In July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 will be effective for annual and interim reporting periods beginning after December 15, 2013, with both early adoption and retrospective application permitted. The Company does not expect this standard to have a material impact on the Company’s Audited Consolidated Financial Statements.
(3) The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes other investments and operating cash.
For 2013, catastrophe related losses added 3.9 percentage points to the Company’s net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 10.6 percentage points in 2012 and 24.8 percentage points in 2011. Additionally, the Company recorded a lower expected loss ratio in the Insurance segment’s agriculture line of business in the year ended December 31, 2013 compared to 2012 as a result of improved growing conditions experienced in the U.S. compared to the prior year, which was adversely impacted by a severe drought. Compared to the year ended December 31, 2011, the Company recorded a higher expected loss ratio in the agriculture line of the Insurance segment in the current year which reflected modestly lower harvest yields in portions of the Midwest as the U.S. recovered from the 2012 drought and declines in commodity prices in 2013.
Net Losses and Loss Expenses. The decrease in the net loss ratio in the Company’s Insurance segment for the year ended December 31, 2013 compared to 2012 was partly driven by the agriculture line of business that incurred lower levels of losses as a result of improved growing conditions experienced in the U.S. compared to the prior year, which was adversely affected by extreme drought conditions. In addition, an absence of major loss events in 2013 compared to the prior year reduced the accident year loss ratio in the property line of business. The increase in the 2013 net loss ratio compared to 2011 resulted primarily from a higher expected loss ratio in the agriculture line in the current year which reflected declining corn commodity prices and reduced harvest yields in portions of the Midwest as the U.S. recovered from the 2012 drought.
The contractual maturity distribution for our fixed maturity portfolio held as of December 31, 2013 and 2012 was as follows:
Professional lines. The favorable loss emergence within the professional line of business during 2013 and 2012 was primarily due to lower than expected claims activity in the directors and officers liability business.
Income tax refunds received in 2013 totaled $8.4 million. The Company paid net income taxes and received net refunds totaling $1.6 million and $15.7 million for the years ended December 31, 2012 and 2011, respectively. Net operating loss carryforwards in the amount of $80.3 million, $10.6 million, $5.3 million, and $9.9 million are available for application against future taxable income in the United States, United Kingdom, Singapore and Switzerland respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carry forwards expire through 2020 and 2033, respectively.
American Agri-Business Insurance Company (“American Agri-Business”), managed by ARMtech Insurance Services, Inc. (together with American Agri-Business, “ARMtech”)
If the Company has the intent to sell an available for sale security in an unrealized loss position or it is more likely than not that the Company will be required to sell the security, the Company deems the security to be other-than-temporarily impaired and writes down the value to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings (losses) as an other-than-temporary impairment (“OTTI”) loss.
The Company accounts for income taxes for its subsidiaries operating in taxable jurisdictions. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The accounting guidance allows for the recognition of tax benefits of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is established for any tax benefit claimed in a tax return in excess of this threshold. Income tax related interest and penalties are included as income tax (expense) benefit.
Convertible debt funds - There are generally no restrictions on the Company’s right to redeem its interest in convertible debt funds with the exception of certain redemption frequency and notice requirements. The redemption frequency of these funds is monthly with a required notice period of 5 days.
As of December 31, 2013, 880 available for sale securities were in an unrealized loss position aggregating $49.6 million. Of those, 71 securities with aggregated unrealized losses of $5.8 million at December 31, 2013 had been in a continuous unrealized loss position for twelve months or greater.
The following table sets forth the Company’s available for sale investments, other investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2012:
observable inputs: contract price, notional, option strike, term to expiry, interest rate, contractual limits;
Interest Rate Futures, Swaps, Swaptions and Options - to manage exposure to interest rate risk, which can include increasing or decreasing its exposure to this risk through modification of the portfolio composition and duration.
Operating leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2013 are as follows:
There were unrecognized stock-based compensation expenses of $5.7 million related to unvested stock options at December 31, 2013. This expense is expected to be recognized between 2014 and 2017, with approximately 53.9% expected to be recognized during 2014.
Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains for Endurance’s Delaware domiciled entities. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2013, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions, and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2014 without the prior approval of the applicable insurance regulator. If the parent company is also an insurer, as is the case with Endurance American, Endurance American Specialty and Endurance Risk Solutions, the parent company or companies must also meet their own dividend eligibility requirements in order to pass along any dividends received from subsidiary insurance companies. At December 31, 2013, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.9 million (2012 - $4.3 million) without prior regulatory approval.
The Singapore Branch is subject to Fund Solvency and Capital Adequacy requirements by the Monetary Authority of Singapore as a foreign company in Singapore and is regulated by the Monetary Authority of Singapore pursuant to the Insurance Act in Singapore. At December 31, 2013 and 2012, the Singapore Branch complied with the capital requirements promulgated by the Monetary Authority of Singapore.
The actual income tax (expense) benefit attributable to income (losses) for the years ended December 31, 2013, 2012 and 2011 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income (loss) before income taxes, as a result of the following:
The following is a summary of the unaudited quarterly data for the year ended December 31, 2012: