During 2007, pricing in virtually all insurance and reinsurance markets declined, on average, by approximately 10% due to increasing competition from the private sector and, for catastrophe prone business, the impact of event-linked securities and certain governmental initiatives that occurred or were anticipated to occur.
Net favorable loss and LAE development occurring in 2008 that related to prior year losses was $104.8 million. Summaries by line of business are as follows:
· Net estimated ultimate Other Specialty losses for prior years decreased by $19.9 million due primarily to a decrease in Marine losses relating to hurricane Rita, decreases in expected losses on proportional contracts relating to the Aviation, Marine and Personal Accident classes of business and favorable commutations of a related group of Other Specialty contracts.
During the year ended December 31, 2008, Montpelier Syndicate 5151 wrote $116.2 million of gross premiums with its U.S.-based underwriters producing $36.3 million and its U.K.-based underwriters producing $79.9 million. Syndicate 5151 has experienced significant growth since 2007, the predominance of which has been in its Property Specialty and Other Specialty lines. Within these lines of business, Syndicate 5151 has produced new business in engineering, individual and treaty property coverage and U.S. casualty lines, written on both a proportional and non-proportional basis. During 2007, the year in which Montpelier Syndicate 5151 was established, it wrote $15.3 million of gross premiums.
The significant decrease in incentive compensation during 2008, as compared to 2007, is due to a sharp reduction in incentive accruals resulting from hurricane losses incurred during the 2008 third quarter. Additional reasons for the decreases are: (i) a decrease in performance share expense due to a lower share price in the 2008 periods versus 2007; and (ii) lower overall RSU expense in 2008 due to the timing of outstanding awards (RSU awards are more heavily amortized in the early stages of the award). The significant increase in our incentive compensation from 2006 to 2007 was mainly the result of: (i) having fewer employees within Corporate and Other in 2006 than in 2007; (ii) having two cycles of performance shares outstanding versus only one cycle during 2006 (all performance shares issued for the 2005 - 2007 performance period were cancelled without payment as there was no expected payout related to this tranche due to the adverse financial effects of the 2005 hurricanes); and (iii) having two cycles of restricted share units (“RSUs”) outstanding versus only one cycle outstanding during 2006.
At any time prior to the termination of the Forward Sale Agreement, we have the right to borrow from the counterparty up to $89.1 million (representing 7,920,000 common shares at the floor price of $11.25 per common share) subject to an annual interest rate equal to the U.S. dollar LIBOR through the termination date. Upon the termination of the Forward Share Agreement, we have the right to either repay the counterparty in cash or to issue or otherwise deliver the requisite number of common shares.
Our cash flows used for operating activities totaled $191.3 million (excluding net purchases of trading securities) which resulted primarily from net paid losses of $757.0 million exceeding premiums received, net of acquisition costs.
· we paid $30.0 million in cash dividends to our common shareholders and warrant holders,
Our loss and LAE reserves include both a component for outstanding case reserves for claims which have been reported and a component for IBNR for claims that have not been reported. Our case reserve estimates are initially set on the basis of loss reports received from third-parties. IBNR consists of a provision for additional development in excess of the case reserves reported by ceding companies, as well as a provision for claims which have occurred but which have not yet been reported to us by ceding companies.
The development of our prior-year losses is monitored during the course of subsequent calendar years by comparing the actual reported losses against expected losses. The analysis of this loss development is an important factor in our ongoing refinement of the assumptions underlying our reserving process. Our internal analysis of changes in prior year reserve estimates is focused on changes in the estimated ultimate loss and therefore management believes that it is not meaningful to split the movement of prior year reserve estimates between case reserves and IBNR. With regards to our short tail property book of business, we do not feel that we can estimate the expected breakdown of losses in the first year with a high level of accuracy. The percentage split between paid losses, case reserves, and IBNR would vary greatly depending on the number, nature and timing of losses throughout the year. However, we would expect that by the end of the year subsequent to the year in which the loss occurred, the majority of these short tail property losses would be reported to us, and by the end of the following year the majority would be paid.
In determining the grant date fair value of RSUs, a zero to five percent discount to the then market value of the shares is applied as sale restrictions may remain after RSUs are vested, depending on the date and term of the award. We also assume a 3% to 9% forfeiture rate. Actual forfeitures are periodically compared to assumed forfeitures for reasonableness.