For diluted net income per share specifically, the decrease was partially offset by the accretive impact of a reduction in the diluted number of common shares and common share equivalents outstanding as a result of share repurchases. The factors driving these increases and decreases are described in more detail in Review of Net Income below.
As the Company’s reinsurance operations are exposed to low frequency and high severity risk events, some of which are seasonal, results for certain periods may include unusually low loss experience, while results for other periods may include significant catastrophic losses. For example, the Company's results for 2014 included no significant catastrophic losses, while in 2013 the Company incurred losses of $142 million, net of retrocession and reinstatement premiums, related to the combined impact of the German Hailstorm, Alberta Floods and the European Floods, and in 2012 the Company incurred losses of $318 million, net of retrocession and reinstatement premiums, related to the combined impact of Superstorm Sandy and the U.S. drought. As a reference point, the Company's results for 2011 included an unusually high frequency of high severity catastrophic events, including the Japan Earthquake and 2011 New Zealand Earthquakes, with incurred losses of $1,790 million, net of retrocession and reinstatement premiums.
In determining the loss reserves, the Company often relies on a blend of the results from two or more methods (e.g., weighted averages). The judgment as to which of the above method(s) is most appropriate for a particular underwriting year and reserving cell could change over time as new information emerges regarding underlying loss activity and other data issues. Furthermore, as each line is typically composed of several reserving cells, it is likely that the reserves for the line will be dependent on several reserving methods. This is because reserves for a line are the result of aggregating the reserves for each constituent reserving cell and that a different method could be selected for each reserving cell. Although it is not appropriate to refer to reserves for a line as being determined by a particular method, the table below summarizes the methods that were given principal weight in selecting the best estimates of reserves in each reserving line and can therefore be viewed as key drivers of selected reserves. The table distinguishes methods for mature and immature underwriting years, as they are often different. The definition of maturity is specific to a line and is related to the reporting tail. If at the reserve evaluation date, a significant proportion of losses for the underwriting year are expected to have been reported, then the underwriting year is deemed to be mature, otherwise it is deemed to be immature. For short-tail lines, such as property or agriculture, immature years can refer to the one or two most recent underwriting years, while for longer tail lines, such as casualty, immature years can refer to the three or four most recent underwriting years.
the loss development factors used to form an expectation of the evolution of reported and paid claims for several years following the inception of the underwriting year. These are often derived by examining the Company’s data after due consideration of the underlying factors listed below. In some cases, where the Company lacks sufficient volume to have statistical credibility, external benchmarks are used to supplement the Company’s data;
Engineering: Aggregate losses reported in 2014 were higher than expected across several underwriting years reflecting increased exposure for proportional business. These increases were partially offset by lower loss ratios resulting from aggregate losses reported in 2014 being slightly lower than expected for several underwriting years.
Non-U.S. Proportional: Aggregate losses reported in 2014 for the Global (Non-U.S.) P&C motor proportional line were slightly higher than expectations in aggregate, which led to modest increases in loss ratios by the Company on certain underwriting years.
Policy benefits for life and annuity contracts relate to the Company’s Life and Health segment, which predominantly includes:
The estimate assumes that the changes in net premiums written become known at the mid-point of the risk period and is made by applying the reported technical ratio for the year ended December 31, 2014.
Under U.S. GAAP, a deferred tax asset or liability is to be recognized for the estimated future tax effects attributable to temporary differences and carryforwards. U.S. GAAP also establishes procedures to assess whether a valuation allowance should be established for deferred tax assets. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a deferred tax asset. Management must use its judgment in considering the relative impact of positive and negative evidence. The Company has also established tax liabilities relating to uncertain tax positions as defined under U.S. GAAP of $19 million at December 31, 2014 (see Notes 2(l) and 15 to Consolidated Financial Statements in Item 8 of Part II of this report).
Company’s fixed income, equity and other invested assets and investments underlying the funds held - directly managed account and changes in net unrealized gains or losses. Interest in earnings or losses of equity method investments includes the Company’s strategic investments. Other components of net income or loss include technical result and other income or loss, other expenses, interest expense, amortization of intangible assets, net foreign exchange gains or losses and income tax expense or benefit.
Technical result and other income primarily relate to income on insurance-linked securities and principal finance transactions within the Corporate and Other segment.
The liabilities for policy benefits for ordinary life and accident and health policies have been established based upon information reported by ceding companies, supplemented by the Company’s actuarial estimates of mortality, critical illness, persistency and future investment income, with appropriate provision to reflect uncertainty. Future policy benefit reserves for annuity and universal life contracts are carried at their accumulated values. Reserves for policy claims and benefits include both mortality and critical illness claims in the process of settlement, and claims that have been incurred but not yet reported.
In recording foreign currency transactions, revenue and expense items are converted into the functional currency at the average rates of exchange for the period. Assets and liabilities originating in currencies other than the functional currency are translated into the functional currency at the rates of exchange in effect at the balance sheet dates. The resulting foreign exchange gains or losses are included in net foreign exchange gains and losses in the Consolidated Statements of Operations. The Company
Short-term investments are valued in a manner similar to the Company’s fixed maturity investments and are generally classified in Level 2.
Equity securities include U.S. and foreign common and preferred stocks, real estate investment trusts, mutual funds and exchange traded funds. Equities, real estate investment trusts and exchange traded funds are generally classified in Level 1 as the Company uses prices received from independent pricing sources based on quoted prices in active markets. Equities classified as Level 2 are generally mutual funds invested in fixed income securities, where the net asset value of the fund is provided on a daily basis, and common stocks traded in inactive markets. Equities classified as Level 3 are generally mutual funds invested in securities other than the common stock of publicly traded companies, where the net asset value is not provided on a daily basis, and inactively traded common stocks. The significant unobservable inputs used in the fair value measurement of inactively traded common stocks classified as Level 3 include market return information, weighted using management’s judgment, from comparable selected publicly traded companies in the same industry, in a similar region and of a similar size, including net income multiples, tangible book value multiples, comparable returns, revenue multiples, adjusted earnings multiples and projected return on equity ratios. Significant increases (decreases) in any of these inputs could result in a significantly higher (lower) fair value measurement. Significant unobservable inputs used in measuring the fair value measurement of inactively traded common stocks also include a liquidity discount. A significant increase (decrease) in the liquidity discount could result in a significantly lower (higher) fair value measurement.
The cost, gross unrealized gains, gross unrealized losses and fair value of investments classified as trading securities at December 31, 2014 and 2013 were as follows (in thousands of U.S. dollars):
The Company’s net reserves for unpaid losses and loss expenses at December 31, 2014 and 2013 included $189 million and $193 million, respectively, that represent estimates of its net ultimate liability for asbestos and environmental claims. The gross liability for such claims at December 31, 2014 and 2013 was $201 million and $203 million, respectively, which primarily relate to Paris Re’s gross liability for asbestos and environmental claims for accident years 2005 and prior of $127 million and $123 million, respectively, with any favorable or adverse development being subject to the Reserve Agreement. Of the remaining $74 million and $80 million in gross reserves at December 31, 2014 and 2013, respectively, the majority relates to casualty exposures in the United States arising from business written by the French branch of PartnerRe Europe and PartnerRe U.S.
The Life and Health segment reported net favorable loss development for prior accident years of $19 million, $39 million and $14 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The reconciliation of the beginning and ending balance of the noncontrolling interests in Lorenz Re for the years ended December 31, 2014 and 2013 was as follows (in thousands of U.S. dollars):
The Company and its Bermuda domiciled subsidiaries are not subject to Bermuda income or capital gains tax under current Bermuda law. In the event that there is a change in current law such that taxes on income or capital gains are imposed, the Company and its Bermuda domiciled subsidiaries would be exempt from such tax until March 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966.
Realization of the deferred tax assets is dependent on generating sufficient taxable income in future periods. Although realization is not assured, Management believes that it is more likely than not that the deferred tax assets will be realized. The valuation allowance recorded at December 31, 2014 related to a foreign tax credit carryforward of $47.0 million in Ireland and to tax loss carryforwards of $20.0 million and $1.1 million in Singapore and Canada, respectively. The valuation allowance recorded at December 31, 2013 related to a foreign tax credit carryforward of $24.7 million in Ireland and to a tax loss carryforward of $21.4 million in Singapore.
At December 31, 2014, 0.3 million shares remained available for issuance under this plan.
For the years ended December 31, 2014, 2013 and 2012, the Company’s share-based compensation expense was $34.4 million, $29.8 million and $26.8 million, respectively, with a tax benefit of $6.9 million, $3.3 million and $3.6 million, respectively. Included within these tax benefits are amounts related to the exercise of share options and the conversion of RSUs and SSARs into shares by employees of the Company of $6.2 million, $7.0 million and $1.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
For employee retirement benefits, the Company maintains certain defined contributions plans and other active and frozen defined benefit plans. The majority of the defined benefit obligation at December 31, 2014 relates to the active defined benefit plan for the Company’s Zurich office employees (the Zurich Plan).
In the normal course of its underwriting activities, the Company and certain subsidiaries entered into reinsurance contracts with Atradius N.V. (a company in which a board member of the Company was a supervisory director until May 2012). The activity included in the Consolidated Statements of Operations related to Atradius N.V. for the year ended December 31, 2012 includes net premiums written of $80.3 million, net premiums earned of $75.7 million, losses and loss expenses and life policy benefits of $35.2 million and acquisition costs of $28.5 million.