Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to the Company’s plans and strategy for its business and statements regarding marketplace conditions and trends, includes forward-looking statements that involve risk and uncertainties. Please see the “Cautionary Statement Regarding Forward-Looking Statements” in this Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the “Risk Factors” set forth in this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
The Company’s revenues also include income generated from its investment portfolio. The Company’s investment portfolio is comprised of fixed maturity investments, short-term investments and equity securities that are held as available for sale and other investments, comprised of alternative and specialty funds that are accounted for under the equity method of
The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. The Company uses quoted values and other data provided by nationally recognized independent pricing sources as inputs into its process for determining fair values of its fixed maturity, short-term and equity portfolios. The Company obtains multiple prices for its securities where available. Pricing sources used in pricing the Company’s fixed maturity, short-term and equity portfolios at December 31, 2014 were as follows:
In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company’s stock price relative to both its book value and its net income. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company’s goodwill asset. In addition, if the current economic environment and/or the Company’s financial performance were to deteriorate significantly, this could lead to an impairment of goodwill, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2014.
The annualized net earned yield and total return of the investment portfolio for the years ended December 31, 2014, 2013 and 2012 and market yield and portfolio duration as of December 31, 2014, 2013 and 2012 were as follows:
Includes only cash and cash equivalents and fixed income investments managed by the Company’s investment managers.
estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. As a result of the incorporation of the Company’s own loss reporting patterns and loss history related to its short tail business, including catastrophe reinsurance and property insurance and reinsurance business lines, the Company would expect its prior year loss reserve development and adjustments for short tail business to be less than recorded in prior years. Reserve adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss reserves were established by the Company’s actuaries and reflect management’s best estimate of ultimate losses. See “Reserve for Losses and Loss Expenses” below for further discussion.
The Company incurred a tax expense for the year ended December 31, 2014 of $0.4 million compared to a tax expense of $5.9 million and $3.3 million for the years ended December 31, 2013 and 2012. The tax expense in 2014 resulted from an increase in the deferred tax asset valuation allowance related to the Company's United States taxable jurisdictions.
The following table summarizes the underwriting results and associated ratios for the Company’s Insurance segment for the years ended December 31, 2014, 2013 and 2012:
The change in the Reinsurance business segment net premiums written during 2014 compared to 2013 and 2012 was driven by the following factors:
Net Losses and Loss Expenses. The net loss ratio in the Company’s Reinsurance segment for 2014 decreased compared to 2013 and 2012 as a result of lower levels of catastrophe related activity in 2014, and a decline in the current accident year loss ratio. The following table shows the net losses after adjustment for reinstatement premiums and other loss sensitive accruals recorded by the Company in connection with catastrophes in the Reinsurance segment for the years ended December 31, 2014, 2013 and 2012.
On January 17, 2014, the Company and certain designated subsidiaries of the Company entered into a $50.0 million revolving letter of credit reimbursement agreement ("LOC Agreement") and cash collateral agreement with Australia and New Zealand Banking Group Limited. As of December 31, 2014, the Company had issued letters of credit of $5.9 million
Current and prior year incurred losses and loss expenses by segment and line of business for the year ended December 31, 2014 were as follows:
The Company’s U.S., U.K. and Bermuda insurance operating subsidiaries use proportional and excess reinsurance to protect larger limits on certain business written by the Insurance segment. The Company's agriculture line of business participates in a crop reinsurance program sponsored by the U.S. federal government as well as utilizes third party reinsurance covers. Excess reinsurance coverage is often purchased in relation to the property insurance line of business to protect against catastrophic events.
The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland and Singapore, which are subject to the relevant taxes in those jurisdictions. During 2014, the Internal Revenue Service completed
For equity securities, the Company considers its ability and intent to hold the equity security in an unrealized loss position for a reasonable period of time to allow for a full recovery. When the Company determines that the decline in value of an equity security is other-than-temporary, the Company reduces the cost of the equity security to its fair value and recognizes the loss in the Consolidated Statements of Income and Comprehensive Income. The new cost basis is not changed for subsequent recoveries in fair value.
The components of net investment income for the years ended December 31, 2014, 2013 and 2012 are as follows:
Private investment funds - The Company generally has no right to redeem its interest in any private investment funds in advance of dissolution of the applicable partnership. Instead, the nature of these investments is that distributions are received by the Company in connection with the distribution of income or the liquidation of the underlying assets of the applicable limited partnership. It is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 5 to 10 years from inception of the limited partnership. A secondary market, with unpredictable liquidity, exists for limited partner interests in private investment funds.
There were no impairment losses on Level 3 securities recognized in earnings for the year ended December 31, 2014 or 2013.
Investment commitments. As of December 31, 2014 and 2013, the Company had pledged cash and cash equivalents and fixed maturity investments of $130.6 million and $146.1 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2014 and 2013, the Company had also pledged $240.0 million and $302.7 million of its cash and fixed maturity investments as required to meet collateral obligations for $209.9 million and $260.3 million in secured letters of credit outstanding under its credit facilities, respectively. In addition, at December 31, 2014 and 2013, cash and fixed maturity investments with fair values of $205.2 million and $273.7 million were on deposit with U.S. state regulators, respectively.
The Series A Preferred Shares and Series B Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after December 15, 2015 (in the case of the Series A Preferred Shares) and after June 1, 2016 (in the case of the Series B Preferred Shares) in each case at a redemption price of $25.00 per share plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series A Preferred Shares or Series B Preferred Shares before their respective redemption dates at a redemption price of $26.00 per share, plus any declared and unpaid dividends to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series A Preferred Shares or Series B Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction or change in Bermuda law.
The following table sets forth dividends declared in the years ended December 31, 2014, 2013 and 2012, respectively:
The Company has granted restricted share units in an amount equal to the dividends that would have been paid on the notional amount of certain options held by employees of the Company. These restricted share units vest and settle on the first March 1st following the six-month anniversary of the date of issuance of the unit.