We lease 60,000 square feet of office space in Westerville, Ohio that expires in 2024.
This annual report may provide information including certain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements regarding the intent, belief, or current expectations of management, including, but not limited to, those statements that use the words “believes,” “expects,” “anticipates,” “estimates,” or similar expressions. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: actual loss and loss adjustment expenses exceeding our reserve estimates; competitive pressures in our business; the failure of any of the loss limitation methods we employ; a failure of additional capital to be available or only available on unfavorable terms; our geographic concentration and the business and economic conditions, natural perils, man made perils, and regulatory conditions within our most concentrated region; our ability to appropriately price the risks we underwrite; goodwill impairment risk employed as part of our growth strategy; actions taken by regulators, rating agencies or lenders, including the impact of the downgrade by A.M. Best of the Company’s Insurance Company Subsidiaries’ financial strength rating, A.M. Best’s downgrade of our issuer credit rating and any other future action by A.M. Best with respect to such ratings; increased risks or reduction in the level of our underwriting commitments due to market conditions; a failure of our reinsurers to pay losses in a timely fashion, or at all; interest rate changes; continued difficult conditions in the global capital markets and the economy generally; market and credit risks affecting our investment portfolio; liquidity requirements forcing us to sell our investments; a failure to introduce new products or services to keep pace with advances in technology; the new federal financial regulatory reform; our holding company structure and regulatory constraints restricting dividends or other distributions by our Insurance Company Subsidiaries; minimum capital and surplus requirements imposed on our Insurance Company Subsidiaries; our reliance upon producers, which subjects us to their credit risk; loss of one of our core selected producers; our dependence on the continued services and performance of our senior management and other key personnel; our reliance on our information technology and telecommunications systems; managing technology initiatives and obtaining the efficiencies anticipated with technology implementation; a failure in our internal controls; the cyclical nature of the property and casualty insurance industry; severe weather conditions and other catastrophes; the effects of litigation, including the previously disclosed arbitration and class action litigation or any similar litigation which may be filed in the future; state regulation; assessments imposed upon our Insurance Company Subsidiaries to provide funds for failing insurance companies, and risks and uncertainties relating to the proposed transaction with Fosun, including the risk that the Company’s shareholders do not approve the transaction; uncertainties as to the timing of the transaction; the risk that regulatory or other approvals required for the transaction are not obtained or are obtained subject to conditions that are not anticipated; competitive responses to the transaction; litigation relating to the transaction; disruptions of current plans and operations caused by the announcement and pendency of the proposed transaction; potential difficulties in employee retention as a result of the announcement and pendency of the proposed transaction; and disruption from the proposed transaction making it more difficult to maintain relationships with agents, wholesalers, suppliers, customers, policyholders and regulators.
In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an
Significant periods of time can elapse between the occurrence of a loss, the reporting of the loss to the insurer, and the insurer’s payment of that loss. To recognize liabilities for unpaid losses and LAE, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported net losses and LAE.
The completeness and accuracy of data received from cedants on assumed business that we do not manage directly is verified through monthly reconciliations to detailed statements, inception-to-date roll-forwards of claim data, actuarial estimates of historical trends, field audits, and a series of management oversight reports on a program basis.
The following table sets forth our net case and IBNR reserves for losses and LAE by line of business at December 31, 2014 (in thousands):
When a claim is reported to one of our Insurance Company Subsidiaries or our affiliate MFH, for the majority of claims, our claims personnel within our risk management subsidiary will establish a case reserve for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The estimate reflects the informed judgment of such personnel based on general insurance reserving practices, which focus on the ultimate probable cost of each reported claim, as well as the experience and knowledge of the claims person. Until the claim is resolved, these estimates are revised as deemed necessary by the responsible claims personnel based on subsequent developments, new information, or periodic reviews.
In developing claim and claim adjustment expense reserve estimates, we perform a complete and detailed reserve analyses each quarter. To perform this analysis, the data is organized at a “reserve category” level. A reserve category can be a line of business such as commercial automobile liability, or it may be a particular geographical area within a line of business such as California workers’ compensation. The reserves within a reserve category level are characterized as either short tail or long tail. About 98% of our reserves can be characterized as coming from long tail lines of business. For long tail business, several years may lapse between the time the business is written and the time when all claims are settled. Our long-tail exposures include workers’ compensation, commercial automobile liability, general liability, professional liability, products liability, aviation liability, excess, and umbrella. Short-tail exposures include property, commercial automobile physical damage, a portion of ocean marine, a portion of aviation, and inland marine. The analyses generally review losses both gross and net of reinsurance.
This is a method that assigns partial weight to initial expected losses for each accident year and partial weight to observed paid losses. The weights assigned to the initial expected losses decrease as the accident year matures.
This technique adjusts prior estimates of ultimate losses based on the actual paid loss emergence in the quarter compared to the expected emergence. It is useful in evaluating reserves by considering the longer term implications of ordinary fluctuations in the development patterns.
This technique adjusts prior estimates of ultimate losses based on the actual case incurred loss emergence in the quarter compared to the expected emergence. It may also be useful in evaluating reserves by considering the longer term implications of ordinary fluctuations in the development patterns and generally reacts faster than the paid roll-forward technique.
The reserve categories for which the above methods are not applicable are few. The largest of these is our workers’ compensation residual market reserve category, where we utilize detailed reserve analyses performed by the industry statistical agency NCCI in making our estimates. We adjust these estimates for timing differences in the reporting of the data. The other reserve categories that deviate from the above methods are smaller; as a group they constitute less than one percent of the total reserves.
To analyze the development patterns, we compile, to the extent available, long-term and short-term historical data for our Insurance Company Subsidiaries, organized in a manner which provides an indication of the
historical development patterns. To the extent that the historical data may provide insufficient information about future patterns-whether due to environmental changes such as legislation or due to the small volume or short history of data for some segments of our business-benchmarks based on industry data, and forecasts made by industry rating bureaus regarding the effect of legislative benefit changes on such patterns, may be used to supplement, adjust, or replace patterns based on our Insurance Company Subsidiaries' historical data.
The other factors having influence upon the loss and LAE reserve levels are too numerous and interdependent to efficiently model and test for sensitivity. Likewise, the development factors by reserve category and age are too numerous to model and test for sensitivity. Instead, ranges are estimated by reserve category considering past history, fluctuations in the development patterns, emerging issues, trends, and other factors. The ranges are compiled and the total range is estimated considering the sensitivity to all of the underlying factors together. The resulting range is our best estimate of the expected ongoing variability in the loss reserves.
The range of loss and LAE reserves at December 31, 2013 had a minimum reserve estimate of $971.8 million and a maximum reserve estimate of $1,210.0 million. At December 31, 2013 we recorded the loss and LAE reserves at $1,111.1 million. At December 31, 2014, re-estimated loss and LAE reserves for December 31, 2013 were $1,109.3 million which was within our 2013 loss and LAE estimated reserve range.
The sensitivity around the other lines of business primarily reflects the size of the underlying book of business. Our other reserves represent 3% of total reserves at December 31, 2014. A large portion of these
Reinsurance recoverables represent (1) amounts currently due from reinsurers on paid losses and LAE, (2) amounts recoverable from reinsurers on case basis estimates of reported losses and LAE, and (3) amounts recoverable from reinsurers on actuarial estimates of IBNR losses and LAE. Such recoverables, by necessity, are based upon estimates. Reinsurance does not legally discharge us from our legal liability to our insureds, but it does make the assuming reinsurer liable to us to the extent of the reinsurance ceded. Instead of being netted against the appropriate liabilities, ceded unearned premiums and reinsurance recoverables on paid and unpaid losses and LAE are reported separately as assets in our consolidated balance sheets. Reinsurance recoverable balances are also subject to credit risk associated with the particular reinsurer. In our selection of reinsurers, we continually evaluate their financial stability. While we believe our reinsurance recoverables are collectible, the ultimate ceded reserve recoverable may be greater or less than the amount accrued. At December 31, 2014 and 2013, reinsurance recoverables on paid and unpaid losses were $535.4 million and $519.9 million, respectively.
(1) After-tax non- cash goodwill impairment represented $101.6 million (or $2.04 loss per diluted share) of the 2013 net operating loss.
We use net operating income (loss) and net operating income (loss) per share as components to assess our performance and as measures to evaluate the results of our business. We believe these measures provide investors with valuable information relating to our ongoing performance that may be obscured by the net effect of realized gains and losses as a result of our market risk sensitive instruments, which primarily relate to fixed income securities that are available for sale and not held for trading purposes. Realized gains and losses may vary significantly between periods and are generally driven by external economic developments, such as capital market conditions. In 2014, realized gains before tax were $10.9 million, compared to $7.8 million of realized gains in 2013. Realized gains in 2012 were $55.3 million that were generated by the sale of a large portion of our investment portfolio. Accordingly, net operating income (loss) excludes the effect of items that tend to be highly variable from period to period and highlights the results from our ongoing business operations and the underlying loss or profitability of our business. We believe that it is useful for investors to evaluate net operating income (loss) and net operating income (loss) per share, along with net income (loss) and net income (loss) per share, when reviewing and evaluating our performance.
We use the accident year loss and LAE ratio as one component to assess our current year performance and as a measure to evaluate, and if necessary, adjust our pricing and underwriting. Our net loss and LAE ratio is based on calendar year information. Adjusting this ratio to an accident year loss and LAE ratio allows us to evaluate information based on the current year activity. We believe this measure provides investors with valuable information for comparison to historical trends and current industry estimates. We also believe that it is useful for investors to evaluate the accident year loss and LAE ratio and net loss and LAE ratio separately when reviewing and evaluating our performance.
On December 30, 2014 Fosun International Limited (HKEx stock code: 00656, together with its subsidiaries, “Fosun”) and the Company announced each entered into a definitive agreement under which Fosun will acquire all of the issued and outstanding common stock of the Company. The transaction follows a thorough review of strategic alternatives by the Company’s Board of Directors and represents a 24% premium over the Company’s closing price on December 29, 2014 and a premium of 39% to the Company’s three-month average closing price for the period ending December 29, 2014. The transaction also represents a multiple of approximately 1.04x the Company’s tangible book value per share as of September 30, 2014.
Net income for the year ended December 31, 2014 was $28.7 million, or $0.57 per diluted share, compared to a net loss of ($112.3 million), or ($2.25) per diluted share, for the year ended December 31, 2013. Net operating income, a non-GAAP measure, for the year ended December 31, 2014 was $21.5 million, or $0.43 per diluted share, compared to a net operating loss of ($117.9 million), or ($2.36) per diluted share in 2013. The 2014 net income includes $7.1 million, or $0.14 per diluted share, of after-tax realized gains, compared to $5.6 million, or $0.11 per diluted share, in 2013. The 2013 results were largely impacted by an after-tax goodwill impairment of ($101.6 million), or ($2.04) per share.
Revenues for the year ended December 31, 2014 decreased $48.7 million, or 6.1%, to $742.5 million, from $791.2 million for the comparable period in 2013. This decrease primarily reflects reduced premium levels.
Net earned premiums decreased $54.1 million, or 7.8%, to $643.3 million for the year ended December 31, 2014, from $697.4 million in the comparable period in 2013. The decrease in premium is attributed to the
Expenses decreased $223.5 million from $936.9 million for the year ended December 31, 2013 to $713.4 million for the year ended December 31, 2014. The decrease primarily is attributed to the $115.4 million goodwill impairment and $68.4 million of unfavorable development on prior years that was recorded during 2013.
Net loss and loss adjustment expenses (“LAE”) decreased $128.2 million to $420.8 million for the year ended December 31, 2014, from $549.0 million for the same period in 2013. Our loss and LAE ratio was 65.4% for the year ended December 31, 2014 and 78.7% for the year ended December 31, 2013. The loss and LAE ratio for the year ended December 31, 2014 includes a 0.3 percentage point decrease from net ultimate loss estimates for accident years 2013 and prior, whereas the 2013 results include a 9.8 percentage point increase from net ultimate loss estimates for accident years 2012 and prior. The accident year loss and LAE ratio was 65.7% for the year ended December 31, 2014, down from 68.9% in the comparable period in 2013. Additional discussion of our reserve activity is described below within the Other Items ~ Reserves section.
General, selling and administrative expenses increased $6.2 million, to $32.0 million in 2014 from $25.8 million in 2013. The increase was driven by the USSU commission expense, which is no longer considered intercompany expense, and by increased agency commission expense attributable to a recently acquired agency. The increase attributed to the USSU commission expense did not impact our consolidated financial results, as there is a corresponding increase in the commission revenues.
Net earned premiums decreased $156.8 million, or 18.4%, to $697.4 million for the year ended December 31, 2013, from $854.3 million in the comparable period in 2012. The decrease in premium is attributed to the termination of, or premium volume reductions in certain programs where pricing and underwriting did not meet the Company’s underwriting standards and was offset by an overall 12% rate increase, which exceeded the Company’s estimated loss ratio trend of 1.7%.
Policy acquisition and other underwriting expenses decreased $48.6 million, to $225.5 million for the year ended December 31, 2013, from $274.1 million for the same period in 2012. Our expense ratio increased 0.2 percentage points to 32.3% for the year ended December 31, 2013, from 32.1% for the same period in 2012. The 2013 expense ratio, excluding the impact of the quota share reinsurance treaty, was 33.3% compared to
32.1% in 2012, or an increase of 1.2 percentage points. This increase reflects the effect of the arbitration award expense of 0.3 percentage points and 0.4 percentage points relating to a reallocation of corporate overhead costs from our fee-for-service operations to Insurance Company Subsidiaries' operations. The reallocation reflects a shift of corporate resources used to support capital and operating enhancements focused on strengthening statutory surplus and returning the Insurance Company Subsidiaries to an underwriting profit and a corresponding decrease to general selling and administrative costs. This reallocation had no net income effect. In addition, the expense ratio included a 0.4 percentage point increase relating to the use of an unaffiliated “A” rated insurance company for policy issuance purposes. The remaining 0.1 percentage point reflects the impact of deleveraging fixed costs.
Goodwill impairment expense increased by $115.4 million from $0 in 2012 due to the $115.4 million impairment recognized in the second quarter of 2013. Refer to Note 14 - Goodwill and Other Intangible Assets of the Notes to the Consolidated Financial Statements, for additional information specific to the goodwill impairment.
Federal income tax benefit for the year ended December 31, 2013 was $31.1 million, or 21.3% of income before taxes, compared to an expense of $8.1 million, or -794.3% of income before taxes for the same period in 2012. Income tax expense on net capital gains and the change in our valuation allowance on deferred tax assets was $2.1 million for the year ended December 31, 2013, compared to $15.2 million for the year ended December 31, 2012. The unusual 2012 tax rate is primarily due to the large tax benefit generated from underwriting losses resulting from adverse loss development and storm losses offset by the tax expense on net investment income and realized gains. The effective tax rate on net investment income in 2013 was 20.8%, driven by the level of tax exempt investments, compared to 25.7% for the year ended December 31, 2012. The 2013 effective tax rate on underwriting results and profits from net commissions and fees was 21.5% compared to 2012 of 34.3%. The 2013 effective tax rate on realized gains was 27.9% compared to 27.4% in 2012. The proportion of these three components of 2013 net income resulted in the 21.3% overall effective tax rate.
In July 2009, our subsidiary, Star, purchased a 28.5% ownership interest in an affiliate, MFH, for $14.8 million in cash. We are not required to consolidate this investment as we are not the primary beneficiary of the business nor do we control the entity’s operations. Our ownership interest is significant, but is less than a majority ownership and, therefore, we are accounting for this investment under the equity method of accounting. Star recognizes 28.5% of the profits and losses as a result of this equity interest ownership. We recognized equity earnings, net of tax, from MFH of $2.5 million, or $0.05 per dilutive share, for the year ended December 31, 2014, compared to $2.8 million, or $0.06 per dilutive share, for the comparable period of 2013, and $3.0 million, or $0.06 per dilutive share, for the comparable period of 2012. We received dividends from MFH in 2014, 2013 and 2012, for $3.2 million, $2.0 million and $4.0 million, respectively.
In November 2012, our subsidiary, Century, committed to a $10 million contribution to the Aquiline Financial Services Fund II L.P. as a strategic investment. As of December 31, 2014, approximately $6.7 million of the commitment had been satisfied with $3.3 million of unfunded commitment remaining. Our ownership interest is approximately 1.3% of the fund, which does not constitute “significant influence”. Therefore, we are accounting for this investment under the equity method of accounting. Century recognizes 1.3% of the Fund’s
At December 31, 2014, our best estimate for the ultimate liability for loss and LAE reserves, net of reinsurance recoverables, was $1.1 billion. We established a reasonable range of reserves of approximately $953.8 million to $1.2 billion. This range was established primarily by considering the various indications derived from standard actuarial techniques and other appropriate reserve considerations. The following table sets forth this range by line of business (in thousands):
The key assumptions used in our selection of ultimate reserves included the underlying actuarial methodologies, a review of current pricing and underwriting initiatives, an evaluation of reinsurance costs and retention levels, and a detailed claims analysis with an emphasis on how aggressive claims handling may be impacting the paid and incurred loss data trends embedded in the traditional actuarial methods. With respect to the ultimate estimates for losses and LAE, the key methods remained consistent for the year ended December 31, 2014, and the year ended December 31, 2013. We reviewed the key assumptions that underlie the actuarial standard methods and made the appropriate adjustments to reflect the emergence of claim activity.
The following table shows the re-estimated December 31, 2013 held reserves by line as of December 31, 2014 (in thousands):
The following combined ratios and development figures are before the impact of the Quota Share Reinsurance Treaty which was terminated as of October 1, 2013.
The following table shows the calendar year combined ratio by line and calendar year:
The following table reconciles the calendar year combined ratios to the accident year combined ratios as they were originally reported for the related 12 month period:
The following table shows the accident year combined ratio by line and year as originally reported:
The following table reconciles the originally reported accident year combined ratios to those with the ultimate evaluated at 12/31/14:
A significant portion of our consolidated assets represents assets of our Insurance Company Subsidiaries that may not be transferable to the holding company in the form of dividends, loans or advances in accordance with state insurance laws. These laws generally specify that dividends can be paid only from unassigned surplus and only to the extent that all dividends in the current twelve months do not exceed the greater of 10% of total statutory surplus as of the end of the prior fiscal year or 100% of the statutory net income for the prior year, less any dividends paid in the prior twelve months. Using these criteria, the available ordinary dividend available to be paid from the Insurance Company Subsidiaries during 2014 was $48.8 million without prior regulatory approval. Of this $48.8 million, ordinary dividends of $20.0 million were declared and paid as of December 31, 2014. In addition to ordinary dividends, the Insurance Company Subsidiaries had the capacity to pay $149.9 million of extraordinary dividends in 2014, subject to prior regulatory approval. The ability to pay ordinary and extraordinary dividends must be reviewed in relation to the impact on key financial measurement ratios, including RBC ratios (all of which were above any regulatory action levels, refer to Note 8 ~ Regulatory Matters and Rating Issues for further details) and BCAR. The Insurance Company Subsidiaries’ ability to pay future dividends without advance regulatory approval is dependent upon maintaining a positive level of unassigned surplus, which in turn, is dependent upon the Insurance Company Subsidiaries generating net income. Total ordinary dividends paid from our Insurance Company Subsidiaries to our holding company were $20.0 million and $14.0 million for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, we had non-regulated cash and cash equivalents of $7.9 million. As of December 31, 2014, on a trailing twelve month statutory consolidated basis, the gross and net premium leverage ratios were 1.4 to 1.0 and 1.2 to 1.0, respectively.
On August 29, 2012, the Company executed $130.0 million in senior credit facilities (the “Credit Facilities”). The Credit Facilities included a $30.0 million term loan facility and a $100.0 million revolving credit facility.
The principal amount outstanding under the Credit Facilities provides for interest at either the Alternative Base Rate (“ABR”) or the London interbank offered rate (“LIBOR”). ABR borrowings under the Credit Facilities will bear interest at the greatest of (a) the Administrative Agent’s prime rate, (b) the federal funds effective rate plus 0.5%, or (c) the adjusted LIBOR for a one-month period plus 1.0%, in each case, plus a margin that is adjusted on the basis of Company’s consolidated leverage ratio. Eurodollar borrowings under the Credit Facilities will bear interest at the adjusted LIBOR for the interest period in effect plus a margin that is adjusted on the basis of Company’s consolidated leverage ratio. In addition, the Credit Facilities provide for an unused facility fee ranging between twenty-five basis points and thirty-seven and a half basis points, based on the Company’s consolidated leverage ratio as defined by the Credit Facilities. At December 31, 2014, the interest rate on the Company’s term loan was 2.81%, which consisted of a variable rate of 0.31%, plus an applicable margin of 2.50%. At December 31, 2014, the interest rate on the Company’s revolving credit facility was approximately 0.27%, plus a 2.50% margin.
Additionally, under the Amendment, the financial covenants applicable to the Credit Facilities consist of: (1) minimum consolidated net worth of $365,697,000 as of the effective date of the Amendment, with quarterly increases thereafter of the sum of (a) seventy-five percent of positive net income and (b) seventy-five percent of increases in shareholders’ equity by reason of the issuance and sale of equity interests, if any, (2) minimum Risk Based Capital Ratio for all material Insurance Company Subsidiaries of 1.75 times Company Action Level,
On March 18, 2013, the Company issued $100.0 million of 5.0% cash convertible senior notes (the “Notes”), which mature on March 15, 2020. Interest on the Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing September 15, 2013. Until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes solely into cash at any time on or after September 15, 2019 or earlier under certain circumstances determined by: (i) the market price of the Company’s stock, (ii) the trading price of the Notes, or (iii) the occurrence of specified corporate transactions, including change in control. The Notes are not convertible into Meadowbrook common stock or any other securities under any circumstances. The initial conversion rate is 108.8732 shares of common stock per $1,000 principal amount of the Notes (equivalent to an initial conversion price of approximately $9.18 per share), subject to adjustment upon the occurrence of certain events. Additionally, in the event of a fundamental change, the holders may require the Company to repurchase the Notes for a cash price equal to 100% of the principal, plus any accrued and unpaid interest. The proceeds from the issuance of the Notes were bifurcated into a debt component and an embedded conversion option component.
Deferred issuance costs of $3.7 million will also be amortized into interest expense over the term of the Notes. Interest expense on the Notes, including amortization of deferred issuance costs, recognized on the notes was $7.0 million and $5.4 million for the years ended December 31, 2014 and 2013, respectively.
As the conversion feature is structured under the cash settlement method, the embedded conversion option is reported as a derivative liability.
The Company paid $12.9 million for the Note Hedges, which are exercisable upon conversion of the Notes. The Note Hedges are structured under the cash settlement method and are accounted for as a derivative asset.
Refer to Note 7 ~ Derivative Instruments of the Notes to the Consolidated Financial Statements, for additional information specific to our interest rate swaps.
In general, we believe our overall investment portfolio is conservatively invested. The effective duration of the investment portfolio at December 31, 2014 and 2013, was 4.3 years and 5.0 years, respectively. Our pre-tax book yield, excluding cash and cash equivalents at December 31, 2014 was 2.9% compared to 3.0% in 2013. The tax equivalent yield, excluding cash and cash equivalents was 3.5% at December 31, 2014, compared to 3.7% at December 31, 2013. Approximately 99.9% of our fixed income investment portfolio is investment grade.
The following table is a summary of our contractual obligations and commitments as of December 31, 2014 (in thousands):
(3) Relates to the cash convertible senior notes, refer to Note 6 ~ Debt. The current carrying value on the Balance Sheet considering the original issue discount is $89.8 million. This will accrete to par value of $100 million due in 2020.
(8) The loss and loss adjustment expense payments do not have contractual maturity dates and the exact timing of payments cannot be predicted with certainty. However, based upon historical payment patterns, we have included an estimate of our gross losses and loss adjustment expenses. In addition, we have anticipated cash receipts on reinsurance recoverables on unpaid losses and loss adjustment expenses of $519.5 million, of which we estimate that these payments to be paid for losses and loss adjustment expenses for the periods less than one year, one to three years, three to five years, and more than five years, to be $88.2 million, $120.0 million, $76.1 million, and $235.2 million, respectively, resulting in net losses and loss adjustment expenses of $330.1 million, $373.6 million, $153.8 million, and $213.4 million, respectively.
(9) In November 2012, Century committed to a $10.0 million contribution to the Aquiline Financial Services Fund II L.P. as a strategic investment. As of December 31, 2014, approximately $6.7 million of the commitment had been satisfied with $3.3 million of unfunded commitment remaining. The remainder of the capital commitment will most likely be called in 2015; however, the exact date is not known as it is at the discretion of the fund managers based on the timing of the fund’s investments.
(10) In May 2014, ProCentury committed to a $2.0 million contribution to the Michigan Income & Principal-Protected Growth Fund, L.P. as a strategic investment. As of December 31, 2014, $440,000 of the commitment had been satisfied with $1.56 million of unfunded commitment remaining. The remainder of the capital commitment will most likely be called in 2015; however, the exact date is not known as it is at the discretion of the fund managers based on the timing of the fund’s investments.
The LTIP is intended to provide an incentive to management to improve our performance over a period of time and remain with the Company, thereby increasing shareholder value. The LTIP is paid entirely in stock based upon the performance of the Company and the participant’s service during the applicable period. A participant’s target annual opportunity as a percentage of salary is established by the Compensation Committee and the Board of Directors in advance of any LTIP award.
At December 31, 2014, each of our Insurance Company Subsidiaries was in excess of any minimum threshold at which corrective action would be required. Refer to Note 8 ~ Regulatory Matters and Rating Issues for further details of RBC.
Insurance operations are subject to various leverage tests (e.g., premium to statutory surplus ratios), which are evaluated by regulators and rating agencies. As of December 31, 2014, on a trailing twelve month statutory consolidated basis, the gross and net premium leverage ratios were 1.4 to 1.0 and 1.2 to 1.0, respectively.
A given ratio result may or may not reflect financial difficulty, depending on the underlying circumstances. Therefore, any “unusual values” generated by IRIS tests should be reviewed and analyzed in coordination with the overall financial condition of a company. Analysis of a company's Statutory Annual Statement and familiarity with its operations and history are important in reviewing each ratio result and its significance to the company's financial condition.
(1) Investment Yield is a measure of the return on invested assets. It is calculated on a pre-tax basis and includes statutory net investment income, but excludes realized and unrealized capital gains/(losses). Because pre-tax investment income is used in the calculation, the ratio does not take into account lower yield rates on tax-exempt bonds. All six insurance subsidiaries generated unusual values for this ratio in 2014. In general, we believe our overall investment portfolio is conservatively invested. On a consolidated basis, our overall tax equivalent yield, excluding cash and cash equivalents was 3.5% at December 31, 2014, compared to 3.7% at December 31, 2013. As a comparison, the risk free rate on the 10 Year treasuries decreased during 2014 from 3.0% to 2.2% continuing to reflect historical lows. Approximately 99.9% of our fixed income investment portfolio is investment grade.
(4) Two-Year Reserve Development to Policyholders’ Surplus measures the deficiency/(redundancy) of reserves reported to date on loss/ALAE costs reported in the second prior year, in relation to policyholders’ surplus as of year-end. Four of the six Insurance Subsidiaries generated Two-Year Reserve Development to Policyholders’ Surplus ratios greater than the usual value of 20%. The results of this ratio are driven by the adverse prior year development experienced in calendar year 2013.
In regard to our excess-of-loss reinsurance, we manage our credit risk on reinsurance recoverables by reviewing the financial stability, A.M. Best rating, capitalization, and credit worthiness of prospective or existing reinsurers. We generally do not seek collateral where the reinsurer is rated “A−” or better by A.M. Best, has $500 million or more in surplus, and is admitted in the state of Michigan. The following table sets forth information relating to our five largest unaffiliated excess-of-loss reinsurers based upon ceded premium as of December 31, 2014:
Effective December 31, 2012, we entered into a Multiple Line Quota Share Treaty with Swiss Reinsurance America Corporation (“Swiss Re”). This agreement was terminated on a run-off basis for business effective October 1, 2013 and after. Effective December 31, 2012, we ceded 50% of our unearned premium on a select portion of business. In return, we received a provisional ceding commission. The business included in the agreement was subject to specific limitations and ceded certain business based upon an in-force, new and renewal basis. We ceded 25% of direct written premium on this selected business commencing January 1, 2013, until the contract termination date of September 30, 2013, the remaining unearned premium and losses will continue to run-off. The ceded earned premium associated with this agreement was $23.2 million, ceded loss and LAE was $11.4 million and the ceding commission benefit was $10.2 million for the year ended December 31, 2014.
As of December 31, 2014, we have no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.
Refer to Note 17 ~ Related Party Transactions of the Notes to the Consolidated Financial Statements.