In addition, we lease an aggregate of approximately 660,000 square feet of office space in 65 locations. See Item 13. “Certain Relationships and Related Transactions, and Director Independence.”
Premiums. We recognize insurance premiums, other than in our Specialty Risk and Extended Warranty segment, as earned on the straight-line basis over the contract period. Insurance premiums on Specialty Risk and Extended Warranty business are earned based on estimated program coverage periods. We base these estimates on the expected distribution of coverage periods by contract at inception because a single contract may contain multiple coverage period options, and we revise these estimates based on the actual coverage periods selected by the insured. Unearned premiums represent the portion of premiums written that is applicable to the unexpired term of the contract or policy in force. We base premium adjustments on contracts and audit premiums on estimates made over the contract period. We also estimate an allowance for doubtful accounts based on a percentage of premium. We review our bad debt write-offs at least annually and adjust our premium percentage as required. Allowance for doubtful accounts were approximately $32 million and $15 million at December 31, 2013 and 2012, respectively.
could not continue to record deferred policy acquisition costs as an asset and may be required to establish a liability for a premium deficiency reserve.
Reclassifications - Certain accounts in the prior years’ consolidated financial statements have been reclassified for comparative purposes to conform to the current year’s presentation. This did not have any impact on the net income.
We previously recorded any residual value from the acquired reinsurance entities as an intangible asset. The intangible asset was amortized based on the usage of the equalization reserves and included as a component of Policy acquisition expense. We have reclassified the intangible assets to goodwill and now impair the goodwill in accordance with ASC 350 Intangibles-Goodwill and Other. As a result, we recorded impairment of $16.3 million and $30.5 million during 2012 and 2011, respectively, which resulted in a reduction in the aforementioned amounts in Policy acquisition expense and an increase in Other expense. Additionally, reductions to our Luxembourg tax liability were previously included as a reduction of Policy acquisition expense. In accordance with ASC 740 Income Taxes, we now classify the reduction of our Luxembourg tax liability as a reduction in Provision for income taxes. As a result, we recorded a reduction to income tax expense of $25.7 million and $57.4 million during 2012 and 2011, respectively, and increased Policy acquisition expenses and Other insurance general and administrative expense in total by an equivalent amount in the same periods. These reclassifications increased total assets and total liabilities by approximately $19.3 million as of December 31, 2012 and related primarily to goodwill, intangible assets and deferred tax liability. There was no impact on our results of operations or liquidity.
We paid a 10% stock dividend in 2013 and 2012. Accordingly, the weighted average number of shares used for basic and diluted earnings per share have been adjusted in all prior periods presented.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $84.6 million, or 31.2%, to $356.0 million for the year ended December 31, 2012 from $271.4 million for the year ended December 31, 2011. Acquisition costs and other underwriting expenses were reduced in each period by ceding commission primarily earned through the Maiden Quota Share, whereby we receive a ceding commission between 30% and 31%, depending on the mix of business ceded, for all business except retail commercial package business, and 34.375% for retail commercial package business, on written premiums ceded to Maiden. The ceding commission earned during the years ended December 31, 2012 and 2011 was $197.0 million and $154.0 million, respectively. Ceding commission increased period over period as a result of increased premium writings. The expense ratio decreased to 25.1% in 2012 from 26.2% in 2011, and was primarily driven by economies of scale achieved as we continued to increase both written and earned premium, while leveraging our existing infrastructure. Specifically, non-claims payroll declined by .05% as a percentage of earned premium from 2011 to 2012. This decrease was partially offset by prospectively adopting a new accounting standard related to deferred acquisition costs in 2012, which reduced the amount of expense deferred in 2012 compared to 2011.
compared to 2011, partially offset by higher loss and loss adjustment expenses during the year ended December 31, 2012 as compared to the year ended December 31, 2011.
Our investment in marketable equity securities consist of investments in preferred and common stock across a wide range of sectors. We evaluated the near-term prospects for recovery of fair value in relation to the severity and duration of the impairment and have determined in each case that the probability of recovery is reasonable and we have the ability and intent to hold these investments until a recovery of fair value. We believe the gross unrealized losses of $2.1 million as of December 31, 2013 are not material to our financial position.
The laws of the jurisdictions in which our insurance subsidiaries are organized regulate and restrict, under certain circumstances, their ability to pay dividends to us. As of December 31, 2013 and 2012, respectively, our insurance subsidiaries would have been permitted to pay dividends in the aggregate of approximately $473.3 million and $403.1 million, respectively. Our insurance subsidiaries paid dividends to us of $6.9 million, $7.2 million and $5.8 million of in 2013, 2012 and 2011, respectively. In addition, the terms of our debt arrangements limit our ability to pay dividends on our common stock, and future borrowings may include prohibitions and restrictions on dividends. Additional information regarding our dividends is presented in “Item 1. Business - Regulation”, in “Item 1A. Risk Factors” and in “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities - Dividend Policy” appearing elsewhere in this Form 10-K.
We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short-term and long-term basis. Cash payments for claims were $867.9 million, $691.7 million and $569.9 million in 2013, 2012 and 2011, respectively. Historically, we have funded claim payments from cash flow from operations (principally premiums) net of amounts ceded to our third party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our cash and investment portfolio has increased from $2.34 billion (excluding $11.1 million of other investments) at December 31, 2012 to $4.47 billion (excluding $25.7 million of other investments) at December 31, 2013. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and financial condition and could reduce investment income in future periods.
The following table summarizes the top ten reinsurers that account for approximately 82% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2013: