Our offices are located at Boyle Building, 2nd Floor, 31 Queen Street, Hamilton, Bermuda HM11, and the telephone number is (441) 296-8560. The principal corporate offices of our U.S. subsidiaries are located at 100 Galleria Parkway, Suite 700, Atlanta, Georgia 30339, and the telephone number is (770) 916-1908.
(6) Net written premiums to equity: The net written premiums to equity is the ratio of net written premiums to the total shareholders’ equity.
The following information is presented on the basis of GAAP accepted in the United States of America and should be read in conjunction with “Business” and “Risk Factors,” and our consolidated financial statements and the related notes included elsewhere in this report. All amounts and percentages are rounded.
Net earned premiums totaled $253.9 in 2012 compared to $232.9 million in 2011, an increase of 9.0%. E&S totaled $138.5 million, a 16.2% increase from $119.2 million for the same period in 2011; ART decreased to $56.5 million, a 6.9% decrease over the 2011 period; Reinsurance totaled $58.9 million, an 11.2% increase from 2011. The increase in earned premium for the E&S division was due to increased production across all product lines but driven primarily by our primary casualty, excess and surety lines. The surety line includes premiums earned following the acquisition of the Bluestone business. The ART division’s decrease in net earned premiums was due primarily to the non-renewal of certain programs in addition to the de-emphasis of the specialty program business. The Reinsurance division’s increase in net earned premiums was due to continued increased writings in targeted classes of business during 2011 and 2012.
Net investment income decreased 3.6% to $30.2 million for the year ended December 31, 2012, compared to $31.3 million for 2011 due to lower yields on increased average invested assets. The continued low interest rate environment during 2012 impacted investment income as cash flow prepayments and portfolio maturities were reinvested at lower rates than the prevailing market yield of the portfolio. Average invested assets increased to $906.9 million as of December 31, 2012, from $850.8 million as of December 31, 2011. The average pre-tax investment yield was 3.8% for 2012 and 4.1% for 2011.
Net realized gains for the period ended December 31, 2012 were $9.7 million as compared to $11.0 million in 2011. The Company had sales of $115.3 million and $342.6 million in 2012 and 2011 of available for sale securities, resulting in generation of realized gains of $9.4 million and $11.0 million in 2012 and 2011, respectively. Included in the 2012 net realized gains are $0.3 million of holding gains from our trading securities.
Fee income earned was approximately $3.3 million for both 2011 and 2012, reflecting soft market conditions. Currently, fee income is generated from the healthcare industry.
Also during 2012, the Company’s loss ratio included property catastrophe losses of $11.4 million compared to $12.1 million in 2011. The 2012 losses included $5.9 million of losses from super storm Sandy.
Acquisition expenses are commissions paid to our producers, offset by ceding commissions we receive from our reinsurers. Acquisition expenses also include premium taxes paid to states in which we are admitted to conduct business. Acquisition expenses increased to $58.6 million for the year ended December 31, 2012, as compared to $52.1 million for the same period of 2011. The increase year over year is the result of growth in gross written premiums of $319.2 million for 2012 as compared to $298.5 million in 2011. As a percentage of net earned premiums acquisition costs were 23.1 % in 2012 and 22.5% in 2011, due primarily to changes in business mix.
Other underwriting expenses were $47.5 million for the year ended December 31, 2012, compared to $42.2 million for the same 2011 period due primarily to the addition of underwriting teams and the acquisition of Bluestone Surety.
Equity. Equity in the Bermuda operations was $205.0 million at the end of 2012 compared to $228.0 million at the end of 2011. The reduction was the result of dividends to the Company from our Bermuda operations in the amount of $33.8 million that were subsequently utilized to fund acquisitions and to increase the capital of the U.S. insurance companies. Equity of U.S. operations increased to $140.0 million at the end of 2012 from $106.7 million at December 31, 2011, due to net unrealized gains in the investment portfolio as well as investments made in the U.S. operations from the Bermuda Holding Company.
Net realized gains for the period ended December 31, 2011, were $11.0 million as compared to $2.3 million in 2010. The Company sold fixed maturity securities with proceeds of $342.6 million and $191.5 million generating realized gains of $11.0 million and $2.0 million in 2011 and 2010, respectively.
Corporate and other underwriting expenses were $44.9 million for the year ended December 31, 2011, compared to $45.4 million for the same 2010 period as lower salary and related costs were offset by higher technology costs.
After a review of the individual securities in the investment portfolio, the Company did not record net realized losses due to other-than-temporary-impairment. The analysis to determine other-than-temporary-impairment was completed on all securities with additional focus on securities with unrealized losses greater than 30% of book value and securities whose unrealized loss was greater than 20% of book value for more than three months.
Net cash provided by operations was $34.2 million for the year ended December 31, 2012, and $61.9 million for the year ended December 31, 2011. The decrease is attributable to increased paid losses, mostly in the E&S division. In 2012, paid losses were $139.0 million compared to $115.5 in 2011.
See Note 1(m), “Summary of Significant Accounting Polices,” to the Company’s consolidated financial statements included herein for a discussion on recent accounting pronouncements.
• adverse changes in the issuer’s availability of production resources, revenue sources, technological conditions; and
We determine the fair values of certain financial instruments based on the fair value hierarchy established in “Fair Value Measurements” (“ASC 820-10-15”). ASC 820-10-15 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumption about the assumptions that market participants would use in pricing an asset or liability.
Our Level 2 instruments include most of our fixed income securities, which consist of U.S. government agency securities, municipal bonds, certain corporate debt securities, and certain mortgage and asset-backed securities. We measure fair value of our Level 2 instruments using quoted prices of securities with similar characteristics.
Because the Company’s loss reserves are primarily comprised of long-tail business, current year ultimate losses are developed using mostly the expected loss ratio method. The method is appropriate because there are very few claims reported from the most recent accident year for long-tail lines of business. The expected loss ratio is determined based on the review of the projected ultimate loss ratios for similar risks from the prior years. At December 31, 2012, the carried loss and loss adjustment expense reserves for accident years prior to 2008 were determined largely based on the indications produced by the Bornhuetter-Ferguson method or loss development factor method because of the additional claims experience gained as the business line matures.
The carried gross loss reserves by division are as follows (in thousands of dollars):
The actuarial staff evaluates reserves for each of the following exclusive categories: (1) construction defect claims in California; (2) construction defect in all other states; (3) commercial and residential contractors claims other than construction defects; (4) claims in New York state; (5) claims from product liability exposures; (6) claims from habitational risks; and (7) claims from miscellaneous risks.
The following table displays the resulting range of possible deviation of the net carried reserves for each division at December 31, 2012 (dollars in thousands):
The following table depicts the effects on our financial position and results of operations of our ceded reinsurance activities (dollars in thousands):