In the Insurance segment, January 2008 renewals continue to reflect increasing soft market conditions as premium rates across most lines of business continue to decrease within the market. In addition, competitive pressures continue to make new business more difficult to win. Initial indications based on January 2008 renewals indicate decreases in premium rates of approximately 5 to 20%, while certain casualty lines have experienced premium rate reductions of approximately 5 to 15%. In addition, premium rates within certain specialty lines and the U.S. Excess and Surplus line of business have decreased by up to 10%. While market competition continues to increase in most lines of business in early 2008, desired retentions have broadly been maintained. However, as a result of recent rating agency downgrades in late January 2008, as described above, it may be more difficult for the Company, going forward, to attract new business and/or retain previously written business, particularly within certain casualty and professional lines of business, however, initial reactions from customers and brokers have indicated this is likely to be limited.
The following table details the current exposures to the topical assets within the Company’s fixed income portfolio as well as the current net unrealized gain/loss position as at December 31, 2007, and related earnings and comprehensive earnings impact in 2007:
During 2005, total net adverse prior year development within the Insurance Segment was $1.02 billion of which $834.2 million resulted from the negative outcome of the Winterthur Decision. The remaining $186.0 million was comprised of net adverse development of $259.7 million in professional lines and $34.7 million within other specialty lines including runoff and discontinued business partially offset by releases of $108.4 million primarily in European casualty business. During 2005, net prior year reserves across the Reinsurance segment developed adversely by $93.5 million. Net adverse development of $266.9 million in casualty and professional lines was partially offset by releases in short-tail lines of business of $173.4 million.
Net investment income was $2.2 billion in 2007 as compared to $2.0 billion in 2006. This increase was primarily due to a larger average investment asset base combined with higher investment yields. The increase in the average size of the investment portfolio primarily
In late July 2007, Mr. Brian W. Nocco joined the Company and effective August 10, 2007 began serving as the Company’s Chief Financial Officer (“CFO”). Ms. Fiona E. Luck, who served as the Company’s Interim CFO prior to that date and following the departure of the Company’s former CFO, Jerry de St. Paer, on March 5, 2007, will continue in her role as the Company’s Chief of Staff.
There are factors that would cause reserves to increase or decrease within the context of the range provided. The magnitude of any change in ultimate losses would be determined by the magnitude of any changes to the Company’s assumptions or combined impact of changes in assumptions. Factors that would increase reserves include, but are not limited to, increases in claim severity, increases in expected level of reported claims, changes to the regulatory environment which expand the exposure insured by the Company, changes in the litigation environment that increase claim awards, filings or verdicts, unexpected increases in loss inflation, and/or new types of claims being pursued against the Company. Factors that would decrease reserves include, but are not limited to, decreases in claim severity, reductions in the expected level of reported claims, changes to the regulatory environment which contract the exposure insured by the Company, changes in the litigation environment that decrease claim awards, filings or verdicts, and/or unexpected decreases in loss inflation.
As stated above, the future policy benefit reserves include provisions for adverse deviation in excess of best estimate assumptions that amounted to approximately $410 million and $371 million at December 31, 2007 and 2006, respectively. The future policy benefit reserves would only be increased if these provisions for adverse deviation became insufficient in the light of emerging claims experience. The present value of future claims would increase by approximately $21 million if mortality rates were to decrease by 1% in all future years, relative to the reserving assumptions.
the amount of subordination in the CDS contracts before liability attaches that would be required by a market participant in order for it to assume the risks;
the quality of the specific assets referenced in the CDS contracts at the measurement date;
Net premiums earned decreased marginally by 0.2% in the year ended December 31, 2006 compared with the year ended December 31, 2005. The decrease over the prior year was primarily attributable to the reasons noted above affecting net premiums written and partially offset by 2005 hurricane ceded reinstatement premiums recognized and earned in 2005.
Gross and net premiums written decreased by 13.1% and 11.5%, respectively, during the year ended December 31, 2007 as compared with the year ended December 31, 2006. These decreases resulted from the Company declining business due to competitive pressures continuing to drive certain rates below the Company’s acceptable underwriting levels as well as certain favorable reinstatement premium and U.S. property program adjustments recorded in 2006. For the year ended December 31, 2007, premium rate decreases were most significant in certain casualty and non-U.S. property lines of business. Net premiums written reflect the above changes in gross premiums written, combined with a reduction in ceded premiums in 2007 as compared to 2006 as a result of higher retentions and a lower cost of external retrocession.
With respect to the Life Operations segment, gross and net premiums written, net premiums earned and claims and policy benefits in each of the three years ended December 31, 2007, 2006 and 2005 included the assumption of the following long duration single premium annuity portfolios:
Prior to the secondary offering of SCA common shares on June 6, 2007, net income from SCA was consolidated with the Company’s results and SCA was considered an operating segment of the Company. Subsequent to June 6, 2007, SCA was no longer a consolidated subsidiary or an operating segment of the Company and its remaining investment in SCA has been accounted for using the equity method of accounting, recorded on a one quarter lag through equity earnings (loss) from financial operating affiliates. For the period from June 6 to December 31, 2007, the recent credit market volatility and concern over residential mortgage markets have impacted SCA’s results significantly. For further information on SCA, see “Results of Operations” and “Other Revenues and Expenses” within Management’s Discussion and Analysis of Financial Condition and Results of Operations. In addition, see Notes 3 and 8 to the Consolidated Financial Statements, “Security Capital Assurance” and “Investments in Affiliates”, for further information.
During the year ended December 31, 2007, the Company realized losses of $90.6 million and $4.0 million upon the sale of fixed income securities and equity securities, respectively, that had been in an unrealized loss position for greater than twelve months. During the year ended December 31, 2006, the Company realized losses of $7.6 million and $1.2 million upon the sale of fixed income securities and equity securities, respectively, that had been in an unrealized loss position for greater than twelve months. The decisions to sell these securities were made by the Company’s investment managers based upon a change in market conditions and other factors (these decisions were independent of the Company’s previously stated intent and ability to hold such securities).
Under Rule 3-09 of Regulation S-X, the Company is required to file separate audited financial statements of SCA (the “SCA Financials”). The SCA Financials were not available at the time of filing this Annual Report on Form 10-K (the “10-K”). The Company intends to file the SCA Financials as an exhibit to an amendment to the 10-K (the “10-K/A”) as soon as they are available. Until such time, the Company may not satisfy the registrant requirements for use of Form S-3 and therefore may be ineligible to use such Form. Should the Company be unable to file the 10-K/A on or before March 17, 2008, the Company may be ineligible to use Form S-3 for a period of twelve months.
Consistent with the ratings actions noted above, Fitch Ratings (“Fitch”), in 2008, revised the financial strength rating of the Company’s leading property and casualty operating subsidiaries to “A+” from “AA-” and affirmed them with a ‘stable’ outlook. As well, in January 2008, Moody’s Investors Service, Inc. (“Moody’s”) downgraded the insurance financial strength ratings of the Company’s core property and casualty operating companies to “A1” from “Aa3”.
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 (Continued)
The Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. Non-exchange traded weather products are recorded at fair value. The changes in fair value of derivatives are shown in the consolidated statement of income as “net realized and unrealized gains and losses on derivative instruments” unless the derivatives are designated as hedging instruments. The accounting for derivatives which are designated as hedging instruments is discussed below. Changes in fair value of derivatives may create volatility in the Company’s results of operations from period to period.
Short-term investments comprise investments with a remaining maturity less than one year. Equity securities include investments in open end mutual funds and shares of publicly traded alternative funds.
For the Company’s financial guarantee reserves, a case basis reserve for unpaid losses and loss adjustment expenses is recorded at the net present value of an estimated loss when, in management’s opinion, the likelihood of a future loss on a particular insured obligation is probable and determinable at a balance sheet date. The Company also maintains an unallocated reserve on its financial guarantee business which is based on actuarial reserving analysis. This non-specific reserve is established for expected levels of losses associated with currently insured credits and is based on a portion of premiums earned to date. The Company, on an ongoing basis, monitors these reserves and may periodically adjust such reserves based on the Company’s actual loss experience, its future mix of business, and its view of future economic conditions.
At December 31, 2007 and 2006, approximately $704.7 million and $698.1 million, respectively, of securities were on deposit with various U.S. state or government insurance departments in order to comply with relevant insurance regulations.
During 2006, the Company sold its interest in FrontPoint Partners LLC, an integrated alternative asset firm, resulting in equity earnings of $41.7 million recorded in 2006 related to the initial sale and $32.4 million recorded in 2007, primarily related to the receipt of contingent proceeds.
The Company’s exposure to asbestos and environmental claims arises from contracts written, both on a proportional and excess basis, after 1972. The Company discontinued writing contracts with these exposures in 1985. Business written was across many different policies, each with a relatively small contract limit. The Company’s reported asbestos claims related to both traditional products and premises and operations coverage.
The fair value of the Company’s notes payable and debt outstanding as at December 31, 2007 and 2006, is estimated to be $2.6 billion and $3.4 billion, respectively, and is based on quoted prices.
The following table summarizes these instruments and the effect on net income in the years ended December 31, 2007, 2006 and 2005:
As a part of the purchase of GAPS, as described in Note 6, “Business Combinations,” the Company acquired certain defined benefit pension liabilities. The related balances are not included in the tables below as the liabilities are insured under an annuity type contract.
The status of the above mentioned plans at December 31, 2007 and 2006 is as follows:
The Company has operations in subsidiary and branch form in various other jurisdictions around the world, including but not limited to the U.K., Switzerland, Ireland, Germany, France, India, Luxembourg and various countries in Latin America that are subject to relevant taxes in those jurisdictions.