On November 26, 2010, we received approval from the Supreme Court of Bermuda to change the place of incorporation of our ultimate parent company from Bermuda to Switzerland. We completed the Redomestication on December 1, 2010. After the Redomestication, Holdings is now our ultimate parent company and Allied World Bermuda is a wholly owned subsidiary of Holdings. To affect the Redomestication on December 1, 2010, Holdings and Allied World Bermuda entered into a contribution-in-kind agreement. Under the terms of the contribution-in-kind agreement all issued and outstanding voting and non-voting shares of Allied World Bermuda were cancelled and issued to Holdings as a contribution-in-kind in exchange for which the holders of such voting and non-voting shares immediately prior to the completion of the Redomestication received the same number of voting and non-voting shares of Holdings. As a result of the contribution-in-kind and the resulting par value changing from $0.03 to CHF 15.00, the share capital balance was increased to CHF 600.1 million with an equal reduction in additional paid-in capital. At the time of contribution-in-kind, the exchange rate between the U.S. dollar and Swiss Franc was one-for-one.
Annualized operating return on average shareholders’ equity is calculated using operating income and average shareholders’ equity, excluding the average after tax unrealized gains or losses on investments.
The examples below illustrate the types of treaty reinsurance arrangements in force at December 31, 2010:
There have been no material changes to any of our valuation techniques from those used as of December 31, 2009. Based on all reasonably available information received, we believe the prices that were obtained from inactive markets were orderly transactions and therefore, reflected the current price a market participant would pay for the asset. Since fair valuing a financial instrument is an estimate of what a willing buyer would pay for our asset if we sold it, we will not know the ultimate value of our financial instruments until they are sold. We believe the valuation techniques utilized provide us with the best estimate of the price that would be received to sell our assets in an orderly transaction between participants at the measurement date.
We classify intangible assets into three categories: (1) intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. Intangible assets, other than goodwill, consist of renewal rights, internally generated software, non-compete covenants and
During 2010, we performed the first step of the goodwill impairment testing on the goodwill acquired from the Darwin acquisition. As part of our goodwill testing we performed four separate calculations to determine the fair value of the reporting unit to which the goodwill has been allocated. Two of the calculations are based on market multiples of book value and diluted earnings per share, respectively, and are considered our market multiple models. The other two calculations are the statutory dividend model, and the actuarial model and are considered our discounted cash flow models. Under the statutory dividend model, we estimate the cash flows that can be used to pay a dividend under regulatory constraints as well as other operating constraints. The actuarial model calculates the economic value of the U.S. insurance segment reporting unit by projecting the future profits of the U.S. insurance segment reporting unit that are embedded in the loss reserves, unearned premiums, new and renewal business less the cost of capital. To determine an overall point estimate of the fair value of the U.S. insurance segment reporting
The other income of $0.9 million and $1.5 million for the years ended December 31, 2010 and 2009, respectively, represents fee income from the program administrator and wholesale brokerage operation. We sold these operations during the year ended December 31, 2010 for a gain of $1.9 million.
The following table shows the components of the increase in net losses and loss expenses of $103.8 million for the year ended December 31, 2010 compared to the year ended December 31, 2009.
The decrease in net losses paid for the year ended December 31, 2009 was primarily due to lower paid losses in our international insurance and reinsurance segments including lower paid losses on catastrophes partially offset by the inclusion of Darwin. The decrease in reported case reserves was primarily due to lower case reserves in our international insurance segment due to the payment of claims partially offset by increased case reserves in our U.S. insurance and reinsurance segments. The decrease in IBNR was due to lower IBNR in our international
Net paid losses for the years ended December 31, 2009 and 2008 were $172.4 million and $245.0 million, respectively. The decrease in net paid losses was primarily due to lower net paid losses in our general casualty line of business.
As of December 31, 2010, our shareholders’ equity was $3.1 billion, a 4.3% decrease compared to $3.2 billion as of December 31, 2009. The decrease was primarily the result of our share and warrant repurchase activities of $744.7 million during the year partially offset by net income for the year ended December 31, 2010 of $665.0 million, driven primarily by strong investment returns.
In February 2011, we repurchased a warrant owned by AIG in a privately negotiated transaction. The warrant entitled AIG to purchase 2,000,000 of our common shares for $34.20 per share. We repurchased the warrant for an aggregate purchase price of $53.6 million. The repurchase of the warrant will be recognized as a reduction in “additional paid-in capital” in the consolidated balance sheets. The repurchase was executed separately from the Company’s share repurchase program.
Cash flows from financing activities consist primarily of capital raising activities, which include the issuance or repurchase of common shares or debt and the payment of dividends. Cash flows used in financing activities were $486.1 million for the year ended December 31, 2010 compared to net cash used in financing activities of $450.0 million for the year ended December 31, 2009 and net cash flows provided by financing activities of $242.3 million for the year ended December 31, 2008. During the year ended December 31, 2010, we paid dividends of $47.7 million, repurchased $674.7 million of our common shares, which included the repurchase of all the common shares owned by Goldman Sachs, and repurchased $70.0 million in warrants to purchase our common shares from Chubb and Goldman Sachs. Also during 2010, we issued 5.50% Senior Notes for net proceeds of $298.6 million which we used for share repurchases and other general corporate purposes. In 2009, cash flows used in financing activities included dividends of $36.7 million, repayment of $243.7 million of a credit facility borrowing, and $177.0 million reduction in securities lending collateral. The increase in cash flows used in financing activities for the year ended December 31, 2009 compared to the year ended December 31, 2008 was primarily due to the repayment of our syndicated loan of $243.8 million.