We lease office space in Hamilton, Bermuda, where our principal executive office is located. We also lease office space in a number of U.S. states, the United Kingdom, Australia, Ireland, Switzerland, Canada, India, Singapore and several European countries.
During the year ended December 31, 2014, we increased our book value per share on a fully diluted basis by 13.3% to $119.22 per share. We grow our book value primarily in the following ways:
earning premiums in excess of related losses for our Torus, Atrium and life and annuities segments (net premiums earned);
earning fees and commission income by providing expert run-off management services for a fixed and/or incentive based fee in our non-life run-off segment, and by providing managing general agency services through our Atrium segment (fees and commission income); and
Net ultimate losses and loss adjustment expense liabilities established by management utilizing analysis performed by independent actuaries prepared on an annual basis are reviewed by our management each quarter. Reserves reflect management’s best estimate of the remaining unpaid portion of these liabilities. Prior period estimates of net ultimate losses and loss adjustment expense liabilities may change as our management considers the combined impact of commutations, policy buy-backs, settlement of losses on carried reserves and the trend of incurred loss development compared to prior forecasts. Net reductions in ultimate losses and loss adjustment expense liabilities are reported as negative expenses by us. For more information on how the reserves are calculated, see “- Critical Accounting Policies - Losses and Loss Adjustment Expenses.”
We derive income from premiums from our insurance and reinsurance businesses. Insurance and reinsurance premiums are a function of the amount and type of contracts written as well as prevailing market prices and conditions. Non-life premiums are earned over the terms of the underlying coverage. Life and annuity premiums are generally earned when the premium is due from policyholders. Each of our insurance and reinsurance contracts contain different pricing, terms and conditions and expected profit margins. Therefore, the amount of premiums is not necessarily an accurate indicator of our anticipated profitability. Premium estimates are based upon information in underlying contracts and data received from clients, cedants and brokers. Changes in premium estimates are expected and may result in significant adjustments in any period. These estimates change over time as additional information regarding the underlying business volume or insured values of our clients is obtained. There is often a delay in the receipt of updated premium information from clients due to the time lag in preparing and reporting the data to us. After review by our underwriters and finance staff, we increase or decrease premium estimates as updated information from our clients is received.
Our Atrium segment earns profit commission income primarily related to the provision of managing general agency services to Syndicate 609 and its third-party members. Our non-life run-off segment generates fee income for run-off and claims services based on a combination of fixed and success-based fee arrangements. Fee income will vary from period to period depending on the timing of completion of success-based fee arrangements. Success-based fees are recorded when targets related to overall project completion or profitability goals are achieved.
for acquired assets and liabilities. Accordingly, consistent with provisions of U.S. GAAP, we have developed internal models that we believe allow us to determine fair values that are reasonable proxies for market exit values. We are familiar with the major participants in the acquisition run-off market and believe that the key assumptions we make in valuing acquired assets and liabilities are consistent with the kinds of assumptions made by such market participants. Furthermore, in our negotiation of purchase prices with sellers, it is frequently clear to us that other bidders in the market are using models and assumptions similar in nature to ours during the competitive bid process. The majority of acquisitions are completed following a public tender process whereby the seller invites market participants to provide bids for the target acquisition.
The key assumptions used by us and, we believe, by other run-off market participants in the fair valuation of acquired companies are (i) the projected payout, timing and amounts of claims liabilities; (ii) the related projected timing and amount of reinsurance collections; (iii) a risk-free discount rate, which is applied to determine the present value of the future cash flows; (iv) the estimated unallocated loss adjustment expenses to be incurred over the life of the run-off; (v) the impact that any accelerated run-off strategy may have on the adequacy of acquired bad debt provisions; and (vi) an appropriate risk margin.
With respect to our U.K., Bermudian and Australian insurance and reinsurance subsidiaries, the local legislation provides for the possibility of pursuing strategies to achieve complete finality and conclude the run-off of a company by promoting solvent schemes of arrangement. Solvent schemes of arrangement have been a popular means of achieving financial certainty and finality for insurance and reinsurance companies incorporated or managed in the U.K., Bermuda and Australia by making a one-time full and final settlement of an insurance and reinsurance company’s liabilities to policyholders. In April 2014, the PRA issued a supervisory statement that indicated that the PRA may require policyholders to be offered continuity of cover as part of a solvent scheme of arrangement proposal, in order to be compatible with the PRA’s statutory objective of securing an appropriate degree of protection for policyholders. On acquisition of a U.K., Bermudian or Australian company, the claims payout projection is weighted according to management’s estimated probability of being able to complete a solvent scheme of arrangement. To the extent that solvent schemes of arrangement are not available to an acquired company, no weighting is applied to the projected claims payout.
therefore the cost, of the run-off), the success of this strategy is far from certain. Therefore, the estimates of unallocated loss adjustment expenses are based on running off the liabilities and assets over the actuarially projected life of the run-off. In those domiciles where solvent schemes of arrangement are available, management’s estimates of the total unallocated loss adjustment expenses are probability-weighted in accordance with the estimated time that a solvent scheme of arrangement could be completed, which has the effect of reducing the period of the run-off and the related unallocated loss adjustment expenses. For those acquisitions in domiciles where solvent schemes of arrangement are not available, the unallocated loss adjustment expenses are estimated over the projected life of the run-off.
Our primary objective in running off the operations of acquired companies and portfolios of insurance and reinsurance business in run-off is to increase book value by settling loss reserves below their acquired fair value. The earnings created in each acquired company or portfolio of insurance and reinsurance business, together with the related decrease in loss reserves, lead to a reduction in the capital required for each company, thereby providing the ability to distribute both earnings and excess capital to the parent company.
Commutations of blocks of policies, along with disciplined claims management, have the potential to produce favorable claims development compared to established reserves. For each newly-acquired company, we determine a commutation strategy that broadly identifies commutation targets using the following criteria:
Previous commutations completed by existing portfolio companies with policyholders of the newly-acquired company;
The following table provides a breakdown of losses and loss adjustment expense reserves (net of reinsurance balances recoverable) by type of exposure as of December 31, 2014 and 2013:
As of December 31, 2014, the IBNR reserves (net of reinsurance balances receivable) accounted for $862.4 million, or 32.7%, of our total net losses and loss adjustment expenses. The reserve for IBNR (net of reinsurance balance receivable) accounted for $962.6 million, or 33.4%, of our total net loss reserves at December 31, 2013.
Where we provide reinsurance or retrocession reinsurance protection, the process of claims advice from the direct insurer to the reinsurers and/or retrocessionaires naturally involves more levels of communication, which inevitably creates delays or lags in the receipt of loss advice by the reinsurers/retrocessionaires relative to the date of first advice to the direct insurer. Certain types of exposure, typically latent health exposures such as asbestos-related claims, have inherently long reporting delays, in some cases many years, from the date a loss occurred to the manifestation and reporting of a claim and ultimately until the final settlement of the claim. For asbestos and environmental exposures, our actuaries apply explicit time lag assumptions in their reserving
In establishing reserves, management includes amounts for IBNR reserves using information from independent actuarial estimates of ultimate losses. Our independent actuaries use generally accepted actuarial methodologies to estimate ultimate losses and loss adjustment expenses and those estimates are reviewed by our management.
The above reports provide our Chief Actuary and Chief Financial Officer with the relevant information to determine whether loss development (including commutations) during the year has, for each company, been sufficiently meaningful so as to warrant an adjustment to the reserves recommended by our external actuaries in the most recent actuarial study. It is not possible to quantify how much of any reserve release specifically relates to commutations or favorable development of non-commuted claims as the revised historical loss development used by the actuaries to estimate required reserves is a combination of both the elimination of historical loss development relating to commuted policies and non-commuted loss development.
The range of gross loss and loss adjustment expense reserves implied by the various methodologies used by each of our insurance and reinsurance subsidiaries as of December 31, 2014 were:
Costs imposed due to joint and several liability if not all potentially responsible parties (or PRPs) are capable of paying their share.
1. Paid Survival Ratio Method. In this method, our expected annual average payment amount is multiplied by an expected future number of payment years to get an indicated reserve. Our historical calendar year payments are examined to determine an expected future annual average payment amount. This amount is multiplied by an expected number of future payment years to estimate a reserve. Trends in calendar year payment activity are considered when selecting an expected future annual average payment amount. Accepted industry benchmarks are used in determining an expected number of future payment years. Each year, annual payments data is updated, trends in payments are re-evaluated and changes to benchmark future payment years are reviewed. Advantages of this method are ease of application and simplicity of assumptions. A potential disadvantage of the method is that results could be misleading for portfolios of high excess exposures where significant payment activity has not yet begun.
4. IBNR:Case Ratio Method. In this method, the ratio of estimated industry IBNR reserves to industry case reserves is multiplied by our case reserves to estimate our IBNR reserves. Specific
5. Ultimate-to-Incurred Method. In this method, the ratio of estimated industry ultimate losses to industry incurred-to-date losses is applied to our incurred-to-date losses to estimate our IBNR reserves. Specific considerations in the application of this method include the completeness of our incurred-to-date loss information, the potential acceleration or deceleration in our incurred losses (relative to the industry) due to our claims handling practices and the impact of large individual settlements. Each year incurred-to-date loss information is updated (for both us and the industry) and updates to industry estimated ultimate losses are reviewed. This method has the advantage that it incorporates both paid and case reserve information in projecting ultimate losses. A potential disadvantage is that results could be misleading where cumulative paid loss data is incomplete or where our case reserve adequacy differs significantly from overall industry case reserve adequacy. In these instances, the industry IBNR:Case Ratios were adjusted to reflect our portfolio case reserve adequacy.
6. Decay Factor Method. In this method, a decay factor is directly applied to our payment data to estimate future payments. The decay factors were selected based on a review of our own decays and industry decays. This method is most useful where our data shows a decreasing pattern and is credible enough to be reliable. This method was introduced in 2013.
To the extent that data availability allows, the six methodologies described above are applied for each of the 32 asbestos reserving categories and each of the 22 environmental reserving categories. As is common in actuarial practice, no one methodology is exclusively or consistently relied upon when selecting a recorded reserve. Consistent reliance on a single methodology to select a recorded reserve would be inappropriate in light of the dynamic nature of both the A&E liabilities in general, and our actual exposure portfolios in particular.
The following key assumptions were used to estimate A&E reserves at December 31, 2014:
The following tables provide a summary of the impact of changes in industry ultimate losses, from the selected $74 billion for asbestos and $40 billion for environmental, and changes in the time-lag, from the selected averages of 2.8 years for asbestos and 2.2 years for environmental, for us behind industry development that it is assumed relates to our insurance and reinsurance companies. Please note that the table below demonstrates sensitivity to changes to key assumptions using methodologies selected for determining loss and allocated loss adjustment expenses, or ALAE, at December 31, 2014 and differs from the table on page 81, which demonstrates the range of outcomes produced by the various methodologies.
Due to the inability of our external actuaries to review the data, methodologies and calculations supporting the industry published estimates, our external actuaries themselves have estimated ultimate industry losses. This allows our external actuaries to better monitor the impact on us of the selected asbestos and environmental ultimate loss assumptions on an annual basis and also allow them to monitor industry payments against expectations. For the year ended December 31, 2014, there were no changes in the assumptions regarding industry asbestos and environmental ultimate loss and loss reporting lag described on page 85.
1. Cumulative Reported and Paid Loss Development Methods. The Cumulative Reported (Case Incurred) Loss Development method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors (or LDFs) are calculated to measure the relative development of an accident year from one maturity point to the next. Age-to-age LDFs are then selected based on these historical factors. The selected age-to-age LDFs are used to project the ultimate losses. The Cumulative Paid Loss Development Method is mechanically identical to the Cumulative Reported Loss Development Method described above, but the paid method does not rely on case reserves or claim reporting patterns in making projections. The validity of the results from using a cumulative loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple payments per claim, legal changes, or variations in a company’s mix of business from year to year. Typically, the most appropriate circumstances in which to apply a
Our quarterly paid and incurred loss development is often driven by large, “wholesale” settlements - such as commutations and policy buy-backs - which settle many individual claims in a single transaction. This allows for monitoring of the potential profitability of large settlements, which, in turn, can provide information about the adequacy of reserves on remaining exposures that have not yet been settled. For example, if it were found that large settlements were consistently leading to large negative, or favorable, incurred losses upon settlement, it might be an indication that reserves on remaining exposures are redundant. Conversely, if it were found that large settlements were
As described above, our management regularly reviews and updates reserve estimates using the most current information available and employing various actuarial methods. Adjustments resulting from changes in our estimates are recorded in the period when such adjustments are determined. The ultimate liability for losses and loss adjustment expenses is likely to differ from the original estimate due to a number of factors, primarily consisting of the overall claims activity occurring during any period, including the completion of commutations of assumed liabilities and ceded reinsurance receivables, policy buy-backs and general incurred claims activity.
The following table provides a breakdown of the total liability for losses and loss adjustment expenses by type of exposure for the years ended December 31, 2014 and 2013:
The reserve for losses and loss expenses includes reserves for unpaid reported losses and for IBNR reserves. The reserves for unpaid reported losses and loss expenses are established by management based on reports from brokers, ceding companies and insureds and represents the estimated ultimate cost of events or conditions that have been reported to, or specifically identified by us. The reserve for incurred but not reported losses and loss expenses is established by management based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts recorded in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, will be recorded in earnings in the period in which they become known. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves established in previous calendar years.
Since the development of the policy benefits is based upon cash flow projection models, we must make estimates and assumptions based on experience and industry mortality tables, longevity and morbidity rates, lapse rates, expenses and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefits are determined at the inception of the contracts, reviewed and adjusted at the point of acquisition as required, and are locked-in throughout the life of the contract unless a premium deficiency develops. The assumptions are reviewed no less than annually and are unlocked if they would result in a material adverse reserve change. We establish these estimates based upon transaction-specific historical experience, information provided by the ceding company for the assumed business and industry experience. Actual results could differ materially from these estimates. As the experience on the contracts emerges, the assumptions are
During the years ended December 31, 2014, 2013 and 2012, there were no adjustments to the locked-in assumptions for these policy benefits.
In addition to the acquired retrocessional agreements, on an annual basis, our active underwriting subsidiaries purchase tailored outwards reinsurance programs designed to manage their risk profiles. The majority of the total third-party reinsurance cover for our active underwriting subsidiaries is with Lloyd’s Syndicates or other reinsurers rated A- or better.
To estimate the provision for uncollectible reinsurance recoverable, the reinsurance recoverable is first allocated to applicable reinsurers. As part of this process, ceded IBNR is allocated by reinsurer. We use a detailed analysis to estimate uncollectible reinsurance. The primary components of the analysis are reinsurance recoverable balances by reinsurer and bad debt provisions applied to these balances to determine the portion of a reinsurer’s balance deemed to be uncollectible. These provisions require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer (in order to determine its ability to settle the reinsurance balances) as well as other key considerations and assumptions, such as claims and coverage issues.
Our premiums written are earned on a pro-rata basis over the coverage period. Our reinsurance premiums are recorded at the inception of the policy, unless policy language stipulates otherwise, and are estimated based upon information in underlying contracts and information provided by clients and/or brokers. A change in reinsurance premium estimates is made when additional information regarding changes in underlying exposures is obtained. Such changes in estimates are expected and may result in significant adjustments in future periods. We record any adjustments as premiums written in the period they are determined.
With respect to retrospectively rated contracts (where additional premium would be due should losses exceed pre-determined, contractual thresholds), any additional premiums are based upon contractual terms, and management judgment is involved in estimating the amount of losses that we expect to be ceded. We would recognize additional premiums at the time loss thresholds specified in the contract are exceeded and are earned over the coverage period, or are earned immediately if the period of risk coverage has passed. Changes in estimates of losses recorded on contracts with additional premium features would result in changes in additional premiums recognized.
The use of valuation techniques may require a significant amount of judgment. During periods of market disruption, including periods of rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our securities if trading becomes less frequent or market data becomes less observable.
circumstances such as movements in credit spreads based on the market’s perception of industry risks. As a result of these potential fluctuations, it is possible to have significant unrealized gains or losses on a security. At maturity, absent any credit loss, fixed maturity investments’ amortized cost will equal their fair value and no realized gain or loss will be recognized in income. If, due to an unforeseen change in loss payment patterns, we need to sell any available-for-sale investments before maturity, we could realize significant gains or losses in any period, which could have a meaningful effect on reported net income for such period.
For the years ended December 31, 2014, 2013 and 2012, we did not recognize any other-than-temporary impairment charges through earnings.
The fixed income funds and equity funds in which we invest have been classified as Level 2 investments because their fair value is estimated using the net asset value provided regularly and because the fixed income funds and equity funds are highly liquid.
We measure the fair value of direct investments in CLO equities based on valuations provided by the external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is based on valuations provided by the broker or lead underwriter of the investment. The CLO equities investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets.
Certain funds included in other investments may be allowed to invest a portion of their assets in illiquid securities, such as private equity or convertible debt. In such cases, a common mechanism used is a “side-pocket”, whereby the illiquid security is assigned to a separate memorandum capital account or designated account. Typically, the investor loses its redemption rights in the designated account. Only when the illiquid security is sold, or is otherwise deemed liquid by the fund, may investors redeem their interest in the side-pocket. At December 31, 2014, the Company had $2.0 million of investments subject to side-pockets ($3.2 million as of December 31, 2013). There is, however, no significant uncertainty in relation to the valuation of these investments and as of December 31, 2014, management has not made any adjustments to the fair value estimate reported by the fund managers for the side-pocketed investments.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired. We perform an initial valuation of our goodwill assets and assess goodwill for impairment on an annual basis. If, as a result of the assessment, we determine the value of our goodwill asset is impaired, goodwill is written down in the period in which the determination is made.
Consolidated Results of Operations - For the Years Ended December 31, 2014, 2013 and 2012
We reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $227.2 million and $223.8 million for the years ended December 31, 2014 and 2013, respectively. Our comparative results were impacted by our 2014 acquisition of Torus and our 2013 acquisitions of SeaBright, Pavonia, Arden and Atrium. Our acquisitions are described in “Item 1. Business - Recent Transactions” and Notes 3 and 4 to our audited consolidated financial statements included in Item 8 of this report.
Net premiums earned - Combined net premiums earned for our four operating segments were $646.5 million and $239.8 million for the years ended December 31, 2014 and 2013, respectively. The increase in 2014 was due primarily to the net premiums earned by the Torus and Atrium segments, partially offset by reductions in net premiums earned of SeaBright in our non-life run-off segment as described in greater detail in the segment discussion below.
Fees and commission income - Fees and commission income was $33.1 million and $12.8 million for the years ended December 31, 2014 and 2013, respectively. The increase during 2014 was predominantly attributable to fees and commission income earned by the Atrium segment.
Net investment income - Net investment income was $117.4 million and $93.3 million for the years ended December 31, 2014 and 2013, respectively. The increase during 2014 was principally attributable to the net investment income earned on a larger base of cash and fixed maturity investments as a result of the Torus, Atrium, Arden, SeaBright and Pavonia acquisitions, along with an increase in other investment income associated with our non-life run-off segment.
Net increase (reduction) in ultimate losses and loss adjustment expense liabilities - Net increase (reduction) in ultimate losses and loss adjustment expense liabilities were $9.1 million and $(163.7) million for the years ended December 31, 2014 and 2013, respectively. The increase in 2014 was attributable primarily to net increases in ultimate losses and loss adjustment expense liabilities of $218.4 million and $55.4 million in the Torus and Atrium segments, respectively (2013: $nil and $19.3 million, respectively), which largely consisted of current period loss development related to the
Acquisition costs - Acquisition costs were $132.6 million and $23.2 million for the years ended December 31, 2014 and 2013, respectively. The increase of $109.4 million was due primarily to the acquisitions of Torus ($65.7 million) and Atrium ($43.4 million).
Salaries and benefits - Salaries and benefits were $211.2 million and $124.6 million for the years ended December 31, 2014 and 2013, respectively. The increase of $86.6 million was due primarily to: (i) the salaries and benefits costs associated with an increased number of employees following the Torus and Atrium acquisitions; and (ii) an increase of $4.4 million in our 2014 bonus accrual of $36.5 million (2013: $32.1 million) relating primarily to a bonus accrual rate of 14.6% of pre-bonus net after tax profits under our annual incentive compensation program as compared to 13.3% in 2013.
Noncontrolling interest - Noncontrolling interest in earnings decreased by $1.7 million to $13.5 million as a result of lower earning in those companies in which there are either noncontrolliing interests or redeemable noncontrolling interests.
Net investment income - Net investment income was $93.3 million and $77.8 million for the years ended December 31, 2013 and 2012, respectively. The increase during 2013 was attributable primarily to the net investment income earned on a larger base of cash and fixed maturity investments as a result of the SeaBright, Pavonia, Arden and Atrium acquisitions, although this was partially offset by lower reinvestment yields on new purchases of fixed maturity investments.
Net reduction in ultimate losses and loss adjustment expense liabilities - These are comprised of the results of our non-life run-off and Atrium segments.
Atrium segment results related to losses incurred for Arden and Atrium of $19.4 million and are described in the Atrium discussion below.
Salaries and benefits - Salaries and benefits were $124.6 million and $100.5 million for the years ended December 31, 2013 and 2012, respectively. The increase of $24.1 million was due primarily to: (i) the salaries and benefits costs associated with an increased number of employees following the SeaBright, Pavonia and Atrium acquisitions (we did not acquire any employees in the Arden acquisition) and (ii) an increase of $2.5 million in our 2013 bonus accrual of $32.1 million (2012: $29.6 million) relating to increased net earnings for the year ended December 31, 2013 and a bonus accrual rate of 13.3% of pre-bonus net after-tax profits under our annual incentive compensation program (2012: 15%).
Our non-life run-off segment is comprised of the operations and financial results of our subsidiaries that are running off their property and casualty and other non-life lines of business, as well as the run-off businesses of Arden and Torus. It also includes our smaller management business, which manages the run-off portfolios of third parties through our service companies.
Our Atrium segment is comprised of the active underwriting operations and financial results of Northshore Holdings Limited, a holding company that owns Atrium and its subsidiaries and Arden. Atrium is a managing general agent at Lloyd’s of London, which manages Syndicate 609 through a corporate capital vehicle, Atrium 5 Ltd., and provides approximately 25% of the syndicate’s underwriting capacity and capital (with the balance provided by traditional Lloyd’s Names). Atrium specializes in accident and health, aviation, marine, property, non-marine direct and facultative, liability, property and casualty binding authorities, reinsurance, upstream energy, war and terrorism insurance, cargo and fine art. Arden is a Bermuda-based reinsurance company that provides reinsurance to Atrium (through an approximately 65% quota share reinsurance arrangement with Atrium 5 Ltd.) and is currently in the process of running off certain other third-party business. Results related to Arden’s run-off business are included within our non-life run-off segment.
Our Torus segment is comprised of the active underwriting operations and financial results of Bayshore Holdings Limited, a holding company that owns Torus and its subsidiaries. Torus is a global specialty insurer that offers a diverse range of property, casualty and specialty insurance through its operations in the U.K., Continental Europe, and the U.S. Torus’ active underwriting operations are reported in the Torus segment, with Torus’ run-off business reported in the non-life run-off segment.
Our life and annuities segment is comprised of the operations and financial results of our subsidiaries that are operating our closed-block of life and annuity businesses, which primarily consists of the companies we acquired in the Pavonia acquisition on March 31, 2013.
Results of Operations by Segment - For the Years Ended December 31, 2014, 2013 and 2012
(viii) a net foreign exchange loss of $8.0 million for the year ended December 31, 2014, which was a $13.9 million decrease from the net foreign exchange gain of $5.9 million for the same period in 2013;
(ix) an increase in salaries and benefits of $10.6 million; and
In our non-life run-off segment, we reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $212.0 million and $187.4 million for the years ended December 31, 2013 and 2012, respectively. The increase in earnings of approximately $24.6 million was attributable primarily to the following:
Gross non-life run-off premiums earned for the years ended December 31, 2014 and 2013 totaled $45.7 million and $124.3 million, respectively. Ceded non-life run-off reinsurance premiums earned for the years ended December 31, 2014 and 2013 totaled $14.5 million and $11.7 million, respectively.
Our management companies in the non-life run-off segment earned fees and commission income of approximately $19.3 million and $12.8 million for the years ended December 31, 2014 and 2013, respectively. The increase in fees and commission income of $6.5 million related primarily to management fees charged to our Torus segment. These internal fees are eliminated upon consolidation of our results of operations. While our consulting subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, our core focus of these subsidiaries is providing in-house services to companies within the Enstar group.
Net investment income for the non-life run-off segment for the year ended December 31, 2014 increased by $7.2 million to $71.2 million, as compared to $64.0 million for the year ended December 31, 2013. The increase was a result of the following:
(iii) a decrease in investment income of $4.0 million that arose primarily as a result of lower yields obtained on our cash and fixed maturity portfolios in combination with a reduction in the current year average cash and fixed maturity balances as compared to those in 2013.
Net realized and unrealized gains for the non-life run-off segment for the year ended December 31, 2014 and 2013 were $48.0 million and $79.4 million, respectively. The decrease of $31.3 million was attributable primarily to the following items:
negative returns on equity funds in 2014 compared to gains in 2013 caused by lower global equity returns and foreign exchange currency movements in underlying portfolios;
a decrease in income earned on our fixed income and private equity funds in 2014, due to lower returns earned in 2014 as compared to those earned in 2013; and
a decrease in earnings in 2014 as a result of lower returns on our hedge fund investments;
(i) an increase of $38.4 million in net unrealized and realized gains due to greater amounts invested in, and improved performance of, our private equity and other investment holdings; and
(ii) an increase of $16.7 million in net unrealized and realized gains due to greater amounts invested in, and improved performance of, our equity portfolios; partially offset by
(iii) net unrealized and realized losses related to fixed maturity securities of $18.9 million (including $8.3 million related to SeaBright) for the year ended December 31, 2013, compared to net unrealized and realized gains of $28.7 million for the same period in 2012, due largely to increases in U.S interest rates during the year-ended December 31, 2013, as compared to the same period in 2012.
The average credit ratings of our fixed maturity investments in the non-life run-off segment as at December 31, 2014, 2013 and 2012 were AA-, A+ and AA-, respectively.
The following table shows the components of the movement in the net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the non-life run-off segment for the years ended December 31, 2014, 2013 and 2012:
Net change in case and LAE reserves comprises the movement during the year in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR reserves represents the change in our actuarial estimates of losses incurred but not reported, less amounts recoverable.
The net reduction in ultimate losses and loss adjustment expense liabilities for the year ended December 31, 2014 of $264.7 million included current period incurred losses and loss adjustment expenses of $24.2 million related to current period net earned premium of $31.2 million (primarily for the portion of the run-off business acquired with Torus). Excluding current period net ultimate losses and loss adjustment expense liabilities of $24.2 million, net ultimate losses and loss adjustment expense liabilities relating to prior periods were reduced by $288.9 million, which was attributable to a reduction in estimates of net ultimate losses of $224.6 million, paid loss recoveries on provisions for bad debt of $11.2 million, reduction in provisions for bad debt of $7.7 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $49.5 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.0 million.
The reduction in estimates of net ultimate losses relating to prior periods of $224.6 million comprised reductions in IBNR reserves of $262.4 million partially offset by net incurred loss development of $37.8 million. The decrease in the aggregate estimate of net IBNR reserves of $262.4 million (compared to $265.2 million during the year ended December 31, 2013), was comprised of
The net reduction in ultimate losses and loss adjustment expense liabilities for the year ended December 31, 2013 of $183.0 million included current period incurred losses of $74.1 million related to SeaBright. Excluding SeaBright’s current period incurred losses of $74.1 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $257.1 million, which was attributable to a reduction in estimates of net ultimate losses of $215.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $49.6 million, relating to 2013 run-off activity, partially offset by an increase in provisions for bad debt of $2.0 million and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $5.9 million.
The reduction in estimates of net ultimate losses relating to prior periods of $215.5 million comprised reductions in IBNR reserves of $265.2 million partially offset by net incurred loss development of $49.7 million. The decrease in the aggregate estimate of net IBNR reserves of $265.2 million (compared to $267.4 million during the year ended December 31, 2012), consisted of $69.8 million relating to asbestos liabilities (compared to $36.4 million in 2012), $4.9 million relating to environmental liabilities (compared to $2.6 million in 2012), $42.6 million relating to general casualty liabilities (compared to $96.3 million in 2012), $42.1 million relating to workers compensation liabilities (compared to $52.7 million in 2012) and $105.8 million relating to all other remaining liabilities (compared to $79.4 million in 2012).
The aggregate reduction in net IBNR reserves of $265.2 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 108 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and loss
(ii) an increase of $4.4 million in our 2014 bonus accrual primarily relating to a bonus accrual rate of 14.6% of pre-bonus net after tax profits under our annual incentive compensation program, as compared to 13.3% for 2013; and
Salaries and benefits for the non-life run-off segment, which include expenses relating to our discretionary bonus and employee share plans, were $117.1 million and $99.3 million for the years ended December 31, 2013 and 2012, respectively.
(i) an increase of $6.0 million related principally to an increase in: (a) professional fees of $1.9 million, (b) information technology costs of $1.6 million (due to increased project-related costs), and (c) $2.5 million of other costs related largely to amortization of fair value adjustments for assets and liabilities previously acquired;
(iii) a decrease in bank charges of $6.2 million due to lower arrangement fees incurred on various loan and revolving credit facilities in 2014 as compared to 2013.
We recorded net foreign exchange gains of $5.9 million for the non-life run-off segment for the year ended December 31, 2013 as compared to net foreign exchange losses of $0.6 million for the year ended December 31, 2013. The net foreign exchange gains for the year ended December 31, 2013 arose primarily as a result of holding surplus U.S. dollar assets in one of our subsidiaries whose functional currency is Australian dollars at a time when the Australian dollar depreciated sharply against the U.S. dollar. These gains were partially offset by net foreign exchange losses as a result of
Income tax expense is primarily generated through our foreign operations outside of Bermuda, principally in the United States, Europe and Australia. The effective tax rate, which is calculated as income tax expense or benefit divided by income before tax, is driven primarily by the geographic distribution of pre-tax net income between jurisdictions with comparatively higher tax rates and those with comparatively lower income tax rates and as a result may fluctuate significantly from period to period.
The decrease in income taxes of $10.1 million was due principally to decreased pre-tax net income recorded in our U.S. and U.K. based subsidiaries as compared to the prior year.
We recorded a noncontrolling interest in earnings of our non-life run-off segment of $9.8 million and $12.1 million for the years ended December 31, 2014 and 2013, respectively.
(1) Loss ratio is obtained by dividing net increase in ultimate losses and loss adjustment expense liabilities by net premiums earned by Atrium 5. Loss ratio is a non-GAAP financial measure because it excludes net increase in ultimate losses and loss adjustment expense liabilities related to the Atrium holding companies. The most directly comparable GAAP financial measure would be to include these holding company expenses, which would result in a ratio of 40.8% for the year ended December 31, 2014.
(2) Acquisition cost ratio is obtained by dividing acquisition costs by net premiums earned by Atrium 5.
(3) Other operating expense ratio is obtained by dividing general and administrative expenses attributable to Atrium 5 by net premiums earned by Atrium. Other operating expense ratio is a non-GAAP financial measure because it excludes the general and administrative expenses and salaries and benefits of AUL (including those eliminated) and Atrium holding companies. The most directly comparable GAAP financial measure would be to include these AUL and Atrium holding company expenses (including AUL expenses eliminated), which would result in a ratio of 25.7% for the year ended December 31, 2014.
We provide loss ratio, acquisition cost ratio, other operating expense ratio, and the combined ratio in our discussions of the results for the Atrium segment in order to provide more complete information regarding our underwriting results. The ratios are calculated by dividing the related expense by net earned premiums, and the combined ratio is the sum of these ratios. Our loss, other operating expense and combined ratios are considered to be “non-GAAP” financial measures, which may be defined or calculated differently by other companies.
The excluded AUL general and administrative expenses relate to expenses incurred in managing the syndicate, and eliminated items represent Atrium 5’s share of the fees and commissions paid to AUL. The excluded AUL salaries and benefits expenses relate to salaries, benefits, bonuses expenses, and current year share grant costs for AUL managing agency employees. We believe this is the most meaningful presentation because these costs are principally funded by the profit commission fees earned from Syndicate 609.
For the Atrium segment, we reported consolidated net earnings, before net earnings attributable to noncontrolling interest, of approximately $21.4 million for the year ended December 31, 2014.
Noncontrolling interest in earnings of the Atrium segment of $11.0 million resulted in net earnings attributable to Enstar Group Limited of $10.4 million for the year ended December 31, 2014. The noncontrolling interests’ share of earnings is greater than their 41.02% share of the Atrium segment’s net earnings due primarily to interest expense in respect of borrowings under our revolving credit facility that are recorded within the Atrium segment and 100% attributable to us.
(i) net underwriting result of $12.9 million (comprised of net premiums earned of $32.2 million less $19.3 million in net increase in ultimate losses and loss adjustment expense liabilities);
(iii) net investment income and net realized and unrealized gains of $1.1 million; partially offset by
Net premiums earned for the Atrium segment were $135.9 million for the year ended December 31, 2014 and $32.2 million for the period from the date of acquisition to December 31, 2013. The increase was attributable to us only owning Atrium for approximately one month in 2013 as compared to a full year for 2014. Net premiums earned for the 2014 year reflect execution of Atrium’s underwriting strategies combined with the impact of softened market conditions across the industry. These conditions contributed to a very challenging 2015 renewal season for most lines of business, with continued pressure on pricing and overcapacity in many markets. We anticipate these challenging market conditions will continue for the rest of 2015 and as a result, Atrium may write less premium than in 2014. Atrium has, however, considered market conditions in its strategic planning and will continue to manage the impact of these conditions through maintaining underwriting discipline and strong risk management practices.
The Atrium segment earned fees and commission income of approximately $26.2 million and $2.7 million for the years ended December 31, 2014 and 2013, respectively. The fees represent management and profit commission fees earned by us in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The increase in 2014 as compared to 2013 was due primarily to us owning Atrium for a full year in 2014.
Atrium’s investment portfolio returned 0.53% as the investment portfolio was allocated to cash and short-duration fixed maturity investments. Fixed income yields in U.S. Dollars, Euros and British pounds remained low in 2014, which had a significant impact on the Atrium portfolio.
There is no assurance that conditions or trends that have affected the development of our reserves in the past will continue, and prior period development may not be indicative of development in future periods.
Interest expense for the Atrium segment of $5.4 million and $0.3 million was recorded for the years ended December 31, 2014 and 2013, respectively. The interest expense recorded in the segment was in respect of borrowings under the Enstar revolving credit facility that are recorded in the segment and 100% attributable to us.
We recorded noncontrolling interest in earnings of the Atrium segment of $11.0 million and $4.2 million for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, Trident and Dowling had a combined 41.02% noncontrolling interest in the Atrium segment, although their share of net earnings was higher due primarily to the interest expense recorded in the segment that is 100% attributable to us.
(1) Loss ratio is obtained by dividing net increase in ultimate losses and loss adjustment expense liabilities by net premiums earned attributable to Torus. Loss ratio is a non-GAAP financial measure because it excludes the net increase in ultimate losses and loss adjustment expense liabilities and net premiums earned of the Torus holding companies. The most directly comparable GAAP financial measure would be to include these holding company expenses, which would result in a ratio of 58.5% for the year ended December 31, 2014.
(3) Other operating expense ratio is obtained by dividing the sum of general and administrative expenses and salaries and benefits attributable to Torus by net premiums earned by Torus. Other operating expense ratio is a non-GAAP financial measure because it excludes the general and administrative expenses, salaries and benefits and the net premiums earned of the Torus holding companies. The most directly comparable GAAP financial measure would be to include these holding company expenses, which would result in a ratio of 30.3% for the year ended December 31, 2014.
(4) Our combined ratio is the sum of: (i) our loss ratio, (ii) our acquisition cost ratio and (iii) our other operating expense ratio. The combined ratio is a non-GAAP financial measure as described in footnotes (1), (2) and (3). The most directly comparable GAAP financial measure would be to include these holding company expenses, which would result in a ratio of 106.4% for the year ended December 31, 2014. Our historical combined ratio may not be indicative of future underwriting performance.
For the Torus segment, we reported net loss, before net loss attributable to noncontrolling interest, of approximately $17.9 million for the year ended December 31, 2014.
(iii) net foreign exchange losses of $0.9 million; partially offset by
(iv) net underwriting result of $89.5 million (comprised of net premiums earned of $373.6 million less $218.4 million in net increase in ultimate losses and loss adjustment expense liabilities and $65.7 million of acquisition costs); and
Net premiums earned for the Torus segment from April 1, 2014 to December 31, 2014 were $373.6 million, which included $6.6 million of holding company expense related to the amortization of our fair value adjustment associated with Torus’ acquisition date unearned premium reserves. Excluding the holding company expense, net premiums earned by Torus from April 1, 2014 to December 31, 2014 were $380.3 million.
Torus repositioned itself during 2014 to focus on its core specialty products. Insurance markets have seen a general slowdown and leveling off of market conditions, with downward pressures on rates in certain lines of business. Despite the slowdown in pricing, Torus believes that good fundamentals and opportunities for profitable growth exist in many lines. In 2015, Torus looks to continue the selective expansion of its U.S. operations by using its Escape broker portal to increase access to business and focusing on workers compensation, healthcare and excess casualty lines where we believe pricing can remain strong compared to international markets. Torus will continue to explore its opportunities for expansion while maintaining a focus on risk management and underwriting returns. Enstar expects increased premiums written by Torus in 2015 as a result of owning Torus for a full year as compared to only nine months in 2014.
General and administrative expenses for the Torus segment for the year ended December 31, 2013 were $2.6 million and related to pre-acquisition costs of the holding company.
The term life business consists of 10, 15, 20 and 30 year direct term business with approximately 90% of premiums to be earned over the next 20 years. The assumed life reinsurance premiums will continue to be earned until the year 2053; however, approximately 70% are expected to be earned within the next 12 years. Credit life and disability premiums are monthly premiums received on credit products that mostly consist of sub-prime mortgages in the U.S. and Canada; approximately 90% of these premiums are expected to be earned before the year 2023. Substantially all net premiums earned in 2014 relate to the acquisition of the Pavonia companies. The premiums are expected to reduce by approximately 15-20% per annum as the blocks of business continue to run-off and policies lapse.
For our life and annuities business, although the companies no longer write new business, the strategy differs from the non-life run-off business, in particular because the companies have limited ability to shorten the duration of the liabilities in this business through either early claims settlement, commutations or policy buy backs. Instead, the companies will hold the policies associated with the life and annuities business to their natural maturity or lapse and will pay claims as they fall due.
Net premiums earned were $95.0 million and $3.5 million for the years ended December 31, 2013 and 2012, respectively. Substantially all net premiums earned in 2013 relate to the acquisition of the Pavonia companies. We separately recorded acquisition costs from the date of acquisition to December 31, 2013 of approximately $8.8 million associated with the premiums earned by Pavonia. Net premiums earned in 2012 related to the Laguna term life business.
Net investment income for the life and annuities segment for the years ended December 31, 2014 and 2013 was $39.5 million and $30.2 million, respectively. The increase was due primarily to the inclusion of the investments of the Pavonia companies for the full year in 2014.
Net investment income for the life and annuities segment for the years ended December 31, 2013 and 2012 was $30.2 million and $0.9 million, respectively. The increase was due primarily to the inclusion of the cash and fixed maturity securities associated with the acquisition of the Pavonia companies on March 31, 2013.
Life and annuity policy benefits for 2012 related to the Laguna term life business.
General and administrative expenses were $11.1 million and $16.0 million for the years ended December 31, 2014 and 2013, respectively. The decrease in expenses was primarily related to non-recurring Pavonia transaction costs of approximately $4.0 million in 2013, partially offset by the additional expenses of operating the Pavonia business for a full year in 2014. General and administrative expenses consist primarily of information technology, rent, premium taxes, bank charges, legal and professional fees, and other expenses.
General and administrative expenses were $16.0 million and $1.6 million for the years ended December 31, 2013 and 2012, respectively. The expenses in 2013 related to our acquisition and operation of Pavonia in 2013, while 2012 expenses related only to the Laguna business.
Our capital management strategy is to preserve sufficient capital to enable us to make future acquisitions while maintaining a conservative investment strategy. As we are a holding company and have no substantial operations of our own, our assets consist primarily of investments in subsidiaries. The potential sources of the cash flows to Enstar as a holding company consist of dividends, advances and loans from our subsidiary companies.
We believe that restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies will not have a material impact on our ability to meet our cash obligations. Retained earnings of our insurance and reinsurance subsidiaries are not currently restricted, as our minimum capital solvency margins are covered by share capital and additional paid-in-capital.
At December 31, 2014, we had total cash and cash equivalents, restricted cash and cash equivalents and investments of approximately $7.50 billion, compared to approximately $6.56 billion at December 31, 2013. Our cash and cash equivalent portfolio is comprised mainly of cash, high-grade fixed deposits, commercial paper with maturities of less than three months and money market funds.
On an annual basis, both Torus and Atrium purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s total third-party reinsurance cover is with Lloyd’s Syndicates or other highly rated reinsurers. The majority of Torus’ total third-party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.
As of December 31, 2014 and 2013, the provision for uncollectible reinsurance recoverable relating to reinsurance balances recoverable was $289.9 million and $338.6 million, respectively. To estimate the provision for uncollectible reinsurance recoverable, the balances are first allocated to applicable reinsurers using management judgment. As part of this process, ceded IBNR reserves are allocated by reinsurer. The ratio of the provision for uncollectible reinsurance recoverable to total non-life reinsurance balances recoverable (excluding provision for uncollectible reinsurance recoverable) as of December 31, 2014 decreased to 17.9% as compared to 19.9% as of December 31, 2013, primarily as a result of reinsurance balances recoverable of Torus acquired during the year that required minimal provisions for uncollectible reinsurance recoverable partally offset by commutations and cash collections from reinsurers with minimal bad debt provisions.
See “Item 8. Financial Statements and Supplementary Data - Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012” for further information.
(i) a net increase of $920.5 million in the purchases, sales and maturities of trading securities between 2014 and 2013; partially offset by
(ii) an increase in reinsurance balances recoverable of $236.3 million in 2013 due primarily to increased balances associated with our current year acquisitions;
(iii) a decrease in funds held by reinsured companies of $175.8 million in 2013 compared to an increase of $257.5 million in 2012, due primarily to the RITC transaction completed by Syndicate 2008 in 2012;
Net cash used in investing activities was $365.8 million during the year ended December 31, 2013 compared to net cash provided by investing activities of $228.6 million during the year ended December 31, 2012. The decrease of $594.4 million in investing cash flows between 2013 and 2012 was due primarily to the following:
(i) an increase of $409.6 million in net cash used for acquisitions between 2013 and 2012, due primarily to the acquisitions of Pavonia, Arden, and Atrium during 2013;
(iii) a decrease of $157.4 million in the sales and maturity of available-for-sale securities between 2013 and 2012; partially offset by
(iv) a decrease of $107.2 million in the purchase of other investments between 2013 and 2012.
(i) an increase of $369.8 million in cash received attributable to bank loans between 2012 and 2013, and a decrease of $95.0 million in the repayment of bank loans between 2012 and 2013;
(iii) a distribution of capital and dividends to noncontrolling interests of $3.9 million in 2013 compared to $99.2 million in 2012.
Aggregate invested assets, comprising cash and cash equivalents, restricted cash and cash equivalents, fixed maturities, short-term investments, equities and other investments, were $7.50 billion as of December 31, 2014 compared to $6.56 billion as of December 31, 2013, an increase of 14.3%. The increase in cash and invested assets resulted principally from the completion of the acquisition of Torus.
As at December 31, 2014, we held investments on our balance sheet totaling approximately $6.0 billion, compared to approximately $5.52 billion at December 31, 2013, with net unrealized losses included in accumulated comprehensive income of approximately $3.0 million compared to unrealized gains of approximately $3.1 million at December 31, 2013. As at December 31, 2014, we had approximately $3.6 billion of restricted assets compared to approximately $2.9 billion at December 31, 2013. The increase in restricted assets is primarily due to 2014 acquisition activity.
Across all of our segments, we strive to structure our investments in a manner that recognizes our liquidity needs for future liabilities. In that regard, we attempt to correlate the maturity and duration of our investment portfolio to our general liability profile. If our liquidity needs or general liability profile unexpectedly change, we may adjust the structure of our investment portfolio to meet new business needs.
For our life and annuities segment, we have limited ability to shorten the duration of the policy benefits for life and annuity contracts liabilities and, as a result, we maintain a longer duration investment portfolio that attempts to match the cash flows and duration of our liability profile. Accordingly, the majority of this portfolio consists of highly rated fixed maturity investments, primarily corporate bonds.
Our fixed maturity investments associated with our PPA business are primarily highly rated corporate bonds with which we attempt to match duration and cash flows to the liability profile for this business. As these fixed maturity investments are classified as held-to-maturity, we invest surplus cash flows from maturities into longer dated fixed maturities. As at December 31, 2014, the duration of our fixed maturity investment portfolio associated with our PPA business was shorter than the liabilities, as a significant amount of the liabilities extend beyond 30 years and it is difficult, due to limited investment options, to match duration and cash flows beyond that period.
Our fixed maturity investments associated with our non-PPA life business are primarily highly rated corporate bonds with which we attempt to match duration and cash flows to the liability profile for this business (the non-PPA life business has a short-duration liability profile). These fixed maturity investments are classified as trading, and therefore we may sell existing securities to buy higher yielding securities and funds in the future. As at December 31, 2014, the duration of our fixed maturity investment portfolio associated with our non-PPA life business was shorter than the liabilities, although we have the discretion to change this in the future.
The maturity distribution for our fixed maturity and short-term investments held as of December 31, 2014 and 2013 was as follows:
As at December 31, 2014 and 2013, our fixed maturity investments and short-term investment portfolio had an average credit quality rating of AA- and A+, respectively. At December 31, 2014 and 2013, our fixed maturity investments rated BBB or lower comprised 9.4% and 9.5% of our total investment portfolio, respectively.
The fair value of our fixed maturity investments will fluctuate with changes in the interest rate environment and when changes occur in the overall investment market and in overall economic conditions. We recorded no impairment losses in 2014 and 2013.
As at December 31, 2014 and 2013, we had total unfunded capital commitments related to other investments of approximately $99.9 million and $114.2 million, respectively.
The following table presents the fair value, unfunded commitments and redemption frequency for the funds included within other investments. These investments are all valued at net asset value as at December 31, 2014 and 2013.
This class comprises hedge funds that invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of three years from the time of our initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice.
This class comprises equity funds that invest in a diversified portfolio of international publicly-traded equity securities.
Our long-term debt consists of loan facilities used to partially finance certain of our acquisitions or significant new business transactions and our revolving credit facility, or the EGL Revolving Credit Facility, which can be used for permitted acquisitions and general corporate purposes. The EGL Revolving Credit Facility replaced our prior revolving credit facility on September 16, 2014.
For the years ended December 31, 2014, 2013 and 2012, we incurred interest expense of approximately $12.9 million, $12.4 million and $8.4 million, respectively, on our loan facilities. All of our currently outstanding loan facilities are floating rate loans, and the fair values of these loans approximate their book values.
During the existence of any event of default (as specified in the Companion Facility), the lenders may declare all or a portion of outstanding amounts immediately due and payable, declare all or a portion of borrowed amounts payable upon demand, or proceed against the security. During the existence of any payment default, the interest rate would be increased by 1.0%. The Companion Facility terminates and all amounts borrowed must be repaid on December 24, 2018.
Interest is payable at the end of each interest period chosen by us or, at the latest, each six months. The interest rate is LIBOR plus a margin factor initially set at 2.75%. The margin factor is subject to variation (ranging from 2.50% to 3.25%) in the event of a change to our long term senior unsecured debt rating assigned by Standard & Poor’s Ratings Services or Fitch Ratings Ltd. Any unused portion of the EGL Revolving Credit Facility will be subject to a commitment fee of 35% of the applicable margin factor. The EGL Revolving Credit Facility imposes various financial and business covenants on us and our subsidiaries, including certain limitations on mergers and consolidations, acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets, and limitations on liens.
As of December 31, 2014, the unused portion of the EGL Revolving Credit Facility was approximately $180.5 million. As of December 31, 2014, all of the covenants relating to the EGL Revolving Credit Facility were met.
On September 30, 2014, we fully repaid the remaining $66.0 million of outstanding principal and accrued interest on the Clarendon Facility out of the proceeds of distributions from Clarendon. We had previously repaid $13.0 million of the outstanding principal on the Clarendon Facility on March 17, 2014. All security pursuant to the Clarendon Facility was released in connection with the full repayment of the facility.
The following table shows our aggregate contractual obligations and commitments by time period remaining to due date as at December 31, 2014.
The amounts in the above table represent our estimates of known liabilities as of December 31, 2014 and do not take into account corresponding reinsurance recoverable amounts that would be due to us. Furthermore, reserves for losses and loss adjustment expenses recorded in the audited consolidated financial statements as of December 31, 2014 are computed on a fair value basis, whereas the expected payments by period in the table above are the estimated payments at a future time and do not reflect the fair value adjustment in the amount payable.
Refer to “Item 3. Legal Proceedings” for a description of our litigation matters.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Enstar Group Limited’s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
(i) Non-life run-off - This segment is comprised of the operations and financial results of the Company’s subsidiaries that are running off their property and casualty and other non-life lines of business together with the run-off businesses of Arden and Torus. It also includes the Company’s management business, which manages the run-off portfolios of third parties through its service companies.
(iii) Torus - This active underwriting segment is comprised of the operations and financial results of Bayshore Holdings Limited, a holding company that owns Torus and its subsidiaries. Torus is a global specialty insurer that offers a diverse range of property, casualty and specialty insurance through its operations in the U.K., Continental Europe, and the U.S. Torus’ active underwriting operations are reported in the Torus segment, with Torus’ run-off business reported in the non-life run-off segment.
(iv) Life and annuities - This segment is comprised of the operations and financial results of the Company’s subsidiaries that are operating its closed-block of life and annuity businesses, which primarily consists of the companies it acquired in the Pavonia acquisition on March 31, 2013.
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash and cash equivalents.
Short-term investments and fixed maturities classified as trading are carried at fair value, with realized and unrealized holding gains and losses included in net earnings and reported as net realized and unrealized gains and losses.
Equities are classified as trading and are carried at fair value with realized and unrealized holding gains and losses included in net earnings and reported as net realized and unrealized gains and losses.
Commutations provide an opportunity for the Company to exit exposures to entire policies with insureds and reinsureds for an agreed upon payment, or payments, often at a discount to the previously estimated ultimate liability. As a result of exiting all exposures to such policies, all advised case reserves and incurred but not reported (“IBNR”) reserves relating to the insured or reinsured are eliminated. A commutation is recognized upon the execution of a commutation release agreement. Following completion of a commutation, all the related balances, including insurance and reinsurance balances payable and/or receivable, funds held by ceding companies, and losses and loss adjustment expenses (including fair value adjustments and estimated IBNR), are written off with corresponding gain or loss recorded in the net reduction of ultimate losses. A commutation may result in a net gain irrespective of whether the settlement exceeds the advised case reserves. Advised case reserves are those reserve estimates for a specific loss or losses reported to the Company by either the broker or insured or reinsured. IBNR reserves are established by the Company at a class of business or exposure level for claims that have not yet been reported to the Company but can reasonably be expected to have occurred, as well as for the future development of reported claims. A commutation settlement is a negotiated settlement of both the advised case reserves and an estimate of the IBNR reserves that relate to the policies being commuted. For latent exposures with a long reporting tail, the
To the extent that commuted policies are protected by reinsurance, then the Company will, on completion of a commutation with an insured or reinsured, negotiate with the reinsurers to contribute their share of the commutation settlement. Any amounts received from such reinsurers will be recorded in net losses paid and the impact of any savings or loss on reinsurance recoverable on unpaid losses will be included in the actuarial reassessment of net ultimate liabilities and net IBNR reserves.
The Company’s insurance and reinsurance subsidiaries also establish provisions for loss adjustment expenses relating to run-off costs for the estimated duration of the run-off, which are included in losses and loss adjustment expenses. These provisions are assessed at each reporting date, and provisions relating to future periods are adjusted to reflect any changes in estimates of the periodic run-off costs or the duration of the run-off, including the impact of any acceleration of the run-off period that may be caused by commutations. Provisions relating to the current period together with any adjustment to future run-off provisions are included in net reduction in ultimate loss and loss adjustment expenses in the consolidated statements of earnings.
other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts recorded in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, will be recorded in earnings in the period in which they become known. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves established in previous calendar years.
Consideration received for business assumed by way of novation and premiums received on retroactive reinsurance is recorded in the balance sheet. The difference between the consideration received and liabilities assumed is recorded as an intangible asset or liability. Intangible assets or liabilities are subsequently amortized using the interest method over the expected claims settlement periods. As changes in estimates of timing or amount of losses and loss adjustment expenses are recognized, the amortization is adjusted retrospectively and included in losses and loss adjustment expenses in the period of the charge.
Certain contracts written prior to the business going into run-off, are retrospectively rated and additional premium will be due should losses exceed pre-determined contractual thresholds. These
required additional premiums are based upon contractual terms and management judgment is involved with respect to the estimate of the amount of losses that the Company expects to be ceded. Additional premiums are recognized at the time loss thresholds specified in the contract are exceeded and are earned over the coverage period, or are earned immediately if the period of risk coverage has passed. Changes in estimates of losses recorded on contracts with additional premium features will result in changes in additional premiums based on contractual terms.
The Company’s policy benefits for life and annuity contracts (“policy benefits”) are calculated using standard actuarial techniques and cash flow models in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 944, Financial Services -Insurance. The Company establishes and maintains its policy benefits at a level that the Company estimates will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third party servicing obligations as they become payable. The Company reviews its policy benefits regularly and performs loss recognition testing based upon cash flow projections.
Since the development of the policy benefits is based upon cash flow projection models, the Company makes estimates and assumptions based on experience and industry mortality tables, longevity and morbidity rates, lapse rates, expenses and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefits are determined at the inception of
The reporting currency of the Company is the U.S. dollar. Assets and liabilities of entities whose functional currency is not the U.S. dollar are translated at period end exchange rates. Revenue and expenses of such foreign entities are translated at average exchange rates during the year. The effect of the currency translation adjustments for these foreign entities is included in accumulated other comprehensive income.
The Company uses the purchase method in accounting for acquisitions. The difference between the fair value of net assets acquired and purchase price is recorded as goodwill or negative goodwill.
The purchase method of accounting requires that the acquirer record the assets and liabilities acquired at their estimated fair value. The fair values of each of the reinsurance assets and liabilities acquired are derived from probability-weighted ranges of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. The Company’s run-off strategy, as well as that of other run-off market participants, is expected to be different from the sellers as generally sellers are not specialized in running off insurance and reinsurance liabilities whereas the Company and other market participants do specialize in such run-offs.
from the acquisition of Atrium and the syndicate capacity, U.S. insurance licenses, technology and brand arising from the acquisition of Torus. Definite-lived intangible assets are amortized over their useful lives. The Company recognizes the amortization of all intangible assets in the consolidated statement of earnings. Indefinite-lived intangible assets are not subject to amortization. The carrying values of intangible assets are reviewed for indicators of impairment on at least an annual basis. Impairment is recognized if the carrying values of the intangible assets are not recoverable from their undiscounted cash flows and are measured as the difference between the carrying value and the fair value.
The Company primarily uses three types of share-based compensation: restricted shares, cash-settled stock appreciation rights (SARs) and shares issued under the Company’s employee share purchase plans. With the exception of SARs and the incentive plan awards in Northshore issued to certain employees of Atrium, the Company’s share-based compensation awards qualify for equity classification. The fair value of the compensation cost is measured at the grant date and is expensed over the period for which the employee is required to provide services in exchange for the award. Both the Company’s SARs and the Northshore incentive plan awards are classified as liability awards. Liability classified awards are recorded at fair value within accounts payable in the consolidated balance sheet with changes in fair value relating to the vested portion of the award recorded within salaries and benefits in the consolidated statements of earnings.
In November 2014, the FASB issued ASU No. 2014-17, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event
ASU 2014-16, Determining whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
In May 2014, the FASB issued ASU No. 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC including ASC 944 - Insurance. However, while contracts within the scope of ASC 944 are excluded from the scope of the ASU, certain insurance-related contracts should be accounted for under the ASU, for example contracts under which service providers charge their customers fixed fees in exchange for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers of non-financial assets, including in-substance non-financial assets that are not an output of an entity’s ordinary activities (e.g., sales of (1) property, plant, and equipment; (2) real estate; or (3) intangible assets). Such provisions include guidance on recognition (including determining the existence of a contract and control principles) and measurement. The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016, for public entities and early application is not permitted. The Company is currently evaluating the impact of this guidance, however, it is not expected to have a material impact on the Company’s consolidated financial statements.
On January 27, 2015, the Company and Sussex Holdings, Inc. (“Sussex”), an indirect, wholly-owned subsidiary of the Company, completed the previously announced acquisition of Companion Property and Casualty Insurance Company (“Companion”) from Blue Cross and Blue Shield of South Carolina, an independent licensee of the Blue Cross Blue Shield Association. Companion is a South Carolina-based insurance group writing property, casualty, specialty and workers compensation business, and has also provided fronting and third party administrative services.
Upon the closing of the Torus acquisition, Bayshore, Kenmare and Trident entered into a Shareholders’ Agreement (the “Bayshore Shareholders’ Agreement”), which was subsequently amended, as described in “Dowling Co-investments in Bayshore and Northshore” below.
Prior to acquisition, Torus ceased underwriting certain lines of business in order to focus on core property, casualty and specialty lines. The results of the discontinued lines of business that were placed into run-off are included within the Company’s non-life run-off segment.
The following table summarizes the intangible assets recorded in connection with the acquisition:
Technology represents the intangible asset related to Torus’ capitalized software and has been valued on a replacement cost basis.
From the date of acquisition to December 31, 2014, the Company earned premiums of $28.6 million, recorded net increase in ultimate losses and loss adjustment expense liabilities of $20.6 million on those earned premiums, and recorded $0.1 million in net earnings attributable to Enstar Group Limited in its consolidated statement of earnings related to Torus’ non-life run-off business.
The operating results for Torus have been included in the consolidated financial statements from the date of acquisition. The following pro forma condensed combined statement of earnings for the years ended December 31, 2014 and 2013 combines the historical consolidated statements of earnings of the Company with those historical consolidated statements of earnings of Torus, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2013 and 2014, as applicable. The unaudited pro forma financial information presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of Torus had taken place at the beginning of each period presented, nor is it indicative of future results.
The Amended and Restated Bayshore Shareholders’ Agreement also provides that during the 90-day period following the fifth anniversary of the Torus closing, and at any time following the seventh anniversary of such closing, Kenmare would have the right to purchase the Bayshore shares owned by all other shareholders of Bayshore at their then fair market value, which would be payable in cash. Following the seventh anniversary of the Torus closing, Trident would have the right to require Kenmare to purchase all of Trident’s shares in Bayshore for their then current fair market value and Dowling would have the right to participate in such transaction by requiring Kenmare to purchase all of its shares in Bayshore on the same terms. Kenmare would have the option to pay for such shares either in cash or by delivering the Company’s Voting Ordinary Shares.
On November 25, 2013, Kenmare and Trident completed the acquisition of Atrium.
Atrium provides underwriting, actuarial and support services to Syndicate 609 pursuant to a management contract. The fair value of the management contract was estimated using the income approach.
The net unearned premiums acquired included a decrease of $14.4 million to adjust net unearned premiums to fair value. This fair value adjustment was included within unearned premiums on the
December 31, 2013 consolidated balance sheet. This amount was amortized to acquisition costs in the consolidated statements of earnings during 2013. The amortization approximated the amount of SeaBright’s deferred acquisition costs that would have been recognized as acquisition costs had they not been fair valued under acquisition accounting. As at December 31, 2013, this fair value adjustment was fully amortized.
On January 15, 2015, the Company’s wholly-owned subsidiary, Providence Washington Insurance Company, completed the loss portfolio transfer reinsurance transaction with Reciprocal of America (in Receivership) and its Deputy Receiver relating to a portfolio of workers compensation business in run-off. The total net insurance reserves assumed were approximately $162.1 million, with an equivalent amount of cash and/or investments being received as consideration.
On April 26, 2013, the Company, through its wholly-owned subsidiary, Providence Washington Insurance Company (“PWIC”), completed the assignment and assumption of a portfolio of workers’
compensation business from American Physicians Assurance Corporation and APSpecialty Insurance Company (collectively “APS”). Total assets and liabilities assumed were approximately $35.3 million.
On January 1, 2012, Syndicate 2008 transferred the assets and liabilities relating to its 2009 and prior underwriting years of account into its 2010 underwriting year of account by means of an RITC transaction. Following the transfer, the existing noncontrolling interest held by its other investors ceased, resulting in the Company now providing 100% of the underwriting capacity for Syndicate 2008.
The Company’s other investments are comprised of private equity funds, fixed income funds, fixed income hedge funds, equity and real estate debt funds. The Company also holds both direct and indirect investments in collateralized loan obligation (“CLO”) equity-tranched securities, which are all variable interests issued by VIEs. The indirect investments are in the form of CLO equity funds. For
these variable interests, the Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs and, accordingly, it is not the primary beneficiary for any of these VIEs. The Company’s maximum exposure to loss on these interests is limited to the amount of its investment. The Company has not provided financial or other support with respect to these structured securities other than its original investment.
Included within residential and commercial mortgage-backed securities as at December 31, 2014 were securities issued by U.S. governmental agencies with a fair value of $263.4 million (as at December 31, 2013: $177.9 million).
The contractual maturities of the Company’s short-term and fixed maturity investments classified as trading are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The contractual maturities of the Company’s fixed maturity investments classified as held-to-maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As at December 31, 2014 and December 31, 2013, the number of securities classified as available-for-sale in an unrealized loss position was 212 and 135, respectively, with a fair value of $149.6 million and $121.8 million, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 120 and nil, respectively. As of December 31, 2014, none of these securities were considered to be other than temporarily impaired.
The Company assesses whether declines in the fair value of its fixed maturity investments classified as available-for-sale and held-to-maturity represent impairment losses that are other-than-temporary and whether a credit loss exists in accordance with its accounting policies. In assessing whether it is more likely than not that the Company will be required to sell a fixed maturity investment before its anticipated recovery, the Company considers various factors including its future cash flow requirements, legal and regulatory requirements, the level of its cash, cash equivalents, short-term investments and fixed maturity investments available-for-sale in an unrealized gain position, and other relevant factors. For the year ended December 31, 2014, the Company did not recognize any other-than-temporary impairment losses due to required sales. The Company determined that, as at December 31, 2014, no credit losses existed.
This class comprises several private equity funds that invest primarily in the financial services industry. All of the Company’s investments in private equity funds are subject to restrictions on redemptions and sales that are determined by the governing documents and limit the Company’s ability to liquidate those investments. These restrictions have been in place since the dates the initial investments were made by the Company.
As of December 31, 2014 and December 31, 2013, the Company had $197.3 million and $161.2 million, respectively, of other investments recorded in private equity funds, which represented 2.6% and 2.5% of total investments, cash and cash equivalents and restricted cash and cash equivalents at December 31, 2014 and December 31, 2013, respectively. Due to a lag in the valuations reported by the managers, the Company records changes in the investment value with up to a three-month lag. Management regularly reviews and discusses fund performance with the Company’s fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments.
This class comprises investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by the Company in these securities.
The following tables present the fair value, unfunded commitments and redemption frequency for the funds included within other investments. These investments are all valued at net asset value as at December 31, 2014 and 2013:
The Company’s fixed maturity investments portfolio is managed by the Company’s Chief Investment Officer and outside investment advisors with oversight from the Company’s Investment Committee. Fair values for all securities in the fixed maturity investments portfolio are independently provided by the investment custodians, investment accounting service providers and investment managers, each of which utilize internationally recognized independent pricing services. Interactive Data Corporation is, however, the main pricing service utilized to estimate the fair value measurements for the Company’s fixed maturity investments. The Company records the unadjusted price provided by the investment custodians, investment accounting service providers or the investment managers and validates this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to the Company’s knowledge of the current investment market. The Company’s internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, securities are classified within Level 3. As at December 31, 2014, the Company had no residential or commercial mortgage-backed securities classified as Level 3.
The Company’s equities are predominantly traded on the major exchanges and are primarily managed by two external advisors. The Company uses Interactive Data Corporation, an internationally recognized pricing service, to estimate the fair value for all of its equities. The Company’s equities are widely diversified and there is no significant concentration in any specific industry.
The fixed income funds and equity funds in which the Company invests have been classified as Level 2 investments because their fair value is estimated using the published net asset value and because the fixed income funds and equity funds are highly liquid.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase (or decrease) in either of these significant inputs in isolation would result in lower (or higher) fair value estimates for direct investments in the Company’s CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs because they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios,
If valuations from the external CLO equity manager or brokers were not available, the Company would use an income approach based on certain observable and unobservable inputs to value these investments. An income approach is also used to corroborate the reasonableness of the valuations provided by the external manager and brokers. Where an income approach is followed, the valuation is based on available trade information, such as expected cash flows and market assumptions on default and loss severity rates. Other inputs used in the valuation process include asset spreads, loan prepayment speeds, collateral spreads and estimated maturity dates.
During 2014 and 2013, the Company had no transfers between Levels 1 and 2.
The amount of net (losses) gains for the twelve months ended December 31, 2013 included in earnings attributable to the fair value of changes in assets still held at December 31, 2013 was $48.8 million. All of this amount was included in net realized and unrealized gains.
The Company is required to maintain investments and cash and cash equivalents on deposit with various regulatory authorities to support its insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust accounts to collateralize business with its insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of the Company’s restricted assets, including restricted cash of $535.0 million and $397.7 million, as of December 31, 2014 and December 31, 2013 was as follows:
The increase in restricted assets of $661.7 million since December 31, 2013 is primarily as a result of the acquisition of Torus.
From time to time, the Company uses foreign currency forward contracts as part of its overall foreign currency risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement. These derivatives are not designated as hedging investments.
For the year ended December 31, 2014, the Company did not enter into any new derivative instruments. The following table sets forth the estimated fair value of derivative instruments recorded within other assets on the condensed consolidated balance sheet as at December 31, 2014 and 2013, and realized gains (losses) on derivative instruments recorded in net earnings for the years ended December 31, 2014, 2013 and 2012:
On an annual basis, both Torus and Atrium purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s total third party reinsurance cover is with Lloyd’s Syndicates or other highly rated reinsurers. The majority of Torus’ total third party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.
As of December 31, 2014 and 2013, the Company had, excluding reinsurance recoverables related to its life and annuities segment, reinsurance balances recoverable of $1.30 billion and $1.33 billion, respectively. The decrease of $26.8 million in reinsurance balances recoverable was primarily a result of commutations and cash collections made during the year ended December 31, 2014 in the Company’s non-life run-off segment partially offset by balances associated with the Torus acquisition.
As at December 31, 2014 and 2013, the reinsurance balances recoverable associated with the Company’s life and annuities business amounting to $26.5 million and $31.9 million, respectively, consisted of term life business ceded by Pavonia to reinsurers under various quota share arrangements. All of the reinsurers as at December 31, 2014 and 2013 were rated A- and above by a major rating agency.
At December 31, 2014 and 2013, the top ten reinsurers of the Company’s business accounted for 64.9% and 68.3%, respectively, of total reinsurance balances recoverable (which includes total reinsurance reserves and paid losses recoverable) and included $310.9 million and $290.1 million,
As at December 31, 2014 and 2013, reinsurance balances recoverable with a carrying value of $314.5 million and $256.2 million, respectively, were associated with two and one reinsurers, respectively, which represented 10% or more of total non-life run-off reinsurance balances recoverable. One of those reinsurers (accounting for $139.3 million of the $314.5 million as at December 31, 2014) was rated A+, while the remaining $175.2 million of the $314.5 million as at December 31, 2014 was secured by trust funds held for the benefit of the Company’s insurance and reinsurance subsidiaries.
In establishing the reserves for losses and loss adjustment expenses related to asbestos and environmental claims, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, reserves have been established to cover additional exposures on both known and unreported claims. Estimates of the reserves are reviewed and updated continually. Developed case law and adequate claim history do not exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. In view of the changes in the legal and tort environment that affect the development of such claims, the uncertainties inherent in valuing asbestos and environmental claims are not likely to be resolved in the near future. Ultimate values for such claims cannot be estimated using traditional reserving techniques and there are significant uncertainties in estimating the amount of the Company’s potential losses for these claims. There can be no assurance that the reserves established by the Company will be adequate or will not be adversely affected by the development of other latent exposures. The Company’s liability for unpaid losses and loss adjustment expenses as of December 31, 2014 and 2013 included $389.1 million and $480.9 million, respectively that represented an estimate of its net ultimate liability for asbestos and environmental claims. The gross liability for such claims as at December 31, 2014 and 2013 was $439.5 million and $539.5 million, respectively.
provisions for unallocated loss adjustment expense liabilities of $49.5 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.0 million.
The reduction in aggregate provisions for bad debt of $7.7 million was a result of the collection of certain reinsurance recoverables against which bad debt provisions had been provided in earlier periods.
The reduction in estimates of net ultimate losses relating to prior periods of $215.5 million comprised reductions in IBNR reserves of $265.2 million partially offset by net incurred loss development of $49.7 million. The decrease in the aggregate estimate of net IBNR reserves of $265.2 million (compared to $267.4 million during the year ended December 31, 2012), was comprised
The aggregate reduction in net IBNR reserves of $265.2 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 108 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures. The prior period estimate of aggregate net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2013, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $310.5 million for net paid losses of $360.2 million, related to the settlement of non-commuted losses in the year and 108 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of one of our top ten assumed exposures and one of our top ten ceded recoverables as at January 1, 2013). Net advised case and LAE reserves settled by way of commutation and policy buy-back during the year ended December 31, 2013 amounted to $29.8 million (comprising $97.3 million of assumed case reserves and LAE reserves partially offset by $67.5 million of ceded incurred reinsurance recoverable case reserves).
The aggregate reduction in net IBNR reserves of $215.0 million was a result of the application, on a basis consistent with the assumptions applied in the prior period, of the Company’s actuarial methodologies to revised historical loss development data, following 101 commutations, to estimate loss reserves required to cover liabilities for unpaid losses and loss adjustment expenses relating to non-commuted exposures. The prior period estimate of aggregate net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2012, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred favorable loss development, excluding the allocation by one of the Company’s insurance entities of $52.4 million from net IBNR reserves to specific net case and LAE reserves, of $3.1 million, resulting from settlement of net advised case and LAE reserves of $317.6 million for net paid losses of $314.5 million, related to the settlement of non-commuted losses in the year and 101 commutations of assumed and ceded exposures. Net incurred liabilities settled by way of commutation during the year ended December 31, 2012 amounted to $26.6 million (comprising $163.1 million of assumed incurred liabilities partially offset by $136.5 million of ceded incurred reinsurance recoverables) compared to the net aggregate reduction in advised case reserves during the same period of $317.6 million (excluding the allocation of $52.4 million from net IBNR reserves to specific net case and LAE reserves).
The net (reduction) increase in ultimate losses and loss adjustment expense liabilities for the Company’s Atrium and Torus segments for the year ended December 31, 2014 and the Company’s Atrium segment for December 31, 2013 was as follows:
The Company has entered into long duration contracts that subject the Company to mortality, longevity and morbidity risks and which are accounted for as life and annuity premiums earned. Life and annuity benefit reserves are established using assumptions for investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. The Company establishes and reviews its life and annuity reserves regularly based upon cash flow projections. The Company establishes and maintains its life and annuity reinsurance reserves at a level that the Company estimates will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third party servicing obligations as they become payable. Refer to Note 2(i) - Significant Accounting Policies - Policy Benefits for Life and Annuity Contracts” for a description of the assumptions used and the process for establishing the Company’s assumptions and estimates.
(i) Fair value adjustments (“FVA”) related to outstanding losses and loss adjustment expenses, policy benefits for life and annuity contracts, unearned premiums and reinsurance recoverables. These are included as a component of each balance sheet item. FVA are amortized in proportion to future premiums for policy benefits for life and annuity contracts, over the estimated payout or recovery period for outstanding losses and loss adjustment expenses and reinsurance recoverables and as the unearned premiums expire for business in-force as of the acquisition date; and
Intangible asset amortization for the years ended December 31, 2014, 2013 and 2012 was $5.8 million, $21.2 million and $22.6 million, respectively.
For the years ended December 31, 2014, 2013 and 2012, the Company incurred interest expense of $12.9 million, $12.4 million and $8.4 million, respectively, on its loan facilities. All of the Company’s currently outstanding loan facilities are floating rate loans, and the fair values of these loans approximate their book values.
On December 24, 2014, Sussex, an indirect, wholly-owned subsidiary of the Company, as borrower and guarantor, entered into the Companion Facility with NAB and Barclays (the “Lenders”). The Companion Facility provides for a four-year term loan facility pursuant to which Sussex was permitted to borrow up to an aggregate of $109.0 million to fund 50% of the consideration payable for the acquisition of Companion. Sussex fully drew down on the Companion Facility and completed the acquisition of Companion on January 27, 2015.
The Credit Agreement refinances and replaces, in its entirety, the Company’s Revolving Credit Facility Agreement, originally dated June 14, 2011, as amended from time to time, and as amended and restated pursuant to the Restatement Agreement, dated July 8, 2013, among the Company and certain of its subsidiaries, NAB and Barclays, as mandated lead arrangers, NAB, Barclays and RBC, as original lenders, and NAB as agent (the “Prior Credit Agreement”). The Prior Credit Agreement had permitted the Company to borrow up to an aggregate of $375 million on a secured basis over a five-year term (the “Prior EGL Revolving Credit Facility”). Effective September 16, 2014 and concurrent with its entry into the Credit Agreement, the Company terminated the Prior Credit Agreement. Outstanding borrowings under the Prior EGL Revolving Credit Facility totaled $319.6 million and were refinanced on September 16, 2014 with borrowings pursuant to the EGL Revolving Credit Facility.
The Prior EGL Revolving Credit Facility had been secured by a first priority lien on the stock of certain of the Company’s subsidiaries and certain bank accounts held with Barclays in the name of the Company and into which amounts received in respect of any capital release from certain of the Company’s subsidiaries were required to be paid. In connection with the termination of the Prior Credit Agreement, all security pursuant to the Prior EGL Revolving Credit Facility was released, effective September 16, 2014.
On February 27, 2015, the Credit Agreement was amended and restated (the “Restated EGL Revolving Credit Facility”) in order to: (i) increase the amount the Company is permitted to borrow to $665.0 million, (ii) add Lloyd’s Bank plc as a Lender, and (iii) reallocate the capacity provided among the four Lenders into equal shares.
Redeemable noncontrolling interest (“RNCI”) comprises the ownership interest held by Trident in both Bayshore and Northshore. As of December 31, 2014, Trident’s RNCI was as follows:
On March 30, 2014, Trident contributed $260.8 million to Bayshore in relation to its 40% share of both the purchase price of Torus and the transaction costs related to the acquisition. On May 8, 2014, Dowling purchased common shares of both Northshore and Bayshore from Kenmare and Trident (on a pro rata basis in accordance with their respective interests) for an aggregate amount of $15.4 million. The impact on Trident of the Dowling transaction was to reduce its RNCI in both Bayshore and Northshore from 40% to 39.32%.
During the second quarter of 2014, a Fitzwilliam Insurance Limited (“Fitzwilliam”) segregated cell, of which Kenmare owned 60% and Trident owned 40%, entered into a 100% quota share reinsurance of Torus’ non-life run-off reserves with effect from January 1, 2014. On September 30, 2014, Kenmare and Trident transferred their interests in the Fitzwilliam cell to Bayshore, with Trident’s $18.1 million portion of the total capital contribution to Bayshore increasing its RNCI in Bayshore.
A reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI is as follows:
As at December 31, 2014 and 2013, the authorized share capital was 111,000,000 ordinary shares (“Voting Ordinary Shares”) and non-voting convertible ordinary shares (“Non-Voting Ordinary Shares”), each par value $1.00 per share, and 45,000,000 preference shares of par value $1.00 per share. Each Voting Ordinary Share entitles the holder thereof to one vote. In accordance with the Company’s bye-laws, however, any U.S. shareholder or direct foreign shareholder group whose shares constitute 9.5% or more of the voting power of the Voting Ordinary Shares would be entitled to less than one vote for each Voting Ordinary Share held by them.
Issued and fully paid Voting Ordinary Shares of par value $1.00 each:
At the Company’s annual general meeting on June 10, 2014, the Company’s shareholders approved the amendment to its bye-laws to create the Series E Non-Voting Ordinary Shares, an additional series of Non-Voting Ordinary Shares. Pursuant to the terms of the Non-Voting Preferred Shares, the Non-Voting Preferred Shares held by First Reserve converted on a share-for share basis into Series E Non-Voting Ordinary Shares immediately following the annual general meeting.
have all of the economic rights (including dividend rights) attaching to Voting Ordinary Shares but are non-voting except in certain limited circumstances;
The total unrecognized compensation cost related to the Company’s non-vested share awards under the 2006 Equity Incentive Plan (the “Equity Plan”) as at December 31, 2014, 2013 and 2012 was $4.6 million, $4.7 million and $7.6 million, respectively. This cost is expected to be recognized over the next 1.6 years, which is the weighted average contractual life of the awards. Compensation costs of $3.9 million, $2.9 million and $2.8 million relating to these share awards were recognized in the Company’s statement of earnings for the years ended December 31, 2014, 2013 and 2012, respectively.
For the years ended December 31, 2014, 2013 and 2012, 28,575, nil and 191 shares, respectively, were awarded to non-executive officer employees under the Equity Plan.
During the year ended December 31, 2014, the Company granted cash-settled stock appreciation right awards (“SARs”) under the Equity Plan. SARs give the holder the right, upon exercise, to receive in cash the difference between the market price per share of the Company’s ordinary shares at the time of exercise and the exercise price of the SARs. The exercise price of the SAR is equal to the market price of the Company’s ordinary shares on the date of the grant. Vested SARs are exercisable for periods not to exceed either 4 or 10 years from the date of grant.
The accrued expense relating to the Enstar Group Limited 2011-2015 Annual Incentive Compensation Program for the years ended December 31, 2014, 2013 and 2012 was $36.5 million, $32.1 million and $29.6 million, respectively.
For the years ended December 31, 2014, 2013 and 2012, 3,716, 3,566 and 3,029 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors (the “Deferred Compensation Plan”). The Company recorded expenses related to the restricted share units for the years ended December 31, 2014, 2013 and 2012 of $0.5 million, $0.5 million and $0.3 million, respectively.
The Company provides pension benefits to eligible employees through various plans sponsored by the Company. All pension plans, except for the noncontributory defined benefit pension plan acquired in the Providence Washington transaction in 2010 (the “PWAC Plan”), are structured as defined contribution plans.
Pension expense for the years ended December 31, 2014, 2013 and 2012 were $9.2 million, $6.0 million and $4.5 million, respectively. The increase for 2014 over the same periods in 2013 and 2012 was attributable to the increase in employee headcount (and associated additional defined contribution plan expense) as a result of the April 2014 acquisition of Torus and the November 2013 acquisition of Atrium.
The Company recorded pension expense relating to the PWAC Plan of $0.5 million, $0.7 million and $0.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. During 2014, an actuarial review was performed on the PWAC plan, which determined that the PWAC Plan’s unfunded liability, as at December 31, 2014, was $12.6 million as compared to $7.8 million as at December 31, 2013. As at December 31, 2014, PW Acquisition Company had an accrued liability of $12.6 million for the unfunded PWAC Plan liability.
As of December 31, 2014 and 2013, U.K. insurance subsidiaries and branch operations had tax loss carryforwards, which do not expire, and deductions available for tax purposes of approximately $284.2 million and $357.4 million, respectively. Certain of the Company’s U.K. insurance and reinsurance subsidiaries have tax loss carryforwards that arose prior to acquisition. Under U.K. tax law, these tax loss carryforwards are available to offset future taxable income generated by the acquired company without time limit.
Included in the balances at December 31, 2014, 2013 and 2012 were $nil, $1.5 million and $4.4 million, respectively, of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company also has separate accounts managed by Eagle Point Credit Management, which is an affiliate of entities owned by Trident, with respect to which the Company incurred approximately $0.1 million and $0.3 million in management fees for the year ended December 31, 2014 and 2013, respectively.
In addition, the Company has invested in two funds managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as director. The fair value of the Company’s investments in Sound Point Capital funds was $39.9 million as of December 31, 2014 (December 31, 2013: one fund with a fair value of $21.6 million). For the twelve months ended December 31, 2014 and 2013, the Company has recognized $0.8 million and $1.2 million, respectively, in net realized and unrealized gains in respect of Sound Point Capital investments.
Affiliates of Goldman Sachs own approximately 4.2% of the Company’s Voting Ordinary Shares and 100% of the Company’s Series C Non-Voting Ordinary Shares. Sumit Rajpal, a managing director of Goldman Sachs, was appointed to the Board of Directors in connection with Goldman Sachs’ investment in the Company. As of December 31, 2014, the Company had investments in two funds (carried within other investments) affiliated with entities owned by Goldman Sachs, which had a fair value of $36.3 million (December 31, 2013: one fund with a value of $3.2 million). During the twelve months ended December 31, 2014, the Company invested £12.5 million (approximately $20.7 million) in indirect non-voting interests of two companies affiliated with Hastings Insurance Group Limited. The investment had a fair value of $25.1 million as at December 31, 2014. The Company’s interests are held in accounts managed by affiliates of Goldman Sachs, with respect to which the Company incurred
approximately $0.3 million in management fees for the year ended December 31, 2014. Goldman Sachs affiliates have an approximately 50% interest in the Hastings companies, and Mr. Rajpal serves as a director of the entities in which the Company has invested. For the year ended December 31, 2014 and 2013, the Company recognized $7.0 million and $0.3 million, respectively, in net realized and unrealized gains in respect of the Goldman Sachs-affiliated investments.
As at December 31, 2014, the amount of consolidated retained earnings of the Company that was free of restrictions and therefore potentially available to be distributed to the Company’s ordinary shareholders was $1,395.2 million (2013: $1,181.5 million). This amount is held primarily within our insurance and reinsurance subsidiaries and represents retained earnings held in those companies in excess of their minimum regulatory requirements. Although these amounts are in excess of statutory minimums, regulators may nonetheless further restrict distributions, and therefore actual amounts available for distribution to shareholders are likely to be significantly less. In addition, the Company does not intend to pay dividends on its ordinary shares, as it intends instead to reinvest any distributions from its subsidiaries back into the Company, primarily as a means to fund future acquisitions.
The statutory capital and surplus amounts for the years ended December 31, 2014 and 2013 and statutory net income (loss) amounts for the years ended December 31, 2014, 2013 and 2012 for the Company’s insurance and reinsurance subsidiaries based in Bermuda, the United Kingdom, Australia, the United States and Europe were as follows:
The Company’s Bermuda-based insurance and reinsurance subsidiaries are registered under the Insurance Act 1978 of Bermuda and related regulations, as amended (the “Insurance Act”). The Insurance Act requires that the Company’s Bermuda-based insurance and reinsurance subsidiaries maintain certain solvency and liquidity standards. The minimum liquidity ratio requires that the value of relevant assets must not be less than 75% of the amount of relevant liabilities. The minimum solvency margin, which varies depending on the class of the insurer, is determined as a percentage of either net reserves for losses and loss adjustment expenses or premiums or pursuant to a risk-based capital measure. The Company’s Bermuda subsidiary, Torus Insurance (Bermuda) Limited (“TIBL”), is required to maintain a minimum statutory capital and surplus (its Enhanced Capital Requirement or “ECR”) equal to the greater of a minimum solvency margin and its Bermuda Solvency Capital Requirement (“BSCR”). TIBL’s BSCR is calculated based on a standard risk-based capital model developed by the Bermuda Monetary Authority. As at December 31, 2014, TIBL’s minimum solvency margin was greater than its BSCR.
Each of the Company’s regulated Bermuda insurance and reinsurance subsidiaries would be prohibited from declaring or paying any dividends if it were in breach of its minimum solvency margin (which is a function of outstanding losses) or liquidity ratio (which is a function of relevant assets) or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. In addition, each of the Company’s regulated Bermuda insurance and reinsurance subsidiaries is prohibited, without the prior approval of the Bermuda regulator, from reducing by 15% or more its total statutory capital as set out in its previous year’s statutory financial statements. The Company’s Bermuda insurance companies that are in run-off are required to seek regulatory approval for any dividends or distributions.
As of December 31, 2014 and 2013, each of the Company’s Bermuda-based insurance and reinsurance subsidiaries exceeded their respective minimum solvency and liquidity requirements. The Bermuda insurance and reinsurance subsidiaries in aggregate exceeded minimum solvency requirements by $1.19 billion as of December 31, 2014 (2013: $724.3 million) and exceeded minimum liquidity requirements by $928.5 million as of December 31, 2014 (2013: $459.1 million).
The Company’s U.K. based insurance subsidiaries are regulated by the U.K. Prudential Regulatory Authority (the “PRA”) and the Financial Conduct Authority (the “FCA”), which together replaced the Financial Services Authority effective April 1, 2013 (the PRA and FCA collectively, the “U.K. Regulator”).
The Company’s U.K.-based insurance subsidiaries are required to maintain adequate financial resources in accordance with the requirements of the U.K. Regulator. The calculation of the minimum capital resources requirements in any particular case depends on, among other things, the type and amount of insurance business written and claims paid by the insurance company. As at December 31, 2014 and 2013, all of the Company’s U.K. insurance subsidiaries maintained capital in excess of the minimum capital resources requirements (or received a waiver from the U.K. Regulator from the requirement to remedy any shortfall) and complied with the relevant U.K. Regulator requirements. The U.K.-based insurance subsidiaries, in aggregate, maintained capital in excess of the minimum capital resources requirements by $442.8 million and $509.6 million as of December 31, 2014 and 2013, respectively.
In addition, the U.K. Regulator’s Individual Capital Adequacy Standards framework (“ICAS framework”), requires insurance companies to carry out various capital modeling and risk management exercises in order to calculate a company-specific Individual Capital Assessment amount (“ICA amount”), which is the company’s internal calculation of its capital requirements under the ICAS framework. For companies in run-off, the U.K. Regulator typically requires specific loadings to be applied to a company’s ICA (as stipulated by the U.K. Regulator) in order to calculate a company’s Individual Capital Guidance (ICG), which represents the amount of capital a company is required to hold. This is intended to ensure a company holds sufficient capital such that there is no material risk that its liabilities cannot be met as they fall due. In 2009, the European Parliament approved the Solvency II framework directive. Solvency II is expected to take effect in January 2016 although our U.K. subsidiaries have been preparing for compliance in advance of that date. Solvency II will set out new, strengthened EU-wide requirements on capital adequacy and risk management for insurers with the aim of increasing policyholder protection, instilling greater risk awareness and improving the international competitiveness of EU insurers.
The U.K. Regulator’s rules require the Company’s U.K. insurance subsidiaries to obtain regulatory approval for any proposed or actual payment of a dividend. The U.K. Regulator uses the ICG and the estimated capital requirement for Solvency II purposes when assessing requests to make distributions and therefore dividends approved by the U.K. Regulator will often significantly differ from any surplus capital above the entity’s minimum capital resources requirements.
The underwriting capacity of a member of Lloyd’s must be supported by providing a deposit (referred to as “Funds at Lloyd’s”) in the form of cash, securities or letters of credit in an amount determined under the ICA. The amount of the Funds at Lloyd’s is assessed annually and is determined by Lloyd’s in accordance with the capital adequacy rules established by the U.K. Regulator. In order to achieve finality and to release their capital, Lloyd’s members are usually required to have transferred their liabilities through an approved RITC, such as offered by Syndicate 2008. RITC is generally put in place after the third year of operations of a syndicate year of account. On successful conclusion of RITC, any profit from the syndicate’s operations for that year of account can be remitted by the managing agent to the syndicate’s members.
The Company’s Australian insurance subsidiary is regulated and subject to prudential supervision by the Australian Prudential Regulation Authority (“APRA”). APRA is the primary regulatory body responsible for regulating compliance with the Insurance Act 1973. APRA’s prudential standards require that all insurers maintain and meet prescribed capital adequacy requirements to enable their insurance obligations to be met under a wide range of circumstances.
An insurer must obtain APRA’s written consent prior to making any capital releases, including any payment of dividends. The Company’s insurance subsidiary must provide APRA a valuation prepared by an appointed actuary that demonstrates that the tangible assets of the insurer, after the proposed capital reduction, are sufficient to cover its insurance liabilities to a 99.5% level of sufficiency of capital before APRA will consent to a capital release or dividend. As of December 31, 2014 and 2013, the Company’s Australian-based insurance subsidiary exceeded the required 99.5% level of sufficiency by $5.7 million and $33.3 million, respectively.
The U.S. subsidiaries are required to file annual statements with insurance regulatory authorities prepared on a statutory basis prescribed or permitted by such authorities. Statutory accounting principles differ from U.S. GAAP in the treatment of various items, including treatment of deferred acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes. For all of the Company’s U.S. insurance and reinsurance subsidiaries, with the exception of one subsidiary which has a permitted accounting practice to treat an adverse development cover reinsurance agreement as prospective reinsurance, there are no prescribed or
The Company’s Swiss insurance subsidiary, Harper Insurance Limited, is regulated by the Swiss Financial Market Supervisory Authority (“FINMA”) pursuant to the Insurance Supervisory Act 2004. This subsidiary is obligated to maintain a minimum solvency margin based on the Solvency I and Swiss Solvency Test regulations (“SST”) as stipulated by the Insurance Supervisory Act. As of December 31, 2014 and 2013, this subsidiary exceeded the Solvency I requirements by $119.2 million (2013: $118.1 million) and exceeded the SST requirements by $85.3 million (2013: $67.4 million). The amount of dividends that this subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings, the current year profit and legal reserves. Any dividend exceeding the current year profit requires FINMA’s approval. The solvency and capital requirements must continue to be met following any distribution.
The Company’s Liechtenstein insurance subsidiary (Torus Insurance (Europe) AG) is regulated by the Liechtenstein Financial Market Authority (“FMA”) pursuant to the Insurance Supervisory Act 1999. This subsidiary is obligated to maintain a minimum solvency margin based on the Solvency I regulations, as stipulated by the Insurance Supervisory Act. As of December 31, 2014, this subsidiary exceeded the Solvency I requirements by $20.0 million. The amount of dividends that this subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings, the current year profit and legal reserves. Any dividend exceeding the current year profit requires the FMA’s approval. The solvency and capital requirements must continue to be met following any distribution.
The Company’s life and annuities subsidiaries file financial statements with state insurance regulatory authorities and the NAIC in the United States and the Office of Superintendent of Financial Institutions (“OSFI”) in Canada (as a result of one of the Company’s subsidiaries having a Canadian branch operation). Such statements are prepared in accordance with Statutory Accounting Principles (“SAP”) prescribed or permitted by such authorities which may vary materially from U.S. GAAP. SAP includes the Accounting Practices and Procedures Manual of the NAIC as well as other laws, regulations and administrative rules promulgated by the state insurance departments. SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with U.S. GAAP are that
The Company’s life and annuity companies are subject to certain Risk-Based Capital (“RBC”) requirements as specified by the NAIC and OSFI. RBC is used to evaluate the adequacy of capital and surplus maintained by the Company’s life and annuities companies in relation to risks associated with: (i) asset risk; (ii) insurance risk; (iii) interest rate risk and (iv) business risk.
In addition, this subsidiary files audited regulatory returns with the Central Bank of Ireland. The returns are prepared in accordance with the European Communities (Life Assurance) Framework Regulations, 1994. The Company has exceeded the minimum required solvency margin as at December 31, 2014 and 2013 by $13.3 million and $11.0 million, respectively. The subsidiary cannot make any distributions without the prior approval of the Central Bank of Ireland, and any such payments must be paid within six months of the most recent actuarial investigation, the purpose of which is to ensure that the subsidiary’s insurance policyholders are not negatively affected.
Rent expense for the years ended December 31, 2014, 2013 and 2012 was $10.2 million, $5.5 million and $3.9 million, respectively.
As at December 31, 2014 and 2013, the Company had, in total, parental guarantees supporting a subsidiary’s insurance obligations in the amount of $238.6 million and $228.5 million, respectively.
Atrium and Torus are reported as separate segments because they are managed and operated in separate and distinct manners. Atrium’s senior management runs its day-to-day operations with limited involvement of the Company’s senior management, whereas the Company’s senior management and employees are involved in Torus’ day-to-day operations. Atrium employees are not involved in the management or strategy of Torus, nor are Torus employees involved in the management or strategy of Atrium. Atrium and Torus are monitored and reported upon separately and distinctly and their strategies and business plans are determined independently of each other.
Invested assets are managed on a subsidiary by subsidiary basis, and investment income and realized and unrealized gains on investments are recognized in each segment as earned.
(2) The difference in the amount of other investments shown at fair value and the other investments shown in the Company’s consolidated balance sheet relates to the fair value of $303.9 million as of December 31, 2014 for its other investments in funds or companies owned by or affiliated with certain related parties. Refer to Note 18 of the notes to the consolidated financial statements.
As at and for the years ended December 31, 2014, 2013 and 2012