We currently lease office space in Pembroke, Bermuda, where the Company, Montpelier Re and Blue Water Re are located. We also lease office space in London, U.K. where MUAL, MCL and MUSL are located; in Zug, Switzerland, where MEAG is located; in Chicago, IL, Hartford, CT and Overland Park, KS where MUI is located; and in Woburn, MA and Hanover, NH where MTR is located.
(b) During 2011 we incurred $409.0 million in net losses (not including the benefit of reinstatement premiums, which are recorded as revenues) 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. During 2008 we incurred $177.1 million in net losses (not including the benefit of reinstatement premiums) associated with Hurricanes Ike and Gustav. The magnitude of these catastrophic events significantly impacted our expenses in those years.
(d) In May 2011 we issued Preferred Shares in the amount of $150.0 million.
Our underwriting results for 2012 included a $102.8 million net catastrophe loss (not including the benefit of reinstatement premiums) from windstorm Sandy. This net loss was partially offset by $87.4 million of prior year favorable loss reserve development. Our investment results for 2012 included $82.4 million of net realized and unrealized investment gains, which were comprised of $64.4 million in net gains from fixed maturities, $8.8 million in net gains from equity securities and $9.2 million in net gains from other investments.
During 2011 we also recognized a $11.1 million gain from the MUSIC Sale.
Pricing in most insurance and reinsurance markets is cyclical in nature and the high level of natural catastrophe loss activity experienced during 2011, along with revisions to vendor catastrophe models, led to improved property catastrophe pricing conditions into 2012.
Despite the favorable property catastrophe pricing environment we experienced in 2012, we saw overall market conditions become more competitive into the January 2013 renewal season, especially for classes without exposure to U.S. natural catastrophe risk. As a result, excluding the impact of reinstatement premiums, we currently expect a 1% to 5% increase in our net written premiums for the first quarter of 2013, versus those written in the first quarter of 2012.
Additionally, Common Share repurchases continue to represent an attractive means of increasing shareholder value, as measured by growth in FCBVPCS.
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 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; and also include those exposures we have assumed through our investment in the BCGR Listed Fund. The treaty limits 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 that 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, 2013. As of that date, Mid-Atlantic hurricane 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.
As of January 1, 2013, 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.
We view this approach as a supplement to our single event stress test as it allows for multiple losses from both natural catastrophe and other circumstances and attempts to take into account certain risks that are unrelated to our underwriting activities. Through our modeling, we endeavor to take into account many risks that we face as an enterprise. However, by the very nature of the insurance and reinsurance business, and due to limitations associated with the use of models in general, our simulated result does not cover every potential risk.
Our consolidated financial results for the years ended December 31, 2012, 2011 and 2010 follow:
We currently operate through four reportable segments: Montpelier Bermuda, Montpelier Syndicate 5151, Blue Capital and MUSIC Run-Off. Each of our segments represents a separate underwriting platform through which we write, or formerly wrote, insurance and reinsurance business. Our segment disclosures provided herein present the operations of Montpelier Bermuda, Montpelier Syndicate 5151, Blue Capital and MUSIC Run-Off prior to the effects of intercompany quota share reinsurance agreements among them.
Gross premiums written by Montpelier Bermuda during 2012 totaled $480.5 million, an increase of $34.0 million, or 8%, as compared to 2011. This increase was driven by the Property Catastrophe - Treaty line of business, which experienced improved pricing in 2012 versus that experienced in 2011. This improvement led to both additional property catastrophe writings and increased premium on renewal 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 that 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, 2012, 2011 and 2010, and the composition of its gross loss and LAE reserves at December 31, 2012 and 2011:
Our best estimates of Montpelier Bermuda’s ending gross loss and LAE reserves at December 31, 2012 and 2011, were $728.2 million and $716.9 million, respectively. Montpelier Bermuda’s gross IBNR reserves, as a percentage of its total gross reserves, amounted to 59% and 57% as of December 31, 2012 and 2011, respectively.
Montpelier Bermuda’s ending gross loss and LAE reserves at December 31, 2012 and 2011 include $13.3 million and $19.7 million, respectively, 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.
The following table presents Montpelier Bermuda’s net loss and LAE ratios for the years ended December 31, 2012, 2011 and 2010:
The only individually significant loss event contributing to Montpelier Bermuda’s 2012 current year net loss and LAE of $205.4 million was windstorm Sandy, which represented $85.0 million of Montpelier Bermuda’s current year net loss and LAE.
· $204.5 million from earthquakes in Japan and New Zealand during the first quarter,
During 2011 Montpelier Bermuda experienced $48.0 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:
· 2009 and prior casualty classes of business, including medical malpractice and individual risk contracts ($11.5 million decrease),
The remaining net favorable development on prior year loss reserves recognized during 2012, 2011 and 2010 related to several smaller adjustments made across multiple classes of business.
Montpelier Bermuda recognized net foreign exchange transaction losses related to its current and prior year loss and LAE of $0.9 million, $5.5 million and $0.6 million during the years ended December 31, 2012, 2011 and 2010, respectively. Montpelier Bermuda’s foreign currency transaction gains and losses on its losses and LAE incurred (which are recorded as loss and loss adjustment expenses) are incorporated in its underwriting results and underwriting ratios.
The following table summarizes Montpelier Bermuda’s underwriting expenses during the years ended December 31, 2012, 2011 and 2010:
During 2012, profit commissions earned by Montpelier Bermuda in connection with its ceded reinsurance contracts exceeded profit commissions incurred on its assumed reinsurance contracts by $4.0 million. Net profit commissions incurred during 2011 and 2010 were not significant.
Montpelier Bermuda’s acquisition cost ratio for 2012 decreased, as compared to 2011, primarily as a result of increases in its ceding and profit commissions earned on ceded reinsurance contracts. Montpelier Bermuda’s acquisition cost ratio for 2011 increased, as compared to 2010, primarily as a result of its ceding commissions for that year being relatively low, which had the effect of increasing its overall acquisition cost ratio.
The following table summarizes Montpelier Bermuda’s general and administrative expenses during the years ended December 31, 2012, 2011 and 2010:
Incentive compensation expenses recorded at Montpelier Bermuda 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 (as defined on page 77 of this report) and Variable RSUs (as defined on page 76 of this report) granted in prior years that have been effectively converted to Fixed RSUs because the performance goal has been formally achieved at a level that permits payout; and (ii) the portion of annual employee cash bonuses that is based on individual employee performance goals. The second component represents amounts that are entirely dependent on Company performance and consist of: (i) Variable RSUs in the Initial RSU Period; and (ii) the portion of annual employee cash bonuses that is based on Company performance.
The increase in Montpelier Bermuda’s incentive compensation expenses during 2012, versus those of 2011, is the result of significantly improved Company performance during 2012. The decrease in incentive compensation expenses during 2011, versus those of 2010, is the result of significant catastrophe losses incurred during 2011, which adversely impacted Company performance during that year.
Underwriting results for Montpelier Syndicate 5151 for the years ended December 31, 2012, 2011 and 2010 were as follows:
Net premiums written and earned by Montpelier Syndicate 5151 in 2012, 2011 and 2010 included reinstatement premiums of $2.6 million, $6.5 million and $6.7 million, respectively. The 2012 reinstatement premiums were mainly attributable to windstorm Sandy, the 2011 reinstatement premiums were mainly attributable to the Japan and New Zealand earthquakes and the 2010 reinstatement premiums were mainly attributable to the Chilean earthquake. The level of reinstatement premiums that we may realize in future periods will be dependent upon the occurrence of future losses.
Net premiums earned within Montpelier Syndicate 5151 in 2012, 2011 and 2010 were $217.3 million, $194.5 million and $175.0 million, respectively. Net premiums earned are primarily a function of the amount and timing of net premiums written.
(1) Montpelier Syndicate 5151’s ending reinsurance recoverable at December 31, 2012 and 2011, includes a recoverable from Montpelier Bermuda pursuant to an intercompany reinsurance contract of $13.3 million and $19.7 million, respectively. The effects of these intercompany reinsurance contracts are eliminated in consolidation.
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, 2012.
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 net 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.
· three individual risk losses incurred at Montpelier Syndicate 5151 during 2008 and 2011 ($5.3 million decrease).
· 2009 and prior non-marine individual risk losses ($9.0 million decrease), and
In addition to the loss reserve movements referred to above, Montpelier Syndicate 5151’s prior year loss development also related to movements associated with reserves established in prior years in order to provide for claims and events that had been incurred in that year but had not yet been reported to us. These reserves were originally recorded by Montpelier Syndicate 5151 largely on the basis of historical loss rates, industry data and actuarial judgment and experience as opposed to information received from cedants and other customers. As prior underwriting years have matured, Montpelier Syndicate 5151 has begun to increase its reliance on the loss data it has received and, as a result, has adjusted its estimates of ultimate losses accordingly.
Net Impact of Foreign Currency Movements on Loss and LAE Incurred and Loss and LAE Reserves
Montpelier Syndicate 5151 recognized net foreign exchange transaction losses (gains) related to its current and prior year loss and LAE of $(7.6) million, $(2.6) million and $2.2 million during the years ended December 31, 2012, 2011 and 2010, respectively. Montpelier Syndicate 5151’s foreign currency transaction gains and losses on its losses and LAE incurred (which are recorded as loss and loss adjustment expenses) are incorporated in its underwriting results and underwriting ratios.
The following table summarizes Montpelier Syndicate 5151’s underwriting expenses for the years ended December 31, 2012, 2011 and 2010:
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. Net profit commissions incurred, which are accrued based on the estimated results of the subject contracts assumed and ceded, totaled $1.1 million, $2.7 million and $2.4 million during 2012, 2011 and 2010, respectively.
Montpelier Syndicate 5151’s acquisition cost ratio has increased gradually from 2010 to 2012 as a result of changes in the mix of the business it writes. Montpelier Syndicate 5151’s marine, pro-rata engineering and casualty writings, which have grown significantly from 2010 to 2012, are subject to a higher acquisition cost ratio than most of the other business it writes.
Incentive compensation expenses recorded at Montpelier Syndicate 5151 consist of two independent components. The first component represents amounts that are not, or are no longer, dependent on Company performance and consist of: (i) Fixed RSUs and Variable RSUs granted in prior years that have been effectively converted to Fixed RSUs because the performance goal has been formally achieved at a level that permits payout; and (ii) the portion of annual employee cash bonuses that is based on individual employee performance goals. The second component represents amounts that are entirely dependent on Company performance and consist of: (i) Variable RSUs in the Initial RSU Period; and (ii) the portion of annual employee cash bonuses that is based on Company performance.
Blue Capital’s gross and net premiums written and earned during 2012 totaled $2.4 million. Blue Capital did not cede any premium or incur any losses during 2012.
Blue Capital incurred $1.7 million of general and administrative expenses during 2012, which was comprised primarily of third party legal and consulting costs associated with its formation, as well as allocated internal personnel and information technology costs.
All premiums written within the MUSIC Run-Off Segment relate to our Property and Specialty Individual Risk line of business.
The MUSIC Run-Off segment has not ceded any reinsurance premiums subsequent to the MUSIC Sale. The increase in MUSIC’s ceded reinsurance premiums in 2011, as compared to 2010, resulted from a significant purchase of additional excess-of-loss reinsurance in 2011 covering MUSIC’s property and casualty exposures. MUSIC’s ceded reinsurance premiums in 2011 and 2010 also include amounts ceded to Montpelier Syndicate 5151 as part of an inter-segment excess-of-loss reinsurance agreement. See “Corporate and Other” under this Item 7.
Net premiums earned within the MUSIC Run-Off segment in 2012, 2011 and 2010 were $27.3 million, $50.2 million and $36.5 million, respectively. Net premiums earned are primarily a function of the amount and timing of net premiums written.
(1) The MUSIC Run-Off segment’s ending loss and LAE reserves of $43.5 million and $38.3 million at December 31, 2012 and 2011, respectively, represent MUSIC’s losses and LAE that were assumed by Montpelier Re under the MUSIC Quota Share. These loss and LAE reserves have historically been, and will continue to be, reported within our MUSIC segment as opposed to our Montpelier Bermuda segment.
Our best estimates of MUSIC Run-Off’s ending gross loss and LAE reserves at December 31, 2012 and 2011, were $43.5 million and $38.3 million, respectively. We estimated MUSIC Run-Off’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 MUSIC Run-Off’s reserving process during the year ended December 31, 2012.
The following table presents MUSIC Run-Off’s net loss and LAE ratios for the years ended December 31, 2012, 2011 and 2010:
Current year net losses incurred during the years presented primarily represented IBNR as there were no individually significant loss events experienced within the MUSIC Run-Off segment during those periods. Current year losses incurred by MUSIC during 2011 further reflect $3.5 million of net losses resulting from U.S. storms occurring in 2011.
The significant increase in the MUSIC Run-Off segment’s acquisition cost ratio for 2012, versus those for 2011 and 2010, is due to the ceding commission (the “MUSIC Ceding Commission”) associated with the business we have assumed from Selective in connection with the MUSIC Sale. The MUSIC Ceding Commission was designed to reimburse Selective for its general and administrative costs incurred in support of the business it cedes to us. As a result, the MUSIC Run-Off segment did not incur any general and administrative expenses in 2012 and is not expected to incur any such costs in future periods.
The gross and net premiums associated with these inter-segment arrangements during the years presented were as follows:
(1) Beginning in June 2012, our weighted average investment portfolio calculations exclude those cash and cash equivalents that served to collateralize Blue Water Re’s reinsurance operations. These assets generate virtually no investment income and the return on these invested assets is reflected as Blue Water Re’s underwriting result, and is included in our combined ratio.
During 2011 we recognized $34.0 million in net realized and unrealized gains from our fixed maturity portfolio, $1.5 million in net realized and unrealized losses from our equity portfolio and $6.3 million in net realized and unrealized losses from our other investments. The fixed maturity net gains we experienced during 2011 were largely the result of declines in U.S. Treasury yields as well as tightening credit spreads between the yield on the fixed maturity investments we held versus that of U.S. Treasuries. The equity portfolio net losses we experienced during 2011 followed a trend consistent with that of the U.S. equity market as a whole, as measured by the S&P 500. The other investment net losses we experienced during 2011 included a $4.7 million unrealized loss associated with a private investment fund.
During 2012, 2011 and 2010, we experienced net foreign exchange transaction gains (losses) on cash and investments (those in connection with our investing activities) of $2.3 million, $(3.5) million and $0.1 million, respectively. These foreign exchange transaction gains and losses represent foreign exchange fluctuations in the value of our non-U.S. dollar managed cash and investments.
We formerly owned an investment in Symetra Financial Corporation (“Symetra”), which we acquired through in a private placement investment made in 2004. In January 2010, Symetra’s common shares began trading on the New York Stock Exchange under the symbol “SYA”. Symetra was originally carried as an other investment on our consolidated balance sheets and its net appreciation or depreciation was reported as a separate component of our shareholders’ equity, with changes therein reported as a component of our other comprehensive income. As a result of the Symetra IPO, 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.
See “Net Investment Income and Total Return on Cash and Investments” above for details of our net foreign exchange transaction gains (losses) we experienced in connection with our investing activities during the years presented.
The net foreign exchange transaction gains (losses) we experienced during the years presented associated with our other activities is primarily due to a strengthening (weakening) of the U.S. dollar against the British pound, the European Union euro and the New Zealand dollar, during such periods.
The following table presents our consolidated net income (loss) from derivative instruments during the years ended December 31, 2012, 2011 and 2010:
The following table summarizes our consolidated interest and other financing expenses for the years ended December 31, 2012, 2011 and 2010:
During 2012 we recorded a net tax provision of $0.3 million consisting of a current tax provision of $0.8 million, partially offset by a deferred tax benefit of $0.5 million. During 2011 and 2010, we recorded a deferred tax benefit of $0.6 million and $1.3 million, respectively.
The movements in our income tax provisions during the years presented herein were associated primarily with our U.K. operations. In particular, during 2010 we re-characterized an existing intercompany loan between two of our wholly-owned subsidiaries as a contribution of capital. In connection with this re-characterization, we recorded a one-time $1.0 million deferred income tax benefit representing: (i) current and prior year reversals of U.K. deferred income tax provisions; and (ii) the amended treatment of foreign exchange gains experienced while the loan was outstanding.
During 2012, 2011 and 2010, our U.K. operations generated losses before income taxes of $4.4 million, $18.0 million and $1.3 million, respectively, and certain of these operations are currently in a 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 the resulting U.K. gross deferred tax assets, we have established offsetting valuation allowances against the majority of these 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 companies as described under “Regulation” herein. We currently pay a regular dividend of $0.115 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.
The following table summarizes our capital structure as of December 31, 2012 and December 31, 2011:
Our debt and interest and other financing obligations assume that the Trust Preferred Securities are redeemed upon their maturity in March 2036, and that the interest rate thereon remains at 4.905% per year, the rate that we have achieved through the LIBOR Swap.
Our letter of credit facilities are cancellable upon one-years’ notice and are assumed to have been cancelled on December 31, 2012.
Our unfunded commitments to invest $14.8 million into three separate private investment funds are assumed to be fully funded during 2013.
Our Foreign Exchange Contracts, Credit Derivatives, Interest Rate Contracts, Investment Options and Futures and the Loss Development Cover each constitute off-balance sheet arrangements. Excluding these specific transactions, as of December 31, 2012, we were not subject to any off-balance sheet arrangement that we believe is material to our investors.
During 2012, 2011 and 2010 we experienced a net increase (decrease) in cash and cash equivalents of $(9.5) million, $108.0 million and $30.2 million, respectively.
During 2012, 2011 and 2010 we generated $200.8 million, $166.8 million and $317.7 million of net cash from our operations, respectively, which resulted primarily from our premiums received, net of acquisition costs, exceeding our net losses and operating expenses paid.
Our cash flows used for financing activities totaled $86.8 million, resulting from the following:
We also experienced a $5.4 million increase in the U.S. dollar value of our cash and cash equivalents due to foreign exchange rate fluctuations.
· we received $2.7 million from net sales of equity securities and other investments,
Our cash flows provided from financing activities totaled $26.7 million, resulting from the following:
· we received $52.9 million from net sales of equity securities and other investments,
· we paid $1.0 million to repurchase and retire a portion of our 2013 Senior Notes,
As of December 31, 2012, we had total cash and cash equivalents of $330.8 million. Of this amount, $212.7 million was held in Bermuda, $102.4 million was held in the U.K., $14.6 million was held in the U.S. and $1.1 million was held in Switzerland.
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. In the case of our reinsurance business, our reserving process is highly dependent on the loss information we receive from ceding companies.
Most of our treaty reinsurance contracts comprise business which has both a low frequency of claims occurrence and a high potential severity of loss, such as claims arising from natural catastrophes, terrorism, large individual property risks, and marine, space and aviation risks. Given the high-severity, low-frequency nature of these events, the losses typically generated therefrom do not lend themselves to traditional actuarial reserving methods, such as statistical calculations of a range of estimates surrounding the best point estimate of our loss and LAE reserves. Therefore, our reserving approach for these types of coverages is to estimate the ultimate cost associated with a single loss event rather than analyzing the historical development patterns of past losses as a means of estimating ultimate losses for an entire accident year. We estimate our reserves for these large events on a contract-by-contract basis by means of a review of policies with known or potential exposure to a particular loss event.
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 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 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 in relation to the same event are considered as we migrate from industry loss-based estimates to specific cedant information.
Estimating loss reserves for our modest book of longer-tail casualty reinsurance business, which can be either 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. At December 31, 2012 and 2011, we recorded gross loss and LAE reserves related to our casualty business of $243.2 million and $249.4 million, respectively.
The following tables provide the details of our gross case reserves and IBNR, by line of business, at December 31, 2012 and 2011:
The portion of our gross loss and LAE reserves at any given time represented by IBNR tends to be lower for large loss events than it does for loss events of lower severity, unless we happen to experience a significant loss late in the year. At the end of 2012 (a year in which we incurred a significant loss from windstorm Sandy late in the year) our ending gross IBNR reserves represented 58% of our total ending gross loss and LAE reserves, roughly equal to the 57% of total ending gross loss and LAE reserves represented by IBNR reserves at the end of 2011 (a year in which we incurred significant losses from a high number of large loss events occurring throughout the year), and lower than the 63% of gross loss and LAE reserves represented by IBNR reserves at the end of 2010 (a year in which we incurred significant losses from a low number of large loss events occurring early in the year).
We have determined that our best estimates for our gross loss and LAE reserves at December 31, 2012 and 2011 were $1,112.4 million and $1,077.1 million, respectively. Of these estimates, at December 31, 2012 and 2011, $171.2 million and $119.9 million related to our direct insurance and facultative business, respectively, and $941.2 million and $957.2 million related to our reinsurance business, respectively.
Reinsurance contracts can be written on a risks-attaching or losses-occurring basis. Under risks-attaching reinsurance contracts, all claims from cedants’ underlying policies incepting during the contract period are covered, even if they occur after the expiration date of the reinsurance contract. In contrast, losses-occurring reinsurance contracts cover all claims occurring during the period of the contract, regardless of the inception dates of the underlying policies. Any losses occurring after the expiration of the losses-occurring contract are not covered.
For pro-rata contracts and certain excess-of-loss contracts in which a deposit or minimum premium is not specified in the contract, written premium is recognized evenly over the term of the reinsurance contract based on estimates of ultimate premiums provided by the ceding companies. When the actual premium is reported by the ceding company, typically on a quarterly or six month lag, it may be significantly higher or lower than the estimate.
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 $3.8 million and $3.6 million for uncollectible insurance and reinsurance premiums receivable as of December 31, 2012 and 2011, respectively, each of which represented less than one percent of our consolidated net insurance and reinsurance premiums earned in those years.
As of December 31, 2012, we had no ongoing material reinsurance contract disputes.
At the discretion of the Compensation Committee, incentive awards, the value of which are based on Common Shares, may be made to our eligible officers, 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 (“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 first year of the applicable performance period (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.
For the 2010-2013 Variable RSU award cycle, the targeted performance metric was based on a 2010 ROE of 9.69%. At an achieved ROE of 9.69% (our target), we would have expected to grant approximately 580,000 Variable RSUs to participants. At an achieved ROE of 3.69% (our threshold) or less, we would not have expected to grant any Variable RSUs to participants. At an achieved ROE of 19.69% (our maximum) or more, we would have expected to grant approximately 1,160,000 Variable RSUs to participants. 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 725,922 RSUs (as recorded at December 31, 2010) to as few as 408,084 RSUs (as recorded at June 30, 2010). Based on our actual ROE achieved for 2010 of 11.94%, the final number of Variable RSUs granted for the 2010-2013 Variable RSU award cycle was determined to be 713,741 RSUs (or 123% of the target RSUs in force for that cycle at that time) by the Compensation Committee in March 2011, after which these awards were effectively converted to Fixed RSUs.
During 2012, 2011 and 2010, we also granted 50,700, 100,000 and 10,000 Fixed RSUs, respectively, to certain of our employees and non-management directors.
As of December 31, 2012, the unamortized grant date fair value of the 1,327,041 RSUs outstanding was $10.3 million. As of December 31, 2011, the unamortized grant date fair value of the 761,279 RSUs outstanding was $4.7 million.