For 2012 the Compensation Committee substituted the “increase in FCBVPCS” performance measure for the return on equity-based performance measure for both the portion of annual employee cash bonuses that is based on Company performance and for Variable RSU awards (as defined on page 76 of this report). We believe that this refinement of the performance measure: (i) more directly aligns our interests and motivations with those of stakeholders, since it encompasses both our actual underwriting results and our actual investment results; and (ii) provides our employees with the ability to more easily understand, and identify with, their incentive hurdle, and allows our shareholders to track the Company’s performance with respect to this goal, since we present our calculations of FCBVPCS and the increase or decrease in our FCBVPCS in our quarterly earnings releases and our annual and quarterly filings with the SEC.
Reinsurance premiums ceded by Montpelier Bermuda in 2012, 2011 and 2010 were $99.8 million, $78.4 million and $41.7 million, respectively. The increases in reinsurance premiums ceded from 2010 to 2012 are mainly the result of several private underwriting partnerships (in the form of property catastrophe quota share reinsurance treaties) that Montpelier Bermuda has entered into since 2011 with various third parties. These underwriting partnerships allow Montpelier Bermuda to: (i) write larger property catastrophe lines with preferred clients; (ii) recover a portion of its losses from events of all sizes, not just from those events that exceed a specified loss amount; and (iii) reduce its net acquisition costs.
The following table summarizes Montpelier Syndicate 5151’s general and administrative expenses during the years ended December 31, 2012, 2011 and 2010:
Prior to the MUSIC Sale, the MUSIC Run-Off segment’s acquisition cost ratio consisted of commissions, premium taxes, excise taxes and profit commissions and its general and administrative expenses consisted of: (i) salaries, employee benefits, incentive compensation and premises expenses; and (ii) intercompany allocations of information technology and other centrally-managed expenses.
Operating expenses recorded within Corporate and Other include salaries and benefits, information technology costs, director fees, legal and consulting expenses, corporate insurance premiums, audit fees and fees associated with being a publicly traded company. Operating expenses incurred during 2012 decreased, versus those of 2011, primarily as a result of reductions in software depreciation. The increase in operating expenses experienced from 2010 to 2011 relates primarily to increased allocations of our centrally managed information technology costs to Corporate and Other.
Our total return on cash and investments for 2012 was higher than that of 2011, due primarily to significantly higher net realized and unrealized investment gains experienced in 2012. Our total return on cash and investments for 2011 was lower than that of 2010, due primarily to lower net realized and unrealized investment gains and lower net investment income experienced in 2011.
Despite a higher average investment portfolio balance, our investment income has decreased each year since 2010, due to continual declines in market interest rates.
During 2012 we declared $13.3 million in cash dividends on our Preferred Shares. During 2011 we declared $9.1 million in cash dividends on our Preferred Shares from May 10, 2011 to December 31, 2011, the interim period during which the Preferred Shares were outstanding during that year.
As a provider of short-tail insurance and reinsurance, mainly from natural and man-made catastrophes, we could be required to pay significant losses on short notice. As a result, we have structured our fixed maturity investment portfolio with high-quality securities with a short average duration in order to reduce our sensitivity to interest rate fluctuations and to provide adequate liquidity for the settlement of our expected liabilities. As of December 31, 2012, our fixed maturities had an average credit quality of “AA-” (Very Strong) from Standard & Poor’s and an average duration of 3.3 years. If our calculations with respect to the timing of the payment of our liabilities are incorrect, or if we improperly structure our investment portfolios, we could be forced to liquidate our investments prior to maturity, potentially at a significant loss.
The Trust Preferred Securities mature on March 30, 2036, but are redeemable at our option at par. The Trust Preferred Securities bore interest at 8.55% per annum through March 29, 2011, and thereafter at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. We currently have no intention of redeeming the Trust Preferred Securities.
In January 2012, our U.S. operations repatriated $53.5 million in cash to the Company in Bermuda, representing the majority of the proceeds we received from the MUSIC Sale. We did not incur any income or withholding taxes associated with this repatriation.
As of December 31, 2012 and 2011, we recorded $6.7 million and $7.7 million in reinsurance recoverable on paid losses, respectively, and $102.7 million and $77.7 million in reinsurance recoverable on unpaid losses, respectively. We record provisions for uncollectible reinsurance recoverable when collection becomes unlikely due to the reinsurer’s inability to pay. Based on a review of the financial condition of the reinsurers and other factors, we have determined that a reserve for uncollectible reinsurance recoverable on paid and unpaid loss and LAE was not considered appropriate as of December 31, 2012 and 2011.
RSUs are phantom (as opposed to actual) Common Shares which, depending on the individual award, vest in equal tranches over a one to five-year period, subject to the recipient maintaining a continuous relationship with us through the applicable vesting date. RSUs are payable in Common Shares upon vesting (the amount of which may be reduced by applicable statutory income tax withholdings at the recipient’s option). RSUs do not require the payment of an exercise price and holders of RSUs are not entitled to voting rights, but they are entitled to receive payments equivalent to any dividends and distributions declared on the Common Shares underlying the RSUs.