The summary consolidated statement of operations data for the years ended December 31, 2007 and December 31, 2006 and the period ended December 31, 2005 and the summary consolidated balance sheet data as of December 31, 2007 and December 31, 2006 are derived from our audited consolidated financial statements. On July 2, 2007 the Company acquired Talbot Holdings Ltd. (“Talbot”) and is consolidating Talbot effective as of that date. As a result, Talbot is only included in the Company’s consolidated results from July 2, 2007 through December 31, 2007. Talbot is not included in consolidated results for the year ended December 31, 2006 and the first six months of 2007.
Since most of the lines of business underwritten have large aggregate exposures to natural and man-made catastrophes, the Company expects that claims experience will often be the result of relatively few events of significant severity. The occurrence of claims from catastrophic events is likely to result in substantial volatility in, and could potentially have a material adverse effect on, the Company’s financial condition, results of operations, and ability to write new business. The acquisition of Talbot mitigates these risks by providing us with significant benefits in terms of product line and geographic diversification.
items that require the most subjective and complex estimates are (1) reserve for losses and loss expenses and (2) premiums and (3) reinsurance premiums ceded and reinsurance recoverables.
The Company uses a reserving methodology that establishes a point estimate for ultimate losses. The point estimate represents management’s best estimate of ultimate losses and loss expenses. The Company does not select a range as part of its loss reserving process. The extent of reliance on management judgment in the reserving process differs depending on the circumstances surrounding the estimations, including the volume and credibility of data, the perceived relevance of historical data to future conditions, the stability or lack of stability in the Company’s operational processes for handlings losses (including claims practices and systems) and other factors. The Company reviews its reserving assumptions and methodologies on a quarterly basis. Two of the most critical assumptions in establishing reserves are loss emergence patterns and expected (or “prior”) loss ratios. Loss emergence patterns are critical to the reserving process as they can be one key indicator of the ultimate liability. A pattern of reported loss emergence different from expectations may indicate a change in the loss climate and may thus influence the
The uncertainties inherent in the reserving process, together with the potential for unforeseen developments, including changes in laws and the prevailing interpretation of policy terms, may result in losses and loss expenses materially different from the reserves initially established. Changes to prior year reserves will affect current period underwriting income by increasing income if the prior year ultimate losses are reduced or decreasing income if the prior year ultimate losses are increased. The Company expects volatility in results in periods when significant loss events occur because U.S. GAAP does not permit insurers or reinsurers to reserve for loss events until they have both occurred and are expected to give rise to a claim. As a result, the Company is not allowed to record contingency
Net reserves for loss and loss expenses at December 31, 2007 - Sensitivity to
The most significant variance in the above scenarios, six month acceleration in loss emergence patterns, would have the effect of increasing losses and loss expenses by $138.2 million. In the Company’s judgment, such a variance would not have a material impact on the liquidity or financial position of the Company.
Premiums. For insurance business, written premium estimates are informed by the business plan estimates of premiums by class, the aggregate of underwriters’ estimates on a policy-by-policy basis, and projections of ultimate premiums using generally accepted actuarial methods. In particular, direct insurance premiums are recognized in
Talbot results for the three months ended December 31, 2006 are presented for comparative purposes. The results of operations for Talbot are consolidated only from the July 2007 date of acquisition.
Reinsurance premiums ceded for the three months ended December 31, 2007 were $4.6 million compared to ($0.4) million for the three months ended December 31, 2006, an increase of $5.0 million. Reinsurance premiums ceded increased primarily as a result of an increase in property premiums ceded to Petrel Re Limited (“Petrel Re”).
Talbot. Talbot net premiums earned for the three months ended December 31, 2007 were $155.5 million compared to $145.0 million for the three months ended December 31, 2006, an increase of $10.5 million or 7.3%.
of major catastrophes in 2006 and the year ended 2007 has contributed to the overall low level of losses experienced. Favorable loss development on prior years totaled $30.6 million and was experienced in all lines of business. The $29.7 million favorable loss reserve development in the Talbot segment relates to the 2005 and prior underwriting years as described below. Favorable loss reserve development benefitted the Company’s fourth quarter 2007 loss ratio by 9.6 percentage points. There was no prior year loss reserve development - favorable or unfavorable - in the three months ended December 31, 2006, as 2006 was the initial year of operations for the Company.
Policy acquisition costs for the three months ended December 31, 2007 were $53.3 million compared to $11.5 million for the three months ended December 31, 2006, an increase of $41.8 million or 363.4%. Policy acquisition costs were higher due to $31.2 million resulting from the consolidation of Talbot.
As of December 31, 2007, the Company had approximately $22.8 million of AAA rated asset-backed securities with sub-prime collateral and $15.3 million of insurance enhanced AAA rated asset-backed securities that have no underlying credit ratings, representing 0.74% and 0.49% of total cash and investments, respectively.
The loss ratio in 2007 is not comparable to the 2006 loss ratio due to the consolidation of Talbot effective July 2, 2007. In general, Talbot has experienced a higher loss ratio than Validus Re in the periods since inception of Validus Re, attributable to the different mix of business written by Validus Re and Talbot.
Policy acquisition costs for the year ended December 31, 2007 were $134.3 million compared to $36.1 million for the year ended December 31, 2006, an increase of $98.2 million or 272.2%. Policy acquisition costs were higher as a result of $64.0 million resulting from the consolidation of Talbot and the higher level of premiums earned.
The following table presents the loss and loss expenses ratio, acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the years ended December 31, 2007 and 2006.
Where years of account improve/worsen after they have closed this development is borne by the oldest open year. The result for the oldest open year given above includes prior year development.
On March 14, 2006 (the “effective date”), the Company entered into a 364-day $100,000,000 revolving credit facility and a three-year $200,000,000 secured letter of credit facility. The credit facilities were provided by a syndicate of commercial banks arranged by J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. Associated with each of these bank facilities are various covenants that include, among other things, (i) the requirement under the revolving credit facility that the Company at all times maintain a minimum level of consolidated net worth of at least 65% of consolidated net worth calculated as of the effective date, (ii) the requirement under the letter of credit facility that the Company initially maintain a minimum level of consolidated net worth of at least 65% of the consolidated net worth as calculated as of the effective date, and thereafter to be increased quarterly by an amount equal to 50% of consolidated net income (if positive) for such quarter plus 50% of any net proceeds received from any issuance of common shares of the Company during such quarter, and (iii) the requirement under each of the facilities that the Company maintain at all times a consolidated total debt to consolidated total capitalization ratio not greater than 0.30:1.00. The Company was in compliance with the covenants at December 31, 2006 and for the period then ended.
As of December 31, 2007 and 2006, the Company had cash and cash equivalents of $444.7 million and $63.6 million, respectively.
the other factors set forth under Item 1 A. “Risk Factors”, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Annual Report on Form 10-K, as well as the other factors set forth in the Company’s filings with the SEC.