The annualized net earned yield, total return of the investment portfolio for the years ended December 31, 2012, 2011 and 2010 and market yield and portfolio duration as of December 31, 2012, 2011 and 2010 were as follows:
The net loss ratio reflected lower favorable prior year loss reserve development recorded for 2012 as compared to 2011 and similar favorable prior year loss reserve development compared to 2010. Prior year loss reserves were reduced in 2012 by $46.2 million as compared to reductions of $70.8 million and $46.9 million for the years ended December 31, 2011 and 2010. All lines of business in the Company’s Insurance segment experienced net reductions in the Company’s estimated losses for prior accident years in 2012 as claims have not materialized as originally estimated by the Company.
The following table details the impact of the catastrophe related activity for the Reinsurance segment for the years ended December 31, 2012, 2011 and 2010.
Commercial Mortgage-Backed Securities. Our commercial mortgage-backed securities (“CMBS”) portfolio is diversified both geographically and by the types of underlying properties. Our portfolio is primarily backed by office and retail and other commercial properties. We have limited exposure to lodging and industrial properties. The majority of commercial mortgage-backed securities in our portfolio are non-agency and in the super senior tranche with average credit support in excess of approximately 30.4%. The principal risks inherent in holding agency commercial mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash flows will be received. Non-agency CMBS also have credit risk should losses on the underlying collateral exceed the credit protection provided.
Asset-Backed Securities. Asset-backed securities are diversified both by type of collateral and issuer. The majority of our asset-backed securities are AAA-rated bonds backed by pools of automobile loan receivables, credit card receivables, student loans and other collateral originated by a variety of financial institutions. The principal risks in holding asset-backed securities are structural and credit risks. Structural risks include the security’s priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include performance of the underlying consumer or corporate loans, which act as collateral to these securities.
Our cash and cash equivalents increased $233.1 million to $1,124.0 million at December 31, 2012, compared to $890.9 million at December 31, 2011, and $609.9 million at December 31, 2010.
The Credit Facility requires the Company’s compliance with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a leverage ratio (no greater than 0.35:1.00 at any time) and a consolidated tangible net worth (no less than $1.8 billion at any time). In addition, each of the Company’s regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the Credit Facility restrict the declaration or payment of dividends if the Company is already in default or the payment or declaration would cause a default under the terms of the Credit Facility.
Preferred Shares. On October 10, 2005, Endurance Holdings issued 8,000,000 shares of its 7.75% Non-Cumulative Preferred Shares, Series A (the “Series A Preferred Shares”) and on June 1, 2011, Endurance Holdings issued 9,200,000 shares of its 7.5% Non-Cumulative Preferred Shares, Series B (the “Series B Preferred Shares”). The Series A Preferred Shares and Series B Preferred Shares sold were registered under the Securities Act of 1933, as amended, and are traded on the New York Stock Exchange. The Series A Preferred Shares and Series B Preferred Shares were both issued at a price to the public of $25.00 per share. Endurance Holdings received net proceeds of $193.5 million from its offering of Series A Preferred Shares and $224.0 million from its offering of Series B Preferred Shares, in each case after expenses and underwriting discounts. The proceeds from both offerings were used to provide additional capital to Endurance Holdings’ subsidiaries and for other general corporate purposes.
Professional lines. The favorable loss emergence within the professional line of business during 2012 and 2011 was primarily due to lower than expected claims activity.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endurance Specialty Holdings Ltd.‘s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2013 expressed an unqualified opinion thereon.
The following table summarizes the composition of the investment portfolio by investment type at December 31, 2012 and 2011:
The following table sets forth the Company’s available for sale investments and derivative instruments categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2011:
On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior Notes due July 15, 2034 (the “7% Senior Notes”), $250.0 million of which were initially issued on July 15, 2004 at a price of 94.976% of their principal amount, providing an effective yield to investors of 7.449%. On the closing of the additional issuance, the Company had a total par value of $335.0 million of the 7% Senior Notes outstanding. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than the date of issue, the initial purchase price to the public and the first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with the previously issued 7% Senior Notes. The Company used the proceeds from the additional 7% Senior Notes for general corporate purposes.
The following table reconciles total segment results to income (loss) before income tax (expense) benefit for the years ended December 31, 2012, 2011 and 2010:
The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2012, 2011 and 2010:
No impairment of the Company’s goodwill or intangible assets was noted following the annual impairment review for the years ended December 31, 2012 and 2011. No changes were made in the methodologies and assumptions used in the Company’s application of its impairment testing. The Company expects the amortization of the intangible assets with finite lives to approximate $7.0 million in 2013, $6.5 million in 2014, $6.3 million in each of 2015 to 2017 and $31.4 million in all years thereafter.
Operating leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2012 are as follows:
As of December 31, 2012 and 2011, the Company had no uncertain tax positions.