Our consolidated gross premiums written increased by $196.7 million, or 7.2%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 driven by the growth in our North American Insurance and Global Markets Insurance segments. Our net income increased by $72.4 million to $490.3 million compared to the year ended December 31, 2013. The increase was primarily due to higher underwriting income and investment returns (net investment income and realized gains) during 2014 compared to 2013.
We reported net income of $130.5 million for the three months ended December 31, 2014 compared to a net income of $137.9 million for the three months ended December 31, 2013, a decrease of $7.4 million.
For the three months ended December 31, 2014, we incurred $22.0 million of pre-tax catastrophe-related losses primarily from a hailstorm in Brisbane, Australia and Typhoon Rammasun compared to $13.5 million of pre-tax catastrophe-related losses from Typhoon Fitow during the three months ended December 31, 2013.
A reduction in net realized investment gains or losses of $82.9 million. For the three months ended December 31, 2014 we recognized $15.3 million of realized investment losses compared to realized investment gains of $67.6 million for the three months ended December 31, 2013.
In August 2014, we reached definitive agreements to acquire the Hong Kong and Singapore operations of RSA for approximately $201.8 million, at current exchange rates, subject to adjustments at closing. In addition to the purchase price, we expect to contribute an additional $90.0 million to capitalize the businesses on an ongoing basis. Subject to regulatory approvals in both Hong Kong and Singapore, as well as court approval in Singapore, the acquisition is expected to be completed in the early part of the second quarter of 2015. We believe the acquisition of the Hong Kong and Singapore branches of RSA complements our global specialist insurance strategy by providing meaningful additional scale in the region.
In presenting the company’s results, management has included and discussed certain non-GAAP financial measures, as such term is defined in Item 10(e) of Regulation S-K promulgated by the SEC. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results of operations in a manner
The Company measures its segment results as underwriting income or loss plus other insurance-related revenue and expenses, which may include the net earnings from our claims administration services operations and other income or expense that is not directly related to our insurance operations. Management measures results for each segment's underwriting income or loss on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio,” “expense ratio” and the “combined ratio.” Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written.
It is important to understand our accounting policies in order to understand our financial position and results of operations. Our consolidated financial statements reflect determinations that are inherently subjective in nature and require management to make assumptions and best estimates to determine the reported values. If events or other factors cause actual results to differ materially from management’s underlying assumptions or estimates, there could be a material adverse effect on our financial condition or results of operations. The following are the accounting estimates that, in management’s judgment, are critical due to the judgments, assumptions and uncertainties underlying the application of those estimates and the potential for results to differ from management’s assumptions.
In certain lines of business, claims are generally reported and paid within a relatively short period of time (“short-tail lines”) during and following the policy coverage period. This generally enables us to determine with greater certainty our estimate of ultimate losses and loss expenses. The estimate of reserves for our short-tail lines of business and products, including property, crop, aviation, marine, personal accident and workers compensation catastrophe relies primarily on traditional loss reserving methodologies, utilizing selected paid and reported loss development factors.
Our casualty insurance and casualty reinsurance lines of business include general liability risks, healthcare and professional liability risks. Claims may be reported or settled several years after the coverage period has terminated for these lines of business (“long-tail lines”), which increases uncertainties of our reserve estimates in such lines. In addition, our attachment points for these long-tail lines can be relatively high, making reserving for these lines of business more difficult than short-tail lines due to having to estimate whether the severity of the estimated losses will exceed our attachment point. We establish a case reserve when sufficient information is gathered to make a reasonable estimate of the liability, which often requires a significant amount of information and time. Due to the lengthy reporting pattern of these casualty lines, reliance is placed on industry benchmarks supplemented by our own experience. For expected loss ratio selections, we are giving increasing consideration to our existing experience supplemented with analysis of loss trends, rate changes and experience of peer companies.
For excess-of-loss reinsurance, cedents generally are required to report losses that either exceed 50% of the retention, have a reasonable probability of exceeding the retention or meet serious injury reporting criteria. For quota share reinsurance treaties, cedents are required to give a periodic statement of account, generally monthly or quarterly. These periodic statements typically include information regarding written premiums, earned premiums, unearned premiums, ceding commissions, brokerage amounts, applicable taxes, paid losses and outstanding losses. They can be submitted 60 to 90 days after the close of the reporting period. Some quota share reinsurance treaties have specific language regarding earlier notice of serious claims.
The key assumptions used to arrive at our best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, selection of benchmarks and reported and paid loss emergence patterns. Our reporting factors and expected loss ratios are based on a blend of our own experience and industry benchmarks for long-tailed business and primarily our own experience for short-tail business. The benchmarks selected were those that we believe are most similar to our underwriting business.
For short-tail lines, the primary assumption that changed during both 2014 as compared to 2013 and 2013 as compared to 2012 as it relates to prior year losses was actual paid and reported loss emergence patterns were generally less severe than
During the years ended December 31, 2014, 2013 and 2012, we incurred $65.0 million, $13.5 million and $179.6 million of catastrophe-related losses. In addition, during the year ended December 31, 2012 we recognized $36.0 million related to drought losses on the U.S. crop reinsurance book. We classify catastrophe losses as those losses that result from a major singular event or series of similar events (such as tornadoes) which are assigned a catastrophe loss number by industry data services, where our consolidated losses are expected to be at least $10 million per net loss event or series of similar events and where we believe it is important to our investors’ understanding of our operations.
Our overall change in the loss reserve estimates related to prior years increased as a percentage of total carried reserves during 2014. During 2014 we had a net decrease of $212.6 million, or 4.7%, on an opening carried reserve base of $4,532.0 million, net of reinsurance recoverables. During 2013 we had a net decrease of $180.3 million, or 4.0%, on an opening carried reserve base of $4,504.4 million, net of reinsurance recoverables. We believe that these changes are reasonable given the long-tail nature of our business.
There is potential for significant variation in the development of loss reserves, particularly for the casualty lines of business due to their long-tail nature and high attachment points. The maturing of our casualty insurance and reinsurance loss reserves have caused us to reduce what we believe is the reasonably possible variance in the expected loss ratios for older loss years. As of December 31, 2014 and 2013, we believe the reasonably possible variances in our expected loss ratio in percentage points for our loss years are as follows:
The change in the reasonably possible variance for the 2006 through 2010 loss years in 2014 compared to 2013 is due to giving greater weight to the Bornhuetter-Ferguson loss development method for additional lines of business during 2014 and
If our final casualty insurance and reinsurance loss ratios vary by five percentage points from the expected loss ratios in aggregate, our required net reserves after reinsurance recoverable would increase or decrease by approximately $687.9 million. Excluding the impact of income taxes, this would result in either an increase or decrease to net income and total shareholders’ equity of approximately $687.9 million. As of December 31, 2014, this represented approximately 18% of total shareholders’ equity.
In terms of liquidity, our contractual obligations for reserves for losses and loss expenses would also increase or decrease by approximately $687.9 million after reinsurance recoverable. If our obligations were to increase, we believe we currently have sufficient cash and investments to meet those obligations.
The following tables provide our ranges of loss and loss expense reserve estimates by business segment as of December 31, 2014:
We had net cash outflows relating to ceded reinsurance activities (premiums paid less losses recovered and net ceding commissions received) of approximately $261.8 million, $294.5 million and $247.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. The net cash outflows in all years are reflective of less losses that were recoverable under our reinsurance coverages than we paid in premiums.
General Property: We have purchased both quota share reinsurance for our general property business written in our North American Insurance and Global Markets Insurance segments, as well as excess-of-loss cover providing protection for specified classes of catastrophe. We have also purchased a limited amount of facultative reinsurance, which provides cover for specified general property policies.
Professional Liability: For professional liability policies, our reinsurance varied by writing office and by policy type. Professional liability policies written in our Bermuda, Europe and Asia offices were quota-share reinsured with cession percentages dependent upon location. Additionally, the professional liability policies written in the United States were reinsured on an excess-of-loss basis.
The following table shows our reinsurance recoverables by operating segment as of December 31, 2014 and 2013:
Our reinsurance recoverables are subject to the same uncertainties as the estimate of case reserves and IBNR reserves. The reasonably possible variance of our expected ceded loss ratio for all loss years for our casualty insurance and casualty reinsurance lines of business was seven percentage points as of December 31, 2014.
At each measurement date, we estimate the fair value of the financial instruments using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating the fair value of our financial instruments. When quoted market prices or observable market inputs are not available, we utilize valuation techniques that rely on unobservable inputs to estimate the fair value of financial instruments. The following describes the valuation techniques we used to determine the fair value of financial instruments held as of December 31, 2014 and what level within the U.S. GAAP fair value hierarchy the valuation technique resides.
Equity securities: Comprised of U.S. and foreign common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Foreign mutual funds where the net asset value ("NAV") is not provided on a daily basis are included in the Level 3 fair value hierarchy.
Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the NAV of the funds as reported by the fund manager. The fair values of these investments are included in the Level 3 fair value hierarchy as we believe the NAV is an unobservable input and these securities are not redeemable in the near term. The Company does not measure its investments that are accounted for using the equity method of accounting at fair value.
International indices: We use international indices, which include the FTSE, Deutsche Teleborse and the Scotia Index, to price our non-U.S. government and government agencies securities. The observable inputs used by international indices to determine its prices are based on new issuance and secondary trades and information provided by broker-dealers.
Other sources: We utilize other indices and pricing services to price various securities. These sources use observable inputs consistent with indices and pricing services discussed above.
There have been no material changes to any of our valuation techniques from those used as of December 31, 2013. Based on all reasonably available information received, we believe the prices that were obtained from inactive markets were orderly transactions and therefore, reflected the current price a market participant would pay for the asset. Since fair valuing a financial instrument is an estimate of what a willing buyer would pay for our asset if we sold it, we will not know the ultimate value of our financial instruments until they are sold. We believe the valuation techniques utilized provide us with the best estimate of the price that would be received to sell our assets in an orderly transaction between participants at the measurement date.
We classify intangible assets into three categories: (1) intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. Intangible assets, other than goodwill, consist of renewal rights, internally generated software, non-compete covenants and insurance licenses held by subsidiaries domiciled in the United States. The following is a summary of our goodwill and other intangible assets as of December 31, 2014 and 2013:
Related to the acquisition of Allied World Underwriters, Inc. ("AW Underwriters") (f/k/a Darwin Professional Underwriters, Inc.)
Related to the acquisition of the remaining interest in a claims administration services company we did not own.
For indefinite lived intangible assets we do not amortize the intangible asset but test these intangible assets for impairment by comparing the fair value of the assets to their carrying values on an annual basis or more frequently if circumstances warrant. The factors we consider to determine if an impairment exists are similar to factors noted above. As a result of our evaluation, we determined that there was no impairment to the carrying value of our indefinite lived intangible assets for the year ended December 31, 2014.
We have determined that the goodwill arising from the acquisition of AW Underwriters and the claims administration services company should be allocated to the U.S. direct insurance operations reporting unit of the North American Insurance segment as the assets employed and the liabilities relate to the U.S. direct insurance operations. All the insurance operations of AW Underwriters and the claims administration services company are included into the North American Insurance segment.
For goodwill, we perform an impairment test annually, or more frequently if circumstances warrant. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of the qualitative assessment will determine if an entity needs to proceed with the two-step goodwill impairment test.
The process of determining whether or not an asset, such as goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of goodwill, we perform a discounted cash flow analysis. The discounted cash value may be different from the fair value that would result from an actual transaction between a willing buyer and a willing seller. Such analyses are particularly sensitive to changes in discount rates,
Based on our analysis, the point estimate fair value of the U.S. direct insurance operations reporting unit, using both a discounted cash flow model and market multiple model, was in excess of its carrying value by approximately 19% as of the September 30, 2014 measurement date. As a result, we concluded there was no implied goodwill impairment, and therefore, no step two goodwill impairment testing was required.
The total return of our investment portfolio was 3.1% and 2.6% for the years ended December 31, 2014 and 2013, respectively. The increase in total return was primarily due to lower mark-to-market losses on our fixed maturity investments due to lower interest rates and tighter credit spreads during the year ended December 31, 2014 compared to the year ended December 31, 2013. Equity securities and other invested assets continued to have a positive impact on the total return for both the years ended December 31, 2014 and 2013. The realized and unrealized losses on derivatives for the year ended December 31, 2014 were the result of selling interest rate future and swap contracts to reduce the duration of the investment portfolio. Given the decrease in interest rates during the year, we recorded a loss related to these interest rate future and swap contracts.
Other income represents the revenue of our third-party claims administration services that we acquired in the current year.
The current year non-catastrophe losses and loss expenses increased by $56.8 million primarily due to the growth of our operations across each of our operating segments. The decrease in the current year non-catastrophe losses and loss expense ratio was primarily due to lower reported large non-catastrophe property losses and a higher reduction in IBNR loss reserves for current year property losses during the year ended December 31, 2014 compared to the year ended December 31, 2013 in our Reinsurance segment.
During the year ended December 31, 2014, we incurred $65.0 million in catastrophe-related losses compared to $13.5 million of catastrophe-related losses during the year ended December 31, 2013. The catastrophe related losses during 2014 were related to Hurricane Odile ($18.0 million), hailstorm in Brisbane, Australia ($12.5 million), Property Claims Services designated storm #45 in the Midwestern U.S. ("PCS storm #45") ($12.5 million), Windstorm Ela ($12.0 million) and Typhoon Rammasun ($10.0 million). Of the $65.0 million of catastrophe-related losses incurred during the year ended December 31, 2014, $4.0 million, $11.0 million and $50.0 million was incurred in our North American Insurance, Global Markets Insurance and Reinsurance segments, respectively. The catastrophe-related losses during 2013 were related to Typhoon Fitow in China, which was incurred in our Reinsurance segment.
The net unfavorable prior year reserve development in our North American Insurance segment for the 2011 through 2013 loss years was primarily related to our healthcare line of business and was due to higher than expected loss frequency and severity. The net favorable reserve development in our Reinsurance segment primarily related to our property line of business for the 2013 loss year due to benign global property catastrophe activity.
The following table shows the components of net losses and loss expenses for the years ended December 31, 2014 and 2013.
Acquisition costs increased by $42.4 million, or 16.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in acquisition costs was primarily due to higher acquisition costs in our North American Insurance and Reinsurance segments. Acquisition costs as a percentage of net premiums earned were 13.5% for the year ended December 31, 2014 compared to 12.6% for 2013. The increase in the acquisition cost ratio was primarily driven by the increased profit commissions we pay related to our collateralized property catastrophe reinsurance program in our Reinsurance segment, as well as higher commissions charged by brokers in our North American Insurance segment.
General and administrative expenses increased by $13.4 million, or 3.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in general and administrative expenses was primarily due to increased salary and related costs as average headcount increased to support our continued growth, particularly in our direct insurance operations, as well as higher building-related costs driven by the increased head count. Our general and
The amortization of intangible assets remained the same for 2014 and 2013. We have one intangible asset that we amortize over its useful life that will continue to amortize over the next nine years.
Corporate income tax expense or benefit is generated through our operations in Australia, Canada, Europe, Hong Kong, Singapore and the United States. Our income tax expense or benefit may fluctuate significantly from period to period depending on the geographic distribution of pre-tax net income or loss in any given period between different jurisdictions with different tax rates. The geographic distribution of pre-tax net income or loss can vary significantly between periods principally due to the geographic location of the business written, the mix of business and the profitability of such business; the geographic location of investment income; the geographic location of net losses and loss expenses incurred; and the amount of inter-company reinsurance utilized for rating agency purposes.
North American Insurance: Gross premiums written in our North American Insurance segment increased by $196.4 million, or 14.3%, for the year ended December 31, 2013 compared to 2012. The increase in gross premiums written was primarily driven by higher production in our U.S. direct insurance operations. The higher gross premiums written in our U.S. direct insurance operations was due to new business across most lines that added $414.7 million during the year, combined with premium rate increases in all lines of business. This was particularly evident in our property and casualty lines of business that had an overall increase in gross premiums written of $183.1 million. This growth was partially offset by the non-renewal of business, particularly in our healthcare and
private/not for profit D&O lines of business, that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition;
Reinsurance: Gross premiums written in our Reinsurance segment increased by $173.5 million, or 22.8%. The increase in gross premiums written was primarily due to the growth in our property and specialty lines of business. The growth of the property reinsurance line of business related to new business across all geographic locations, as well as increased business through Aeolus Re. Our specialty reinsurance line of business increased primarily due to growth in our crop reinsurance and marine and aviation reinsurance lines of business.
Net investment income decreased by $9.5 million, or 5.7%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The decrease was due to lower net investment income on our fixed maturity investments as we have increased the allocation of our investment portfolio to "other invested assets", which contribute to our total return but carry little
or no current yield. This was partially offset by an increase of $14.6 million of net investment income related to our equity method investments that we invested in at the end of 2012, as well as higher net investment income from our equity securities, hedge funds and private equity investments. As of December 31, 2013, we held 10.9% of our total investments and cash equivalents in "other invested assets" compared to 8.9% as of December 31, 2012.
Investment management expenses of $16.8 million and $16.5 million were incurred during the years ended December 31, 2013 and 2012, respectively.
The total return of our investment portfolio was 2.6% and 5.5% for the years ended December 31, 2013 and 2012, respectively. The decrease in total return was primarily due to mark-to-market losses on our fixed maturity investments and lower mark-to-market gains on our equity securities. The mark-to-market losses on our fixed maturity investments were caused by higher interest rates partially offset by tightening credit spreads on our fixed income portfolio. As yields rise, prices fall and that can result in mark-to-market losses, as well as lower realized gains on the sale of fixed maturity securities. During the year, the yield on the 10-year U.S. treasury increased by 118 basis points. The rising interest rate environment also negatively impacted our dividend focused equity portfolio, which underperformed the S&P 500 for the period. The investment portfolio return for the year ended December 31, 2012 benefited from the favorable financial, economic and business environment during the year and the absence of significant market events. Equity markets performed well, with the S&P 500 up over 13% during 2012. Fixed income securities also benefited from the U.S. Federal Reserve’s continued quantitative easing, resulting in spreads tightening during the year.
The current year non-catastrophe losses and loss expenses increased by $160.0 million primarily due to the growth of our operations across each of our operating segments. The decrease in the current year non-catastrophe losses and loss expense ratio was due to net favorable development on our short-tail lines as reported claims were lower than our initial expectation, partially offset by a number of large reported losses across several lines of business, which required us to increase our reserves in those lines.
During the year ended December 31, 2013, we incurred $13.5 million of catastrophe-related losses related to Typhoon Fitow in China while during the year ended December 31, 2012, we incurred $179.6 million of catastrophe-related losses, of which $175.7 million related to Superstorm Sandy and $3.9 million related to Hurricane Isaac.
The unfavorable reserve development for the 2011 and 2012 loss years for our North American Insurance segment was due to higher than expected loss emergence, primarily in our private/not for profit D&O, healthcare and E&O products. The healthcare emergence was largely driven by several claims, as well as higher than expected loss emergence on reported claims. The emergence in the E&O and private/not for profit D&O was due to higher than expected loss frequency. For long-tail lines, like healthcare, D&O and E&O, it may take several years for a claim to be reported or develop. This could be due to a number of factors, including among others, information becoming available in subsequent periods that allows the insured to report a claim or change in the severity of an already reported claim, or court decisions that define insurance coverages or exclusions differently than intended when the policy was originally bound. These factors contributed to us increasing our reserve for losses and loss expenses in the current period for the 2011 and 2012 loss years, while the absence of these factors and related trend of not experiencing these factors contributed to us decreasing the reserve for losses and loss expenses for the older loss years across each segment.
The following table shows the components of net losses and loss expenses for the years ended December 31, 2013 and 2012.
The amortization of intangible assets remained the same for 2013 and 2012. We have one intangible asset that we amortize over its useful life that will continue to amortize over the next 10 years.
Income tax expense decreased by $8.6 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. The decrease was primarily due to the lower income before income taxes from our U.S. operations and a net loss before income taxes from our Swiss operations.
North American Insurance Segment. The North American Insurance segment includes our direct specialty insurance operations in the United States, Bermuda and Canada, as well as the company's claim administration services operation. This segment provides both direct property and specialty casualty insurance to North American domiciled accounts.
Global Markets Insurance Segment. The Global Markets Insurance segment includes our direct insurance operations in Europe and Asia Pacific, which includes offices in Australia, Hong Kong and Singapore. This segment provides both direct property and casualty insurance primarily to non-North American domiciled accounts.
Net premiums written increased by $148.4 million, or 13.7%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net premiums written was primarily due to higher gross premiums written and lower premiums ceded. We ceded 28.3% of gross premiums written for the year ended December 31, 2014 compared to 31.2% for 2013. The decrease in the ceded written percentage was primarily due to retaining more of our gross premiums written in several lines of business in the current period than in the prior period.
Net premiums earned increased by $88.2 million, or 8.6%, for the year ended December 31, 2014 compared to 2013. The increase was due to the continued growth of the U.S. direct insurance operations of the North American Insurance segment and lower ceded premiums earned due to the lower premiums ceded.
The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2014 and 2013:
During the year ended December 31, 2014, we incurred $4.0 million catastrophe-related losses from Hurricane Odile. We did not incur any significant catastrophe losses during the year ended December 31, 2013.
Acquisition costs. Acquisition costs increased by $11.0 million, or 11.6%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily caused by increased net premiums earned, higher
commission and brokerage rates charged by brokers and lower ceding commission income due the reduction in our ceded reinsurance purchases in the current year. The acquisition cost ratio increased to 9.5% for the year ended December 31, 2014 from 9.3% for 2013 due to the factors noted above.
Other insurance-related income and expense. The other insurance-related income and expense represents the revenue and related expenses of our third-party claims administration services company that we acquired in the current year.
Net premiums written increased by $118.2 million, or 12.3%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in net premiums written was primarily due to higher gross premiums written. We ceded 31.2% of gross premiums written for the year ended December 31, 2013 compared to 29.9% for 2012. The increase in
the ceded written percentage is primarily due to higher quota share cessions on our 2013 renewals for general casualty and general property lines of business and the purchase of new reinsurance in our programs, surety and primary general liability lines of business. We also purchased a new property catastrophe coverage during 2013. These additional reinsurance purchases were partially offset by a reduction in the cost of reinsurance in our professional liability and healthcare lines of business.
Net losses and loss expenses. Net losses and loss expenses increased by $42.5 million, or 7.0%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. Overall, the increase in net losses and loss expenses was primarily due to growth in net premiums earned and lower favorable prior year reserve development in 2013 compared to 2012, partially offset by lower property catastrophe losses.
The increase in the current year non-catastrophe losses and loss expenses and the related ratio was primarily due to a higher amount of reported losses in 2013 compared to 2012. During 2013, we had several losses from fires, large losses in our healthcare, E&O and private/not for profit D&O lines of business, and also increased our reserve for loss adjustment expenses across several lines of business. These losses combined for a total increase in net losses and loss expenses of $33.3 million compared to $23.4 million in 2012 and an increase in the current year non-catastrophe losses and loss expense ratio of 1.0 percentage point. The remaining increase in the current year non-catastrophe losses and loss expenses is due to the continued growth of the U.S. direct insurance operations.
The unfavorable reserve development for the 2010 and 2011 loss years was primarily due to adverse development of $25.1 million on a program that commenced writing in 2008 and was terminated during 2011. This was partially offset by favorable development on our active programs. The unfavorable reserve development in our general casualty line for the 2011 loss year was due to adverse development on an individual claim, estimated to reach our full limit of $20.0 million, net of reinsurance. We also experienced adverse development for the 2011 loss year for certain professional liability products.
Acquisition costs. Acquisition costs increased by $17.2 million, or 22.1%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in the acquisition costs and related ratio was primarily caused by increased net premiums earned and increased profit commission accruals in our program line of business, as well as increased accruals for other acquisition costs. The increase in the acquisition cost ratio from 8.7% for the year ended December 31, 2012 to 9.3% for the year ended December 31, 2013 was due to the increase in profit commission accruals and other acquisition cost accruals.
General and administrative expenses. General and administrative expenses increased by $23.8 million, or 12.9%, for the year ended December 31, 2013 compared to the year ended December 31, 2012, due to the continued growth of our U.S. direct insurance operations. The increase in general and administrative expenses was primarily due to increased salary and related costs, as average headcount increased to support our continued growth, and higher stock-based compensation expense. The general and administrative expense ratio decreased to 20.4% for the year ended December 31, 2013 from 20.7% in 2012.
The following table summarizes the underwriting results and associated ratios for the Global Markets Insurance segment for the years ended December 31, 2014, 2013 and 2012.
The Bermuda gross premiums written was related to the trade credit line of business which did not transfer to the North American Insurance segment. There will be no further trade credit business written out of our Bermuda office going forward.
Net premiums written increased by $43.0 million, or 29.7%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net premiums written was primarily due to higher gross premiums written, partially offset by higher ceded premiums. We ceded to reinsurers 33.0% of gross premiums written for the year ended December 31, 2014 compared to 37.7% for the year ended December 31, 2013. The decrease was due to retaining more of our gross premiums written in our professional liability, general casualty and healthcare lines of business in the current period than in the prior period.
The current year non-catastrophe losses and loss expenses increased primarily due to the growth of the Global Markets Insurance operations partially offset by lower large reported property losses in 2014 compared to 2013. The decrease in the non-catastrophe losses and loss expenses ratio was primarily due to lower reported large property losses as discussed above.
During the year ended December 31, 2014, we incurred $11.0 million of catastrophe-related losses from Hurricane Odile. We did not incur any significant catastrophe losses during the year ended December 31, 2013.
Overall, our Global Markets Insurance segment recorded net favorable reserve development of $53.6 million during the year ended December 31, 2014 compared to net favorable reserve development of $38.3 million for the year ended December 31, 2013, as shown in the tables below.
The net favorable prior year reserve development for loss years 2005 to 2011 was a result of actual loss emergence being lower than anticipated. The unfavorable prior year reserve development in the professional liability line of business for the 2012 loss year was primarily due to higher than expected loss emergence.
The net favorable prior year reserve development for loss years 2004 to 2012 is a result of actual loss emergence being lower than anticipated.
Acquisition costs. Acquisition costs increased by $8.2 million, or 82.0%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in acquisition costs was due to mix of business as we wrote more business from managing general agents, which carry higher acquisition costs than broker-placed business, during the current year, higher other acquisition-related costs and lower ceding commission income due to the reduction in ceded premiums. The acquisition cost ratio was 11.2% for the year ended December 31, 2014 and 8.0% for the year ended December 31, 2013. The increase in the acquisition cost ratio was due to factors noted above.
General and administrative expenses. General and administrative expenses increased by $4.9 million, or 7.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in general and administrative expenses was primarily due to the continued growth of our Global Markets Insurance operations, which drove an increase in salary and related costs, as well as increased costs related to expanding and improving our office space to support this growth. The building-related costs included the costs to build-out our new office space in London and the expense incurred for exiting the lease for the previous office space. The general and administrative expense ratios for the years ended December 31, 2014 and 2013 were 41.9% and 50.1%, respectively. The decrease in the general and administrative expense ratio was the result of the increase in net premiums earned outpacing the growth in expenses.
Other insurance-related income and expense. The other insurance-related expenses incurred for the current period represent the transaction-related costs incurred for our expected acquisition of RSA's Hong Kong and Singapore operations.
Net premiums written increased by $19.4 million, or 15.4%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in net premiums written was due to higher gross premiums written, partially offset by higher ceded premiums. We ceded to reinsurers 37.7% of gross premiums written for the year ended December 31, 2013 compared to 34.9% for the year ended December 31, 2012. The increase was due to higher quota share cessions on our 2013 renewals for general casualty, general property and trade credit lines of business, as well as new quota share reinsurance for our aviation line of business.
During the year ended December 31, 2013, we did not incur any losses related to catastrophes. During the year ended December 31, 2012, we incurred $1.7 million of catastrophe-related losses related to Superstorm Sandy.
Overall, our Global Markets Insurance segment recorded net favorable reserve development of $38.3 million during the year ended December 31, 2013 compared to net favorable reserve development of $57.0 million for the year ended December 31, 2012, as shown in the tables below.
The net favorable prior year reserve development for loss years 2004 to 2012 was a result of actual loss emergence being lower than anticipated.
Net premiums earned increased by $52.2 million, or 6.1%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net premiums earned was primarily a result of the growth in net premiums written since 2012, and the reduction in ceded earned premium related to the non-renewal of the prior year collateralized retrocessional catastrophe cover partially offset by the current year collateralized property catastrophe reinsurance protection.
Net losses and loss expenses. Net losses and loss expenses increased by $32.7 million, or 7.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. Overall, the increase in net losses and loss expenses was primarily due to the growth of the reinsurance business and higher property catastrophe losses in the current year compared to prior year.
The decrease in the current year non-catastrophe losses and loss expenses and related ratio was primarily due to lower reported large non-catastrophe property losses and a higher reduction in IBNR loss reserves for current year property losses during the year ended December 31, 2014 compared to the year ended December 31, 2013. During the year ended December 31, 2014, we incurred $18.3 million in large non-catastrophe property losses, mostly related to several storm events in the United States, compared to $34.2 million of large non-catastrophe property losses during 2013. The net impact of lower
reported non-catastrophe property losses and a greater reduction in IBNR loss reserves resulted in a 4.1 percentage point decrease in the current year non-catastrophe losses and loss expense ratio.
Overall, our Reinsurance segment recorded net favorable reserve development of $90.6 million during the year ended December 31, 2014 compared to net favorable reserve development of $96.0 million for the year ended December 31, 2013, as shown in the tables below.
The favorable loss reserve development for the 2011 and 2012 loss years for our Reinsurance segment was largely due to lower than expected reported losses in our property reinsurance line of business. The unfavorable loss reserve development in our casualty reinsurance line of business for the 2011 and 2012 loss years was primarily due to the frequency of claims being greater than anticipated.
General and administrative expenses. General and administrative expenses decreased by $2.1 million, or 2.6%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease was primarily due to lower compensation related costs. The general and administrative expense ratios for the years ended December 31, 2014 and 2013
were 8.6% and 9.3%, respectively, reflecting higher net premiums earned and lower general and administrative expenses in 2014.
The decline in Europe was due to the transfer of business from Europe to the United States as we established our Lloyd’s coverholder in Miami, Florida.
The table below illustrates our gross premiums written by line of business for each of the periods indicated.
Current year non-catastrophe losses increased as a result of the growth of the reinsurance operations in 2013 compared to 2012, partially offset by lower net increases in reported loss activity in 2013 compared to 2012. The same lower net increase in reported loss activity contributed to the decrease in the current year non-catastrophe losses and loss expenses ratio in 2013 compared to 2012. During 2013, we accrued $34.2 million of additional IBNR for large reported property-related losses caused by global weather events, as well as a factory explosion in China. This compared to $51.7 million in 2012, which included $36.4 million of crop reinsurance-related losses and loss expenses related to drought conditions across much of the United States and $15.3 million in other U.S. weather-related losses. Partially offsetting the reported large loss activity is the reduction of current year property losses for certain property reinsurance lines of business as reported loss activity was lower than expected. For the years ended December 31, 2013 and 2012, the reduction in the current year property losses and loss expenses was $31.5 million and $16.0 million, respectively. On a combined basis, the large reported property loss activity and the reduction in losses and loss expenses for certain property reinsurance lines of business was a net increase in losses and loss expenses of $2.7 million for the year ended December 31, 2013 compared to $35.7 million for the year ended December 31, 2012. These combined factors contributed to a reduction in the current year non-catastrophe losses and loss expenses ratio of 3.9 percentage points. The offsetting 0.5 percentage point increase in the current year non-catastrophe losses and loss expense ratio was due to mix of business.
During the year ended December 31, 2013, we incurred $13.5 million of catastrophe-related losses related to Typhoon Fitow in China while during the year ended December 31, 2012, we incurred $81.0 million of catastrophe-related losses related to Superstorm Sandy.
Liquidity is a measure of our ability to access sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. The company believes that its cash flows from operations and investments will provide sufficient liquidity for the foreseeable future.
As of December 31, 2014, we had $150 million available under our revolving loan facility.
Holdings’ U.S. domiciled operating subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. In particular, payments of dividends by Allied World Assurance Company (U.S.) Inc., Allied World National Assurance Company, Allied World Insurance Company, Allied World Specialty Insurance Company (f/k/a Darwin National Assurance Company), Allied World Surplus Lines Insurance Company (f/k/a Darwin Select Insurance Company) and Vantapro Specialty Insurance Company are subject to restrictions on statutory surplus pursuant to the respective states in which these insurance companies are domiciled. Each state requires prior regulatory approval of any payment of extraordinary dividends. We have not paid a dividend to any affiliate or parent company outside of the U.S.
In our casualty lines of business, claims may be reported and settled several years after the coverage period has terminated. As a result, we expect that we will generate significant operating cash flow as we accumulate casualty loss reserves on our balance sheet. In our property lines of business, claims are generally reported and paid within a relatively short period of time and we expect volatility in our operating cash flows as losses are incurred. Our net paid losses may increase in the short-term due to the recent natural catastrophe activity. We expect increases in the amount of expected loss payments in future periods with a resulting decrease in operating cash flow; however, we do not expect loss payments to exceed the premiums generated. Actual premiums written and collected and losses and loss expenses paid in any period could vary materially from our expectations and could have a significant and adverse effect on operating cash flow.
In addition, as of December 31, 2014 and 2013, a further $571.8 million and $1,053.6 million, respectively, of cash and cash equivalents and investments were pledged as collateral for our credit facilities. The decrease in the assets pledged as collateral for our credit facilities was primarily due to a reduction in funding to various cedents where we were overfunded and our establishment of a direct collateral arrangement for our Lloyd's operations and, as such, the pledged assets are included in the $3,585.8 million noted above, whereas previously they were included in the pledged assets for our credit facilities.
The table below sets forth the capital structure of the company as of December 31, 2014 and 2013:
On May 1, 2014, our shareholders approved a new share repurchase program in order for us to repurchase up to $500.0 million of our common shares. This new share repurchase program supersedes the 2012 share repurchase program and no
further repurchases will be made under the 2012 share repurchase program. Under the terms of this new share repurchase program, the first three million of common shares repurchased will remain in treasury and will be used by us to satisfy share delivery obligations under our equity-based compensation plans. Any additional common shares will be designated for cancellation at acquisition and will be canceled upon shareholder approval. As of December 31, 2014 approximately $418.4 million remained under this share repurchase authorization. During the third quarter of 2014, we temporarily suspended our share repurchase program so as to preserve capital for future obligations such as the expected purchase of the Hong Kong and Singapore operations of RSA and any catastrophic events that may have occurred during the year. We restarted our share repurchase program late in the fourth quarter of 2014.
During the year ended December 31, 2014, our share repurchases were as follows:
Shares repurchased by the company and not designated for cancellation are classified as “Treasury shares, at cost” on the consolidated balance sheets. The company will issue shares out of treasury principally related to the Company’s employee benefit plans. Shares repurchased and designated for cancellation are constructively retired and recorded as a share cancellation.
In July 2006, Allied World Bermuda issued $500 million aggregate principal amount of 7.50% senior notes due August 1, 2016, with interest payable August 1 and February 1 each year. Allied World Bermuda can redeem the senior notes prior to maturity, subject to payment of a “make-whole” premium; however, Allied World Bermuda currently has no intention of redeeming the notes.
In the normal course of our operations, we enter into agreements with financial institutions to obtain secured and unsecured credit facilities.
Our unpaid losses and loss expenses represent our best estimate of the cost to settle the ultimate liabilities based on information available as of December 31, 2014, and are not fixed amounts payable pursuant to contractual commitments. The timing and amounts of actual loss payments related to these reserves might vary significantly from our current estimate of the expected timing and amounts of loss payments based on many factors, including large individual losses as well as general market conditions.
The amounts included for reserve for losses and loss expenses reflect the estimated timing of expected loss payments on known claims and anticipated future claims as of December 31, 2014 and do not take reinsurance recoverables into account. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these