(6) Based on 64.6 million, 56.2 million, 55.7 million, 50.9 million and 46.3 million shares outstanding for December 31, 2005, 2004, 2003, 2002 and 2001, respectively.
The U.S. Reinsurance segment accounted for $20.7 million of net unfavorable prior period reserve adjustments for the year ended December 31, 2005, which included $72.5 million of unfavorable catastrophe prior period reserve adjustments, partially offset by favorable net non-A&E, non-catastrophe reserve adjustments of $63.3 million. Net unfavorable prior period reserve adjustments were $77.7 million for the year ended December 31, 2004, which included $102.2 million of unfavorable non-A&E, non-catastrophe prior period reserve adjustments, partially offset by $34.8 million of favorable development primarily due to reserve reduction related to catastrophe losses from the 2001 World Trade Center losses. Asbestos exposures accounted for $11.5 million and $10.3 million of unfavorable reserve adjustments for the years ended December 31, 2005 and 2004, respectively. During the late 1990s and early 2000s, there had been a proliferation of claims related to bankruptcies and other financial management improprieties. This increased number of claims, combined with larger claims, has significantly increased incurred losses on the professional liability policies. In the general casualty area, the Company continues to experience losses greater than historical trends for accident years 1998 through 2001. These losses are being driven by adverse trends in litigation and economic variability.
Segment underwriting expenses decreased by 4.7% to $1,024.9 million in 2005 from $1,075.8 million in 2004. Commission, brokerage, taxes and fees decreased by $60.3 million, principally reflecting decreases in premium volume and changes in the mix of business. Segment other underwriting expenses increased by $9.4 million as the Company continued to expand operations. Contributing to the segment underwriting expense decreases were a 36.6% ($49.8 million) decrease in the Specialty Underwriting operation, a 3.8% ($14.9 million) decrease in the U.S. Reinsurance operation and a 0.7% ($1.3 million) decrease in the Bermuda operation, partially offset by a 4.5% ($7.9 million) increase in the U.S. Insurance operation and a 4.2% ($7.2 million) increase in the International operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.
Premiums Written. Gross written premiums increased 2.8% to $4,704.1 million in 2004 from $4,573.8 million in 2003, as the Company took advantage of selected growth opportunities, while continuing to maintain a disciplined underwriting approach. Premium growth areas included a 32.0% ($166.9 million) increase in the International operations, primarily due to a $97.7 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business, and a $67.2 million increase in Asian business. The Bermuda operation grew 21.3% ($155.2 million) reflecting an emphasis on traditional business classes in Bermuda and the UK. The U.S. Insurance operation grew 9.2% ($98.3 million), principally as a result of a $193.8 million increase in program business other than workers’ compensation, partially offset by a $95.5 million decrease in workers’ compensation business. The Specialty Underwriting operation decreased 3.1% ($15.8 million), resulting primarily from a $70.4 million decrease in A&H business, partially offset by an increase in surety business of $29.6 million and an increase in marine and aviation business of $25.0 million. The U.S. Reinsurance operation decreased 15.6% ($274.1 million), principally relating to an $142.5 million decrease in treaty casualty business, a $74.9 million decrease in facultative business, a $32.6 million decrease in treaty property business and a $19.8 million decrease in treaty non-property business.
The International segment had $15.1 million of favorable net prior period reserve adjustments for the year ended December 31, 2004 and net unfavorable prior period reserve adjustments of $9.3 million for the year ended December 31, 2003. The favorable development in 2004 related primarily to 2003 Canadian property catastrophe, international and Asian business. The prior period reserve development for 2003 related primarily to general casualty business written in the U.S. and Canada on both a quota share and excess basis for accident years 1996 through 2002.
percentage of claims filed by individuals with no functional impairment, which should have little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation.
REINSURANCE RECEIVABLES. The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from reinsurers of a portion of losses and loss expenses under certain circumstances without relieving the insurer of its obligation to the policyholder. In the event reinsurers were unable to meet their obligations under these reinsurance agreements or were able to successfully challenge losses ceded by the Company under the reinsurance contracts, the Company would not be able to realize the full value of the reinsurance recoverable balance. In some cases, the Company may hold partial collateral, including letters of credit and funds held arrangements, for these agreements. The Company establishes reserves for uncollectible balances based on management’s assessment of the collectibility of the outstanding balances. As of December 31, 2005 and 2004, the reserve for uncollectible balances was $25.0 million and $25.0 million, respectively. To minimize exposure from uncollectible reinsurance receivables, the Company has a reinsurance credit security committee that generally evaluates the financial strength of a reinsurer prior to entering into a reinsurance arrangement. Additionally, creditworthy foreign reinsurers of business written in the U.S. are generally required to secure their obligations. Management believes that adequate provision has been made for the Company’s uncollectible balances. Actual uncollectible amounts may vary, perhaps substantially, from such reserves, impacting income in the period in which the change in reserves is made. See also Note 1 of Notes to the Consolidated Financial Statements and “Financial Condition - Reinsurance Receivables” below.
which is partially collaterized by funds held arrangements. No other retrocessionaire accounted for more than 5% of the Company’s receivables.
U.S. Reinsurance $ 4,077,789 -10.2 % $ 3,663,855 10.2 % $ 4,491,723
CAPITAL. The Company’s business operations are in part dependent on the Company’s financial strength, and the market’s perception thereof, as measured by shareholders’ equity, which was $4,139.7 million and $3,712.5 million at December 31, 2005 and 2004, respectively. The Company has flexibility with respect to capitalization as a result of its perceived financial strength, including its financial strength ratings as assigned by independent rating agencies, and its access to the debt and equity markets. The Company continuously monitors its capital and financial position, as well as investment and security market conditions, both in general and with respect to the Company’s securities, and responds accordingly.
CONTRACTUAL OBLIGATIONS. The following table shows the Company’s contractual obligations for the year ended December 31, 2005:
Interest Rate Shift in Basis Points: -100/-200 -50/-100 0/0 50/100 100/200