Common shareholders’ equity of $5.3 billion; diluted book value per common share of $42.97
2011 versus 2010: Eleven percent growth in gross premiums written and changes in our reinsurance purchasing effected during the second quarter of 2010 drove the 18% growth in net premiums earned for our insurance segment. The 8% increase in our reinsurance segment is consistent with gross premiums written growth.
A lower level of loss activity in our property and marine lines of business and a reduction in the ratio for our credit and political risk business (given a notable improvement in loss experience during the year) were the primary drivers of the improvement in our insurance segment.
In 2010, we recognized $118 million of net favorable prior year reserve development, the principal components of which were:
During 2012, we recognized estimated pre-tax net losses (inclusive of related premiums to reinstate our reinsurance protection) of $178 million for Storm Sandy. In addition, we recognized aggregate pre-tax net losses of $44 million for Hurricane Isaac and first and second quarter 2012 U.S. weather events.
2012 versus 2011: The reduction in catastrophe business written during 2012, described above, drove the decrease in net premiums earned. Partially offsetting this was an increase for motor reinsurance, driven by the recent increases in proportional writings previously noted.
2011 versus 2010: The 4% reduction in investment income from fixed maturities reflected lower reinvestment yields primarily due to a downward shift in U.S. and European risk-free yield curves. The reduction was partially offset by widening credit spreads and growth of 7% on our average fixed maturities balances during 2011 as additional cash provided by operations was allocated partially to fixed maturities.
We also have an indirect eurozone exposure through our investment of $104 million in non-U.S. bond mutual funds.
At December 31, 2012, our non-U.S. sovereign debt portfolio had net unrealized gains of $28 million (2011: $29 million net unrealized losses) which included gross unrealized foreign exchange losses of $3 million (2011: $50 million), mainly on euro-denominated securities.
We increased our allocation to commercial MBS in 2012, primarily due to attractive valuations relative to other structured products. Our non-agency CMBS portfolio continues to be rated highly, with approximately 90% rated AA or better (2011: 96%). Additionally, the weighted average estimated subordination percentage for the portfolio was 30% at December 31, 2012 (2011: 25%), which represents the current weighted average estimated percentage of the capital structure subordinated to the investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. At December 31, 2012, the average duration and weighted average life was 2.8 years (2011: 2.9 years) and 3.1 years (2011: 4.2 years), respectively.
An “opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations”.
We believe that the material items requiring such subjective and complex estimates are our:
The following is a brief description of the reserve estimation methods commonly employed by our actuaries and a discussion of their particular strengths and weaknesses:
The results show the cumulative increase (decrease) in our loss reserves across all accident years. For example, if our assumed loss development pattern for our property and other insurance business was three months shorter with no accompanying change in our ELR assumption, our loss reserves may decrease by approximately $22 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserving classes. Therefore, it would be inappropriate to take each of the amounts and add them together in an attempt to estimate total volatility. While we believe the variations in the expected loss ratios and loss development patterns presented could be reasonably expected, our own historical data regarding variability is generally limited and actual variations may be greater or less than these amounts. It is also important to note that the variations are not meant to be a “best-case” or “worst-case” series of scenarios and, therefore, it is possible that future variations in our loss reserves may be more or less than the amounts presented. While we believe that these are reasonably likely scenarios, we do not believe this sensitivity analysis should be considered an actual reserve range.
Our excess of loss reinsurance contracts with cedants generally include provisions for a deposit or minimum premium payable to us. The minimum/deposit premium is generally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. Minimum/deposit premiums generally cover the majority of premiums due under excess of loss contracts, with the adjustable portion typically comprising an insignificant portion of the total premium paid to us. Therefore, the deposit/minimum premiums are generally considered to be the best estimate of the excess of loss reinsurance written premiums at inception. We record adjustments to the deposit/minimum premiums in the period during which they become determinable. Excess of loss contracts accounted for 47%, 53% and 55% of our reinsurance segment’s total gross premiums written for the years ended December 31, 2012, 2011 and 2010, respectively. The decrease during 2012 was primarily driven by the repositioning of our catastrophe portfolio throughout the year.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010
At December 31, 2012, 146 securities (2011: 138) have been in a continuous unrealized loss position for 12 months or greater and have a fair value of $268 million (2011: $177 million). Following our credit impairment review, we concluded that these securities as well as the remaining securities in an unrealized loss position in the above table were temporarily depressed at December 31, 2012, and are expected to recover in value as the securities approach maturity. Further, at December 31, 2012, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.
At December 31, 2012, we have $40 million (2011: nil) of unfunded commitments relating to our investments in hedge and credit funds.
We lease office space under operating leases which expire at various dates. We renew and enter into new leases in the ordinary course of business, as required. During 2012, total rent expense with respect to these operating leases was $29 million (2011: $24 million; 2010: $19 million).
In 2005, a putative class action lawsuit was filed against our U.S. insurance subsidiaries. In re Insurance Brokerage Antitrust Litigation was filed on August 15, 2005 in the United States District Court for the District of New Jersey and includes as defendants numerous insurance brokers and insurance companies. The lawsuit alleges antitrust and Racketeer Influenced and Corrupt Organizations Act (“RICO”) violations in connection with the payment of contingent commissions and manipulation of insurance bids and seeks damages in an unspecified amount. On October 3, 2006, the District Court granted, in part, motions to dismiss filed by the defendants, and ordered plaintiffs to file supplemental pleadings setting forth sufficient facts to allege their antitrust and RICO claims. After plaintiffs filed their supplemental pleadings, defendants renewed their motions to dismiss. On April 15, 2007, the District Court dismissed without prejudice plaintiffs' complaint, as amended, and granted plaintiffs thirty (30) days to file another amended complaint and/or revised RICO Statement and Statements of Particularity. In May 2007, plaintiffs filed (i) a Second Consolidated Amended Commercial Class Action complaint, (ii) a Revised Particularized Statement Describing the Horizontal Conspiracies Alleged in the Second Consolidated Amended Commercial Class Action Complaint, and (iii) a Third Amended Commercial Insurance Plaintiffs' RICO Case Statement Pursuant to Local Rule 16.1(B)(4). On June 21, 2007, the defendants filed renewed motions to dismiss. On September 28, 2007, the District Court dismissed with prejudice plaintiffs' antitrust and RICO claims and declined to exercise supplemental jurisdiction over plaintiffs' remaining state law claims. On October 10, 2007, plaintiffs filed a notice of appeal of all adverse orders and decisions to the United States Court of Appeals for the Third Circuit, and a hearing was held in April 2009. On August 16, 2010, the Third Circuit Court of Appeals affirmed the District Court's dismissal of the antitrust and RICO claims arising from the contingent commission arrangements and remanded the case to the District Court with respect to the manipulation of insurance bids allegations. We continued to believe that the lawsuit was completely without merit and on that basis vigorously defended the filed action. However, for the sole purpose of avoiding additional litigation costs, we reached
The holders of our Series A, B and C preferred shares have no voting rights other than the right to elect a specified number of directors if preferred share dividends are not declared and paid for a specified period.
In 2012, we issued common shares to non-management directors under the 2007 Plan with no restriction. At December 31, 2012, 6,633,981 equity-based awards remained available for grant under the 2007 Plan. Between January 1, 2013 and February 21, 2013, we granted a total of 1,656,500 restricted stock units to our employees. Included in the total restricted stock units granted subsequent to December 31, 2012 were 748,250 awards which will be settled in cash upon vesting.
Under current Bermuda law, we are not required to pay any taxes in Bermuda on income or capital gains. We have received an assurance from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, we will be exempt from taxation in Bermuda until March 2035. Our Bermuda subsidiary has an operating branch in Singapore, which is subject to the relevant taxes in that jurisdiction. The branch is not under examination in this tax jurisdiction, but remains subject to examination for tax years 2009 through 2012.