Selected consolidated statement of operations data, ending balance sheet data and share data for each of the five years ended December 31, 2011, follows:
(g) 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. During 2008 we repurchased 7,799,019 Common Shares for $125.7 million. During 2007 we repurchased 4,719,344 Common Shares for $81.0 million and all outstanding warrants to acquire Common Shares for $47.7 million.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2011, 2010 and 2009 and our financial condition as of December 31, 2011 and 2010. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included within this filing.
We ended 2010 with a fully converted tangible book value per share of $24.53, an increase of 18.1% for the year after taking into account dividends declared on Common Shares. The increase in our fully converted tangible book value per share during 2010 resulted from good overall underwriting and investment results. Our comprehensive income for 2010 was $208.7 million and our GAAP combined ratio was 82.0%.
The following table presents our computations of book value per Common Share, fully converted book value per Common Share and fully converted tangible book value per Common Share as of December 31, 2011, 2010 and 2009:
(2) Computed as the change in fully converted tangible book value per Common Share after taking into account dividends declared on Common Shares of $0.405, $0.775 and $1.09 for the one, two and three year periods ended December 31, 2011, respectively.
Our computations of fully converted tangible book value per Common Share and the change in our fully converted tangible book value per Common Share are non-GAAP measures which we believe are important to our investors, analysts and other interested parties who benefit from having an objective and consistent basis for comparison with other companies within our industry.
Pricing in most insurance and reinsurance markets is cyclical in nature and the high level of catastrophe activity experienced during 2011 led to improved pricing conditions in the 2012 January renewal season. Our property catastrophe line of business achieved overall price increases of approximately 10%, including increases within our U.S. portfolio of approximately 15%.
(1) For purposes of this presentation, “Mid-Atlantic” includes Georgia, South Carolina, North Carolina, Virginia, Maryland, Delaware and New Jersey; “Northeast” includes New York, Connecticut, Rhode Island, Massachusetts, New Hampshire 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 outward reinsurance or other third-party protection we purchase but have not been reduced by any expected 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, but do not include individual risk business and other reinsurance classes.
For U.S. earthquake, the regional limits shown are for earthquake ground motion damage only, i.e., excluding limits for contracts that do not specifically cover earthquake damage but may provide coverage for fire following an earthquake event. Contracts which provide coverage for multiple regions are included in the totals for each potentially exposed zone, therefore the limits for a single multi-zone policy may be included within several different zone limits.
These treaty limits are a snapshot of our exposure as of January 1, 2012. As of that date, New Madrid earthquake represents our largest concentration of net reinsurance treaty limits among the selected zones. The relative comparison between zones and the absolute level of exposure may change materially at any time due to changes in the composition of our portfolio and changes in our outward reinsurance program.
For certain defined natural catastrophe region and peril combinations, we assess the probability and likely magnitude of losses using a combination of industry third-party vendor models, CATM and underwriting judgment. We attempt to model the projected net impact from a single event, taking into account contributions from property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance, workers compensation catastrophe reinsurance, event-linked derivative securities and individual risk business, offset by the net benefit of any reinsurance or derivative protections we purchase and the benefit of reinstatement premiums.
(1) A “100-year” return period can also be referred to as the 1.0% occurrence exceedance probability (“OEP”) meaning there is a 1.0% chance in any given year that this level will be exceeded. A “250-year” return period can also be referred to as the 0.4% OEP meaning there is a 0.4% chance in any given year that this level will be exceeded.
As of January 1, 2012, our three largest modeled exposures to a single event loss at a 250-year return period were U.S. Hurricane, U.S. Earthquake and European Windstorm.
Our single event loss estimates represent snapshots as of January 1, 2012. 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 outwards reinsurance and derivative protections.
In addition to monitoring treaty contract limits and single event accumulation potential, we attempt to simulate our annual operating result to reflect an aggregation of modeled underwriting, investment and other risks. This approach estimates a net operating result over simulated twelve month periods, including contributions from certain variables such as aggregate premiums, losses, expenses and investment results.
We currently operate through three reportable segments: Montpelier Bermuda, Montpelier Syndicate 5151 and MUSIC. Each operating segment represents a separate underwriting platform through which we write insurance and reinsurance business. The activities of the Company, certain of its intermediate holding and service companies and intercompany eliminations relating to inter-segment reinsurance and support services, collectively referred to as “Corporate and Other”, are also presented herein.
Gross premiums written by Montpelier Bermuda during 2010 were also largely unchanged from 2009, increasing by less than one percent. However, there was a sizable business shift that occurred during the year among its Property Specialty - Treaty line of business and its Other Specialty line of business due primarily to: (i) the non-renewal and subsequent renewal and reclassification of one large engineering contract from its Property Specialty - Treaty line of business to its Other Specialty - Treaty line of business; and (ii) an increase in space and aviation business written during the year (Other Specialty-Treaty).
Net premiums earned within Montpelier Bermuda in 2011, 2010 and 2009 were $378.0 million, $413.9 million and $426.0 million, respectively. Net premiums earned are a function of the amount and timing of net premiums written.
Montpelier Bermuda’s ending gross loss and LAE reserves at December 31, 2011 include $19.7 million of losses assumed from Montpelier Syndicate 5151 as a result of inter-segment excess-of-loss reinsurance arrangements. These reserves have been eliminated in our consolidated results. There were no inter-segment gross loss and LAE reserves as of December 31, 2010.
· 2010 earthquakes in Chile and New Zealand ($5.5 million decrease),
· 2007 European Windstorm Kyrill and U.K. floods ($2.2 million decrease).
The prior year loss and LAE development recorded by Montpelier Bermuda in 2011, 2010 and 2009 associated with natural catastrophes such as hurricanes, wildfires, floods and windstorms was the result of new information received from multiple cedants and information regarding the impact of such losses on the entire reinsurance market.
Acquisition costs include commissions, profit commissions, brokerage costs and excise taxes, when applicable. Profit commissions and brokerage costs can vary based on the nature of business produced.
Profit commissions, which are paid by assuming companies to ceding companies in the event of a favorable loss experience, change as Montpelier Bermuda’s estimates of loss and LAE fluctuate. Profit commissions incurred by Montpelier Bermuda during 2011 and 2010 were not significant. Acquisition costs incurred during 2009 incorporated a profit commission reversal of $3.8 million as a result of adjustments made to several large contracts. Relatively few of Montpelier Bermuda’s assumed reinsurance contracts contain profit commission clauses, and the terms of these profit commissions are specific to the individual contracts and vary as a percentage of the contract results.
The increase in Montpelier Bermuda’s operating expenses during 2011, as compared to 2010, was largely due to a one-time, $5.2 million benefit recognized during 2010 from the settlement of a reinsurance dispute with a third-party. Absent this settlement, operating expenses decreased slightly from 2010 to 2011, mainly as a result of a change in the allocation of our centrally managed information technology costs to Montpelier Bermuda.
The decrease in Montpelier Bermuda’s operating expenses during 2010, as compared to 2009, was due to both the reinsurance settlement referred to above and a decrease in our overall centrally managed information technology costs, as well as a change in the manner in which those costs were allocated Montpelier Bermuda. Overall, information technology costs borne by Montpelier Bermuda decreased by $10.5 million in 2010, as compared to 2009.
The decreases in incentive compensation expenses recorded at Montpelier Bermuda from 2009 to 2011 reflect reductions in our consolidated underwriting results over that period.
The following table summarizes Montpelier Syndicate 5151’s gross premiums, by line of business, for the years ended December 31, 2011, 2010 and 2009:
Gross premiums written by Montpelier Syndicate 5151 during 2011 were largely unchanged from 2010, increasing by less than one percent. However, there was a sizable business shift that occurred during the year among its Property Specialty - Treaty line of business and its Other Specialty - Treaty and Property and Specialty Individual Risk lines of business due primarily to: (i) non-renewals by MUI and transfers of certain lines of MUI business from Montpelier Syndicate 5151 to Montpelier Bermuda (Property Specialty - Treaty); (ii) growth in its financial products writings (Other Specialty - Treaty); and (iii) growth in its marine writings (Property and Specialty Individual Risk).
Reinsurance premiums ceded by Montpelier Syndicate 5151 in 2011, 2010 and 2009 were $29.5 million, $21.5 million and $16.4 million, respectively. Montpelier Syndicate 5151 purchases reinsurance in the normal course of its business in order to manage its exposures. The amount and type of reinsurance that Montpelier Syndicate 5151 purchases is dependent on a variety of factors, including the cost of a particular reinsurance cover and the nature of its gross premiums written during a particular period. Various other factors will also continue to affect Montpelier Syndicate 5151’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.
Net premiums earned within Montpelier Syndicate 5151 in 2011, 2010 and 2009 were $194.5 million, $175.0 million and $133.1 million, respectively. Net premiums earned are a function of the timing of net premiums written.
The following tables summarize Montpelier Syndicate 5151’s loss and LAE reserve activities for the years ended December 31, 2011, 2010 and 2009:
We estimated Montpelier Syndicate 5151’s loss and LAE reserves using the methodology outlined in our “Summary of Critical Accounting Estimates” contained in Item 7 herein. We did not make any significant changes in the assumptions or methodology used in Montpelier Syndicate 5151’s reserving process during the year ended December 31, 2011.
The following table presents Montpelier Syndicate 5151’s net loss and LAE ratios for the years ended December 31, 2011, 2010 and 2009:
During 2011 Montpelier Syndicate 5151 incurred $234.5 million of current year net loss and LAE. The individually significant loss events contributing to Montpelier Syndicate 5151’s 2011 current year loss and LAE 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 2011 current year loss and LAE related to claims and events that had been incurred in that year but had not yet been reported to us.
During 2010 Montpelier Syndicate 5151 incurred $141.0 million of current year net loss and LAE. The individually significant loss event contributing to Montpelier Syndicate 5151’s 2010 current year loss and LAE was $29.6 million of net losses from an earthquake in Chile. Most of the remaining 2010 current year loss and LAE related to claims and events that had been incurred in that year but had not yet been reported to us.
During 2009 Montpelier Syndicate 5151 experienced $7.5 million of favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with: (i) the settlement of two individual risk losses below the amounts previously reserved ($5.4 million decrease); and (ii) 2008 Hurricane Ike ($2.6 million decrease).
Acquisition costs include commissions, profit commissions, brokerage costs, and excise taxes, when applicable. Profit commissions and brokerage costs can vary based on the nature of business produced.
Profit commissions, which are paid by assuming companies to ceding companies in the event of favorable loss experience, change as Montpelier Syndicate 5151’s estimates of loss and LAE fluctuate. Profit commissions incurred by Montpelier Syndicate 5151 totaled $2.7 million, $2.4 million and $1.0 million during 2011, 2010 and 2009, respectively.
The following table summarizes Montpelier Syndicate 5151’s general and administrative expenses during the years ended December 31, 2011, 2010 and 2009:
The decreases in incentive compensation expenses recorded at Montpelier Syndicate 5151 from 2009 to 2011 reflect reductions in our consolidated underwriting results over that period.
On December 31, 2011, we completed the MUSIC Sale. Since we have either retained, reinsured or otherwise indemnified Selective, the purchaser of MUSIC, for all of the business written by MUSIC with an effective date on or prior to December 31, 2011, the sale of MUSIC does not constitute a “discontinued operation” in accordance with GAAP. As a result, the future cash flows associated with our significant continuing involvement with MUSIC will continue into 2012 and beyond and such future cash flows, as well as certain reinsurance balances and other designated assets serving as collateral supporting such cash flows, will continue to be presented within this MUSIC segment. See “MUSIC Sale Considerations” contained in Item 1 herein.
Net premiums earned within MUSIC in 2011, 2010 and 2009 were $50.2 million, $36.5 million and $14.1 million, respectively. Net premiums earned are a function of the timing of net premiums written.
The following tables summarize MUSIC’s loss and LAE reserve activities for the years ended December 31, 2011, 2010 and 2009:
The following table presents MUSIC’s net loss and LAE ratios for the years ended December 31, 2011, 2010 and 2009:
The following table summarizes MUSIC’s general and administrative expenses during the years ended December 31, 2011, 2010 and 2009:
The decreases in incentive compensation expenses recorded at MUSIC from 2009 to 2011 reflect reductions in our consolidated underwriting results over that period.
The following table summarizes the general and administrative expenses of Corporate and Other during the years ended December 31, 2011, 2010 and 2009:
The following table summarizes our consolidated total return on cash and investments for the years ended December 31, 2011, 2010 and 2009:
Investment expenses in 2011 were lower than those incurred during 2010 due mainly to changes in the allocation of invested balances among our investment managers. Investment expenses in 2010 were fairly consistent with those incurred during 2009.
During 2011, 2010 and 2009 we experienced net foreign exchange gains (losses) on cash and investments of $(2.7) million, $(2.6) million and $0.8 million, respectively. The foreign exchange gains (losses) experienced during these years were due to the weakening (strengthening) of the U.S. dollar against the various foreign currencies in which we transact, principally the British pound, the European Union euro and the Canadian dollar.
During 2009 we recorded an unrealized loss from our investment in Symetra Financial Corporation (“Symetra”) of $0.5 million. Our investment in Symetra was acquired in a private placement in 2004 and, in January 2010, Symetra’s common shares began trading on the New York Stock Exchange under the symbol SYA. As a result, during 2010 we reclassified the cumulative net appreciation associated with our investment in Symetra, which totaled $2.6 million at December 31, 2009, from other comprehensive income to net unrealized investment gains on our consolidated statements of operations and moved that investment from other investments to equity securities on our consolidated balance sheets. Symetra provides retirement plans, employee benefits, life insurance and annuities through a national network of independent advisors and agents.
As of December 31, 2009, $202.6 million, or 8.3%, of our total invested assets measured at fair value were considered to be Level 3 assets. Our investments classified as Level 3 at December 31, 2009 consisted primarily of the following: (i) with respect to fixed maturity investments, bank loans and certain asset-backed securities, many of which are not actively traded; (ii) with respect to equity securities, certain preferred instruments; and (iii) with respect to other investments, certain limited partnership interests and our investment in Symetra.
See “Net Investment Income and Total Return on Cash and Investments” above for details of our net foreign exchange transaction gains on cash and investments.
Our net foreign exchange transaction gains (losses) on insurance and reinsurance balances represent realized gains and losses, primarily resulting from premiums receivable by Montpelier Bermuda in currencies other than the U.S. dollar and from cash and premiums receivable by Montpelier Syndicate 5151 in currencies other than the British pound. These transaction gains and losses do not include fluctuations associated with our loss and LAE, which we record as favorable or (unfavorable) loss reserve development, and certain foreign currency exchange agreements we enter into in order to mitigate the financial effects of these foreign exchange rate fluctuations. See “Net Income (Expense) from Derivative Instruments” below.
The following table presents our consolidated net income (expense) from derivative instruments during the years ended December 31, 2011, 2010 and 2009:
Foreign Exchange Contracts related to our underwriting activities do not eliminate fluctuations in the value of our assets and liabilities denominated in foreign currencies; rather, they are designed to protect us against adverse movements in foreign exchange rates. Foreign Exchange Contracts related to our investing activities are designed to either protect us from adverse movements in foreign exchange rates or to enhance our investment performance.
Our open Foreign Exchange Contracts at December 31, 2011 were denominated in British pounds, New Zealand dollars, European Union euros, Canadian dollars, Chinese renminbi, Indian rupees, Malaysian ringgits, Mexican pesos, Philippines pesos, Korean won, Australian dollars, Danish kroner and Brazilian reals. Our open Foreign Exchange Contracts at December 31, 2010 were denominated in British pounds, New Zealand dollars, European Union euros and Canadian dollars.
We recorded an expense of $7.5 million and $0.1 million associated with Interest Rate Contracts during 2011 and 2010, respectively.
From time to time we enter into various exchange-traded investment options and futures (“Investment Options and Futures”) as part of our investing strategy.
We recorded an expense of $0.7 million and $0.3 million associated with the ILW Swap during 2011 and 2010, respectively.
In December 2005 we purchased fully-collateralized coverage (the “CAT Bond Protection”) for losses sustained from qualifying hurricane and earthquake loss events from a third-party that financed this coverage through the issuance of $90.0 million in catastrophe bonds to investors under two separate bond tranches, each of which matured in January 2009. Both tranches responded to parametric triggers, whereby payment amounts were determined on the basis of modeled losses incurred by a notional portfolio rather than by actual losses incurred by us. For that reason, this transaction was accounted for as a derivative, rather than as a reinsurance transaction.
During 2009 we repurchased and retired $21.0 million in principal amount of our Senior Notes and recognized a gain of $5.9 million representing the difference between the $15.1 million in consideration paid and the carrying value of the Senior Notes repurchased.
Our interest and other financing expenses also decreased during 2010, as compared to 2009. The reduction in interest expense experienced in 2010 was due to the repurchase of $1.0 million and $21.0 million of our Senior Notes in 2010 and 2009, respectively. The reduction in letter of credit and trust fees experienced during 2010 was the result of the Lloyd’s Capital Trust and the Reinsurance Trust replacing two non-renewed letter of credit facilities that expired during 2010.
We are domiciled in Bermuda and have subsidiaries domiciled in several other countries, including the U.S., the U.K. and Switzerland. At the present time, no income taxes are levied in Bermuda and we have received an assurance from the Bermuda government exempting our Bermuda operations from all local income, withholding and capital gains taxes until at least 2035.
MCL, MUAL, PUAL, MUSL and their parent, Montpelier Holdings Limited, are subject to U.K. income taxes and are currently in a cumulative net operating loss position. The net operating loss associated with these operations may be carried forward to offset future taxable income generated in that jurisdiction and do not expire with time.
MUI, MTR and their parent, MRUSHL, are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations and are currently in a cumulative net operating loss position. The net operating losses associated with these operations may be carried forward to offset future taxable income in that jurisdiction and will begin to expire in 2027.
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 preferred and common shareholders and to fund any Common Share repurchase activities. There are restrictions on the payment of dividends to the Company from its regulated operating companies as described under “Regulation” herein. We currently pay a regular dividend of $0.105 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 of December 31, 2011, our sources of immediate and unencumbered liquidity consisted of: (i) $206.1 million of cash and cash equivalents; (ii) $135.8 million of highly liquid fixed maturity investments which currently trade at a very narrow bid-ask spread and whose proceeds are available within two business days; and (iii) $258.7 million of liquid fixed maturity investments which currently trade at a narrow bid-ask spread and whose proceeds are available within four business days. Further, we believe that we have significant sources of additional liquidity within our fixed maturity investment portfolio, although the bid-ask spreads associated with such investment securities would likely be broader, perhaps significantly, than those with respect to the securities referred to above, particularly if a large individual investment holding were required to be liquidated in an expeditious manner. We also believe that we have additional liquidity within our portfolio of equity securities, whose proceeds are available within four business days.
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 should be sufficient to cover our cash obligations under most loss scenarios through the foreseeable future.
Our Senior Notes bear interest at a rate of 6.125% per annum and are scheduled to mature on August 15, 2013. We currently intend to refinance the Senior Notes prior to their maturity. Whereas we believe that current market conditions would permit such a refinancing on reasonable terms, future terms and conditions may prove to be unfavorable. In the event we are unable to refinance the Senior Notes prior to their maturity, we would expect to be in a position to repay that obligation with internal funds.
Neither the Senior Notes, the Trust Preferred Securities nor the Preferred Shares contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which we must adhere.
The agreements governing our letter of credit facilities contain covenants that limit our ability, among other things, to grant liens on our assets, sell our assets, merge or consolidate, incur debt and enter into certain agreements. In addition, the syndicated secured facilities require us to maintain a debt to capital ratio of no greater than 30% and for Montpelier Re to maintain an A.M. Best financial strength rating of no less than “B++”. If we were to fail to comply with these covenants or fail to meet these financial ratios, the lenders could revoke these facilities and exercise remedies against our collateral. As of December 31, 2011 and 2010, our debt to capital ratio (which, as defined in such agreements, is currently the ratio of the amount of Senior Notes outstanding divided by the sum of the amount of Senior Notes outstanding and our total shareholders’ equity) was 12.8% and 12.3%, respectively, and Montpelier Re’s A.M. Best financial strength rating was “A-” (with a positive outlook).
Effective June 9, 2011, our Syndicated 5-Year Facility (I), which had a capacity of $500.0 million, expired in accordance with its terms and was not renewed. As a result: (i) we can no longer issue letters of credit under the facility; (ii) all outstanding letters of credit drawn under the facility will continue for up to 360 days; and (iii) all outstanding letters of credit drawn under the facility will have to be renewed into an alternate letter of credit facility or one of our reinsurance trusts upon expiry. This facility is subject to an annual commitment fee of 0.275% on drawn balances and, while active, was subject to an annual commitment fee of 0.075% on undrawn balances.
The Syndicated 5-Year Facility (II) is subject to an annual commitment fee of 0.225% on drawn balances and 0.08% on undrawn balances.
On June 17, 2011, we entered into a 364-Day Letter of Credit Reimbursement and Pledge Agreement with a syndicate of commercial banks for the provision of a secured letter of credit facility for our account. This facility, which has a capacity of $250.0 million, is subject to an annual commitment fee of 0.45% on drawn balances and 0.10% on undrawn balances.
· we paid $30.8 million in dividends to holders of Common Shares and Preferred Shares.
Our cash flows provided from operations totaled $317.7 million, which resulted primarily from premiums received, net of acquisition costs, partially offset by net paid losses.
· we paid $393.6 million for net purchases of fixed maturities,
· we received $32.0 million in connection with the termination of a forward share agreement with a third-party,
We also experienced a $5.6 million increase in the U.S. dollar value of our cash and cash equivalents due to foreign exchange rate fluctuations.
As of December 31, 2011, we had total cash and cash equivalents of $340.3 million. Of this amount, $141.9 million was held in Bermuda, $135.6 million was held in the U.K., $62.1 million was held in the U.S. and $0.7 million was held in Switzerland.
Of our cash and cash equivalents held in the U.S. at December 31, 2011, $54.9 million represented the gross cash proceeds from the MUSIC Sale received by MRUSHL. In January 2012, MRUSHL repatriated $53.5 million of these funds to the Company in Bermuda. We do not expect to incur any income or withholding taxes associated with this repatriation.
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported and disclosed amounts of our assets and liabilities as of the balance sheet dates and the reported amounts of our revenues and expenses during the reporting periods. We believe the items that require the most subjective and complex estimates are: (i) our loss and LAE reserves; (ii) our written and earned insurance and reinsurance premiums; (iii) our ceded reinsurance; and (iv) our share-based compensation.
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.
While the approach we use in reserving for large events is applied with consistency, at any point in time the specific reserving assumptions may vary among contracts. The assumptions for a specific contract may depend upon the class of business, historical reporting patterns of the cedant, whether or not the cedant provides an IBNR estimate, how much of the loss has been paid, the number of underlying claims still open and other factors. For example, the expected loss development for a contract with 1% of its claims still open would likely be less than for a contract with 50% of its claims still open.
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 reserving practices overall 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 reporting period, particularly if the loss involves a catastrophic event. These factors further contribute to the degree of uncertainty in our reserving process.
The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in our loss and LAE reserves being significantly greater or less than the loss and LAE reserves we initially established. Any adjustments to our loss and LAE reserves are reflected in our financial results during the period in which they are determined. Changes to our prior year loss reserves will impact our current underwriting results by improving our results if the prior year reserves prove to be redundant or impairing our results if the prior year reserves prove to be insufficient. We expect volatility in our results in periods that significant loss events occur because GAAP does not permit insurers or reinsurers to reserve for such loss events until they have occurred and are expected to give rise to a claim. As a result, we do not record contingency reserves to account for expected future losses. We anticipate that claims arising from future events will require the establishment of substantial reserves from time to time.
Provided we do not experience a significant loss late in the calendar year, the portion of our loss and LAE reserves at year-end represented by IBNR tends to be lower for large loss events than it does for loss events of lower severity. During 2011, a year with a high number of large loss events occurring early in the year, as compared to 2010, our gross IBNR reserves decreased year to year relative to our total gross loss and LAE reserves.
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. 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 2011, 2010 and 2009, we recorded written and earned reinstatement premiums totalling $27.5 million, $17.5 million and $1.4 million, respectively.
We routinely review the creditworthiness of our cedants on the basis of our market knowledge, the cedant’s current financial strength ratings, the timeliness of cedants’ past payments and the status of current balances owing. Based on our reviews, we established allowances of $3.6 million and $3.0 million for uncollectible insurance and reinsurance premiums receivable as of December 31, 2011 and 2010, respectively, each of which represented less than one percent of our consolidated net insurance and reinsurance premiums earned in those years.
The cost of reinsurance purchased varies based on a number of factors. The initial premium associated with excess-of-loss reinsurance is normally based on the underlying premiums we assume. As these reinsurance contracts are typically purchased prior to the time the assumed risks are written, ceded reinsurance premiums recorded in the period of inception reflect an estimate of the amount that we will ultimately pay. In the majority of cases, the premiums initially recorded are subsequently adjusted to reflect premiums actually assumed by us during the contract period. These adjustments are recorded in the period that they are determined, and to date they have not been significant. In addition, losses which pierce excess-of-loss reinsurance cover may generate reinstatement premiums ceded, depending on the terms of the contract. Reinstatement premiums ceded are recognized as written and expensed at the time the reinsurance recovery is estimated and recorded.
Reinsurance recoverable on paid losses represents amounts currently due from reinsurers. Reinsurance recoverable on unpaid losses represents amounts that will be collectible from reinsurers once the losses are paid. The recognition of reinsurance recoverable requires two key judgments. In determining our ceded IBNR, the first judgment involves the estimation of the amount of gross IBNR to be ceded to reinsurers. Ceded IBNR is developed as part of our loss reserving process, and consequently, the estimate is subject to similar risks and uncertainties as the estimate of gross IBNR. The second judgment relates to the amount of the reinsurance recoverable balance that ultimately will not be collected from reinsurers due to insolvency, contractual dispute or other reasons.
At the discretion of the Compensation Committee, incentive awards, the value of which are based on Common Shares, may be made to our officers, employees, consultants and directors. Incentive awards currently outstanding consist solely of RSUs.
For the 2011-2014 Variable RSU award cycle, the targeted performance metric was based on a 2011 ROE of 9.01%. At an achieved ROE of 9.01% (our target), we would have expected to grant approximately 590,000 Variable RSUs to participants. At an achieved ROE of 3.01% (our threshold), we would not have expected to grant any Variable RSUs to participants. At an achieved ROE of 19.01% (our maximum), we would have expected to grant approximately 1,180,000 Variable RSUs to participants. Throughout the Initial RSU Period for this cycle, our quarterly Variable RSU accrual for this cycle remained at zero. Because we estimated our achieved ROE for 2011 to be negative 7.4%, the preliminary number of Variable RSUs to be granted for the 2011-2014 Variable RSU award cycle was determined to be zero. The actual ROE and the final number of Variable RSUs to be granted and effectively converted to Fixed RSUs will be determined by the Compensation Committee on February 28, 2012.
During 2011, 2010 and 2009, we also granted 100,000, 10,000 and 32,500 Fixed RSUs, respectively, to certain of our employee and directors.
As of December 31, 2011, the unamortized grant date fair value of the 761,279 RSUs outstanding was $4.7 million, all of which were Fixed RSUs.