Ironshore Inc.
Consolidated Financial Statements
December 31, 2013
A member firm of Ernst & Young Global Limited
Ernst & Young LLP 5 Times Square New York, New York 10036
Tel: (212) 773-3000 Fax: (212) 773-6350 ey.com
Report of Independent Auditors
The Board of Directors and Shareholders Ironshore Inc.
We have audited the accompanying consolidated financial statements of Ironshore Inc., which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards U.S. generally accepted accounting principles. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
A member firm of Ernst & Young Global Limited
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ironshore Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
Ernst & Young LLP April 2, 2014
See accompanying notes to the consolidated financial statements.
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Ironshore Inc.
Consolidated Balance Sheets
As of December 31, 2013 and 2012
(Expressed in thousands of U.S. dollars, except share data)
2013 2012
ASSETS
Fixed maturity securities, at fair value (amortized cost: 2013 - $3,425,287;
2012 - $2,960,830) $3,423,413 $3,037,910
Equity securities, at fair value (cost: 2013 - $129,298; 2012 - $79,716) 131,947 83,557
Short term investments, at cost which approximates fair value 45,828 9,000
Other investments 13,588 10,088
Total investments 3,614,776 3,140,555
Cash and cash equivalents 281,300 330,679
Accrued investment income 18,389 18,028
Premiums receivable 463,467 381,640
Reinsurance recoverable on unpaid losses 601,352 621,965
Reinsurance recoverable on paid losses 102,494 75,230
Deferred acquisition costs 123,066 88,987
Prepaid reinsurance premiums 283,214 267,405
Goodwill and other intangible assets 82,558 84,542
Deferred tax asset 4,328 -
Receivable for securities sold 3,516 9,659
Other assets 181,981 93,700
Total assets $5,760,441 $5,112,390
LIABILITIES
Reserve for losses and loss adjustment expenses $2,181,812 $1,856,759
Unearned premiums 1,207,707 984,015
Insurance and reinsurance balances payable 255,637 258,240
Payable for securities purchased 16,147 27,517
Deferred tax liability - 3,179
Other liabilities 105,498 91,838
Debt obligations 247,296 246,990
Total liabilities 4,014,097 3,468,538
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common shares, 200,000,000 authorized, par value $0.01 per share
(2013: 136,211,426; 2012: 135,479,000), shares issued and outstanding 1,362 1,355
Additional paid-in capital 1,354,164 1,347,401
Accumulated other comprehensive loss (10,321) (8,498)
Retained earnings 397,230 299,863
TOTAL IRONSHORE INC. SHAREHOLDERS' EQUITY 1,742,435 1,640,121
Non-controlling interest 3,909 3,731
TOTAL SHAREHOLDERS' EQUITY 1,746,344 1,643,852
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,760,441 $5,112,390
See accompanying notes to the consolidated financial statements.
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Ironshore Inc.
Consolidated Statements of Operations and Comprehensive Income
For the years ended December 31, 2013 and 2012
(Expressed in thousands of U.S. dollars, except share data)
2013 2012
REVENUES
Gross premiums written $1,993,123 $1,667,666
Reinsurance premiums ceded (535,404) (502,264)
Net premiums written 1,457,719 1,165,402
Change in unearned premiums (203,396) (156,826)
Net premiums earned 1,254,323 1,008,576
Net investment income 84,372 79,563
Net realized and unrealized (losses) gains on investments (70,462) 48,876
Net foreign exchange (losses) gains (2,989) 55
Other income 29,554 11,749
Total revenues 1,294,798 1,148,819
EXPENSES
Losses and loss adjustment expenses 745,173 630,727
Acquisition expenses 174,052 130,061
General and administrative expenses 250,643 233,214
Interest expense 21,663 21,629
Total expenses 1,191,531 1,015,631
Income before income tax expense 103,267 133,188
Income tax expense 5,723 1,605
Net income 97,544 131,583
Net income (loss) available (attributable) to non-controlling interest 177 (105)
Net income available to Ironshore Inc. 97,367 131,688
OTHER COMPREHENSIVE INCOME
Equity losses from foreign currency translation (2,845) (3,969)
Gains on intra-entity foreign currency transactions 1,022 1,513
COMPREHENSIVE INCOME $95,544 $129,232
Earnings per share:
Weighted average common shares outstanding - Basic 134,334,072 132,916,337
Weighted average common shares outstanding - Diluted 137,686,875 136,752,806
Net income per common share outstanding - Basic $0.72 $0.99
Net income per common share outstanding - Diluted $0.71 $0.96
See accompanying notes to the consolidated financial statements.
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Ironshore Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2013 and 2012
(Expressed in thousands of U.S. dollars)
2013 2012
COMMON SHARES
Balance as of beginning of year $1,355 $1,348
Issue of shares 10 9
Repurchase of restricted shares (3) (2)
Balance as of end of year 1,362 1,355
ADDITIONAL PAID-IN CAPITAL
Balance as of beginning of year 1,347,401 1,338,363
Issue of shares 2,722 982
Repurchase of restricted shares (2,899) (2,181)
Stock compensation expense 8,115 10,237
Modification of equity awards to liabilities (1,175) -
Balance as of end of year 1,354,164 1,347,401
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance as of beginning of year (8,498) (6,042)
Equity losses from foreign currency translation (2,845) (3,969)
Gains on intra-entity foreign currency transactions 1,022 1,513
Balance as of end of year (10,321) (8,498)
RETAINED EARNINGS
Balance as of beginning of year 299,863 168,175
Net income attributable to Ironshore Inc. 97,367 131,688
Balance as of end of year 397,230 299,863
TOTAL IRONSHORE INC. SHAREHOLDERS' EQUITY 1,742,435 1,640,121
Non-controlling interest 3,909 3,731
TOTAL SHAREHOLDERS' EQUITY $1,746,344 $1,643,852
See accompanying notes to the consolidated financial statements.
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Ironshore Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2013 and 2012
(Expressed in thousands of U.S. dollars)
2013 2012
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $97,544 $131,583
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Amortization and depreciation 10,384 8,799
Stock compensation expense 8,115 10,237
Amortization of fixed maturity securities 19,367 18,480
Net realized and unrealized losses (gains) on investments 70,462 (48,876)
Deferred tax (benefit) expense (7,446) 171
CHANGES IN OPERATIONAL ASSETS AND LIABILITIES:
Accrued investment income (365) (2,782)
Premiums receivable (79,759) (32,753)
Reinsurance recoverable on unpaid losses 23,348 (94,814)
Reinsurance recoverable on paid losses (24,800) (20,821)
Deferred acquisition costs (33,848) (26,259)
Prepaid reinsurance premiums (12,162) (8,624)
Other assets (37,840) (10,047)
Reserve for losses and loss adjustment expenses 319,491 410,529
Unearned premiums 218,943 168,756
Insurance and reinsurance balances payable (11,013) 918
Other liabilities 16,266 19,604
Net cash provided by operating activities 576,687 524,101
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of subsidiaries, net of cash acquired (9,098) (20,641)
Investment in joint venture - (5,194)
Purchase of intangible in asset acquisition - (514)
Purchases of fixed maturity securities (4,089,326) (2,697,106)
Purchases of short term investments (369,153) (113,878)
Purchases of equity securities (221,031) (44,796)
Purchase of other investments (3,500) -
Proceeds on sales of fixed maturity securities 3,387,972 2,100,703
Proceeds on maturity of fixed maturity securities 210,043 203,483
Proceeds on sales of short term investments 332,024 170,258
Proceeds on sales of equity securities 183,797 16,263
Purchases of fixed assets (6,402) (9,467)
Issuance of note receivable (41,970) (10,088)
Net cash used in investing activities (626,644) (410,977)
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common shares 2,492 981
Repurchase of restricted shares (2,902) (191)
Net cash (used in) provided by financing activities (410) 790
Net (decrease) increase in cash and cash equivalents (50,367) 113,914
Cash and cash equivalents as of beginning of year 330,679 209,732
Effect of exchanges rates on cash and cash equivalents 988 7,033
CASH AND CASH EQUIVALENTS AS OF END OF YEAR $281,300 $330,679
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $6,092 $3,855
Interest paid $21,250 $21,250
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
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1. Nature of the business
Ironshore Inc. (“Ironshore”), a Cayman Islands corporation, through its subsidiaries (collectively referred to as the “Company”)
provides specialty commercial property and casualty coverage for risks located throughout the world.
The Company’s principal operating subsidiary, Ironshore Insurance Ltd. (“Ironshore Insurance”), is registered as a Class 4 insurer
under The Insurance Act 1978 in Bermuda, related regulations and amendments thereto (the “Bermuda Insurance Act”). Ironshore
Insurance writes primarily property catastrophe and property all-risks coverage for small to mid-sized commercial risks and
includes Ironshore Insurance Ltd, Singapore Branch which is registered as a direct insurer to carry on general insurance in
Singapore effective January 26, 2012.
Iron-Starr Excess Agency Ltd (“Iron-Starr Excess” or the “Agency”) acts as a specialty lines insurance and reinsurance managing
general agency in the offering, issuance and administration of insurance policies written on an equal subscription basis by
Ironshore Insurance and Starr Insurance and Reinsurance Limited (“SIRL”). Iron-Starr Excess writes catastrophic excess casualty
insurance products, targeting Fortune 2000 and other clients purchasing catastrophe excess coverage.
The Company’s U.S. platform consists of Ironshore Holdings (U.S.) Inc. (“Ironshore Holdings U.S.”), a Delaware corporation, and
its principal subsidiaries Ironshore Indemnity Inc., (“Ironshore Indemnity”), a Minnesota domiciled insurer, and Ironshore
Specialty Insurance Limited (“Ironshore Specialty”), an Arizona domiciled insurer (collectively referred to as the “U.S.
companies”). The U.S. companies serve the property and specialty casualty insurance market sectors. The U.S. companies also
insure all classes of aviation and aerospace risks worldwide through an agreement with Starr Aviation Agency, Inc.
The Company’s International platform consists of Ironshore International Ltd. (“IIL”) and a subsidiary company, Ironshore
Corporate Capital Ltd. (“ICCL”) both of which were incorporated in England and Wales, and Pembroke JV Limited (“PJV”) and
its principal subsidiary, Pembroke Managing Agency Limited (“PMA”). PMA operates within the Lloyd’s of London (“Lloyd’s”)
insurance market through Syndicate 4000 and underwrites a portfolio of specialist lines products including financial institutions,
professional liability, marine and other select specialist lines.
The Company’s International platform also includes Ironshore Europe Limited (“IEL”), an Irish corporation, which commenced
underwriting a diverse range of specialty lines in 2011.
2. Significant accounting policies
Basis of presentation These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) and include the financial statements of Ironshore and its wholly owned and majority
owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Certain prior
year amounts have been reclassified to conform to the current year presentation.
Use of estimates in financial statements The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported and disclosed amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ materially from those estimates. The major estimates reflected in the Company’s consolidated financial statements
include, but are not limited to, the reserves for losses and loss adjustment expenses, reinsurance recoverable balances including
allowances for reinsurance recoverables deemed uncollectible, estimates of written and earned premium, the fair value of
investments, recoverability of intangible assets and the net deferred tax liability.
Premiums and related expenses
Insurance premiums written are recorded in accordance with the terms of the underlying policies and include estimates based on
information received from brokers, ceding companies and insureds and any subsequent differences arising on such estimates are
recorded in the period in which they are determined. Premiums written are earned on a pro rata basis over the terms of the risk
period. For contracts written on a losses occurring basis, the risk period is generally the same as the contract or policy term. For
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
8
contracts written on a risks attaching basis, the risk period is based on the terms of the underlying contracts and policies. The
portion of the premiums written applicable to the unexpired terms of the underlying contracts and policies are recorded as
unearned premiums. Reinstatement premiums are estimated after the occurrence of a significant loss and are recorded in
accordance with the contract terms based upon the ultimate loss estimates associated with each contract. Reinstatement premiums
are earned when written.
Certain assumed reinsurance contracts are deemed not to transfer insurance risk in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 944 Financial Services – Insurance and are
accounted for using the deposit method of accounting. Management exercises significant judgment in determining whether
contracts should be accounted for as assumed reinsurance contracts or deposit reinsurance contracts. Using the deposit method of
accounting, for those contracts that contain an element of underwriting risk, the estimated profit margin is deferred and amortized
over the contract term and is included in the Company’s underwriting results. When the estimated profit margin is explicit, the
margin is reflected as fee income and adverse results on such contracts are reflected as incurred losses. When the estimated profit
margin is implicit, the margin is reflected as an offset to paid losses and any adverse results are reflected as incurred losses. For
those contracts that do not transfer an element of underwriting risk, the projected profit is reflected in earnings over the estimated
settlement period using the interest method and is included in investment income. Deposit accounting assets or liabilities are
included in other assets or other liabilities, respectively, on the Company’s consolidated balance sheets.
Retroactive loss portfolio transfer (“LPT”) contracts in which the insured loss events occurred prior to the inception of the contract
are evaluated to determine whether they meet the established criteria for reinsurance accounting. If reinsurance accounting is
appropriate, premiums written are fully earned and corresponding losses and loss adjustment expenses recognized at the inception
of the contract. The contracts can cause significant variances in gross premiums written, net premiums written, net premiums
earned, and net incurred losses in the years in which they are written. Reinsurance contracts sold not meeting the established
criteria for reinsurance accounting are recorded using the deposit method.
A premium deficiency reserve is established when expected claim payments or incurred losses, loss adjustment expenses and
administrative expenses exceed the premiums to be earned over the remaining contract period. For the purposes of determining
whether a premium deficiency reserve exists contracts are grouped in a manner consistent with how policies are marketed,
serviced and measured. Anticipated investment income is utilized as a factor in the premium deficiency reserve calculation.
Acquisition expenses
Acquisition expenses are costs that vary with, and are directly related to, the production of new and renewal business, and consist
principally of commissions and brokerage expenses. Acquisition expenses are shown net of commissions on reinsurance ceded.
These costs are deferred and amortized over the periods in which the related premiums are earned. Deferred acquisition costs are
limited to their estimated realizable value based on the related unearned premiums. Anticipated loss and loss adjustment expenses
based on historical and current experience and anticipated investment income related to those premiums are considered in
determining the recoverability of deferred acquisition costs. Acquisition expenses also include profit commission. Profit
commissions are recognized when earned.
Reserve for losses and loss adjustment expenses The reserve for losses and loss adjustment expenses includes reserves for unpaid reported losses and for losses incurred but not
reported. The reserve for unpaid reported losses and loss expenses is established by management based on reports from loss
adjusters, ceding companies and insureds and represents the estimated ultimate cost of events or conditions that have been reported
to, or specifically identified, by the Company. The reserve for incurred but not reported losses and loss adjustment expenses is
established by management based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the
estimate of ultimate losses and loss expenses are expected trends in claim severity and frequency and other factors which vary
significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts
recorded in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new
information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are recorded in earnings in the
periods in which they become known and are accounted for as changes in estimates.
Ceded Reinsurance
In the normal course of business, the Company may seek to mitigate underwriting risk that could cause unfavorable results by
reinsuring certain amounts of risk with reinsurers. Reinsurance does not relieve the Company of its primary obligation to the
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
9
insured. The accounting for reinsurance ceded depends on the method of reinsurance. If the policy is on a losses occurring basis,
reinsurance premiums ceded and associated commissions are expensed on a pro rata basis over the period reinsurance coverage is
provided. If the policy is on a risk attaching basis, reinsurance premiums ceded and associated commissions are expensed in line
with gross premiums earned to which the risk attaching policy relates. Prepaid reinsurance premiums represent the portion of
premiums ceded on the unexpired terms of the policies purchased. Reinsurance commissions that will be earned in the future are
deferred and recorded as deferred acquisition costs on the balance sheets.
Reinsurance recoverable is presented on the balance sheets net of any reserves for uncollectible reinsurance. The method of
determining the reinsurance recoverable on unpaid losses and loss adjustment expenses involves actuarial estimates in a manner
consistent with the determination of unpaid losses and loss adjustment expenses.
Investments
The Company’s investments in fixed maturity securities and equity securities are classified as trading and are carried at fair value,
with related unrealized gains and losses recorded in net realized and unrealized gains (losses) on investments in earnings. The
Company believes that accounting for its investments as trading with all changes in fair value included in income reduces an
element of management judgment as the Company is not required to perform an analysis of its investments for other-than-
temporary impairment.
Fair values of the Company’s fixed maturity and equity securities are based on quoted market prices or, when such prices are not
available, by reference to broker or underwriter bid indications and/or internal pricing valuation techniques. Investment
transactions are recorded on a trade date basis with balances pending settlement recorded as receivable for investments sold or
payable for investments purchased.
For mortgage-backed and other asset-backed debt securities, fair value includes estimates regarding prepayment assumptions,
which are based on current market conditions. Amortized cost in relation to these securities is calculated using a constant effective
yield based on anticipated prepayments and estimated economic lives of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date. Changes in
estimated yield are recorded on a retrospective basis, which results in future cash flows being used to determine current book
value.
Realized gains and losses on sales of investments are determined on the average cost basis.
Net investment income includes interest income on fixed maturity securities, recorded when earned, dividend income on equity
investments, recorded when declared and the amortization of premiums and discounts on investments. The amortization of
premium and accretion of discount is computed using the effective interest rate method. Net investment income is recorded net of
investment expenses.
Short term investments Short term investments, which are managed as part of the Company’s investment portfolio, have an original maturity of one year
or less when purchased, and are carried at cost which approximates fair value.
Cash and cash equivalents The Company considers all investments with an original maturity of ninety days or less as cash equivalents.
Other Assets
Investments in which the Company had significant influence over the operating and financial policies of the investee are classified
as other assets and are accounted for under the equity method of accounting. Under this method, the Company records its
proportionate share of income or loss from such investments in its results for the period and includes these investments in other
assets in its consolidated financial statements.
Business combinations, goodwill and other intangible assets The Company accounts for business combinations in accordance with FASB ASC Topic 805 Business Combinations, and
goodwill and other intangible assets that arise from business combinations in accordance with FASB ASC Topic 350 Intangibles –
Goodwill and Other. A purchase price that is in excess of the fair value of the net assets acquired arising from a business
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
10
combination is recorded as goodwill, and is not amortized. Other intangible assets with a finite life are amortized over the
estimated useful life of the asset. Other intangible assets with an indefinite useful life are not amortized.
Goodwill and other indefinite life intangible assets are tested for impairment at least annually. The Company first assesses
qualitative factors in determining whether it is necessary to perform the two-step quantitative goodwill impairment test. Only if
management determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount based
on qualitative factors, would it be required to then perform the two-step quantitative goodwill impairment test detailed below.
The first step identifies potential impairments by comparing the fair value of the reporting unit to its book value, including
intangibles. If the fair value of the reporting unit exceeds the carrying amount, the intangible is not impaired and the second step is
not required. If the carrying value is in excess of the fair value, the second step computes the possible impairment loss by
comparing the implied fair value of the intangible with the carrying amount. If the implied fair value of the intangible is less than
the carrying amount, the intangible is written down to its fair value with a corresponding expense being charged to earnings.
The Company considers the recoverability of its intangible assets whenever a change in circumstances arises and in the event that
an impairment exists, any excess unamortized balances are recorded in earnings.
Non-controlling interest The Company accounts for non-controlling interest in accordance with FASB ASC Topic 805 Business Combinations which
establishes accounting and reporting standards that require that ownership interests in subsidiaries held by other parties be
presented in the consolidated statement of shareholders’ equity separately from the parent’s equity and the consolidated net income
attributable to non-controlling interest be presented on the face of the consolidated statements of operations and comprehensive
income. The guidance also requires that changes in a parent’s ownership interest while the parent retains controlling financial
interest in its subsidiary be accounted for consistently. Disclosures in financial statements are required to identify and distinguish
between the interests of the parent and non-controlling owners.
Foreign exchange The Company’s reporting currency is the United States Dollar (U.S. dollars or $). Monetary assets and liabilities denominated in
currencies other than U.S. dollars are revalued at the exchange rates in effect as of the balance sheet date with the resulting foreign
exchange gains and losses included in earnings as net foreign exchange gains (losses). Revenues and expenses denominated in
currencies other than U.S. dollars are translated at the average rate for the period. The financial statements of each of the
Company’s subsidiaries are initially measured using the entity’s functional currency, which is determined based on its operating
environment and its underlying cash flows. For entities with a functional currency other than U.S. dollars, foreign currency assets
and liabilities are translated into U.S. dollars using the period end rates of exchange, while statements of operations are translated
at average rates of exchange for the period. The resulting cumulative translation adjustment is recorded in accumulated other
comprehensive income as a separate component of shareholders’ equity.
Stock based compensation The Company accounts for its stock compensation plans in accordance with the fair value recognition provisions of FASB ASC
Topic 718 Compensation – Stock Compensation, which requires the Company to measure the cost of services received from
employees, directors and eligible consultants in exchange for an award of equity instruments based on the estimated fair value of
the award on the date of grant. The cost of these services is recognized as compensation expense over the requisite service period
and is included in earnings.
Earnings per share Basic earnings per ordinary share are calculated by dividing net income available to ordinary shareholders by the weighted average
number of ordinary shares outstanding. Diluted earnings per ordinary share are based on the weighted average number of ordinary
shares, warrants, restricted stock and options outstanding, except the effects of the warrants, restricted stock and options that are
anti-dilutive.
Taxation
Income taxes have been provided in accordance with the provisions of FASB ASC Topic 740 Income Taxes on those operations
which are subject to income taxes. Deferred tax assets and liabilities result from temporary differences between the amounts
recorded in the consolidated financial statements and the tax basis of the Company’s assets and liabilities. The effect on deferred
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
11
tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. A
valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits
related to deferred tax assets will not be realized.
The Company reflects tax positions in accordance FASB ASC Topic 740, Income Taxes. Such tax positions are, based solely on
their technical merits, more likely than not to be sustained upon examination by taxing authorities and reflect the largest amount of
benefit, determined on a cumulative probability basis that is more likely than not to be realized upon settlement with the applicable
taxing authority with full knowledge of all relevant information.
Recent accounting pronouncements
Balance sheet offsetting disclosure
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities and on January 31, 2013
issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which limits the scope of the new
balance sheet offsetting disclosures to the extent that they are offset in the financial statements or subject to an enforceable master
netting arrangement or similar agreement. This guidance did not have a material impact on the Company’s consolidated financial
statements.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income, which requires preparers to report information about reclassifications out of
accumulated other comprehensive income (“AOCI”). The guidance also requires companies to report changes in AOCI balances.
We adopted this guidance effective January 1, 2013. This guidance did not have a material impact on the Company’s consolidated
financial statements.
Testing Indefinite-Lived Intangible Assets for Impairment
In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”) which
allows an entity to first assess qualitative factors in determining whether it is more likely than not that an indefinite lived asset is
impaired as a basis for determining whether it is necessary to perform the two-step quantitative impairment test described in ASC
Topic 350 Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. This new guidance is effective for fiscal
years beginning after September 15, 2012. Early adoption was permitted and the Company chose to early adopt. This guidance
did not have a material impact on the Company’s consolidated financial statements.
3. Business combinations
On December 31, 2012, Ironshore Holdings U.S. acquired 100% of the issued and outstanding shares of capital stock of Excess
Risk Reinsurance Inc. (“ERR”) under a Stock Purchase Agreement (“ERR Acquisition Agreement”) for a net cash purchase price
of $19,100 plus contingent consideration of $820. ERR is a Managing General Underwriter that manages, underwrites, services
and administers specific and aggregate medical stop loss insurance.
Goodwill with a fair value of $19,100 was provisionally recorded as of the date of acquisition pending receipt of the final
valuations of net assets acquired in the transaction. Goodwill is deemed to have an indefinite useful life and will not be amortized
but will be tested for impairment at least annually. The ERR Acquisition Agreement includes an earn-out clause which details the contingent consideration included in the
transaction. The earn-out clause provides for an adjustment to be made to the purchase price based on ERR’s underwriting
performance for five years from the date of acquisition. The earn-out amount payable ranges from 0 - 4% of the excess of Gross
Premiums Written above $20,000 for each relevant underwriting year subject to a maximum payout of $3,000. The Company
assessed that a portion of the earn-out arrangement amounting to $900 with a fair value of $820 was contingent consideration
included in the purchase price. The remaining $2,100 of the earn-out agreement represents compensation to be recognized as
earned over the vesting period.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
12
In 2013, the Company completed the initial accounting of the ERR acquisition resulting to a reclassification of $7,579 from
goodwill to the following accounts: $8,268 to other intangible assets; $(820) to earn-out liability; and $131 to net tangible assets
acquired.
The fair value of the assets and liabilities acquired and allocation of the purchase price is summarized as follows:
Purchase price (cash and contingent consideration) $19,920
Assets acquired
Cash and other assets 922
Intangible asset – Trade name 434
Intangible asset – Customer relationship 2,553
Intangible asset – Non-compete agreement 5,281
Liabilities acquired
Accounts payable and other liabilities (791)
Net assets acquired 8,399
Excess purchase price – Goodwill $11,521
4. Investment in Joint Ventures
Ironshore Holdings U.S. formed IDP Holdings LLC (“IDP”) as a joint venture with The Distinguished Programs Group LLC
(“DPG”). It is intended that IDP will acquire small- to mid-sized program managers, MGAs, brokers, or agency companies that
write specialty insurance programs.
On November 1, 2012, IDP entered into an Asset and Membership Interest Purchase Agreement with National Specialty
Underwriters, Inc. and certain of its subsidiaries (collectively, “NSU”) pursuant to which IDP purchased NSU’s hospitality and
casualty insurance programs business and related claims administration business for cash and a promissory note issued by IDP.
Interest accrues on the promissory note at a rate of 0.23% per annum on the unpaid balance until the maturity date of April 1,
2014. Ironshore Holdings U.S. made a cash equity investment of $4,844 to IDP and advanced a loan of $9,688 to IDP, which
equity investment and loan, together with a cash equity investment by DPG, were used to finance the purchase from NSU. This
loan from Ironshore Holdings U.S. to IDP bears an interest rate of prime rate plus 4% per annum subject to a minimum interest
rate of 6% per annum and a maximum interest rate of 12% per annum. Loan was secured by a pledge of substantially all of the
assets of IDP. All profits and losses of operations are shared equally between Ironshore Holdings U.S. and DPG. For the year
ended December 31, 2013 and December 31, 2012, Ironshore Holdings U.S.’s share of IDP’s net income (loss) of $1,000 and
$(494) was recorded in other income in the Company’s statements of operations and comprehensive income.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
13
5. Goodwill and other intangible assets
Goodwill and other intangibles as of December 31, 2013 and 2012 are as follows:
Goodwill & other
Goodwill intangible assets
Gross Gross Amortization
Foreign
Exchange Total Total
Balance as of January 1, 2012 $6,283 $71,643 $(5,018) $(7,350) $59,275 $65,558
Acquired during 2012 19,100 514 - - 514 19,614
Amortization - - (1,905) - (1,905) (1,905)
Foreign exchange translation (a) - - - 1,275 1,275 1,275
Balance as of December 31, 2012 25,383 72,157 (6,923) (6,075) 59,159 84,542
Reclassification (b) (7,579) 8,268 - - 8,268 689
Amortization - - (3,021) - (3,021) (3,021)
Foreign exchange translation (a) - - - 348 348 348
Balance as of December 31, 2013 $17,804 $80,425 $(9,944) $(5,727) $64,754 $82,558
(a) Represents foreign exchange translation on Lloyd’s Syndicate capacity
(b) Represents adjustment related to the acquisition of ERR. Refer also to Note 3.
Other intangible assets
The gross carrying value and accumulated amortization by major category of other intangible asset as of December 31, 2013 is
shown below:
Gross carrying
value
Accumulated
amortization
Foreign exchange
translation Total
Admitted licenses $11,006 $ - $ - $11,006
Excess & surplus lines licenses 8,925 - - 8,925
Lloyd’s Syndicate capacity 33,570 - (5,374) 28,196
Indefinite life 53,501 - (5,374) 48,127
Customer relationship, customer lists
and trade name 11,129 (6,378) (353) 4,398
Renewal rights 10,514 (2,812) - 7,702
Non-compete agreement 5,281 (754) - 4,527
Definite life 26,924 (9,944) (353) 16,627
Total intangible assets $80,425 $(9,944) $(5,727) $64,754
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
14
The gross carrying value and accumulated amortization by major category of other intangible asset as of December 31, 2012 is
shown below:
Gross carrying
value
Accumulated
amortization
Foreign exchange
translation Total
Admitted licenses $11,006 $ - $ - $11,006
Excess & surplus lines licenses 8,925 - - 8,925
Lloyd’s Syndicate capacity 33,570 - (5,722) 27,848
Indefinite life 53,501 - (5,722) 47,779
Customer relationship, customer lists
and trade name 8,142 (5,173) (353) 2,616
Renewal rights 10,514 (1,750) - 8,764
Definite life 18,656 (6,923) (353) 11,380
Total intangible assets $72,157 $(6,923) $(6,075) $59,159
The useful life of intangible assets with finite lives ranges from 3 to 10 years, with an average amortization period of 7 years.
Expected amortization of the intangible assets is shown below:
Other
intangible
assets
2014 $2,426
2015 2,426
2016 2,426
2017 2,426
2018 and thereafter 6,923
Total remaining amortization expense – definite life 16,627
Indefinite life 48,127
Total $64,754
As described in Note 2, Significant accounting policies, the annual qualitative impairment test was performed and neither goodwill
nor the other intangible assets were deemed to be impaired.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
15
6. Investments
The amortized cost, gross unrealized gains and losses and fair value of investments as of December 31, 2013 are as follows:
Amortized Unrealized Unrealized Fair
cost gains losses value
U.S. government and government
agency securities $271,486 $1,547 $(1,609) $271,424
Non U.S. government and
government agency securities 97,093 514 (3,065) 94,542
Municipal securities 73,714 1,727 (942) 74,499
Corporate securities 1,255,768 18,849 (10,063) 1,264,554
Bank loans 330,943 4,294 (1,346) 333,891
U.S. asset-backed securities 431,760 2,396 (2,620) 431,536
U.S. mortgage-backed securities 964,523 7,586 (19,142) 952,967
Total fixed maturity securities 3,425,287 36,913 (38,787) 3,423,413
Equity securities 129,298 6,044 (3,395) 131,947
Short term investments 45,828 - - 45,828
$3,600,413 $42,957 $(42,182) $3,601,188
The amortized cost, gross unrealized gains and losses and fair value of investments as of December 31, 2012 are as follows:
Amortized Unrealized Unrealized Fair cost gains losses value
U.S. government and government
agency securities $257,988 $5,698 $(9) $263,677
Non U.S. government and
government agency securities 109,066 898 (160) 109,804
Municipal securities 71,238 2,937 (22) 74,153
Corporate securities 1,073,963 40,544 (649) 1,113,858
Bank loans 296,830 4,607 (656) 300,781
U.S. asset-backed securities 251,079 5,152 (3) 256,228
U.S. mortgage-backed securities 900,666 21,188 (2,445) 919,409
Total fixed maturity securities 2,960,830 81,024 (3,944) 3,037,910
Equity securities 79,716 5,329 (1,488) 83,557
Short term investments 9,000 - - 9,000
$3,049,546 $86,353 $(5,432) $3,130,467
Included in the above are fixed maturity securities with a fair value of $23,046 and $20,578, which are on deposit with U.S.
insurance regulators as of December 31, 2013 and 2012, respectively, to meet certain statutory requirements. The Company also
maintains fixed maturity securities and cash amounting to $1,221,100 and $881,292 in trust accounts as collateral under the terms
of certain insurance and reinsurance transactions as of December 31, 2013 and 2012, respectively.
As of December 31, 2013, the Company maintained a trust collateral of $25,047 composed of short-term and fixed maturity
securities for the Company’s political risk business and $19,918 composed of cash and fixed maturity securities to meet certain
Canadian insurance regulatory requirements for Ironshore Insurance Ltd. Canada Branch.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
16
On December 1, 2009, the Company entered into a $50,000 standby letter of credit facility provided by Citibank Europe plc. As of
December 31, 2013 and 2012, $22,962 and $16,466, respectively, of letters of credit were issued and outstanding under this
facility, for which $32,488 and $19,692, of fixed maturity securities were pledged as collateral.
The Company operates in the Lloyd’s market through its corporate member Ironshore Corporate Capital Ltd. (“ICCL”), which
represents its participation in Syndicate 4000. Lloyd’s sets capital requirements for corporate members annually based on the
Syndicates’ business plans, rating and reserving environment together with input arising from Lloyd’s discussions with regulatory
and rating agencies. Such capital, or Funds at Lloyd’s (“FAL”), may be satisfied by cash, investments and undrawn letters of
credit provided by banks. As of December 31, 2013 and 2012, fixed maturity securities with a fair value of $182,564 and
$117,690, short term investments with a fair value of $1,382 and $14,174 and cash of $5,325 and $17,762, respectively, were
restricted to satisfy the Company’s FAL requirements.
The following represents an analysis of net realized gains (losses) on the sale of investments for the years ended:
December 31, 2013
Realized
gains
Realized
losses
Net realized
gains (losses)
Fixed maturity securities $18,355 $(21,125) $(2,770)
Equity securities 12,714 (366) 12,348
Short term investments 1,443 (1,337) 106
$32,512 $(22,828) $9,684
December 31, 2012
Realized
gains
Realized
losses
Net realized
gains (losses)
Fixed maturity securities $30,109 $(17,771) $12,338
Equity securities 412 (557) (145)
Short term investments 236 (172) 64
$30,757 $(18,500) $12,257
The amortized cost and fair value amounts for fixed maturity securities held as of December 31, 2013 are shown by contractual
maturity below. Actual maturity may differ from contractual maturity because certain borrowers may have the right to call or
prepay certain obligations with or without call or prepayment penalties.
December 31, 2013
Amortized cost Fair value
Due in one year or less $122,638 $123,474
Due after one year through five years 1,309,237 1,321,107
Due after five years through ten years 462,377 462,547
Due after ten years 30,326 27,802
U.S. asset-backed securities 431,760 431,536
U.S. mortgage-backed securities 964,523 952,967
U.S. government sponsored enterprises 104,426 103,980
Total fixed maturity securities $3,425,287 $3,423,413
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
17
The following table sets forth certain information regarding the investment ratings of the Company’s fixed maturity investment
portfolio as of December 31, 2013. Investment ratings are as designated by Standard & Poor’s Ratings Group or Moody’s
Investors Service.
December 31, 2013
S&P Equivalent Rating (a)
Amortized cost Fair value
AAA $628,191 $630,846
AA 1,362,996 1,350,856
A 620,978 628,339
BBB 454,312 452,367
Below BBB 279,199 281,425
Not rated 79,611 79,580
Total fixed maturity securities $3,425,287 $3,423,413
(a) Carried at the lower of Standard & Poor’s or Moody’s rating, presented in Standard & Poor’s equivalent rating
Net investment income is derived from the following sources:
2013 2012
Fixed maturity securities $83,074 $81,624
Equity securities 5,794 2,165
Cash and cash equivalents 2,068 1,120
Short term investments 6 6
Total gross investment income 90,942 84,915
Investment expenses (6,570) (5,352)
Net investment income $84,372 $79,563
7. Fair value measurement
U.S. GAAP establishes a framework for measuring fair value using a hierarchy of fair value measurements that distinguishes
market data between observable independent market inputs and unobservable market assumptions and requires additional
disclosures about such fair value measurements. Financial assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3
measurements).
The three levels of the fair value hierarchy are described further below:
Level 1: Quoted prices in active markets for identical assets/liabilities (unadjusted);
Level 2: Indirect observable inputs including quoted prices for similar assets/liabilities (adjusted) and market corroborated inputs;
Level 3: Unobservable inputs which reflect the underlying entity’s interpretation of risk assumptions used by market participants.
The Company receives assistance with its investment accounting function from an independent service provider.
This service provider as well as the Company’s investment managers uses several pricing services and brokers to assist with the
determination of the fair value of the Company’s investment portfolio. The Company does not typically adjust prices obtained from
pricing services. In accordance with accounting guidance regarding fair value measurements, the Company’s service providers
maximize the use of observable inputs ensuring that unobservable inputs are used only when observable inputs are not available.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
18
The following table presents the Company's investments that are measured at fair value on a recurring basis as well as the carrying
amount of these investments as of December 31, 2013 by level within the fair value hierarchy:
Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
2013 (Level 1) (Level 2) (Level 3) Total
U.S. government and
government agency securities $167,445 $103,979 $ - $271,424
Non-U.S. government and
government agency securities - 94,542 - 94,542
Municipal securities - 74,499 - 74,499
Corporate securities - 1,264,477 77 1,264,554
Bank loans - 201,060 132,831 333,891
U.S. asset-backed securities - 380,965 50,571 431,536
U.S. mortgage-backed securities - 949,400 3,567 952,967
Total fixed maturity securities 167,445 3,068,922 187,046 3,423,413
Equity securities 98,911 33,036 - 131,947
Short term investments - 45,828 - 45,828
$266,356 $3,147,786 $187,046 $3,601,188
The following table presents the Company's investments that are measured at fair value on a recurring basis as well as the carrying
amount of these investments as of December 31, 2012 by level within the fair value hierarchy:
Quoted Prices in
Active Markets
for Identical
Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
2012 (Level 1) (Level 2) (Level 3) Total
U.S. government and
government agency securities $133,311 $130,366 $ - $263,677
Non-U.S. government and
government agency securities - 109,804 - 109,804
Municipal securities - 74,153 - 74,153
Corporate securities - 1,113,858 - 1,113,858
Bank loans - 195,410 105,371 300,781
U.S. asset-backed securities - 256,228 - 256,228
U.S. mortgage-backed securities - 919,409 - 919,409
Total fixed maturity securities 133,311 2,799,228 105,371 3,037,910
Equity securities 56,836 26,721 - 83,557
Short term investments - 9,000 - 9,000
$190,147 $2,834,949 $105,371 $3,130,467
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
19
A description of the valuation techniques and inputs used to determine fair values of investments carried at fair value, as well as the
classification of each investment type in the fair value hierarchy is detailed below.
The Company’s investments classified as Level 1 include U.S. government and government agency securities and equity securities
where fair value is based on quoted market prices in active markets which is defined by the Company’s pricing service as a security
that has traded in the previous 7 days.
The Company’s Level 2 securities primarily consist of securities that are valued using models or other valuation techniques. These
models are industry standard models that take into account various assumptions including time value, yield curve, prepayments
speeds, default rates, loss severity, current market and contractual prices for the underlying securities as well as other economic data.
The majority of these assumptions are observable in the marketplace and this category includes some U.S. and Non-U.S.
government and government agency securities, municipal securities, corporate securities, bank loans, U.S. asset-backed securities
and U.S. mortgage-backed securities.
The Company's investments classified as Level 3 consist of bank loans and certain U.S. asset and mortgage-backed securities. These
are valued using non-binding broker quotes and other third party pricing sources, without modification.
There have been no significant changes in the Company’s use of valuation techniques or related inputs nor have there been any
transfers between Level 1 and Level 2 during the years ended December 31, 2013 and 2012, respectively. The transfers from
Level 2 to Level 3 during the years ended December 31, 2013 and 2012 reflect low level of trading activity in certain fixed
maturity securities while the transfers of fixed maturity securities from Level 3 to level 2 that occurred during the same periods
reflect higher reliance on observable inputs. The Company’s policy is to recognize transfers in and out of the fair value
measurement hierarchy measurement levels as of the date of the actual transfer.
As of December 31, 2013 and 2012, the Company’s Level 3 investments represented 5.2% and 3.4% of its total investments
measured at fair value, respectively.
Level 3 Gains and Losses
The table below presents assets that are measured at fair value on a recurring basis as of December 31, 2013 using significant
Level 3 inputs:
Bank loans
Corporate
securities
U.S. asset-
backed
securities
U.S.
mortgaged-
backed
securities Total
Balance at beginning of year $105,371 $ - $ - $ - $105,371
Realized gains 255 - - - 255
Unrealized (losses) gains 80 2 (734) (10) (662)
Purchases 82,187 75 51,304 3,954 137,520
Sales (46,541) - - (1,743) (48,284)
Amortization 495 - 1 22 518
Transfer into Level 3 9,394 - - 1,344 10,738
Transfer out of Level 3 (18,410) - - - (18,410)
Balance at end of the year $132,831 $77 $50,571 $3,567 $187,046
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
20
The table below presents assets that are measured at fair value on a recurring basis as of December 31, 2012 using significant
Level 3 inputs:
Bank loans
Balance at beginning of year $305,849
Realized gains 394
Unrealized gains 1,347
Purchases 148,741
Sales (123,237)
Amortization 798
Transfer into Level 3 42,031
Transfer out of Level 3 (270,552)
Balance at end of the year $105,371
Change in unrealized (loss) gain for the year included in earnings for assets held at the end of December 31, 2013 and 2012
amounted to $(743) and $1,347, respectively.
8. Reserves for losses and loss adjustment expenses
Reserves for losses and loss adjustment expenses are based in part upon the estimation of case reserves reported from brokers,
insureds and ceding companies. The Company also uses statistical and actuarial methods to estimate ultimate expected losses and
loss adjustment expenses. The period of time from the occurrence of a loss, the reporting of a loss to the Company and the
settlement of the Company’s liability may be several months or years. During this period, additional facts and trends may be
revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase or decrease in the
overall reserves of the Company, and at other times requiring a reallocation of incurred but not reported reserves to specific case
reserves. These estimates are reviewed regularly, and such adjustments, if any, are recorded in earnings in the period in which
they become known. While management believes that it has made a reasonable estimate of ultimate losses, there can be no
assurances that ultimate losses and loss expenses will not exceed the total reserves.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
21
The following table represents the activity in the reserve for losses and loss adjustment expenses for the years ended December 31,
2013 and 2012, respectively:
2013 2012
Gross reserves for losses and loss adjustment expenses, beginning of year $1,856,759 $1,432,403
Less reinsurance recoverable balances, beginning of year 621,965 515,207
Net reserves for losses and loss adjustment expenses, beginning of year 1,234,794 917,196
Increase (decrease) in net losses and loss adjustment expenses incurred in
respect of losses occurring in:
Current year 754,435 648,854
Prior years (9,262) (18,127)
Total incurred losses and loss adjustment expenses 745,173 630,727
Less net losses and loss adjustment expenses paid in respect of losses
occurring in:
Current year 100,785 69,373
Prior years 293,621 248,079
Total net paid losses 394,406 317,452
Net foreign currency (gain) loss on loss and loss adjustment expenses (5,101) 4,323
Net reserve for losses and loss adjustment expenses, end of year 1,580,460 1,234,794
Plus reinsurance recoverable balances, end of year 601,352 621,965
Gross reserve for losses and loss adjustment expenses, end of year $2,181,812 $1,856,759
For the year ended December 31, 2013, the net favorable loss development of $9,262 included a reduction in the ultimate claims
due to better than expected reported claims activity in the Company’s political risk and IronPro businesses as well the revision in
the assumption on loss development pattern in the International business. This was partially offset by higher than expected loss
incurred activity in the Bermuda property and U.S. casualty businesses.
For the year ended December 31, 2012, the net favorable loss development for the Company of $18,127 included a reduction in the
ultimate claims due to better than expected reported claims activity in the Company’s property line of business, associated with a
variety of accident years. The favorable loss development was also due to better than expected reported claims activity in the
Company’s professional liability and financial institutions lines of business which are all claims made business.
The Company has written an increasing volume of casualty business in recent years which adds significant variability to
management's estimates because of the longer tail nature of the risks.
As of December 31, 2013 and 2012, reinsurance recoverable and reserve for losses and loss adjustment expenses include amounts
of $29,986 and $56,657, respectively, related to the acquisition of Ironshore Indemnity and Ironshore Specialty that are secured by
conditional guarantees from the parents of the sellers.
9. Reinsurance
In certain cases, the risks written by the Company are wholly or partially reinsured with third-party reinsurers. Reinsurance ceded
varies by location and line of business based on a number of factors, including market conditions. The benefits of ceding risks to
third-party reinsurers include reducing exposure on individual risks, protecting against catastrophic risks, maintaining acceptable
capital ratios and enabling the writing of additional business. Reinsurance ceded contracts do not discharge the Company from its
liabilities to the original policyholder in respect of the risk being reinsured.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
22
The Company uses reinsurance to support its underwriting and retention guidelines as well as to control the aggregate exposure of
the Company to a particular risk or class of risks. Reinsurance may be purchased at several levels ranging from reinsurance of
risks assumed on individual contracts to reinsurance covering the aggregate exposure on a portfolio of policies issued by groups of
companies.
(a) Effects of reinsurance on premiums written and earned The effects of reinsurance on premiums written and earned, and on losses and loss adjustment expenses is as follows:
2013 2012
Net premiums written
Direct
$1,582,682 $1,413,846
Assumed
410,441 253,820
Ceded
(535,404) (502,264)
Net premiums written
$1,457,719 $1,165,402
Net premiums earned
Direct
$1,389,094 $1,259,762
Assumed
384,270 238,793
Ceded
(519,041) (489,979)
Net premiums earned
$1,254,323 $1,008,576
Loss and loss adjustment expenses
Gross losses and loss adjustment expenses incurred $931,157 $921,269
Losses and loss adjustment expense recoveries (185,984) (290,542)
Net losses and loss adjustment expenses $ 745,173 $ 630,727
Retroactive reinsurance policies generally provide large, but limited, indemnification of unpaid losses and loss adjustment
expenses with respect to past loss events that are generally expected to be paid over long periods of time. Premiums earned under
retroactive reinsurance contract amounted to $1,509 and $2,232 during the year ended December 31, 2013 and 2012, respectively.
The contract provides for a maximum limit of indemnification of $25,000 and $4,000 during the year ended December 31, 2013
and 2012, respectively.
A contract incepting in 2011 which provided for a maximum limit of indemnification of $57,500 was terminated and commuted on
November 30, 2012. The commutation of this contract resulted in a settlement of $29,686, including the release of loss reserves of
$28,482 and the release of a deferred gain of $1,463.
Underwriting results attributable to retroactive reinsurance include the recurring periodic amortization of deferred charges that are
established with respect to these contracts. At the inception of a contract, deferred charges represent the difference between the net
premium received and the estimated ultimate losses payable. Deferred charges are subsequently amortized over the estimated
claims payment period. As of December 31, 2013 and 2012, unamortized deferred charges for retroactive contracts were $1,773
and $2,281, respectively. The amortized deferred income was $639 and $507, respectively, for 2013 and 2012 and was included in
other income. Gross unpaid losses from retroactive reinsurance contracts were approximately $8,692 and $12,555 as of
December 31, 2013 and 2012, respectively.
(b) Credit risk The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from its exposure
to individual reinsurers. Reinsurance programs are generally placed with reinsurers whose rating, as of the time of placement, is
A- or better as rated by AM Best or the equivalent with other rating agencies. Exposure to a single reinsurer is also controlled with
restrictions dependent on rating. As of December 31, 2013 and 2012, respectively, 96.8% and 98.6% of reinsurance recoverables
(which includes loss reserves recoverable and recoverables on paid losses) were from reinsurers rated A- or better and included
$431,178 and $414,831, respectively, of IBNR recoverable.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
23
Reinsurance recoverables by reinsurer are as follows:
December 31, 2013 December 31, 2012
Reinsurance
Recoverable
% of
Total
Reinsurance
Recoverable
% of
Total
Top 10 Reinsurers $552,924 78.6% $524,904 75.3%
Other reinsurers balances > $1 million 144,145 20.4% 164,383 23.6%
Other reinsurers balances < $1 million 6,777 1.0% 7,908 1.1%
Total $703,846 100.0% $697,195 100.0%
Reserves for reinsurance recoverables deemed uncollectible are based on an estimate of the amount of the reinsurance recoverable
balance that will ultimately not be recovered due to reinsurer insolvency, contractual dispute or some other reason. The valuation
of the reserve for uncollectible reinsurance includes a detailed review of the credit ratings of the reinsurance recoverable by
reinsurer on a continuous basis with any resulting adjustments recorded in earnings in the period that collection issues are
identified. As of December 31, 2013 and 2012, the reserves for reinsurance recoverables deemed uncollectible was $700 and
$693, respectively.
10. Share capital
(a) Authorized and issued The Company’s authorized share capital is 200,000,000 ordinary shares, which may be Class A (voting) ordinary shares or Class B
(non-voting) ordinary shares, with a par value of $0.01 each. All ordinary shares outstanding as of December 31, 2013 and 2012
are Class A ordinary shares. Holders of Class A ordinary shares are entitled to one vote per ordinary share, except that voting
rights are subject to adjustment pursuant to a methodology specified in the Company’s Articles of Association.
On November 30, 2013, under the terms and conditions of the 2006 Long Term Incentive Plan, the Company issued 184,541
ordinary shares at a price of $11.88 per share for net proceeds of $2,192.
On February 29, 2012, the Company issued 46,168 ordinary shares at a price of $10.83 per share for net proceeds of $500 to
directors of the Company and on March 27, 2012, the Company issued 4,554 ordinary shares at a price of $10.98 per share for net
proceeds of $50. On August 15, 2012, under the terms and conditions of the 2006 Long Term Incentive Plan, the Company issued
37,672 ordinary shares at a price of $11.45 per share for net proceeds of $431.
During 2012, the Company re-purchased 16,900 of the Company’s ordinary shares, par value of $0.01 per share, for $191. The
shares repurchased by the Company were cancelled and retired.
(b) Warrants The Company did not issue any warrants during the years ended December 31, 2013 and 2012.
For the years ended December 31, 2013 and 2012, the outstanding warrants of 10,282,185 and 10,317,185, respectively, were fully
vested and had a weighted average exercise price $10.00.
As of December 31, 2013 and 2012, all warrants are exercisable over 3.0 years and 4.0 years, respectively.
(c) Dividends The Company did not declare any dividends during the years ended December 31, 2013 and 2012.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
24
11. Stock compensation plans
The Company has a stock incentive plan, the 2006 Long Term Incentive Plan (the “Plan”), under which the Compensation
Committee of the Company’s Board of Directors has periodically granted stock option awards, restricted share unit awards, and
restricted share awards to employees, non-employee directors and consultants.
(a) Options Stock option awards granted under the Plan may be exercised for the Company’s voting ordinary shares upon vesting. Exercise
prices are established at not less than the fair value of the Company’s ordinary shares on the date of grant.
The fair value of each stock option award is estimated on the date of the grant using the Black–Scholes option pricing model which
includes the following weighted average-valuation assumptions for all awards issued:
Expected Volatility: The expected volatility is estimated by the Company based on a historical peer group stock volatility analysis.
No allowance was made as of the grant dates for any potential illiquidity associated with the private trading of the Company’s
shares. The weighted average volatility assumption for 2013 was 31.8% (2012: 33.0%) and the range of volatility assumptions
used was 31.8% - 32.1% (2012: 32.6% - 33.4%).
Expected Term: In accordance with Staff Accounting Bulletin (“SAB”) Topic 14, the Company has elected to use the simplified
method of calculating the expected term of the Company’s stock option awards. This method calculates the expected term based
on the average of the vesting period and the contractual term for each stock option award. The Company’s management considers
this method appropriate given the lack of historical data and the straight forward nature of the contractual terms of the stock option
awards. An expected term of 6.5 years was used for 2013 (2012: 6.5 years).
Expected Dividend Yield: The expected dividend yield is nil.
Risk-Free Interest Rate: The risk-free rate is estimated based on the yield of a U.S. treasury zero-coupon issue with a remaining
term equal to the expected term of the stock option awards. The weighted average risk-free rate for 2013 was 1.8% (2012: 1.6%)
and the range of risk-free rates for the year was 0.9% - 2.7% (2012: 0.9% - 2.0%).
When estimating forfeitures, the Company considers its historical forfeitures as well as expectations about employee behavior and
currently uses a 5.0% forfeiture rate.
Activity with respect to options for the years ended December 31, 2013 and 2012 is as follows:
Options
Weighted
average grant
date fair value
Weighted average
exercise price
Options outstanding, January 1, 2012 9,537,378 $3.04 $10.08
Options issued during 2012 575,400 $2.89 $10.74
Options forfeited during 2012 (608,547) $3.54 $9.85
Options issued but not yet vested, December 31, 2012 (2,241,962) $3.10 $10.30
Options vested as of December 31, 2012 7,262,269 $10.06
Options outstanding, January 1, 2013 9,504,231 $3.00 $10.08
Options issued during 2013 1,760,247 $3.29 $11.99
Options exercised during 2013 (144,000) $3.10 $10.16
Options forfeited during 2013 (86,610) $3.45 $10.80
Options issued but not yet vested, December 31, 2013 (2,531,396) $3.26 $11.38
Option vested as of December 31, 2013 8,502,472 $10.09
As of December 31, 2013 and 2012, there was $8,252 and $6,953 respectively, of total unrecognized compensation expense
relating to the stock option awards granted that is expected to be recognized over a weighted average remaining vesting period of
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
25
3.5 years (2012: 2.2 years). During 2013 and 2012, stock compensation expense of $5,205 and $4,082 respectively, relating to
stock option awards was recorded in general and administrative expenses.
The weighted average remaining contractual term of the stock option awards outstanding is 8.6 years (2012: 6.7 years) and the
weighted average remaining contractual term of options fully vested is 5.1 years (2012: 3.8 years).
A portion of the options issued during 2013 included a performance condition. This award will vest on December 31, 2018 at the
applicable vested percentage rate of 0% to 100% based upon achievement of the targeted average annual return on equity
(“ROE”).
Cash received from options exercised was $300 and $0 for the years ended December 31, 2013 and 2012, respectively.
b) Restricted shares Restricted share awards are granted periodically by the Compensation Committee of the Board of Directors. They generally vest
ratably over a four or five year period and contain certain restrictions for the four or five year period, relating to, among other
things, forfeiture in the event of termination of employment and transferability.
Activity with respect to restricted share awards for the years ended December 31, 2013 and 2012 is as follows:
Restricted shares
Weighted average
grant date fair value
Restricted shares outstanding, January 1, 2012 2,256,904 $9.74
Restricted shares issued during 2012 761,901 $10.87
Restricted shares forfeited during 2012 (17,398) $10.81
Restricted shares issued but not yet fully vested, December 31, 2012 (1,850,058) $10.34
Restricted shares vested as of December 31, 2012 1,151,349 $9.84
Restricted shares outstanding, January 1, 2013 3,001,407 $10.02
Restricted shares issued during 2013 1,025,596 $10.50
Restricted shares settled during 2013 (250,201) $10.46
Restricted shares forfeited during 2013 (75,444) $10.59
Restricted shares issued but not yet fully vested, December 31, 2013 (1,548,766) $10.65
Restricted shares vested as of December 31, 2013 2,152,592 $9.87
During 2013 and 2012, stock compensation expense of $6,714 and $6,053 respectively, was recorded in general and administrative
expenses. Compensation cost is equivalent to the estimated fair value as of the grant date for the number of shares expected to
fully vest and is amortized over the vesting period. As of December 31, 2013 and 2012, there was $11,103 and $5,868
respectively, of deferred compensation expense relating to the restricted share awards issued that is expected to be recognized over
a weighted average remaining vesting period of 1.7 years (2012: 1.7 years).
A portion of the restricted shares issued during 2013 included a performance condition. This award will vest on December 31,
2018 at the applicable vested percentage rate of 0% to 100% based upon achievement of targeted average annual return on equity
(“ROE”).
During 2011, the Company modified the existing restricted share and restricted share unit awards allowing cash settlement of
certain awards issued under the 2011, 2012 and 2013 grants. Restricted shares and restricted share units issued under these awards
are liability-classified with fair value measurement based on the Company’s diluted book value at the end of each reporting period.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
26
12. Retirement plans
The Company maintains defined contribution retirement plans. Contributions are based on the participants’ eligible compensation.
During 2013 and 2012, the Company expensed $7,404 and $7,862 respectively, related to these retirement plans.
13. Taxation
(a) Cayman Islands Under current Cayman Islands law, the Company is not required to pay any taxes on its income or capital gains. If a Cayman
Islands law were to be enacted that would impose taxes on income or capital gains, the Company has received an undertaking from
the Governor in Cabinet that would exempt it from such taxation until October 2026.
(b) Bermuda Under current Bermuda law, Ironshore Insurance is exempt from all Bermuda income, withholding and capital gains taxes. At the
present time, no such taxes are levied in Bermuda. In the event that such taxes are imposed, Ironshore Insurance would be exempt
until March 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and Amended Act of 1987.
(c) United States The Company’s U.S. subsidiaries are subject to federal, state, and local corporate income taxes and other taxes applicable to U.S.
operations.
(d) United Kingdom
The Company operates in the U.K. through its U.K. subsidiaries and the profits of these companies are subject to U.K. corporation
taxes. Income from the Company’s operations at Lloyd’s is also subject to U.S. income taxes. Under a Closing Agreement
between Lloyd’s and the IRS, Lloyd’s Members pay U.S. income tax on U.S.-connected income written by Lloyd’s Syndicates.
U.S. income tax due on this U.S.-connected income is calculated by Lloyd’s and remitted directly to the IRS and is charged by
Lloyd’s to Members in proportion to their participation on the relevant Syndicates. The Company’s Corporate Member is subject
to this arrangement and will receive a U.K. corporation tax credit for any U.S. income tax incurred up to the value of the
equivalent U.K. corporation tax charge on the U.S. income.
(e) Ireland
The Company operates in Ireland through its Irish subsidiary which is subject to income taxes in that jurisdiction. A valuation
allowance has been established for the Company’s net deferred tax asset related to its Irish operations, as management believes
that the realization of the tax benefits from these deferred tax assets is uncertain.
The Company is subject to income taxation in other jurisdictions than those stated above, but the impact of the other jurisdictions
is not material to the provision for income taxes for 2013 and 2012. There can be no assurance that there will not be changes in
applicable laws, regulations or treaties, which might require the Company to change the way it operates or become subject to
taxation.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
27
The components of the provision for income taxes attributable to operations consist of the following:
2013 2012
Current tax expense:
U.S. Federal $7,768 $1,195
U.S. State & local 530 240
United Kingdom 4,933 -
Total 13,231 1,435
Deferred tax expense (benefit):
U.S. Federal (6,281) 178
U.S. State & local 96 (8)
United Kingdom (1,323) -
Total (7,508) 170
Income tax expense $5,723 $1,605
Deferred income taxes reflect the tax impact of temporary differences between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. Significant components of the net deferred tax liabilities were as follows:
Deferred tax assets: 2013 2012
Discounting of loss reserves $6,392 $5,535
Unearned premiums 7,657 6,124
Deferred acquisition costs 19,528 22,681
Non-deductible compensation 18,550 16,891
Net operating losses 7,770 15,909
Underwriting losses 3,938 -
Other deferred tax assets 3,733 1,120
Total deferred tax assets 67,568 68,260
Valuation allowance (51,107) (52,868)
Deferred tax assets net of valuation allowance 16,461 15,392
Deferred tax liabilities:
Amortization of intangibles $(3,595) $(3,062)
Investments (3,065) (9,116)
Fixed assets (1,567) (4,078)
Other deferred tax liabilities (3,906) (2,315)
Total deferred tax liabilities (12,133) (18,571)
Net deferred tax asset (liability) $4,328 $(3,179)
The Company’s net deferred tax asset or liability relates primarily to net operating loss carry-forwards and U.S. GAAP versus tax
basis accounting differences. The Company has provided a valuation allowance to reduce certain deferred tax assets to an amount
that management expects will more likely than not be realized. In 2013, The Company reassessed its estimate of deferred tax
assets that are more likely than not to be realized, resulting in a reduction to the valuation allowance. As of December 31, 2013,
the Company’s net deferred tax asset is composed of $7,269 representing U.S. income taxes due for 2013 that could potentially be
recovered in the future; $1,322 representing a reduction in the valuation allowance related to a U.K. subsidiary that is expected to
be profitable in future years; and $(4,263) representing deferred tax liability related to indefinite-lived intangibles. The net deferred
tax liability as of December 31, 2012 is all related to indefinite-lived intangibles.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
28
A reconciliation of the difference between the provision for income taxes and the expected tax provision at the U.S. statutory
federal income tax rate for the years ended December 31, 2013 and 2012 is as follows:
2013 2012
Expected income tax provision at 35% rate $36,143 $46,616
State income taxes (net of federal benefit) 4,517 (1,134)
Tax benefit attributable to non-taxable jurisdiction (32,527) (50,034)
Valuation allowance (1,761) 7,143
Others (649) (986)
Income tax expense $5,723 $1,605
As of December 31, 2013, the Company’s U.S. subsidiaries have $2,413 of U.S. federal net operating loss carryovers that expire in
the years 2028 to 2032 and net operating loss carryovers in various non-U.S. jurisdictions of $6,908 that do not expire. The
Company’s U.S. subsidiaries have U.S. state and local net operating loss carryovers with a tax value of $5,825 that expire in the
years 2028 to 2034.
During 2013 and 2012, the Company had no unrecognized benefits from uncertain tax positions. The Company does not
anticipate any significant changes in the amount of unrecognized tax benefits during the next 12 months. The Company’s U.S.
federal and state income tax returns for fiscal years 2010 to 2013 remain open to examination. The Company’s U.K. corporation
tax returns for fiscal years 2010 to 2013 are open for examination by the U.K. tax authorities. The Company’s Irish income tax
returns for fiscal years 2012 to 2013 are open for examination by the Irish tax authorities.
14. Debt obligations
On May 4, 2010, the Company issued $250 million of Senior Notes at an issue price of 99.17%, generating net proceeds of
$246,300,000. The Senior Notes bear interest at a rate of 8.5%, payable semi-annually in arrears on May 15 and November 15 of
each year, beginning November 15, 2010. Unless previously redeemed, the Senior Notes will mature on May 15, 2020. The
Company may redeem the Senior Notes prior to maturity subject to the payment of a “make-whole” premium. The Senior Notes
also include certain interest rate adjustment clauses based on changes in S&P and Moody’s ratings and debt to capital ratios. The
Company was in compliance with all of these clauses as of December 31, 2013. The carrying value of the Senior Notes as of
December 31, 2013 and 2012 was $247,296 and $246,990, respectively
Interest expense on the Senior Notes includes interest payable, amortization of offering discount and amortization of debt offering
expenses. The offering discount and the debt offering expenses are amortized over the period of time during which the Senior
Notes are outstanding. The Company incurred interest expense on the Senior Notes of $21,663 and $21,629 respectively, for the
years ended December 31, 2013 and 2012.
15. Commitments and contingencies
(a) Concentration of credit risk The creditworthiness of a counterparty is evaluated by the Company, taking into account credit ratings assigned by independent
agencies. The credit approval process involves an assessment of factors, including, among others, the counterparty, country and
industry credit exposure limits. The areas where significant concentrations of credit risk may exist include reinsurance
recoverables (see Note 9), investments and cash and cash equivalent balances.
The Company underwrites a significant amount of its business through brokers. Credit risk exists should any of these brokers be
unable to fulfill their contractual obligations with respect to the payments of insurance and reinsurance balances owed to the
Company.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
29
During the years ended December 31, 2013 and 2012, the following brokers were used to generate greater than 10% of the
Company’s consolidated gross premiums written:
Broker
% of Gross Premiums
Written December 31,
2013
% of Gross Premiums
Written December 31,
2012
Aon Benfield 10.9% 10.9%
Marsh & McLennan Companies 11.4% 13.0%
The Company’s investment portfolio is managed in accordance with guidelines designed to ensure specific investment strategies
are met. These guidelines include standards of diversification which limit the allowable holdings of any single issue. There were
no investments in any entity in excess of 10% of the Company’s shareholders’ equity as of December 31, 2013 and 2012 other
than investments issued or guaranteed by the U.S. government, its agencies or U.S. Government-Sponsored Enterprises.
The Company’s cash and cash equivalents are on deposit with various financial institutions. Credit risk arises from the failure of
the counterparty to perform according to the terms of a contract. The Company’s deposits are with reputable banks to minimize
this risk and they are located in Bermuda, the U.S., the U.K., Ireland, Singapore, Australia, Canada and the Cayman Islands.
(b) Operating leases The Company has entered into various operating lease agreements to lease office space and fixtures and fittings that expire up to
2022. During the years ended 2013 and 2012, total rent expenses of $7,483 and $7,416, respectively, were recorded in general and
administrative expenses. The future minimum lease payments in the aggregate as of December 31, 2013 are as follows:
December 31, 2013
2014 $7,333
2015 6,990
2016 4,535
2017 2,982
2018 2,724
Later years 5,543
Total minimum future lease commitments $30,107
(c) Outsourcing On December 23, 2011, the Company entered into a services agreement with Genpact International, Inc. (“Genpact”), whereby
Genpact will provide certain information technology processes and business process functions to the Company up to December 31,
2018. The future minimum payments as of December 31, 2013 are as follows:
December 31, 2013
2014 $17,253
2015 16,087
2016 15,391
2017 15,706
2018 16,167
Total minimum future commitments $80,604
(d) Letters of credit
The Company operates in the Lloyd’s market through its corporate member, ICCL which represents its participation in Syndicate
4000. Lloyd’s sets capital requirements for corporate members annually based on the Syndicates’ business plans, rating
environment and reserving environment together with input arising from Lloyd’s discussions with regulatory and rating agencies.
Such capital, or FAL, may be satisfied by cash, investment and undrawn letters of credit provided by banks.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
30
As of December 31, 2013 and 2012, the Company has an existing letter of credit facility with a face value of $125,000 provided by
ING Bank N.V. for the purpose of providing FAL. As of December 31, 2013 and 2012, the Company has pledged fixed maturity
securities of $146,345 and $159,548, respectively, as collateral.
The letter of credit facility is guaranteed by Ironshore (the “Guarantor”) and contains covenants that include, among other things,
(i) the requirement that U.S. GAAP Net Worth of the Guarantor shall not be less than $500,000 in the event that collateral cover
provided is equal to the aggregate face value of all letters of credit or the sum of (a) $1,109,933 plus (b) 50% of the consolidated
net income of the Guarantor in the applicable fiscal year plus (c) 50% of the aggregate increases in shareholders' equity of the
Guarantor in the applicable fiscal year in the event the collateral provided does not equal the aggregate face value of all letters of
credit, (ii) the requirement that the Guarantor shall ensure that the Total Debt to Total Capitalization Ratio does not exceed 30%,
and (iii) the requirement that the Account Party shall ensure that Primary FAL of not less than 33% of the its FAL requirement is
maintained. As of December 31, 2013 and 2012, the Company was in compliance with all covenants and restrictions.
As of December 31, 2013 and 2012, ICCL (the “Account Party”) has an outstanding quota share agreement with Ironshore
Insurance (the “Reinsurer”) pursuant to which 75% of the retained risks written by the Account Party as a member of Syndicate
4000 for the 2014 and 2013 underwriting years of account are reinsured by the Reinsurer. As of December 31, 2013 and 2012, the
Account Party assigned by way of security any right it has to receive payment under the quota share agreement to ING Bank N.V.
On December 1, 2009, the Company entered into a $50,000 standby letter of credit facility provided by Citibank Europe plc. As of
December 31, 2013 and 2012, $22,962 and $16,466, respectively, of letters of credit were issued and outstanding under this
facility for which $32,488 and $19,692, respectively, of fixed maturity securities were pledged as collateral.
(e) Litigation
The Company is subject to litigation and arbitration in the normal course of its business. These lawsuits and arbitrations
principally involve claims on policies of insurance and contracts of reinsurance and are typical for the Company and for the
property and casualty insurance and reinsurance industry in general. Such legal proceedings are considered in connection with the
Company’s loss and loss expense reserves. In addition to litigation relating to insurance and reinsurance claims, the Company and
its subsidiaries are subject to lawsuits in the normal course of business. The status of any such legal actions is actively monitored
by management. If management believed, based on available information, that an adverse outcome upon resolution of a given
legal action was probable and the amount of that adverse outcome was reasonable to estimate, a loss would be recognized and a
related liability recorded. No such liabilities were recorded by the Company as of December 31, 2013 and 2012.
16. Related party transactions
The Company’s founding investors, Tara Partners Fund LLC and Tara Partners Fund II LLC (collectively, “Tara”), are affiliated
with a member of the Company’s Board of Directors. This individual is also a founder and director of Integro Ltd. (“Integro”), an
insurance broker. During the years ended December 31, 2013 and 2012, Ironshore wrote $11,051 and $9,923, respectively, of
premiums that have been brokered by Integro, and incurred commission expense of $1,128 and $1,180, respectively.
On January 12, 2009, Ironshore entered into an agreement with Integro to sublease certain office space in New York City. During
the years ended December 31, 2013 and 2012, the Company incurred rental, maintenance and utility expenses of $1,031 and $952,
respectively, related to this sublease.
On April 17, 2013, the Company through its wholly-owned subsidiary, Ironshore Surety Holdings Inc. (“ISHI”) invested a total of
$9,097 with Lexon Group composed of Lexon Surety Group LLC (“LSG”), Surety Agency Holding Company LLC (“SAHC”),
and Surety Management Company (“SMC”). Lexon Group is engaged in the business of underwriting, placing, insuring and
reinsuring contract and commercial surety bonds, court and probate surety bonds, surety bail bonds, U.S. Customs surety bonds
and other related risks. ISHI purchased Class B units in LSG and common units in SAHC and SMC. The Class B units rank
senior to the Common and Class A units of LSG. The Class B units are also entitled to a cumulative fixed return of 3% per annum
for the first five years and then 9% per annum thereafter. The investment is recorded in other assets in the Company’s balance
sheet as of December 31, 2013.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
31
In connection with the above investment, the Company through its subsidiaries Ironshore Indemnity and Ironshore Specialty will
provide quota share reinsurance and primary fronting facility on new and renewal business for U.S. commercial and contract
surety risks. The amounts of gross written premium assumed by Ironshore Indemnity and Ironshore Specialty as part of the quota
share facility for the year ending December 31, 2013 are $115,110 and $0, respectively.
17. Earnings per share
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2013 and
2012:
2013 2012
Net income attributable to Ironshore Inc. $97,367 $131,688
Weighted average shares – basic 134,334,072 132,916,337
Share equivalents:
Warrants 1,765,216 1,315,901
Options 1,018,087 702,986
Restricted stock 569,500 1,817,582
Weighted average shares – diluted 137,686,875 136,752,806
Basic earnings per share $0.72 $0.99
Fully diluted earnings per share $0.71 $0.96
18. Note receivable
On December 31, 2013, the Company, through its subsidiary, Ironshore Holdings U.S., extended a loan to a third party entity
(“Borrower”) for $41,800 in order to partially finance Borrower’s acquisition of substantially all the assets of a managing general
agency (“MGA”). The loan is evidenced by a secured recourse promissory note that bears annual interest for the first three years at
the greater of (a) 1.65% of the principal amount and (b) fixed amount of $800 plus 80% of annual contingency income earned by
Borrower in MGA’s agency agreement with a third party insurer for the year in which interest is payable. Thereafter, the note
bears annual interest at 3.32% of the principal amount. In the event that MGA’s agency agreement with the third party insurer is
terminated before December 31, 2016, the annual interest rate shall be adjusted to 3.32% from the date of such termination. The
note receivable is recorded in other assets in the Company’s balance sheet as of December 31, 2013.
The note receivable is due upon the earliest of: (a) the 5th anniversary date of the note, (b) the expiration or earlier termination of
the current agency agreement of MGA with a third party insurer, and (c) the occurrence of default (“Maturity Date”). Upon
maturity and at option of the Company, the note receivable shall be repaid as follows: (a) the Borrower to convey to the Company
MGA’s existing rights to underwrite and administer insurance policies constituting MGA’s business and pay in cash all unpaid
interest on the note receivable accrued as of the Maturity Date, or (b) the Borrower to pay cash in twenty equal annual payments of
principal together with interest on the then outstanding amount.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
32
19. Other income
The Company recorded $7,995 of other income in respect of previously unresolved claims for certain investment losses for the
year ending December 31, 2013.
20. Segment reporting
The Company conducts its operations worldwide through three reportable segments, Bermuda, U.S. and International and one
corporate function, which have been determined under FASB ASC Topic 280 Segment Reporting. The Company’s operating
segments are strategic business units that offer different policies.
The Bermuda segment provides property catastrophe, property all-risks insurance as well as all classes of aviation and aerospace
insurance covers on a worldwide basis. This segment also offers catastrophe excess liability and financial lines insurance through
Iron-Starr Excess. The Bermuda segment is managed by the chief executive officer of Ironshore Insurance who provides oversight
to a team of underwriters, risk modelers and other industry professionals.
The U.S. segment offers a wide array of property and casualty coverage on an admitted and excess and surplus lines basis. The
U.S. segment is managed by the chief executive officer of U.S. Operations.
The International segment operates through Lloyd’s of London Syndicate 4000 and IEL and underwrites financial institutions
liability, professional management liability, property and other select specialist lines. The International segment is managed by the
chief executive officer of IIL.
The corporate function includes the activities of the parent company and activities of certain key executives, such as the Chief
Executive Officer and Chief Financial Officer of Ironshore. The corporate function includes revenue earned on the Company’s
investment portfolio and costs associated with parent company activities.
The Company does not manage its assets by segment and therefore total assets are not allocated to the segments.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
33
Data for the years ended December 31, 2013, and 2012 is as follows:
Year ended December 31, 2013 Bermuda U.S. International P&C Total Corporate Total
REVENUES
Gross premiums written $191,970 $1,234,920 $566,233 $1,993,123 - $1,993,123
Reinsurance premiums ceded (79,529) (291,195) (164,680) (535,404) - (535,404)
Net premiums written 112,441 943,725 401,553 1,457,719 - 1,457,719
Change in unearned premiums 5,098 (129,155) (79,339) (203,396) - (203,396)
Net premiums earned 117,539 814,570 322,214 1,254,323 - 1,254,323
Net investment income - - - - 84,372 84,372
Net realized and unrealized losses on investments - - - - (70,462) (70,462)
Net foreign exchange losses - - - - (2,989) (2,989)
Other income 4,119 12,164 4,079 20,362 9,192 29,554
Total revenues 121,658 826,734 326,293 1,274,685 20,113 1,294,798
EXPENSES
Losses and loss adjustment expenses 61,743 523,868 159,562 745,173 - 745,173
Acquisition expenses 7,888 88,152 78,012 174,052 - 174,052
General and administrative expenses 24,010 135,795 58,316 218,121 32,522 250,643
Interest expense - - - - 21,663 21,663
Total expenses 93,641 747,815 295,890 1,137,346 54,185 1,191,531
Income (loss) before income tax expense $28,017 $78,919 $30,403 $137,339 ($34,072) $103,267
Loss ratio (a) 52.5% 64.3% 49.5% 59.4%
Acquisition costs ratio (b) 6.7% 10.8% 24.2% 13.9%
General and administrative expense ratio (c) 16.9% 15.2% 16.8% 15.8%
Combined ratio (d) 76.1% 90.3% 90.5% 89.1%
(a) The loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned.
(b) The acquisition costs ratio is calculated by dividing acquisition expenses by net premiums earned.
(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned, adjusted to
include other income.
(d) The combined ratio is the sum of the loss ratio, acquisition costs ratio and general and administrative expense ratio.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
34
Year ended December 31, 2012 Bermuda U.S. International P&C Total Corporate Total
REVENUES
Gross premiums written $216,479 $1,035,277 $415,910 $1,667,666 - $1,667,666
Reinsurance premiums ceded (82,271) (272,992) (147,001) (502,264) - (502,264)
Net premiums written 134,208 762,285 268,909 1,165,402 - 1,165,402
Change in unearned premiums (15,973) (87,681) (53,172) (156,826) - (156,826)
Net premiums earned 118,235 674,604 215,737 1,008,576 - 1,008,576
Net investment income - - - - 79,563 79,563
Net realized and unrealized gains on investments - - - - 48,876 48,876
Net foreign exchange gains - - - - 55 55
Other income 3,677 5,164 2,908 11,749 - 11,749
Total revenues 121,912 679,768 218,645 1,020,325 128,494 1,148,819
EXPENSES
Losses and loss adjustment expenses 51,718 466,369 112,640 630,727 - 630,727
Acquisition expenses 8,743 67,621 53,697 130,061 - 130,061
General and administrative expenses 24,949 122,454 35,646 183,049 50,165 233,214
Interest expense - - - - 21,629 21,629
Total expenses 85,410 656,444 201,983 943,837 71,794 1,015,631
Income before income tax expense $36,502 $23,324 $16,662 $76,488 $56,700 $133,188
Loss ratio (a) 43.7% 69.1% 52.2% 62.5%
Acquisition costs ratio (b) 7.4% 10.0% 24.9% 12.9%
General and administrative expense ratio (c) 18.0% 17.4% 15.2% 17.0%
Combined ratio (d) 69.1% 96.5% 92.3% 92.4%
(a) The loss ratio is calculated by dividing losses and loss adjustment expenses by net premiums earned.
(b) The acquisition costs ratio is calculated by dividing acquisition expenses by net premiums earned.
(c) The general and administrative expense ratio is calculated by dividing general and administrative expenses by net premiums earned, adjusted to
include other income.
(d) The combined ratio is the sum of the loss ratio, acquisition costs ratio and general and administrative expense ratio.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
35
21. Statutory financial data
Bermuda Ironshore Insurance is subject to the requirements of the Bermuda Insurance Act. Under the Bermuda Insurance Act, Ironshore
Insurance is required to prepare statutory financial statements and to file a statutory financial return. The Bermuda Insurance Act
also requires Ironshore Insurance to maintain certain measures of solvency and liquidity during the year. Declarations of
dividends from retained earnings and distributions from additional paid-in capital are subject to these solvency and liquidity
requirements being met. As of December 31, 2013 and 2012, these requirements were met.
Under the Bermuda Insurance Act, Ironshore Insurance is restricted from paying dividends for amounts greater than 25% of the
prior year’s statutory capital and surplus unless approved by the Bermuda Monetary Authority.
As of December 31, 2013 and 2012, Ironshore Insurance was required to maintain a minimum statutory capital and surplus of
$593,629 and $476,571, respectively. As of December 31, 2013 and 2012, Ironshore Insurance had statutory capital and surplus of
approximately $1,278,504 and $1,371,914, respectively. The declaration of dividends from retained earnings and distributions
from additional paid-in capital are limited to the extent that the solvency and liquidity requirements are met.
United States Ironshore Indemnity and Ironshore Specialty file financial statements prepared in accordance with statutory accounting practices
prescribed or permitted by U.S. insurance regulators. Statutory net income and statutory surplus, as reported to the insurance
regulatory authorities, differ in certain respects from the amounts prepared in accordance with U.S. GAAP. The main differences
between statutory net income and U.S. GAAP net income relate to deferred acquisition costs, deferred income and deferred
income taxes. In addition to deferred acquisition costs, deferred income and deferred income tax assets, other differences between
statutory surplus and U.S. GAAP shareholders’ equity are unrealized appreciation or decline in value of investments and non-
admitted assets.
Ironshore Indemnity is required to maintain a minimum combined statutory surplus of $1,500. As of December 31, 2013 and
2012, Ironshore Indemnity’s statutory surplus was $120,500 and $97,500, respectively, and its statutory net income was $100 and
$8,200 for the years ended December 31, 2013 and 2012, respectively.
The maximum dividend Ironshore Indemnity can pay is restricted by regulatory requirements of the State of Minnesota and is
limited to the greater of 10% of the insurer's policyholder surplus on December 31 of the preceding year or the net income, not
including realized capital gains of the preceding year. Until the balance in unassigned funds is positive, any dividend requires
approval of the Minnesota Department of Commerce. As of December 31, 2013 and 2012, Ironshore Indemnity could not pay any
dividend without prior regulatory approval.
Ironshore Specialty is required to maintain a minimum combined statutory surplus of $1,300. As of December 31, 2013 and 2012,
Ironshore Specialty’s statutory surplus was $300,300 and $291,300, respectively, and its statutory net income was $21,400 and
$17,100 for the years ended December 31, 2013 and 2012, respectively.
The maximum dividend Ironshore Specialty can pay is restricted by regulatory requirements of the State of Arizona and is limited
to the lesser of 10% of statutory surplus as of the end of the preceding year or the statutory net investment income for the
preceding year, with larger dividends payable only upon prior regulatory notice and non-disapproval. As of December 31, 2013
and 2012, the maximum dividend payout that can be made without prior regulatory approval is approximately $17,700 and
$13,200, respectively. In 2013, Ironshore Specialty made a dividend payment of $17,000 to its parent company, Ironshore
Holdings U.S.
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
36
United Kingdom and Lloyd’s
The Company owns a Lloyd’s managing agency, PMA which operates in the Lloyd’s insurance market and manages Syndicate
4000 and Special Purpose Syndicate 6110 (“SPS 6110”). PMA is subject to regulation by the UK Financial Conduct Authority
(“FCA”) and the Prudential Regulation Authority (“PRA”). The majority of the underwriting risk is borne by ICCL which is a
corporate member at Lloyd’s. Effective January 1, 2010, Ironshore CC (Two) Limited (“ICC2”), which is a wholly owned
subsidiary of IIL, also participated in the underwriting of Syndicate 4000. This participation ceased at the end of the 2012 year of
account, leaving ICCL as the sole capital provider for Syndicate 4000 going into the 2013 year.
SPS 6110, which commenced trading on January 1, 2012, is managed by PMA and all of the capacity is provided by Hampden
Agency Ltd Names. SPS 6110 assumes business by way of a variable quota share of predominantly short tail lines of business
from Syndicate 4000. Through this arrangement, Syndicate 4000’s stamp capacity has risen from £205,000 in 2012 to £250,000 in
2013. The increased gross premiums written and related quota share reinsurance arising from this transaction is included in ICCL
and ICCL 2’s statement of operations. In addition PMA receives a managing agency fee from SPS 6110 and allocates a proportion
of administrative expenses to the SPS 6110.
During 2013, approval was given by the Corporation of Lloyd’s for PMA to establish a new syndicate called Syndicate 2014.
PMA will manage this syndicate and its capacity of £75,000 will be provided by a third party.
Corporate members of Lloyd’s and Lloyd’s syndicates are bound by the rules of the Society of Lloyd’s, which are prescribed by
By-laws and Requirements made by the Council of Lloyd’s under powers conferred by the Lloyd’s Act 1982. These rules
prescribe corporate members’ membership subscription, the level of their contribution to the Lloyd’s Central Fund and the assets
they must deposit with Lloyd’s in support of their underwriting. The Council of Lloyd’s has broad powers to sanction breaches of
its rules, including the power to restrict or prohibit a member’s participation on Lloyd’s Syndicates.
The amount which is provided as FAL is not available for distribution for the payment of dividends or for working capital
requirements. Corporate members may also be required to maintain funds under the control of Lloyd’s in excess of their capital
requirements and such funds also may not be available for distribution for the payment of dividends. Lloyd’s sets the corporate
members’ required capital annually. Individual Capital Assessments (ICA’s) are agreed with the syndicates based on their
business plans.
FAL may comprise cash, investments and undrawn letters of credit provided by authorized banks. The FAL requirement set by
Lloyd’s to support the planned level of underwriting by ICCL for 2014 and 2013 was £211,680 and £180,000 respectively. For
the 2014 year of account all the FAL was provided by ICCL. ICC2 ceased to participate on the Syndicate after 2012. ICC2 is still
required to hold FAL to a value of £11.7m to support its participation on the open years of account (2011 and 2012). The FAL
requirement was based on business plans which were approved by the directors of PMA in October 2013 and 2012.
As of December 31, 2013 and 2012, the Company has outstanding letter of credit facility of $125,000 provided by ING Bank N.V.
issued for the purposes of providing FAL. Refer also to Note 6 for the fair value of assets restricted to satisfy the Company’s FAL
requirements.
Ireland
The Company’s Irish-regulated operating subsidiary, IEL, is subject to the regulatory framework established by the Central Bank
of Ireland (“CBI”). It is required to:
maintain an adequate solvency margin and guarantee fund;
submit quarterly and annual regulatory returns as well as ad hoc reporting of certain material transactions; and
obtain regulatory pre-approval of certain transactions, such as payment of dividends or acquisitions and disposals in the
ownership/voting rights of (re)insurance companies.
The CBI has minimum competency and fitness and probity codes that seek to ensure that regulated entities are run by those with
appropriate professional qualifications or experience within the CBI’s view, with regulatory pre-approval required for certain key
roles. The CBI’s code of corporate governance includes prescriptive rules regarding board role and composition, establishment
and operation of board sub-committees and requirements around the approval of risk appetites and the monitoring and reporting of
risks. In addition, the CBI has broad supervisory and administrative powers over capital and surplus requirements and the
Ironshore Inc.
Notes to consolidated financial statements (Expressed in thousands of U.S. dollars, except share data)
37
declaration of and payment of dividends or other distributions. IEL is required to seek prior approval from the CBI to reduce its
share capital or to pay dividends.
As of December 31, 2013, IEL was required to maintain a minimum statutory capital and surplus of $36,196 while the actual
statutory capital and surplus was $41,394.
International
The Company’s international subsidiaries prepare statutory financial statements based on local laws and regulations. Some
jurisdictions impose complex regulatory requirements on insurance companies while other jurisdictions impose fewer
requirements. In some countries, the applicable subsidiary must obtain licenses issued by governmental authorities to conduct local
insurance business. These licenses may be subject to reserves and minimum capital and solvency tests. Jurisdictions may impose
fines, censure, and/or criminal sanctions for violation of regulatory requirements.
22. Subsequent events
On January 6, 2014, the Company through its subsidiary, Ironshore Australia BidCo Pty Ltd., entered into an agreement to
purchase all of the shares of Assetinsure Holdings Pty Ltd. (“Assetinsurance”). Assetinsure, an insurance company providing
surety, aviation, credit, property and other coverage, will provide the Company with a platform from which to expand its presence
in the Australian market. The transaction remains subject to customary closing conditions and regulatory approvals, including the
Australian Prudential Regulation Authority, and is expected to close in the second quarter of 2014.
Subsequent events have been evaluated up to and including April 2, 2014, the date of issuance of these consolidated financial
statements.