We lease office space in Bermuda, which houses our executive offices and operations for our Reinsurance, Lloyd’s and Insurance segments. In addition, certain U.S. based subsidiaries, including but not limited to, Renaissance Trading and REAL, lease office space in a number of U.S. states. Both our Reinsurance and Lloyd’s segments also lease office space in Dublin, Ireland and London, U.K. The U.S.-based insurance operations being sold to QBE currently lease office space in a number of U.S. states, and we anticipate the termination or transfer of these leases in early 2011 in connection with the closing of the sale of our U.S.-based insurance operations. While we believe that for the foreseeable future our current office space is sufficient for us to conduct our operations, it is likely that we will expand into additional facilities and perhaps new locations to accommodate future growth. To date, the cost of acquiring and maintaining our office space has not been material to us as a whole.
The following tables set forth our selected consolidated financial data and other financial information at the end of and for each of the years in the five-year period ended December 31, 2010. Comparative figures for 2007 and 2006 have not been reclassified for discontinued operations. See “Note 3. Discontinued Operations in our Notes to Consolidated Financial Statements” for additional information regarding discontinued operations. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this filing and all other information appearing elsewhere or incorporated into this filing by reference.
generally indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income. We also discuss our net claims and claim expense ratio on an accident year basis. This ratio is calculated by taking net claims and claim expenses, excluding development on net claims and claim expenses from events that took place in prior fiscal years, divided by net premiums earned.
On November 18, 2010, we entered into a Stock Purchase Agreement with QBE to sell substantially all of our U.S.-based insurance operations, including our U.S. property and casualty business underwritten through managing general agents, our crop insurance business underwritten through Agro National, our commercial property insurance operations and our claims operations. The Company has classified the assets and liabilities associated with this transaction as held for sale and its financial results are reflected in our Consolidated Financial Statements as “discontinued operations.” See “Note 3. Discontinued Operations in our Notes to Consolidated Financial Statements” for additional information.
(2) Specialty reinsurance, written for our own account, and for DaVinci, covering certain targeted classes of business where we believe we have a sound basis for underwriting and pricing the risk that we assume. Our portfolio includes various classes of business, such as catastrophe exposed workers’ compensation, surety, terrorism, political risk, trade credit, medical malpractice, financial, mortgage guarantee, catastrophe-exposed personal lines property, casualty clash, certain other casualty lines and other specialty lines of reinsurance that we collectively refer to as specialty reinsurance. We believe that we are seen as a market leader in certain of these classes of business. We are seeking to expand our specialty reinsurance operations over time, although we cannot assure you that we will do so, particularly in light of current and forecasted market conditions.
Our Insurance segment includes the insurance policies previously written in connection with our Bermuda-based insurance operations which were not included in the Stock Purchase Agreement with QBE. Our Insurance segment is managed by the Global Chief Underwriting Officer. The Bermuda-based insurance business is written by Glencoe, a Bermuda domiciled excess and surplus lines insurance company that is currently eligible to do business on an excess and surplus lines basis in 49 U.S. states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Although we are not actively underwriting new business in the Insurance segment, we may from time to time evaluate potential new business opportunities for our Insurance segment.
We regularly review potential strategic transactions that might improve our portfolio of business, enhance or focus our strategies, expand our distribution or capabilities, or to seek other benefits. In evaluating potential new ventures or investments, we generally seek an attractive estimated return on equity, the ability to develop or capitalize on a competitive advantage, and opportunities which we believe will not detract from our core operations. While we regularly review potential strategic transactions and periodically engage in discussions regarding possible transactions, there can be no assurance that we will complete any such transactions or that any such transaction would be successful or materially enhance our results of operations or financial condition. We believe that our ability to potentially attract investment and operational opportunities is supported by our strong reputation and financial resources, and by the capabilities and track record of our ventures unit.
With respect to our Reinsurance operations, since 1993 we have developed and continuously seek to improve our proprietary, computer-based pricing and exposure management system, REMS©. We believe that REMS©, as updated from time to time, is a more robust underwriting and risk management system than is currently commercially available elsewhere in the reinsurance industry and offers us a significant competitive advantage. REMS© was originally developed to analyze catastrophe risks, though we continuously seek ways to enhance the program in order to analyze other classes of risk.
We recorded $540.5 million of gross claims and claim expenses incurred in 2008 as a result of losses arising from hurricanes Gustav and Ike which struck the U.S. in 2008. In 2010, we recorded $159.7 million, $166.8 million and $23.0 million of gross claims and claim expenses as a result of losses arising from the Chilean earthquake, the New Zealand earthquake and the Australian flooding, respectively. Our estimates of losses from these events are based on factors including currently available information derived from the Company’s preliminary claims information from certain customers and brokers, industry assessments of losses from the events, proprietary models, and the terms and conditions of our contracts. The uncertainty of our estimates for these 2010 events is additionally impacted by the preliminary nature of the information available, the magnitude and relative infrequency of the events, the expected duration of the respective claims development period, inadequacies in the data provided thus far by industry participants and the potential for further reporting lags or insufficiencies (particularly in respect of the 2010 earthquakes); and in the case of the Australian flooding, significant uncertainty as to the form of the claims and legal issues including, but not limited to, the number, nature and fiscal periods of the loss events under the relevant terms of insurance contracts and reinsurance treaties. Given the magnitude and relatively recent occurrence of these events, and the continuing uncertainty relating to the large storms of 2005, especially hurricane Katrina, and those of 2008, meaningful uncertainty remains regarding total covered losses for the insurance industry and, accordingly, several of the key assumptions underlying our loss estimates. In addition, our actual net losses from these events may increase if our reinsurers or other obligors fail to meet their obligations.
The favorable development within our catastrophe unit of $184.4 million in 2009 was principally attributable to a reduction in ultimate net losses associated with the 2008 hurricanes of $44.7 million; the 2005 hurricanes of $25.5 million, the 2007 European windstorm Kyrill of $16.7 million, the 2007 California wildfires of $14.1 million, the 2007 flooding in the U.K. of $14.6 million and the 2004 hurricanes of $11.3 million, due to better than expected reported claims activity, and with respect to the 2004 and 2005 hurricanes, the adoption of a new actuarial technique using reported loss development factors to estimate the ultimate losses for these events, as discussed in more detail above. The remaining favorable development within our catastrophe unit was due to a reduction of ultimate net losses on a variety of smaller catastrophes such as hail storms, winter freezes, floods, fires, tornadoes which occurred during the 2006 through 2008 accident years.
As quantified in the table above, since the inception of the Company in 1993, while we have experienced adverse development from time to time, on a cumulative basis we have experienced $750.2 million of net favorable development on the run-off of our gross reserves within our catastrophe unit. This represents 16.4% of our initial estimated gross claims and claim expenses for accident years 2009 and prior of $4.6 billion and is calculated based on our estimates of claims and claim expense reserves as of December 31, 2010, compared to our initial estimates of ultimate claims and claim expenses, as of the end of each accident year. As described above, given the complexity in reserving for claims and claims expenses associated with catastrophe losses for property catastrophe excess of loss reinsurance contracts, we have experienced development, both favorable and unfavorable, in any given accident year in amounts that exceed our inception to date percentage of 16.4%. For example, our 2005 accident year developed favorably by $190.7 million, which is 12.9% better than our initial estimates of claims and claim expenses for the 2005 accident year as estimated as of December 31, 2005, while our 2004 accident year developed unfavorably by $59.0 million, or negative 7.7%. On a net basis our cumulative favorable or unfavorable development is generally reduced by offsetting changes in our reinsurance recoverables, as well as changes to loss related premiums such as reinstatement premiums, and redeemable noncontrolling interest for changes in claims and claim expenses that impact DaVinciRe, all of which generally move in the opposite direction to changes in our ultimate claims and claim expenses.
The percentage of claims unpaid at December 31, 2010 for each accident year reflects both the speed at which claims and claim expenses for each accident year have been paid and our estimate of claims and claim expenses for that accident year. As seen above, claims and claim expenses for the 2004 accident year have to date been paid quickly compared to prior accident years. This is due to the fact that hurricanes Charley, Frances, Ivan and Jeanne which occurred in 2004 have been relatively rapid claims paying events. This is driven in part by the mix of our business in Florida, which primarily includes property catastrophe excess of loss reinsurance for personal lines property coverage, rather than commercial property coverage or retrocessional coverage, and the speed of the settlement and payment of claims by our underlying cedants. In contrast, our 2001 accident year, which includes losses from the events of September 11, 2001, and our 2005 accident year, which includes significant losses from hurricane Katrina, includes a higher mix of commercial business and retrocessional coverage where the underlying claims of our cedants tend to be settled and paid more slowly. In addition, claims from our underlying cedants for the 2001 and 2005 accident years are subject to more complex coverage and legal matters due to the complexity of the catastrophic events taking place in those years.
The table below shows the impact on our ultimate claims and claim expenses, net income and shareholders’ equity as of and for the year ended December 31, 2010 of reasonably likely changes to our estimates of ultimate losses for claims and claim expenses incurred from catastrophic events within our property catastrophe
reinsurance business unit. The reasonably likely changes are based on an historical analysis of the period-to-period variability of our ultimate costs to settle claims from catastrophic events, giving due consideration to changes in our reserving practices over time. In general, our claim reserves for our more recent catastrophic events are subject to greater uncertainty and, therefore, greater variability and are likely to experience material changes from one period to the next. This is due to the uncertainty as to the size of the industry losses from the event, uncertainty as to which contracts have been exposed to the catastrophic event, and uncertainty as to the magnitude of claims incurred by our clients. As our claims age, more information becomes available and we believe our estimates become more certain, although there is no assurance this trend will continue in the future. As a result, the sensitivity analysis below is based on the age of each accident year, our current estimated ultimate claims and claim expenses for the catastrophic events occurring in each accident year, and the reasonably likely variability of our current estimates of claims and claim expenses by accident year. The impact on net income and shareholders’ equity assumes no increase or decrease in reinsurance recoveries, loss related premium or redeemable noncontrolling interest - DaVinciRe.
Within our specialty reinsurance business, we seek to review substantially all of our claims and claim expense reserves quarterly. Typically, our quarterly review procedures include reviewing paid and reported claims in the most recent reporting period, reviewing the development of paid and reported claims from prior periods, and reviewing our overall experience by underwriting year and in the aggregate. We monitor our expected ultimate claims and claim expense ratios and expected loss reporting assumptions on a quarterly basis and compare them to our actual experience. These actuarial assumptions are generally reviewed annually, based on input from our actuaries, underwriters, claims personnel and finance professionals, although adjustments may be made more frequently if needed. Assumption changes are made to adjust for changes in the pricing and terms of coverage we provide, changes in industry standards, as well as our actual experience, to the extent we have enough data to rely on our own experience. If we determine that adjustments to an earlier estimate are appropriate, such adjustments are recorded in the period in which they are identified. During the years ended December 31, 2010, 2009 and 2008, changes to our prior year estimated claims reserves in our specialty reinsurance unit increased our net income by $128.6 million, $65.1 million and $56.5 million, respectively, excluding the consideration of changes in reinstatement premium, profit commissions, redeemable noncontrolling interest - DaVinciRe and income tax benefit (expense).
The favorable development within our specialty reinsurance unit of $65.1 million in 2009 was principally attributable to lower than expected claims emergence on the 2005 through 2008 underwriting years of $87.6 million which was driven by the application of our formulaic actuarial reserving methodology for this business with the reductions being due to actual paid and reported loss activity being more favorable to date than what was originally anticipated when setting the initial IBNR reserves, as well as $10.0 million due to a reduction on one claim on a contract related to the 2005 hurricanes, and partially offset by a $32.5 million increase in our estimated ultimate net losses on the 2008 Madoff matter.
The Actual vs. Initial Estimated Ultimate Claims and Claim Expense Ratio table below summarizes our key actuarial assumptions in reserving for our specialty reinsurance business. As noted above, the key actuarial assumptions include the estimated ultimate claims and claim expense ratios and the estimated loss reporting patterns. The table shows our initial estimates of the ultimate claims and claim expense ratio by underwriting year. The table shows how our initial estimates of these ratios have developed over time, with the re-estimated ratios reflecting a combination of the amount and timing of paid and reported losses compared to our initial estimates. The initial estimate is based on the actuarial assumptions that were in place at the end of that year. A decrease in the ultimate claims and claim expense ratio implies that our current estimates are lower than our initial estimates while an increase in the ultimate claims and claim expense ratio implies that our current estimates are higher than our initial estimates. The result would be a corresponding favorable impact on shareholders’ equity and net income or a corresponding unfavorable impact on shareholders’ equity and net income, respectively. The table also shows how our initial estimated ultimate claims and claim expense ratios have changed from one underwriting year to the next. The table below reflects a summary of the weighted average assumptions for all classes of business written within our specialty reinsurance unit. The table is presented on a gross loss basis and therefore does not include the benefit of reinsurance recoveries or loss related premium.
The table above shows our initial estimated ultimate claims and claim expense ratios for attritional losses for each new underwriting year within our specialty reinsurance unit as of the end of each calendar year. Until 2007, our initial estimated ultimate remained relatively constant between 76.6% in 2006 and 78.2% in 2004 and 2005. This reflects the fact that management had not made significant changes to its initial estimates of expected ultimate claims and claim expense ratios from one underwriting year to the next. The principal reason for the
expenses for each accident year and how these initial estimates have developed over time. The initial estimate of accident year claims and claim expenses represents our estimate of the ultimate settlement and administration costs for claims incurred from catastrophic events occurring during a particular accident year, and as reported as of December 31 of that year. The re-estimated ultimate claims and claim expenses as of December 31, 2008, 2009 and 2010, represent our revised estimates as reported as of those dates. The cumulative favorable (adverse) development shows how our most recent estimates as reported at December 31, 2010 differ from our initial accident year estimates. Favorable development implies that our current estimates are lower than our initial estimates while adverse development implies that our current estimates are higher than our original estimates. Total reserves as of December 31, 2010 reflect the unpaid portion of our estimates of ultimate claims and claim expenses. The table is presented on a gross basis and therefore does not include the benefit of reinsurance recoveries or loss related premium such as reinstatement premium.
Actual vs. Initial Estimated Lloyd’s Segment Property Catastrophe Reinsurance Claims and Claim Expense Reserve Analysis
As shown in the table above, due to the fact that we commenced writing business within our Lloyd’s segment in mid-2009 and the segment has only been impacted by one catastrophe, namely the New Zealand earthquake in 2010, the initial estimate of accident year claims and claim expenses is equal to the claims and claim expense at December 31, 2010 of $5.3 million.
The Actual vs. Initial Estimated Ultimate Claims and Claim Expense Ratio table below summarizes our key actuarial assumptions in reserving for our specialty reinsurance and insurance lines of business in our Lloyd’s segment. As noted above, the key actuarial assumptions include the estimated ultimate claims and claim expense ratios and the estimated loss reporting patterns. The table shows our initial estimates of the ultimate claims and claim expense ratio by underwriting year. The initial estimate is based on the actuarial assumptions that were in place at the end of that year. A decrease in the ultimate claims and claim expense ratio implies that our current estimates are lower than our initial estimates while an increase in the ultimate claims and claim expense ratio implies that our current estimates are higher than our initial estimates. The result would be a corresponding favorable impact on shareholders’ equity and net income or a corresponding unfavorable impact on shareholders’ equity and net income, respectively. The table below reflects a summary of the weighted average assumptions for all classes of specialty reinsurance business in our Lloyd’s segment. The table is presented on a gross loss basis and therefore does not include the benefit of reinsurance recoveries or loss related premium such as reinstatement premium.
The table below shows the impact on our ultimate claims and claim expenses, net income and shareholders’ equity as of and for the year ended December 31, 2010 of reasonably likely changes to our estimates of ultimate losses for claims and claim expenses incurred from catastrophic events associated with property catastrophe reinsurance business within our Lloyd’s segment. The reasonably likely changes are based on a historical analysis of the period-to-period variability of our ultimate costs to settle claims from catastrophic events, giving due consideration to changes in our reserving practices over time. In general, our claim reserves for our more recent catastrophic events are subject to greater uncertainty and, therefore, greater variability and are likely to experience material changes from one period to the next. This is due to the uncertainty as to the size of the industry losses from the event, uncertainty as to which contracts have been exposed to the catastrophic event, and uncertainty as to the magnitude of claims incurred by our clients. As our claims age, more information becomes available and we believe our estimates become more certain, although there is no assurance this trend will continue in the future. As a result, the sensitivity analysis below is based on the age of each accident year, our current estimated ultimate claims and claim expenses for the catastrophic events occurring in each accident year, and the reasonably likely variability of our current estimates of claims and claim expenses by accident year.
The favorable development on prior year reserves in 2010, 2009 and 2008 is primarily due to actual reported loss activity being more favorable to date than what was originally anticipated when setting the initial reserves, and in 2009, also due to $2.1 million related to the adoption of a new actuarial technique using reported loss development factors to estimate the ultimate losses for the 2004 and 2005 hurricanes, as discussed in more detail in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Estimates, Claims and Claim Expense Reserves, Insurance”.
Actual vs. Initial Estimated Insurance Segment Claims and Claim Expense Reserve Analysis - Estimated Ultimate Claims and Claim Expense Ratio
As noted above, some of our Insurance contracts are exposed to claims and claim expenses from large natural and man-made catastrophes. Claims and claim expenses from these large catastrophes are reserved for after the event which gave rise to the claims in a manner which is consistent with our property catastrophe reinsurance reserving practices as discussed above. The large catastrophes occurring during the period from 2004 to 2008 principally include hurricanes Charley, Frances, Ivan and Jeanne in 2004, hurricanes Katrina, Rita and Wilma in 2005, and hurricanes Gustav and Ike in 2008. Our ultimate claims and claim expenses from these events within our Insurance segment are shown in the table below.
The table below quantifies the impact on our reserves for claims and claim expenses, net income and shareholders’ equity as of and for the year ended December 31, 2010 of reasonably likely changes to the actuarial assumptions used to estimate our December 31, 2010 claims and claim expense reserves within our Insurance segment. The table quantifies reasonably likely changes in our initial estimated ultimate claims and claim expense ratios and estimated loss reporting patterns. The changes to the initial estimated ultimate claims and claim expense ratios represent percentage increases or decreases to our current estimated ultimate claims and claim expense ratios. The change to the reporting patterns represent claims reporting that is both faster and slower than our current estimated reporting patterns. The impact on net income and shareholders’ equity assumes no increase or decrease in reinsurance recoveries or loss related premium and is before tax.
expense ratios and loss reporting patterns could be significantly different from the sensitivity analysis described above. For example, we could be liable for events which we have not estimated reserves for or for exposures we do not currently think are covered under our contracts. These changes could result in significantly larger changes to our reserves for claims and claim expenses, net income and shareholders’ equity than those noted above. We also caution the reader that the above sensitivity analysis is not used by management in developing our reserve estimates and is also not used by management in managing the business.
The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within our financial statements, and is a critical accounting policy and estimate for us. Fair value is defined under accounting guidance currently applicable to us to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. We recognize the change in unrealized gains and losses arising from changes in fair value in our consolidated
statements of operations, with the exception of changes in unrealized gains and losses on our fixed maturity investments available for sale, which are recognized as a component of accumulated other comprehensive income in shareholders’ equity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and we considers factors specific to the asset or liability.
There have been no material changes in our valuation techniques in the period represented by these consolidated financial statements.
(1) Other assets of $3.9 million, $51.3 million and $31.5 million are included in Level 1, Level 2 and Level 3, respectively. Other liabilities of $8.5 million, $0.1 million and $15.0 million are included in Level 1, Level 2 and Level 3, respectively.
As at December 31, 2010, we classified $415.4 million and $15.0 million of assets and liabilities, respectively, at fair value on a recurring basis using Level 3 inputs. This represented 5.1% and 0.4% of our total assets and liabilities, respectively. Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. These measurements are made under circumstances in which there is little, if any, market activity for the asset or liability. We use valuation models or other pricing techniques that require a variety of inputs including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs, some of which may be unobservable, to value these Level 3 assets and liabilities. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, we considered factors specific to the asset or liability. In certain cases, the inputs used to measure fair value of an asset or a liability may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is determined based on the lowest level input that is significant to the fair value measurement of the asset or liability.
In assessing our intent to sell securities, our procedures may include actions such as discussing planned sales with our third party investment managers, reviewing sales that have occurred shortly after the balance sheet date, and consideration of other qualitative factors that may be indicative of our intent to sell or hold the relevant securities. The Company recognized a total of $nil of other-than-temporary impairments due to our intent to sell these securities during the year ended December 31, 2010 (2009 - $1.3 million).
During the fourth quarter of 2009, we started designating, upon acquisition, certain fixed maturity investments as trading, rather than as available for sale and, as a result, we recognized $24.8 million of net unrealized gains on these securities in our consolidated statements of operations in 2010 (2009 - net unrealized losses of $10.8 million). We currently expect to continue to designate, in future periods, upon acquisition, certain fixed maturity investments as trading, rather than as available for sale, and, as a result, we currently expect our fixed maturity investments available for sale balance to decrease and our fixed maturity trading balance to increase over time, resulting in a reduction in other-than-temporary accounting judgments we make. This change will over time result in additional volatility in our net income (loss) in future periods as net unrealized gains and losses on these fixed maturity investments will be recorded currently in net income (loss), rather than as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
Investments in which we have significant influence over the operating and financial policies of the investee are classified as investments in other ventures, under equity method, and are accounted for under the equity method of accounting. Under this method, we record our proportionate share of income or loss from such investments in our results for the period. Any decline in the value of investments in other ventures, under equity method, including goodwill and other intangible assets arising upon acquisition of the investee, considered by management to be other-than-temporary, is impaired and is reflected in our consolidated statements of
In determining whether an equity method investment is impaired, we look at a variety of factors including the operating and financial performance of the investee, the investee’s future business plans and projections, recent transactions and market valuations of publicly traded companies where available, discussions with the investees’ management, and our intent and ability to hold the investment until it recovers in value. In doing this, we make assumptions and estimates in assessing whether an impairment has occurred and if, in the future, our assumptions and estimates made in assessing the fair value of these investments change, this could result in a material decrease in the carrying value of these investments. This would cause us to write-down the carrying value of these investments and could have a material adverse effect on our results of operations in the period the impairment charge is taken. During the year ended December 31, 2010, we recorded $0.8 million (2009 - $nil, 2008 - $1.0 million) in other-than-temporary impairment charges related to investments in other ventures, under the equity method.
We generated $702.6 million of net income available to RenaissanceRe common shareholders in 2010, compared to $838.9 million in 2009, a decrease of $136.2 million. In 2008, we incurred a loss attributable to RenaissanceRe common shareholders of $13.3 million. As a result of our net income available to RenaissanceRe common shareholders in 2010, we generated a 21.7% return on average common equity and our book value per common share increased from $51.68 at December 31, 2009 to $62.58 at December 31, 2010, a 23.0% increase, after considering the change in accumulated dividends paid to our common shareholders. In 2009 and 2008, we generated returns on average common equity of 30.2% and (0.5%), respectively, and increased
Lower Underwriting Income - our underwriting income decreased $220.6 million, primarily due to a $200.0 million increase in net claims and claim expenses and a $17.3 million decrease in net premiums earned. The $220.6 million decrease in underwriting income and 23.9 percentage point increase in the combined ratio was driven by the comparably high level of insured catastrophes during 2010, compared to 2009, specifically the comparative impact of the 2010 earthquakes, which resulted in $252.1 million of underwriting losses and increased our combined ratio by 32.0 percentage points in 2010, as described in more detail below. In addition, claims and claim expenses include $302.1 million of favorable development on prior accident years due to reductions to our estimated ultimate losses in our catastrophe unit, combined with lower than expected loss emergence in our specialty unit and Insurance segment, as described in more detail below;
Lower Net Income Attributable to Redeemable Noncontrolling Interest - DaVinciRe - our net income attributable to redeemable noncontrolling interest - DaVinciRe decreased $55.1 million principally due to a reduction in DaVinciRe’s underwriting income, due to an increase in current accident year net claims and claim expenses primarily due to the 2010 earthquakes, which also impacted DaVinciRe and decreased its net income in 2010, and consequently decreased redeemable noncontrolling interest - DaVinciRe, combined with an increase in our ownership of DaVinciRe to 41.2% in 2010, compared to 38.2% in 2009; and
Increased Other Income - other income increased $39.3 million, to $41.1 million in 2010, compared to 2009, primarily the result of: a $15.8 million gain on the sale of our interest in ChannelRe in 2010; a $10.1 million positive mark-to-market on the Platinum Underwriters Holdings Ltd. (“Platinum”) warrants, compared to $5.0 million in 2009, due to the increase in the common share price of Platinum during 2010; a reduction in other losses associated with our weather-related and loss mitigation activities of $11.1 million in 2010; a $37.8 million improvement in other income associated with the fair value of the assumed and ceded reinsurance contracts accounted for at fair value or as deposits; and partially offset by a decrease of $29.0 million in other income from our weather and energy risk management operations due to overall less favorable trading conditions experienced in 2010, compared to 2009.
During 2009, the most significant events affecting our financial performance on a comparative basis to 2008 include:
Net negative impact includes the sum of estimates of net claims and claim expenses incurred, earned reinstatement premiums assumed and ceded, lost profit commissions, redeemable noncontrolling interest and for the New Zealand earthquake, equity in net claims and claim expenses of Top Layer Re. Our estimates of losses from the events noted below are based on industry insured loss estimates, market share analysis, the application of our modeling techniques, and a review of our in-force contracts. Given the relatively preliminary nature of the information available, the magnitude and relatively recent occurrence of the events noted below, the expected lengthy duration of the claims development period characteristic of earthquake events, and other factors and uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from the events noted below and our actual ultimate net losses from these events will vary from these estimates, perhaps materially. Changes in these estimates will be recorded in the period in which they occur.
Below is a summary of the underwriting results and ratios for our Reinsurance segment followed by an analysis of our catastrophe unit and specialty reinsurance unit underwriting results and ratios for the years ended December 31, 2010, 2009 and 2008:
(1) Includes gross premiums ceded from the Insurance segment to the Reinsurance segment of $9.5 million, $12.7 million and $5.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
decline in our specialty reinsurance premiums of $45.4 million, as discussed below. Gross premiums written in our Reinsurance segment for 2008 includes $58.4 million of loss related reinstatement premiums as a result of hurricanes Gustav and Ike.
Our property catastrophe reinsurance gross premiums written continue to be characterized by a large percentage of U.S. and Caribbean premium as we have found business derived from exposures in Europe and the rest of the world to be, in general, less attractive on a risk-adjusted basis during recent periods. A significant amount of our U.S. and Caribbean premium provides coverage against windstorms, mainly U.S. Atlantic hurricanes, as well as earthquakes and other natural and man-made catastrophes.
Ceded premiums written increased by $89.3 million in 2009, compared to 2008, principally due to the Company electing to purchase additional reinsurance protection due to appropriately priced coverage being available during 2009, combined with the utilization in the 2009 U.S. hurricane season of a fully-collateralized joint venture, Tim Re II, pursuant to which $32.0 million of assumed catastrophe reinsurance premium was fully ceded in 2009.
Reinsurance Segment Underwriting Results - The Reinsurance segment generated $517.0 million of underwriting income and had a combined ratio of 38.4% in 2010, compared to $719.2 million of underwriting income and a 15.4% combined ratio in 2009. The $202.1 million decrease in underwriting income was primarily due to a $238.0 million increase in current accident year net claims and claim expenses due to a comparably high level of insured catastrophes occurring in 2010 compared to 2009, specifically the comparative impact of the 2010 earthquakes noted below, which added $259.9 million in net claims and claim expenses and 32.6 percentage points to the Reinsurance segment’s combined ratio in 2010, and estimated ultimate claims and claims expenses related to tropical storm Tasha of $18.1 million.
The favorable development in 2009 was the result of reductions in estimated ultimate losses on certain specific events within the catastrophe unit, and lower than expected claims emergence within our specialty unit, as discussed in more detail below. For 2008, the favorable prior year reserve development was principally the result of a reduction in ultimate net losses associated with the 2005 hurricanes, Katrina, Rita and Wilma.
Our Reinsurance segment generated $719.2 million of underwriting income and reported a combined ratio of 15.4% in 2009, compared to $281.6 million of underwriting income and a combined ratio of 69.0% in 2008, an increase of $437.6 million in underwriting income and a 53.6 percentage point decrease in the combined ratio. The increase in underwriting income and decrease in the combined ratio were primarily due to a $528.5 million decrease in net claims and claim expenses due to a comparably lower level of insured catastrophes occurring in 2009, compared to 2008, specifically the comparative impact of hurricanes Gustav and Ike (see below for additional detail), which added $432.5 million in net claims and claim expenses and 46.6 percentage points to the Reinsurance segment’s combined ratio in 2008, as detailed in the table below. In 2009, our Reinsurance segment generated a net claims and claim expenses ratio of negative 10.3%, an underwriting expense ratio of 25.7% and a combined ratio of 15.4%. Current accident year losses of $161.9 million in 2009 were down $467.2 million from $629.0 million in 2008, principally due to the comparably low level of insured catastrophes occurring in 2009, compared to 2008, specifically the comparative impact of hurricanes Gustav and Ike as noted above and as detailed in the table below.
Losses from our property catastrophe reinsurance and specialty reinsurance policies can be infrequent, but severe, as demonstrated by our 2008 results. During periods with low levels of property catastrophe loss activity, such as 2009, we have the potential to produce a low level of losses and a related increase in underwriting income. As described above, we believe there has been an increase in the frequency and severity of hurricanes that have the potential to make landfall in the U.S., potentially as a result of decadal ocean water temperature cyclical trends, a longer-term trend towards global warming, or both or other factors.
(1) Includes gross premiums written ceded from the Insurance segment to the catastrophe unit of $9.5 million, $12.7 million and $5.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The 2010 earthquakes added 36.8 percentage points to the catastrophe unit’s combined ratio for 2010 as detailed in the table below:
$33.6 million to the estimated ultimate losses of mature, large, mainly international catastrophe events, combined
with reductions in net ultimate losses associated with the 2005 Buncefield Oil Depot loss of $27.4 million, the 2005 hurricanes of $25.5 million, the 2008 hurricanes of $10.9 million, European windstorm Klaus of $8.0 million and the 2004 hurricanes of $8.1 million, with the remainder due to a reduction in ultimate losses on a large number of relatively small catastrophes.
In 2009, our specialty reinsurance gross premiums written decreased by $45.4 million, or 28.4%, to $114.3 million, compared to $159.8 million in 2008, principally due to the non-renewal of several programs that did not meet our underwriting standards, combined with the non-renewal and portfolio transfer out of a catastrophe exposed homeowners personal lines property quota share contract during the second quarter of 2009.
Our specialty reinsurance premiums are prone to significant volatility as this business is characterized by a relatively small number of comparably large transactions.
Specialty Reinsurance Underwriting Results - Our specialty reinsurance unit generated $117.3 million of underwriting income in 2010, compared to $69.8 million in 2009, an increase of $47.6 million, primarily due to decreases of $53.9 million and $20.4 million in net claims and claim expenses and underwriting expenses, respectively, and partially offset by a $26.8 million decrease in net premiums earned. Current accident year losses in 2010 of $89.1 million were up $9.5 million from $79.5 million in 2009, and include $15.0 million of loss reserves established in 2010 associated with the Deepwater Horizon oil rig event. In 2010, our specialty reinsurance unit generated a net claims and claim expense ratio of negative 33.6%, an underwriting expense
ratio of 33.6% and a combined ratio of 0.0%, compared to 10.0%, 41.6% and 51.6%, respectively, in 2009. The net claims and claim expense ratio of negative 33.6% in 2010 is driven by the favorable development on prior accident years of $128.6 million exceeding current accident year claims of $89.1 million. The 8.0 percentage point decrease in the specialty unit’s underwriting expenses ratio in 2010, compared to 2009, is primarily due to the decrease in net premiums earned, combined with the non-renewal and portfolio transfer out of a catastrophe exposed personal lines property quota share contract, as discussed above, which carried higher acquisition costs than the business we wrote in 2010.
Our specialty reinsurance unit experienced $128.6 million of net favorable development in 2010 and includes $31.4 million associated with actuarial assumption changes made in the first quarter of 2010, principally in the casualty clash and surety lines of business, and partially offset by an increase in reserves within the workers compensation per risk line of business, principally as a result of revised initial expected loss ratios and loss development factors due to actual experience coming in better than expected; $25.9 million due to a decrease in case reserves and additional case reserves, which are reserves established at the contract level for specific losses or large events; and reported losses coming in better than expected in 2010 on prior accident years events.
(1) Includes gross premiums written ceded from the Insurance segment to the Lloyd’s segment and from the Reinsurance segment to the Lloyd’s segment of $17.4 million and $0.2 million, respectively, for the year ended December 31, 2010.
Below is a summary of the underwriting results and ratios for the years ended December 31, 2010, 2009 and 2008 for our Insurance segment:
Net investment income was $204.0 million in 2010, compared to $318.2 million in 2009. The $114.2 million decrease in net investment income was principally driven by a $106.1 million decrease from our other investments, primarily due to lower average invested assets in senior secured bank loan funds in 2010, compared to 2009, combined with a $52.3 million decrease in net investment income from our fixed maturity investments due to lower yields during 2010, compared to 2009. Partially offsetting the decreases noted above, is net investment income from our hedge funds and private equity investments which increased $46.1 million due to higher total returns, principally from private equity investments. Our hedge funds, private equity and other investments are accounted for at fair value with the change in fair value recorded in net investment income which included net unrealized gains of $57.5 million in 2010, compared to $88.5 million in 2009.
Net investment income for 2009 was $318.2 million, compared to $13.9 million in 2008. The $304.3 million increase in net investment income was principally driven by a $120.1 million increase in net investment income from our hedge funds and private equity investments from negative $101.8 million in 2008 to $18.3 million in 2009, and a $263.2 million increase in net investment income from our senior secured bank loan funds and non-U.S. fixed income funds within our other investments, from negative $117.9 million in 2008 to $145.4 million in 2009, and partially offset by a $39.0 million and $36.8 million decrease in net investment income from
During the fourth quarter of 2009, we started designating, upon acquisition, certain fixed maturity investments as trading, rather than as available for sale and, as a result, we recognized $24.8 million of net unrealized gains on these securities in our consolidated statement of operations for 2010. We currently expect to continue to designate, in future periods, upon acquisition, certain fixed maturity investments as trading, rather than as available for sale, and, as a result, we currently expect our fixed maturity investments available for sale balance to decrease and our fixed maturity trading balance to increase over time, resulting in a reduction in other-than-temporary accounting judgments we make. This change will over time result in additional volatility in our net income (loss) in future periods as net unrealized gains and losses on these fixed maturity investments will be recorded in net income (loss), rather than as a component of accumulated other comprehensive income (loss) in shareholders’ equity.
Net realized gains on fixed maturity investments were $119.7 million in 2010, compared to $104.5 million in 2009, an increase of $15.1 million, as a result of a $19.5 million decrease in gross realized losses and a $4.4 million decrease in gross realized gains. Net other-than-temporary impairments recognized in earnings were $0.8 million in 2010 compared to $22.5 million for 2009. Net other-than-temporary impairments relate to our fixed maturity investments available for sale. Of the total other-than-temporary impairment charges in 2010, $0.8 million was recognized in earnings and includes $0.8 million for credit losses and $nil for investments we intend to sell, and $2 thousand related to other factors recorded as an unrealized loss in accumulated other comprehensive income. Under the new guidance which became effective in the second quarter of 2009, we recognize other-than-temporary impairments in earnings for impaired fixed maturity investments available for sale (i) for which we have the intent to sell the security or (ii) it is more likely than not that we will be required to sell the security before its anticipated recovery and (iii) for those securities which have a credit loss.
Equity in (losses) earnings of other ventures represents primarily our pro-rata share of the net (loss) income from our investments in the Tower Hill Companies and Top Layer Re. Equity in losses of other ventures was $11.8 million in 2010, compared to equity in earnings of other ventures of $11.0 million in 2009. The $22.8 million decrease was primarily due to our equity in losses of Top Layer Re of $12.1 million during 2010, as a result of Top Layer Re experiencing net claims and claim expenses related to the New Zealand earthquake.
The equity in earnings from the Tower Hill Companies is recorded one quarter in arrears.
In 2010, we generated $41.1 million of other income, compared to $1.8 million in 2009. We sold our entire ownership interest in ChannelRe Holdings Ltd. (“ChannelRe”), a financial guaranty reinsurance company, for $15.8 million in July 2010 and recorded other income of $15.8 million as a result of the sale. We no longer have an ownership interest in ChannelRe and have no contractual obligations to provide capital or other financial support to ChannelRe. Other income attributable to our weather and energy risk management operations of $8.1 million in 2010, decreased $29.0 million, from other income of $37.2 million in 2009, due to a combination of less favorable net positions in respect of certain weather outcomes, lower business volume and less liquidity in the markets in which we operate. Our assumed and ceded reinsurance contracts accounted for as derivatives and deposits generated $5.2 million in other income in 2010, compared to an other loss of $32.6 million in 2009, an improvement of $37.8 million, primarily due to less ceded reinsurance contracts that were accounted for at fair value in 2010, compared to 2009.
In 2009, we generated $1.8 million of other income compared to $5.5 million in 2008. The $3.7 million decrease in other income was primarily due to a $21.4 million increase in other loss related to our assumed and ceded reinsurance contracts accounted for as derivatives and deposits, principally due to the inception of several new ceded contracts during the second quarter of 2009, for which the losses principally relate to the expiration of the contractual premium over the risk period and for which no recoveries have been estimated, and partially offset by a $12.1 million increase in other income from our weather and energy risk management operations from $25.1 million in 2008 to $37.2 million in 2009.
We are subject to income taxes in certain jurisdictions in which we operate; however, since the majority of our income is currently earned in Bermuda, a non-taxable jurisdiction, the tax impact to our operations has historically been minimal. During 2010 and 2008, we generated an income tax benefit of $6.1 million and $0.2 million, respectively, which was principally the result of our U.S. operations incurring pretax losses, compared to an income tax expense of $10.0 million in 2009, which was principally the result of our U.S. operations generating pretax income.
RenaissanceRe CCL and Syndicate 1458 are subject to regulation by the Council of Lloyd’s. Syndicate 1458 is also subject to regulation by the FSA under the Financial Services and Markets Act 2000. Underwriting capacity of a member of Lloyd’s must be supported by providing a deposit in the form of cash, securities or letters of credit, which are referred to as Funds at Lloyd’s, in an amount determined by Lloyd’s in relation to the member’s underwriting capacity. This amount is determined by Lloyd’s through application of a risk-based capital formula. At December 31, 2010, the Company maintained $74.3 million and £15.0 million as a Funds at Lloyd’s facility (2009 - $74.3 million and £15.0 million). In addition, the FSA requires Lloyd’s syndicates to satisfy an annual solvency test and to maintain solvency on a continuous basis, which Syndicate 1458 was in compliance with at December 31, 2010.
In the aggregate, our operating subsidiaries have historically produced sufficient cash flows to meet their expected claims payments and operational expenses and to provide dividend payments to us. Our subsidiaries also maintain a concentration of investments in high quality liquid securities, which management believes will provide additional liquidity for extraordinary claims payments should the need arise. See “Capital Resources” section below.
Cash flows provided by operating activities. Cash flows provided by operating activities in 2010 were $494.7 million, which consisted of, among other items, our net income of $861.2 million, partially offset by a decrease in claims and claim expenses, net of $159.9 million, net realized and unrealized investment gains on fixed maturity investments of $151.2 million and unrealized gains included in net investment income of $57.5 million related to our other investments. As discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Results of Operations for 2010, 2009 and 2008”, we generated strong underwriting and investment results, which contributed to cash flows provided by operating activities. In addition, as noted above, claims and claim expenses, net decreased $159.9 million in 2010, compared to 2009, primarily as a result of $402.3 million of paid claims and claim expenses during 2010, partially offset by incurred claims and claim expenses of $242.5 million. Our 2010 cash flows provided by operating activities were primarily used to support our financing activities as discussed below.
Cash flows provided by investing activities. During 2010, our cash flows provided by investing activities were $108.6 million, which principally reflects our decision to decrease our allocation to other investments, specifically hedge funds, resulting in net sales of other investments of $122.1 million. Our 2010 cash flows provided by investing activities were primarily used to support our financing and repurchase activities as discussed below.
Cash flows used in financing activities. Our cash flows used in financing activities in 2010 were $531.6 million, primarily as a result of the repurchase of $448.9 million of our common shares, the redemption of $100.0 million of our 7.30% Series B Preference Shares as discussed below, the payment of $55.9 million and $42.1 million in dividends to our common and preferred shareholders, respectively, the repurchase of $136.7 million of DaVinciRe shares of third party shareholders, and partially offset by the issuance of $250.0 million of 5.75% Senior Notes for $249.1 million.
In 2010, our capital resources increased by $149.7 million, principally due to our comprehensive income attributable to RenaissanceRe of $723.1 million and the issuance of $250.0 million of 5.75% Senior Notes for
$249.1 million during 2010, partially offset by the renewal of the RenaissanceRe revolving credit facility with a commitment amount of $150.0 million, compared to the commitment amount of $345.0 million which had previously been in effect, the redemption of $100.0 million principal amount of our 7.30% Series B Preference Shares as discussed below, $55.9 million of dividends on common shares, and $460.4 million of common share repurchases during 2010, as discussed in more detail in “Item 5 - Issuer Repurchases of Equity Securities”.
In January 2003, we issued $100.0 million of 5.875% Senior Notes due February 15, 2013, with interest on the notes payable on February 15 and August 15 of each year. The notes can be redeemed by us prior to maturity subject to payment of a “make-whole” premium. The notes, which are senior obligations, contain various covenants, including limitations on mergers and consolidations, restrictions as to the disposition of the stock of designated subsidiaries and limitations on liens of the stock of designated subsidiaries.
On March 17, 2010, RRNAH issued $250.0 million of 5.75% Senior Notes due March 15, 2020, with interest on the notes payable on March 15 and September 15 of each year. The notes, which are senior obligations, are guaranteed by RenaissanceRe and can be redeemed by RRNAH prior to maturity subject to payment of a “make-whole” premium. The documents governing the notes contain various covenants, including limitations on the ability of RRNAH and RenaissanceRe to merge, consolidate and transfer or lease their respective properties and assets as an entirety or substantially as an entirety, as well as restrictions on RRNAH and RenaissanceRe relating to the disposition of the stock of designated subsidiaries and the creation of liens on the stock of designated subsidiaries.
Effective September 17, 2010, each of Renaissance Reinsurance, DaVinci and Glencoe (collectively, the “Bilateral Facility Participants”), entered into a secured letter of credit facility with Citibank Europe plc (“CEP”).
The Bilateral Facility provides a commitment from CEP to issue letters of credit for the account of one or more of the Bilateral Facility Participants and their respective subsidiaries in multiple currencies and in an aggregate amount of up to $300.0 million. The Bilateral Facility terminates on December 31, 2012 and is evidenced by a Facility Letter and three separate Master Agreements between CEP and each of the Bilateral Facility Participants, as well as certain ancillary agreements.
DaVinciRe is a party to a Third Amended and Restated Credit Agreement, dated as of April 5, 2006 (the “DaVinciRe Credit Agreement”), which provides for a revolving credit facility in an aggregate amount of up to $200.0 million that matures on April 5, 2011. The term of the DaVinciRe Credit Agreement may be extended and the commitment amount may be increased to $250.0 million, provided certain conditions are met. Effective as of March 9, 2010, DaVinciRe and the other parties to the DaVinciRe Credit Agreement entered into Amendment No. 1 to the DaVinciRe Credit Agreement (the “Amendment”). The Amendment provided for the release of certain collateral that was previously pledged by DaVinciRe in support of its obligations under the DaVinciRe Credit Agreement and the pledge by DaVinci of other collateral in substitution for the released collateral.
Interest rates are based on a spread above LIBOR, and averaged approximately 1.0% during 2010 (2009 - 1.3%). The DaVinciRe Credit Agreement requires DaVinciRe and DaVinci to maintain a minimum net worth of $350.0 million and $450.0 million, respectively, and requires DaVinciRe to maintain a debt to capital ratio of no greater than 30%. At December 31, 2010, $200.0 million remained outstanding. Neither RenaissanceRe nor Renaissance Reinsurance is a guarantor of this facility and the lenders have no recourse against us or our subsidiaries other than DaVinciRe and DaVinci under the DaVinciRe Credit Agreement. Pursuant to the terms of the Credit Agreement, a default by DaVinciRe on its obligations under the DaVinciRe Credit Agreement will not result in a default under the Credit Agreement.
Our ability to renew the DaVinciRe Credit Agreement, and the terms of such renewal, if any, will depend on the facts and circumstances at the time, including the financial position and operating results of DaVinci and capital market conditions. In the event that we are unable to renew the DaVinciRe Credit Agreement at a reasonable price and otherwise on terms satisfactory to us or at all, or if we decide not to renew the DaVinciRe Credit Agreement in whole or in part, we may pursue alternative financing arrangements if required to meet the liquidity needs of DaVinci and DaVinciRe.
The Reimbursement Agreement serves as our principal secured letter of credit facility and the commitments thereunder expire on April 22, 2013. As of December 31, 2010, the Reimbursement Agreement provided commitments from the Banks in an aggregate amount of $1.0 billion. Effective as of February 15, 2011, we reduced the commitments under the Reimbursement Agreement from $1.0 billion to $700.0 million. The reduction was implemented in connection with a reassessment of the future collateral needs of the Account Parties, taking into account, among other things, their access to alternative sources of credit enhancement. If the sale of substantially all of our U.S.-based insurance operations to QBE pursuant to the Stock Purchase Agreement is consummated, we expect to reduce the commitments under the Reimbursement Agreement by an additional $100.0 million to $600.0 million. Prior to the expiration date set forth above and after giving effect to the full $400.0 million reduction, the commitments of the Banks under the Reimbursement Agreement may be increased from time to time up to an aggregate amount not to exceed $1.1 billion, subject to the satisfaction of certain conditions. The Reimbursement Agreement contains representations, warranties and covenants in respect of RenaissanceRe and the Account Parties and Renaissance Investment Holdings Ltd. (“RIHL”), a subsidiary of RenaissanceRe, that are customary for facilities of this type, including customary covenants limiting the ability to merge, consolidate, sell, transfer or lease all or any substantial part of their respective assets. The Reimbursement Agreement also contains certain financial covenants that are customary for reinsurance and insurance companies in facilities of this type, which require RenaissanceRe and DaVinci to maintain a minimum net worth of $1.75 billion and $650.0 million, respectively. The foregoing net worth requirements are recalculated effective as of the end of each fiscal year, all as more fully set forth in the Reimbursement Agreement.
At December 31, 2010, RenaissanceRe had provided guarantees in the amount of $243.0 million to certain counterparties of the weather and energy risk operations of Renaissance Trading. In the future, RenaissanceRe may issue guarantees for other purposes or increase the amount of guarantees issued to counterparties of Renaissance Trading.
Certain third party shareholders of DaVinciRe submitted repurchase notices on or before the required annual redemption notice date of March 1, 2009, in accordance with the Shareholders Agreement. The repurchase notices submitted on or before March 1, 2009 were for shares of DaVinciRe with a GAAP book value of $173.6 million at December 31, 2009. Effective January 1, 2010, DaVinciRe redeemed the shares for $173.6 million, less a $17.6 million reserve holdback and, in a separate transaction, the Company sold a portion of its shares in DaVinciRe to a third party shareholder. Our ownership in DaVinciRe was 38.2% at December 31, 2009 (2008 - 22.8%) and subsequent to the above transactions, the Company’s ownership interest in DaVinciRe increased to 41.2% effective January 1, 2010.
Certain third party shareholders of DaVinciRe submitted repurchase notices on or before the required annual redemption notice date of March 1, 2010, in accordance with the Shareholders Agreement. The repurchase notices submitted on or before March 1, 2010, were for shares of DaVinciRe with a GAAP book value of $88.4 million at December 31, 2010. Furthermore, DaVinciRe resolved to return additional capital of $86.6 million to the remaining shareholders, including the Company, after the receipt of the repurchase notices described above. Effective January 1, 2011, DaVinciRe redeemed the shares and returned additional capital for an aggregate of $175.0 million, less a $17.5 million reserve holdback. As a result of the above transactions, our ownership interest in DaVinciRe increased to 44.0% effective January 1, 2011.
Presented below are the ratings of our principal operating subsidiaries and joint ventures by segment and the ERM rating of RenaissanceRe as of February 16, 2011.
(1) The A.M. Best, S&P, Moody’s and Fitch ratings for the companies in the Reinsurance and Insurance segments reflect the insurer’s financial strength rating.
(2) The A.M. Best, S&P and Fitch ratings for the Lloyd’s Overall Market Rating represent its financial strength rating.
(3) The S&P rating for RenaissanceRe represents rating on its Enterprise Risk Management practices.
A.M. Best. “A+” is the second highest designation of A.M. Best’s sixteen rating levels. “A+” rated insurance companies are defined as “Superior” companies and are considered by A.M. Best to have a very strong ability to meet their obligations to policyholders. “A” is the third highest designation assigned by A.M. Best, representing A.M. Best’s opinion that the insurer has an excellent ability to meet its ongoing obligations to policyholders.
S&P. The “AA” range (“AA+”, “AA”, AA-”), which has been assigned by S&P to Renaissance Reinsurance, Renaissance Europe and Top Layer Re, is the second highest rating assigned by S&P, and indicates that S&P believes the insurers have very strong financial security characteristics, differing only slightly from those rated higher. S&P assigns an issuer credit rating to an entity which is an opinion on the credit worthiness of obligor with respect to a specific financial obligation.
On January 21, 2009, S&P initiated coverage of Renaissance Europe, assigning a rating of “AA-” for both its CCR and FSR. The outlook is stable for this rating.
In addition, S&P assesses companies’ ERM practices, which is an opinion on the many critical dimensions of risk that determine overall creditworthiness. RenaissanceRe has been assigned an ERM rating of “Excellent”, which is the highest rating assigned by S&P, and indicates that S&P believes the Company has extremely strong capabilities to consistently identify, measure, and manage risk exposures and losses within the Company’s predetermined tolerance guidelines.
Moody’s. Moody’s Insurance Financial Strength Ratings and Moody’s Credit Ratings represent its opinions of the ability of insurance companies to pay punctually policyholder claims and obligations and senior unsecured debt instruments. Moody’s believes that insurance companies rated “A1”, such as Renaissance Reinsurance, and companies rated “A3”, such as RenaissanceRe, offer good financial security. However, Moody’s believes that elements may be present which suggest a susceptibility to impairment sometime in the future.
On January 19, 2011, Fitch upgraded the IFS of Renaissance Reinsurance to “A+” from “A”. The outlook is stable for this rating.
A.M. Best, S&P and Fitch have each assigned an FSR to the Lloyd’s overall market. The financial risks to policy holders of syndicates within the Lloyd’s market are partially mutualized through the Lloyd’s Central Fund, to which all underwriting members contribute. Because of the presence of the Lloyd’s Central Fund, and the current legal and regulatory structure of the Lloyd’s market, FSRs on individual syndicates are not appropriate. This reflects the fact that syndicates are groupings of one or more capital providers, managed on their behalf by a managing agent, and are not legal entities in themselves.
None of our operating subsidiaries which conduct the trading activities of REAL are currently rated by any of the nationally recognized rating agencies.
The table below shows the aggregate amounts of our invested assets at December 31, 2010 and 2009:
(1) Included in fixed maturity investments, at fair value at December 31, 2010 and 2009 are $3,871.8 million and $696.9 million, respectively, of fixed maturity investments designated as trading under ASC Topic 320, Investments - Debt and Equity Securities.
At December 31, 2010, we held investments totaling $6.1 billion, compared to $6.0 billion at December 31, 2009, with net unrealized appreciation included in accumulated other comprehensive income of $19.4 million at December 31, 2010, compared to $46.0 million at December 31, 2009. Our investment guidelines stress preservation of capital, market liquidity, and diversification of risk. Notwithstanding the foregoing, our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities.
mortgage-backed and asset-backed securities. We also have an allocation to other investments, including hedge funds, private equity partnerships, senior secured bank loan funds and other investments. At December 31, 2010, these other investments totaled $787.5 million, or 12.9%, of our total investments (2009 - $858.0 million or 14.3%).
Within our other investments category, we have several funds that invest in non-investment grade fixed income securities as well as securities denominated in foreign currencies. These investments expose us to losses from insolvencies and other credit-related issues. We are also exposed to fluctuations in
foreign exchange rates that may result in realized losses to us if our exposures are not hedged or if our hedging strategies are not effective and also to widening of credit spreads.
Our fixed maturity investments are classified as available for sale or trading and are reported at fair value. The net unrealized appreciation or depreciation on fixed maturity investments available for sale is included in accumulated other comprehensive income. The net unrealized gains (losses) on fixed maturity investments trading is included in net realized and unrealized gains on fixed maturity investments. Net investment income includes interest income together with amortization of market premiums and discounts and is net of investment management and custody fees. The amortization of premium and accretion of discount for fixed maturity investments is computed using the effective yield method. The fair values of our fixed maturity investments are based on quoted market prices, or when such prices are not available, by reference to broker or trader bid indications and/or internal pricing valuation techniques.
Realized gains or losses on the sale of investments are determined on the basis of the first in first out cost method and include adjustments to the cost basis of investments for declines in value that are considered to be other-than-temporary. Pursuant to authoritative guidance effective April 1, 2009, we revised our quarterly process for assessing whether declines in the fair value of our fixed maturity investments available for sale represent impairments that are other-than-temporary. The process now includes reviewing each fixed maturity investment available for sale that is impaired and determining: (i) if we have the intent to sell the debt security or (ii) if it is more likely than not that we will be required to sell the debt security before its anticipated recovery; and (iii) whether a credit loss exists, that is, where we expect that the present value of the cash flows expected to be collected from the security are less than the amortized cost basis of the security. See “Note 6. Investments in our Notes to Consolidated Financial Statements” for additional information regarding other-than-temporary impairments.
During 2010, we recorded $0.8 million (2009 - $22.5 million, 2008 - $214.9 million) in net other-than-temporary impairment charges. Net other-than-temporary impairments decreased in 2010, compared to 2009 due to the designation, upon acquisition of our fixed maturity investments as trading, rather than as available for sale, and as a result, at December 31, 2010, our fixed maturity investments available for sale represented 5.9% of our total fixed maturity investments, compared to 83.1% at December 31, 2009. The significant decrease in net other-than-temporary impairments during 2009, compared to 2008, is due to a combination of improved economic conditions during 2009, and the adoption of new authoritative accounting guidance related to the recognition and presentation of other-than-temporary impairments adopted during the second quarter of 2009. The net other-than-temporary impairment charges in 2009 and 2008 were primarily due to widening credit spreads during the early part of 2009 and throughout 2008 as a result of the turmoil in the financial and capital markets. For the three months ended March 31, 2009, and the year ending December 31, 2008, we recognized impairment charges for principally all of our fixed maturity investments available for sale that were in an unrealized loss position at the end of each quarter as under prior authoritative accounting guidance we did not have the intent to hold them until they fully recovered in value. Credit-related impairment charges were $0.8 million, $2.2 million and $8.3 million in 2010, 2009 and 2008, respectively, and relate to impaired securities which we believe we would not be able to recover the full principal amount if held to maturity. At December 31, 2010, we held 22 fixed maturity investments available for sale securities that were in an unrealized loss position. At December 31, 2010 our gross unrealized losses on fixed maturity investments available for sale totaled $0.7 million.
The following table summarizes the composition of the amortized cost and fair value of our fixed maturity investments, short term investments and other investments at the date indicated by ratings as assigned by S&P, or Moody’s and/or other rating agencies when S&P ratings were not available, and the respective yield to maturity.
(1) The credit ratings included in this table are those assigned by S&P. The Company has grouped short term investments with an A-1+ and A-1 short-term issue credit rating as AAA, short term investments with A-2 short-term issue credit rating as AA and short term investments with an A-3 short-term issue credit rating as A.
(1) Excludes FDIC guaranteed and non-U.S. government-backed corporate fixed maturity investments, repurchase agreements and commercial paper, at fair value.
The fair value of certain of our fund investments, which principally include hedge funds, private equity partnerships, senior secured bank loan funds and non-U.S. fixed income funds, is generally established on the basis of the net valuation criteria established by the managers of such investments, if applicable. These net asset valuations are determined based upon the valuation criteria established by the governing documents of such investments. Such valuations may differ significantly from the values that would have been used had ready markets existed for the shares, partnership interests or notes. Many of our fund investments are subject to restrictions on redemptions and sales which are determined by the governing documents and limit our ability to liquidate these investments in the short term. In addition, due to a lag in reporting, some of our fund managers, fund administrators, or both, are unable to provide final fund valuations as of our current reporting date. In these circumstances, we estimate the fair value of these funds by starting with the prior month’s or quarter’s fund valuation, adjusting these valuations for capital calls, redemptions or distributions and the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which we estimate the return for the current period, we use all credible information available to us. This principally includes preliminary estimates reported to us by our fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to us with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which we have reported results, or other valuation methods, as necessary. Actual final fund valuations may differ, perhaps materially so, from our estimates and these differences are recorded in the period they become known as a change in estimate. Our estimate of the fair value of catastrophe bonds are based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications.
Interest income, income distributions and realized and unrealized gains and losses on other investments are included in net investment income and resulted in $103.7 million of net investment income for 2010 (2009 - $163.6 million, 2008 - negative $219.6 million). Of this amount, $57.5 million relates to net unrealized gains (2009 - $88.5 million, 2008 - net unrealized losses of $259.4 million).
Private equity partnerships - Included in our investments in private equity partnerships are alternative asset limited partnerships that invest in certain private equity asset classes including U.S. and global leveraged buyouts; mezzanine investments; distressed securities; real estate; oil, gas and power; and secondaries. The fair values of the investments in this category have been estimated using the net asset value per share of the investments. We generally have no right to redeem our interest in any of these private equity partnerships in advance of dissolution of the applicable partnership. Instead, the nature of these investments is that distributions are received by us in connection with the liquidation of the underlying assets of the applicable limited partnership. If these investments were held, it is estimated that the majority of the underlying assets of the limited partnerships would liquidate over 7 to 10 years from inception of the limited partnership.
Previously, we generally had no right to redeem our investment in certain bank loan funds in advance of dissolution of the applicable funds. Instead, the nature of this investment was that distributions were received by us in connection with the liquidation of the underlying assets of the applicable fund. However, during 2010, the management of the senior secured bank loan funds which previously could generally not be redeemed restructured these investments to a fund structure which would liquidate in the near term, and we elected to transfer our investment to the new fund structure. Subsequently, the balance of our investment in the new structure has been liquated and we have received $100.8 million in distributions from the new fund structure.
Non-U.S. fixed income funds - Our non-U.S. fixed income funds invest primarily in European high yield bonds and non-U.S. convertible securities. The fair values of the investments in this category have been estimated using the net asset value per share of the investments. Investments of $46.9 million are redeemable, in whole or in part, on a bi-monthly basis. The remaining $33.4 million can generally only be redeemed by us at a rate of 10% per month. The issuers of these securities may permit redemptions which exceed this amount, but they are not obliged to do so.
Hedge funds - We invest in hedge funds that pursue multiple strategies. The strategies employed include, among others, the following: fundamentally driven long/short; event oriented; and private investments. The fair values of the investments in this category have been estimated using the net asset value per share of the investments. Included in our hedge funds is $9.5 million of so called “side pocket” investments which are not redeemable at the option of the shareholder. As to each investment in a hedge fund that includes side pocket investments, if the investment is otherwise fully redeemed, we will still retain our interest in the side pocket investments until the underlying investments attributable to such side pockets are liquidated, realized or deemed realized at the discretion of the fund manager.
Our catastrophe-exposed operations are subject to the ever-present potential for significant volatility in capital due primarily to our exposure to severe catastrophic events. Our specialty reinsurance portfolio is also exposed to emerging risks arising from the ongoing economic weakness, including with respect to a potential increase of claims in directors and officers, errors and omissions, surety, casualty clash and other lines of business.
2004, 2005 and 2008, for example, in which hurricanes Katrina, Rita, Wilma and Ike, among others, resulted in
Despite these large seismic events, 2010 continued the trend toward increasingly ample supplies of capital, impacted by continuing recovery in the financial markets and in asset valuations, and a more positive perception of liquidity; decreasing demand, impacted by the same factors; and to a degree by exposure reduction. In addition, the competitive conditions in the markets we serve are believed to have been meaningfully impacted in 2009 by the U.S. federal government’s financing and backstopping of certain large market participants, which are deemed by many market observers and participants to have contributed to inadequate pricing conditions in respect of certain lines and coverages, which conditions continued into 2010. While 2010 was also characterized on a full-year basis by meaningful returns of capital, both by us and by participants in our industry more generally, following the relatively strong rebound in the financial markets, overall industry capital levels continue to reflect ample supply.
As a result of these and other factors, the January 2011 renewal season reflected continued softening and uncertainty in the predominant part of the markets in which we focus, and we currently expect these conditions to continue throughout the remainder of 2011. Among other things, increased capital levels and appetite for risk among primary insurance companies may continue to lead to increased retentions, further impacting the reinsurance marketplace.
Despite these dynamics and trends, we believe that our strong relationships, and track record of superior claims paying ability and other client service, will enable us to compete for the business we find attractive. However, it is possible that industry pricing in our core product lines will decrease more rapidly than we anticipate, or that we will encounter more significant competitive barriers than we have in the past.
In addition, we continue to explore potential strategic transactions or investments, and other opportunities, from time to time that are presented to us or that we originate. In evaluating these potential investments and opportunities, we seek to improve the portfolio optimization of our business as a whole, the opportunity to enhance our strategy, an attractive estimated return on equity in respect of investments, the ability to develop or capitalize on a competitive advantage, and opportunities that will not detract from our core operations.
We believe the 2007 Florida Bill caused a substantial decline in the private reinsurance and insurance markets in and relating to Florida, and contributed to the decline in our property catastrophe gross premiums written in 2008 and 2007 as compared to 2006. The 2007 Florida Bill and other regulatory actions over this period may have contributed to instability in the Florida primary insurance market, where many insurers reported substantial and continuing losses in 2009 and 2010, each unusually low catastrophe years. Because of our position as one of the largest providers of catastrophe-exposed coverage, both on a global basis and in respect of the Florida market, the 2007 Florida Bill and the weakened financial position of Florida insurers may have a disproportionate adverse impact on us compared to other reinsurance market participants. In addition, it is possible that other regulatory or legislative changes in, or impacting Florida could affect our ability to sell certain of our products and could therefore have a material adverse effect on our operations.
In July 2009, U.S. Rep. Richard Neal introduced the Neal Bill, which provides that foreign insurers and reinsurers would be capped in deducting reinsurance premiums ceded from U.S. units to offshore affiliates. The Obama Administration included similar provisions in its formal 2010 and 2011 budgetary proposals. In the event the sale of substantially all of our U.S.-based insurance operations does not close, we believe that passage of such legislation could adversely affect us, perhaps materially.
In March 2009, U.S. Senator Carl Levin and Rep. Lloyd Doggett introduced legislation in the U.S. Senate and House, respectively, entitled the “Stop Tax Haven Abuse Act” (S. 506). Rep. Doggett introduced similar legislation in 2010 and early 2011. If enacted, this legislation would, among other things, cause to be treated as a U.S. corporation for U.S. tax purposes generally, entities whose shares are publicly traded on an established securities market, or whose gross assets are $50.0 million or more, if the “management and control” of such a corporation is, directly or indirectly, treated as occurring primarily within the U.S. The proposed legislation provides that a corporation will be so treated if substantially all of the executive officers and senior management of the corporation who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the corporation are located primarily within the U.S. In addition, among other things, the legislation would establish presumptions for entities and transactions in jurisdictions deemed to be “offshore secrecy jurisdictions” and would provide a list of such jurisdictions. To date, this legislation has not been approved by either the House of Representatives or the Senate. However, we can provide no assurance that this legislation or similar legislation will not ultimately be adopted. While we do not believe that the legislation would impact us, it is possible that an adopted bill would include additional or expanded provisions which could negatively impact us, or that the interpretation or enforcement of the current proposal, if enacted, would be more expansive or adverse than we currently estimate.
In July 2010 the Dodd-Frank Act was signed into law by President Obama. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, establishes the new federal Bureau of Consumer Financial Protection (the “BCFP”), and will require the BCFP and other federal agencies to implement many new rules. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact the Company’s business. However, compliance with these new laws and regulations will result in additional costs, which may adversely impact the Company’s results of operations, financial condition or liquidity. Even if we are not subject to additional regulation by the federal government, new or additional state, federal or international financial sector regulatory reform, including the Dodd-Frank Act, could have a significant impact on us. For example, legislative or regulatory changes, or their resultant impact on our market, could have an unexpected adverse effect on our customers, our competitive position or our rights as a creditor. Although we do not currently expect material adverse consequences to our business from the developments of which we are aware, we cannot assure you this expectation will prove accurate or that the Dodd-Frank Act or other developments will not impact our business more adversely than we currently estimate.