The U.S. Insurance division writes specialty insurance lines and classes of business, such as medical professional liability, professional liability, non-standard personal and commercial automobile, specialty liability and property and package.
The provision for IBNR in unpaid losses and LAE as of December 31, 2008 was $2,421.9 million. For illustration purposes, a change in the expected loss ratio for recent treaty years that increases the year ended December 31, 2008 calendar year loss ratio by 2.5 loss ratio points would increase IBNR by $51.9 million. A change in loss emergence trends that increases unpaid losses and LAE at December 31, 2008 by 2.5% would increase IBNR by $114.0 million.
Our personal automobile business, which primarily includes non-standard automobile business written in California, decreased $27.3 million, or 52.9%, to $24.3 million in gross premiums written for the year ended December 31, 2008, from $51.6 million for the year ended December 31, 2007. This decrease is primarily due to market conditions, which has resulted in the non-renewal of several programs.
The increase in net premiums written consisted of an increase in gross premiums written of $31.8 million, offset by an increase in ceded premiums written of $31.0 million. The increase in ceded premiums written was primarily related to a change in the retention level of Newline Syndicate 1218’s excess of loss contracts and an increase in cessions associated with a new program incepting in 2008.
business, partially offset by loss emergence greater than expectations in the period on miscellaneous property lines of business. Losses and LAE for the year ended December 31, 2007 included $26.8 million for Windstorm Kyrill, $12.3 million for Cyclone Gonu, $5.6 million for the Jakarta floods and a reduction in prior period losses of $6.9 million, principally attributable to favorable loss emergence on credit and miscellaneous property lines of business, partially offset by increased loss estimates on motor and liability exposures.
Americas. Gross premiums written in the Americas division for the year ended December 31, 2007 were $834.9 million, a decrease of $89.3 million, or 9.7%, as compared to $924.2 million for the year ended December 31, 2006. These amounts represent 36.6% of our gross premiums written for the year ended December 31, 2007 and 39.6% in 2006. Gross premiums written across each geographic region of the Americas are as follows:
Professional liability, our largest class of business, gross premiums written increased $8.3 million, or 6.3%, to $139.3 million for the year ended December 31, 2007, from $131.0 million for the year ended December 31, 2006. This primarily resulted from expansion in the environmental specialists and architects and engineers classes of business.
In June 2008, the FASB issued FSP Emerging Issues Task Force 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS 128, “Earnings Per Share.” FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. The adoption of FSP EITF 03-6-1 will not have a material impact to our earnings per share calculation. If FSP EITF 03-6-1 had been applicable for the years ending December 31, 2008 and 2007, our diluted earnings per share would have been $8.44 per share and $8.19 per share, respectively.
In connection with the total return swap transactions, we owned a series of index call options on Standard and Poor’s depository receipts (“SPDRs”) and the iShares Canadian S&P/TSX60 (XIU), the majority of which expired in 2008 and the last of which was closed out as of January 14, 2009. A call option gives the purchaser the right, but not the obligation, to purchase an underlying security at a specific price or prices at or for a certain time. As of December 31, 2007, we owned index call options on SPDRs and the Financial Select SPDR Fund (XLF), at a cost of $1.0 million, with average strike prices of approximately 127.8% of the notional amount of the swap transactions as of December 31, 2007. Our maximum potential loss on the total return swap and call option transactions was $193.2 million as of December 31, 2007. The call options were recorded at fair value in other invested assets, and changes in the fair value were recorded as realized gains or losses in the consolidated statements of operations. For the years ended December 31, 2008, 2007 and 2006, the call options had net realized losses of $1.1 million, $3.7 million and $0.4 million, respectively.
As of December 31, 2008 and December 31, 2007, 21.5% and 13.4%, respectively, of our total investments and cash was in common stocks (unaffiliated and affiliated). Marketable equity securities, which represented 19.9% and 11.6% as of December 31, 2008 and December 31, 2007, respectively, of our total investments and cash, are exposed to equity price risk, defined as the potential for loss in fair value owing to a decline in equity prices. A 10% decline in the price of each of these marketable equity securities would result in a decline of $157.0 million and $90.3 million as of December 31, 2008 and December 31, 2007, respectively, in the fair value of our total investments and cash.
The following tables reflect the fair value and gross unrealized depreciation of our fixed income securities and common stock investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2008 and December 31, 2007 (in millions):
(g) Deposit Assets and Liabilities. The Company may enter into assumed and ceded reinsurance contracts that contain certain loss limiting provisions and, as a result, do not meet the risk transfer provisions of SFAS 113, “Accounting for Reinsurance of Short-Duration and Long-Duration Contracts.” These contracts are accounted for using the deposit accounting method in accordance with Statement of Position 98-7, “Deposit Accounting:
(p) Fixed Assets. Fixed assets, with a net book value of $10.7 million and $12.5 million as of December 31, 2008 and 2007, respectively, are included in other assets. Property and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the following estimated useful lives:
In December 2007, the FASB issued SFAS 141(R), “Business Combinations,” to replace SFAS 141, “Business Combinations.” While several items from SFAS 141 were retained, including the acquisition method of accounting and the recognition of intangible assets separately from goodwill, SFAS 141(R) broadens its scope and establishes a definition of the acquirer and the acquisition date. SFAS 141(R) should be applied on a prospective basis in the first annual reporting period beginning on or after December 15, 2008. Earlier application is prohibited. The adoption of SFAS 141(R) will not have a material impact on the Company’s consolidated financial statements.
described in SFAS 128, “Earnings Per Share.” FSP EITF 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. Earlier application is not permitted. The adoption of FSP EITF 03-6-1 will not have a material impact on the Company’s earnings per share calculation. If FSP EITF 03-6-1 was applicable for the years ending December 31, 2008 and 2007, the Company’s diluted earnings per share would have been $8.44 per share and $8.19 per share, respectively.
All of the amounts above are included in net realized investment gains in the consolidated statement of operations.
The Company’s hedge fund and private equity partnership investments may be subject to restrictions on redemptions or sales, which are determined by the governing documents thereof, and limit the Company’s ability to liquidate these investments in the short term. Due to a time lag in reporting by a majority of hedge fund and private equity fund managers, valuations for these investments are reported by OdysseyRe on a one month or one quarter lag. For the year ended December 31, 2008, the Company incurred a loss of $19.6 million from its hedge funds and private equity investments, which is netted against net investment income and recognized net investment income of $8.2 million and $29.3 million for the years ended December 31, 2007 and 2006, respectively. Interest and dividend income, and realized and unrealized gains and losses of hedge funds and private equity partnerships, are included in net investment income. With respect to the Company’s $25.5 million investment in private equity partnerships included in other invested assets as of December 31, 2008, the Company has commitments that may require additional funding of up to $21.6 million. Other invested assets include $6.7 million related to the Company’s investment in O.R.E Holdings Limited, which is net of other-than-temporary write-downs of $9.9 million.
In connection with the total return swap transactions, the Company owned a series of index call options on Standard and Poor’s depository receipts (“SPDRs”) and the iShares Canadian S&P/TSX60 (XIU), the majority of which expired in 2008 and the last of which was closed out as of January 14, 2009. A call option gives the purchaser the right, but not the obligation, to purchase an underlying security at a specific price or prices at or for a certain time. As of December 31, 2007, the Company owned index call options on SPDRs and the Financial Select SPDR Fund (XLF), at a cost of $1.0 million, with average strike prices of approximately 127.8% of the notional amount of the swap transactions as of December 31, 2007. The Company’s maximum potential loss on the total return swap and call option transactions was $193.2 million as of December 31, 2007. The call options were recorded at fair value in other invested assets, and changes in the fair value were recorded as realized gains or losses in the consolidated statements of operations. For the years ended December 31, 2008, 2007 and 2006, the call options had net realized losses of $1.1 million, $3.7 million and $0.4 million, respectively.
The following table shows the components of the change in accumulated other comprehensive income, net of deferred income taxes, for the years ending December 31, 2008, 2007 and 2006 (in thousands):
The Series B preferred shares have a liquidation preference of $25.00 per share and are redeemable by the Company at the redemption prices below (in thousands, except per share amounts):
The components of the federal and foreign income tax provision (benefit) included in the consolidated statements of operations for the years ended December 31, 2008, 2007 and 2006 follow (in thousands):
As of July 14, 2000, Odyssey America agreed to guarantee the performance of all the insurance and reinsurance contract obligations, whether incurred before or after the agreement, of Compagnie Transcontinentale de Réassurance (“CTR”), a subsidiary of Fairfax, in the event CTR became insolvent and CTR was not otherwise indemnified under its guarantee agreement with a Fairfax affiliate. The guarantee, which was entered into while Odyssey America and CTR were each 100% owned by Fairfax, was provided by Odyssey America to facilitate the transfer of renewal rights to CTR’s business, together with certain CTR employees, to Odyssey America in 2000 in
The Plan’s expected future benefit payments are shown below (in thousands):