One implicit assumption underlying development patterns is that the claims inflation trends will continue into the future similar to their past patterns. To estimate the sensitivity of the estimated ultimate loss and settlement expense payments to an unexpected change in inflationary trends, our actuarial department derives expected payment patterns separately for each major line of business. These patterns were applied to the December 31, 2014 loss and settlement expense reserves to generate estimated annual incremental loss and settlement expense payments for each subsequent calendar year. Then, for the purpose of sensitivity testing, an explicit annual inflationary variance of one percent was added to the inflationary trend that is implicitly embedded in the estimated payment pattern, and revised incremental loss and settlement expense payments were calculated. General inflation trends have been fairly stable over the past several years but there have been fluctuations of one to two percent over the past ten years and therefore we used a one percent annual inflation variance factor. The effect differed by line of business but overall was a four percent change in reserve adequacy or approximately $24.9 million effect on after tax net income. A variance of this type would typically be recognized in loss and settlement expense reserves and, accordingly, would not have a material effect on liquidity because the claims have not been paid.
Net investment income decreased by $1.4 million, or 3.0%, to $45.1 million for the year ended December 31, 2014, from $46.5 million for the comparable period in 2013. The decrease reflects the impact of lower reinvestment rates in 2014.
Expenses decreased $58.6 million from $995.5 million for the year ended December 31, 2012 to $936.9 million for the year ended December 31, 2013.
Net loss and loss adjustment expenses (“LAE”) decreased $128.6 million to $549.0 million for the year ended December 31, 2013, from $677.7 million for the same period in 2012. Our loss and LAE ratio was 78.7% for the year ended December 31, 2013 and 79.3% for the year ended December 31, 2012. The loss and LAE ratio for the year ended December 31, 2013 includes a 9.8 percentage point increase from net ultimate loss estimates for accident years 2012 and prior, whereas the 2012 results include a 10.0 percentage point increase from net ultimate loss estimates for accident years 2011 and prior. The accident year loss and LAE ratio was 68.9% for the year ended December 31, 2013, down from 69.3% in the comparable period in 2012. Additional discussion of our reserve activity is described below under “Other Items ~ Reserves”.
profits and losses as a result of this equity interest ownership. We recognized equity earnings, net of tax, from the Aquiline Financial Services Fund II L.P. of $1.1 million, or $0.02 per dilutive share and $0.6 million, or $0.01 per dilutive share, for the years ended December 31, 2014 and 2013, respectively.
related to the 2009-2012 accident years combined. Accident year 2011 has the highest loss & ALAE ratio of that group peaking at 67%. Accident year 2013 is at a 57% loss & ALAE ratio and accident year 2014 is even lower. The improvement in the recent accident year loss ratios reflects the rate increase, underwriting actions, and termination of unprofitable business undertaken since 2012.
The workers’ compensation residual market line of business had a decrease in net ultimate loss estimate of $1.2 million, or 5.2% of net reserves. This decrease reflects a reduction in the net ultimate loss estimates for various accident years. We record loss reserves as reported by the NCCI, plus a provision for the reserves incurred but not yet analyzed and reported to us due to a two quarter lag in reporting. These changes reflect a difference between our estimate of the lag incurred but not reported and the amounts reported by the NCCI in the year.
* Uses expense ratios originally reported in calendar year statement. These expense ratios have been restated in statement years 2012 and subsequent in accordance with accounting guidance retrospectively adopted on January 1, 2012. The impact on the expense ratio for any given year of the guidance was 0.2 points or less.
The Company received $3.0 million for the Warrants sold to certain counter-parties. The Warrants have a strike price of $11.69 and will be net share settled, meaning the Company will issue a number of shares per Warrant corresponding to the difference between its share price on each Warrant exercise date and the exercise price. The Warrants meet the definition of derivatives under the guidance in Accounting Standards Codification
The NAIC’s Insurance Regulatory Information System (“IRIS”) was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies thirteen industry ratios and specifies “usual values” for each ratio. State insurance regulators review the IRIS ratio results in coordination with a company’s Statutory Annual Statement filings to determine if an insurer is in need of further regulatory scrutiny or action. While the ratios, individually and collectively, are effective tools for identifying companies that may be experiencing financial difficulty, they are only a guide for regulators and should not be considered an absolute indicator of a Company's financial condition.
In 2014, our Insurance Company Subsidiaries generated ratios that varied from the “usual value” range. The variations and additional details for the reasons are set forth below:
(3) The Two-Year Overall Operating ratio measures the overall profitability of an entity over a two-year period. For 2014, this ratio is above 100% for five of six Insurance Subsidiaries. This was driven by the adverse prior year development experienced in calendar year 2013.