The occurrence of large loss events could reduce the reinsurance coverage that is available to us and could weaken the financial condition of our reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our
Our most critical accounting policies involve the reporting of the reserves for losses and LAE (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of invested assets, accounting for Lloyd’s results and the translation of foreign currencies.
Impairment of Investment Securities. Impairment of investment securities results in a charge to operations when a market decline below cost is other-than-temporary. Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In general, we focus our attention on those securities whose market value was less than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost or amortized cost of the security, as appropriate, the length of time the investment has been below cost or amortized cost and by how much, our intent and
Net investment income increased 53.5% due to the cash flow from operations coupled with the net proceeds from the Company’s April 2006 debt offering and the Company’s October 2005 equity offering, and the increase in the pre-tax investment yield to 4.4% in 2006 compared to 3.8% in 2005.
delays and of premium for onshore energy business which principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption.
Excluding the effect of ceded reinstatement premiums for hurricane losses for 2005, the ratio of ceded written premium to gross written premium was 49.3%. The decline in the ratio of ceded written premium to gross written premium in 2007 compared to 2006 was due to a combination of the following factors:
Restructuring our professional liability reinsurance to retain more business net effective April 1, 2006.
At December, 2007, the IBNR loss reserve was $558.5 million or 65.9% of our total loss reserves compared to $452.9 million or 65.1% in 2006.
There are instances in which facts and circumstances require a deviation from the general process described above. Two such instances relate to the IBNR loss reserve processes for our 2005 Hurricanes Katrina and Rita losses and our asbestos exposures, where extrapolation techniques are not applied, except in a limited way, given the unique nature of hurricane losses and limited population of marine excess policies with potential asbestos exposures. In such circumstances, inventories of the policy limits exposed to losses coupled with reported losses are analyzed and evaluated principally by claims personnel and underwriters to establish IBNR loss reserves. At December 31, 2007, the gross and net loss reserve amounts of our 2005 Hurricanes Katrina and Rita losses were $141.8 million and $4.5 million, respectively, and the gross and net loss reserve amounts for our asbestos exposures were $23.2 million and $16.7 million, respectively.
The claims emergence patterns for various marine product lines vary substantially. Our largest marine product line is marine liability, which has one of the longer loss development patterns. Marine liability protects an insured’s business from liability to third parties stemming from their marine-related operations, such as terminal operations, stevedoring and marina operations. Since marine liability claims generally involve a dispute as to the extent and amount of legal liability that our insured has to a third party, these claims tend to take a longer time to develop and settle. Other longer-tail marine product lines include P&I insurance, which provides coverage for third party liability as well as injury to crew for vessel operators, and transport insurance, which provides both property and third party liability on a primary basis to businesses such as port authorities, marine terminal operators and others engaged in the infrastructure of international transportation. Offshore energy provides physical damage coverage to offshore oil platforms along with offshore operations related to oil exploration and production. The significant offshore energy claims are generally caused by fire or storms, and thus tend to be large, infrequent, quickly reported, but occasionally not quickly settled because the damage is often extensive but not always immediately known. Other marine product lines have considerably shorter periods in which losses develop and settle. Ocean cargo insurance, for example, provides physical damage coverage to goods in the course of transit by water, air or land. By their nature, cargo claims tend to be reported quickly as losses typically result from an obvious peril such as fire, theft or weather. Similarly, bluewater hull insurance provides coverage against physical damage to ocean-going vessels. Such claims for physical damage generally are discovered, reported and settled quickly. The Company currently has extensive experience for all of these products and thus the IBNR loss reserves for all of the marine products are determined using the key assumptions and actuarial methodologies described above. Prior to 2007, however, as discussed below, the Company did not have sufficient experience in the transport product line and instead used its hull and liability products loss development experience as a key assumption in setting the IBNR loss reserves for its transport product.
Personal umbrella coverage is purchased by individuals who seek higher limits of liability than are provided in their homeowners or personal automobile policies. Losses tend to be large and infrequent, and often result from automobile accidents. They are reserved primarily using the Company’s historical loss experience.
The Insurance Companies recorded net prior years’ reserve deficiencies of $1.9 million for marine business principally due to an increase of approximately $4.5 million for unallocated loss adjustment expense reserves offset by net favorable loss experience of $2.6 million mostly related to the 2002 and prior underwriting years.
Set forth below is a sensitivity analysis that estimates the effect on the Company’s net loss reserve position of using alternative expected loss ratios for the underwriting years 2000 to 2007 and alternative loss development factors for the underwriting years 2000 to 2006 rather than those actually used in determining the Company’s best estimates at December 31, 2007. The analysis addresses each major line of business and underwriting year for which a material deviation to the Company’s overall reserve position is believed reasonably possible, and uses what the Company believes is a reasonably likely range of potential deviation for each line of business. The underwriting years prior to 2000 were not included given the maturity of such years and their
Whenever a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members up to 3% of a member’s underwriting capacity in any one year. The Company does not believe that any assessment is likely in the foreseeable future and has not provided any allowance for such an assessment. However, based on the Company’s 2007 capacity at Lloyd’s of £140 million, the December 31, 2007 exchange rate of £1 equaled $1.98 and in the event of a maximum 3% assessment, the Company would be assessed approximately $8.3 million. In addition, beginning with the 2005 underwriting year, Lloyd’s added a second tier of assets to the existing Central Fund. This second tier was built up through a compulsory interest bearing loan to the Society of Lloyd’s from the Lloyd’s members based on the stamp capacity of each syndicate for the respective underwriting year. The funds were invested in assets eligible for Society of Lloyd’s solvency. The loans, of which the Company had $5.9 million at June 30, 2007, were repaid during the 2007 third quarter from a bond offering completed by Lloyd’s in September 2007.
Investments and cash increased to $1.77 billion at December 31, 2007 from $1.48 billion at December 31, 2006. The increase was primarily due to the positive cash flow from operations. Net investment income was $70.7 million for 2007, $56.9 million for 2006 and $37.1 million for 2005.
Our capital resources consist of funds deployed or available to be deployed to support our business operations. At December 31, 2007 and 2006, our capital resources were as follows: