New York City, New York (Argo Group US, Inc. and Colony Specialty)
The modest increase in gross written premiums for the year ended December 31, 2014 as compared to the same period ended in 2013 was primarily the result of increased premiums in our Excess and Surplus Lines and Commercial Specialty segments, partially offset by a decline in our Syndicate 1200 segment as we continue to experience competition in this segment. All segments were impacted to some degree by increasing competition and, in some cases, declining rates. The increase in consolidated earned premiums for the year ended December 31, 2014 as compared to 2013 was due to increased premiums in the fourth quarter of 2013 which continued into 2014.
The increase in consolidated net realized investment and other gains for the year ended December 31, 2014 as compared to 2013 was primarily attributable to the recognition of a $43.3 million pre-tax gain resulting from the sale of property and increase in value of our other investments, which are accounted for under the equity method of accounting. Absent these increases, a small amount of gains were recognized on our fixed maturity and equity portfolios. The increase in consolidated net investment and other gains for the year ended December 31, 2013 as compared to 2012 was primarily driven by $57.7 million in realized gains from our equity portfolio due to a tactical reduction in equities at year end. Net realized gains from the sales of fixed maturity securities were $4.8 million, $13.9 million and $18.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. Net realized gains for our other investments were $23.0 million, $8.1 million and $6.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. Net realized gains (losses) from the sales of equity investments were $28.6 million, $57.7 million and $(0.1) million for the years ended December 31, 2014, 2013 and 2012, respectively. Included in consolidated net realized investments gains and other for the year ended December 31, 2014 was a $2.0 million gain resulting from the extinguishment of one of our junior subordinated debentures and a $4.0 million in realized losses resulting from the write-down of an asset held for sale. Included in consolidated net realized investment and other gains for the years ended December 31, 2014, 2013 and 2012 were write-downs of approximately $2.3 million, $7.8 million and $3.7 million, respectively, from the recognition of other-than-temporary impairments on certain investment securities.
In determining appropriate reserve levels for the year ended December 31, 2014, we maintained the same general processes and disciplines that were used to set reserves at prior reporting dates. No significant changes in methodologies were made to estimate the reserves since the last reporting date; however, at each reporting date we reassess the actuarial estimate of the reserve for loss and loss adjustment expenses and record our best estimate. Consistent with prior reserve valuations, as claims data becomes more mature for prior accident years, actuarial estimates were refined to weigh certain actuarial methods more heavily in order to respond to any emerging trends in the paid and reported loss data. While prior accident years’ net reserves for losses and loss adjustment expenses for some lines of business have developed favorably in recent years, this does not imply that more recent accident years’ reserves also will develop favorably; pricing, reinsurance costs, legal environment, general economic conditions including changes in inflation and many other factors impact our ultimate loss estimates.
In 2011, we entered into two reinsurance transactions with a special purpose reinsurance company which provided coverage through the issuance of two catastrophe bond transactions. The reinsurance transactions provided coverage for selected events. The initial catastrophe bond cover expired on December 31, 2012. The second catastrophe bond cover expired on December 31, 2013. In accordance with generally accepted accounting principles in the United States (“GAAP”), we accounted for these covers as derivatives, and as such, presented the financial statement impact in “Other reinsurance-related expenses” in our Consolidated Statements of Income. Other reinsurance-related expenses totaled $19.2 million and $27.3 million for the years ended December 31, 2013 and 2012, respectively. As the last of these contracts expired in December 2013, there was no expense recognized in 2014. As management viewed these coverages as reinsurance protection, we treated the financial statement effects of these covers as ceded premium for the purposes of calculating our loss, expense and combined ratios.
Consolidated underwriting, acquisition and insurance expenses were $539.2 million, $510.8 million and $464.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in the consolidated expense ratio for 2014 as compared to 2013 was primarily attributable to increased compensation related costs, coupled with increased consulting and information technology expenses. The decrease in the consolidated expense ratio for 2013 as compared to 2012 was primarily attributable to reduced fixed
costs as a percentage of earned premiums, partially offset by increased equity compensation expense due to the impact of the increase in our stock price on cash-settled equity awards.
Consolidated interest expense was $19.9 million, $20.2 million and $23.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decline in consolidated interest expense from 2014 as compared to 2013 was the result of the July 2014 extinguishment of a junior subordinated debenture. The decline in consolidated interest expense for the year ended December 31, 2013 as compared to 2012 was due to the redemption in November 2012 of the $118.6 million Capital Trust Securities with proceeds from the senior fixed rate notes, which bear a lower interest rate.
The consolidated provisions for income taxes were $32.8 million, $36.5 million and $14.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. The consolidated income tax provision represents the income tax expense associated with our operations based on the tax laws of the jurisdictions in which we operate. Therefore, the consolidated provision for income taxes represents taxes on net income for our U.S., Ireland, Belgium, Brazil, Switzerland and United Kingdom operations. The consolidated effective taxes rates were 15.2%, 20.3% and 21.6% for the years ended December 31, 2014, 2013 and 2012, respectively. The decline in the consolidated effective tax rate for the year ended December 31, 2014 as compared to 2013 and 2012 was primarily attributable to increased income from our Bermuda operations, which is not subject to income taxes. The decline in the consolidated effective tax rate for the year ended December 31, 2013 as compared to 2012 was primarily attributable to reduced income tax expense for our United Kingdom operations.
The increase in gross written and earned premiums for the year ended December 31, 2014 as compared to the same period in 2013 was primarily attributable to growth in all lines, with the exception of transportation and special property. We began exiting transportation in 2013 due to reduced profitability. Gross written premiums for special property declined due to increased competition from both U.S. and London markets. During 2014, all lines within the Excess and Surplus Lines segment have experienced competition and pressure on rates. The increase in gross written and earned premiums for the year ended December 31, 2013 as compared to the same period in 2012 was primarily attributable to increased underwriting activity and rate increases in virtually all lines, excluding transportation as noted above.
Included in losses and loss adjustment expenses for the year ended December 31, 2012 was $16.7 million in catastrophe losses from storm activity in the United States, including $8.8 million from Superstorm Sandy. In addition, Commercial Specialty experienced several large non-cat property losses during the year. The Commercial Specialty segment had net unfavorable loss reserve development on prior accident years of $22.2 million primarily attributable to $31.5 million of unfavorable development in general liability due to increases in claim severity and $5.5 million of unfavorable development in the automobile liability lines of business. Partially offsetting this unfavorable development was $10.1 million of favorable development in workers compensation.
The increase in the expense ratio for the year ended December 31, 2014 as compared to the same period in 2013 was primarily due to increased corporate and information technology costs and decreasing ceding commissions earned. The decline in the expense ratio for the year ended December 31, 2013 as compared to 2012 was primarily attributable to a shift of select functions from risk bearing activities to non-risk bearing activities, as we were developing our fee-based business.
As noted above, in 2013 we began to focus on the development of our fee-based operations. As a result, the expenses associated with the fee-based operations have outpaced the income received for these activities, resulting in net fee expense for the years ended December 31, 2014 and 2013, respectively.
As a result of our annual evaluation of goodwill and other intangible assets, we determined that the goodwill and intangible asset which resulted from a 2010 acquisition were impaired and therefore, they were written-off during the fourth quarter of 2014.
Losses and loss adjustment expenses for the year ended December 31, 2013 included $16.5 million in catastrophe losses primarily attributable to Canadian and European floods and the German hailstorm. Loss reserve development on prior accident years was negligible.
Losses and loss adjustment expenses are reported net of losses ceded to the trade capital providers. Included in losses and loss adjustment expenses for the year ended December 31, 2014 was $2.4 million of catastrophe losses resulting from Hurricane Odile. Additionally, included in losses and loss adjustment expenses were current accident year losses of $18.1 million resulting from large general liability, aviation and satellite losses. Offsetting these current accident year losses was $21.9 million in net favorable loss reserve development on prior accident years primarily attributable to $11.9 favorable development in various property classes, $5.5 million favorable development in the liability lines and $4.4 million favorable development in the aerospace and specialty lines.
The increase in the expense ratio for the year ended December 31, 2014 as compared to the same period in 2013 was primarily attributable to a decline in ceding commission received from a quota share reinsurance contract that was terminated in 2014, coupled with increased commission expenses due to the current competitive market. The decline in the expense ratio for the year ended December 31, 2013 as compared to the same period in 2012 was primarily attributable to reduced fixed costs as a percentage of earned premiums.
Through our subsidiary Argonaut Insurance Company, we are exposed to asbestos liability at the primary level through claims filed against our direct insureds, as well as through its position as a reinsurer of other primary carriers. Argonaut Insurance Company has direct liability arising primarily from policies issued from the 1960s to the early 1980s, which pre-dated policy contract wording that excluded asbestos exposure. The majority of the direct policies were issued on behalf of small contractors or construction companies. We believe that the frequency and severity of asbestos claims for such insureds is typically less than that experienced for large, industrial manufacturing and distribution concerns.
Losses and loss adjustment expenses for the year ended December 31, 2013 included $10.5 million of unfavorable loss reserve development in general liability lines resulting from asbestos exposure. The unfavorable development was driven by increasing defense costs in the primary book of business, higher than expected loss activity in the assumed book of business and commutations and settlements in 2013. Other run-off lines recorded $4.4 million in unfavorable development, including $2.0 million in unfavorable development in medical malpractice liability due to the loss of the New York Liquidation Bureau funding for structured annuity payments.
policyholder dividend in the run-off risk management lines, offset by $1.8 million in higher fee and bad debt expenses. Underwriting expense for the year ended December 31, 2013 was reduced by $2.3 million received due to the settlement of a disputed assessment. Underwriting expense for the year ended December 31, 2012 were reduced $2.6 million due to a reduction in insurance assessments. Absent these items, underwriting expenses were comparable for the years presented.
We perform an extensive actuarial analysis of the asbestos and environmental reserves on at least an annual basis. We continually monitor the status of the claims and may make adjustments outside the annual review period. The review entails a detailed analysis of our direct and assumed exposure. We consider the indications from the various actuarial methods from the review to determine our best estimate of the asbestos and environmental losses and loss adjustment expense reserves. We primarily relied on a method that projects future reported claims and severities, with some weight given to other methods. This method relies most heavily on our historical claims and severity information, whereas other methods rely more heavily on industry information. The method produces an
The primary sources of our cash flows are premiums, reinsurance recoveries, proceeds from sales and redemptions of investments and investment income. The primary cash outflows are claim payments, loss adjustment expenses, reinsurance costs and operating expenses. The nature of insurance is that cash collected for premiums written is invested, interest and dividends are earned thereon and loss and settlement expenses are paid out over a period of years. This period of time varies by line of business and the circumstances surrounding each claim. A substantial portion of our losses and loss expenses are paid out after more than one year. Additional cash outflows occur through payments of underwriting and acquisition costs such as commissions, taxes, payroll and general overhead expenses. Management believes that cash receipts from premiums, proceeds from investment sales and redemptions and investment income are sufficient to cover cash outflows in the foreseeable future. Should the need for additional cash arise, we believe we have access to additional sources of liquidity.
Cash provided (used) by operating activities can fluctuate due to timing difference in the collection of premiums and reinsurance recoveries and the payment of losses and expenses. For the years ended December 31, 2014 and 2012, cash provided by operating activities was $130.5 million and $30.5 million, respectively, while cash used by operating activities was $0.2 million for the year ended December 31, 2013. For 2014, cash provided by operating activities was primarily due to increased collections on our reinsurance recoverables on paid losses offset by the settlement of our reinsurance payable due to the closing of the Syndicate 1200 segment’s remaining whole account quota share contract covering segment loss reserves for 2009 and prior years of account in addition to the closing of the 2011 year of account. The decrease in cash flows from operations in 2013 compared to 2012 was primarily due to net cash payment of $86.2 million in partial settlement of a whole account quota share contract covering the Syndicate 1200 segment loss reserves for the 2009 and prior years of account. The source of cash used to settle this reinsurance payable was the sale of fixed maturity assets, and is included in the cash from investing activities of our Statements of Cash Flow.
settle the Syndicate 1200 segment’s reinsurance payable in 2013 and fewer sales of investments in 2014 as cash from operations assisted in meeting operational activities. Also, the increase in cash flows from investing activities from 2012 to 2013 was mainly the result of the sale of fixed maturity assets used to settle the Syndicate 1200 segment’s reinsurance payable. As of December 31, 2014, 2013 and 2012, $275.8 million, $351.6 million and $234.3 million, respectively, of the investment portfolio were invested in short-term investments.
For the year ended December 31, 2014, Argo Re paid a cash dividend of $40.9 million to Argo Group which was used to repay an intercompany note. For the year ended December 31, 2014, Argo Group US, Inc. received dividends of $55.2 million from Colony, $48.8 million from Argonaut Insurance Company and $20.0 million from Rockwood.
Included in the New Credit Agreement is a provision that allows up to $17.5 million of the revolving credit facility to be used for letters of credit (“LOCs”), subject to availability. On March 7, 2014, the $0.2 million LOC outstanding under the original $150.0 Credit Agreement was transferred to the New Credit Agreement. As of December 31, 2014, there were no borrowings outstanding and $0.2 million in LOCs against the New Credit Facility.
A summary of our outstanding junior subordinated debentures at December 31, 2014 is presented below:
For the year ended December 31, 2014, our Board declared quarterly dividends in the aggregate amount of $0.69 per share. Cash dividends paid for the year ended December 31, 2014 totaled $18.2 million. On February 17, 2015, our Board declared a quarterly cash dividend in the amount of $0.20 on each share of common stock outstanding. The dividend will be paid on March 19, 2015 to shareholders of record at the close of business on March 2, 2015. In addition, our Board declared a 10% stock dividend, payable on March 16, 2015, to shareholders of record at the close of business on March 2, 2015. The cash dividend will be paid on the adjusted number of common shares outstanding. The declaration and payment of future dividends to our shareholders is at the discretion of our Board and will depend upon our financial results, cash requirements, future prospects and other factors deemed relevant by our Board.
We invest excess cash in a variety of investment securities. As of December 31, 2014, our investment portfolio consisted of 69.3% fixed maturities, 11.9% equity securities, 12.1% other investments and 6.7% short-term investments (based on fair value) compared to 69.0% fixed maturities, 13.1% equity securities, 9.3% other investments and 8.6% short-term investments as of December 31, 2013. We classify the majority of our investment portfolio as available-for-sale; resulting in these investments being reported at fair market value with unrealized gains and losses, net of tax, being reported as a component of shareholders’ equity. At December 31, 2014, no investments were designated as trading. No issuer (excluding United States Government and United States Governmental agencies) of fixed maturity or equity securities represents more than 2.6 % of shareholders’ equity at December 31, 2014.
Our insurance and reinsurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and fund operating expenses. During the year ended December 31, 2014, cash flow provided by operations was $130.5 million. Based on current premium volumes and other measures of capital deployed in our business, we determined we had excess capital and, therefore, returned capital to our shareholders through the share buy-back program and through dividend payments to our shareholders. We believe our liquidity generated from operations and, if required, from our investment portfolio, will be sufficient to meet our obligations for the foreseeable future. We believe we have access to various sources of liquidity including cash, investments and the ability to borrow under our revolving credit facility. Additionally, we continue to have access to the debt and equity markets, though we currently do not foresee needing access to these sources of capital.
The discussion of transactions with related parties is included in Note 24, “Transactions with Related Parties” in the Notes to the Consolidated Financial Statements, included in Item 8, “Financial Statements and Supplementary Data” beginning on page.
We have committed to invest up to a total of $359.0 million in a series of private equity related limited partnerships, of which $286.1 million was funded and included in other invested assets in our consolidated balance sheet. As of December 31, 2014, we have a remaining obligation to the partnerships to invest up to an additional $72.9 million, which can be called at any time. We have not recorded this commitment in our consolidated financial statements. The investment will be recorded at such time as the capital partnership requires the additional investment. Additionally, we have not recorded the liabilities for our operating leases in our consolidated financial statements.
Other than as described in the immediately preceding paragraph, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K at December 31, 2014.
Our estimated contractual obligations and commitments as of December 31, 2014 were as follows:
Interest only on Senior Unsecured Fixed Rate Notes through 2042. Interest calculated based on the rate in effect at December 31, 2014. Principal due September 2042.
Purchase obligations consist primarily of software, hardware and equipment servicing and software licensing fees.
quarter, we review the loss ratio selections and the emerged loss experience to determine if deviating from the loss ratio method is appropriate. In general, we continue to use the loss ratio method until the end of the accident year, at which time we begin to assign weight to the paid and incurred BF methods depending on the line of business being evaluated. The BF methods compute IBNR through a blend of the expected loss ratio method and traditional loss development methods. The BF methods estimate IBNR for an accident year as the product of expected losses (earned premium multiplied by an expected loss ratio) plus an expected percentage of unreported losses. The expected percentage of unreported losses is derived from age-to-ultimate loss development factors that result from our analyses of loss development triangles. As accident years mature to the point at which the reported loss experience is more credible, we assign increasing weight to the paid and incurred loss development methods.
For long-tail lines such as general liability and automobile liability, the starting point for determining ultimate losses is initially the expected loss ratio method. The time lag for reporting claims is greater in liability lines of business than it is in short-tail lines. Facts and information are frequently not complete at the time case reserves are established, and because protracted litigation is sometimes involved potentially creating additional uncertainty in final settlement amounts, case reserves alone are an insufficient measure of the ultimate loss costs. Due to the variability in the timing of receipt and completeness of case reserve data, loss experience is not deemed fully credible for several years. At the end of the accident year, we rely primarily on the BF methods and continue to rely on those methods for several years. We assign greater weight to the paid and incurred development methods as the data matures.
Workers compensation is also a long-tail line of business. An expected loss ratio method is used for the initial evaluations of an accident year, followed by paid and incurred BF loss development methodologies as well as paid and incurred development methods as the data matures. Loss development for workers compensation spans many years. However, a significant portion of the outstanding reserves correspond to scheduled annuity payments and are not subject to extreme volatility. The portion of reserves that is not scheduled or annuitized is subject to potentially large variations in ultimate loss cost due to the uncertainty of medical cost inflation. Sources of medical cost inflation include increased utilization, new and more expensive medical testing procedures and increased utilization and cost of prescription drugs.
Each business segment is analyzed individually, with development characteristics for each short-tail and long-tail line of business identified and applied accordingly. In comparing loss reserve methods and assumptions used at December 31, 2014 as compared with methods and assumptions used at December 31, 2014, management has not changed or adjusted methodologies or assumptions in any significant manner.
difficulty in identifying sources of environmental or asbestos contamination and in properly allocating responsibility and/or liability for environmental or asbestos damage;
Loss adjustment expenses used in connection with our loss reserves are comprised of both allocated and unallocated expenses. Allocated loss adjustment expenses generally relate to specific claim files. We often combine allocated loss adjustment expenses with losses for purposes of projecting ultimate liabilities. For some types of claims, such as asbestos, environmental and professional liability, allocated loss adjustment expenses consisting primarily of legal defense costs may be significant, sometimes exceeding the liability to indemnify claimants for losses. Unallocated loss adjustment expenses generally relate to the administration and handling
of claims in the ordinary course of business. We typically calculate unallocated loss adjustment expense reserves using a percentage of unpaid losses for each line of business.
Shifts in law suit mix between U.S. federal and state courts; and
Workers compensation is generally considered a long-tail coverage as it takes a relatively long period of time to finalize claims from a given accident year. Certain payments, such as initial medical treatment or temporary wage replacement for the injured worker, are generally disbursed quickly. Other payments are made over the course of several years, such as awards for permanent partial injuries. Some payments continue to take place throughout the injured worker’s life, such as permanent disability benefits and on-going
For the long-tail lines underwritten by ArgoGlobal Syndicate 1200, such as professional indemnity and general liability, it may be several years before claims are fully advised and settled. The large time lag involved for reporting and settling claims introduces a large amount of uncertainty into the loss estimation process. Loss experience is not deemed fully credible for several years. Until the time that an underwriting year of account is closed, we use an expected loss ratio method to determine ultimate losses, supplemented by paid and incurred BF loss development methods, to the extent that the reported loss data matures and is considered credible.
We perform our loss reserve analysis on a syndicate basis, which represents 100% of the business underwritten by the syndicate. We use reinsurance to cede a proportion of its premium income and incurred losses to reinsurers. The percentage of the cession differs for each underwriting year of account. The reinsurers’ share of provisions for claims is based on calculated amounts of outstanding claims and projections for IBNR, net of estimated unrecoverable amounts. ArgoGlobal Syndicate 1200 evaluates the reinsurance program in place for the class of business, claims experience for the year and security rating of the reinsurance companies involved.
The commercial automobile liability product line is a long-tail coverage, mainly due to exposures arising out of bodily injury claims. Losses in this line associated with bodily injury claims generally are more difficult to accurately estimate and take longer to resolve. Claim reporting lags also can be lengthy. Examples of loss and LAE risk factors that can change over time and result in adjustments to commercial automobile liability loss reserves include, but are not limited to, the following:
Recorded gross reserves for general liability were $1,355.8 million, with approximately 4% of that amount related to run-off asbestos and environmental exposures as of December 31, 2014. For general liability losses relating to ongoing operations, reported loss development patterns are a key assumption for this line of business. Historically, assumptions on reported loss development patterns have been impacted by, among other things, emergence of new types of claims (e.g., construction defect claims) or a shift in the mixture between smaller, more routine claims and larger, more complex claims. We have reviewed the historical variation in reported loss development patterns for general liability losses deriving from continuing operations. If the reported loss development patterns change by 10%, a change that we have experienced in the past and that management considers possible, the estimated net reserve could change by $60.0 million, in either direction.
Similar to general liability, commercial multiple peril reserves are affected by reported loss development pattern assumptions. Recorded gross reserves for commercial multiple peril business were $198.3 million as of December 31, 2014. If the development patterns underlying our net reserves for this line of business change by 10%, the estimated net reserve could change by $10.0 million, in either direction.
Recorded gross reserves for workers compensation were $536.8 million as of December 31, 2014. The two most important assumptions for workers compensation reserves are loss development factors and loss cost trends, particularly medical cost inflation. Loss development patterns are dependent on medical cost inflation. Approximately 60% of the workers compensation net reserves are related to future medical costs. A review of National Council on Compensation Insurance data suggests that the annual growth in industry medical claim costs has varied from -2% to +13% since 1991. Across the entire reserve base, a 1% change in calendar year medical inflation could change the estimated net reserve by $20.0 million, in either direction.
Recorded gross reserves for commercial auto liability were $165.2 million as of December 31, 2014. A key assumption for commercial lines auto liability is the annual loss cost trend, particularly the severity trend component of loss costs. A 3% change in assumed annual severity is within the range of our historical experience and which management considers possible. A 3% change in assumed annual severity could change the estimated net reserve by $25.0 million, in either direction.
The reporting pattern for assumed reinsurance claims, including those related to asbestos and environmental claims is much longer than for direct claims. In many instances, it takes months or years to determine that the policyholder’s own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves.
reserves, which is detailed in Note 21, “Run-off Lines,” of Notes to Consolidated Financial Statements, remains subject to a wide variety of uncertainties. Due to these uncertainties, further developments could cause us to change our estimates and ranges of our asbestos and environmental reserves, and the effect of these changes could be material to our consolidated operating results, financial condition and liquidity.
Our investments in fixed maturities and stocks are classified as available-for-sale and reported at fair value under GAAP. Changes in the fair value of investments classified as available-for-sale are not recognized in income during the period, but rather are recognized as a separate component of shareholders’ equity until realized. Fair values of these investments are estimated using prices obtained from third-party pricing services, where available. For securities where we are unable to obtain fair values from a pricing service or broker, fair values are estimated using information obtained from investment advisors. Management performed several processes to ascertain the reasonableness of investment values included in our consolidated financial statements at December 31, 2014, including i) obtaining and reviewing internal control reports for our accounting service providers that obtain fair values from third-party pricing services, ii) discussing with our investment managers their process for reviewing and validating pricing obtained from outside services and obtained values for all securities from our investment managers and iii) comparing the security pricing received from the investment managers with the prices used in our consolidated financial statements and obtained additional information for variances that exceeded a certain threshold. As of December 31, 2014, investments classified as available-for-sale for which we did not receive a fair value from a pricing service or broker accounted for less than 1% of our investment portfolio. The actual value at which such securities could be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller. Our investments in hedge and private equity funds and other private equity direct investments are accounted for under the equity method of accounting, with changes in the value of investments recognized in realized gains or losses during the period. We also have two small private equity investments accounted for at cost.
We regularly monitor the difference between the estimated fair values of our investments and their cost or book values to identify underperforming investments and whether declines in value are temporary in nature or “other-than-temporary.” If a decline in the value of a particular investment is believed to be temporary, the decline is recorded as an unrealized loss, net of tax, in other comprehensive income as a separate component of shareholders’ equity. If the decline is believed to be “other-than-temporary,” the carrying value of the investment is written down and recorded as a realized loss in our Consolidated Statements of Income. We evaluate our investments for impairment. For fixed maturities securities, the evaluation for a credit loss is generally based on the present value of expected cash flows of the security as compared to the amortized book value. For mortgage-backed securities,
frequency and severity inputs are used in projecting future cash flows of the securities. Loss frequency is measured as the credit default rate, which includes such factors as loan-to-value ratios and credit scores of borrowers. Loss severity includes such factors as trends in overall housing prices and house prices that are obtained at foreclosure. For equity securities, the length of time and the amount of decline in fair value are the principal factors in determining other-than-temporary impairment. For the years ended December 31, 2014 and 2013, we recorded $2.3 million and $7.8 million, respectively, of realized losses due to the recognition of other-than-temporary impairments.
For the year ended December 31, 2014, we determined as a result of the slower than anticipated development of revenues for our title art insurance company, the likelihood of near term recovery of the intangible assets, including goodwill, was not probable. Therefore, we wrote off $1.6 million of goodwill and $1.8 million of indefinite lived intangible assets related to this operating unit.
We evaluated our definite lived intangibles for indicators of impairment. If indicators of impairment had been identified, we would have been required to test definite lived intangible assets for impairment. As of October 1, 2014, the testing date, no indicators of impairment were identified. Therefore, we were not required to test for impairment. As with the indefinite-lived intangible assets, we will continue to monitor for indicators of impairment and test as required.