Consolidated Financial Statements December 31, 2015
Ernst & Young LLP 5 Times Square New York, NY 10036-6530 Tel: +1 212 773 3000 Fax: +1 212 773 6350 ey.com The Board of Directors and Shareholders Ironshore Inc. Report of Independent Auditors We have audited the accompanying consolidated financial statements of Ironshore Inc., which comprise the consolidated balance sheets as of December 31, 2015 and 2014, 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 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 these 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 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 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 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. 1 A member firm of Ernst & Young Global Limited
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ironshore Inc. as of December 31, 2015 and 2014, 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. March 10, 2016 2 A member firm of Ernst & Young Global Limited
Consolidated Balance Sheets As of December 31, 2015 and 2014 2015 2014 ASSETS Fixed maturity securities, at fair value (amortized cost: 2015 - $4,451,226; 2014 - $4,031,724) $4,425,968 $4,044,195 Equity securities, at fair value (cost: 2015 - $202,014; 2014 - $209,265) 200,724 207,090 Short term investments, at cost which approximates fair value 3,979 40,877 Other investments 90,866 61,089 Total investments 4,721,537 4,353,251 Cash and cash equivalents 381,604 328,797 Accrued investment income 21,057 19,351 Premiums receivable 494,834 514,035 Reinsurance recoverable on unpaid losses 776,787 693,298 Reinsurance recoverable on paid losses 59,034 66,397 Deferred acquisition costs 106,939 125,098 Prepaid reinsurance premiums 372,612 305,647 Goodwill and other intangible assets 76,226 79,354 Deferred tax asset 37,228 12,191 Receivable for securities sold 9,179 17,904 Other assets 193,036 184,592 Total assets $7,250,073 $6,699,915 LIABILITIES Reserve for losses and loss adjustment expenses $3,197,541 $2,838,158 Unearned premiums 1,304,591 1,310,908 Insurance and reinsurance balances payable 228,243 240,594 Payable for securities purchased 21,761 11,388 Other liabilities 183,383 111,477 Debt obligations 347,992 347,629 Total liabilities 5,283,511 4,860,154 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common shares, 400,000,000 authorized, par value $0.01 per share (2015: 140,657,340; 2014: 136,625,637), shares issued and outstanding 1,407 1,366 Additional paid-in capital 1,431,794 1,364,762 Accumulated other comprehensive loss (6,149) (8,074) Retained earnings 539,510 481,707 TOTAL SHAREHOLDERS' EQUITY 1,966,562 1,839,761 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,250,073 $6,699,915 See accompanying notes to the consolidated financial statements. 3
Consolidated Statements of Operations and Comprehensive Income For the years ended December 31, 2015 and 2014 2015 2014 REVENUES Gross premiums written $2,163,852 $2,210,554 Reinsurance premiums ceded (684,028) (591,374) Net premiums written 1,479,824 1,619,180 Change in unearned premiums 63,427 (92,184) Net premiums earned 1,543,251 1,526,996 Net investment income 113,300 97,043 Net realized and unrealized gains (losses) on investments (48,351) 28,039 Net foreign exchange losses (11,054) (5,283) Other income 50,413 33,566 Total revenues 1,647,559 1,680,361 EXPENSES Losses and loss adjustment expenses 1,010,218 1,077,274 Acquisition expenses 210,053 214,708 General and administrative expenses 322,728 279,101 Non-recurring transaction expenses 39,529 - Interest expense 22,169 21,906 Total expenses 1,604,697 1,592,989 Income before tax benefit (expense) 42,862 87,372 Income tax benefit (expense) 14,941 (2,906) Net income 57,803 84,466 Net loss attributable to non-controlling interest - (11) Net income attributable to Ironshore Inc. $57,803 $84,477 COMPREHENSIVE INCOME Net income $57,803 $84,466 Other comprehensive income, before tax Equity gains from foreign currency translation 3,851 6,909 Losses on intra-entity foreign currency transactions (1,926) (4,662) Other comprehensive income, before tax 1,925 2,247 Income tax on other comprehensive income - - Other comprehensive income, net of tax 1,925 2,247 Comprehensive income 59,728 86,713 Comprehensive loss attributable to non-controlling interests - (11) Comprehensive income attributable to Ironshore Inc. $59,728 $86,724 Earnings per share: Weighted average common shares outstanding - Basic 137,195,272 135,185,765 Weighted average common shares outstanding - Diluted 143,106,668 139,934,730 Net income (loss) per common share outstanding - Basic $0.42 $0.62 Net income (loss) per common share outstanding - Diluted $0.41 $0.61 See accompanying notes to the consolidated financial statements. 4
Consolidated Statements of Changes in Shareholders Equity For the years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars) 2015 2014 COMMON SHARES Balances as of beginning of year $1,366 $1,362 Issuance of shares, net of forfeitures 377 8 Repurchase of shares (336) (4) Balance as of end of year 1,407 1,366 ADDITIONAL PAID-IN CAPITAL Balance as of beginning of year 1,364,762 1,354,164 Issuance of shares, net of forfeitures 466,387 2,590 Repurchase of shares (469,813) (5,189) Contribution of additional paid-in capital 36,947 - Stock compensation expense 19,450 7,927 Tax benefit on stock compensation expense 8,088 722 Modification of liability awards to equity 5,973 5,897 Purchase of non-controlling interest - (1,349) Balance as of end of year 1,431,794 1,364,762 ACCUMULATED OTHER COMPREHENSIVE LOSS Balance as of beginning of year (8,074) (10,321) Equity gains from foreign currency translation 3,851 6,909 Losses on intra-entity foreign currency transactions (1,926) (4,662) Balance as of end of year (6,149) (8,074) RETAINED EARNINGS Balance as of beginning of year 481,707 397,230 Net income attributable to Ironshore Inc. 57,803 84,477 Balance as of end of year 539,510 481,707 TOTAL IRONSHORE INC. SHAREHOLDERS' EQUITY 1,966,562 1,839,761 NON-CONTROLLING INTEREST Balance as of beginning of year - 3,909 Net loss attributable to non-controlling interest - (11) Purchase of non-controlling interest - (3,898) Balance as of end of year - - TOTAL SHAREHOLDERS' EQUITY $1,966,562 $1,839,761 See accompanying notes to the consolidated financial statements. 5
Consolidated Statements of Cash Flows For the years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars) 2015 2014 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income $57,803 $84,466 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Amortization and depreciation 7,906 10,478 Stock compensation expense 22,953 11,866 Amortization of fixed maturity securities 23,444 19,724 Net realized and unrealized (gains) losses on investments 48,351 (28,039) Deferred tax benefit (25,065) (7,931) CHANGES IN OPERATING ASSETS AND LIABILITIES: Accrued investment income (1,765) (1,031) Premiums receivable 13,138 (60,928) Reinsurance recoverable on unpaid losses (88,342) (109,272) Reinsurance recoverable on paid losses 6,551 (5,993) Deferred acquisition costs 16,027 (2,683) Prepaid reinsurance premiums (68,945) (33,088) Other assets 2,018 5,370 Reserve for losses and loss adjustment expenses 381,347 681,891 Unearned premiums 4,691 116,772 Insurance and reinsurance balances payable (8,461) 59,492 Other liabilities 48,699 15,499 Net cash provided by operating activities 440,350 756,593 CASH FLOWS USED IN INVESTING ACTIVITIES: Purchases of fixed maturity securities (3,974,331) (3,723,875) Purchases of short term investments (22,055) (278,929) Purchases of equity securities (134,894) (347,221) Purchases of other investments (83,236) (58,497) Proceeds from sales of fixed maturity securities 3,086,889 2,654,490 Proceeds from maturity of fixed maturity securities 430,589 401,470 Proceeds from sales of short term investments 58,956 283,885 Proceeds from sales of equity securities 135,978 278,630 Proceeds from sales of other investments 61,724 1,726 Purchases of fixed assets (9,890) (9,368) Issuance of note receivable - (3,741) Net cash used in investing activities (450,270) (801,430) See accompanying notes to the consolidated financial statements. 6
Consolidated Statements of Cash Flows For the years ended December 31, 2015 and 2014 (Expressed in thousands of U.S. dollars) 2015 2014 CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Proceeds from issuance of common shares 466,764 2,600 Repurchase of shares (470,149) (5,156) Contribution of additional paid-in capital 36,965 - Contribution of deferred merger consideration 35,413 - Issuance of debt - 100,000 Purchase of non-controlling interest - (5,247) Net cash provided by financing activities 68,993 92,197 Net increase in cash and cash equivalents 59,073 47,360 Cash and cash equivalents as of beginning of year 328,797 286,700 Effect of exchange rates on cash and cash equivalents (6,266) (5,263) CASH AND CASH EQUIVALENTS AS OF END OF YEAR $381,604 $328,797 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Income taxes paid $20,639 $12,578 Interest paid $21,631 $21,393 See accompanying notes to the consolidated financial statements. 7
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, 2014. 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 2011. 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
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
the remaining contract period. Ceded reinstatement premiums earned were $5,905 and $8,296 for the years ended December 31, 2015 and 2014, 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. It also includes investment in a Cayman-island registered partnership fund that primarily invests in portfolio companies in China, Hong Kong, Macau and/or Taiwan. Investments in promissory notes are carried at cost with interest income recorded in net investment income. Investments in closed-end limited partnerships and Cayman-island registered fund 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
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). 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
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 Amendments to Fair Value Disclosures In May 2015, the FASB issued Accounting Standards Update 2015-07 Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. However, the reporting entity is still required to disclose information that will help users understand the nature and risk of these investments. This update is effective for public business entities for fiscal years beginning after December 15, 2015 and after December 15, 2016 for all other entities. The amendments should be applied retrospectively for all periods presented. Earlier application is permitted. The Company adopted this pronouncement starting for the period ended June 30, 2015 and it had no material impact on the consolidated financial statements. Amendments to the Consolidation Standard In February 2015, the Financial Accounting Standards Board ( FASB ) issued Accounting Standards Update No. 2015-2, Consolidation Amendments to the Consolidation Analysis, which amends the current consolidation guidance. The main provisions of these amendments may affect consolidation conclusion and include, among others, the following key items: elimination of three of the six conditions for evaluating whether a fee paid to a decision maker or a service provider represents a variable interest; exclusion of some fee arrangements paid to a decision maker on determining primary beneficiary; and reduction in the application of related party guidance on determining primary beneficiary. 12
This update will be effective for public business entities with annual periods beginning after December 15, 2015 and December 15, 2016 for all other entities. Earlier application is allowed. The Company believes that this guidance has no impact on the consolidated financial statements. Elimination of Extraordinary Item Concept In January 2015, the FASB issued Accounting Standard Update No. 2015-01, Income Statement Extraordinary and Unusual Items which eliminates the concept of extraordinary items. Preparers and their auditors will no longer need to evaluate whether unusual and/or infrequent items are treated properly. Presentation and disclosure guidance for items that are unusual in nature or infrequent in occurrence will be expanded to include items that have both characteristics. This update will be effective for interim and annual periods beginning after December 15, 2015. Earlier application is allowed. The Company believes that this guidance will have no impact on the consolidated financial statements. Simplifying the Presentation of Debt Issuance Costs In April 2015, the FASB issued Accounting Standards Update 2015-03 Simplifying the Presentation of Debt Issuance Costs requiring entities to present debt issuance costs related to a recognized liability in the balance sheet as a direct reduction from that liability rather than as an asset. This will align the presentation of debt issuance costs with that of debt discounts and premiums. The guidance is effective for non-public business entities for fiscal years beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016. Earlier application is permitted. The Company believes that this guidance will not have a material impact on the consolidated financial statements. Disclosures about Short Duration Insurance Contracts In May 2015, the FASB issued Accounting Standards Update 2015-09 Disclosures about Short Duration Insurance Contracts requiring insurers to make additional disclosures about short-duration contracts (typically a year or less). The disclosures focus on the liability for unpaid claims and claim adjustment expenses. Insurers are required to provide tables showing incurred and paid claims development information by accident year for the number of years claim typically remain outstanding (but not more than 10 years). Insurers will also have to provide a reconciliation of this information to the statement of financial position. For accident years included in the development tables, insurers will have to disclose the total of incurred-but-not-reported liabilities and expected development on reported claims plus claims frequency information unless impracticable, and the historical average annual percent of payout incurred claims. These disclosures will be required to be aggregated or disaggregated so that useful information is not obscured. The guidance is effective for non-public business entities for fiscal years beginning after December 15, 2016 and interim periods the following year. Earlier application is permitted. The Company believes that this guidance has no impact on the consolidated financial statements as it is a change in disclosure only. Simplifying the Accounting for Measurement Period Adjustments In September 2015, The FASB issued Accounting Standards Update 2015-16 Simplifying the Accounting for Measurement Period Adjustments eliminating the requirement that an acquirer in a business combination account for adjustments it makes to the provisional amounts it records for assets and liabilities retrospectively. An acquirer must recognize these measurement-period adjustments during the period in which it determines their amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for nonpublic business entities for fiscal years beginning after December 15, 2016 and interim periods with fiscal years beginning after December 15, 2017. Earlier application is permitted. The Company believes that this guidance will not have a material impact on the consolidated financial statements. 3. Fosun Equity Investment and Ironshore Tender Offer On August 17, 2014, the Company entered into a definitive equity purchase agreement (the Equity Purchase Agreement ) with Fosun International Limited ( Fosun ) and Mettlesome Investment Limited, a wholly owned subsidiary of Fosun ( Mettlesome ), pursuant to which the Company agreed to sell to Mettlesome 20% of Ironshore s total outstanding ordinary shares on a fully diluted basis (the Fosun Equity Investment ). The Fosun Equity Investment was consummated on February 12, 2015 and, pursuant to the terms of the Equity Purchase Agreement, the Company initially issued to Mettlesome 27,980,743 ordinary shares for a cash purchase price of $456,804. The purchase price and number of shares issued were subject to certain post-closing adjustments under the Equity Purchase Agreement. 13
In November 2014, the Company launched a tender offer (the Ironshore Tender Offer ) to repurchase securities representing 20% of Ironshore s total outstanding ordinary shares on a fully diluted basis. Following closing of the Fosun Equity Investment, the Company consummated the Ironshore Tender Offer, repurchasing 27,687,491 ordinary shares (including shares underlying options and Class B warrants exercised in connection with the tender offer) at approximately $16.3256 per share and 1,921,040 Class A warrants at approximately $6.3256 per warrant. All of the proceeds from the Fosun Equity Investment, together with the exercise price payable to the Company upon the exercise of options and Class B warrants described above, were used to pay the tender offer consideration. The securities repurchased by the Company pursuant to the Ironshore Tender Offer were cancelled and retired. The number of securities repurchased by the Company and the aggregate tender offer consideration are subject to adjustment based on the post-closing adjustments pursuant to the Equity Purchase Agreement. On March 6, 2015, in conjunction with the initial post-closing adjustment pursuant to the Equity Purchase Agreement, the Company issued 97,296 additional shares to Mettlesome and received a cash purchase price adjustment of $9,776. The post-closing adjustments under the Equity Purchase Agreement and the related post-closing share adjustments pursuant to the Ironshore Tender Offer were finalized in the second fiscal quarter of 2015. Costs incurred associated with the Fosun Equity Investment are recorded in non-recurring transaction expenses in the consolidated statement of operations and comprehensive income. Effective upon closing of the Fosun Equity Investment, the Company s memorandum of association was amended to increase the authorized capital of the Company from 200,000,000 ordinary shares to 400,000,000 shares, par value of $0.01 each, which may be ordinary shares or preferred shares. 4. Merger with Fosun On May 1, 2015, the Company entered into a definitive merger agreement (the Merger Agreement ) with Fosun International Limited ( Fosun ), Mettlesome Investments (Cayman) III Limited ( Purchaser ), Mettlesome Investment 2, a wholly-owned subsidiary of Purchaser ( Merger Sub ) and IS Equityholder Rep, LLC, solely in its capacity as the representative of the equityholders of the Company ( Equityholder Representative ), pursuant to which the parties agreed that Fosun would acquire indirectly the remaining interest in the Company that Fosun did not already beneficially own (the Fosun Acquisition ). On November 20, 2015, the Fosun Acquisition was effected by the merger of Merger Sub with and into the Company, with the Company surviving the merger and becoming a wholly owned indirect subsidiary of Fosun. The aggregate consideration paid by Purchaser was $2,042,936, which was allocated ratably among the holders of shares, restricted share units, warrants and options of the Company (taking into consideration the exercise prices of warrants and options), after deduction of (a) the portion of transaction expenses incurred by the Company payable out of the merger consideration, (b) transaction expenses incurred by the Equityholder Representative prior to the Closing, (c) $2,500 to fund an escrow account against which indemnity claims may be made by the Purchaser and (d) $750 to fund potential expenses incurred by the Equityholder Representative after the closing. Payments for certain equity held by certain employees of the Company were funded into separate escrow accounts for the benefit of such employees, and payments out of such escrow accounts will be made to such employees on a deferred basis, in each case, pursuant to arrangements contemplated by the Merger Agreement. The deferred consideration payable was $48,498 and is recorded in the consolidated balance sheet in the following line items: cash of $48,498, other liabilities of $35,413, and additional paid in capital of $13,085. Costs incurred associated with the merger of $22,110 are recorded in non-recurring transaction expenses in the consolidated statement of operations and comprehensive income. Fosun reimbursed the Company for these expenses and the reimbursement is recorded as additional paid in capital in the balance sheet. Non-recurring transaction expenses also include costs incurred of $7,615 associated with the Fosun Equity Investment (refer to Note 3) and $9,804 due to the accelerated vesting of certain share based compensation awards pursuant to the Merger Agreement. 14
5. Investment in Joint Ventures Ironshore Holdings U.S. formed IDP Holdings LLC ( IDP ) as a joint venture with The Distinguished Programs Group LLC ( DPG ). 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 were 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. On October 26, 2015, Ironshore Holdings U.S. sold its ownership interest in IDP to DPG for $10,893 resulting in a gain of $5,330 recognized in other income. In addition, the aggregate promissory note value of $13,828 and accrued interest outstanding up to the October 26, 2015 were settled by DPG. 6. Goodwill and other intangible assets Goodwill and other intangibles as of December 31, 2015 and 2014 are as follows: Goodwill Gross Goodwill & other Other intangible assets intangible assets Foreign Gross Amortization Exchange Total Total Balance as of January 1, 2014 $17,804 $80,425 $(9,944) $(5,727) $64,754 $82,558 Reclassification (b) 391 (391) - - (391) - Acquired during 2014-620 - - 620 620 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 Acquired during 2015 187 425 - - 425 612 Amortization - - (2,519) - (2,519) (2,519) Foreign exchange translation (a) - - - (1,221) (1,221) (1,221) Balance as of December 31, 2015 $18,382 $81,079 $(14,847) $(8,388) $57,844 $76,226 (a) Represents foreign exchange translation on Lloyd s Syndicate capacity. (b) Represents adjustment related to the acquisition of ERR acquisition. 15
The gross carrying value and accumulated amortization by major category of other intangible asset as of December 31, 2015 is shown below: Gross carrying Accumulated Foreign exchange value amortization translation Total Admitted licenses $11,006 $ - $ - $11,006 Excess & surplus lines licenses 8,925 - - 8,925 Lloyd's Syndicate capacity 33,570 - (8,033) 25,537 Indefinite life 53,501 - (8,033) 45,468 Customer relationship, customer lists and trade name 11,468 (7,591) (355) 3,522 Renewal rights 10,514 (4,937) - 5,577 Non-compete agreement 5,596 (2,319) - 3,277 Definite life 27,578 (14,847) (355) 12,376 Total intangible assets $81,079 $(14,847) $(8,388) $57,844 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 - - 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 The useful life of intangible assets with finite lives ranges from 3 to 10 years, with an average amortization period of 5.2 years. Expected amortization of the intangible assets is shown below: Other intangible assets 2016 $2,541 2017 2,541 2018 2,541 2019 2,323 2020 and thereafter 2,430 Total remaining amortization expense - definite life 12,376 Indefinite life 45,468 Total $57,844 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. 16