The following table reflects operating income and a reconciliation of total operating income to consolidated net income.
Net premiums written in the personal automobile line of business for the year ended December 31, 2013 were $890.3 million compared to $922.7 million for the year ended December 31, 2012, a decrease of $32.4 million. This decrease was primarily due to a decline in policies in force of 11.0%, primarily from ongoing exposure management actions and actions to improve underwriting results. This reduction in policies in force was partially offset by rate increases. Net premiums written in the homeowners line of business for the year ended December 31, 2013 were $496.7 million compared to $510.2 million for the year ended December 31, 2012, a decrease of $13.5 million. This is attributable to a decline in policies in force of 11.7%, as a result of aforementioned exposure management actions, partially offset by rate increases.
While we estimate that a majority of our written premium is in what we would characterize as shorter-tailed classes of business, most of our loss reserves relate to longer-tail liability classes of business. Long-tailed classes include commercial liability, automobile liability, workers’ compensation and other types of third party coverage. Chaucer’s longer-tailed lines include aviation liability, marine liability, energy liability, nuclear liability, U.K. motor medical and liability, international liability, specialist liability, and financial institutions and professional liability. For many liability claims, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the discovery and reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for long-tailed liability coverage has limited statistical credibility because a relatively small proportion of losses in these accident years (the calendar years in which losses are incurred) are reported claims and an even smaller proportion are paid losses. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations, the legal environment and the risk and expense of protracted litigation. Consequently, the estimation of loss reserves for these coverages is more complex and typically subject to a higher degree of variability and uncertainty compared to short-tailed coverages.
Personal Automobile Personal Injury Protection Medical Payment - reserves recorded for personal injury protection medical payment on U.S. voluntary business were $179.2 million as of December 31, 2013. A key assumption for this coverage is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting
Workers’ Compensation - reserves recorded for workers’ compensation on U.S. voluntary business were $349.5 million as of December 31, 2013. A key assumption for workers’ compensation is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A five point change in the imbedded inflation and a one point change to the tail factor assumption would have changed estimated IBNR by approximately $37 million, either positive or negative, at December 31, 2013.
within casualty and other lines, specialist liability lines, primarily in the 2008 accident year, and
Catastrophe reinsurance serves to protect us, as the ceding insurer, from significant losses arising from a single event such as snow, ice storm, windstorm, hail, hurricane, tornado, riot or other extraordinary events. Although we believe our catastrophe reinsurance program, including our retention and co-participation amounts for 2014, are appropriate given our surplus level and the current reinsurance pricing environment, there can be no assurance that our reinsurance program will provide coverage levels that will prove adequate should we experience losses from one significant or several large catastrophes during 2014. Additionally, as a result of the current economic environment, as well as losses incurred by reinsurers in the past several years, the availability and pricing of appropriate reinsurance programs may be adversely affected in future renewal periods. We may not be able to pass these costs on to policyholders in the form of higher premiums or assessments.
Discontinued operations for the year ended December 31, 2012 primarily included the net gain on the sale of our third party administration subsidiary, CMI, which was completed on April 30, 2012. CMI provided third party workers’ compensation and disability program administration services (such as claims administration, loss prevention and medical cost containment and in-house excess workers’ compensation coverage) to public entities, self-insured employers and group programs. CMI generated total revenues of $4.4 million during the four months ended April 30, 2012 and $12.5 million during the year ended December 31, 2011. Income before taxes totaled $0.7 million during the first four months of 2012, while contributing $2.0 million during 2011. Assets and shareholder’s equity transferred as part of this sale totaled $10.9 million and $0.6 million, respectively. This sale resulted in a net gain of $10.8 million after taxes and is included in discontinued operations for the year ended December 31, 2012.
Over the past several years, we have issued, through two separate transactions, $500 million in senior debentures and have received advances of $171.3 million through our membership in FHLBB as part of a collateralized borrowing program. In March 2013, we issued $175 million aggregate principal amount of subordinated unsecured debentures due March 30, 2053. These subordinated debentures pay interest quarterly. We may redeem these subordinated debentures in whole at any time, or in part from time to time, on or after March 30, 2018, at a redemption price equal to their principal amount plus accrued and unpaid interest.
(3) Reflects funding associated with the expectation of terminating one of our qualified plans in 2014, and approximately $2 million associated with the Chaucer plan, based upon current funded status. We do not expect to make any significant contributions in order to meet our minimum funding requirements. However, additional contributions may be required in the future based on the level of pension assets and liabilities in future periods.
Deferred acquisition costs (“DAC”) for each line of business are reviewed to determine if the costs are recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. Although recoverability of DAC is not assured, the Company believes it is more likely than not that all of these costs will be recovered. The amount of DAC considered recoverable, however, could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of a disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised.
Unrealized gains and losses on available-for-sale and other securities are summarized in the following table.
At December 31, 2013, there were contractual investment commitments of up to $58.6 million.
The carrying value of non-income producing fixed maturities, as well as the carrying value of fixed maturity securities on non-accrual status, at December 31, 2013 and 2012 were not material. The effects of non-accruals for the years ended December 31, 2013, 2012 and 2011, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were reductions in net investment income of $2.3 million, $2.5 million and $2.3 million, respectively.
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.
The table below provides a reconciliation of the beginning and ending liability for uncertain tax position as follows:
The IRS audits of the years 2007 and 2008 commenced in April 2010. In 2011, the Company received a Revenue Agent Report for the 2007 and 2008 IRS audit. The Company agreed to all proposed adjustments other than the disallowance of deduction for certain loss reserves, for which it filed a formal protest. In December 2013, the Company reached a tentative settlement on the disallowance of deduction for certain loss reserves and as a result a liability for uncertain tax positions was established for $4.8 million, with an offsetting deferred tax asset. The Company expects to reach a final settlement of this issue during 2014.
The following table reflects the estimated amortization to be recognized in net periodic benefit cost in 2014:
The fair value of shares that vested during the years ended December 31, 2013 and 2012 was $2.3 million and $1.6 million, respectively. For the year ended December 31, 2011, the market price of shares that vested was lower than the value of these shares on their grant date. As of December 31, 2013, the Company had unrecognized compensation expense of $4.7 million related to unvested stock options that is expected to be recognized over a weighted average period of 1.6 years.