The lease for office space in Dublin expired on July 31, 2007. However, we extended this lease for a further period expiring on June 30, 2008 and moved into a smaller office of approximately 80 square feet. This lease may be cancelled prior to that date following three months notice. The annual lease payments for this office space is approximately $55,000
During 2007, the following significant events and achievements occurred, all of which are more fully described throughout this annual report:
• We reduced our total general and administrative costs to $59.9 million (including $13.8 million in our Lloyd’s segment) for the year ended December 31, 2007.
• We generated net investment income of $41.9 million, excluding net gains on investments, during the year ended December 31, 2007.
• We have further reduced the total amount of letters of credit outstanding under our credit facility to $91.6 million at December 31, 2007.
During 2007 we incurred professional, legal and consulting costs of $16.3 million compared to $22.5 million in 2006. During 2007 we incurred significant professional, legal and consulting costs in connection with the management of our Lloyd’s business, engagement of third party run-off advisors to assist in certain projects related to our run-off, the restructuring of our Lloyd’s business and costs associated with ongoing litigation.
Following the decision of our Board of Directors to place most of our business in run-off in 2006, we changed the composition of our reportable segments and renamed our specialty insurance segment and specialty reinsurance segment as specialty insurance run-off segment and specialty reinsurance run-off segment. We continue to earn premiums in our insurance and reinsurance run-off segments related to business written in prior periods and related to extensions and renewals of policies which we are legally required to write in business lines we have exited. The specialty insurance run-off and specialty reinsurance run-off segments, along with our Lloyd’s and technical services segments, are more fully described as follows:
We have derived the majority of our revenues from two principal sources: premiums from policies written by Syndicate 4000 at Lloyd’s in our Lloyd’s operating segment and investment income from our investment portfolios.
Net loss and loss expenses, which are net of loss and loss expenses recovered under our ceded reinsurance contracts, depend on the number and type of insurance and reinsurance contracts we write and reflect our best estimate of ultimate losses and loss expenses we expect to incur on each contract written using various actuarial analyses. Actual losses and loss expenses will depend on either actual costs to settle insurance and reinsurance claims, or the estimated loss amount that we may agree with our policyholders under the terms of commutation and cancellation arrangements. Our ability to accurately estimate expected ultimate loss and loss expense at the time of pricing each insurance and reinsurance contract and the occurrence of unexpected high loss severity catastrophe events are critical factors in determining our profitability.
Net foreign exchange losses. Net foreign exchange gains were $0.9 million for the year ended December 31, 2007 compared to a loss of $3.8 million for the year ended December 31, 2006. The net foreign exchange gains and losses were driven primarily by our Lloyd’s segment and the relationship between the U.S. Dollar and the British Pound. Due to the sale of our interest in Syndicate 4000, we expect that our exposure to foreign currency movements will be significantly reduced in 2008.
Income on disposal of discontinued operations. Income on disposal of discontinued operations was $0.7 million for the year ended December 31, 2006. This income is presented in the Consolidated Statement of Operations as Income on disposal of discontinued operations, a component of discontinued operations. The components of this income are summarized below.
Net losses and loss expenses. Net losses and loss expenses were $156.1 million for the year ended December 31, 2006, a decrease of $168.1 million, or 51.9%, compared to $324.2 million for the year ended December 31, 2005. Net losses and loss expenses are a function of our net premiums earned and changes in our expected ultimate losses and loss expenses for reported and unreported claims on contracts of insurance and reinsurance underwritten. The decrease in net losses and loss expenses is due to:
Our technical risk property (primarily the HBW program), environmental liability and other product lines returned premium of $12.5 million, $8.5 million and $2.3 million, for the year ended December 31, 2007.
• the decrease in significant loss occurrences, particularly compared to those related to the 2005 hurricanes and the first quarter 2005 rupture of an oil pipeline in California during a mudslide;
General and administrative expenses. General and administrative expenses were $12.9 million for the year ended December 31, 2006 an increase of $4.2 million, compared to $8.7 million for the year ended December 31, 2005. The increase in our general and administrative expense from 2005 to 2006 was mainly due to the fact that 2005 was a start-up year for Syndicate 4000 and 2006 reflects the general and administrative expenses of a fully operating Syndicate 4000, including an additional number of employees hired throughout 2006 as well as increases in Lloyd’s central fund and managing
insurance contracts in the future, we may be viewed as having had the risks described above and, as a result, we could be deemed to have retained life reinsurance risk and, as a result, may be required to account for some or all of the underlying insurance contracts as life insurance, recognizing life premiums written and life benefit reserves in the consolidated statement of operations. If deposit accounting had not been used with respect to this particular arrangement, we would have recognized gross life reinsurance premiums written of approximately $33.6 million, $62.6 million and $16.8 million for the years ended December 31, 2007, 2006 and 2005.
Prior to adoption of SFAS 159, we periodically reviewed our investments to determine whether an impairment, being a decline in fair value of a security below its amortized cost, was other than temporary. If such a decline was classified as other than temporary, we wrote down, to fair value, the impaired security resulting in a new cost basis of the security and the amount of the write-down was charged to the consolidated statement of operations as a realized loss. Some of the factors that we considered in determining whether an impairment was other than temporary included (i) the amount of the impairment, (ii) the period of time for which the fair value has been below the amortized cost, (iii) specific reasons or market conditions which could affect the security, including the financial condition of the issuer and relevant industry conditions or rating agency actions, and (iv) our ability and intent to hold the security for sufficient time to allow for possible recovery.
As of December 31, 2007 and 2006, environmental liabilities assumed includes two environmental remediation projects, for which estimated liabilities of $1.5 million and $3.3 million have been recorded. The assumed environmental remediation obligations for the projects are contractually defined pursuant to a site specific remediation plan.
During the first quarter of 2007, we adopted the 2007 Long Term Incentive Plan (the ‘‘2007 LTIP’’). The 2007 LTIP is intended to motivate and reward our Chief Executive Officer, Chief Financial Officer and certain key employees for the successful management of the run-off of the business and insurance operations. The 2007 LTIP is also intended to help us retain certain key employees by providing benefits that do not vest for up to three years except in the event of a change of control or termination of a participant’s employment by us without cause, or due to death,