Gross premiums written by Montpelier Bermuda during 2011 were largely unchanged from 2010, decreasing by just 2%, as compared to 2010. However, there was a sizable business shift that occurred during 2011 among the Other Specialty - Treaty line of business and the Property Catastrophe - Treaty line of business due primarily to: (i) the non-renewal of several large marine and casualty contracts (both of which are Other Speciality - Treaty classes); and (ii) the assumption of a property catastrophe quota share (Property Catastrophe - Treaty) from a competitor.
Net premiums earned within Montpelier Bermuda in 2012, 2011 and 2010 were $369.5 million, $378.0 million and $413.9 million, respectively. Net premiums earned are primarily a function of the amount and timing of net premiums written.
The individually significant loss events contributing to Montpelier Bermuda’s 2011 current year net loss and LAE of $421.8 million included the following:
Profit commissions, which are paid by assuming companies to ceding companies in the event of favorable loss experience, change as Montpelier Bermuda’s estimates of loss and LAE fluctuate. Montpelier Bermuda pays profit commissions on certain assumed reinsurance contracts, and receives profit commissions on certain ceded reinsurance contracts. Only a few of Montpelier Bermuda’s assumed and ceded reinsurance contracts contain profit commission clauses, and the terms of these profit commissions are specific to the individual contracts and vary as a percentage of the contract results.
Montpelier Bermuda’s operating expenses incurred during 2012 decreased, versus those incurred during 2011, primarily as a result of reductions in software depreciation and Bermuda payroll tax expenses. The increase in Montpelier Bermuda’s operating expenses during 2011, as compared to 2010, was largely due to a one-time, $5.2 million expense reimbursement recognized during 2010 from the settlement of a reinsurance dispute with a third-party. Absent the benefit recognized from this settlement, operating expenses decreased slightly from 2010 to 2011, mainly as a result of a change in the allocation of our centrally managed information technology costs to Montpelier Bermuda.
During 2012 Montpelier Syndicate 5151 incurred $148.6 million of current year net loss and LAE. The only individually significant loss event contributing to Montpelier Syndicate 5151’s 2012 current year net loss and LAE was windstorm Sandy, which represented $17.8 million of Montpelier Syndicate 5151’s current year net loss and LAE. Most of the remaining 2012 current year net loss and LAE related to claims and events that had been incurred in that year but had not yet been reported to us.
The decrease in MUSIC Run-Off’s general and administrative expenses during 2011, versus those of 2010, primarily represents lower incentive compensation expenses as a result of significant catastrophe losses incurred during 2011, which adversely impacted Company performance during that year.
At the time of the MUSIC Sale, MUSIC had 44 employees, all of whom were retained by Selective.
The net foreign exchange transaction gains (losses) we experienced in connection with our other activities represent net foreign exchange gains and losses resulting from: (i) Montpelier Bermuda’s premiums receivable that are denominated in currencies other than the U.S. dollar (Montpelier Bermuda’s functional currency); and (ii) Montpelier Syndicate 5151’s assets and liabilities that are denominated in currencies other than the British pound (Montpelier Syndicate 5151’s functional currency), including those denominated in U.S. dollars. These net transaction gains and losses do not include: (i) fluctuations associated with Montpelier Bermuda’s and Montpelier Syndicate 5151’s losses and LAE, which we record as favorable or unfavorable loss reserve development; (ii) the income or loss associated with those foreign currency exchange agreements we enter into in order to mitigate the financial effects of certain foreign exchange rate fluctuations, see “Net Income (Loss) from Derivative Instruments”; and (iii) any offsetting foreign currency translation gains and losses we recognize through our comprehensive income or loss associated with Montpelier Syndicate 5151’s assets and liabilities (those other than its loss and LAE reserves) that are denominated in U.S. dollars.
The following table summarizes our consolidated other revenue for the years ended December 31, 2012, 2011 and 2010:
Excluding the incremental interest associated with the issuance of the 2022 Senior Notes described above, our interest and other financing expenses decreased during 2012, as compared to 2011 and 2010. These reductions were mainly due to: (i) the interest rate on our $100.0 million of capital securities (the “Trust Preferred Securities”) moving from an 8.55% per annum fixed rate to a floating rate, effective March 30, 2011 (this floating rate varied from 4.05% to 4.38% during the period from March 30, 2011 to December 31, 2011 and from 4.11% to 4.38% during 2012); and (ii) continual reductions in letter of credit fees experienced since 2010 as a result of the Reinsurance Trust and the Lloyd’s Capital Trust replacing letter of credit facilities that we allowed to expire in accordance with their terms.
Our cash flows provided from operations totaled $200.8 million in 2012.
Estimating loss and LAE reserves requires us to make assumptions regarding reporting and development patterns, frequency and severity trends, claims settlement practices, potential changes in legal environments, inflation, loss amplification and other factors. These estimates and judgments are based on numerous considerations and are often revised as: (i) we receive changes in loss amounts reported by ceding companies; (ii) we obtain additional information, experience or other data; (iii) new or improved methodologies are developed; or (iv) laws change.
We do not typically experience significant claims processing backlogs, although such backlogs may occur following a major catastrophic event. At December 31, 2012 and 2011, we did not have a significant backlog in either our insurance or reinsurance claims processing.
We also use fixed RSUs (“Fixed RSUs”) as a supplemental component of our ongoing long-term incentive compensation for certain of our employees and non-employee directors. Unlike Variable RSUs, the number of Fixed RSUs is fixed on the grant date. Fixed RSUs are typically granted for the following purposes: (i) to induce individuals to join us; (ii) to retain key employees; (iii) to reward employees for exhibiting outstanding individual performance; and (iv) as remuneration for non-management directors. Additionally, when the actual number of Variable RSUs to be awarded in any given year has been formally determined, they are effectively converted into Fixed RSUs.
For the 2012-2015 Variable RSU award cycle, the targeted performance metric was based on a 2012 increase in FCBVPCS of 9.88%. At an achieved increase in FCBVPCS of 9.88% (our target), we would have expected to grant approximately 530,000 Variable RSUs to participants. At an achieved increase in FCBVPCS of 2.88% (our threshold) or less, we would not have expected to grant any Variable RSUs to participants. At an achieved increase in FCBVPCS of 16.88% (our maximum) or more, we would have expected to grant approximately 1,060,000 Variable RSUs to participants. Throughout the Initial RSU Period for this cycle, our quarterly Variable RSU accrual for this cycle varied in response to actual year-to-date results achieved and ranged from as many as 1,068,556 RSUs (as recorded at September 30, 2012) to as few as 669,105 RSUs (as recorded at March 31, 2012). Because we determined our achieved increase in FCBVPCS for 2012 to be 17.0%, the preliminary number of Variable RSUs expected to be granted for the 2012-2015 Variable RSU award cycle was determined to be 1,058,304 at December 31, 2012. The final number of Variable RSUs granted for the 2012-2015 Variable RSU award cycle was subsequently determined to be 1,058,304 RSUs (or 200% of the in force target RSUs for that cycle at that time) by the Compensation Committee on February 21, 2013.