Argo Group leases office space in Bermuda, where its principal executive offices are located. Argo Group US leases office space San Antonio, Texas, for its United States headquarters, Trident subsidiary company, and for certain support functions associated with Argonaut Insurance Company. Argo Group also leases space in the following locations:
Consolidated fee income represents commissions and other fees earned by the Company for the non-risk bearing activities. Fee income is generated by the Commercial Specialty segment as a result of business placed with other insurance companies. In addition, the International Specialty segment generates fee income from managing third party capital for certain syndicates at Lloyds. Consolidated fee income was $13.6 million for the year ended December 31, 2008.
Consolidated losses and loss adjustment expenses were $724.9 million for the year ended December 31, 2008, compared to $526.9 million and $477.6 million for the same periods in 2007 and 2006, respectively. Included in loss and losses adjustment expenses for the year ended December 31, 2008 was $72.3 million in losses resulting from hurricane activity in the United States during the third quarter of 2008. Losses and loss adjustment expenses for 2008 also include $22.5 million in property losses resulting primarily from severe weather during the second quarter of 2008 and $18.9 million of losses in certain casualty lines of business resulting from higher than expected severity in the fourth quarter of 2008. Prior accident year net favorable loss reserve development recognized during 2008 was $61.2 million of which $31.8 million related to property lines of business. This favorable development included: (a) $14.3 million from the 2006 and 2007 accident years within the U.S. operations, (b) $12.5 million from the PXRE non-catastrophe lines and (c) $5.0 million from 2005 PXRE catastrophe reserves. Net favorable development across casualty lines of business totaled $29.4 million and resulted from: (a) $27.5 million of favorable development in general and other liability lines of business primarily related to accident years 2005 and prior, (b) $13.8 million of net favorable development within workers’ compensation and commercial multi peril lines primarily related to accident years 2006 and prior, (c) adverse development of $6.8 million in commercial auto liability lines for the 2006 and 2007 accident years, and (d) net adverse development of $5.2 million for asbestos and environmental reserves.
Consolidated losses and loss adjustment expenses for the year ended December 31, 2007 included $30.3 million of net favorable development. The favorable development was primarily concentrated in the Excess and Surplus Lines segment due to lower claim counts and severity for the 2004 through 2006 accident years and lower frequency and severity within the Commercial Specialty segment for the 2002 through 2006 accident years. Partially offsetting this favorable development was $22.2 million of reserve strengthening in the Run-off Lines segment, primarily due to the Company strengthening the reserves for the asbestos and environmental exposures by $26.0 million in the third quarter of 2007. Additionally, the Company recorded approximately $32.2 million in additional losses and loss adjustment expenses for the 2007 accident year due to higher than expected losses, primarily in the Excess and Surplus Lines and the Commercial Specialty segments.
The following table summarizes the above referenced reserve development as respects to prior year loss reserves by line of business for the year ended December 31, 2008:
When determining reserve levels, the Company recognizes that there are several factors that present challenges and uncertainties to the estimation of loss reserves. Examples of these uncertainties include growth over the last several years in both the Excess and Surplus Lines and Commercial Specialty segments, and changes to the reinsurance structure. The Company’s net retained losses vary by product and they have generally increased over time. To properly recognize these
For general liability business, the Company increased its premium volume significantly from 2002 through 2006. This growth occurred in both the Excess and Surplus Lines and Commercial Specialty segments. The premium increases derived from both organic growth and acquisitions. In setting loss reserves, internal and external actuaries assumed that the new business may not perform as well as renewal business and that prior year loss development patterns may not be representative of future loss emergence. The actuarial assumption that new business may not perform as well as renewal business is primarily predicated on the basis that the new insurance company offers a lower price or better terms and conditions than the incumbent carrier. Further, the incumbent carrier has the benefit of historical experience and loss characteristics of the insured. Thus, the actuarial methods utilizing the assumption that new business would generate a higher loss ratio were assigned more weight. The Company’s loss reserve estimates gradually blend in the results from other methodologies over time. For general liability estimates, more credibility is assigned to the Company’s own loss experience approximately 60 to 72 months after the beginning of an accident year. Over the course of time, the Company has recognized that the new business growth from 2002 through 2006 exhibited similar underwriting and profitability characteristics as the Company’s renewal book. Further review and analysis of the data in the fourth quarter of 2008 suggested that favorable loss experience on the new business growth continued to emerge in the fourth quarter of 2008. Thus the Company reduced its ultimate loss estimates for general liability lines of business for the 2003, 2004, 2005 and 2006 accident years.
For property business, the Company’s loss reserve estimates also blend in the results from other actuarial methodologies over time. In contrast to general liability estimates, full credibility is assigned to the Company’s loss experience approximately 24 to 36 months after the beginning of an accident year, where loss reporting and claims closing patterns settle more quickly. The Company’s loss experience receives partial weighting in the estimates 12 to 24 months after the beginning of the accident year. As such, the Company recognized favorable loss experience for the 2005 and 2006 accident years in 2007. Likewise, during 2008, the Company recognized favorable loss experience deriving from the 2006 and 2007 accident years.
Consolidated interest expense and other were $37.4 million, $25.2 million and $13.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. Consolidated interest expense increased to $29.9 million for the year ended December 31, 2008 compared to $20.9 million and $13.0 million for the same periods in 2007 and 2006, respectively. The increase in interest expense for the year ended December 31, 2008 as compared to 2007 was due to the inclusion of a full year of interest on the junior subordinated debentures acquired in the Merger with PXRE, coupled with $1.1 million in interest expense related to Heritage indebtedness assumed in May 2008. Included in consolidated interest expense and other for the year ended December 31, 2008 was $6.4 million in expense related to the generation of fee income. Fee income is generated by the Commercial Specialty segment as a result of business placed with other insurance companies. The International Specialty segment generates fee income from managing certain syndicates at Lloyds. Also included in consolidated interest expense and other for the year ended December 31, 2008 was $0.6 million resulting from the net change in fair value on derivative reinsurance contracts, compared to $3.5 million for 2007. Foreign currency exchange losses on transactions that are settled in currencies other than U.S. Dollars were $0.5 million for the year ended December 31, 2008 compared to $0.7 million for the same period in 2007.
Consolidated provisions for income taxes were $23.5 million, $42.3 million and $57.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. The consolidated income tax provision for the year ended December 31, 2008 represents the income tax expense associated with the Company’s operations based on the tax laws of the jurisdictions in which they operate. Therefore, the consolidated provision for income taxes represents taxes on net income for the Company’s United States and United Kingdom operations. Additionally, the Company’s tax rate for 2008 was impacted by fluctuations in foreign exchange rates within the International Specialty segment.
The Company is primarily engaged in writing property and casualty insurance and reinsurance. Prior to the Merger, Argonaut Group classified its business into three ongoing reporting segments: Excess and Surplus Lines, Commercial Specialty (formerly known as Select Markets) and Run-off Lines. PXRE classified its business prior to the Merger into two reportable property and casualty segments: Catastrophe & Risk Excess and Exited Lines.
Subsequent to the Merger, the Company evaluated its reporting segments and management determined that the Company would have three ongoing reporting segments: Excess and Surplus Lines and Commercial Specialty segments (which were previously included in Argonaut Group’s ongoing reporting segments), and the Reinsurance segment (formerly known as International Specialty - see discussion below). Additionally, the Company has a Run-off Lines segment for products that it no longer writes. Amounts applicable to prior periods have been reclassified to conform to the presentation followed in 2008.
Excess and Surplus Lines. Excess and surplus lines insurance carriers focus on risks that the standard (admitted) market is unwilling or unable to underwrite due to the unique risk characteristics of the insureds or the lack of insurers offering such coverage, which may be caused by physical perils, the nature of the business or the insured’s loss experience. The Company, through Colony, Argonaut Specialty and Argo Pro, its three platforms, is able to underwrite these risks with more flexible policy terms at unregulated premium rates to the extent the business is underwritten on an excess and surplus lines basis. Colony provides commercial liability, commercial property and products liability coverages to commercial enterprises, including restaurants, artisan contractors and manufacturers. Argonaut Specialty provides primary general liability, excess/umbrella coverage and property lines of business for risks the admitted market chooses not to underwrite. Argonaut Specialty’s risks are typically larger than Colony’s and it utilizes a smaller distribution platform. Argo Pro focus on professional lines coverages, including allied medical, errors and omissions and environmental. During 2008, the Excess and Surplus lines segment established an additional platform, Argo Pro, to expand its professional lines product offering. Additionally, during 2008, the Argo Pro platform was expanded through the acquisition of Insight Insurance. Insight Insurance is a specialty underwriter of architects and engineers, accountants and insurance agents.
-made and occurrence forms related to accident years 2005 through 2006.
The increase in the expense ratio to 33.1% for the year ended December 31, 2008 as compared to 31.8% for the same period ended 2007 was primarily attributable to rate declines and reinstatement premiums. The increase in the expense ratio to 31.8% for the year ended December 31, 2007 as compared to 31.4% for the same period in 2006 was due primarily to the reduction to reinsurance costs in addition to higher than expected contingent commissions on the segment’s binding authority units.
The increase in net investment income for the year ended December 31, 2008 as compared to 2007 and 2006 was primarily attributable to higher invested assets resulting from increased cash flows. Invested assets were $1,567.1 million, $1,330.4 million and $1,132.1 million as of December 31, 2008, 2007 and 2006, respectively.
Commercial Specialty. This segment provides property and casualty coverages targeting specific groups of insureds and is underwritten by Great Central, Rockwood, Grocers Insurance and Trident. Great Central specializes in property insurance, liability insurance and workers compensation coverage in three broadly defined markets: food and hospitality, religious and other institutions, and specialty retail. Rockwood primarily provides workers compensation insurance for coal mines, other mining business and small commercial accounts. In addition, Rockwood provides supporting general liability, umbrella liability, property, commercial automobile and surety business, for certain of its mining accounts. Grocers Insurance underwrites property, general liability, and workers compensation to privately owned independent grocers throughout the United States. Trident, which includes Massamont (acquired in March 2008), offer comprehensive insurance packages to small to intermediate sized governmental entities and school districts throughout the United States. Also included in the Commercial Specialty segment are policies and programs written through the Company’s Corporate Accounts division and its Select Programs division.
Included in losses and loss adjustment expenses for the year ended December 31, 2007 was $14.8 million in net favorable development on prior accident years. The favorable development consisted of $7.6 million in workers compensation reserves primarily for accident years 2004 through 2006 due to lower loss frequency and lower losses on the large deductible policies in addition to $4.1 million for workers compensation occupational disease for accident years 1998 and prior. Favorable development for general liabilities and automobile lines totaled $7.2 million for accident years 2002 through 2005 and $0.4 million for property lines due to lower than expected frequency and severity. Included in losses and loss adjustment expenses for the 2007 accident year was $2.5 million attributable to storm losses which occurred in December 2007 in the Northwest and Midwest. Workers compensation reverses for the 2007 accident year included $4.4 million of additional reserves due to increased frequency of claims, including $0.5 million mining accident. Loss reserves for the 2007 accident year within the public entity products were increased by $2.5 million for the property lines and $1.7 million for the commercial automobile and other lines.
Included in losses and loss adjustment expenses for the year ended December 31, 2006, was favorable development on prior accident years of $10.8 million primarily attributable to a $6.7 million reduction in 2005 and prior accident year reserves within the public entity product lines for general liability, automobile and property lines, a $3.0 million reduction in a lead paint reserves due to claims settlements and $4.0 million of favorable loss development from ongoing actuarial reviews, offset by unfavorable prior year development of $2.3 million from workers compensation discount and $0.6 million of unallocated loss adjustment expenses. Partially offsetting this net favorable development was a $4.8 million addition due to higher than expected property losses for the 2007 accident year.
The expense ratio for the year ended December 31, 2008 and 2007 were comparable at 28.5% and 28.4%, respectively. The expense ratio for the year ended December 31, 2007 was 28.4%, compared to 28.8% for the same period ended 2006. The improvement in the expense ratio for the year ended December 31, 2007 as compared to 2006 was primarily attributable to increased earned premiums in the public entity products, without a corresponding increase in fixed costs.
Reinsurance. Reinsurance includes the results of operations of Argo Re (from the closing date of the Merger), in addition to various international reinsurance programs for which the Company began assuming premiums during the year ended December 31, 2006. Argo Re underwrites property catastrophe reinsurance on a controlled basis to a relatively small number of reinsureds. Argo Re also underwrites property per risk and pro rata reinsurance on a select basis.
For the year ended December 31, 2007 the results of operations for Argo Re are included beginning on August 7, 2007, the closing date of the Merger.
The following table summarizes the results of operations for the Reinsurance segment:
The increase in earned premiums for the year ended December 31, 2008 as compared to 2007 was primarily attributable to the effect of initiating operations for Argo Re in 2008. For the year ended December 31, 2008 Argo Re reported earned premiums of $52.4 million on gross written premiums of $80.1 million, compared to earned premiums of $1.0 million for the same period in 2007. Earned premiums for the assumed programs were comparable at $17.5 million and $17.7 million for the years ended December 31, 2008 and 2007, respectively, as the Company’s assumed programs remained unchanged. Earned premiums increased in 2007 as compared to the same period in 2006 primarily due to the introduction of new programs in 2007.
International Specialty. The International Specialty segment is focused on underwriting worldwide property and liability insurance business, under the Lloyds global franchise. The segment’s business platform, Heritage, based in London, comprises three principal components: (1) Syndicate 1200, which underwrites the insurance risk on a year of account basis; (2) Heritage Managing Agency, which manages the syndicates for the providers of capital; and (3) Heritage Underwriting Agency, which participates with other capital providers on the Syndicates. The International Specialty segment includes the results of operations of Heritage for the seven months ended December 31, 2008. The following table summarizes the results of operations for the International Specialty segment:
Earned premiums represent the portion of gross written premiums retained by the Company. Beginning in 2008, Heritage increased its underwriting participation by 20% to 54%. The International Specialty segment’s premiums tend to be seasonal, with approximately 75% of the premium being written in the first six months of the year. The International Specialty segment has experienced increased pricing pressures in 2008, and as a result, rates for the property business have decreased moderately while rates on the liability business have decreased to a lesser extent. Earned premiums were reduced by $4.1 million of reinsurance costs related to premium volume and increased pricing of the reinsurance program.
Losses and loss adjustment expenses are reported net of losses ceded to the trade reinsurers. Included in losses and loss adjustment expenses for the year ended December 31, 2008 was $40.7 million in losses resulting from hurricanes Gustav and Ike. Additionally, included in losses and loss adjustment expenses was $3.5 million of unfavorable loss development related to property facultative claims from the 2006 year of account. Loss reserves as of December 31, 2008 were $449.7 million, including $183.3 million of reserves attributable to the trade capital providers.
Run-off Lines. The Company has discontinued the underwriting of certain lines of business, including those lines which were previously reported in Argonaut Group’s Risk Management segment. The Risk Management segment has not written any new or renewal policies since the third quarter of 2005. All activity associated with the former Risk Management segment is related to the management of claims and other administrative functions.
Upon the completion of the Merger, business previously written by PXRE Bermuda and PXRE Reinsurance Company (prior to its sale in March 2008) classified as property catastrophe and Lloyds of London is included in the Run-off Lines segment. The Company is no longer actively underwriting business within these programs, and therefore all current activity is related to the management of claims and other administrative functions. For the year ended December 31, 2007 the results of operations for the former PXRE business are included beginning on August 7, 2007, the closing date of the Merger.
Losses and loss adjustment expense for the year ended December 31, 2008 included $14.2 million in net favorable loss reserve development on prior accident years. Included in losses and loss adjustment expenses for the year ended December 31, 2008 was $12.5 million favorable loss reserve development on prior accident years for PXRE non-catastrophe property lines and $5.0 million favorable loss development related to PXRE’s 2005 hurricane losses and $1.7 million of favorable loss reserve development in risk management lines. Partially offsetting this favorable development was $5.0 million of unfavorable loss reserve development on prior accident years, primarily driven by strengthening the reserves for the Company’s asbestos and environmental exposure.
Underwriting expenses for the year ended December 31, 2008 decreased as compared to 2007 due to reduced administrative expenses, partially offset by the recognition of $5.8 million in bad debt expense on an uncollectible reinsurance recoverable balance. The increase in underwriting expenses for the year ended December 31, 2007 as compared to 2006 was primarily attributable to the inclusion of $5.6 million in underwriting expenses for the results of operations of the PXRE run-off, partially offset by the reduction of variable expenses resulting from declining premium volume and reduced administrative expenses in the former risk management lines.
Argonaut Insurance Company also assumed risk as a reinsurer, primarily for the period from 1970 to 1975, a portion of which was assumed from the London market. Argonaut Insurance Company also reinsured risks on policies written by domestic carriers. Such reinsurance typically provided coverage for limits attaching at a relatively high level which are payable only after other layers of reinsurance are exhausted. Some of the claims now being filed on policies reinsured by Argonaut Insurance Company are on behalf of claimants who may have been exposed at some time to asbestos incorporated into buildings they occupied, but have no apparent medical problems resulting from such exposure. Additionally, lawsuits are being brought
The following table represents a reconciliation of total gross and net reserves for the Run-off Lines for each of the years in the three-year period ended December 31, 2008. Amounts in the net column are reduced by reinsurance recoverables:
Historically, the Company has reviewed on an annual basis its loss and loss adjustment expense reserves for its asbestos and environmental claims. The process is initiated at the end of the second quarter and is typically completed in the third quarter of the calendar year. The Company continually monitors the status of the claims, and may make adjustments outside of the annual review period. The review entails a detailed analysis of the Company’s direct and assumed exposure. The Company engages a consulting actuary to provide its best estimate of ultimate losses and management evaluates that estimate in assessing the adequacy of the asbestos and environmental loss and loss adjustment expense reserves.
Total reserves for Run-off Lines as of December 31, 2008 were $528.8 million, net of reinsurance, including reserves for asbestos and environmental claims of $125.4 million. Management uses various actuarial methods to determine its best estimate of losses for the asbestos and environmental exposure within the Run-off Lines segment, which resulted in a range of potential ultimate liability, net of reinsurance, of $80.3 million to $192.4 million. In determining its best estimate, management primarily relied on the report year method, with some weight given to other methods. The report year method relies most heavily on the Company’s historical claims and severity information, whereas other methods rely more heavily on industry information. This method produces an estimate of losses which have been incurred but not yet reported based on projections of future claims and the average severity for those future claims. The severities were calculated based on the Company’s specific data and in management’s opinion best reflect the Company’s liabilities based upon the insurance policies issued.
The following table represents a reconciliation of the number of asbestos and environmental claims outstanding for each of the years in the three-year period ended December 31, 2008:
The number of claims opened during the three years ended December 31, 2008 were as follows:
For the year ended December 31, 2008, net cash provided by operating activities was $117.7 million, compared to $166.2 million and $299.0 million for the years ended December 31, 2007 and 2006, respectively. The decrease in cash flows from operations in 2008 as compared to 2007 was primarily attributable to Heritage’s positive net cash flow offset by increased claim payments for Argo Group US and Argo Re in 2008 as compared to these two entities’ claim payments in 2007. The decrease in cash flows from operations in 2007 as compared to 2006 was primarily attributable to increased cash outflows for claim payments in 2007 as compared to 2006, coupled with negative cash flow related to the PXRE legacy companies of $68.8 million.
For the year ended December 31, 2008, net cash used by financing activities totaled $11.6 million. For the years ended December 31, 2007 and 2006, cash provided by financing activities totaled $15.5 million and $7.5 million, respectively. The decrease in financing activities in 2008 is resulting from less activity from the Company’s stock incentive plans in 2008 due to the respective strike price of the awards being in excess of market price, net cash payment on the revolving credit facility and the repurchase by the Company of 145,999 shares of its common stock offset by no dividend payments made in 2008. The increase in cash provided by financing activities in 2007 as compared to 2006 was primarily the result of cash received from stock option exercises.
The payment of dividends by Argo Re is limited under Bermuda insurance laws, which require Argo Re to maintain certain measures of solvency and liquidity. As of December 31, 2008, Argo Re’s solvency and liquidity margins and statutory capital and surplus were in excess of the minimum levels required by the Insurance Act. As of December 31, 2008, the unaudited statutory capital and surplus of Argo Re was estimated to be $1.1 billion and the amount required to be maintained was estimated to be $100.0 million, thereby allowing Argo Re the potential to pay dividends or capital distributions within the parameters of the solvency and liquidity margins. The Company believes that the dividend and capital distribution capacity of Argo Re will provide the Company with sufficient liquidity to meet its operating and debt service commitments, as well as other obligations that may arise from time to time.
As a mid-level holding company, Argo Ireland is largely dependent on dividends or other permitted payments from Argo Group US to fund its operating expenses or to fund dividends to Argo Re. Argo Group US is a mid-level holding company owned by Argo Ireland and is largely dependent on dividends and other permitted payments from its insurance subsidiaries to fund its operating expenses, fund debt service, or to fund dividends to Argo Ireland. Each holding company is subject to their respective domiciliary regulations and tax laws. The Company believes that Argo Ireland along with Argo Group US have sufficient dividend and capital distribution capacity to meet the operating and capital needs of their parents.
During 2009, based on the state of domicile’s ordinary dividend calculation, Argonaut Insurance Company may not be permitted to pay dividends to Argo Group US without approval from the Illinois Division of Insurance because of Argonaut Insurance Company’s extraordinary dividend in 2008. Colony Insurance Company and Rockwood Casualty Insurance Company, direct subsidiaries of Argo Group US, may be permitted to pay dividends of up to $38.3 million and $11.8 million, respectively, in cash without approval from the Virginia Bureau of Insurance or the Pennsylvania Department of Insurance, respectively. Business and regulatory considerations may impact the amount of dividends actually paid, and prior approval of dividend payments may be required.
Although Heritage holds no LOCs, LOCs have been filed with Lloyds under a third party property deed on behalf of the trade reinsurers. LOCs have been filed as part of the terms of whole account quota share reinsurance contracts entered into by the trade reinsurers. In the event such LOCs are funded, the Company is not liable.
During 2004, Argonaut Group, now known as Argo Group US, through a series of statutory trusts (non-consolidated), sold $83.0 million of Floating Rate Capital Securities (the “2004 Capital Securities”) (liquidation amount $1,000 per Capital Security) in a series of private sales. In conjunction with the sales of the 2004 Capital Securities, the trusts sold $2.6 million of Floating Rate Common Securities to Argo Group US. The trusts used the proceeds from these sales to purchase $85.6 million of Floating Rate Junior Subordinated Debentures (the “2004 Debentures”) from Argo Group US. The 2004 Debentures are unsecured and are subordinate in right of payment to all of the Company’s future senior indebtedness. The interest rates on the 2004 Debentures and the 2004 Capital Securities are equal to the three-month LIBOR plus a margin ranging from 3.55% to 3.85%, reset quarterly. For selected 2004 Debentures, the interest rates are not to exceed 12.5% prior to the coupon cap date, which is approximately five years after the issuance date. The remaining 2004 Debentures have interest rates that are not to exceed the highest rate permitted by New York Law prior to the coupon cap date. The 2004 Debentures are due 30 years after issuance, but may be redeemed after the five-year anniversary at a price equal to 100% of the principal amount of the 2004 Debentures, plus accrued and unpaid interest on the date of redemption. The 2004 Debentures may be redeemed prior to the five-year anniversary date upon the occurrence of specific events at a price equal to 107.5% to 101% plus accrued and unpaid interest to the date of redemption.
of Floating Rate Junior Subordinated Debentures (the “2003 Debentures”) from Argo Group US. The 2003 Debentures are unsecured and are subordinate in right of payment to all of the Company’s future senior indebtedness. The interest rates on the 2003 Debentures and the 2003 Capital Securities are equal to the three-month LIBOR plus a margin of 4.10%, reset quarterly. The 2003 Debentures are due 30 years after issuance, but may be redeemed after the five-year anniversary at a price equal to 100% of the principal amount of the 2003 Debentures, plus accrued and unpaid interest on the date of redemption.
The Company assumed debt through the acquisition of Heritage. At December 31, 2008, the outstanding balance on this debt was $67.3 million. The total debt is comprised of two U.S. denominated notes (issued in 2005 and 2006) and three Euro denominated notes (issued 2005, 2006 and 2007). The debt is unsecured, and each note has an option to repay in full on any interest payment date following the fifth anniversary of issue. No principal payments were made on these notes during the seven months ended December 31, 2008. These notes mature beginning in 2034.
The Company invests excess cash in a variety of investment securities. As of December 31, 2008, the Company’s investment portfolio consisted of 78.9% fixed maturities, 6.8% equity securities, 1.4% other investments and 12.9% short-term investments (based on fair value) compared to 73.0% fixed maturities, 8.5% equity securities, 0.4% other investments and 18.1% short-term investments for the same period in 2007. The Company classifies the majority of its investment portfolio as available-for-sale; resulting in these investments being reported at fair market value, with unrealized gains and losses, net of tax, being reported as a component of shareholders’ equity. Of the Company’s total investments of $3,995.4 million, only $2.1 million is classified as trading. All trading investments are reported at fair market value, with unrealized gains and losses, net of tax, being reported as a component of net income. No issuer (exclusive of the United States Government and United States Governmental agencies) of fixed income or equity securities represented more than 1.7% of shareholders’ equity as of December 31, 2008.
Additional information relating to the Company’s investment strategy and credit risk is included under