(Incorporated in Bermuda) Consolidated Financial Statements (expressed in U.S. dollars)
pwc April15, 2015 Independent Auditor's Report To the Board of Directors and Shareholders of Pa.CRe, Ltd. We have audited the accompanying consolidated financial statements of PaCRe, Ltd. and its subsidiary, which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of operations, of shareholders' equity and of cash flows for the years then ended. Management's responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In malting those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated 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 Company'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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers Ltd., Chartered Professional Accountants, P.O. Box HM 1171, Ham ilton HM EX, Bermuda T: +1 (441) 295 2000, F: +1 (441) 2951242, www.pwc.com/ bermuda
pwc Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PaCRe, Ltd. and its subsidiary at December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. P~c~ ~- Chartered Professional Accountants Reference: Independent Auditor's Report on the Consolidated Financial Statements of PaCRe, Ltd. and its subsidiary as at December 31, 2014 and 2013 and for the years then ended. Page: 2 of2
Consolidated Balance Sheets As at December 31, 2014 and 2013 Assets Investments, at fair value (cost: 558, 700; 2013: 569,022) Cash and cash equivalents Total investments and cash Premiums receivable Deferred acquisition costs Other assets Total assets liabilities Reserves for losses and loss expenses Unearned premiums Related party payable Accounts payable and accrued expenses Total liabilities Shareholders' equity Common shares 30,000,000; (2013: 30,000,000) authorized, par value 1.00 Issued and outstanding 22,600,000 (201 3: 22,600,000) Additional paid-in capital Retained deficit Total shareholders' equity available to PaCRe, Ltd. Non-controlling interest Total shareholders' equity Total liabilities and shareholders' equity 2014 477,928 31,452 509,380 2,897 273 86 512,636 2,299 560 637 3,496 22,600 542,400 {55,960) 509,040 100 509,140 512,636 2013 543,877 10,030 553,907 4,752 378 87 559,124 3,253 2,228 604 6,085 22,600 542,400 {12,061) 552,939 100 553,039 559,124 Approved by the Board of Directors ------- - --- ------Director ----------------- Director The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations For the years ended December 31,2014 and 2013 Revenues Gross premiums written Reinsurance premiums ceded Net premiums written Change in unearned premiums Net premiums earned Net unrealized loss on investments Net realized gain on investments Net investment income Net realized and unrealized foreign exchange loss Expenses Losses and loss expenses Policy acquisition costs Performance fee Legal fees Finance expenses Rating agency fees General and administrative expenses Audit fees Corporate fees Net (loss) income Net loss (income) attributable to non-controlling interest Net and comprehensive (loss) income available to PaCRe 2014 8,397 8,397 954 9,351 (55,627) 8,178 (36) (38,134) 1,076 1,655 1,452 105 58 1,079 160 180 5,765 (43,899) (43,899) 2013 12,012 12,012 51 12,063 (9,826) 4,022 6,259 1,274 2,158 76 295 55 338 228 180 4,604 1,655 1,655 The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Shareholders' Equity Common shares Balance- Beginning of year Common shares issued Balance - End of period Additional paid-in capital Balance - Beginning of year Common shares issued Balance - End of year Retained deficit Balance- Beginning of year Net (loss) income Balance - End of year Total shareholders' equity available to PaCRe, Ltd. Non-controlling interest Total shareholders' equity 2014 22,600 22,600 542,400 542,400 (12,061) {43,899} (55,960) 509,040 100 509,140 2013 20,000 2,600 22,600 480,000 62,400 542,400 (13,716) 1,655 (12,061) 552,939 100 553,039 The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows 2014 2013 Cash flows provided by (used in) operating activities Net (loss) income (43,899) 1,655 Adjustment to reconcile net (loss) income to net cash provided by operating activities: Net unrealized loss on investments 55,627 9,826 Net realized gain on investments (8, 178) (4,022) Net realized and unrealized foreign exchange loss 36 Changes in: Premiums receivable 1,846 (1,818) Deferred acquisition costs 105 (21 ) Other assets 1 3 Unearned premiums (954) (51 ) Related party payable (1,668) 1,794 Accounts payable and accrued expenses 33 231 Net cash provided by operating activities 2,949 7,597 Cash flows provided by (used in) investing activities Purchases of investments (25,000) (97,500) Proceeds on the sale of investments 43,500 32,500 Net cash provided by (used in) investing activities 18,500 (65,000) Cash flows provided by (used in) financing activities Issuance of common shares - 65,000 Net cash provided by financing activities - 65,000 Effect of foreign currency changes on cash and cash equivalents (27) Net increase in cash 21,422 7,597 Cash and cash equivalents - Beginning of year 10,030 2,433 Cash and cash equivalents- End of year 31,452 10,030 The accompanying notes are an integral part of these consolidated financial statements.
(Expressed in thousands of U.S. dollars, except sha re amounts) 1. Nature of the business PaCRe, Ltd. (the "Company") was incorporated under the laws of Bermuda on November 18, 2011. Validus Reinsurance, Ltd., ("Validus Re") owns 100% of the voting shares of the Company. Validus Re is 100% owned by Validus Holdings, Ltd. a publicly traded company (NYSE:VR "Validus Holdings"). The other investors consist of a small number of sophisticated private investors. The Company is registered as a Class 4 insurer under The Insurance Act 1978 of Bermuda, amendments thereto and related Regulations ("The Act"). The Company underwrites reinsurance and retrocessional reinsurance for top-layers of catastrophe programs on a world-wide basis, effective May 1, 2012. Validus Services (Bermuda) Limited ("Validus Services"), a wholly-owned subsidiary of Validus Holdings, underwrote business for the Company from May 1, 2012 to September 30, 201 2, for which it was paid a performance fee based on the underwriting results. AlphaCat Managers, ltd. ("AiphaCat Managers"), a whollyowned subsidiary of Validus Holdings, underwrote business for the Company from October 1, 2012, for which it was paid a performance fee based on the underwriting results. The Company is the majority shareholder (99.99%) in PaCRe Investments, ltd. ("PRIL"), which was incorporated under the laws of the Cayman Islands on March 28, 2011. PRIL invests in hedge funds. 2. Basis of preparation These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The major estimates reflected in the Company's consolidated financial statements include the valuation of the reserve for losses and loss expenses and the hedge fund investments. 3. Significant accounting policies The following is a summary of the significant accounting policies adopted by the Company: (a) Premiums Reinsurance premiums written are recorded at the inception of the policy and are based on information received from brokers, ceding companies and reinsureds, and any subsequent differences arising will be recorded in the periods in which they are determined. Premiums written are earned on a pro-rata basis over the term of the policy. Contracts and policies are written on a losses occurring basis and the risk period is generally the same as the contract or policy terms. The portion of the premiums written applicable to the unexpired terms of the underlying contracts and policies in force are recorded as unearned premiums. Mandatory reinstatement premiums are recorded at the time a loss event occurs. (b) Policy acquisition costs Policy acquisition costs are costs that vary with, and are directly related to, the successful production of new and renewal business, and consist principally of commissions and brokerage expenses. 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 and anticipated claims. The realizable value of the Company's deferred acquisition costs is determined without consideration of investment income. (1)
(c) Reserve for losses and loss expenses The reserve for losses and loss expenses includes reserves for unpaid reported losses and for losses incurred but not reported (" IBNR"). The reserve for unpaid reported losses and loss expenses is established by management based on reports from brokers, 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 IBNR losses and loss 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 may vary significantly as claims are settled. Accordingly, ultimate losses and loss expenses may differ materially from the amounts recorded in the 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, will be recorded in earnings in the period in which they become known. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves established in previous calendar years. (d) Investments Fair value is defined as the price received to transfer an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting the highest and best use valuation concepts. The guidance for "Fair Value Measurement and Disclosure" provides a framework for measuring fair value by creating a hierarchy of fair value measurements that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity. The guidance further expands disclosures about such fair value measurements. The guidance applies broadly to most existing accounting pronouncements that require or permit fair value measurements (including both financial and non-financial assets and liabilities) but does not require any new fair value measurements. The Company has adopted all authoritative guidance in effect as of the balance sheet date regarding certain market conditions that allow for fair value measurements that incorporate unobservable inputs where active market transaction based measurements are unavailable. Investments consist of investments in five Paulson & Co. Inc. managed hedge funds ("the Paulson hedge funds"). All investment transactions are recorded on a first-in-first-out basis and realized gains and losses on the sale of investments are determined on the basis of cost. Investments are carried at fair value. The fair value of investments is established on the basis of the net valuation criteria established by the investment managers of the investments. These net valuations are determined based upon the valuation criteria established by the governing documents of such investments. The Company uses the net asset value ("NAV"), as prepared monthly by the fund administrator to establish the fair value of the Pau lson hedge funds. (e) Cash and cash equivalents The Company considers time deposits and money market funds with an original maturity of 30 days or less as equivalent to cash. (f) Foreign exchange The U.S. Dollar is the functional currency of the Company. Monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date and revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date with the resulting foreign exchange gains and losses included in earnings. (2)
4. Investments The Company's investments consist of the Paulson hedge funds which are classified as trading and carried at fair value, with related net unrealized gains or losses included in earnings. (a) Classification within the fair value hierarchy Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants. Under U.S. GAAP, a company must determine the appropriate level in the fair value hierarchy for each fair value measurement. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or liability, into three levels. It gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The level in the fair value hierarchy within which a fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below: Level 1 - Fair values are measured based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level 2 - Fair values are measured based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. Level 3 - Fair values are measured based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own judgments about assumptions where there is little, if any, market activity for that asset or liability that market participants might use. The Company's investments in the Paulson hedge funds are the only financial instruments in this category. For these hedge fund investments, the Company obtains and reviews the valuation methodology used by the fund administrators and investment managers to ensure that the hedge fund investments are fo llowing fair value principles consistent with U.S. GAAP in determining NAV. The strategies of the Paulson hedge funds include event-driven, fixed income, merger arbitrage and gold exposure. Investments may be withdrawn from four of the funds quarterly or semi-annually with at least 1 00 days prior written notice and from one fund monthly and weekly with 3 days prior notice. The amount which may be withdrawn, on a single withdrawal date, is in some cases limited, to 25% of the invested amount. Additionally, in some cases, the General Partners, at their discretion, have the right to withhold reserves for contingencies and the right to suspend withdrawals. At December 31, 2014, the Company's investments were allocated between levels 1, 2 and 3 as follows: Level 1 Level 2 Level 3 Total Hedge funds Total 477,928 477,928 477,928 477,928 (3)
At December 31, 2013, the Company's investments were allocated between levels 1, 2 and 3 as follows: Level 1 Level 2 Level 3 Total Hedge funds Total 543,877 543,877 543,877 543,877 The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the year ended December 31, 2014: Year ended December 31, 2014 Level 3 investments- Beginning of year Purchases Sales Issuances Settlements Net realized gains Net unrealized (losses) Amortization Transfers Investments 543,877 25,000 (43,500) 8,178 (55,627) Level 3 investments - End of year 477,928 Year ended December 31, 2013 Level 3 investments- Beginning of year Purchases Sales Issuances Settlements Net realized gains Net unrealized (losses) Amortization Transfers Investments 484,681 97,500 (32,500) 4,022 (9,826) Level 3 investments - End of year 543,877 (4)
(b) Investments - cost, gains and losses The cost, gross unrealized gains (losses) and estimated fair value of investments at December 31, 2014 were as follows: Gross Gross unrealized unrealized Estimated Cost gains losses fair value Hedge Funds 558,700 53,431 (134,203} 477,928 Total 558,700 53,431 (134,203} 477,928 The cost, gross unrealized gains (losses) and estimated fair value of investments at December 31, 2013 were as follows: Gross Gross unrealized unrealized Estimated Cost gains losses fair value Hedge Funds 569,022 69,950 (95,095) 543,877 Total 569,022 69,950 (95,095) 543,877 5. Premiums receivable Premiums receivable are composed of premiums in the course of collection, net of comm1ss1ons and brokerage, and premiums accrued but unbilled, net of commissions and brokerage. The following is a breakdown of the components of receivables at December 31, 2014 and 201 3: Premiums in course of collection Premiums accrued but unbilled Total Balance as at December 31, 2013 Change during year 2,096 2,656 4,752 (987) (868) (1,855) Balance as at December 31, 2014 1,109 1,788 2,897 Premiums in course of collection Premiums accrued but unbilled Total Balance as at December 31, 2012 Change during year 264 1,832 2,670 (1 4} 2,934 1,818 Balance as at December 31, 2013 2,096 2,656 4,752 (5)
6. Share capital and additional paid-in capital (a) Authorized and issued The Company's authorized share capital is 30,000,000 shares with a par value of 1.00 each, consisting of 2,260,000 Class A voting shares, 20,340,000 Class B non-voting shares and 7,400,000 undesignated shares. At December 31,2014 the share capital was designated as follows: Common Shares Authorized capital Issued share capital Additional paid-in capital Retained deficit Share hoi ders' equity Class A Voting Common Shares I 2,260,000 Class B Non-Voting Common Shares I 20,340,000 Undesignated Shares I 7,400,000 Retained deficit Non-controlling interest 2,260 20,340 54,240 488,160 (55,960) 56,500 508,500 (55,960) 100 Total Share Capital I 30,000,000 I 22,600 542,400 (55,960) 509,1 40 At December 31, 2013 the share capital was designated as follows: Common Shares Issued Additional share paid-in Retained Shareholders' Authorized capital capital deficit equity capital Class A Voting Common Shares I 2,260,000 I 2,260 54,240-56,500 Class B Non-Voting Common Shares I 2o,34o,ooo I 20,340 488,160-508,500 Undesignated Shares I 7,400,000 Retained deficit - I - - (1 2,061) (12,061 ) Non-controlling interest I - I - - 100 Total Share Capital 30,000,000 22,600 542,400 (12,061 ) 553,039 (6)
For the years ended December 31, 2014 and 2013 The holder of the non-controlling interest in the Company's subsidiary, an interest which cost 100, does not participate in the allocation of profits or losses of the subsidiary. As such, all of the net losses of the subsidiary, for the years ended December 31, 2014 and 2013, were attributable to the Company. Holders of the Class A Common Shares are entitled to one vote per share, dividends as the Board may from time to time declare and in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for the purpose of a reorganization or otherwise or upon any distribution of capital, be entitled to the surplus assets of the Company. Holders of the Class B Common Shares are not entitled to any voting powers but otherwise are entitled to the same rights as the holders of Class A Common Shares. On November 29, 2011, the Company issued 100 shares at a par value of 1.00 each at a price of 25.00 each. On December 2, 2011, the Company issued 4,700 shares at a par value of 1.00 each at a price of 25.00 each. On March 30, 2012, the 4,800 shares in issue were designated as Class A Common Shares. A lso, on March 30, 2012, the Company issued 19,995,200 shares at a par value of 1.00 each, designated as 1,995,200 Class A Common Shares at a price of 25.00 each and 18,000,000 Class B Common Shares at a price of 25.00 each. On May 1, 2013 the Company issued 2,600,000 shares at a par value of 1.00 each, designated as 260,000 Class A Common Shares at a price of 25.00 each and 2,340,000 Class B Common Shares at a price of 25.00 each. 7. Income taxes and uncertain tax provisions The Company provides for income taxes based upon amounts reported in the financial statements and the provisions of currently enacted tax laws. The Company is registered in Bermuda and is subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company is not taxed on any Bermuda income or capital gains and has received an undertaking from the Bermuda Minister of Finance that, in the event of any Bermuda income or capital gains taxes being imposed, the Company will be exempt from those taxes until March 31, 2035. At the present time no such taxes are levied in Bermuda. The Company's subsidiary is not taxed on any income or capital gains in the Cayman Islands. The Company recognizes the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. The Company did not recognize any resulting liabilities for unrecognized tax benefits. 8. Commitments and contingencies Concentrations of credit risk The Company's investment in the Paulson hedge funds is the Company's sole investment. The Company wrote all its business through brokers and 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 to the Company. These companies are large, well established, and there are no indications that any of them are financially troubled. (7)
The following table shows the percentage of gross premiums written by broker for the years ended December 31,2014 and 2013: 2014 2013 Guy Carpenter & Co. Willis Group Holdings Ltd. Asia Insurance (1950) Co Ltd. Aon Benfield Group Ltd. Lockton Companies International Ltd. 9. Financing arrangements 27% 2% 71 % 74% 15% 6% 3% 2% On March 9, 2012, the Company, Validus Holdings, Validus Re and Validus Re Americas, Ltd. entered into a 400,000 four year unsecured credit facility with Deutsche Bank Securities Inc., as syndication agent, JP Morgan Chase Bank, N.A. as administrative agent, Lloyds Securities Inc. and Suntrust Bank, as codocumentation agents and the lenders party thereto, which provides for letter of credit availability for Validus Holdings, the Company and certain other designated subsidiaries of Validus Holdings and revolving credit availability for Validus Holdings {the "Four Year Unsecured Facility") (the full 400,000 of which is available for letters of credit and/or revolving loans). The Four Year Unsecured Facility was provided by a syndicate of commercial banks arranged by J.P. Morgan Securities LLC, Deutsche Bank Securities Inc., Lloyds Securities Inc. and SunTrust Robinson Humphrey, Inc. Letters of credit under the Four Year Unsecured Facility are available to support obligations in connection with the insurance business of the Company and Validus Holdings and its subsidiaries. Loans under the Four Year Unsecured Facility are available for the general corporate and working capital purposes of Valid us Holdings. Valid us Holdings may request that existing lenders under the Four Year Unsecured Facility or prospective additional lenders agree to make available additional commitments from time to time so long as the aggregate commitments under the Four Year Unsecured Facility do not exceed 500,000. Letter of credit fees are payable on account of each letter of credit issued under the Four Year Unsecured Facility at a rate per annum equal to an applicable rate. Borrowings under the Four Year Unsecured Facility bear interest, at the option of Validus Holdings, at the base rate {the higher of the prime rate announced by JP Morgan Chase Bank, N.A., the federal funds effective rate plus 0.5%, and the adjusted LIBOR rate plus 1.0%) or the adjusted LIBOR rate applicable to such loans, plus an applicable rate. On May 11, 2012, the Company (as Borrower) and its subsidiary (as Guarantor) entered into a secured evergreen credit and letter of credit facility with JP Morgan Chase Bank, N.A. This facility provides for revolving borrowings by the Borrower and for letters of credit issued by the Borrower to be used to support its reinsurance obligations in aggregate amounting to 10,000. This facility is secured by cash accounts and certain hedge fund investments which at December 31, 2014 amounted to 103 and 259,582 respectively (2013: 104 and 332,711, respectively). As of December 31, 2014, 294 (2013: 294) of letters of credit were outstanding under this facility. As of December 31, 2014 and 2013 and throughout the reporting periods presented the Company was in compliance with all covenants and restrictions under the terms of this facility. 10. Related party transactions The Company entered into an underwriting and administrative services agreement with Validus Services, a fellow subsidiary of Validus Holdings, under which Validus Services (the "Underwriting Manager") provides underwriting and administrative services to the Company. As of October 1, 2012, the underwriting and administrative services agreement was transferred to AlphaCat Managers under which AlphaCat Managers is entitled to the prorated fees listed below. The terms of the underwriting and administrative services agreement provide that the following fees are payable by the Company: Performance fee: 20% of premiums earned net of acquisition expenses and loss and loss expenses. (8)
Contract expenses: all reasonable direct and indirectly allocable expenses incurred by the Underwriting Manager on behalf of the Company. During the year ended December 31, 2014, the Company paid performance fees amounting to 3,374 (201 3: 434). In addition, a payable balance of 373 has been recorded to reflect the performance fee payable as at December 31, 2014 (2013: 2,092). During the year ended December 31, 2014, the Company paid contract expenses in respect of administrative services amounting to 692 (2013: 194). In addition, a payable balance of 187 has been recorded to reflect contract expenses payable as at December 31, 2014 (2013: 131 ). Contract expenses incurred are included in general and administrative expenses in the consolidated statements of operations. The Company also had a payable balance, due to AlphaCat Managers, of nil as at December 31, 2014 (2013: 5) relating to operating expenses paid by Alpha Cat Managers on behalf of the Company. The Company's subsidiary has invested in five hedge funds which are managed by a major shareholder in the Company. Also, the Company's subsidiary has an investment management agreement with a company in which the major shareholder has a significant shareholding. Under the terms of this agreement the investment advisor does not charge investment management fees to the Company's subsidiary. During the years ended December 31, 2014 and 2013 the Company entered into a quota share agreement with Validus Re. The transactions and balances (excluding performance fees) arising from this agreement include the following : 2014 2013 Gross premiums written 3,975 3,215 Change in unearned premiums 73 {1,037) Premiums earned 4,048 2,1 78 Policy acquisition costs 508 283 Premiums receivable 1,717 2,796 11. Statutory and regulatory requirements The Company is registered as a Class 4 insurer under The Insurance Act 1978 (Bermuda), Amendments Thereto and Related Regulations ("the Act"). Under The Act, the Company is required to prepare Statutory Financial Statements and to file a Statutory Financial Return. The Company has to meet certain requirements for minimum solvency and liquidity ratios and all statutory filings are prepared in accordance with regulatory accounting practices prescribed by the Act. As at December 31, 2014 and 2013 the Company met all the capital, solvency and liquidity requirements of the Act. As at December 31, 2014, the Company's total statutory capital and surplus was 508,679 (2013: 552,474). The minimum amount of statutory capital and surplus necessary to satisfy regulatory requirements was 100,000 (2013: 1 00,000). For Class 4 statutory filings, the Bermuda Monetary Authority ("the BMA") requires the use of a risk-based capital model, or Bermuda Solvency Capital Requirement ("BSCR"), as a tool to assist the BMA in measuring risk and determining appropriate capitalization. The Company met these requirements at December 31, 2014 and 2013. (9)
The ability of the Company to pay dividends is limited under Bermuda law and regulations. The Act provides that the Company may not declare or pay, in any financial year, dividends of more than 25% of its total statutory capital and surplus (as shown on its statutory balance sheet in relation to the previous financial year) unless it files with the BMA at least seven days prior to the payment, an affidavit signed by at least two directors and the Company's principal representative, stating that in their opinion the Company will continue to satisfy the required margins following declaration of those dividends, however, there is no additional requirement for BMA approval. In addition, before reducing its total statutory capital by 15% or more (as set out in its previous years' statutory financial statements) the Company must make application to the BMA for permission to do so; such applications shall consist of an affidavit signed by at least two directors and the Company's principal representative stating that in their opinion the proposed reduction in capital will not cause the Company to fail to meet its relevant margins, and such other information as the BMA may require. The Act provides that the Company may declare or pay any dividends during any financial year as long as it does not cause the Company to fail to meet its relevant margins subject to the restrictions set out herein. The Company's primary restrictions on net assets consist of regulatory requirements placed upon the Company to hold a minimum amount of total statutory capital and surplus and there were no other material restrictions on net assets in place as of December 31, 2014 and 2013. 12. Subsequent events As at March 31, 2015, the Paulson hedge funds had an estimated value of 542,303. The Company has performed an evaluation of subsequent events through April 15, 2015. (1 0)