| | | | | | | | | | | | | | | | | | | | | | | | December 31, |
| 2022 | | 2021 |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Lloyd's capacity | $ | — | | | n/a | | $ | 17.3 | | | n/a |
Distribution network | 45.5 | | | 45.5 | | | 45.5 | | | 45.5 | |
Other | 6.2 | | | 6.2 | | | 6.2 | | | 6.2 | |
| $ | 51.7 | | | $ | 51.7 | | | $ | 69.0 | | | $ | 51.7 | |
As of December 31, 2020, all of our finite-lived intangible assets had been fully amortized and we had no amortization expense for the years ended December 31, 2022 and 2021. During the year ended December 31, 2020, amortization expense was $1.1 million, and is included in Underwriting, acquisition and insurance expenses in our Consolidated Statements of Income (Loss). The entirety of the amortization expense recorded in the year 2020 relates to Ariel Re and was calculated pro-rata before the sale.
Leases
We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease agreements have lease and non-lease components. We account for these components separately, therefore our operating lease right-of-use asset and operating lease liabilities represent base rent only. Lease expense is recognized on a straight-line basis over the lease term. Renewal options are evaluated prior to the expiration date and recorded upon exercise.
Property and Equipment
Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and carried at cost less accumulated depreciation and are reported in Other assets in our Consolidated Balance Sheets. Depreciation is calculated using a straight-line method over the estimated useful lives of the assets, generally three to thirty-nine years. The accumulated depreciation for property and equipment was $144.7 million and $158.8 million at December 31, 2022 and 2021, respectively. The net book value of our property and equipment at December 31, 2022 and 2021 was $43.6 million and $67.5 million, respectively. The depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $22.3 million, $23.9 million and $24.1 million, respectively.
Derivative Instruments
We enter into short-term, currency spot and forward contracts to manage operational currency exposure from our non-USD insurance operations. The forward contracts are typically thirty to ninety days and are renewed as management deems necessary to accomplish the objectives of the contracts. These foreign currency forward contracts are carried at fair value in Other assets on our Consolidated Balance Sheets at December 31, 2022 and 2021, respectively. The realized and unrealized gains and losses are included in Net realized investment (gains) losses in our Consolidated Statements of Income (Loss). The forwards contracts are not designated as hedges for accounting purposes.
Assets held-for-sale
Assets held-for-sale consists of assets associated with pending business dispositions. The Company classifies a business as held-for-sale when the Company has entered into an agreement to sell the business and certain other specified criteria are met. The business classified as held-for-sale is recorded at the lower of carrying value or estimated fair value, less costs to sell. If the carrying value of the business exceeds its estimated fair value, less costs to sell, a loss is recognized when the criteria for the held-for-sale classification as described above are met. If the estimated fair value, less costs to sell, exceeds the carrying value of the business, the gain is recorded when the sale is completed. See Note 2, “Recent Acquisitions, Disposals & Other Transactions” for further discussion.
Reserves for Losses and Loss Adjustment Expenses
Liabilities for unpaid losses and loss adjustment expenses include the accumulation of individual case estimates for claims reported as well as estimates of IBNR claims and estimates of claim settlement expenses. Reserves for loss and loss adjustment expenses represents management's best estimate of the ultimate liability to settle these claims as of the balance sheet date. The effects of changes in this estimate are included in results of operations in the period in which the estimates are changed. Reinsurance recoverables on unpaid claims and claim expenses represent estimates of the portion of such liabilities that will be recoverable from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the unpaid claims liabilities associated with the reinsurance policy.
Reinsurance
In the normal course of business, our insurance subsidiaries cede risks above certain retention levels to other insurance companies. Reinsurance recoverables include claims we paid and estimates of unpaid losses and loss adjustment expenses that are subject to reimbursement under reinsurance and retrocessional contracts. The method for determining reinsurance recoverables for unpaid losses and loss adjustment expenses involves reviewing actuarial estimates of gross unpaid losses and loss adjustment expenses to determine our ability to cede unpaid losses and loss adjustment expenses under our existing reinsurance contracts. This method is continually reviewed and updated and any resulting adjustments are reflected in earnings in the period identified. Reinsurance premiums, commissions and expense reimbursements are accounted for on a basis consistent with those used in accounting for the original policies issued and the term of the reinsurance contracts. Amounts recoverable from reinsurers for losses and loss adjustment expenses for which our insurance and reinsurance subsidiaries have not been relieved of their legal obligations to the policyholder are reported as assets.
On November 9, 2022, the Company closed on the U.S. LPT with Enstar covering a majority of the Company’s U.S. casualty insurance reserves, including construction, for accident years 2011 to 2019. See Note 2, “Recent Acquisitions, Disposals & Other Transactions” for additional information.
Earned Premiums
Premium revenue is generally recognized ratably over the policy period. Premiums that have yet to be earned are reported as Unearned premiums in our consolidated balance sheets.
At December 31, 2022, trade capital providers balances were reclassified to Assets held-for-sale. At December 31, 2021, ceded unearned premium balances include cessions to reinsurers including trade capital providers, while the earned premium recognized in our Consolidated Statements of Income (Loss) excludes amounts relating to trade capital providers. The trade capital providers’ quota share amount is included in Ceded reinsurance payable, net.
Assumed reinstatement premiums that reinstate coverage are written and earned at the time the associated loss event occurs. The original premium is earned over the remaining exposure period of the contract. Reinstatement premiums are estimated based upon contract terms for reported losses and estimated for incurred but not reported losses.
Retrospectively Rated Policies
We have written a number of workers compensation, property and other liability policies that are retrospectively rated. Under this type of policy, the policyholder or coverholder may be entitled, subsequent to coverage expiration, to a refund or may owe additional premiums based on the amount of losses incurred under the policy. The retrospective premium adjustments on certain policies are limited to a minimum or maximum premium adjustment, which is calculated as a percentage of the standard amount of premium charged during the life of the policy. Accrued retrospectively rated premiums have been determined based on estimated ultimate loss experience of the individual policyholder accounts. The estimated liability for return of premiums under retrospectively rated policies is included in Unearned premiums in our Consolidated Balance Sheets and was $0.2 million and $4.7 million at December 31, 2022 and 2021, respectively. The estimated amount included in premiums receivables for additional premiums due under retrospectively rated policies was $0.2 million and $0.1 million at December 31, 2022 and 2021, respectively.
Liabilities held-for-sale
Liabilities held-for-sale consists of liabilities associated with pending business dispositions. See Assets held-for-sale above for further description of the held-for-sale classification.
Non-Operating Expenses
Non-operating expenses represent costs not associated with our ongoing insurance or other operations, including severance expenses, certain legal costs, merger and acquisition and other transaction-related expenses, and certain non-recurring expenses. As such, non-operating expenses have been excluded from the calculation of our expense ratio. These non-recurring costs are included in the line item Non-operating expenses in the Company’s Consolidated Statements of Income (Loss).
Share-Based Payments
Compensation expense for share-based payments is recognized based on the measurement-date fair value for awards that will settle in shares. The fair value of our performance share and restricted share awards is based on the grant date closing market price. The fair value for our stock settled share appreciation rights is calculated using the Black-Sholes valuation model. Compensation expense for awards that are settled in equity are recognized on a straight line pro rata basis over the vesting period, adjusted for expected forfeitures. See Note 14, “Share-based Compensation” for related disclosures.
Foreign Currency Exchange Gain (Loss)
The reporting currency of the Company is the U.S. dollar (“USD”). USD is the functional currency of all but one of our remaining foreign operations. For foreign operations with the U.S. dollar as the functional currency, monetary assets and liabilities that are denominated in local currencies are remeasured at the exchange rates in effect at the balance sheet date. The resulting gains and losses from changes in the foreign exchange rates are reflected in net income. Non-monetary assets and liabilities are not remeasured. In the case of our non-USD denominated available-for-sale investments, the change in exchange rates between the local currency and USD at each balance sheet date represents an unrealized appreciation or depreciation in value of these securities and is included as a component of Accumulated other comprehensive income (loss) on our Consolidated Balance Sheets. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate during the period with the resulting foreign exchange gains and losses included in net income for the period.
Translation gains and losses related to our operations denominated in local currencies are recorded as a component of shareholders’ equity in our Consolidated Balance Sheets. At December 31, 2022 and 2021, the foreign currency translation adjustments were a loss of $4.2 million and $35.3 million, respectively. The change in the foreign currency translation adjustments was primarily driven by disposal of the Company’s Brazil and Malta operations. See Note 2, “Recent Acquisitions, Disposals & Other Transactions” for further discussion.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in net income or loss in the period in which the change is enacted.
We recognize interest expense and penalties related to the unrecognized tax benefits in Interest expense and Underwriting, acquisition and insurance expenses, respectively, in our Consolidated Statements of Income (Loss).
We recognize valuation allowance in Income tax provision (benefit) in our Consolidated Statements of Income (Loss).
Supplemental Cash Flow Information
Interest paid and income taxes paid (recovered) were as follows: | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(in millions) | 2022 | | 2021 | | 2020 |
Senior unsecured fixed rate notes | $ | 9.3 | | | $ | 9.3 | | | $ | 9.3 | |
Junior subordinated debentures | 13.5 | | | 10.0 | | | 11.9 | |
Other indebtedness | 1.3 | | | 2.5 | | | 5.2 | |
Total interest paid | $ | 24.1 | | | $ | 21.8 | | | $ | 26.4 | |
| | | | | |
Income taxes paid | 26.2 | | | 43.0 | | | 47.7 | |
Income taxes recovered | (2.1) | | | (2.6) | | | (1.8) | |
Income taxes paid, net | $ | 24.1 | | | $ | 40.4 | | | $ | 45.9 | |
Recently Adopted Accounting Pronouncements
The Company evaluated recently issued accounting pronouncements and determined none are material to our results of operations or financial position reported herein.
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