We first invested in funds of hedge funds on April 1, 2006 with an initial investment of $150 million. At December 31, 2006 the investment in funds of hedge funds was $156.9 million or 3.0% of our portfolio and during 2006 we recognized $6.9 million of investment income from our investment in these funds.
an increase in net of tax unrealized gains on investments of $19.3 million, accounted for in other comprehensive income;
Non-proportional treaties. A large number of the reinsurance contracts we write are written on a non-proportional or excess of loss treaty basis. As the ultimate level of business written by each cedant can only be estimated at the time the reinsurance is placed, the reinsurance contracts generally stipulate a minimum and deposit premium payable under the contract with an adjustable premium determined by variables such as the number of contracts covered by the reinsurance, the total premium received by the cedant and the nature of the exposures assumed. Minimum and deposit premiums generally cover the majority of premiums due under such treaty reinsurance contracts and the adjustable portion of the
The contract expired on August 20, 2007 and has no impact on net income in the twelve months ended December 31, 2008. The impact of this contract on net income at December 31, 2007 was $2.4 million.
Estimates of IBNR are generally subject to a greater degree of uncertainty than estimates of the cost of settling claims already notified to us, where more information about the claim event is generally available. IBNR claims often may not be apparent to the insured until many years after the event giving
These factors are incorporated in the recommended reserve range from which management selects its best point estimate. As at December 31, 2008, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $89.5 million in loss reserves which would represent 63.8% of net income before income tax for the twelve months ended December 31, 2008. As at December 31, 2007, a 5% change in the gross reserve for IBNR losses would have equated to a change of approximately $80.6 million in loss reserves which would represent 14.0% of net income before income tax for the twelve months ended December 31, 2007.
The decrease in net premiums earned in 2008 in casualty reinsurance and U.S. insurance was due to challenging market conditions and the repositioning of our U.S. property insurance line. These reductions were partially compensated by an increase of $99.3 million in gross earned premiums in our international insurance segment due to the contribution from new underwriting teams.
The gross expense ratio in 2008 decreased by 0.5 percentage points when compared to 2007, mainly as a result of the reduction in profit commissions payable to policyholders which reduced from $17.9 million in 2007 to $7.3 million in 2008. The increase in operating and administrative expenses is
The reduction in gross written premium in 2008 compared to 2007 reflects the softening market conditions for this segment through the period prior to the September hurricanes, increased competition and the non-renewal of a number of accounts that no longer meet our internal profitability requirements. These premium reductions were partially offset by the recognition of $12.2 million of reinstatement premiums following Hurricanes Ike and Gustav and favorable prior year estimated premium adjustments for the treaty risk excess, treaty pro rata and property facultative business lines.
Losses and loss adjustment expenses. The loss ratio for 2008 was 71.5% compared to 51.7% in 2007. In 2008, the segment was impacted by net hurricane losses of $45.7 million and a $15.7 million pollution loss in France. In addition to the increase in large losses in 2008, the segment was also impacted by a net $3.9 million increase in prior year reserves following adverse experience from the marine and specialty liability line in connection with California wildfire losses in 2007 and shipowners’ liability increases partially offset by releases from U.K. commercial liability and property. This compares to an $80.8 million reserve release in 2007. The loss ratio in 2007 of 51.7% reduced from 53.3% in 2006 despite the 2007 year being adversely affected by a $14.0 million loss from a shipping collision and a $10.1 million loss from an airplane crash in Brazil. The comparative period in 2006 benefited from a reserve release of $32.7 million offset by a $19.0 million deterioration in 2005 hurricane losses. Prior year reserve releases are further discussed under “Reserves for Losses and Loss Expenses.”
The liquidity of the Insurance Subsidiaries is also affected by the terms of contractual obligations to U.S. policyholders and by undertakings to certain regulatory authorities to facilitate the issue of letters of credit or maintain certain balances in trust funds for the benefit of policyholders. The following table shows the forms of collateral or other security provided to policyholders as at December 31, 2008 and 2007:
For a discussion of our commitments and contingencies, please see Note 18 to the audited financial statements for the twelve months ended December 31, 2008 included elsewhere in this report.