We lease office space in Pembroke, Bermuda, where the Company’s Bermuda operations and BCRH and its subsidiaries are located. We lease office space in London, U.K. where the Company’s U.K. operations are located. We lease office space in Woburn, Massachusetts, Chicago, Illinois and Hanover, New Hampshire where the Company’s U.S. operations are located.
(b) During 2012 we incurred a $102.8 million net catastrophe loss (not including the benefit of reinstatement premiums, which we record as revenues) from windstorm Sandy. During 2011 we incurred $409.0 million in net losses (not including the benefit of reinstatement premiums) associated with several catastrophic events, including earthquakes in New Zealand and Japan, and Thailand floods. During 2010 we incurred $135.9 million in net losses (not including the benefit of reinstatement premiums) associated with earthquakes in Chile and New Zealand. The magnitude of these catastrophic events significantly impacted our loss and loss adjustment expenses in those years.
(d) In May 2011 we issued the Preferred Shares in the amount of $150.0 million.
(f) During 2014 we repurchased 6,210,415 Common Shares for $185.9 million. 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.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2014, 2013 and 2012 and our financial condition as of December 31, 2014 and 2013. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this report.
We ended 2014 with a fully converted book value per Common Share (“FCBVPCS”) of $33.19, an increase of 15.0% for the year after taking into account dividends declared on Common Shares during the period. The increase in our FCBVPCS during 2014 was primarily the result of strong underwriting results. Our comprehensive income available to the Company for 2014 was $221.5 million and our GAAP combined ratio was 65.6%.
Our underwriting results for 2014 benefitted from a low level of net catastrophe losses as well as $151.8 million of prior year favorable loss reserve development. Our investment results for 2014 included $5.4 million of net realized and unrealized investment gains, which were comprised of $14.0 million in net gains from fixed maturities, $1.9 million in net gains from equity securities and $10.5 million in net losses from other investments.
During 2013 we also incurred a $7.5 million non-recurring expense associated with the underwriting discount and structuring fees paid by us in connection with the BCRH IPO.
During 2012 we also incurred a $9.7 million non-recurring loss upon the early extinguishment of our 2013 Senior Notes.
Looking ahead to 2015, we experienced continued competition during the key January 1, 2015 renewal season, particularly within our Property Catastrophe-Treaty class, due to relatively light industry catastrophe losses experienced since 2012. As a result, we experienced an overall rate decrease of approximately 6% on the risks we wrote at January 1, 2015.
We have entered into specialized quota share reinsurance contracts with third-parties and certain of our affiliates, namely BCRH and the BCGR Listed Fund, with respect to a portion of Montpelier Re’s Property Catastrophe - Treaty book of business, under which we are eligible to receive override and profit commissions.
We record the override and profit commissions associated with specialized quota share reinsurance contracts with third-parties (when earned) as a reduction to our acquisition costs which, in turn, reduces our acquisition cost and overall combined ratios. These benefits totaled $8.4 million, $12.2 million and $10.4 million during the years ended December 31, 2014, 2013 and 2012, respectively.
We record the override and profit commissions associated with specialized quota share reinsurance contracts with BCRH and the BCGR Listed Fund (when earned), as well as the fronting fees, management and performance fees and expense reimbursements we receive as the manager for these entities, as decreases to the net income attributable to non-controlling interests, thereby increasing the net income and comprehensive income available to the Company. These benefits totaled $7.6 million, $3.3 million and zero during the years ended December 31, 2014, 2013 and 2012, respectively.
We monitor our net reinsurance treaty contract limits that we believe are exposed to a single natural catastrophe occurrence within certain broadly defined major catastrophe zones. We provide these limits as a measure of our relative potential loss exposure across major zones in the event a natural catastrophe occurs.
The projected single event net impact figures also include those single event exposures we have assumed through our investments in BCRH and the BCGR Listed Fund, but exclude those exposures attributable to non-controlling interests.
As of January 1, 2015, our three largest modeled exposures to a single event loss at a 250-year return period were U.S. Hurricane, European Windstorm and U.S. Earthquake.
Our projections of the net impact from single event losses may vary considerably within a particular territory depending on the specific characteristics of the event. This is particularly true for the direct insurance and facultative reinsurance portfolio we underwrite. For example, our projected net impact from a large European windstorm may differ materially depending on whether the majority of loss comes from the U.K. & Ireland or from Continental Europe.
Given the limited availability of reliable historical data, there is a great deal of uncertainty with regard to the accuracy of any catastrophe model, especially when contemplating longer return periods.
Our single event loss estimates represent snapshots as of January 1, 2015. 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, losses incurred and changes in our ceded reinsurance and derivative protections.
Our consolidated financial results for the years ended December 31, 2014, 2013 and 2012 follow:
We currently operate through three reportable segments: Montpelier Bermuda, Montpelier at Lloyd’s and Collateralized Reinsurance. Each of our segments represents a separate underwriting platform through which we write insurance and reinsurance business. Our segment disclosures provided herein present the operations of each segment prior to the effects of intercompany quota share reinsurance agreements among them.
Underwriting results for Montpelier Bermuda for the years ended December 31, 2014, 2013 and 2012 were as follows:
The following table summarizes Montpelier Bermuda’s premium writings, by line of business, for the years ended December 31, 2014, 2013 and 2012:
Note - Montpelier Bermuda’s gross and net premiums written during the years presented include amounts assumed from Montpelier at Lloyd’s. Montpelier Bermuda’s reinsurance premiums ceded during 2014 includes amounts ceded to Collateralized Reinsurance. These inter-segment reinsurance agreements are eliminated in consolidation. See “Corporate and Other” under this Item 7.
Gross premiums written by Montpelier Bermuda during 2014 totaled $416.4 million, a decrease of $13.0 million, or 3%, as compared to 2013. This decrease was largely the result of pricing reductions in the Property Catastrophe - Treaty line of business, which led to decreased premiums on certain renewed contracts. Partially offsetting the 2014 decrease in gross premiums written by Montpelier Bermuda was a $7.7 million increase in Other Specialty - Treaty writings, which related primarily to financial risk and aviation classes of business.
All of Montpelier Bermuda’s reinsurance purchases to date have represented prospective cover; that is, reinsurance has been purchased to protect Montpelier Bermuda against the risk of future losses as opposed to covering losses that have already occurred but have not been paid. Montpelier Bermuda purchases: (i) excess-of-loss reinsurance covering one or more lines of its business; (ii) quota share reinsurance with respect to specific lines of its business; and (iii) industry loss warranty policies which provide coverage for certain losses provided they are triggered by events exceeding a specified industry loss size.
The following tables summarize Montpelier Bermuda’s loss and LAE reserve movements for the years ended December 31, 2014, 2013 and 2012, and the composition of its gross loss and LAE reserves at December 31, 2014 and 2013:
(1) Montpelier Bermuda’s ending gross unpaid loss and LAE reserves at December 31, 2014, 2013 and 2012 include losses assumed from Montpelier at Lloyd’s in the amount of $8.6 million, $8.4 million and $13.3 million, respectively, and amounts recoverable from Collateralized Reinsurance in the amount of $6.1 million, zero and zero, respectively. The effects of these inter-segment reinsurance contracts are eliminated in consolidation.
During 2014 Montpelier Bermuda incurred $148.2 million in current year net losses and LAE. There were no individually significant known loss events impacting Montpelier Bermuda during 2014, other than $29.7 million of net catastrophe losses recognized in connection with U.S. and European wind and hail storms that occurred in June 2014.
During 2013 Montpelier Bermuda incurred $123.7 million in current year net losses and LAE. There were no individually significant known loss events impacting Montpelier Bermuda during 2013, other than $17.5 million of net catastrophe losses incurred from flooding in Europe and Canada, and U.S. tornadoes.
During 2014 Montpelier Bermuda experienced $125.2 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:
In addition, 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.
The following table summarizes Montpelier Bermuda’s underwriting expenses during the years ended December 31, 2014, 2013 and 2012:
During 2014, 2013 and 2012, the profit commissions earned by Montpelier Bermuda in connection with its ceded reinsurance contracts exceeded the profit commissions it incurred in connection with its assumed reinsurance contracts by $3.4 million, $9.0 million and $4.0 million, respectively. The decrease in net profit commissions earned by Montpelier Bermuda from 2013 to 2014, as well as the resulting increase in its acquisition cost ratio for 2014, is primarily the result of an increase in current year Property Catastrophe - Treaty losses ceded to Montpelier Bermuda’s various underwriting partners, including the Collateralized Reinsurance segment, which resulted from the aforementioned U.S. and European wind and hail storms that occurred in June 2014.
Montpelier Bermuda’s incentive compensation expenses incurred during 2014 increased versus those of 2013 primarily as a result of: (i) its 2014 accruals reflecting a higher projected payout level than that of the prior year; and (ii) a greater number of Fixed RSUs outstanding during 2014. The decrease in Montpelier Bermuda’s incentive compensation expenses during 2013, versus those of 2012, was primarily the result of its 2013 accruals reflecting a lower projected payout level than those of the prior year. See Note 9 of the Notes to Consolidated Financial Statements.
Underwriting results for Montpelier at Lloyd’s for the years ended December 31, 2014, 2013 and 2012 were as follows:
Gross premiums written by Montpelier at Lloyd’s during 2014 totaled $273.0 million, an increase of $37.8 million, or 16%, as compared to 2013. The increase, which was mainly within the Other Specialty - Treaty and Property and Specialty Individual Risk lines of business, was primarily the result of an expansion of Montpelier at Lloyd’s direct property and casualty quota-share classes of business.
During 2014 Montpelier at Lloyd’s experienced $27.5 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:·
· 2012 natural catastrophes ($4.1 million decrease, which is net of a $3.0 million increase in connection with windstorm Sandy).
· 2011 catastrophe losses relating to Thai floods and other events ($16.9 million decrease), and·
· three individual risk losses incurred at Montpelier at Lloyd’s during 2008 and 2011 ($5.3 million decrease).
Montpelier at Lloyd’s loss and LAE reserves include foreign currency translation gains (losses) of $22.2 million, $(6.1) million and $(12.0) million during 2014, 2013 and 2012, respectively. Since these foreign currency translation gains (losses) are reported as decreases (increases) in Montpelier at Lloyd’s 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 Lloyd’s underwriting expenses for the years ended December 31, 2014, 2013 and 2012:
Excluding the effects of profit commissions, Montpelier at Lloyd’s acquisition costs and acquisition cost ratios have increased from 2012 to 2014, primarily as a result of changes in the mix of the business it writes. Montpelier at Lloyd’s marine, pro-rata engineering and casualty writings, which have increased during such periods, are typically written at a higher acquisition cost ratio than most other classes of business written by Montpelier at Lloyd’s.
Montpelier at Lloyd’s incentive compensation expenses incurred during 2014 increased versus those of 2013 as a result of an increase in personnel who are eligible to receive RSU awards, as well as its 2014 accruals being recorded at a higher projected payout level than that of the prior year. The increase in Montpelier at Lloyd’s incentive compensation expenses during 2013, versus those of 2012, was primarily the result of additional incentive compensation costs associated with new personnel, which more than offset the benefit of its 2013 accruals being provided at a lower projected payout level than that of the prior year. See Note 9 of the Notes to Consolidated Financial Statements.
Underwriting results for the Collateralized Reinsurance segment, which we launched in 2012, were as follows for the years ended December 31, 2014, 2013 and 2012:
Since the commencement of its operations in June 2012, the Collateralized Reinsurance segment has assumed natural catastrophe exposures from third-parties and Montpelier Re (pursuant to inter-segment reinsurance arrangements), all of which is reflected within the Property Catastrophe - Treaty line of business.
Net reinstatement premiums earned within the Collateralized Reinsurance segment were not significant in any of the periods presented. The level of reinstatement premiums that the Collateralized Reinsurance segment may realize in future periods will be dependent upon the occurrence of future losses; however, any such reinstatement premiums are not expected to be material.
During 2014, 2013 and 2012 the Collateralized Reinsurance segment ceded zero, $3.0 million and zero of its premiums to third-party reinsurers, respectively. The Collateralized Reinsurance segment purchases reinsurance in the normal course of its business in order to manage its exposures. The amount and type of reinsurance that the Collateralized Reinsurance segment 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. Other factors affect the Collateralized Reinsurance segment’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.
Profit commissions, which are paid by assuming companies to ceding companies in the event of favorable loss experience, change as the Collateralized Reinsurance segment’s estimates of loss and LAE fluctuate. Profit commissions incurred during the years ended December 31, 2014, 2013 and 2012 totaled $1.7 million, zero and zero, respectively.
Excluding the effects of profit commissions, the Collateralized Reinsurance segment’s acquisition cost ratios have remained largely consistent during each of the periods presented.
The Collateralized Reinsurance segment incurred $7.3 million, $3.5 million and $1.7 million of general and administrative expenses during 2014, 2013 and 2012, respectively. The Collateralized Reinsurance segment’s general and administrative expenses consist primarily of third-party legal and consulting costs, as well as personnel costs.
Corporate and Other, which collectively represents the Company, certain intermediate holding and service companies, the Company’s former MUSIC Run-Off segment and eliminations relating to intercompany reinsurance and service charges, is not considered to be an operating segment. The underwriting losses generated by Corporate and Other principally reflect general and administrative expenses incurred in support of the Company’s various operating companies.
The premium activity reflected within Corporate and Other represent: (i) the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Montpelier at Lloyd’s and between Montpelier Bermuda and Collateralized Reinsurance, and (ii) premium adjustments relating to policies written by MUSIC on or prior to December 31, 2011, which were not significant during any of the periods presented.
The losses incurred within Corporate and Other represent losses associated with business retained in connection with the MUSIC Sale. The favorable and unfavorable net prior year loss reserve development associated with the reserves we retained from the MUSIC Sale during each of the periods presented was not significant.
The following table summarizes the general and administrative expenses of Corporate and Other during the years ended December 31, 2014, 2013 and 2012:
Operating expenses during 2013 increased over those of 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.
Incentive compensation expenses recorded within Corporate and Other 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; 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.
Incentive compensation expenses incurred during 2014 were less than those of the prior year, primarily as a result of incentive compensation expenses during 2013 being adversely affected by the acceleration of Mr. Busher’s outstanding RSU award in connection with his retirement on December 31, 2013. See Note 14 of the Notes to Consolidated Financial Statements. The increase in Corporate and Other’s incentive compensation expenses during 2013, versus those of 2012, was due to: (i) a greater number of outstanding RSUs attributable to Corporate and Other activities; and (ii) the acceleration of the vesting of Mr. Busher’s outstanding RSUs awards in connection with his retirement. These items more than offset the impact of the 2013 incentives being provided at a lower projected payout level than that of the prior year. See Note 9 of the Notes to Consolidated Financial Statements.
Our investment income has steadily decreased since 2012 due mainly to: (i) declines in the weighted average investment portfolio (when excluding the cash, cash equivalents and short-term investments that relate to our Collateralized Reinsurance segment); and (ii) declines in market interest rates. Our investment expenses for 2014 were largely consistent with those incurred during 2013, but our investment expenses for 2013 were higher than those incurred during 2012 due to changes in the allocation of invested balances among our investment managers.
During 2014 we recognized $14.0 million in net realized and unrealized gains from our fixed maturity portfolio, $1.9 million in net realized and unrealized gains from our equity portfolio and $10.5 million in net realized and unrealized losses from our other investments. The fixed maturity net gains we experienced during 2014 were largely the result of a decline in market interest rates. The equity portfolio net gains we experienced during 2014 followed a trend consistent with global equity markets. The other investment net losses we experienced during 2014 related primarily to a widening of credit spreads between the yield on the fixed maturity investments we held within our other investment portfolio versus that of U.S. Treasuries.
Certain of our investment managers have entered into derivative contracts for investment purposes. Our total net losses from investment-related derivative instruments during 2014, 2013 and 2012 were $15.6 million, $13.6 million and $1.9 million, respectively. Each of our derivative instruments, as well as the income and loss derived therefrom, is described in Note 7 of the Notes to Consolidated Financial Statements.
See “Net Investment Income and Total Return on Cash and Investments” above for details of our net foreign currency transaction gains (losses) we experienced in connection with our investing activities during the years presented.
The net foreign currency transaction gains (losses) we experienced in connection with our other activities represent net foreign currency gains and losses resulting from: (i) Montpelier Bermuda’s premiums receivable that are denominated in currencies other than the U.S. dollar (its functional currency); and (ii) Montpelier at Lloyd’s assets and liabilities that are denominated in currencies other than the British pound (its functional currency), including those denominated in U.S. dollars. These net transaction gains and losses do not include: (i) fluctuations associated with Montpelier Bermuda’s and Montpelier at Lloyd’s losses and LAE, which we record as favorable or unfavorable loss reserve development; (ii) the income or loss associated with those Foreign Exchange Contracts we enter into in order to mitigate the financial effects of certain foreign currency exchange rate fluctuations, see “Net Income (Loss) From Derivative Instruments”; and (iii) any offsetting foreign currency translation gains and losses we recognize through our comprehensive income or loss associated with Montpelier at Lloyd’s assets and liabilities that are denominated in U.S. dollars.
The net foreign currency transaction gains (losses) we experienced during the periods presented associated with our other activities were primarily due to a strengthening (weakening) of the U.S. dollar against the British pound. The closing rates of the U.S. dollar versus the British pound as of December 31, 2014, 2013 and 2012, follow:
The following table presents our consolidated net income (loss) from derivative instruments during the years ended December 31, 2014, 2013 and 2012:
See Note 7 of the Notes to Consolidated Financial Statements for a description of each of our derivative instruments.
Our other interest and financing expenses consist of interest expense and commitment fees associated with BCRH’s 364-day unsecured credit agreement (the “BCRH Credit Agreement”), letter of credit fees and trust fees.
In November 2012 we fully redeemed the 2013 Senior Notes at a “make-whole” redemption price of $237.6 million (104.2% of the principal thereof), plus accrued and unpaid interest to the redemption date. In connection with the redemption of the 2013 Senior Notes, we recorded a loss of $9.7 million.
Our consolidated other expenses are comprised of: (i) operating expenses associated with Cladium; (ii) provisions for our ongoing obligation to Selective in connection with the MUSIC Sale pursuant to the Loss Development Cover; and (iii) professional fees associated with the development of our Collateralized Reinsurance initiatives.
During 2014, 2013 and 2012, our U.S. operations generated income before income taxes of $1.4 million, $0.6 million and $0.1 million, respectively, and are currently in a cumulative net operating loss position. Due to the uncertainty at this time as to whether such operations will generate sufficient taxable income in future periods to utilize its existing deferred tax assets, we have established offsetting valuation allowances against each of our existing U.S. gross deferred tax assets.
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. Our Preferred Shares have a stated dividend rate of 8.875% per year and, beginning in September 2014, we raised our quarterly Common Share dividend to $0.20 per share. 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 investment portfolio with high-quality fixed maturity 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 liabilities. As of December 31, 2014, the average duration of our investment portfolio, including cash, was 0.9 years (inclusive of relevant 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.
In May 2014 BCRH entered into the BCRH Credit Agreement which permits it to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. Borrowings under the BCRH Credit Agreement bear interest, set at the time of the borrowing, at a rate equal to the 3-month LIBOR rate plus 100 basis points.
The BCGR Credit Agreement contains covenants that limit the BCGR Listed Fund’s and, to a lesser extent, the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. The BCGR Credit Agreement also contains a financial covenant that requires the Company to maintain a leverage ratio at or below 30%. If the Company were to fail to comply with any of these covenants, the lender could revoke the facility and exercise remedies against the Company. As of December 31, 2014, the BCGR Listed Fund and the Company (as a guarantor) were in compliance with each of the covenants associated with the BCGR Credit Agreement.
The 2022 Senior Notes bear interest at a fixed rate of 4.70% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. We may redeem the 2022 Senior Notes at any time, in whole or in part, at a “make-whole” redemption price, plus accrued and unpaid interest.
The LIBOR Swap, which we entered into in 2012, will result in the future net cash flows in connection with the Trust Preferred Securities, for the five-year period beginning March 30, 2012, being the same as if these securities bore interest at a fixed rate of 4.905%, provided we hold the LIBOR Swap to its maturity.
The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities. Except in certain limited circumstances, the Preferred Shares are not redeemable prior to May 10, 2016. After that date, we may redeem the Preferred Shares at our option, in whole or in part, at a price of $25.00 per share plus any declared and unpaid dividends.
We do not consider the BCRH’s short-term borrowings outstanding under the BCRH Credit Agreement that we guarantee to be a component of our capital structure.
Below is a schedule of our material contractual obligations and commitments as of December 31, 2014:
Our bilateral letter of credit facility is cancellable upon one-years’ notice and it is assumed, solely for purposes of this exercise, that such notice of cancellation was given on December 31, 2014. Our four year committed letter of credit facility expires in October 2016 and it is assumed that this facility will not be renewed at that time.
We generated $200.9 million, $120.2 million and $200.8 million of net cash from our operations during 2014, 2013 and 2012, respectively, which resulted primarily from our premiums received, net of acquisition costs, exceeding our net losses and operating expenses paid. Our net loss and LAE payments during 2014, 2013 and 2012 were $258.4 million, $324.3 million and $288.1 million, respectively.
Our financing activities provided (used) net cash and cash equivalents of $(238.4) million, $29.9 million and $(86.8) million during 2014, 2013 and 2012, respectively. Our financing cash flows are largely influenced by our Common Share repurchase activities from year-to-year. In addition, our financing cash flows in 2013 and 2012 benefitted from receipts of third-party investments in non-controlling interests and the net proceeds raised from the issuance of the 2022 Senior Notes, respectively.
Our cash flows provided from investing activities totaled $14.2 million, resulting from the following:
· we received $497.5 million from net sales and maturities of fixed maturity investments,
· we paid $10.0 million in settlements of investment-related derivative instruments,
· we received $85.2 million pursuant to net settlements of reverse repurchase agreements,
· we had a $106.3 million decrease in our restricted cash,
Our cash flows used for financing activities totaled $238.4 million, resulting from the following:
· we received $5.2 million from third party investors in the BCGR Listed Fund,
· we paid $40.5 million in dividends to holders of Common Shares and Preferred Shares.
We also experienced a $2.6 million increase in the U.S. dollar value of our cash and cash equivalents due to foreign currency exchange rate fluctuations.
· we paid $33.4 million pursuant to net settlements of reverse repurchase agreements,
We also experienced a $1.7 million decrease in the U.S. dollar value of our cash and cash equivalents due to foreign currency exchange rate fluctuations.
· we paid $224.7 million for net purchases of fixed maturity investments,
· we paid $1.0 million in expenses related to the MUSIC Sale,
· we had a $58.1 million decrease in our restricted cash, and
As of December 31, 2014, we held total cash and cash equivalents of $447.7 million. Of this amount, $415.2 million was held by our Bermuda companies, $24.3 million was held by our U.K. companies and $8.2 million was held by our U.S. companies.
The two primary bases for estimating the ultimate loss associated with a large event are: (i) actual and precautionary claims advices received from the cedant; and (ii) the nature and extent of the impact the event is estimated to have on the industry as a whole. Immediately after a loss event, the estimated industry market loss is the primary driver of our ultimate loss from such event. In order to estimate the nature and extent of the event, we rely on output provided by commercially available catastrophe models, as well as proprietary models (including CATM®) that have been developed in-house. The exposure of each cedant potentially affected by the event is analyzed on the basis of this output. As the amount of information received from cedants or brokers increases during the period following an event, so does our reliance on this correspondence. The quality of the cedant’s historical evaluation of losses and loss information received from other cedants and brokers in relation to the same event are considered as we migrate from industry loss-based estimates to specific cedant information.
For non-catastrophe losses, including those affecting our primary insurance business, we often apply trend-based actuarial methodologies in setting reserves, including paid and incurred loss development, Bornheutter-Ferguson and frequency and severity techniques. We also utilize industry loss ratio and development pattern information in conjunction with our own experience. The weight given to a particular method will depend on many factors, including the homogeneity within the class of business, the volume of losses, the maturity of the accident year and the length of the expected development tail. For example, development methods rely on reported losses, while expected loss ratio methods are typically based on expectations established prior to a notification of loss. Therefore, as an accident year matures, we may migrate from an expected loss ratio method to an incurred development method.
Time lags are inherent in loss reporting, especially in the case of excess-of-loss reinsurance contracts. Also, the combined characteristics of low claim frequency and high claim severity make the available data more volatile and less useful for predicting ultimate losses. In the case of proportional contracts, we rely on an analysis of a contract’s historical experience, industry information and the professional judgment of underwriters in estimating reserves for these contracts. In addition, we utilize ultimate loss ratio forecasts when reported by cedants and brokers, which are normally subject to a quarterly or six month lag for proportional business. Due to the degree of reliance that we place on ceding companies for claims reporting, our reserve estimates are highly dependent on ceding companies’ management judgment. Furthermore, during the loss settlement period, which may last several years, additional facts regarding individual claims and trends often will become known, and case law may change, all of which can affect ultimate expected losses.
Since we rely on ceding company estimates of case and IBNR reserves in the process of establishing our own loss and LAE reserves, we maintain certain procedures designed to mitigate the risk that such information is incomplete or inaccurate. These procedures may include: (i) comparisons of expected premiums to reported premiums, which helps us to identify delinquent client periodic reports; (ii) ceding company audits to facilitate loss reporting and identify inaccurate or incomplete reporting of claims; and (iii) underwriting reviews to ascertain that the losses ceded are covered
as provided under the contract terms. We also use catastrophe model outputs and industry market share information to evaluate the reasonableness of reported losses, which are also compared to loss reports received from other cedants and brokers. In addition, each subsequent year of loss experience with a given cedant provides additional insight into the accuracy and timeliness of previously reported information. These procedures are incorporated in our internal controls process on an ongoing basis and are regularly evaluated and amended as market conditions, risk factors, and unanticipated areas of exposure develop. Our claims handling follow-up actions do not permit us to capture data which records the extent to which ceding company claims are subsequently adjusted as a result of these activities, nor do they permit us to determine the extent to which our actions influence the accuracy of subsequent cedant reporting. Nonetheless, we: (i) reserve the right to perform ceding company audits in order to facilitate loss reporting and identify inaccurate or incomplete claims reporting; and (ii) consider unreliable reporting to be a factor which influences an underwriters’ willingness to offer terms to potential cedants. We believe that our diligence in these matters promotes better reporting by cedants and brokers over the long term. In our history, disputes with ceding companies have been rare and those which have not been resolved in negotiation have been resolved through arbitration in accordance with contractual provisions.
Estimating loss reserves for our book of longer-tail casualty reinsurance business, which can be written on an excess-of-loss or proportional basis, involves further uncertainties. In addition to the uncertainties inherent in the reserving process referred to above, casualty business can be subject to longer reporting lags than property business and claims often take several years to settle. During this period additional factors and trends will be revealed and, as they become apparent, we may adjust our reserves. There is also the potential for the emergence of new types of losses within our casualty book. Therefore, any factors that extend the time until claims are settled add uncertainty to the reserving process. Furthermore, determining the appropriate level of casualty reserves is largely dependent upon our view of premium rates at any given time. Therefore, overestimating the extent to which premium rates have increased (or decreased) can lead to an understatement (or overstatement) of loss reserves. This uncertainty is particularly relevant in relation to Montpelier at Lloyd’s business that is underwritten by its managing agents and coverholders. At December 31, 2014 and 2013, we recorded gross loss and LAE reserves related to our casualty business of $242.4 million and $223.2 million, respectively.
We do not typically experience significant claims processing backlogs, although such backlogs may occur following a major catastrophic event. At December 31, 2014 and 2013, we did not have a significant backlog in either our insurance or reinsurance claims processing.
Our assumed treaty reinsurance premiums are written on an excess-of-loss or on a pro-rata basis. Reinsurance contracts are typically written prior to the time the underlying direct policies are written by cedants and accordingly they must estimate such premiums when purchasing reinsurance coverage. For the majority of excess-of-loss contracts, including insurance contracts, a deposit or minimum premium is defined in the contract wording. The deposit or minimum premium is based on the ceding company’s estimated premiums and this estimate is recorded as written premium in the period the underlying risks incept. In the majority of cases, this premium is adjustable at the end of the contract period to reflect the changes in underlying risks in force during the contract period. Subsequent adjustments, based on reports by the ceding companies of actual premium, are recorded in the period they are determined, which is normally within six months to one year subsequent to the expiration of the policy. To date these adjustments have not been material.
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 relatively large loss events (such as 2012), reinstatement premiums will be higher than in a year in which there are no such events (such as 2014 and 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 2014, 2013 and 2012, we recorded net written and earned reinstatement premiums totaling $8.7 million, $1.5 million and $13.1 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 $3.7 million and $3.6 million for uncollectible insurance and reinsurance premiums receivable as of December 31, 2014 and 2013, 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 earned when the loss occurs and the reinsurance recovery is estimated and recorded.
At the discretion of the Compensation Committee, incentive awards, the value of which are based on Common Shares, may be made to our eligible employees, consultants and non-employee directors. Share-based incentive awards currently outstanding consist solely of RSUs, all of which were awarded under either the 2012 LTIP or the 2007 LTIP.
We currently use Variable RSUs as the principal component of our ongoing long-term incentive compensation for our employees. Variable RSUs are awarded based on our performance during the Initial RSU Period and are earned ratably each year based on continued employment over a four-year vesting period. Since the number of RSUs to be awarded is dependent upon our performance during the Initial RSU Period, the number of RSUs estimated to be awarded for that cycle may fluctuate throughout the Initial RSU Period.
We also use Fixed RSUs as a supplemental component of our ongoing long-term incentive compensation for certain of our employees and non-employee directors. Unlike Variable RSUs, the number of Fixed RSUs is fixed on the grant date. Fixed RSUs are typically granted for the following purposes: (i) to induce individuals to join Montpelier; (ii) to retain certain key employees; (iii) to reward employees for exhibiting outstanding individual performance; and (iv) as remuneration to non-management members of the boards of directors of both the Company and MAL. Additionally, when the actual number of Variable RSUs to be awarded in any given year has been formally determined, they are effectively converted into Fixed RSUs.
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 560,000 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 1,120,000 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.
During 2014, 2013 and 2012, we also granted 49,000, 35,000 and 50,700 Fixed RSUs, respectively, to certain of our employees and non-management directors.
As of December 31, 2014, the unamortized grant date fair value of the 1,520,764 RSUs outstanding was $17.0 million. As of December 31, 2013, the unamortized grant date fair value of the 1,448,374 RSUs outstanding was $12.2 million.