The Company leases office space in Pembroke, Bermuda where the Company’s principal executive office is located. Additionally, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Switzerland and Singapore sufficient for the operation of its Insurance and Reinsurance segments. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2014, please see Note 11 - “Commitments and Contingencies” to our Audited Consolidated Financial Statements.
We derived the following selected consolidated financial information for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 from our Audited Consolidated Financial Statements and related notes. These historical results are not necessarily indicative of results to be expected from any future period.
The Company’s Insurance and Reinsurance segments both include property related coverages, which provide insurance or reinsurance of an insurable interest in tangible property for property loss, damage, or loss of use. In addition, the Company’s Insurance and Reinsurance segments include various casualty insurance and reinsurance coverages, which are primarily concerned with the losses caused by injuries to third parties, i.e., not the insured, or to property owned by third parties and the legal liability imposed on the insured resulting from such injuries.
The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Losses occurring reinsurance contracts accounted for approximately 20%, 21%, and 22% of the Company’s gross premiums written during the years ended December 31, 2014, 2013, and 2012, respectively. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24 month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period. Policies attaching reinsurance contracts accounted for approximately 21%, 24%, and 22% of the Company’s gross premiums written during the years ended December 31, 2014, 2013, and 2012, respectively.
Premiums on the Company’s excess of loss and proportional reinsurance contracts are estimated at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the reinsurance contracts are underwritten. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustments to these estimates are recorded in the period in which they become known. The Company has not historically experienced material adjustments to its initial premium estimates for its excess of loss reinsurance contracts. For proportional contracts, as is customary in the reinsurance market, there is a time lag from the point when premium and related commission and expense activity is recorded by a ceding company to the point when such information is reported by the ceding company to the Company, either directly or through a reinsurance intermediary. This time lag can vary from one to several months or calendar quarters. In addition, uncertainty in premium estimates arises due to changes in renewal rates or rate of new business acceptances by the cedant insurance companies and changes in the rates being charged by cedants. Changes to original premium estimates for proportional contracts could be material and such adjustments may directly and significantly impact earnings in the period they are determined because the subject premium may be fully or substantially earned.
changes in one or more of the premium assumptions as noted above. A 7% variation in the Company’s proportional premiums receivable, net as of December 31, 2014, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $5.6 million on the Company’s net income.
As a result of recognizing the estimated gross premium written at the inception of the policy and collecting that premium over an extended period, we include a premiums receivable asset on our balance sheet. We actively monitor our premiums receivable asset to consider whether we need an allowance for doubtful accounts. As part of this process, we consider the credit quality of our cedants and monitor premium receipts versus expectations. At December 31, 2014, the Company has an allowance for estimated uncollectible premiums receivable of $2.6 million (2013 - $2.3 million).
Acquisition expenses are costs that vary with and are directly related to the successful production of new and renewal business, and consist principally of commissions and brokerage expenses. Acquisition expenses are shown net of commissions, other fees and expense allowances associated with and earned on ceded business. These costs are deferred and amortized over the periods in which the related premiums are earned.
Reserve for Losses and Loss Expenses. The Company’s reserve for losses and loss expenses includes case reserves and reserves for losses incurred but not reported (referred to as “IBNR reserves”). Case reserves are established for losses that have been reported to us, but not yet paid. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. Case reserves and IBNR reserves are established by management based on reports from reinsurance intermediaries, ceding companies and insureds and consultations with independent legal counsel. In addition, IBNR reserves are established by management based on reported losses and loss expenses and actuarially determined estimates of ultimate losses and loss expenses.
Information Used in Determining the Reserve for Losses and Loss Expenses. In order to estimate the Company’s reserve for losses and loss expenses, management uses information either developed from internal or independent external sources, or pricing information created by the Company or provided to the Company by insureds and brokers at the time individual contracts and policies are bound. In addition, we use commercially available risk analysis models, contract by contract review by our underwriting teams, other data and estimates provided by our clients, and, to a limited extent, overall market share assumptions to estimate our loss and loss expense reserves related to specific loss events.
Actuarial Methods Used to Estimate Loss and Loss Expense Reserves. The Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company. One actuarial method used by the Company to estimate its reserve for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current
For the agriculture insurance line of business, case reserves are established from initial loss notifications that are provided to our independent agents from insureds. Based on the information provided, the Company’s system establishes a case reserve amount calculated from a formulaic model that includes historical experience, type of crop, and percent of liability. As actual claims are adjusted, outstanding reserves are adjusted to reflect the actual losses incurred.
the terms of the contracts and policies the Company entered into with its insureds and ceding companies will be interpreted as intended, including those related to applicable aggregation limits and occurrence definitions.
Factors Creating Uncertainty in the Estimation of the Reserve for Losses and Loss Expenses. While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for losses and loss expenses, certain of the Company’s business lines are by their nature subject to additional uncertainties, including the Company’s casualty, property, professional lines, catastrophe, and specialty lines in the Reinsurance segment and the Company’s casualty and professional lines in the Insurance segment, which are discussed in detail below. In addition, the Company’s Reinsurance segment is subject to additional factors that add to the uncertainty of estimating loss and loss expense reserves. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating loss and loss expense reserves.
The aspects of the Company’s casualty and professional lines in the Reinsurance and Insurance segments that complicate the process of estimating loss reserves include the lack of long-term historical data for losses of the same type intended to be covered by the policies and contracts written by the Company and the expectation that a portion of losses in excess of the Company’s attachment levels in many of its contracts will be low in frequency and high in severity, limiting the usefulness of claims experience of other insurers and reinsurers for similar claims. In addition, the portion of the Company’s casualty line in its Insurance segment that is underwritten in Bermuda sometimes includes policy forms that vary from more traditional policy forms. The primary difference in the casualty policy form sometimes used by Endurance Bermuda from more traditional policy forms relates to the coverage being provided on an occurrence reported basis instead of the typical occurrence or claims-made basis used in traditional policy forms. The occurrence reported policy forms typically cover occurrences causing unexpected and unintended personal injury or property damage to third parties arising from events or conditions that commence at or subsequent to an inception date, and prior to the expiration of the policy provided that proper notice is given during the term of the policy or the discovery period.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and loss expense reserve estimates. As of December 31, 2014, there were no significant backlogs related to the processing of policy or contract information in the Company’s Insurance or Reinsurance segments.
Pricing Services and Index Providers. Pricing services, including index providers, provide pricing for less-complex, liquid securities based on market quotations in active markets. For securities that do not trade on a listed exchange, these pricing services may use a matrix pricing consisting of observable market inputs to estimate the fair value of a security. These observable market inputs include reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic factors. Additionally, pricing services may use a valuation model such as an option adjusted spread model commonly used for estimating fair values of mortgage-backed and asset-backed securities. At December 31, 2014, the Company has not adjusted any pricing provided by independent pricing services and index providers and have classified all such securities as Level 2.
Broker/Dealers. Generally, the Company obtains quotes directly from broker/dealers who are active in the corresponding markets when prices are unavailable from independent pricing services or index providers. Broker/dealer quotes may also be used if the pricing from pricing services or index providers is not reflective of current market levels, as detected by our pricing
Other than Temporary Impairment. Following a determination of fair value, the Company reviews its fixed maturity and short-term portfolios to determine whether any declines in the fair value below the amortized cost basis of these securities are other-than-temporary. If the Company determines that a decision to sell the security has been made or that it is more likely than not that the Company will be required to sell a fixed maturity or short-term security, the Company deems the security to be other-than-temporarily impaired and writes it down to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other-than-temporary impairment (“OTTI”) loss.
Other Investments. Other investments consist of alternative and specialty funds and are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. Alternative funds include investments in hedge funds and private investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity. Specialty funds currently include high yield loan funds. The carrying value of other investments are increased or decreased to reflect the Company’s share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by certain of the fund managers, valuations of certain alternative funds and specialty funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.
Intangible assets are tested for impairment annually. For the year ended December 31, 2014, a quantitative analysis was performed to determine the fair value of the Company's intangible assets with indefinite lives. This valuation analysis showed that certain of the Company's U.S. insurance licenses, which are included in the Company's Insurance business segment, were impaired by $5.5 million (2013 - nil). The determination of this impairment was a result of an evaluation of recent sales prices for companies with similar insurance licenses, which indicated that the prices for excess and surplus lines licenses are lower due to the passage of Dodd-Frank legislation that has standardized and simplified the process to obtain excess and surplus lines licenses, resulting in a lower value for these licenses. The impairment loss of $5.5 million is included within the net realized and unrealized gains line item in the Consolidated Statements of Income and Comprehensive Income.
Deferred Tax Assets. The Company provides for income taxes in accordance with the provisions of the relevant accounting guidance on, “Accounting for Income Taxes” and “Accounting for Uncertain Tax Positions” for Endurance Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions, ARMtech and Endurance U.K., which are the Company's operating subsidiaries in income tax paying jurisdictions. The Company's deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our Audited Consolidated Financial Statements and the tax basis of our assets and liabilities. The Company determines deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.
Recent Accounting Pronouncements. In July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 provides guidance on the presentation of unrecognized tax benefits to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 was effective for annual and interim reporting periods beginning after December 15, 2013, with both early adoption and retrospective application permitted. The Company adopted this standard effective January 1, 2014. This standard did not have a material impact on the Company’s consolidated financial statements.
Gross premiums written in 2014 increased $228.8 million, or 8.6%, compared to 2013 and increased $345.1 million, or 13.5% compared to 2012. The following table provides the distribution of gross premiums written by the geographic location in which the risk originated for the years ended December 31, 2014, 2013 and 2012:
Increases in gross premiums written for 2014 versus 2013 and 2012 were driven by the following factors:
property and various professional liability coverages, as a result of the expansion of the Company’s Insurance underwriting personnel in the U.S. and the U.K. over the last twenty four months offset by a decline in gross premiums written in the agriculture line of business due to declines in commodity prices on spring crops;
A decline in gross premiums written in the casualty line of business in the Reinsurance segment due to non-renewal of business that no longer met profitability targets and reduced participation on certain contracts where pricing was inadequate, partially offset by new business.
The Company’s 2014 net investment income decreased 20.9% or $34.7 million as compared to 2013 and decreased 24.1% or $41.8 million as compared to 2012. Net investment income during 2014 included net mark to market gains of $19.6 million on other investments, comprised of alternative funds and specialty funds, as compared to mark to market gains of $64.3 million in 2013 and mark to market gains of $49.1 million in 2012. Investment income generated by the Company’s available for sale investments, which consist of fixed maturity investments, short-term investments and equity securities, increased by $10.7 million in 2014 compared to 2013 and decreased by $12.1 million compared to 2012. The movement in investment income resulted from changes in the book yield of the fixed maturity investment portfolio as a result of interest rate movements and reinvestment of amounts from maturing securities within the periods. The value of the investment portfolio (including cash and cash equivalents and pending investment purchases and sales) as of December 31, 2014 increased 1.6% from 2013 and 0.6% from 2012. The increase in the investment portfolio in 2014 resulted primarily from increased assets available for investment due to income generated during 2013 and 2014. Investment expenses in 2014 were comparable to those of 2013 and increased compared to 2012 due to an increase in invested assets.
During 2014, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 55 basis point range, with a high of 1.17% and a low of 0.62%. Trading activity in the Company’s portfolio in 2014 included increased allocations to collateralized obligations, corporate securities, asset-backed securities, foreign government bonds, and equity securities, and reductions in other investments, U.S. government and government agencies securities and short-term investments. The duration of the fixed maturity portfolio was 2.91 years at December 31, 2014 and 3.11 years at December 31, 2013. The decrease in duration from 2013 to 2014 was due to the decrease in longer term interest rates, which increased the estimated rate of prepayments underlying the Company’s mortgage-backed securities portfolio, causing a reduction of the average expected maturity of these securities.
The Company’s reported net losses and loss expenses are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. The following table shows the net losses after adjustment for reinstatement premiums and other loss sensitive accruals recorded by the Company in connection with catastrophes for the years ended December 31, 2014, 2013 and 2012.
The Company’s general and administrative expense ratio for 2014 was higher than that of 2013 and 2012, due to $15.5 million of expenses related to the potential acquisition of Aspen Insurance Holdings Limited ("Aspen"), an increase in performance based annual incentive compensation expenses associated with improved corporate performance, and an increase in personnel costs related to the addition of new underwriting teams and management personnel. This increase was partially offset by increased ceding commission reimbursements as a result of additional purchases of reinsurance during 2014. At December 31, 2014, the Company had a total of 997 employees as compared to 920 employees at December 31, 2013 and 881 employees at December 31, 2012.
One of the key measures used by management in assessing the Company’s underwriting performance is the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company’s historic combined ratios may not be indicative of future underwriting performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by business segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are allocated primarily based on estimated consumption, headcount and other variables deemed relevant to the allocation of such expenses. Ceded reinsurance and recoveries are recorded within the segment to which they apply.
An increase in gross premiums written in the casualty and other specialty, property, marine and energy, and professional lines of business, including excess casualty, marine, energy, property and various professional liability coverages, as a result of the expansion of the Company’s Insurance underwriting personnel in the U.S. and the U.K. over the last twenty-four months; and
Net premiums earned by the Company in 2014 in the Insurance segment decreased compared to net premiums earned in 2013 and 2012 primarily due to lower gross premiums written in the agriculture line of business due to commodity price declines as well as from additional expense incurred from the purchase of excess of loss reinsurance on this line of business.
General and Administrative Expenses. The Company’s general and administrative expense ratio in the Insurance segment for 2014 increased compared to both 2013 and 2012. The increase in 2014 was due to an increase in annual incentive compensation expenses associated with improved corporate performance, an increase in personnel costs related to the addition of new underwriting teams and management personnel, and increased corporate expenses related to the potential acquisition of Aspen on a lower earned premium base. This increase was partially offset by increased ceding commissions received as a result of additional purchases of reinsurance during the current year.
An increase in net premiums written in the specialty line of business as a result of new trade credit, surety and international agriculture business written, partially offset by non-renewal of business that no longer met profitability targets and increased ceding company retentions in the aviation and space business, and an increase in ceded premiums due to additional proportional retrocession purchased on the specialty line of business;
For 2014 catastrophe related losses added 5.1 percentage points to the Reinsurance segment’s net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 7.4 percentage points in 2013 and 17.3 percentage points in 2012.
The Company experienced lower favorable prior year loss reserve development in its Reinsurance segment in 2014 compared to 2013 and higher levels of favorable development compared to 2012. During 2014, 2013 and 2012, the Company’s previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $153.2 million, $188.5 million and $74.0 million, respectively. The 2014 favorable prior year loss reserve development emerged across all business lines in the segment. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company. During 2014, the majority of the favorable loss reserve development emanated from the catastrophe, property and specialty lines of business. During 2013, the favorable loss reserve development was primarily driven by reductions in the Thailand flood losses of 2011 and Superstorm Sandy losses in 2012, and from lower than expected attritional losses.
Acquisition Expenses. The Company’s acquisition expense ratio in the Reinsurance segment for the year ended December 31, 2014 was higher than in 2013 and 2012 primarily due to growth in net premiums earned in the professional line of business, which incurs a higher than average net acquisition expense rate, and a decline in net premiums earned in the catastrophe line of business, which incurs a lower than average net acquisition expense rate.
General and Administrative Expenses. The general and administrative expense ratio in the Reinsurance segment increased in 2014 compared to 2013 and 2012 due to an increase in annual incentive compensation expenses associated with improved year to date corporate performance, an increase in personnel costs related to the addition of new underwriting teams and management personnel, and higher corporate expenses primarily related to the potential acquisitions of Aspen.
The Company’s investment portfolio was valued at $6.6 billion as of December 31, 2014 compared to $6.5 billion as of December 31, 2013. The Company’s investment portfolio is comprised of cash and cash equivalents, fixed maturity investments, short-term investments, equity securities and other investments, comprised of alternative funds and specialty funds. Alternative funds include investments in hedge funds and private investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity. Specialty funds currently include high yield loan funds. During 2014, the Company's investment in convertible debt funds previously classified as other investments was merged by the investment manager into a new fund that is classified as an available for sale equity security.
Balances include amounts related to collateralized debt obligations held with total fair values of $18.7 million.
Government Guaranteed Corporate Securities. Corporate issued securities backed by the full faith and credit of the sponsor country.
Commercial Mortgage-Backed Securities. The Company's commercial mortgage-backed securities (“CMBS”) portfolio is diversified both geographically and by the types of underlying properties. The portfolio is primarily collateralized by office and retail and other commercial properties. The Company has limited exposure to lodging and industrial properties. The majority of commercial mortgage-backed securities in the Company's portfolio are non-agency backed securities and are in the super senior tranche with average credit support of approximately 28%. The principal risks inherent in holding agency commercial mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash flows are received. Non-agency CMBS also have credit risk should losses on the underlying collateral exceed the credit protection provided.
Collateralized Loan and Debt Obligations. Collateralized loan and debt obligations are diversified by both type of collateral and issuer. Our collateralized loan obligations are backed by floating-rate corporate bank loans of various vintages and sectors. The majority of our collateralized loan obligations are AAA rated. Our collateralized debt obligations are primarily backed by corporate bonds. The principal risks of holding both collateralized loan and debt obligations are structural and credit risks. Structural risks include the security's priority in the issuer's capital structure, and the adequacy of and ability to realize proceeds from the underlying collateral. Credit risks include performance of the underlying bank loans or corporate bonds, which act as collateral for these securities.
Asset-Backed Securities. Asset-backed securities are diversified both by type of collateral and issuer. The majority of our asset-backed securities are AAA-rated bonds backed by pools of automobile loan receivables, credit card receivables, student loans and other collateral originated by a variety of financial institutions. The principal risks in holding asset-backed securities are structural and credit risks. Structural risks include the security’s priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include performance of the underlying consumer or corporate loans, which act as collateral for these securities.
Equity securities in the Company’s investment portfolio consist of publicly traded common stocks, preferred stocks, and mutual funds. The majority of the Company’s equity securities are common stocks of companies that have a record of increasing dividends over time. A portion of our equity securities are comprised of shares of institutional mutual funds which are invested in emerging market debt, convertible bonds and other targeted strategies.
The Company’s other investments are comprised of (i) hedge funds and private investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity (“alternative funds”) and (ii) high yield loan and convertible debt funds (“specialty funds”) are recorded on the Company’s balance sheet as “other investments”. During 2014, the Company's investment in convertible debt funds previously classified as other investments was merged by the investment manager into a new fund that is classified as an available for sale equity security. As of December 31, 2014, the Company's Board of Directors had approved investments in alternative funds at the time of commitment of capital of up to 25% of total shareholders’ equity. Using this measure, as of December 31, 2014, alternative funds represented 17% of the Company’s shareholders’ equity. This restriction does not apply to investments in specialty funds that are typically long only structures. As of December 31, 2014, the Company’s other investments totaled $541.5 million and represented 8.2% of the Company’s investment portfolio. As of December 31, 2014, the Company had invested, net of capital returned, a total of $387.2 million in alternative funds and specialty funds. As of December 31, 2014, the market value of alternative funds represented $486.0 million or approximately 89.7% of other investments, and specialty funds represented $55.5 million or approximately 10.3% of other investments.
Other investments are accounted for under the equity method of accounting. Adjustments to the carrying value of these investments are made based upon the net valuation criteria established by the managers of the other investments, which in turn are established based upon the valuation criteria in the governing documents of the other investments. Such valuations may differ significantly from the values that would have been used had liquid markets existed for the shares or partnership interests
During 2014, 2013 and 2012, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. In identifying such securities, the Company initially considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at the end of the applicable period. To the extent that the Company did not identify securities meeting these criteria, the Company then performed various analyses and reviews to determine whether the investments in an unrealized loss position were other-than-temporarily impaired as a result of credit factors or non-credit related factors. As such, the Company recorded total other than temporary impairments of $0.6 million (2013 - $1.6 million; 2012 - $0.8 million) related to credit factors and recognized in earnings.
In addition to the direct exposures above, the Company has indirect exposure to sovereign and non-sovereign investments held within certain alternative funds in its other investments.
Under the jurisdiction of the United Kingdom’s Prudential Regulatory Authority (“PRA”), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The PRA regulatory requirements impose no explicit restrictions on Endurance U.K.’s ability to pay a dividend, but Endurance U.K. would have to notify the PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At December 31, 2014, Endurance U.K. did not have retained profits available for distributions.
Cash and Invested Assets. The Company’s aggregate invested assets as of December 31, 2014 totaled $6.6 billion compared to aggregate invested assets of $6.5 billion as of December 31, 2013. The increase in invested assets since December 31, 2013 resulted primarily from net income generated during 2014 and an increase in unrealized gains on investments.
Cash flows used in financing activities. The Company’s cash flows used in financing activities for the year ended December 31, 2014 were $99.7 million, compared to $74.4 million and $97.6 million in 2013 and 2012, respectively. The 2014 cash flows used in financing activities increased compared to 2013 primarily due to decreased proceeds from the issuance of ordinary shares. Compared to 2012, cash flows used in financing activities in 2014 increased due to increased dividends paid on common shares and loan facility costs paid, partially offset by the lack of ordinary share repurchase activity.
During 2013, the Company used a portion of its capital to repurchase 318,252 of its ordinary shares in the open market for $14.6 million at an average price per share of $45.83 (2014: nil). During 2012, the Company repurchased $1.0 million of its 6.15% Senior Notes due October 15, 2015 (2014 and 2013: nil).
On December 9, 2014, the Company and certain designated subsidiaries of the Company entered into a $30.0 million Canadian dollar letter of credit reimbursement agreement ("Canadian LOC Agreement") with Bank of Montreal and ING Bank N.V., London Branch. As of December 31, 2014, there were no letters of credit issued under the Canadian LOC Agreement. For letters of credit issued under the Canadian LOC Agreement, the Company is required to pay a fee on the daily amount available to be drawn under each letter of credit. Letters of credit issued under the Canadian LOC Agreement are required to be collateralized with cash in Canadian dollars.
Bridge Facility. On June 2, 2014, the Company entered into a commitment letter with Morgan Stanley Senior Funding, Inc. (the “Commitment Letter”). Pursuant to the Commitment Letter, Morgan Stanley Senior Funding, Inc., as lead arranger, committed to provide to the Company, subject to certain conditions, senior unsecured bank financing of up to $1.0 billion under an unsecured 364-day bridge facility (the “Bridge Facility”), which was to be used to finance a portion of the cash consideration to be paid in connection with the Company’s proposed acquisition of Aspen and related costs and expenses. Upon the termination by the Company on July 30, 2014 of its offer to acquire Aspen, the Bridge Facility expired pursuant to its terms. During 2014, the Company recognized $4.8 million of costs associated with the facility.
The Company also has Credit Facility, LOC Agreement and Canadian LOC Agreement capacity of $574.8 million and $439.7 million as at December 31, 2014 and 2013, respectively.
Credit Facilities. As of December 31, 2014 and 2013, the Company had $209.9 million and $260.3 million, respectively, of letters of credit outstanding under its credit facilities and no revolving loans outstanding. The Company was in compliance with all covenants contained in its credit facilities as of December 31, 2014.
Senior Notes. On October 17, 2005, Endurance Holdings issued $200.0 million principal amount of 6.15% Senior Notes due October 15, 2015. The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%. Endurance Holdings used net proceeds from the offering to repay a $143.5 million revolving loan then outstanding under the Company’s then existing credit facility as well as to provide additional capital to its subsidiaries and for other general corporate purposes. During 2012, the Company repurchased $1.0 million of its 6.15% Senior Notes (2014 and 2013: nil).
At December 31, 2014, the carrying value of the Senior Notes stood at $527.6 million while the fair value as determined by quoted market valuation was $623.7 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2014.
Given that the Company’s Senior Notes and the 2012 Credit Facility contain cross default provisions, the risk exists that the holders of the Senior Notes and the lenders under the Credit Facility may declare such debt due and payable, which could result in an acceleration of all debt due under both the Senior Notes and the Credit Facility. If this were to occur, the Company may not have funds sufficient to repay any or all of such indebtedness.
any declared and unpaid dividends, without accumulation of any undeclared dividends. Distributions will be made pro rata as to the Series A Preferred Shares, Series B Preferred Shares and any parity shares and only to the extent of Endurance Holdings’ assets, if any, that are available after satisfaction of all liabilities to creditors.
Holders of the Series A Preferred Shares and the Series B Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series A Preferred Shares or the Series B Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings’ bye-laws.
Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income.
The Company’s reserving actuaries, who are independent of the Company’s business units, review the Company’s loss and loss expense reserves on a quarterly basis for both current and prior accident years using the most current claims data. These reserve reviews incorporate a variety of actuarial methods and judgments, including the three most common methods of actuarial evaluation used within the insurance industry: the expected loss ratio method; the Bornhuetter-Ferguson method; and the loss development method. The expected loss ratio approach is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). The Bornhuetter-Ferguson method uses an initial loss estimate (expected loss technique) for each accident year by business line and type of contract. Under this method, IBNR is set equal to the initial loss estimate multiplied by the expected percent of loss yet to be reported at each valuation date. In a given quarter, if reported losses are less than expected, then the difference would result in a decrease in estimated ultimate losses. If losses for the quarter are greater than expected, then the difference would result in an increase in estimated ultimate losses. In contrast, the loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. The Company uses these multiple methods, supplemented with its own actuarial and professional judgment, to establish its best estimate of loss and loss expense reserves.
The estimate of the reserve for losses and loss expenses is reviewed each quarter by the Company’s Loss Reserve Committee, consisting of the Company’s Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Group Actuary, Chief Reserving Actuary and representatives of various disciplines from within the Company, such as underwriting, actuarial pricing and legal.
Losses and loss expenses for the year ended December 31, 2013 include $222.4 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during the 2013 year benefited the Company’s 2013 reported loss ratio by approximately 11.0 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company’s reserve categories within both the Insurance and Reinsurance segments.
For the year ended December 31, 2013, as part of the Company’s periodic review of key inputs and parameters and in order to recognize accumulated historical experience and other relevant industry information, the Company adjusted the initial expected loss ratios for a number of business units within the Insurance and Reinsurance segments. Within the Insurance segment, initial expected loss ratios were lowered for historical years for the casualty and other specialty and professional lines of business, and raised for the workers’ compensation line of business that is included in the casualty and other specialty line of business. Within the Reinsurance segment, initial expected loss ratios were lowered for historical years for the catastrophe line of business.
Agriculture. The favorable loss emergence within the agriculture insurance line of business during 2014 and 2013 resulted from lower than anticipated agriculture claims settlements for the 2013 and 2012 crop years, respectively.
Catastrophe. The Company recorded significant favorable loss emergence within the catastrophe line of business during 2014 primarily due to lower than expected claims activity and a reduction of IBNR for worker's compensation catastrophe business for accident years 2005-2013. During 2013, the favorable loss reserve development was driven by reductions in the Thailand flood losses of 2011 and Superstorm Sandy losses in 2012.
Property. The Company recorded favorable loss emergence in the property line of business during 2014 primarily due to lower than expected claims activity. The Company recorded favorable loss emergence in the property line of business in 2013 due to lower than expected claims activity, primarily related to the Thailand floods of 2011 and Superstorm Sandy in 2012.
Casualty. The Company recorded favorable prior period development within this line of business during 2014 primarily due to lower than expected claims emergence in the direct treaty casualty business. In 2013, the Company recorded favorable prior period development within this line of business primarily due to lower than expected claims emergence in the Bermuda treaty casualty business.
Case and IBNR reserves for losses and loss expenses by segment and line of business were as follows at December 31, 2013:
Selected quarterly activity in the reserve for losses and loss expenses for the years ended December 31, 2014 and 2013 is summarized as follows:
Two key inputs utilized in determining loss and loss expense reserves for the Company’s two business segments are the initial expected loss ratio and the speed of the loss reporting pattern. The following tables illustrate the possible percentage effects on current estimates of the reserve for losses and loss expenses due to 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern as of December 31, 2014. The 10% changes in the initial expected loss ratio and the speed of the loss reporting pattern in the tables below were chosen to demonstrate the impact on the Company’s loss and loss expense reserves of variation in key inputs and, as described below, may not be reflective of actual changes in loss and loss expense reserves.
Ceded premiums written were $959.9 million for the year ended December 31, 2014, $616.3 million for the year ended December 31, 2013 and $519.5 million for the year ended December 31, 2012. The increase in ceded premiums written was primarily due to decreased retentions across our entire Insurance segment as the Company purchased a new whole account quota share treaty providing protection for all of the Insurance segment’s book of business for 2014. In addition, the Company purchased excess of loss reinsurance covering the Insurance segment’s agriculture line of business at a lower attachment point compared to 2013, resulting in increased ceded premiums written. In the Reinsurance segment, ceded premium written increased as the Company purchased increased levels of retrocessional protection within the catastrophe and specialty lines of business, including an aggregate all perils excess of loss treaty and increased proportional retrocession.
At December 31, 2014 and 2013, the Company had reinsurance recoverables of $889.1 million and $758.0 million, respectively, related to its ceded reinsurance agreements. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded to the U.S. federal government in the agriculture line of business. Accordingly, the Company has evaluated the reinsurers and retrocessionaires that are providing reinsurance and retrocessional protection and will continue to monitor the stability of its reinsurers and retrocessionaires. At December 31, 2014 and 2013, the Company held collateral of $199.7 million and $14.2 million, respectively, related to its ceded reinsurance agreements. The balance of losses recoverable at December 31, 2014 was distributed as follows based on the ratings of the reinsurers:
The Company’s intangible assets and goodwill are tested at least annually for impairment and more often if a triggering event is deemed to have occurred. Impairment testing for indefinite-lived intangible assets is performed based upon estimates of the fair value of the asset. The Company uses third party valuation appraisals to estimate the fair value of its indefinite-lived intangible assets. Impairment testing for goodwill is performed based upon estimates of the fair value of the “reporting unit” to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The Company’s reporting units identified include the agriculture line of business in the Insurance segment, the remaining Insurance segment lines of business, and the Reinsurance segment. The fair value of the reporting unit is impacted by the performance of the business. The Company uses discounted cash flow analyses to estimate fair value of its reporting units. There have been no significant changes in the Company’s methodologies from the prior year. If it is determined that goodwill or intangible assets with indefinite useful lives have been impaired, the Company must write down the goodwill or intangible asset by the amount of the impairment, with a corresponding charge to net income.
The Company’s income tax expense was as follows for the years ended December 31, 2014, 2013 and 2012, respectively:
Income tax payments in 2014 totaled $0.9 million. The Company received net refunds and paid net income taxes totaling $8.4 million and $1.6 million for the years ended December 31, 2013 and 2012, respectively. Net operating loss carryforwards in the amount of $192.0 million, $57.3 million, $46.0 million, and $45.8 million are available for application against future taxable income in the United States, United Kingdom, Singapore and Switzerland respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carry forwards expire through 2021 and 2033, respectively.
Pre-tax income for our non-U.S. operations was favorable compared to our U.S. operations for the years ending December 31, 2014, 2013 and 2012 because our U.S. operations were impacted by losses resulting from our agriculture line of business that is underwritten by ARMtech due to declines in commodity prices in 2014 and 2013 and extreme drought in 2012. The higher pre-tax income for the year ended December 31, 2014 resulted primarily from the more volatile catastrophe business underwritten in our non-U.S. operations during 2014 being relatively free of losses and thus generating higher levels of net underwriting income during the period compared to the years ended December 31, 2013 and 2012. In addition, our non-U.S. operations hold a substantial amount of our invested assets and thus a larger portion of the Company’s investment income is earned in our non-U.S. operations as compared to our U.S. operations.
audits of income tax returns of the Company’s U.S. subsidiaries for 2009, 2010 and 2011. The audit results were immaterial to the operations of the Company. None of the Company’s operating subsidiaries or branch operations are under an examination in any of the jurisdictions in which they operate. The Company remains subject to examination for tax years 2010 through 2014. As of December 31, 2014 and 2013, the Company had no uncertain tax positions.
The Company is subject to income taxes in certain jurisdictions in which the Company operates; however, since the majority of the Company’s income is currently earned in Bermuda, a jurisdiction with no corporate income tax, the tax impact to the Company’s operations has historically been minimal. In 2014, the Company generated income before income taxes in its subsidiaries, which generated a consolidated 0.1% (2013 - 1.8%, 2012 - 2.0%) effective income tax rate.
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Notes to the Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Endurance Specialty Holdings Ltd. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
The Company’s insurance premiums are earned pro rata over the term of the applicable risk period specified in the insurance policy. The Company’s insurance policies cover losses occurring or claims made during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will only adjust if the underlying insured values adjust. Accordingly, the Company monitors the underlying insured values and records additional or return premiums in the period in which amounts are reasonably determinable.
The Company’s reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies that began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24-month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period.
Premiums receivable are recorded at amounts due less any allowance for estimated uncollectible premiums receivable. At December 31, 2014, the Company had an allowance for estimated uncollectible premiums receivable of $2.6 million (2013 - $2.3 million).
The Company currently classifies its fixed maturity investments, short-term investments and equity securities as “available for sale” and, accordingly, they are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders’ equity as a component of accumulated other comprehensive income. Investment transactions are recorded on a trade date basis. The Company determines the fair value of its available for sale investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. Current accounting guidance establishes three levels as follows:
If the amortized cost of the Company’s fixed maturity and short-term investments is, based upon the judgment of management, unlikely to be recovered, the Company writes down the investment by the amount representing the credit related portion of the decline in value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an OTTI loss. The new cost basis is not changed for subsequent recoveries in fair value.
Identifiable intangible assets are amortized in accordance with their useful lives. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually or more often if impairment indicators arise. In making an assessment of the value of its goodwill and intangible assets, the Company uses both market based and non-market based valuations.
Assets and liabilities of foreign operations whose functional currency is not the United States dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at weighted average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive income, net of applicable deferred income taxes. Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting net foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.
The Company has a share-based employee and non-employee director equity incentive plan (“2007 Equity Incentive Plan”) and other share plans, which are described more fully in Note 15. The fair value of the compensation cost incurred under these plans is measured at the grant date and is expensed over the period for which the employee is required to provide services in exchange for the award. Forfeiture benefits are estimated at the time of grant and incorporated in the determination of share-based compensation costs. Awards under the 2007 Equity Incentive Plan generally vest over four years for employees and one year for non-employee directors.
The following table summarizes the composition by investment rating of the fixed maturity and short-term investments at December 31, 2014 and 2013. In some cases, where bonds are unrated, the rating of the issuer has been applied.
Contractual maturities of the Company’s fixed maturity and short-term investments are shown below as of December 31, 2014 and 2013. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
For additional information on the Company's intangible assets, see Note 10.
For additional information on the Company’s derivative financial instruments, see Note 8.
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2014.
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive income at December 31, 2013.
The following table provides a roll-forward of the amount related to credit losses for the Company’s available for sale investments recognized in earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income for the years ended December 31, 2014, 2013 and 2012 :
The Company is involved in the normal course of business with VIEs primarily as a passive investor in residential and commercial mortgage-backed securities and through its interests in various other investments that are structured as limited partnerships considered to be third party VIEs. The Company determined that it was not the primary beneficiary for any of these investments as of December 31, 2014 and 2013. The Company believes its exposure to loss with respect to these investments is generally limited to the investment carrying amounts reported in the Company’s Consolidated Balance Sheets and any unfunded investment commitments.
The following table sets forth the Company’s available for sale investments, other investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2014:
During 2014, $13.3 million of primarily commercial and residential mortgage-backed securities and corporate securities were transferred into Level 3 as no observable inputs were available, and $7.5 million of primarily commercial and residential mortgage-backed securities and collateralized loan and debt obligations were transferred out of Level 3 as market activity for these securities increased and observable inputs became available. During the year ended December 31, 2014, $6.6 million of U.S. government and agencies securities were transferred from Level 1 to Level 2 as they no longer qualified as on the run U.S. treasury securities.
Observable and unobservable inputs to these valuation techniques vary by contract requirements and commodity type, are validated using market-based or independently sourced parameters where applicable and may typically include the following:
Below is a summary of quantitative information regarding the significant observable and unobservable inputs used in determining the fair value of the net weather and energy related derivative liabilities classified in Level 3 that are measured at fair value on a recurring basis at December 31, 2014 and 2013:
The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2014 and 2013.
Activity in the reserve for losses and loss expenses for the years ended December 31, 2014, 2013 and 2012 is summarized as follows:
During 2014, the Company’s estimated ultimate losses for prior accident years were reduced by $233.8 million (2013 - $222.4 million; 2012 - $120.2 million) due to lower claims emergence than originally estimated by the Company. During 2014, the Company experienced favorable development in the Reinsurance segment of $153.2 million across each line of business. In the Insurance segment, the Company experienced $80.6 million of favorable development across each line of business. During 2013, the Company experienced favorable development in the Reinsurance segment of $188.5 million across each line of business. In the Insurance segment, the Company experienced $33.9 million of favorable development across each line of business. During 2012, the Company experienced favorable development in the Reinsurance segment of $74.0 million in the catastrophe, casualty, professional lines and specialty lines of business. In the Insurance segment, the Company experienced $46.2 million of favorable development across each line of business.
The effects of reinsurance on premiums earned and written during the years ended December 31, 2014, 2013 and 2012 are as follows:
At December 31, 2014 and 2013, the Company held collateral of $199.7 million and $14.2 million, respectively, related to its ceded reinsurance agreements.
For letters of credit issued on a collateralized basis under the Tranche 1 Facility, the Company is required to pay a fee of 0.45% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis under the Tranche 2 Facility, the Company is required to pay a fee ranging from 1.125% to 1.750% over LIBOR on the daily stated amount of such letters of credit based upon the Company’s debt ratings as issued by Moody’s or S&P. The interest rate for revolving loans under the Tranche 2 Facility is (a) the highest of (i) 0.5% in excess of the federal funds effective rate, (ii) the prime rate as announced by JP Morgan and (iii) the Eurodollar rate applicable for an interest period of one month plus 1%, plus a margin ranging from 0.125% to 0.750% depending upon the type of loan and the Company’s ratings as issued by Moody’s and S&P or (b) LIBOR plus a margin ranging from 1.125% to 1.750%. In addition, the Credit Facility required the Company to pay to the lenders a commitment fee.
The Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the Credit Facility, insolvency of the Company, a change in control of the Company, a breach of the Company’s representations or covenants in the Credit Facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the Credit Facility, the lenders can terminate their commitments under the Credit Facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the Credit Facility.
On January 17, 2014, the Company and certain designated subsidiaries of the Company entered into a $50.0 million revolving letter of credit reimbursement agreement ("LOC Agreement") and cash collateral agreement with Australia and New Zealand Banking Group Limited. As of December 31, 2014, the Company had issued letters of credit of $5.9 million (December 31, 2013 - nil) under the LOC Agreement. For letters of credit issued under the LOC Agreement, the Company is required to pay a fee that is negotiated at the time of issuance of the letter of credit. Letters of credit issued under the LOC Agreement are required to be collateralized with cash or investments.
The Company made aggregate interest payments of $40.4 million during the year ended December 31, 2014 (2013 - $35.7 million, 2012 - $35.7 million). Aggregate interest payments during the year ended December 31, 2014 include $4.8 million of costs on the Bridge Facility, as described above.
The Company regularly transacts in certain derivative-based weather risk management products primarily to address weather and energy risks. The trading markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Generally, the Company’s current portfolio of such derivative contracts is of short duration and such contracts are predominantly seasonal in nature.
Commodity Futures and Options - to economically hedge certain underwriting risks.
Insurance - This segment is comprised of four lines of business: agriculture, casualty and other specialty, professional lines, and property, marine and energy. The agriculture line of business is comprised of multi-peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products. The casualty and other specialty line of business is comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty and healthcare liability. The professional line of business includes directors’ and officers’ liability, errors and omissions, employment practices liability, environmental liability and pension trust liability insurance. The property, marine and energy line of business is comprised of the insurance and facultative reinsurance of commercial properties, inland marine and ocean marine insurance, and energy insurance.
The following table provides gross premiums written by line of business for the years ended December 31, 2014, 2013 and 2012:
For the year ended December 31, 2014, a valuation analysis was performed to determine the fair value of the Company's intangible assets with indefinite lives. This valuation analysis showed that certain of the Company's U.S. insurance licenses, which are included in the Company's Insurance business segment, were impaired by $5.5 million (2013 - nil). The determination of this impairment was a result of an evaluation of recent sales prices for companies with similar insurance licenses, which indicated that the prices for excess and surplus lines licenses are lower due to the passage of Dodd-Frank legislation which has standardized and simplified the process to obtain excess and surplus lines licenses. The impairment loss of $5.5 million is included within net realized and unrealized gains in the Consolidated Statements of Income and Comprehensive Income.
Major production sources. The following table shows the percentage of net premiums written generated through the Company’s largest brokers for the years ended December 31, 2014, 2013 and 2012:
Letters of credit. As of December 31, 2014, the Company had issued letters of credit of $204.0 million (2013 - $260.3 million) under its Credit Facility in favor of certain ceding companies to collateralize obligations. As of December 31, 2014, the Company had issued letters of credit of $5.9 million (December 31, 2013 - nil) under its LOC Agreement. Letters of credit issued under the LOC Agreement are required to be collateralized with cash or investments.
Total lease expense under operating leases for the year ended December 31, 2014 was $14.7 million (2013 - $14.7 million; 2012 - $15.2 million). Total sublease income included in total lease expense under operating leases for the year ended December 31, 2014 was $1.3 million (2013 - $0.8 million; 2012 - $0.3 million).
During 2014, the Company issued restricted shares under its equity compensation plans (Note 15). The common shares issued, outstanding and fully paid for at December 31, 2014 includes 1,290,894 restricted shares.
On February 27, 2014, the Company’s Board of Directors authorized the repurchase of up to 5.0 million ordinary shares and share equivalents through February 28, 2016. This authorization superseded previous authorizations. No common shares were repurchased by the Company during 2014. During 2013, under programs authorized by the Company’s Board of Directors, the Company repurchased 318,252 of its ordinary shares in open market and privately negotiated transactions at an average price of $45.83 per share. Common shares repurchased by the Company are not cancelled and are classified as treasury shares. The Company’s treasury shares are recorded at cost as a reduction in common shares and additional paid-in capital within shareholders’ equity. There were 5.0 million shares authorized for repurchase remaining at December 31, 2014 (2013 - nil).
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2014, 2013 and 2012:
Represents earnings and dividends attributable to holders of unvested restricted shares issued under the Company’s stock compensation plans that are considered participating. In periods of loss, no losses are allocated to participating common shareholders (unvested restricted shares).
Pyramis Global Advisors, a subsidiary of FMR, LLC (“Fidelity”), provides investment management services to the Company. Fidelity and its affiliates owned 3.6 million or 8.1% of Endurance Holdings’ ordinary shares outstanding at December 31, 2014 and were therefore considered a related party. The Company incurred investment management fees totaling $1.4 million (2013 - $1.4 million; 2012 - $1.4 million) to this investment manager of which $0.3 million was accrued at December 31, 2014 (2013 - $0.4 million).
A summary of option activity, including options held by employees and non-employee directors, during the year ended December 31, 2014 is presented below:
There were unrecognized stock-based compensation expenses of $2.6 million related to unvested stock options at December 31, 2014. This expense is expected to be recognized between 2015 and 2017, with approximately 61.6% expected to be recognized during 2015.
A summary of the restricted share and restricted share unit activity during the year ended December 31, 2014, is presented below:
During the years ended December 31, 2014, 2013 and 2012, the Company granted an aggregate of 505,997, 503,097 and 437,284 restricted shares and restricted share units under the 2007 Plan. As mentioned above, the Company also granted 708,890 restricted shares to Mr. Charman outside of the 2007 Plan on May 28, 2013. The restricted shares and restricted share units granted had weighted average grant date fair values of $26.7 million, $58.1 million and $16.8 million in the years ended December 31, 2014, 2013 and 2012, respectively. During the years ended December 31, 2014, 2013 and 2012, the aggregate fair value of restricted shares and restricted share units that vested was $18.7 million, $17.1 million and $11.7 million, respectively.
On October 26, 2005, Endurance Holdings’ shareholders approved the Employee Share Purchase Plan (the “ESPP”). The ESPP is not subject to any provisions of the Employee Retirement Income Security Act of 1974 as amended, and is not a qualified plan within the meaning of Section 402(a) of the Internal Revenue Code of 1986, as amended (the “Code”). The ESPP is a qualified plan under Section 423 of the Code.
Following approval by the Company’s shareholders in 2005, 200,000 of Endurance Holdings’ ordinary shares were reserved for issuance under the ESPP. At a meeting on February 23, 2011, the Company’s Board of Directors adopted a resolution to add 200,000 ordinary shares to the ESPP. The addition of 200,000 ordinary shares to the ESPP was approved by the Company’s shareholders at the Annual General Meeting of Shareholders held on May 11, 2011. After approval of the additional ordinary shares, a total of 400,000 ordinary shares were reserved for issuance under the ESPP.
Total expenses related to this plan for the year ended December 31, 2014 was approximately $234,000 (2013 - $167,000; 2012 - $165,000).
The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company’s defined contribution plans, the Company makes contributions to its employees’ accounts in amounts ranging from 4% to 12% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Company contributions for the year ended December 31, 2014 resulted in an expense of $12.6 million being recorded in earnings (2013 - $10.8 million; 2012 - $7.4 million).
Bermuda statutory capital includes an investment in affiliate asset, which represents its interest in the remaining insurance and reinsurance operations of the Company included in the United States and Other columns above.
As a Bermuda holding company, Endurance Holdings is subject to the Companies Act 1981, which limits the Company’s ability to pay dividends and make distributions to its shareholders. The Company’s retained earnings are unrestricted; however, the Company is not permitted to declare or pay a dividend, or make a distribution out of contributed surplus, if it is, or would after the payment be, unable to pay its liabilities as they come due, or if the realizable value of its assets would be less than its liabilities. Endurance Holdings had, as of December 31, 2014, $2.4 billion in retained earnings, $0.1 billion in accumulated other comprehensive income and an additional $0.6 billion in contributed surplus available to declare or pay a dividend, or make a distribution out of contributed surplus, so long as Endurance Holdings remained in compliance with the Companies Act 1981 following such dividend or distribution. Endurance Holdings relies on dividends from Endurance Bermuda to provide cash flow required for debt service and dividends to shareholders.
Endurance Bermuda is a registered Class 4 insurer under the Insurance Act 1978 and related regulations. Endurance Bermuda is required to maintain minimum solvency standards and to hold available statutory capital and surplus equal to or exceeding the Enhanced Capital Requirement as determined by the Bermuda Monetary Authority based upon a standard mathematical model that correlates the risk underwritten to the capital that is dedicated to the business. The required capital noted in the table above has been based on the Enhanced Capital Requirement. In addition to the Enhanced Capital Requirement, Endurance Bermuda is required to maintain a minimum statutory liquidity ratio and solvency margin. For all periods presented herein, Endurance Bermuda materially exceeded these minimum requirements.
Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders’ surplus or statutory net income, excluding realized capital gains for Endurance’s Delaware domiciled entities. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2014, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2015 without the prior approval of the applicable insurance regulator. If the parent company is also an insurer, as is the case with Endurance American, Endurance American Specialty and Endurance Risk Solutions, the parent company or companies must also meet their own dividend eligibility requirements in order to pass along any dividends received from subsidiary insurance companies. At December 31, 2014, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.7 million (2013 - $3.9 million) without prior regulatory approval.
The required and actual statutory capital amounts in the “Other” category in the table above include amounts related to Endurance U.K. and Endurance Bermuda’s Singapore branch (“Singapore Branch”). Under the jurisdiction of the United Kingdom’s Prudential Regulation Authority (“PRA”), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. Insurers are required to calculate their required minimum solvency margin and to report it to the PRA. The PRA also mandates calculation of an Enhanced Capital Requirement for Endurance U.K. At December 31, 2014 and 2013, the actual capital for Endurance U.K. exceeded the capital requirements currently promulgated by the PRA.
Net income tax payments for the year ended December 31, 2014 totaled $0.9 million. The Company received net income tax refunds and paid net income taxes totaling $8.4 million and $1.6 million for the years ended December 31, 2013 and 2012, respectively. Net operating loss carryforwards gross of tax in the amount of $192.0 million, $57.3 million, $46.0 million and $45.8 million are available for application against future taxable income in the United States, United Kingdom, Singapore and Switzerland, respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States, the net operating loss carry forwards expire through 2021 and 2033, respectively.
The Company’s income before income taxes was distributed as follows for the years ended December 31, 2014, 2013 and 2012, respectively:
As of December 31, 2014 and 2013, the Company had no uncertain tax positions.