Computed as the internal rate of return derived from the change in fully converted tangible book value per share, as adjusted for dividends declared.
During the second half of 2007, we commenced the operations of both our newly-formed Lloyd’s syndicate known as Syndicate 5151, and our Lloyd’s Coverholders, MUI and MEAG. Syndicate 5151 underwrites primarily short-tail lines, mainly property insurance and reinsurance, engineering and specialty casualty classes sourced from the London, U.S. and European markets. Stamp capacity for 2007 was £47 million, but is planned to increase to £143 million in 2008, subject to market conditions. Stamp capacity is a measure of the amount of premium a syndicate is authorized to write by Lloyd’s.
During 2008, we expect to revise our reportable operating segments as the insurance and reinsurance initiatives we have undertaken in 2007 gain significance.
· A significant increase in excess of loss (Property Catastrophe) business resulting from strong demand, strong pricing and improved terms experienced post-hurricanes Katrina, Rita and Wilma. This increase was partially offset by a significant reduction in property retrocessional (Property Catastrophe) writings within this segment, as such premiums were predominantly written within our Collateralized Property Catastrophe Retrocessional segment beginning January 1, 2006,
In the normal course of our business, we seek to limit losses that may arise from catastrophes or other events by reinsuring certain levels of risk in various areas of exposure with other third party insurers or reinsurers. As a result, the amount and type of reinsurance that we enter into is dependent on a variety of factors, including the cost of a particular reinsurance cover, relevant terms and conditions and the nature of our gross premiums written during a particular period.
Net premiums earned during 2007 of $495.5 million, were largely unchanged as compared to 2006. Net premiums earned during 2006 of $510.1 million, were 30% lower than net premiums earned during 2005. The significant decrease in net premiums earned during 2006, versus those earned in 2005, was primarily due to significantly higher premium writings during 2005.
The following table summarizes our general and administrative expenses incurred within our Rated Reinsurance and Insurance Business during the years ended December 31, 2007, 2006 and 2005:
The significant increase in our fixed expenses from 2006 to 2007 is primarily due to $10.8 million of incremental fixed costs incurred during 2007 associated with our newly established U.S., U.K. and Swiss operations. The 2007 increase is also the result of additional costs associated with upgrades to our information technology infrastructure and increased rent, operating and maintenance costs related to our new premises in Bermuda, which we moved into during the third quarter of 2006. The increase in fixed expenses from 2005 to 2006 is primarily due to additional costs associated with upgrades to our information technology infrastructure as well as the part-year increase in rent, operating and maintenance costs related to our new premises.
(1) As of January 1, 2007, we adopted FAS 157 and FAS 159, which resulted in substantially all of our investments being carried at fair value with changes in fair value being reported as net realized and unrealized gains (losses) in our statement of operations. Prior to the adoption of FAS 157 and FAS 159, our available for sale investments were carried at fair value with changes in fair value being reported as a separate component of shareholders’ equity, with changes therein reported as a component of other comprehensive income.
In August 2007, we entered into the ILW Contract with a third party under which qualifying loss payments are triggered exclusively by reference to the level of losses incurred by the insurance industry as a whole rather than by losses incurred by the insured. The ILW Contract provides the insured with $15.0 million of second-event protection resulting from industry losses of a stated amount during the period from August 14, 2007 to August 13, 2008. The ILW Contract covers losses resulting from all natural perils within the U.S. and is carried at fair value in accordance with Emerging Issues Task Force (“EITF”) Issue 99-2, “Accounting for Weather Derivatives.” The fair value of the ILW Contract of $0.6 million was derived based on unobservable inputs (Level 3 inputs as defined in FAS 157) and is included as a component of other liabilities in our consolidated balance sheet at December 31, 2007. Changes in the fair value of the ILW Contract, including those triggered by a covered loss event, are included as a component of net revenue (expense) from derivative instruments in our statement of operations and are determined based on an internal underwriting model.
During the year ended December 31, 2007, we recorded $3.1 million in revenue under the ILW Contract. Since the inception of the ILW Contract, no industry loss event has occurred that would trigger a payment to us.
From time to time we have entered into foreign currency exchange agreements which constitute an obligation to purchase or sell a specified currency at a future date at a price set at the inception of the contract. These agreements do not eliminate fluctuations in the value of our assets and liabilities denominated in foreign currencies; rather, they allow us to establish a rate of exchange at a future point in time. The foreign currency contracts are recorded as other investments at fair value with changes therein recorded as a component of net revenue (expense) from derivative contracts in our statements of operations. The fair value of the foreign currency contracts is derived based on inputs that are observable for the assets, either directly or indirectly (Level 2 inputs as defined in FAS 157). At December 31, 2007 and December 31, 2006, we were a party to outstanding foreign currency exchange agreements having a gross notional exposure of $86.9 million and $64.6 million, respectively, and recorded net revenues of $3.2 and $2.5 million, respectively, for the years then ended.
Our other revenue is comprised of interest on funds advanced to ceding companies to cover losses in accordance with contract terms, fees earned by MCA as sub-advisor to the Pioneer Diversified High Income Trust (the “Pioneer Fund”) and ceding commissions and incentive fees relating to our investment in Rockridge Reinsurance Ltd. (“Rockridge”), a former affiliate that ceased its operations in 2006. The following table summarizes our consolidated other revenue for the years ended December 31, 2007, 2006 and 2005:
With respect to the 2007-2009 performance period, 172,000 performance shares have been granted to employees of which 169,000 remained outstanding at December 31, 2007. In accordance with our accounting policy, during 2007 the expected ultimate harvest ratio for this performance share cycle was maintained at 100% and the reference price of our common shares remained at $18.92 (the closing price on the date of grant). The Company recognized performance share expense for grants made within this performance cycle of $1.1 million during 2007.
The unamortized grant date fair value of 474,000 RSUs outstanding as of December 31, 2007, which were granted with respect to the 2007-2009 period, was $3.7 million. The fair value of these RSUs was $8.8 million on the date of grant.