Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions, marine and facultative and treaty reinsurance including crop. We also offer select personal lines policies, such as recreational vehicle and Hawaii homeowners coverages. While our marine and facultative reinsurance coverages are predominantly domestic risks, these portfolios do contain a relatively small portion of foreign risks. Property insurance and reinsurance results are subject to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net
Initial carried IBNR reserves are determined through a reserve generation process. The intent of this process is to establish an initial total reserve that will provide a reasonable provision for the ultimate value of all unpaid loss and ALAE liabilities. For most casualty and surety products, this process involves the use of an initial loss and ALAE ratio that is applied to the earned premium for a given period. The result is our best initial estimate of the expected amount of ultimate loss and ALAE for the period by product. Payments and case reserves are subtracted from this initial estimate of ultimate loss and ALAE to determine a carried IBNR reserve.
For most property products, we use an alternative method of determining an appropriate provision for initial IBNR. Since this segment is characterized by a shorter period of time between claim occurrence and claim settlement, the IBNR reserves are
Underwriting income totaled $28.2 million in 2014, compared to $23.6 million in 2013 and $26.5 million in 2012. The segment’s results translated into combined ratios of 73.8, 77.9 and 75.1 for 2014, 2013 and 2012, respectively. The segment’s loss ratio was 7.3 in 2014, compared to 13.8 in 2013 and 11.1 in 2012. Underwriting performance for each of these years
reflects a combination of positive current accident year results and favorable development in prior accident years’ loss reserves. While all three years benefited from favorable development, the amount in 2014 was $7.5 million higher than in 2013. This increase resulted in the reduced loss ratio in 2014. Results for 2014 were also impacted by $1.3 million of reinsurance reinstatement premium related to unfavorable development on prior years’ surety reserves. The expense ratio for the segment was 66.5 in 2014, compared to 64.1 in 2013 and 64.0 in 2012. The increase in 2014 was due to the combined effect of shifts in mix toward products with higher acquisition expense rates, increased commissions and the impact of the above-mentioned reinstatement premium.
The following table summarizes the distribution of our asset-backed and commercial mortgage-backed securities portfolio as of the dates indicated:
investment compared to $10.9 million in 2013 and $8.9 million in 2012. Sunglass sales were up 14 percent in 2014, after increasing 6 percent in 2013 and 4 percent in 2012. Improved cost of sales also benefited earnings in 2014.
Loss and settlement expense reserves represent our best estimate of the ultimate cost of settling reported and unreported claims and related expenses. As discussed previously, the estimation of loss and loss expense reserves is based on various complex and subjective judgments. Actual losses and settlement expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our financial statements. Similarly, the timing for payment of our estimated losses is not fixed and is not determinable on an individual or aggregate basis. The assumptions used in estimating the payments due by periods are based on our historical claims payment experience. Due to the uncertainty inherent in the process of estimating the timing of such payments, there is a risk that the amounts paid in any period can be significantly different than the amounts disclosed above. Amounts disclosed above are gross of anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on unpaid loss and settlement reserves are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on unpaid loss and settlement reserves totaled $335.1 million at December 31, 2014, compared to $354.9 million in 2013.
At December 31, 2014, we had cash, short-term investments and other investments maturing within one year of approximately $66.3 million and an additional $253.1 million of investments maturing between 1 to 5 years. We maintain a revolving line of credit with JP Morgan Chase Bank N.A., which permits us to borrow up to an aggregate principal amount of $40.0 million. This facility was entered into during the second quarter of 2014 and replaced the previous $25.0 million facility which expired on May 31, 2014. Under certain conditions, the line may be increased up to an aggregate principal amount of $65.0 million. The facility has a four-year term that expires on May 28, 2018. As of and during the year ended December 31, 2014, no amounts were outstanding on the revolving line of credit.
The casualty segment achieved growth in the professional liability and package products in 2014. These products were launched in 2009-2010 and we have expanded product offerings and classes of business since that time. We initially targeted design professionals and achieved good penetration within our targeted market. This growth has begun to moderate. Other professional classes and the related P&C coverages are expected to continue growing, as we only recently made these products available on a nationwide basis. The package business we purchased through CBIC grew in 2014, and we expect this trend to continue as we expand geographically and nurture those additional producer relationships. Our E&S casualty, transportation, medical professional and executive products coverages saw increased competition and flattening rates in 2014. We do not anticipate anything in the market to counteract that trend in 2015. In the fourth quarter, we expanded further into healthcare liability with a team focused on long-term care and hospital liability. Overall, we expect moderate growth in this segment in 2015.
We classify our investments in all debt and equity securities into one of three categories: available-for-sale, held-to-maturity or trading.
Our equity portfolio consists of common stocks and exchange traded funds (ETF). Unrealized losses in the equity portfolio increased $0.7 million to $1.0 million in 2014. Given our intent to hold and expectation of recovery to cost within a reasonable period of time, we do not consider any of our equities to be other-than-temporarily impaired.
The following table is also used as part of our impairment analysis and displays the total value of securities that were in an unrealized loss position as of December 31, 2014, and December 31, 2013. The table segregates the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well as in total. The table further classifies the securities based on the length of time they have been in an unrealized loss position.
The assumed business is made up of short-tail property, casualty, catastrophe and multi-peril crop and hail reinsurance. The majority of this assumed reinsurance is proportional and a large portion of the assumed incurred losses can be attributed to crop-related reinsurance, which we began offering in 2010 and will expire over the next year, and a specialty property treaty. Losses for each crop season are ultimately determined and paid subsequent to December 31 of the crop year reinsured.
Under the LTIP, as under the omnibus plan, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant. Options generally vest and become exercisable ratably over a five-year period.
Shares issued may be less than the number of shares actually exercised, as our plan allows net settlement to cover the option exercise price and taxes due upon option exercise. Shares netted are valued at the closing stock price at the time of option exercise. In these instances, the actual number of shares issued will be less than the options exercised and can result in a decrease to shareholders’ equity. Specifically, when options are exercised with significant intrinsic value (i.e. market value in excess of exercise price) and the exercise is facilitated via net settlement, amounts withheld for taxes result in a decrease in shareholders’ equity. During 2013, the aggregate intrinsic value of options exercised was $22.4 million. A majority of these options were exercised via net settlement with taxes withheld at the statutory minimum rate. As shown in the consolidated statements of shareholders’ equity, the exercise of options in 2013 resulted in a decrease to paid-in-capital, as the taxes withheld pursuant to net settlement exceeded amounts paid in for options that were exercised using cash. This was not the case in 2014 or 2012 as the intrinsic value of the options exercised was not as significant ($6.2 million and $4.7 million, respectively). Therefore, the exercise of options in 2014 and 2012 resulted in increases to paid-in-capital.
We have audited the accompanying consolidated balance sheets of RLI Corp. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of earnings and comprehensive earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. In connection with our audits of the consolidated financial statements, we have also audited financial statement schedules I - IV. We also have audited RLI Corp.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). RLI Corp.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Controls and Procedures. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on RLI Corp.’s internal control over financial reporting based on our audits.