In 2010, the trends observed in 2008 and 2009 continued with diverse conditions prevailing in various markets. Certain markets and lines of business experienced increased competition, higher cedant retentions and declines in pricing, while the terms in other markets strengthened or remained stable. In 2010, there was also an increase in catastrophic and large loss activity, with the most significant events impacting the Company being the Chile Earthquake, the New Zealand Earthquake and the explosion and subsequent sinking of the Deepwater Horizon Drilling Platform (Deepwater Horizon), as well as an increased frequency of losses. The global economy and financial markets continued to improve during 2010 primarily reflecting rising equity markets.
A key challenge for Management is to maintain an appropriate level of capital, especially in light of the recent disruptions in the global credit and capital markets. Management’s first priority is to hold sufficient capital to meet all of the Company’s obligations to cedants, meet regulatory requirements and support its position as one of the stronger reinsurers in the industry. Holding an excessive amount of capital, however, will reduce the
The Company has a clearly defined governance structure for risk management. Executive Management and the Board are responsible for setting the vision and goals including risk appetite and return expectations. Strategy and principles are recommended by Executive Management and approved by the Board. Key policies and Group policies are established by the Chief Executive Officer and policies at the next level down are established by Business Unit and functional management. Risk management policies and processes are coordinated by Group Risk Management and audited by Internal Audit. The results of audits are monitored by the Audit Committee of the Board.
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired of PartnerRe SA, Winterthur Re and Paris Re. The Company assesses the appropriateness of its valuation of goodwill on at least an annual basis. If, as a result of the assessment, the Company determines that the value of its goodwill is impaired, goodwill will be written down in the period in which the determination is made.
The reporting currency of the Company is the U.S. dollar. The national currencies of the Company’s subsidiaries and branches are generally their functional currencies, except for the Company’s Bermuda subsidiaries and its Swiss subsidiaries and branch, whose functional currencies are the U.S. dollar. In translating the financial statements of those subsidiaries or branches whose functional currency is other than the U.S. dollar, assets and liabilities are converted into U.S. dollars using the rates of exchange in effect at the balance sheet dates, and revenues and expenses are converted using the average foreign exchange rates for the period. The effect of translation adjustments are reported in the Consolidated Balance Sheets as currency translation adjustment, a separate component of accumulated other comprehensive income.
Those share-based compensation awards that do not meet the equity classification criteria, are classified as liability awards. Liability-classified awards are recorded at fair value in the Accounts payable, accrued expenses and other in the Consolidated Balance Sheets with changes in fair value relating to the vested portion of the award recorded in the Consolidated Statements of Operations.
Changes in the fair value of the Company’s financial instruments subject to the fair value option, during the years ended December 31, 2010, 2009 and 2008, respectively, were as follows (in thousands of U.S. dollars):
To validate prices, the Company completes quantitative analyses to compare the performance of each equity investment portfolio to the performance of an appropriate benchmark, with significant differences identified and investigated.
The Consolidated Statements of Operations and Cash Flows include results of Paris Re for the period from the Acquisition Date. For the period from October 2, 2009 to December 7, 2009, Paris Re had non-controlling interests. Net income attributable to Paris Re’s non-controlling interests during this period was $4.3 million, and has been recorded within other income (loss) in the Consolidated Statement of Operations.
Intangible asset amortization during the years ended December 31, 2010 and 2009 totaled $68,554 and $40,277, respectively, of which $37,093 and $46,410, respectively, is recorded within acquisition costs and $31,461 and $(6,133), respectively, is recorded within amortization of intangible assets in the Consolidated Statements of Operations. The amounts recorded within acquisition costs in the Consolidated Statements of Operations approximates the amount of Paris Re’s deferred acquisition costs that would have been recorded as acquisition costs had they not been fair valued under purchase accounting.
For the years ended December 31, 2010, 2009 and 2008, the Company incurred interest expense of $4.6 million, $7.0 million and $16.6 million, respectively, and paid interest of $4.6 million, $8.0 million and $16.6 million, respectively.
The statutory net income of the Company’s reinsurance subsidiaries for the years ended December 31, 2010, 2009 and 2008 was as follows (in millions of U.S. dollars):
In determining the weighted average assumptions used, the Company used the same methodology as described in share options above.
The Company incurred expenses for these defined contribution arrangements of $20.9 million, $18.7 million, and $13.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company’s investment strategy allows for the use of derivative instruments, subject to strict limitations. Derivative instruments may be used to replicate investment positions and manage currency, market exposure and duration risk, or to enhance investment performance that would be allowed under the Company’s investment policy if implemented in other ways. The Company is exposed to credit risk in the event of non-performance by the counterparties to the Company’s derivative contracts. However, the Company diversifies the counterparties to its derivative contracts to reduce credit risk, and because the counterparties to these contracts are high credit quality international banks, the Company does not anticipate non-performance. These contracts are generally of short duration and settle on a net basis. The difference between the contract amounts and the related market value represents the Company’s maximum credit exposure.
Performance of these notes receivable to date has been within expectations. As of December 31, 2010, none of the Company’s notes receivable are past due or in default and, accordingly, the Company believes that an allowance for credit losses related to these notes receivable is not required at December 31, 2010.