Generally, policyholders who assert these positions are installers of asbestos products or property owners who allegedly had asbestos on their property. In addition, in an effort to seek additional insurance coverage, some policyholders that have eroded their aggregate limits are submitting new asbestos claims as “non-product” claims or attempting to reclassify previously resolved claims as non-product claims. Unlike product exposures, these non-product exposures are argued not to be subject to aggregate limits, creating potentially greater exposure. The extent to which policyholders will be successful in obtaining coverage on this basis is uncertain and court decisions have been inconsistent to date. Accordingly, it is difficult to predict the ultimate size of the claims for coverage not subject to aggregate policy limits.
For the year ended December 31, 2006, the increase in gross premiums of $253.8 million, or 23.1%, over the year ended December 31, 2005, included $187.0 million of Fairmont’s premiums, of which $18.0 million, $15.0 million, $30.4 million, $3.8 million, $29.7 million and $90.1 million related to the general liability, workers’ compensation, commercial automobile, property, commercial multi-peril and other lines of business, respectively. See “Item 1. Business - Overview” and Note 1 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” for further information about Fairmont. Excluding Fairmont, gross premiums written increased by $66.8 million, or 6.1%, in the year ended December 31, 2006. This increase was primarily due to an increase in new business of approximately 15%, attributable to greater property writings resulting from an overall improved property market in the wake of the 2005 hurricanes. Renewal retention rates in 2006 held steady at 62%, while pricing across all lines of business declined slightly.
For the year ended December 31, 2007, net premiums written decreased by $66.9 million, or 5.7%, as compared to the year ended December 31, 2006. The lower decline in net premiums written as compared to gross premiums written is due to increased retention on the property and accident and health lines of business. The increased retention on the property line is due to lower reinsurance costs, attributable to higher retained limits, on the Company’s property per risk and catastrophe treaties in 2007. The increased retention on the accident and health line is due in part to this business being written directly by the Company in 2007, at higher retained limits, whereas in 2006 the majority of this business was assumed from Fairmont with existing reinsurance commitments.
The liability for unpaid losses and LAE includes reserves for unpaid reported losses and LAE and for IBNR losses. The amounts shown above represent management’s best estimate of the expected timing of payments for losses and LAE given information currently available. Actual results may differ significantly from these estimates. For additional information on the Company’s unpaid losses and LAE, see “Item 1. Business - Reserves”, “Item 1A. Risk Factors - The Company may incur a reduction in its net income if its reserves are insufficient” and “- Critical Accounting Policies and Estimates - Unpaid Losses and Loss Adjustment Expenses”.
In July 2007 and November 2007, Company executed additional short-sales of SPDRs totaling $320 million, bringing the total short positions held in SPDRs to approximately $620 million at December 31, 2007. The Company also holds short positions on securities of certain U.S. financial institutions totaling approximately $12.5 million. The Company has no contractual timeframe within which it must purchase the SPDRs or securities previously sold and any decision to purchase will be based upon economic and market conditions. For purposes of the above chart, the Company has reflected the purchase obligation in 2008. The actual purchase date may differ from this estimate. For additional information on the short-sale transactions, see “- Results of Operations - Investment Results” and Note 3 to the consolidated financial statements included in “Item 8. Financials Statements and Supplementary Data”.
The Company did not have any transactions, agreements or other contractual arrangements with an unconsolidated entity that would be considered an off-balance sheet arrangement required to be disclosed pursuant to Item 303(a)(4) of Regulation S-K.
Of the gross unrealized losses of $35,043 in the equity portfolio at December 31, 2007, $27,718, or 79.1%, is in respect of one security in the pharmaceutical industry, whose loss exceeded 10% of its cost at that date. The remaining losses are attributable to seven securities, two of which had losses that exceeded 10% of their cost. No equity security had been in a loss position for greater than twelve consecutive months at December 31, 2007. The Company has the ability and intent to hold such securities for a period of time sufficient to allow a market recovery.
Under an agreement effective January 1, 2001, FITS is provided certain management and general services by the Company, for which the Company billed $172, $139 and $145 for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company receives loss adjustment services from Cunningham Lindsey U.S., Inc., an affiliate of Fairfax. Expenses incurred for these services were $794, $213 and $33 for the years ended December 31, 2007, 2006 and 2005, respectively.
The increase in the net actuarial gain recognized in the year is primarily attributable to a decrease in the medical participant counts during 2007 as well as a higher assumed discount rate of 5.75% as compared to 5.5% in 2006. The components of net periodic benefit cost are summarized as follows: