Our principal and executive offices are located in Houston, Texas, in buildings owned by Houston Casualty Company. We also maintain offices in approximately 60 locations elsewhere in the United States, the United Kingdom, Spain and Ireland. The majority of these additional locations are in leased facilities.
We are a specialty insurance group with offices in the United States, the United Kingdom, Spain and Ireland, transacting business in approximately 180 countries. Our shares trade on the New York Stock Exchange and closed at $55.48 on February 13, 2015, resulting in market capitalization of $5.3 billion.
We had consolidated shareholders’ equity of $3.9 billion, with book value per share of $40.44.
Our net loss ratio was 55.5% and our combined ratio was 82.1%.
We increased our regular quarterly cash dividend to $0.295 per share, marking the 18th consecutive year of increases and the largest increase in the quarterly cash dividend in our history. We declared dividends of $1.04 per share and paid $96.5 million, which was $24.6 million more than we paid in 2013.
Effective January 1, 2015, we completed the acquisition of all of the capital stock of Producers Ag Insurance Group, Inc. (ProAg) from CUNA Mutual Group for $104.5 million cash. ProAg writes multi-peril crop, crop hail, named peril and livestock insurance. ProAg’s operations will be included in our consolidated results of operations, financial position and cash flows beginning in 2015.
transaction-based revenues, primarily related to residual value and mortgage reinsurance products in our U.S. Property & Casualty segment, and
Net investment income, which is included in our Investing segment, was essentially flat in 2014 and 2013 as declining income from reduced reinvestment yields on fixed maturity securities was offset by increasing dividend income from equity securities. Our investment expense increased in 2013 and decreased in 2014 due to changes in the mix of the portfolio. We recognized $66.4 million of net realized investment gains in 2014, compared to $42.0 million in 2013 and $31.1 million in 2012. The 2014 net realized investment gains were principally due to the sale of equity securities.
We incur expenses for insurance claims paid or payable to policyholders, as well as the potential liability for incurred but not reported claims, and the expense to adjust and settle all claims (collectively referred to as loss and loss adjustment expense).
In 2014, we revised the presentation of our 2013 and 2012 consolidated statements of earnings to correctly classify internal claims department costs as loss and loss adjustment expense. Previously these costs were included in other operating expense. See Note 1, “General Information and Significant Accounting and Reporting Policies - Revision of Financial Statement Presentation” to the Consolidated Financial Statements for additional information.
Policy acquisition costs relate to direct costs we incur to issue insurance policies, including commissions, premium taxes and compensation of our underwriters. The percentage of policy acquisition costs to net earned premium was 12.7% in 2014 and 12.5% in both 2013 and 2012. We record profit commissions due from reinsurers as an offset to policy acquisition costs. The higher percentage in 2014 related to lower profit commissions from reinsurers in 2014 and commissions on our growing short-term medical business.
Other operating expense increased 1% in 2014 and 3% in 2013. In 2014, higher employee compensation and benefit costs were offset by the year-over-year fluctuation in foreign currency benefit/expense. We recognized a foreign currency benefit of $23.2 million in 2014, compared to expense of $5.3 million and $6.2 million in 2013 and 2012. The foreign currency benefit/expense related to changes in the value of the British pound sterling and the Euro relative to the U.S. dollar. In 2013, higher employee compensation and benefit costs, compared to 2012, were partially offset by a $5.1 million benefit related to an indemnification liability. We reduced the indemnification liability, which related to a 2001 subsidiary sale, due to favorable claims activity and successful subrogation recoveries.
Excluding the foreign currency benefit/expense and indemnification benefits, other operating expense increased 9% in 2014 and 5% in 2013 mainly due to increased employee compensation and benefits costs. Our employee count grew to 1,983 at December 31, 2014 from 1,900 at December 31, 2013, mainly due to the addition of new underwriting teams. In addition, our bonus expense increased in 2014 and 2013 due to higher pretax earnings.
Our U.S. Property & Casualty segment pretax earnings increased 16% in 2014, compared to 2013, primarily due to a lower net loss ratio in 2014. Pretax earnings increased $51.1 million in 2013, compared to 2012, primarily due to: 1) net favorable loss development of $39.4 million in 2013, compared to net adverse loss development of $2.3 million in 2012 and 2) net catastrophe losses of $2.0 million in 2013, compared to $11.3 million in 2012.
Gross written premium was essentially flat in 2014 due to increased writings of our expanding casualty business (included in Liability), offset by cyclical reductions in disability and contingency (included in Sports & Entertainment) and title and residual value insurance (included in Other). The growth in 2013, compared to 2012, was due to higher writings in excess casualty, primary casualty and technical property, as well as higher writings for disability, residual value and title reinsurance. Net written premium was flat in the three years due to continuing growth in Liability, offset by reduced premium due to changes in reinsurance for the Public Risk line of business.
Loss expense decreased in 2014 and 2013, primarily due to favorable loss development in both years. In addition, the 2014 accident year loss ratio decreased due to lower losses from the Public Risk line of business, which we began to reunderwrite in late 2012.
The net loss development resulted from our annual review of reserves for this segment, which we conducted in the third quarter of each year. The majority of the lines of business in this segment provide primary coverage, and claims are reported and settled on a short to medium-term basis. Accordingly, changes to our ultimate losses for a given underwriting year typically result from revised actuarial expectations, as compared to the prior year reserve review, with respect to the settlement value of known claims.
Our Public Risk line of business had a lower loss ratio in 2014, primarily due to our expectation of lower ultimate losses in 2014 following our re-underwriting of this business. In addition, we recognized higher favorable development in 2014 based on better than expected actuarially-indicated results since our 2013 annual reserve review. In 2012, we recognized adverse development due to deteriorating results related to underwriting years 2009 and 2010. In addition, Public Risk included catastrophe losses of: 1) 2013 - $2.0 million for Midwest tornadoes and 2) 2012 - $3.8 million for Superstorm Sandy and $3.2 million for United States spring storms.
In 2014, we reduced reserves for our U.S. D&O product by $24.5 million related to underwriting years prior to 2007, due to better than expected loss experience compared to our 2013 annual reserve review. We also strengthened reserves for underwriting year 2007, due to indications of higher ultimate losses.
The fluctuations in the expense ratio primarily related to reinsurance profit commissions of $2.8 million in 2014, $6.5 million in 2013 and $5.1 million in 2012, recognized in conjunction with the favorable development in those years. The profit commissions, which offset the segment’s other expense, reduced the expense ratio by 0.8 percentage points in 2014, 1.8 percentage points in 2013 and 1.3 percentage points in 2012. Excluding the impact of profit commissions, the expense ratio increased over the three year period due to declining net earned premium.
Our Accident & Health segment pretax earnings increased 9% in 2014 and 12% in 2013, compared to the prior year, due to growth in net earned premium. This increase was attributable to writing new medical stop-loss and short-term medical business, as well as rate increases on medical stop-loss renewals in 2014 and 2013. Our short-term medical product experienced significant growth in 2014 as individuals selected this product in lieu of coverage under the U.S. Affordable Care Act, which began enrollments in late 2013. The segment results included net favorable loss development of $13.1 million in 2014, $18.0 million in 2013 and $10.5 million in 2012. The segment’s expense ratio increased in 2014 due to higher commissions related to the short-term medical product, as well as higher compensation and benefits expense.
Our International segment pretax earnings increased $49.4 million in 2014, compared to 2013, primarily due to the favorable impact of lower catastrophe losses and lower net adverse loss development in 2014. Segment earnings decreased $72.2 million in 2013, compared to 2012, primarily due to higher catastrophe losses in 2013 and net adverse loss development in 2013, compared to net favorable development in 2012.
The increase in premium in 2014 and 2013 was primarily due to increased writings in our Surety & Credit and Liability lines of business, as well as our accident and health and direct and facultative property lines of business (included in Other). The increase in 2014 was partially offset by decreased writings of Marine & Energy and Property Treaty business, due to reduced pricing and expanded competition in these lines.
The International segment recognized net adverse loss development of $25.1 million in 2014 and $43.8 million in 2013, compared to net favorable development of $10.1 million in 2012. The net (favorable) adverse loss development recognized by line of business was as follows:
The lines of business in our International segment provide a variety of coverages, most of which are medium to long-tail lines with moderate timing for claims reporting and medium to high reserve volatility. This segment incurs most of our catastrophe losses. In Marine & Energy, we insure complex, worldwide energy production facilities, oil rigs and offshore platforms that are subject to expensive business interruption claims and replacement costs. Catastrophe-related claims for energy projects may take several years to settle and can involve significant reserve volatility for coverage on both a primary and excess basis. The Property Treaty and direct and facultative property lines are short-tail with relatively fast claims reporting and lower reserve volatility. Our Liability business, providing primarily U.K. professional liability coverage, has long-tail claims reporting and medium reserve volatility.
The net adverse loss development in the Surety & Credit line of business in all three years primarily related to strengthening our reserves on a specific class of Spanish surety bonds, the majority of which were written prior to 2006. We recorded $48.9 million of net reserves in 2012 based on management’s evaluation of the claims and the likelihood that we would ultimately be required to pay the claims, based on information available at year-end 2012. In 2013, we revised the estimates of our liability under these bonds in light of an adverse Spanish Supreme Court ruling against an unaffiliated insurance company with respect to a type of surety bond similar to ours. This resulted in $70.3 million of net adverse development in 2013. We paid claims related to these bonds throughout 2014 and settled a majority of the outstanding claims in the third quarter of 2014. In light of these settlements, we revised our estimates of our liability under these bonds and strengthened these reserves, which resulted in $43.5 million of net adverse development in 2014.
Our actual loss experience for Marine & Energy was better than the actuarial expectations in each year’s reserve review compared to the prior year review. We conducted a detailed review of outstanding claims during each annual reserve review to assist in determining these reserves. We recognized net favorable development in 2014 related to the 2012 and prior accident years, partially offset by $10.0 million of reserve strengthening for the 2013 accident year. The net favorable development recognized in 2013 related to the 2008 - 2010 and 2012 accident years, as well as the release of $3.4 million of prior years’ catastrophe reserves related to Superstorm Sandy. The net favorable development recognized in 2012 related to the 2010 and prior accident years, and included the release of $5.1 million of prior years’ catastrophe reserves primarily related to the Japan earthquake and tsunami.
Our Investing segment includes our consolidated investment portfolio, as well as all investment income, investment related expenses, realized investment gains and losses, and other-than-temporary impairment credit losses on investments. Our insurance segments generate the cash flow underlying these investments. We manage all investments and evaluate our investment results centrally and, thus, include them in a separate segment for reporting purposes.
We invest the majority of our funds in highly-rated fixed maturity securities, which are designated as available for sale securities. We held $6.6 billion of fixed maturity securities at December 31, 2014. Substantially all of our fixed maturity securities were investment grade and 73% were rated AAA or AA. In addition, we held $296.4 million of equity securities at December 31, 2014.
In the past several years, the average yield on our fixed maturity securities has continued to decline due to lower reinvestment rates. Despite a persistent low interest rate environment, we have maintained a high quality investment portfolio by allocating funds to longer dated tax-exempt securities when the yield curve has been steep and relative value has been attractive. We have offset this duration extension by investing in securities with attractive yields and low duration, such as bank loans (classified as corporate securities), collateralized loan obligations (classified as asset-backed securities) and global publicly-traded equity securities. Our general policy has been to hold our available for sale securities through periods of fluctuating interest rates. We sell securities and recognize realized gains and losses from these sales if we can reinvest the proceeds to achieve our overall objectives of sufficient liquidity, enhanced income and long-term growth in book value.
The weighted average duration of our fixed maturity securities portfolio decreased to 4.7 years at December 31, 2014 (compared to 5.1 years at December 31, 2013), primarily due to the impact of the lower market interest rates on our municipal securities with call options and structured securities with prepayment options. Duration increased in 2013 due to increased prevailing interest rates and spreads based on investor concerns that the U.S. Federal government would tighten its fiscal policies. Rates on 10-year U.S. Treasury notes declined 86 basis points in 2014 and increased 126 basis points in 2013.
The table below indicates the contractual or expected maturity distribution of our fixed maturity securities at December 31, 2014. In the table, we allocated the maturities of our mortgage-backed and asset-backed securities based on the expected future principal payments. The weighted-average life of our mortgage-backed and asset-backed securities is approximately 5.3 years based on expected future cash flows.
Some of our fixed maturity securities have call or prepayment options. In addition, mortgage-backed and certain asset-backed securities have prepayment, extension or other market-related credit risk. Calls and prepayments subject us to reinvestment risk should interest rates fall and issuers call their securities and we reinvest the proceeds at lower interest rates. Prepayment risk exists if cash flows from the repayment of principal occurs earlier than anticipated because of declining interest rates. Extension risk exists if cash flows from the repayment of principal occurs later than anticipated because of rising interest rates. Credit risk exists if mortgagees default on the underlying mortgages. Net investment income and/or cash flows from investments that have call or prepayment options and prepayment, extension or credit risk may differ from what was anticipated at the time of investment. We mitigate these risks by investing in investment grade securities with varied maturity dates so that only a portion of our portfolio will mature at any point in time. In 2015, we expect approximately 11% of our fixed maturity securities portfolio to mature, call or prepay. Assuming prevailing interest rates remain constant throughout 2015, reinvestment of these funds will be at tax-equivalent yields that are approximately 160 basis points lower than the year-end 2014 yields for these securities.
We believe we have sufficient sources of liquidity at both a consolidated and insurance company legal entity level at a reasonable cost to pay claims and meet our other contractual obligations and liabilities as they become due in the short-term and long-term. Our current sources of liquidity include: 1) significant operating cash flow generated by our insurance companies, 2) our $7.2 billion investment portfolio, most of which is held by our insurance companies, 3) our revolving loan facility and 4) a $1.0 billion shelf registration. Our insurance companies have sufficient resources to pay potential claims. Based on historical payment patterns and claims history, as of year-end 2014 we project that our insurance companies will pay approximately $1.5 billion of claims and collect approximately $0.4 billion of reinsurance recoveries in 2015. In addition to expected cash flow from their 2015 operations, these companies had $6.3 billion of investments available at year-end 2014 to fund claims payments, if needed. Our sources of liquidity are discussed below.
On January 2, 2015, we paid $104.5 million to acquire ProAg. This acquisition is expected to grow profitably over time once fully integrated. Due to the timing of settlements with the U.S. government, our operating cash flow in 2015 and 2016 will be reduced until settlement of our 2015 reinsurance year in October 2016.
At December 31, 2014, we held a $7.2 billion investment portfolio, which included $258.2 million of liquid short-term investments. Our fixed maturity and equity securities portfolios are classified as available for sale. We expect to hold our fixed maturity securities until maturity, but we would be able to sell these securities, as well as our equity securities, to generate cash if needed. The parent company held $838.4 million of cash and investments at December 31, 2014, which are available to cover the holding company’s required cash disbursements.
On August 20, 2014, our Board of Directors authorized a new $500.0 million stock purchase plan (the Plan) and cancelled $130.9 million remaining under a previous authorization. Purchases under the Plan may be made in the open market or in privately negotiated transactions from time-to-time in compliance with applicable laws, rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Purchases under the Plan will be made subject to market and business conditions, the level of cash generated from our operations, cash required for acquisitions, our debt covenant compliance and other relevant factors. The Plan does not obligate us to purchase any particular number of shares, has no expiration date and may be suspended or discontinued at any time at the Board’s discretion. At February 13, 2015,
We maintain sufficient liquidity from our current cash, short-term investments and investment maturities, in combination with future operating cash flow, to pay anticipated policyholder claims on their expected payment dates. Each of our insurance companies pays its own claims using its own operating cash flows, cash, short-term investments or investment maturities.
(1) The estimated loss and loss adjustment expense payments for future periods assume that the percentage of ultimate losses paid from one period to the next by line of business will be relatively consistent over time. Actual payments will be influenced by many factors and could vary from the estimated amounts.
(2) The 6.30% Senior Notes are due in November 2019. We pay interest semi-annually on May 15 and November 15, which is included in the above table.
(4) Includes $15.0 million of acquisition costs payable to third parties. See Note 5, “Acquisitions and Goodwill” to the Consolidated Financial Statements for information related to this acquisition.
A portion of our revenue is related to health care insurance and reinsurance products that are subject to the effects of the underlying inflation of health care costs. Such inflation in the costs of health care tends to generate increases in premiums for medical stop-loss coverage, resulting in greater revenue but also higher claims payments. Inflation also may have a negative impact on insurance and reinsurance operations by causing higher claims settlements than originally estimated, without an immediate increase in premiums to a level necessary to maintain profit margins. We do not specifically provide for inflation when setting underwriting terms and claims reserves, although we do consider market trends in our quarterly reserve reviews.