Ironshore Inc. Consolidated Financial Statements December 31, 2014

Transcription

1 Consolidated Financial Statements December 31, 2014

2 Ernst & Young LLP 5 Times Square New York, NY Tel: Fax: ey.com Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Ironshore Inc. We have audited the accompanying consolidated balance sheets of Ironshore Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive income, changes in shareholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ironshore Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles. March 4, 2015 A member firm of Ernst & Young Global Limited

3 Consolidated Balance Sheets As of December 31, 2014 and ASSETS Fixed maturity securities, at fair value (amortized cost: $4,031,724; $3,425,287) $4,044,195 $3,423,413 Equity securities, at fair value (cost: $209,265; $129,298) 207, ,947 Short term investments, at cost which approximates fair value 40,877 45,828 Other investments 61,089 13,588 Total investments 4,353,251 3,614,776 Cash and cash equivalents 328, ,700 Accrued investment income 19,351 18,389 Premiums receivable 514, ,042 Reinsurance recoverable on unpaid losses 693, ,352 Reinsurance recoverable on paid losses 66,397 69,451 Deferred acquisition costs 125, ,066 Prepaid reinsurance premiums 305, ,214 Goodwill and other intangible assets 79,354 82,558 Deferred tax asset 12,191 4,328 Receivable for securities sold 17,904 3,516 Other assets 184, ,184 Total assets $6,699,915 $5,718,576 LIABILITIES Reserve for losses and loss adjustment expenses $2,838,158 $2,181,812 Unearned premiums 1,310,908 1,207,707 Insurance and reinsurance balances payable 240, ,362 Payable for securities purchased 11,388 16,147 Other liabilities 111,477 93,908 Debt obligations 347, ,296 Total liabilities 4,860,154 3,972,232 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common shares, 200,000,000 authorized, par value $0.01 per share (2014: 136,625,637; 2013: 136,211,426), shares issued and outstanding 1,366 1,362 Additional paid-in capital 1,364,762 1,354,164 Accumulated other comprehensive loss (8,074) (10,321) Retained earnings 481, ,230 TOTAL IRONSHORE INC. SHAREHOLDERS' EQUITY 1,839,761 1,742,435 Non-controlling interest - 3,909 TOTAL SHAREHOLDERS' EQUITY 1,839,761 1,746,344 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,699,915 $5,718,576 See accompanying notes to the consolidated financial statements. 3

4 Consolidated Statements of Operations and Comprehensive Income For the years ended December 31, 2014 and REVENUES Gross premiums written $2,210,554 $1,993,123 Reinsurance premiums ceded (591,374) (535,404) Net premiums written 1,619,180 1,457,719 Change in unearned premiums (92,184) (203,396) Net premiums earned 1,526,996 1,254,323 Net investment income 97,043 84,372 Net realized and unrealized gains (losses) on investments 28,039 (70,462) Net foreign exchange losses (5,283) (2,989) Other income 33,566 29,554 Total revenues 1,680,361 1,294,798 EXPENSES Losses and loss adjustment expenses 1,077, ,173 Acquisition expenses 214, ,052 General and administrative expenses 279, ,643 Interest expense 21,906 21,663 Total expenses 1,592,989 1,191,531 Income before tax expense 87, ,267 Income tax expense 2,906 5,723 Net income 84,466 97,544 Net income (loss) attributable to non-controlling interest (11) 177 Net income attributable to Ironshore Inc. $84,477 $97,367 COMPREHENSIVE INCOME Net income $84,466 $97,544 Other comprehensive income (loss), before tax Equity gains (losses) from foreign currency translation 6,909 (2,845) Gains (losses) on intra-entity foreign currency transactions (4,662) 1,022 Other comprehensive income (loss), before tax 2,247 (1,823) Income tax on other comprehensive income (loss) - - Other comprehensive income (loss), net of tax 2,247 (1,823) Comprehensive income 86,713 95,721 Comprehensive income (loss) attributable to non-controlling interests (11) 177 Comprehensive income attributable to Ironshore Inc. $86,724 $95,544 Earnings per share: Weighted average common shares outstanding - Basic 135,185, ,334,072 Weighted average common shares outstanding - Diluted 139,934, ,686,875 Net income per common share outstanding - Basic $0.62 $0.72 Net income per common share outstanding - Diluted $0.61 $0.71 See accompanying notes to the consolidated financial statements. 4

5 Consolidated Statements of Changes in Shareholders Equity For the years ended December 31, 2014 and 2013 (Expressed in thousands of U.S. dollars) COMMON SHARES Balances as of beginning of year $1,362 $1,355 Issue of shares, net of forfeitures 8 10 Repurchase of shares (4) (3) Balance as of end of year 1,366 1,362 ADDITIONAL PAID-IN CAPITAL Balances as of beginning of year 1,354,164 1,347,401 Issue of shares, net of forfeitures 2,590 2,722 Repurchase of shares (5,189) (2,899) Stock compensation expense 8,649 8,115 Modification of liability awards to (from) equity 5,897 (1,175) Purchase of non-controlling interest (1,349) - Balance as of end of year 1,364,762 1,354,164 ACCUMULATED OTHER COMPREHENSIVE LOSS Balances as of beginning of year (10,321) (8,498) Equity gains (losses) from foreign currency translation 6,909 (2,845) Gains (losses) on intra-entity foreign currency transactions (4,662) 1,022 Balance as of end of year (8,074) (10,321) RETAINED EARNINGS Balances as of beginning of year 397, ,863 Net income attributable to Ironshore Inc. 84,477 97,367 Balance as of end of year 481, ,230 TOTAL IRONSHORE INC. SHAREHOLDERS' EQUITY 1,839,761 1,742,435 NON-CONTROLLING INTEREST Balances as of beginning of year 3,909 3,731 Net income (loss) attributable to non-controlling interest (11) 178 Purchase of non-controlling interest (3,898) - Balance as of end of year - 3,909 TOTAL SHAREHOLDERS' EQUITY $1,839,761 $1,746,344 See accompanying notes to the consolidated financial statements. 5

6 Consolidated Statements of Cash Flows For the years ended December 31, 2014 and 2013 (Expressed in thousands of U.S. dollars) CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $84,466 $97,544 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Amortization and depreciation 10,478 10,384 Stock compensation expense 11,866 11,407 Amortization of fixed maturity securities 19,724 19,367 Net realized and unrealized (gains) losses on investments (28,039) 70,462 Deferred tax benefit (7,931) (7,446) CHANGES IN OPERATING ASSETS AND LIABILITIES: Accrued investment income (1,031) (365) Premiums receivable (60,928) (80,303) Reinsurance recoverable on unpaid losses (109,272) 23,348 Reinsurance recoverable on paid losses (5,993) (48,376) Deferred acquisition costs (2,683) (33,848) Prepaid reinsurance premiums (33,088) (12,162) Other assets 5,370 (42,736) Reserve for losses and loss adjustment expenses 681, ,491 Unearned premiums 116, ,943 Insurance and reinsurance balances payable 59,492 19,016 Other liabilities 15,499 11,961 Net cash provided by operating activities 756, ,687 CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of subsidiaries, net of cash acquired (13,148) (9,098) Purchase of intangible in asset acquisition (620) - Purchases of fixed maturity securities (3,723,875) (4,089,326) Purchases of short term investments (278,929) (369,153) Purchases of equity securities (346,601) (221,031) Purchases of other investments (45,349) (3,500) Proceeds on sales of fixed maturity securities 2,654,490 3,387,972 Proceeds on maturity of fixed maturity securities 401, ,043 Proceeds on sales of short term investments 283, ,024 Proceeds on sales of equity securities 278, ,797 Proceeds on sales of other investments 1,726 - Purchases of fixed assets (9,368) (6,402) Issuance of note receivable (3,741) (41,970) Net cash used in investing activities (801,430) (626,644) See accompanying notes to the consolidated financial statements. 6

7 Consolidated Statements of Cash Flows For the years ended December 31, 2014 and 2013 (Expressed in thousands of U.S. dollars) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Proceeds from issuance of common shares 2,600 2,492 Repurchase of restricted shares (5,156) (2,902) Issuance of debt 100,000 - Purchase of non-controlling interest (5,247) - Net cash provided by (used in) financing activities 92,197 (410) Net increase (decrease) in cash and cash equivalents 47,360 (50,367) Cash and cash equivalents as of beginning of year 286, ,079 Effect of exchange rates on cash and cash equivalents (5,263) 988 CASH AND CASH EQUIVALENTS AS OF END OF YEAR $328,797 $286,700 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes paid $12,578 $6,092 Interest paid $21,393 $21,250 See accompanying notes to the consolidated financial statements. 7

8 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. Ironshore Insurance includes Ironshore Insurance Ltd, Singapore Branch, which is registered as a direct insurer to carry on general insurance in Singapore effective January 26, 2012, and Ironshore Insurance Ltd., Canada Branch, which writes property and casualty insurance for Canadian-domiciled risks effective March 29, 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 Company ( 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 includes Ironshore International Ltd. ( IIL ) and a subsidiary company, Ironshore Corporate Capital Ltd. ( ICCL ), both of which were incorporated in England and Wales. The International platform also includes Pembroke JV Limited ( PJV ), its principal subsidiary, Pembroke Managing Agency Limited ( PMA ), and Ironshore Europe Limited ( IEL ), an Irish corporation. 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. IEL commenced underwriting a diverse range of specialty lines in 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 ). In July 2014, Iron-Starr Excess added Hamilton Re, a Bermuda-based property and casualty reinsurer, as subscribing insurer in order to increase capacity for full suites of products being offered. Iron-Starr Excess writes financial lines, healthcare and catastrophic excess casualty insurance products, targeting Fortune 2000 and other clients purchasing catastrophe excess coverage. 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 asset or liability. Premiums and related expenses Premiums. Direct insurance and assumed facultative reinsurance premiums are recognized as earned on a pro rata basis over the applicable policy or contract periods. For assumed treaty reinsurance written on a losses occurring basis, premiums written are earned on a pro rata basis over the risk period. For assumed treaty reinsurance written on a risks attaching basis, premiums written are earned on a pro rata basis over the periods of the underlying policies. Premiums may include estimates based on information 8

9 received from brokers, ceding insurers and insureds, and any subsequent differences from such estimates are recorded in the period in which they are determined. In each case, the portions of the premiums written applicable to the unexpired terms are recorded as unearned premiums. Assumed 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. The Company does not capitalize internal costs associated with the production of new business. 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 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. Ceded 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. Ceded reinstatement premiums are earned over 9

10 the remaining contract period. Ceded reinstatement premiums earned were $8,296 and $1,100 for the years ended December 31, 2014 and 2013, respectively. Certain ceded reinsurance contracts do not transfer underwriting risk and are accounted for using the deposit method of accounting. Fees are accounted for as income based on the terms of the contract. A deposit asset is recorded at the inception of the contract based on the consideration transferred. Corresponding changes in the amount of the deposit asset reflecting actual and expected future loss payments are recorded as a credit or charge to interest income. Investments The Company s investments in fixed maturity 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 included in the statement of operations and comprehensive income. 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. Other investments Other investments include investments in promissory notes and investments in closed-end limited partnerships that invest primarily in commercial real estate debt in North America and Europe. Investments in promissory notes are carried at cost with interest income recorded in net investment income. Investments in closed-end limited partnerships are carried at fair value, with related unrealized gains and losses recorded in net realized and unrealized gains (losses) on investments included in the statement of operations and comprehensive income. 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. 10

11 Also included in other assets are depreciable long-lived assets such as information technology equipment, software, leasehold improvements, furniture and fixtures that are carried at cost less accumulated depreciation and are depreciated on a straight-line basis over their estimated useful lives taking into account residual value. The estimated useful lives (i.e. information technology equipment 3 years; software 3 to 5 years; leasehold improvements shorter of their useful life or remaining life of the lease; furniture and fixtures 5 years) is based on the period over which the Company expects to generate net cash inflows from the use of these assets. The depreciable long-lived assets are subject to impairment testing whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Insurance and reinsurance balances payable Insurance and reinsurance balances payable principally represents ceded premiums payable and profit commissions payable to third party reinsurance companies or program administrators. Also included within this line item are amounts related to the Company s insurance business principally related to return premiums, which arise when an insurance contract is cancelled and the Company is required to return some or all of the premium received to the insured. 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 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. On July 1, 2014, the Company purchased the remaining 40% interest in Wright & Co. from the non-controlling shareholders for cash of $5,247, increasing its ownership interest from 60% to 100%. 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 the entities functional currencies 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 the entities functional currencies are remeasured 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 11

12 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 for equity-classified awards. The cost of these services is recognized as compensation expense over the requisite service period and is included in earnings. The Company measures liability-classified awards based on the fair value remeasured at each reporting period until the date of settlement. The compensation cost related to liability-classified awards includes a change in the fair value of the liability instrument at each reporting period. 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 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 pronouncement Going concern In August 2014, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update No , Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. The new standard requires management to assess the company s ability to continue as a going concern for each annual and interim reporting period. Disclosures are required when conditions exist that give rise to substantial doubt about a company s ability to continue as a going concern within one year from the issuance of the financial statements. This standard will be effective in the first annual period ending after December 15, Earlier application is permitted. This guidance has no impact on the Company s consolidated financial statements because we believe that we are a going concern. 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 (the 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. 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 12

13 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. 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 Asset acquired Cash and other assets 922 Intangible asset - Trade name 401 Intangible asset - Customer relationship 2,500 Intangible asset - Non-compete agreement 4,976 Liabilities Acquired Accounts payable and other liabilities (791) Net assets acquired 8,008 Excess purchase price - Goodwill $11, 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. Ironshore Holdings U.S. made a cash equity investment of $4,844 and advanced a loan of $10,088 to IDP, which equity investment and loan, together with a cash equity investment by DPG, were used to finance the purchase from NSU. In April 2014, Ironshore Holdings U.S. made an additional cash equity investment of $1,250 and advanced a loan of $2,500 to IDP, which equity investment and loan, together with a cash equity investment by DPG were used to repay the promissory note issued by IDP in connection with the NSU transaction. Further, on September 1, 2014, IDP entered into an asset purchase agreement with DPG pursuant to which IDP purchased certain new hospitality program business from DPG for cash. Ironshore Holdings U.S. made an additional cash equity investment of $620 and advanced a loan of $1,241 to IDP, which equity investment and loan, together with a cash equity investment by DPG were used to finance such purchase from DPG. Each loan from Ironshore Holdings U.S. to IDP bears interest at a rate of prime plus 4% per annum subject to a minimum interest rate of 6% per annum and a maximum interest rate of 12% per annum. The loans are 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 years ended December 31, 2014 and 2013, Ironshore Holdings U.S. s share of IDP s net (loss) income of $(1,269) and $1,000 was recorded in other income in the Company s statements of operations and comprehensive income. 13

14 5. Goodwill and other intangible assets Goodwill and other intangibles as of December 31, 2014 and 2013 are as follows: Goodwill Gross Goodwill & other Other intangible assets intangible assets Foreign Gross Amortization Exchange Total Total Balance as of January 1, 2013 $25,383 $72,157 $(6,923) $(6,075) $59,159 $84,542 Reclassification (b) (7,579) 8, , Amortization - - (3,021) - (3,021) (3,021) Foreign exchange translation (a) Balance as of December 31, ,804 80,425 (9,944) (5,727) 64,754 82,558 Reclassification (b) 391 (391) - - (391) - Acquired during Amortization - - (2,384) - (2,384) (2,384) Foreign exchange translation (a) (1,440) (1,440) (1,440) Balance as of December 31, 2014 $18,195 $80,654 $(12,328) $(7,167) $61,159 $79,354 (a) Represents foreign exchange translation on Lloyd s Syndicate capacity. (b) Represents adjustment related to the acquisition of ERR. Refer also to Note 3. The gross carrying value and accumulated amortization by major category of other intangible asset as of December 31, 2014 is shown below: Gross carrying Accumulated Foreign exchange value amortization translation Total Admitted licenses $11,006 $ - $ - $11,006 Excess & surplus lines licenses 8, ,925 Lloyd's Syndicate capacity 33,570 - (6,814) 26,756 Indefinite life 53,501 - (6,814) 46,687 Customer relationship, customer lists and trade name 11,043 (6,969) (353) 3,721 Renewal rights 10,514 (3,875) - 6,639 Non-compete agreement 5,596 (1,484) - 4,112 Definite life 27,153 (12,328) (353) 14,472 Total intangible assets $80,654 ($12,328) ($7,167) $61,159 14

15 The gross carrying value and accumulated amortization by major category of other intangible asset as of December 31, 2013 is shown below: Gross carrying Accumulated Foreign exchange value amortization translation Total Admitted licenses $11,006 $ - $ - $11,006 Excess & surplus lines licenses 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 The useful life of intangible assets with finite lives ranges from 3 to 10 years, with an average amortization period of 6 years. Expected amortization of the intangible assets is shown below: Other intangible assets 2015 $2, , , , and thereafter 4,480 Total remaining amortization expense - definite life 14,472 Indefinite life 46,687 Total $61,159 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. 6. Investments The amortized cost, gross unrealized gains and losses and fair value of investments as of December 31, 2014 are as follows: Amortized Unrealized Unrealized Fair cost gains losses value U.S. government and government agency securities $359,877 $764 $(370) $360,271 Non-U.S. government and government agency securities 107,536 1,663 (1,122) 108,077 Municipal securities 88,020 1,344 (179) 89,185 Corporate securities 1,325,037 15,915 (8,015) 1,332,937 Bank loans 435,697 1,489 (6,811) 430,375 U.S. asset-backed securities 635,540 1,562 (3,459) 633,643 U.S. mortgage-backed securities 1,080,017 12,379 (2,689) 1,089,707 Total fixed maturity securities 4,031,724 35,116 (22,645) 4,044,195 Equity securities 209,265 5,527 (7,702) 207,090 Short term investments 40, ,877 $4,281,866 $40,643 $(30,347) $4,292,162 15

16 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, (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 $3,600,413 $42,957 $(42,182) $3,601,188 Included in the tables above are fixed maturity securities with a fair value of $25,483 and $23,046, which are on deposit with U.S. insurance regulators as of December 31, 2014 and 2013, respectively, to meet certain statutory requirements. The Company also maintains fixed maturity securities and cash amounting to $1,494,652 and $1,221,100 in trust accounts as collateral under the terms of certain insurance and reinsurance transactions as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, the Company maintained trust collateral of $50,348 and $25,047, respectively, composed of short-term and fixed maturity securities for the Company s political risk business and $18,101 and $19,918, respectively, composed of cash and fixed maturity securities to meet certain Canadian insurance regulatory requirements for Ironshore Insurance Ltd. - Canada Branch. 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, 2014 and 2013, $37,254 and $22,962, respectively, of letters of credit were issued and outstanding under this facility, for which $43,929 and $32,488, of fixed maturity securities were pledged as collateral. The Company operates in the Lloyd s market through its corporate member ICCL, which represents its participation in Syndicate 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, certain investments and undrawn letters of credit provided by approved banks. As of December 31, 2014 and 2013, fixed maturity securities with a fair value of $277,571 and $182,564; equity securities with a fair value of $55,783 and $0; and short term investments with a fair value of $9,929 and $1,382; and cash of $0 and $5,325, respectively, were restricted to satisfy ICCL s FAL requirements. As of December 31, 2013, the Company had 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. The Company had pledged fixed maturity securities with a fair value of $146,345 as collateral. This letter of credit facility was terminated on November 19, The following represents an analysis of net realized gains (losses) on the sale of investments for the years ended: Year ended December 31, 2014 Realized Realized Net realized gains losses gains (losses) Fixed maturity securities $14,263 $(10,951) $3,312 Equity securities 19,639 (4,290) 15,349 Short term investments 664 (707) (43) $34,566 $(15,948) $18,618 16

17 Year ended December 31, 2013 Realized Realized Net realized gains losses 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 The amortized cost and fair value amounts for fixed maturity securities held as of December 31, 2014 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, 2014 Amortized cost Fair value Due in one year or less $148,655 $149,831 Due after one year through five years 1,628,735 1,632,264 Due after five years through ten years 419, ,900 Due after ten years 42,564 41,831 U.S. asset-backed securities 635, ,643 U.S. mortgage-backed securities 1,080,017 1,089,707 U.S. government sponsored enterprises 76,865 77,019 Total fixed maturity securities $4,031,724 $4,044,195 The following table sets forth certain information regarding the investment ratings of the Company s fixed maturity investment portfolio as of December 31, Investment ratings are as designated by Standard & Poor s Ratings Group or Moody s Investors Service. December 31, 2014 S&P Equivalent Rating (a) Amortized cost Fair value AAA $851,126 $853,340 AA 1,498,966 1,507,630 A 700, ,925 BBB 445, ,531 Below BBB 364, ,680 Not rated 172, ,089 Total fixed maturity securities $4,031,724 $4,044,195 (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: For the years ended December Fixed maturity securities $95,864 $83,074 Equity securities 6,302 5,794 Other investments 2, Cash and cash equivalents 686 1,213 Short term investments 8 6 Total gross investment income 104,984 90,942 Investment expenses (7,941) (6,570) Net investment income $97,043 $84,372 17

18 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. 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, 2014 by level within the fair value hierarchy: Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs inputs 2014 (Level 1) (Level 2) (Level 3) Total U.S. government and government agency securities $283,252 $77,019 - $360,271 Non-U.S. government and government agency securities - 108, ,077 Municipal securities - 89,185-89,185 Corporate securities - 1,331, ,332,937 Bank loans - 188, , ,375 U.S. asset-backed securities - 629,027 4, ,643 U.S. mortgage-backed securities - 1,081,844 7,863 1,089,707 Total fixed maturity securities 283,252 3,506, ,836 4,044,195 Equity securities 172,992 33, ,090 Short term investments - 40,877-40,877 Other investments ,761 43,761 $456,244 $3,580,857 $298,822 $4,335,923 18

19 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 Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs 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, ,264,554 Bank loans - 201, , ,891 U.S. asset-backed securities - 380,965 50, ,536 U.S. mortgage-backed securities - 949,400 3, ,967 Total fixed maturity securities 167,445 3,068, ,046 3,423,413 Equity securities 98,911 33, ,947 Short term investments - 45,828-45,828 $266,356 $3,147,786 $187,046 $3,601,188 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 for which 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 seven 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, U.S. mortgage-backed securities, equity securities and short term investments. The Company s investments classified as Level 3 consist of bank loans, certain corporate securities, U.S. asset and mortgage-backed securities, equity securities and other investments. Level 3 securities, other than other investments, are valued using non-binding broker quotes and other third party pricing sources, without modification. Consequently, the information about significant unobservable inputs used in the fair value measurement as required by U.S. GAAP are not disclosed. The Company s other investments include investment in closed-end limited partnerships that invest primarily in private commercial real estate debt in North America and Europe. These investments principally include senior and subordinated instruments, including mortgages, B- notes and mezzanine, senior and bridge loans related to real estate-related assets. The fair value of these investments is estimated using the net asset value (NAV) as provided by the general partners or investment managers. As the NAV obtained from the general partners or investment managers lags by one quarter as of the measurement date, the Company considers any adjustment to the most recent NAV such as capital calls, distributions, redemptions and all other information available to the Company. These investments are not allowed to be redeemed, transferred or resold and have an estimated term of 3 to 7 years. 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, 2014 and 2013, respectively. The transfers from Level 2 to Level 3 during the years ended December 31, 2014 and 2013 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 hierarchy measurement levels as of the date of the actual transfer. As of December 31, 2014 and 2013, the Company s Level 3 investments represented 6.9% and 5.2% of its total investments measured at fair value, respectively. 19