We currently lease office space in Pembroke, Bermuda, where the Company, BCRH, Montpelier Re, Blue Water Re, Blue Capital Re, Blue Capital ILS, BCML and BCIML are located. We also lease office space in London, U.K. where MAL, MCL and MUSL are located; in Woburn, MA and Chicago, IL where MUI is located; and in Woburn, MA and Hanover, NH where MTR is located.
Selected consolidated statement of operations data, ending consolidated balance sheet data and share data for each of the five years ended December 31, 2013, follows:
(a) During 2013 we experienced $49.2 million in net realized and unrealized investment losses. During 2009 we experienced $181.8 million in net realized and unrealized investment gains. The magnitude of the net losses and gain we experienced in 2013 and 2009, respectively, versus those experienced in all other years presented, significantly impacted our revenues in those years.
(f) During 2013 we repurchased 6,590,546 Common Shares for $168.0 million. During 2012 we repurchased 5,981,589 Common Shares for $120.9 million. During 2011 we repurchased 4,349,302 Common Shares for $82.7 million. During 2010 we repurchased 16,123,261 Common Shares for $293.8 million. During 2009 we repurchased 6,599,038 Common Shares for $112.6 million.
(g) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in
We ended 2013 with a fully converted book value per Common Share (“FCBVPCS”) of $29.42, an increase of 14.3% for the year after taking into account dividends declared on Common Shares during the period. The increase in our FCBVPCS during 2013 was primarily the result of strong underwriting results. Our comprehensive income available to the Company for 2013 was $205.4 million and our GAAP combined ratio was 56.1%.
During 2011 we also recognized an $11.1 million non-recurring gain from the MUSIC Sale.
(1) Computed as the change in FCBVPCS after taking into account dividends declared on Common Shares of $0.47, $0.43 and $0.405 during 2013, 2012 and 2011, respectively.
The Company’s increase in FCBVPCS serves as the performance measure for both the portion of our annual employee cash bonuses that are based on Company performance and for our Variable RSU awards in the initial RSU Period (each as defined on page 81 of this report). We believe that this performance measure: (i) directly aligns our interests and motivations with those of our stakeholders; and (ii) provides our employees with the ability to easily understand, and identify with, their incentive hurdle, and allows our stakeholders to easily track the Company’s performance with respect to this goal, since we present our calculations of FCBVPCS and the increase in our FCBVPCS in our quarterly earnings releases and our annual and quarterly filings with the SEC.
During 2013 each of our ongoing operating segments, Montpelier Bermuda, Montpelier at Lloyd’s and Collateralized Reinsurance, experienced strong profitability producing combined ratios of 25%, 91% and 34%, respectively. Overall, we achieved a 14.3% increase in our FCBVPCS for the year while returning $192.0 million to holders of our Common Shares through share repurchases and dividends.
We are pleased with our achievements in 2013. However, looking ahead to 2014, we experienced increased competition during the key January 1, 2014 renewal season, particularly within our Property Catastrophe-Treaty and Property Specialty-Treaty classes, due to relatively light industry catastrophe losses experienced in 2013. Our internal renewal price index for the month was minus 7%, split as follows: Property Catastrophe-Treaty and Property Specialty-Treaty (minus 11%), Other Specialty-Treaty (minus 4%) and Property and Specialty Individual Risk (minus 1%).
We insure and reinsure exposures throughout the world against various natural catastrophe perils. We manage our exposure to these perils using a combination of methods, including underwriting judgment, CATM® (our proprietary risk management system), third-party models and third-party protection such as ceded reinsurance and derivative instrument protections.
Our multi-tiered risk management approach focuses on tracking exposed contract limits, estimating the potential impact of a single natural catastrophe event and simulating our yearly net operating result to reflect an aggregation of modeled underwriting, investment and other risks. The Board regularly reviews the outputs from this process, and we routinely seek to refine and improve our risk management process.
Our January 1, 2014 net reinsurance treaty limits by zone were as follows:
(1) For purposes of this presentation, “Mid-Atlantic” includes Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland, Delaware, Pennsylvania, New Jersey and the District of Columbia; “Northeast” includes New York, Connecticut, Rhode Island, Massachusetts, New Hampshire, Vermont and Maine; “Gulf” includes Texas, Louisiana, Mississippi and Alabama; “New Madrid” includes Missouri, Tennessee, Arkansas, Illinois, Kentucky, Indiana, Ohio and Michigan; “Northwest” includes Washington and Oregon; “Western European” includes France, Belgium, Netherlands, Luxembourg, Germany, Switzerland and Austria; and “Scandinavia” includes Denmark, Norway and Sweden.
The treaty limits presented are shown net of any ceded reinsurance or other third-party protection we purchase but have not been reduced by any reinstatement premiums. The treaty limits include all business coded as property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance, workers compensation catastrophe reinsurance and event-linked derivative securities. The treaty limits also include those exposures we have assumed through our investments in BCRH and the BCGR Listed Fund, but exclude those exposures attributable to non-controlling interests. The treaty limits do not include individual risk business and other reinsurance classes.
Since we utilize a combination of third-party models, CATM® and underwriting judgement to project the net impact from single event losses, our internal projections may be higher or lower than those presented in the table below.
Our single event loss estimates represent snapshots as of January 1, 2014. The composition of our in-force portfolio may change materially at any time due to the acceptance of new policies, the expiration of existing policies, and changes in our ceded reinsurance and derivative protections.
Our consolidated financial results for the years ended December 31, 2013, 2012 and 2011 follow:
We currently operate through four reportable segments: Montpelier Bermuda, Montpelier at Lloyd’s, Collateralized Reinsurance and MUSIC Run-Off. Each of our segments represents a separate underwriting platform through which we write, or formerly wrote, insurance and reinsurance business. Our segment disclosures provided herein present the operations of Montpelier Bermuda, Montpelier at Lloyd’s, Collateralized Reinsurance and MUSIC Run-Off prior to the effects of inter-segment quota share reinsurance agreements among them.
Underwriting results for Montpelier Bermuda for the years ended December 31, 2013, 2012 and 2011 were as follows:
The following table summarizes Montpelier Bermuda’s premium writings, by line of business, for the years ended December 31, 2013, 2012 and 2011:
Net premiums written and earned by Montpelier Bermuda in 2013, 2012 and 2011 included increases due to reinstatements of $4.6 million, $10.5 million and $21.0 million, respectively. The increases in reinstatement premiums recognized in 2012 and 2011, as compared to those recognized in 2013, were mainly attributable to 2012 windstorm Sandy and the 2011 Japan and New Zealand earthquakes. The level of reinstatement premiums that Montpelier Bermuda may realize in future periods will be dependent upon the occurrence of future losses.
The amount and type of reinsurance that Montpelier Bermuda purchases is dependent on a variety of factors, including the cost of a particular reinsurance cover and the nature of its gross exposures assumed during a particular period. Various other factors will also continue to affect Montpelier Bermuda’s appetite and capacity to write and retain risk. These include the impact of changes in frequency and severity assumptions used in our models and the corresponding pricing required to meet our return targets, evolving industry-wide capital requirements, increased competition, market conditions and other considerations.
The following table presents Montpelier Bermuda’s net loss and LAE ratios for the years ended December 31, 2013, 2012 and 2011:
During 2012 Montpelier Bermuda incurred $205.4 million in current year net losses and LAE. There were no individually significant known loss events impacting Montpelier Bermuda during 2012, other than an $85.0 million net catastrophe loss associated with windstorm Sandy.
· $37.4 million in net losses associated with U.S. catastrophe-exposed aggregate covers,
During 2013 Montpelier Bermuda experienced $106.7 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:
· the settlement of several claims which occurred in 2007, 2010 and 2011 within the Property and Specialty Individual Risk line of business ($7.2 million decrease),
Additionally, claims reported to Montpelier Bermuda during 2013 indicated that IBNR for natural catastrophe and individual risk losses initially recorded during 2012 (other than those included in the foregoing) exceeded the extent of losses that actually occurred. Consequently Montpelier Bermuda decreased its loss and LAE reserves by a further $28.4 million and $4.1 million, respectively, for these classes of business.
· 2008 fire loss that settled below our attachment point ($2.6 million decrease),
Montpelier Bermuda’s prior year losses and LAE incurred also includes foreign currency transaction gains (losses) relating to its prior year loss and LAE reserves of $3.8 million, $(1.3) million and $(3.0) million during 2013, 2012 and 2011, respectively. Since these foreign currency transaction gains (losses) are reported as decreases (increases) in Montpelier Bermuda’s losses and LAE incurred, they have a direct impact on its underwriting results and its underwriting ratios.
The decreases in Montpelier Bermuda’s acquisition cost ratio from 2011 to 2013 were primarily the result of the increases in its ceding and profit commissions earned on ceded reinsurance during such period, as described above.
The following table summarizes Montpelier Bermuda’s general and administrative expenses during the years ended December 31, 2013, 2012 and 2011:
Montpelier Bermuda’s operating expenses incurred during 2013 decreased, versus those incurred during 2012, primarily as a result of the re-allocation of certain risk management expenses from Montpelier Bermuda to Corporate and Other. This re-allocation was made in response to an increase in the Company’s group-wide risk management activities, including Solvency II and related initiatives. Montpelier Bermuda’s operating expenses incurred during 2012 decreased, versus those incurred during 2011, primarily as a result of reductions in software depreciation and Bermuda payroll tax expenses.
The decrease in Montpelier Bermuda’s incentive compensation expenses during 2013, versus those of 2012, was primarily the result of its 2013 accruals being provided at a lower projected payout level than that of the prior year. The increase in Montpelier Bermuda’s incentive compensation expenses during 2012, versus those of 2011, was the result of a significant improvement in the Company’s performance during 2012.
The following table summarizes Montpelier at Lloyds’ premium writings, by line of business, for the years ended December 31, 2013, 2012 and 2011:
Gross premiums written by Montpelier at Lloyd’s during 2012 totaled $246.0 million, an increase of $12.5 million, or 5%, as compared to 2011. This increase was mainly driven by additional marine writings and increased premium on marine renewal business, each within the Property and Specialty Individual Risk line of business. Offsetting this increase was a decrease in gross Property Catastrophe - Treaty premiums written due to: (i) a re-allocation of Property Catastrophe writings from the Montpelier at Lloyd’s segment to the Montpelier Bermuda segment; and (ii) a reduction in reinstatement premiums written during 2012, versus those written during 2011.
Net premiums written and earned by Montpelier at Lloyd’s in 2013, 2012 and 2011 included net increases (reductions) due to reinstatements of $(3.4) million, $2.6 million and $6.5 million, respectively. The negative reinstatement premiums recognized during 2013 resulted from an increase in reinsurance recoveries associated with the 2012 Costa Concordia accident (which resulted in ceded reinstatement premiums). The 2012 and 2011 reinstatement premiums were mainly attributable to 2012 windstorm Sandy and the 2011 Japan and New Zealand earthquakes. The level of reinstatement premiums that Montpelier at Lloyd’s may realize in future periods will be dependent upon the occurrence of future losses.
All of Montpelier at Lloyds’ reinsurance purchases to date have represented prospective cover; that is, reinsurance has been purchased to protect Montpelier at Lloyd’s against the risk of future losses as opposed to covering losses that have already occurred but have not been paid. Montpelier at Lloyd’s purchases: (i) excess-of-loss reinsurance covering one or more lines of its business; and (ii) quota share reinsurance with respect to specific lines of its business.
We estimated Montpelier at Lloyds’ loss and LAE reserves using the methodology outlined in our “Summary of Critical Accounting Policies and Estimates” contained in Item 7 herein. We did not make any significant changes in the assumptions or methodology used in Montpelier at Lloyds’ reserving process during the year ended December 31, 2013.
During 2012 Montpelier at Lloyd’s incurred $148.6 million of current year net losses and LAE. There were no individually significant known loss events impacting Montpelier at Lloyd’s during 2012, other than a $17.8 million net catastrophe loss associated with windstorm Sandy.
During 2011 Montpelier at Lloyd’s incurred $234.5 million of current year net losses and LAE. The individually significant known loss events impacting Montpelier at Lloyds during 2011 included: (i) $45.0 million of net losses from the Japan and New Zealand earthquakes; and (ii) $29.7 million in net losses from flooding in Thailand.
Most of the remaining current year loss and LAE incurred during 2013, 2012 and 2011 related to claims and events that had been incurred during those years but had not yet been reported to us.
During 2013 Montpelier at Lloyd’s experienced $39.1 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:
In addition to the loss reserve movements referred to above, Montpelier at Lloyds’ prior year loss development also related to movements associated with reserves established in prior years in order to provide for claims and events that had been incurred in that year but had not yet been reported to us. These reserves were originally recorded by Montpelier at Lloyd’s largely on the basis of historical loss rates, industry data and actuarial judgment and experience as opposed to information received from cedants, brokers and other customers. As prior underwriting years have matured, Montpelier at Lloyd’s has increased its reliance on the loss data it has received and, as a result, has adjusted its estimates of ultimate losses accordingly.
Impact of Foreign Currency Transaction Gains and Losses on Prior Year Loss and LAE Reserves
Impact of Foreign Currency Translation Gains and Losses on Loss and LAE Reserves
Montpelier at Lloyds’ loss and LAE reserves include foreign currency translation gains (losses) of $(6.1) million, $(12.0) million and $2.0 million during 2013, 2012 and 2011, respectively. Since these foreign currency translation gains (losses) are reported as decreases (increases) in Montpelier at Lloyds’ net change in foreign currency translation, which is a component of its comprehensive income or loss, they have no impact on its underwriting results or its underwriting ratios.
The following table summarizes Montpelier at Lloyds’ underwriting expenses for the years ended December 31, 2013, 2012 and 2011:
Incentive compensation expenses recorded at Montpelier at Lloyd’s consist of two independent components. The first component represents amounts that are not, or are no longer, dependent on Company performance and consist of: (i) Fixed RSUs and Variable RSUs granted in prior years that have been effectively converted to Fixed RSUs because the performance goal has been formally achieved at a level that permits payout; and (ii) the portion of annual employee cash bonuses that is based on individual employee performance goals. The second component represents amounts that are entirely dependent on Company performance and consist of: (i) Variable RSUs in the Initial RSU Period; and (ii) the portion of annual employee cash bonuses that is based on Company performance.
Underwriting results for the Collateralized Reinsurance segment, which we launched in 2012, were as follows for the years ended December 31, 2013 and 2012:
Net premiums earned at the Collateralized Reinsurance segment during the years ended December 31, 2013 and 2012 were $26.2 million and $2.4 million, respectively. Premiums earned are primarily a function of the amount and timing of net premiums previously written.
Underwriting results for the MUSIC Run-Off segment for the years ended December 31, 2013, 2012 and 2011 were as follows:
All premiums written and assumed within the MUSIC Run-Off segment relate to the Property and Specialty Individual Risk line of business.
The MUSIC Run-Off segment has not ceded any reinsurance premiums subsequent to the MUSIC Sale. During 2011, MUSIC purchased excess-of-loss reinsurance covering MUSIC’s property and casualty exposures, and also ceded premiums to Montpelier at Lloyd’s as part of an inter-segment excess-of-loss reinsurance agreement. See “Corporate and Other” under this Item 7.
Net premiums earned by the MUSIC Run-Off segment in 2013, 2012 and 2011 were $0.5 million, $27.3 million, and $50.2 million, respectively. Net premiums earned are primarily a function of the amount and timing of net premiums previously written.
(1) The MUSIC Run-Off segment’s ending loss and LAE reserves during the years presented represent MUSIC’s losses and LAE that were assumed by Montpelier Re under the MUSIC Quota Share. These loss and LAE reserves have historically been, and will continue to be, reported within the MUSIC segment as opposed to the Montpelier Bermuda segment.
The following table presents MUSIC Run-Off’s net loss and LAE ratios for the years ended December 31, 2013, 2012 and 2011:
Current year net losses incurred during the years presented primarily represented IBNR as there were no individually significant loss events experienced within the MUSIC Run-Off segment during those periods. Current year losses incurred by MUSIC during 2011 further reflected $3.5 million of net losses resulting from U.S. storms occurring in 2011.
The significant increase in the MUSIC Run-Off segment’s acquisition cost ratio for 2012, versus that for 2011, was due to the ceding commission (the “MUSIC Ceding Commission”) associated with the business that we assumed from Selective in connection with the MUSIC Sale. The MUSIC Ceding Commission was designed to reimburse Selective for its general and administrative costs incurred in support of the business it cedes to us. As a result, the MUSIC Run-Off segment did not incur any general and administrative expenses in 2013 or 2012 and is not expected to incur any such costs in future periods.
The Corporate and Other results for the years ended December 31, 2013, 2012 and 2011 were as follows:
Operating expenses recorded within Corporate and Other include salaries and benefits, information technology costs, director fees, legal and consulting expenses, corporate insurance premiums, audit fees and fees associated with being a publicly traded company.
Operating expenses incurred during 2013 increased over those of the 2012 primarily as a result of the re-allocation of certain risk management expenses from Montpelier Bermuda to Corporate and Other. This re-allocation was made in response to an increase in the Company’s group-wide risk management activities, including Solvency II and related initiatives. Operating expenses incurred during 2012 decreased, versus those of 2011, primarily as a result of reductions in software depreciation.
(1) Our weighted average investment portfolio and investment return calculations, as adjusted, exclude the cash, cash equivalents and short-term investments that relate to our Collateralized Reinsurance segment, which totaled $394.9 million and $72.5 million at December 31, 2013 and 2012, respectively. These assets generate virtually no investment income and the return on these invested assets is represented within the underwriting results of our Collateralized Reinsurance segment.
The amount of investment income we earned in 2013 was consistent with that of 2012, when considering the weighted average value of the investment portfolio during such periods. Despite a higher average investment portfolio balance in 2012, our investment income declined from 2011 to 2012, due mainly to continual declines in market interest rates experienced during that period.
During 2013 we recognized $60.6 million in net realized and unrealized losses from our fixed maturity portfolio, $7.2 million in net realized and unrealized gains from our equity portfolio and $4.2 million in net realized and unrealized gains from our other investments. The fixed maturity net losses we experienced during 2013 were largely the result of an abrupt increase in market interest rates at mid-year. The equity portfolio net gains we experienced during 2013 followed a trend consistent with that of the U.S. equity market, as measured by the S&P 500, when considering that the majority of our equity securities were purchased mid-year. The other investment net gains we experienced during 2013 related primarily to the overall performance of the various limited partnership investments we own.
During 2013, 2012 and 2011, we experienced net foreign currency transaction gains (losses) on cash and investments (those in connection with our investing activities) of $(4.3) million, $2.3 million and $(3.5) million, respectively. These foreign currency transaction gains and losses represent foreign currency fluctuations in the value of our non-U.S. dollar managed cash and investments.
Our investments classified as Level 3 (as defined in GAAP) as of December 31, 2013 and 2012 consisted primarily of the following: (i) with respect to certain fixed maturity investments, bank loans and certain asset-backed securities, many of which are not actively traded; and (ii) with respect to other investments, certain limited partnerships and private investment funds. Our Level 3 investments measured at fair value represented 1.1% ($28.6 million), 4.5% ($124.3 million) and 3.3% ($83.7 million) of our total invested assets measured at fair value as of December 31, 2013, 2012 and 2011, respectively. During 2013 we transferred most of our bank loans from Level 3 to Level 2, reflecting a gradual shift toward holdings that are more broadly syndicated than had previously been the case. We also increased our reliance on pricing services that base their valuations of bank loans on actual transactions, as opposed to non-binding broker quotes.
The net foreign currency transaction losses we experienced during the years presented associated with our other activities was primarily due to a strengthening (weakening) of the U.S. dollar against the British pound, the European Union euro, the Japanese yen and the New Zealand dollar, during such periods.
The following table presents our consolidated net income (loss) from derivative instruments during the years ended December 31, 2013, 2012 and 2011:
The following table summarizes our consolidated other revenues for the years ended December 31, 2013, 2012 and 2011:
Our other revenues are comprised of: (i) amounts recorded in connection with the sale of PUAL; (ii) revenues derived from services provided to third parties consisting of third-party commissions formerly earned by PUAL, transitional services provided to Selective in connection with the MUSIC Sale and advisory fees and royalties earned from providing catastrophe modeling services and technology to third parties; (iii) recognition of the proceeds from the Loss Development Cover; and (iv) interest on funds advanced to ceding companies to cover losses in accordance with contract terms.
We issued the 2022 Senior Notes on October 5, 2012, and the majority of the net proceeds were used to redeem the 2013 Senior Notes on November 5, 2012. The annual interest expense in respect of the 2022 Senior Notes is consistent with that in respect of the 2013 Senior Notes.
In connection with the IPO, we: (i) reimbursed BCRH for the underwriting discount it incurred, which was equal to 5% of the gross proceeds it received from third parties ($6.2 million); and (ii) paid a structuring fee to a third-party equal to 1% of the gross proceeds BCRH received from third parties ($1.3 million).
During 2013 we recorded a net tax benefit of $0.1 million, consisting of a current tax benefit of $0.3 million and a deferred tax provision of $0.2 million. During 2012 we recorded a net tax provision of $0.3 million, consisting of a current tax provision of $0.8 million and a deferred tax benefit of $0.5 million. During 2011 we recorded a deferred tax benefit of $0.6 million.
The movements in our income tax provisions during the years presented herein were associated primarily with our U.K. operations. The pretax income associated with each of our U.K. entities is generally taxable unless: (i) that entity has prior year net operating losses that may be utilized to fully or partially offset its current income tax liability; or (ii) another entity within our U.K. group of companies experiences a current year pretax loss which is eligible to be used to fully or partially offset any other entity’s current income tax liability (“Group Relief”).
During 2013 and 2011, we were able to utilize cumulative net operating losses and Group Relief to either partially or fully offset our current income liabilities for those years. During 2012 each of the entities within our U.K. group generated pretax income so we were unable to utilize Group Relief to offset our current income tax liabilities for that year.
The Company has no operations of its own and relies on dividends and distributions from its subsidiaries to pay its operating expenses, interest on debt, dividends to holders of Preferred Shares and Common Shares and to fund any Common Share repurchase activities. There are restrictions on the payment of dividends to the Company from its regulated operating and holding companies. See Note 13 of the Notes to Consolidated Financial Statements. We currently pay a regular dividend of $0.125 per Common Share per quarter and our Preferred Shares have a stated dividend rate of 8.875% per year. Any future determination to pay dividends to holders of Common Shares and Preferred Shares will, however, be at the discretion of the Board and will be dependent upon many factors, including our results of operations, cash flows, financial position, capital requirements, general business opportunities, and legal, tax, regulatory and contractual restrictions.
As a provider of short-tail insurance and reinsurance, mainly from natural and man-made catastrophes, we could be required to pay significant losses on short notice. As a result, we have structured our fixed maturity investment portfolio with high-quality securities with a short average duration in order to reduce our sensitivity to interest rate fluctuations and to provide adequate liquidity for the settlement of our expected liabilities. As of December 31, 2013, our fixed maturities had an average credit quality of “AA-” (Very Strong) from Standard & Poor’s and an average duration of 2.2 years (inclusive of our fixed maturity derivative and short positions). If our calculations with respect to the timing of the payment of our liabilities are incorrect, or if we improperly structure our investment portfolios, we could be forced to liquidate our investments at inopportune times, potentially at a significant loss.
We do not currently have a revolving credit facility because we anticipate that our current cash and cash equivalent balances, our capacity to raise additional cash through sales and maturities of investments and our projected future cash flows from operations will be sufficient to cover our cash obligations under most loss scenarios through the foreseeable future.
Our total capital increased by $12.7 million during 2013 as a result of our recording comprehensive income available to the Company of $205.4 million, recognizing $12.6 million of additional paid-in capital through the amortization and issuance of share-based compensation, declaring $37.3 million in dividends to holders of Common Shares and Preferred Shares and repurchasing $168.0 million of Common Shares.
We may need to raise additional capital in the future, through the issuance of debt, equity or hybrid securities, in order to, among other things, write new business, incur and/or pay significant losses, respond to, or comply with, changes in the capital requirements that rating agencies or various regulatory bodies use to evaluate us, acquire new businesses, invest in existing businesses or refinance our existing obligations.
In the normal course of our business, we maintain letter of credit facilities and trust arrangements as a means of providing collateral and/or statutory credit to certain of our constituents. These facilities and arrangements are secured by collateral accounts and trusts containing cash, cash equivalents and investment securities.
Below is a schedule of our material contractual obligations and commitments as of December 31, 2013:
Our unfunded commitments to invest $4.9 million into two separate private investment funds are assumed to be fully funded during 2014.
Our holding company and insurance and reinsurance operations are subject to regulation and capital requirements established by supervisors in multiple jurisdictions. See Note 13 of the Notes to Consolidated Financial Statements for detailed information concerning our regulatory and capital requirements.
Our Foreign Exchange Contracts, Credit Derivatives, Interest Rate Contracts, Investment Options and Futures and the Loss Development Cover each constitute off-balance sheet arrangements. Excluding these specific transactions, as of December 31, 2013, we were not subject to any off-balance sheet arrangement that we believe is material to our investors.
We experienced a net increase (decrease) in our cash and cash equivalents of $218.4 million, $(9.5) million and $108.0 million during 2013, 2012 and 2011, respectively.
We generated $120.2 million, $200.8 million and $166.8 million of net cash from our operations, respectively, which resulted primarily from our premiums received, net of acquisition costs, exceeding our net losses and operating expenses paid.
Our financing activities provided (used) net cash and cash equivalents of $29.9 million, $(86.8) million and $26.7 million during 2013, 2012 and 2011, respectively. Our financing cash flows are largely dependent on our Common Share repurchase activities from year-to-year. In addition, our financing cash flows in 2013 and 2011 benefitted from the receipt of third-party investments in non-controlling interests and from the proceeds from the issuance of the Preferred Shares, respectively.
Our cash flows provided from investing activities totaled $70.0 million, resulting from the following:
· we received $21.9 million from net sales of equity securities and other investments,
· we had a $63.4 million increase in our restricted cash,
· we received $0.7 million in settlements of investment-related derivative instruments,
· we paid $228.0 million to extinguish the 2013 Senior Notes,
· we received $299.1 million from the issuance of the 2022 Senior Notes,
· we paid $37.7 million in dividends to holders of Common Shares and Preferred Shares.
We have no current intention, or need, to repatriate any cash or cash equivalents from our U.K., U.S. or Swiss operations to Bermuda in order to satisfy our parent company obligations. Additionally, our current structure is such that any distributions of earnings, in the form of cash or otherwise, from our subsidiaries outside of Bermuda would not currently subject us to a material amount of incremental taxation.
Estimating loss and LAE reserves requires us to make assumptions regarding reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in legal environments, inflation, loss amplification, foreign exchange movements and other factors. These estimates and judgments are based on numerous considerations and are often revised as: (i) we receive changes in loss amounts reported by ceding companies and brokers; (ii) we obtain additional information, experience or other data; (iii) new or improved methodologies are developed; or (iv) laws change.
Our loss and LAE reserves relating to short-tail property risks are typically reported to us and settled more promptly than those relating to our long-tail risks. However, the timeliness of loss reporting can be affected by such factors as the nature of the event causing the loss, the location of the loss, whether the loss is from policies in force with primary insurers or with reinsurers and where our exposure falls within the cedant’s overall reinsurance program. In the case of our reinsurance business, our reserving process is highly dependent on the loss information we receive from ceding companies and brokers.
To the extent we rely on industry data to aid us in our reserve estimates, there is a risk that the data may not match our risk profile or that the industry’s overall reserving practices differ from our own and those of our cedants. In addition, reserving can prove to be especially difficult should a significant loss take place near the end of a financial reporting period, particularly if the loss involves a catastrophic event. These factors further contribute to the degree of uncertainty in our reserving process.
Our internal actuaries review our reserving assumptions and our methodologies on a quarterly basis. Our third quarter and year-end loss estimates are subject to a corroborative review by independent actuaries using generally accepted actuarial principles. The Audit Committee reviews our quarterly and annual reserve analyses and meets with the independent actuaries no less than annually.
The following tables provide the details of our gross case reserves and IBNR, by line of business, at December 31, 2013 and 2012:
We have determined that our best estimates for our gross loss and LAE reserves at December 31, 2013 and 2012 were $881.6 million and $1,112.4 million, respectively. Of these estimates, at December 31, 2013 and 2012, $174.6 million and $171.2 million related to our direct insurance and facultative business, respectively, and $707.0 million and $941.2 million related to our reinsurance business, respectively.
For pro-rata contracts and certain excess-of-loss contracts in which a deposit or minimum premium is not specified in the contract, written premium is recognized evenly over the term of the reinsurance contract based on estimates of ultimate premiums provided by the ceding companies and brokers. When the actual premium is reported by the ceding company, typically on a quarterly or six month lag, it may be significantly higher or lower than the estimate.
Excess-of-loss contracts often include contract terms that require an automatic reinstatement of coverage in the event of a loss. The associated reinstatement premium is normally calculated on the basis of: (i) a fixed percentage (normally 100%) of the deposit or minimum premium; and (ii) the proportion of the original limit exhausted. In a year of large loss events (such as 2011), reinstatement premiums will be higher than in a year in which there are no such events (such as 2013). Reinstatement premiums are fully earned or expensed as applicable when a triggering loss event occurs and losses are recorded. We record reinstatement premiums on a basis consistent with our estimates of loss and LAE. During 2013, 2012 and 2011, we recorded written and earned reinstatement premiums totalling $1.5 million, $13.1 million and $27.5 million, respectively.
In the normal course of business, we purchase reinsurance from third parties in order to manage our exposures. The amount of ceded reinsurance that we buy varies from year to year depending on our risk appetite, as well as the availability and cost of the reinsurance coverage. Ceded reinsurance premiums are earned on a basis consistent with those used in accounting for the underlying premiums assumed, and are reported as a reduction of net premiums written.
Certain of our assumed pro-rata contracts incorporate reinsurance protection provided by third-party reinsurers that inures to our benefit. These reinsurance premiums are reported as a reduction in our gross premiums written and earned.
As of December 31, 2013, we had no ongoing material reinsurance contract disputes.
For 2012, the number of Variable RSUs actually awarded was also based on the increase in the Company’s FCBVPCS.
For 2011, the actual number of Variable RSUs awarded to employees was based on a targeted return on equity (“ROE”) assuming a standardized investment return. ROE is computed by dividing our adjusted comprehensive income or loss (based on the sum of our actual underwriting result and standard investment result) by our actual average common shareholders’ equity for the Initial RSU Period. Adjusted comprehensive income, for these purposes, is our actual comprehensive income or loss less dividends declared on our Preferred Shares, if any, less the actual investment return on our investments, investment-related derivatives and cash and cash equivalents, plus a standardized investment return on our investments, cash and cash equivalents.
For the 2012-2015 Variable RSU award cycle, the targeted performance metric was based on a 2012 increase in FCBVPCS of 9.88%, which would have generated a grant of approximately 530,000 Variable RSUs to participants. The payout range for that year was from a threshold of 2.88% (generating no RSUs) to a maximum of 16.88% (generating approximately 1,060,000 Variable RSUs). Throughout the Initial RSU Period for this cycle, our quarterly Variable RSU accrual for this cycle varied in response to actual year-to-date results achieved and ranged from as many as 1,068,556 RSUs (as recorded at September 30, 2012) to as few as 669,105 RSUs (as recorded at March 31, 2012). Because we determined our achieved increase in FCBVPCS for 2012 to be 17.0%, the preliminary number of Variable RSUs expected to be granted for the 2012-2015 Variable RSU award cycle was determined to be 1,058,304 at December 31, 2012. The final number of Variable RSUs granted for the 2012-2015 Variable RSU award cycle was formally determined to be 1,058,304 RSUs (or 200% of the in force target RSUs for that cycle at that time) by the Compensation Committee in February 2013.
For the years covered by this report, we assumed a zero to 8.8% forfeiture rate depending on the nature and term of individual awards and past and recent experience. Our forfeiture assumptions serve to reduce the unamortized grant date fair value of outstanding RSUs as well as the associated RSU expense. As RSUs are actually forfeited, the number of RSUs outstanding is reduced and the remaining unamortized grant date fair value is compared to assumed forfeiture levels. True-up adjustments are made as deemed necessary.
During 2013, 2012 and 2011, we recognized $18.0 million, $12.1 million and $7.5 million of RSU expense, respectively.
As of December 31, 2013, the unamortized grant date fair value of the 1,448,374 RSUs outstanding was $12.2 million. As of December 31, 2012, the unamortized grant date fair value of the 1,327,041 RSUs outstanding was $10.3 million.