive, plus 25% of any increase in consolidated net worth of Group during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2017, was $5,867.7 million. As of December 31, 2017, the Company was in compliance with all Everest International Credit Facility requirements.

At December 31, 2017 and 2016, Everest International Credit Facility had £0.0 million and £130.6 million, respectively, outstanding letters of credit.

Costs incurred in connection with the Group Credit Facility and Everest International Credit Facility were $0.4 million and $0.8 million for December 31, 2017 and 2016, respectively.

Exposure to Catastrophes. Like other insurance and reinsurance companies, we are exposed to multiple insured losses arising out of a single occurrence, whether a natural event, such as a hurricane or an earthquake, or other catastrophe, such as an explosion at a major factory. A large catastrophic event can be expected to generate insured losses to multiple reinsurance treaties, facultative certificates and direct insurance policies across various lines of business.

We focus on potential losses that could result from any single event, or series of events as part of our evaluation and monitoring of our aggregate exposures to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event or series of events in various geographic areas. These techniques range from deterministic approaches, such as tracking aggregate limits exposed in catastrophe-prone zones and applying reasonable damage factors, to modeled approaches that attempt to scientifically measure catastrophe loss exposure using sophisticated Monte Carlo simulation techniques that forecast frequency and severity of potential losses on a probabilistic basis.

No single universal model or group of models is currently capable of projecting the amount and probability of loss in all global geographic regions in which we conduct business. In addition, the form, quality and granularity of underwriting exposure data furnished by ceding companies is not uniformly compatible with the data requirements for our licensed models, which adds to the inherent imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined to estimate potential losses by and across business units. Also, while most models have been updated to incorporate claims information from recent catastrophic events, catastrophe model projections are still inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles could add further uncertainty to loss projections from models based on historical data.

Nevertheless, when combined with traditional risk management techniques and sound underwriting judgment, catastrophe models are a useful tool for underwriters to price catastrophe exposed risks and for providing management with quantitative analyses with which to monitor and manage catastrophic risk exposures by zone and across zones for individual and multiple events.

Projected catastrophe losses are generally summarized in terms of the PML. We define PML as our anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The PML will vary depending upon the modeled simulated losses and the make-up of the in force book of business. The projected severity levels are described in terms of "return periods", such as "100-year events" and "250-year events". For example, a 100-year PML is the estimated loss to the current in-force portfolio from a single event which has a 1% probability of being exceeded in a twelve month period. In other words, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML. It is important to note that PMLs are estimates. Modeled events are hypothetical events produced by a stochastic model. As a result, there can be no assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.

From an enterprise risk management perspective, management sets limits on the levels of catastrophe loss exposure we may underwrite. The limits are revised periodically based on a variety of factors, including but not limited to our financial resources and expected earnings and risk/reward analyses of the business being underwritten.

Management estimates that the projected net economic loss from its largest 100-year event in a given zone represents approximately 11% of its December 31, 2017 shareholders' equity. Economic loss is the PML exposure, net of third party reinsurance, reduced by estimated reinstatement premiums to renew coverage and estimated income taxes. The impact of income taxes on the PML depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance. Management also monitors and controls its largest PMLs at multiple points along the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500 and 1,000 year return periods. This process enables management to identify and control exposure accumulations and to integrate such exposures into enterprise risk, underwriting and capital management decisions.

Our catastrophe loss projections, segmented by risk zones, are updated quarterly and reviewed as part of a formal risk management review process.

We believe that our greatest worldwide 1 in 100 year exposure to a single catastrophic event is to a hurricane affecting the U.S. southeast coast, where we estimate we have a PML exposure, net of third party reinsurance, of $1,313.0 million. See also table under ITEM 1, "Business - Risk Management of Underwriting and Retrocession Arrangements".

If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $943.0 million. The estimate involves multiple variables, including which Everest entity would experience the loss, and as a result there can be no assurance that this amount would not be exceeded.

We may purchase reinsurance to cover specific business written or the potential accumulation or aggregation of exposures across some or all of our operations. Reinsurance purchasing decisions consider both the potential coverage and market conditions including the pricing, terms, conditions and availability of coverage, with the aim of securing cost effective protection. The amount of reinsurance purchased has varied over time, reflecting our view of our exposures and the cost of reinsurance.

Information Technology. Our information technology is a key component of our business operations and is supported by a team of knowledgeable professionals. The majority of our information technology platform is located at our service processing center in New Jersey but processing is performed at the office locations of our operating subsidiaries and branches. In addition, our main-frame processing is performed by a third party vendor at a separate location. We have implemented procedures that ensure that our key business systems are protected (or secured) and data is backed up and stored at off-site locations so that they can be restored promptly if necessary. We have documented business continuity plans and disaster recovery plans to provide uninterrupted technology services for major systems outages with alternative secure data centers available in case of broader outages.

Our business operations depend on the proper functioning and availability of our information technology platform, which includes data processing and related electronic communications. We communicate electronically internally and with our brokers, program managers, clients and third party vendors. Some of these electronic communications involve personal, confidential and proprietary information. We seek to ensure that all of our systems, data and electronic transmissions are appropriately protected from cybersecurity attacks with the latest technology safeguards. These include, but are not limited to, requiring an independent assessment of outside vendor's computing environment relative to the services they are providing us.

Despite these safeguards, a significant cyber incident, including system failure, security breach and disruption by malware or other damage could interrupt or delay our operations. This type of incident may result in a violation of applicable privacy and other laws. Management is not aware of a cybersecurity incident that has had a material impact on our operations.

Contractual Obligations. The following table shows our contractual obligations for the period indicated.

Payments due by period
Less thanMore than
(Dollars in millions)Total1 year1-3 years3-5 years5 years
4.868% Senior notes400.0$-$-$-$400.0
6.6% Long term notes238.6---238.6
Interest expense (1)964.928.557.157.1822.2
Employee benefit plans59.24.58.76.639.3
Operating lease agreements92.417.035.115.724.7
Gross reserve for losses and LAE (2)11,884.33,188.64,352.41,308.13,035.3
Total$13,639.5$3,238.6$4,453.3$1,387.5$4,560.1
(Some amounts may not reconcile due to rounding.)
(1)Interest expense on 6.6% long term notes is calculated at the variable floating rate of 3.80% as of December 31, 2017.
(2)Loss and LAE reserves represent management's best estimate of losses from claim and related settlement costs. Both the amounts and timing of such payments are estimates, and the inherent variability of resolving claims as well as changes in market conditions make the timing of cash flows uncertain. Therefore, the ultimate amount and timing of loss and LAE payments could differ from our estimates.

The contractual obligations for senior notes and long term notes are the responsibility of Holdings. We have sufficient cash flow, liquidity, investments and access to capital markets to satisfy these obligations. Holdings generally depends upon dividends from Everest Re, its operating insurance subsidiary for its funding, capital contributions from Group or access to the capital markets. Our various operating insurance and reinsurance subsidiaries have sufficient cash flow, liquidity and investments to settle outstanding reserves for losses and LAE. Management believes that we, and each of our entities, have sufficient financial resources or ready access thereto, to meet all obligations.

Dividends.

During 2017, 2016 and 2015, we declared and paid common shareholder dividends of $207.2 million, $195.4 million and $175.1 million, respectively. As an insurance holding company, we are partially dependent on dividends and other permitted payments from our subsidiaries to pay cash dividends to our shareholders. The payment of dividends to Group by Holdings Ireland and Everest Dublin Holdings is subject to Irish corporate and regulatory restrictions; the payment of dividends to Holdings Ireland by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions; and the payment of dividends to Group by Bermuda Re, Everest International or Mt. Logan Re is subject to Bermuda insurance regulatory restrictions. Management expects that, absent extraordinary catastrophe losses, such restrictions should not affect Everest Re's ability to declare and pay dividends sufficient to support Holdings' general corporate needs and that Holdings Ireland, Everest Dublin Holdings, Bermuda Re and Everest International will have the ability to declare and pay dividends sufficient to support Group's general corporate needs. For the years ended December 31, 2017, 2016 and 2015, Everest Re paid no dividends to Holdings. For the years ended December 31, 2017, 2016 and 2015, Bermuda Re paid dividends to Group of $400.0 million, $650.0 million and $575.0 million, respectively; Everest International paid dividends to Group of $0.0 million, $40.0 million and $15.0 million, respectively; and Mt. Logan Re paid dividends to Group of $25.0 million, $0.0 million and $0.0 million, respectively. See ITEM 1, "Business – Regulatory Matters – Dividends" and ITEM 8, "Financial Statements and Supplementary Data" - Note 14 of Notes to Consolidated Financial Statements.

Application of Recently Issued Accounting Guidance.

Accounting for Deferred Taxes in Accumulated Other Comprehensive Income (AOCI). In February 2018, FASB issued ASU 2018-02 which outlines guidance on the treatment of trapped deferred taxes contained within AOCI on the consolidated balance sheets. The new guidance allows the amount of trapped deferred taxes in AOCI, resulting from the change in the U.S. tax rate from 35% to 21% upon enactment of the TCJA, to be reclassed as part of retained earnings in the consolidated balance sheets. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is allowed. The Company has decided to early adopt the guidance as of December 31, 2017. The adoption has resulted in a reclass of $1.3 million between AOCI and retained earnings, which is disclosed separately within the consolidated statement of changes in shareholders equity.

Accounting for Impact on Income Taxes due to Tax Reform. In December 2017, the SEC issued Staff Accounting Bulletin ("SAB") 118 which provides guidance on the application of FASB Accounting Standards Codification ("ASC") Topic 740, Income Taxes, due to the enactment of TCJA. SAB 118 became effective upon release. The Company has adopted the provisions of SAB 118 with respect to measuring the tax effects for the modifications to the determination of tax basis loss reserves. Because of uncertainty in how the Internal Revenue Service ("IRS") intends to implement the modifications and the necessary transition calculation, the Company has determined that a reasonable estimate cannot be determined and has followed the provisions of the tax laws that were in effect prior to the modifications. In 2018, the Company expects to record adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts are finalized. Further adjustments are not expected to have a material impact on the Company's financial statements.

Amortization of Bond Premium. In March 2017, FASB issued ASU 2017-08 which outlines guidance on the amortization period for premium on callable debt securities. The new guidance requires that the premium on callable debt securities be amortized through the earliest call date rather than through the maturity date of the callable security. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its financial statements.

Presentation and Disclosure of Net Periodic Benefit Costs. In March 2017, FASB issued ASU 2017-07 which outlines guidance on the presentation of net periodic costs of benefit plans. The new guidance requires that the service cost component of net periodic benefit costs be reported within the same line item of the statements of operations as other compensation costs are reported. Other components of net periodic benefit costs should be reported separately. Footnote disclosure is required to state within which line items of the statements of operations the components are reported. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its financial statements.

Disclosure of Restricted Cash. In November 2016, FASB issued ASU 2016-18 which outlines guidance on the presentation in the statements of cash flows of changes in restricted cash. The new guidance requires that the statements of cash flows should reflect all changes in cash, cash equivalents and restricted cash in total and not segregated individually. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its financial statements.

Intra-Entity Asset Transfers. In October 2016, FASB issued ASU 2016-16 which outlines guidance on the tax accounting for intra-entity asset sales and transfers, other than inventory. The new guidance requires that reporting entities recognize tax expense from the intra-entity transfer of an asset in the seller's tax jurisdiction at the time of transfer and recognize any deferred tax asset in the buyer's tax jurisdiction at the time of transfer. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-16 to have a material impact on its financial statements.

Valuation of Financial Instruments. In June 2016, FASB issued ASU 2016-13 which outlines guidance on the valuation of and accounting for assets measured at amortized cost and available for sale debt securities. The carrying value of assets measured at amortized cost will now be presented as the amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account). Available for sale debt securities will now record credit losses through an allowance for credit losses, which will be limited to the amount by which fair value is below amortized cost. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its financial statements.

Accounting for Share-Based Compensation. In March 2016, the FASB issued ASU 2016-09, authoritative guidance regarding the accounting for share-based compensation. This guidance requires that the income tax effects resulting from the change in the value of share-based compensation awards between grant and settlement will be recorded as part of the Consolidated Statements of Operations and Comprehensive Income/(Loss). Previously, excess tax benefits have been recorded as part of the additional paid in capital within the Consolidated Balance Sheets. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that annual reporting period. The Company has implemented this guidance prospectively as of January 1, 2017. The guidance also requires that the cost of employee taxes paid via shares withheld upon settlement of share-based compensation awards must be shown as a financing activity within the Statements of Cash Flows. The Company has implemented this guidance retrospectively as of January 1, 2017.

The following table presents certain financial statement line items as previously reported in 2016 and 2015, the effect of those line items due to treating the cost of shares withheld upon settlement of share-based compensation awards as a financing activity with the Statements of Cash Flows and the line items as currently reported within the financial statements.

Years Ended December 31,
Consolidated Statements of Cash Flows:20162015
Effect ofEffect of
adoption ofadoption of
As previouslynew accountingAs previouslynew accounting
reportedpolicyAs adoptedreportedpolicyAs adopted
(Dollars in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Change in other assets and liabilities, net$(56.2)$10.6$(45.6)$(8.9)$11.6$2.7
Net cash provided by (used in) operating activities1,373.010.61,383.61,096.611.61,108.2
CASH FLOWS FROM FINANCING ACTIVITIES:
Cost of shares withheld for taxes on settlements of
share-based compensation awards-(10.6)(10.6)-(11.6)(11.6)
Net cash provided by (used in) financing activities(570.9)(10.6)(581.5)(561.6)(11.6)(573.2)

Leases. In February 2016, FASB issued ASU 2016-02 which outlines new guidance on the accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities on the balance sheets for most leases that were previously deemed operating leases and required only lease expense presentation in the statements of operations. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements.

Recognition and Measurement of Financial Instruments. In January 2016, the FASB issued ASU 2016-01 which outlines revised guidance on the accounting for equity investments. The new guidance states that all equity investments in unconsolidated entities will be measures at fair value, with the change in value being recorded through the income statement rather than being recorded within other comprehensive income. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2016-01 to have material impact on its financial statements.

Disclosures about Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, authoritative guidance regarding required disclosures associated with short duration insurance contracts. The new disclosure requirements focus on information about initial claim estimates and subsequent claim estimate adjustment, methodologies in estimating claims and the timing, frequency and severity of claims related to short duration insurance contracts. This guidance is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods beginning after December 15, 2016. The Company implemented this guidance effective in the fourth quarter of 2016.

Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share. In May 2015, the FASB issued ASU 2015-07, which removes the requirement to categorize, within the fair value hierarchy, investments for which fair values are estimated using the net asset value practical expedient provided by Accounting Standards Codification 820, Fair Value Measurement. The updated guidance is effective for annual reporting periods beginning after December 15, 2015. The Company implemented this guidance effective in the fourth quarter of 2016. The adoption did not have a material impact on the Company's financial statements.

Debt Issuance Costs. In April 2015, The FASB issued ASU 2015–03, authoritative guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs be presented within the balance sheet as a reduction of the carrying value of the debt liability, rather than as a separate asset. This guidance is effective for annual reporting periods beginning after December 15, 2015 and related interim reporting periods. The Company implemented this guidance effective in the second quarter of 2016. The adoption did not have a material impact on the Company's financial statements.

Consolidation. In February 2015, the FASB issued ASU 2015-02, authoritative guidance regarding consolidation of reporting entities. The new guidance focuses on the required evaluation of whether certain legal entities should be consolidated. This guidance is effective for annual and interim reporting periods beginning after December 15, 2015. Based upon this guidance, the Company has determined that the separate segregated accounts associated with Mt. Logan Re should not be consolidated. The Company implemented the guidance effective January 1, 2016.

The following tables present certain financial statement line items as previously reported in 2015, the effect on those line items due to not consolidating the segregated accounts of Mt. Logan Re, in accordance with the newly adopted accounting policy and the line items as currently reported within the financial statements.

CONSOLIDATED BALANCE SHEET:December 31, 2015
Effect of
adoption of
As previouslynew accounting
reportedpolicyAs adopted
(Dollars in millions)
ASSETS:
Short-term investments$1,795.5$(995.8)$799.7
Total investments and cash17,672.2(995.8)16,676.4
Premiums receivable1,479.33.81,483.1
Reinsurance receivables840.453.6894.0
Deferred acquisition costs373.1(0.7)372.4
Prepaid reinsurance premiums157.47.5165.0
Other assets265.656.2321.8
TOTAL ASSETS21,426.2(875.3)20,550.8
LIABILITIES:
Funds held under reinsurance treaties88.5(75.0)13.5
Commission reserves79.8(19.8)60.1
Other net payable to reinsurers166.86.3173.1
Other liabilities291.3(30.0)261.3
Total liabilities13,060.7(118.5)12,942.2
NONCONTROLLING INTERESTS:
Redeemable noncontrolling interests - Mt. Logan Re756.9(756.9)-
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY21,426.2(875.3)20,550.8
CONSOLIDATED STATEMENTS OF OPERATIONSTwelve Months Ended December 31, 2015
AND COMPREHENSIVE INCOME (LOSS):Effect of
adoption of
As previouslynew accounting
reportedpolicyAs adopted
(Dollars in millions)
REVENUES:
Premiums earned$5,481.5$(188.6)$5,292.8
Net investment income473.8(0.4)473.5
Other income (expense)60.427.888.3
Total revenues5,837.9(161.1)5,676.8
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses3,101.9(37.2)3,064.7
Commission, brokerage, taxes and fees1,202.0(18.4)1,183.6
Other underwriting expenses266.0(8.9)257.1
Total claims and expenses4,629.4(64.5)4,564.9
INCOME (LOSS) BEFORE TAXES1,208.5(96.6)1,111.9
NET INCOME (LOSS)1,074.5(96.6)977.9
Net income (loss) attributable to noncontrolling interests(96.6)96.6-
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP977.9(977.9)-
CONSOLIDATED STATEMENT OF CASH FLOWS:Twelve Months Ended December 31, 2015
Effect of
adoption of
As previouslynew accounting
(Dollars in millions)reportedpolicyAs adopted
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$1,074.5$(96.6)$977.9
Decrease (increase) in premiums receivable(93.8)(4.4)(98.2)
Decrease (increase) in funds held by reinsureds, net31.2(75.0)(43.8)
Decrease (increase) in reinsurance receivables(240.4)(24.7)(265.1)
Decrease (increase) in prepaid reinsurance premiums(14.5)(7.3)(21.8)
Increase (decrease) in other net payable to reinsurers38.35.543.7
Change in other assets and liabilities, net0.3(9.2)(8.9)
Net cash provided by (used in) operating activities1,308.4(211.7)1,096.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in short-term investments(98.9)440.6341.7
Net cash provided by (used in) investing activities(1,121.7)440.6(681.1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Third party investment in redeemable noncontrolling interest266.8(266.8)-
Subscription advances for third party redeemable noncontrolling interest30.0(30.0)-
Dividends paid on third party investment in redeemable noncontrolling interest(68.2)68.2-
Net cash provided by (used in) financing activities(332.9)(228.7)(561.6)
EFFECT OF EXCHANGE RATE CHANGES ON CASH(7.6)(0.2)(7.8)

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09 which outlines revised guidance on the recognition of revenue arising from contracts with customers. The new guidance states that reporting entities should apply certain steps to determine when revenue should be recognized, based upon fulfillment of performance obligations to complete contracts. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its financial statements.

Market Sensitive Instruments.

The SEC's Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, "market sensitive instruments"). We do not generally enter into market sensitive instruments for trading purposes.

Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position. The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity securities.

The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.

Interest Rate Risk. Our $18.6 billion investment portfolio, at December 31, 2017, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.

Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $2,445.4 million of mortgage-backed securities in the $14,756.8 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $509.7 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.

Impact of Interest Rate Shift in Basis Points
At December 31, 2017
-200-1000100200
(Dollars in millions)
Total Market/Fair Value$16,130.5$15,704.8$15,266.5$14,807.6$14,347.1
Market/Fair Value Change from Base (%)5.7%2.9%0.0%-3.0%-6.0%
Change in Unrealized Appreciation
After-tax from Base ($)$739.2$376.5$-$(397.8)$(797.7)
Impact of Interest Rate Shift in Basis Points
At December 31, 2016
-200-1000100200
(Dollars in millions)
Total Market/Fair Value$15,390.8$14,976.7$14,538.9$14,078.1$13,616.7
Market/Fair Value Change from Base (%)5.9%3.0%0.0%-3.2%-6.3%
Change in Unrealized Appreciation
After-tax from Base ($)$712.4$366.9$-$(387.2)$(774.6)

We had $11,884.3 million and $10,312.3 million of gross reserves for losses and LAE as of December 31, 2017 and 2016, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.7 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately $1.3 billion resulting in a discounted reserve balance of approximately $9.4 billion, representing approximately 61.6% of the value of the fixed maturity investment portfolio funds.

Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock, preferred stock and mutual fund portfolios arising from changing prices. Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges, and mutual fund investments in emerging market debt. The primary objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through market appreciation and income.

The tables below display the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the period indicated.

Impact of Percentage Change in Equity Fair/Market Values
At December 31, 2017
(Dollars in millions)-20%-10%0%10%20%
Fair/Market Value of the Equity Portfolio$874.5$983.8$1,093.1$1,202.4$1,311.7
After-tax Change in Fair/Market Value$(150.7)$(75.3)$-$75.3$150.7
Impact of Percentage Change in Equity Fair/Market Values
At December 31, 2016
(Dollars in millions)-20%-10%0%10%20%
Fair/Market Value of the Equity Portfolio$903.3$1,016.2$1,129.2$1,242.1$1,355.0
After-tax Change in Fair/Market Value$(154.7)$(77.3)$-$77.3$154.7

Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S./Bermuda ("foreign") operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the Singapore Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB guidance, the impact on the market value of available for sale fixed maturities due to changes in foreign currency exchange rates, in relation to functional currency, is reflected as part of other comprehensive income. Conversely, the impact of changes in foreign currency exchange rates, in relation to functional currency, on other assets and liabilities is reflected through net income as a component of other income (expense). In addition, we translate the assets, liabilities and

income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income.

In June 2016, the United Kingdom approved a referendum to exit the European Union (commonly referred to as "Brexit") which resulted in volatility in global stock markets and currency exchange rates, and has increased political, economic and global market uncertainty. The formal negotiation process for the United Kingdom to exit the European Union will determine the timing and terms of such an exit. The Company has a Lloyd's of London Syndicate and Bermuda Re has a branch operation in the United Kingdom. The nature and extent of the impact of Brexit on regulation, interest rates, currency exchange rates and financial markets is still uncertain and may adversely affect our operations.

The tables below display the potential impact of a parallel and immediate 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure for the periods indicated. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency.

Change in Foreign Exchange Rates in Percent
At December 31, 2017
(Dollars in millions)-20%-10%0%10%20%
Total After-tax Foreign Exchange Exposure$(370.7)$(185.3)$-$185.3$370.7
Change in Foreign Exchange Rates in Percent
At December 31, 2016
(Dollars in millions)-20%-10%0%10%20%
Total After-tax Foreign Exchange Exposure$(309.4)$(154.7)$-$154.7$309.4

Safe Harbor Disclosure.

This report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as "may", "will", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend". Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the impact of the Tax Cut and Jobs Act, the adequacy of capital in relation to regulatory required capital, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements, the ability of Everest Re, Holdings, Holdings Ireland, Dublin Holdings, Bermuda Re and Everest International to pay dividends and the settlement costs of our specialized equity index put option contracts. Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause our actual events or results to be materially different from our expectations include those discussed under the caption ITEM 1A, "Risk Factors". We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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