Gross written premium increased 10% in both 2007 and 2006. Net written premium increased 10% to $2.0 billion and net earned premium increased 16% to $2.0 billion in 2007 compared to increases of 21% and 25%, respectively, in 2006. The 2007 increases were primarily due to our 2006 acquisition of the Health Products Division and organic growth in our surety, credit and other specialty lines of business. The overall percentage of retained premium remained constant at 81% in 2007 and 2006. The 2006 net premium increase exceeded the gross premium increase due to higher retention levels on most non-catastrophe business.
Diversified financial products - The growth in our gross written premium in both years resulted primarily from organic growth in our surety and credit businesses, where pricing is stable and competition is reasonable. This was offset by a decline in our directors’ and officers’ liability business, as competition has resulted in less premium being written. Net written premium also declined in 2007 due to additional quota share reinsurance purchased for our international directors’ and officers’ liability insurance. Net earned premium for diversified financial products increased in both years due to the 2006 increase in net written premium.
Policy acquisition costs, which are net of the related portion of commissions on reinsurance ceded, increased to $366.6 million in 2007 from $319.9 million in 2006 and $261.7 million in 2005. Policy acquisition costs as a percentage of net earned premium decreased to 18.5% in 2007 from 18.7% in 2006 and 19.1% in 2005. The decreases are due to a change in the mix of business and reductions in commission rates on certain lines of business. The GAAP expense ratio of 23.8% in 2007 decreased in comparison to 25.0% in 2006 and 26.1% in 2005 for the same reasons and, in addition, net earned premium increased at a higher rate than the expenses that are used to calculate the expense ratio.
Regulatory guidelines suggest that a property and casualty insurer’s annual statutory gross written premium should not exceed 900% of its statutory policyholders’ surplus and net written premium should not exceed 300% of its statutory policyholders’ surplus. However, industry and rating agency guidelines place these ratios at 300% and 200%, respectively. Our property and casualty insurance companies have maintained premium to surplus ratios lower than such guidelines. For 2007, our statutory gross written premium to policyholders’ surplus was 141.0% and our statutory net written premium to policyholders’ surplus was 113.8%. At December 31, 2007, each of our domestic insurance companies’ total adjusted capital was significantly in excess of the authorized control level risk-based capital level prescribed by the National Association of Insurance Commissioners.
provided by operating activities decreased $15.2 million in 2007 and increased $197.4 million in 2006. The decrease in 2007 resulted principally from reductions of our loss and loss adjustment expense payable balances, partially offset by an increase in net earnings. The increase in 2006 was primarily due to the increase in net earnings and activity in our trading portfolio.
Inflation can also affect interest rates. Any significant increase in interest rates could have a material adverse effect on the fair value of our investments. In addition, the interest rate payable under our Revolving Loan Facility fluctuates with market interest rates. Any significant increase in interest rates could have a material adverse effect on our net earnings, depending on the unhedged amount borrowed on that facility. We
The table below shows our recorded net reserves at December 31, 2007 by line of business, the actuarial reserve point estimates, and the high and low ends of the actuarial reserve range as determined by our reserving actuaries.
Other specialty lines - Total net reserves increased $74.7 million due to increased participation and activity in our Lloyd’s of London syndicate and more assumed quota share surplus lines business.
Discontinued lines - Total net reserves for our discontinued lines decreased $49.3 million in 2007 as a result of claims payments.