We are exposed to losses arising from a variety of catastrophic events, such as hurricanes, windstorms and floods. The loss estimates for these events represent our best estimates based on the most recent information available. We use various approaches in estimating our losses, including a detailed review of exposed contracts and information from ceding companies and claims adjusters. As additional information becomes available, including information from ceding companies and claims adjusters, actual losses may exceed our estimated losses, potentially resulting in adverse effects to our financial results. The extraordinary nature of these losses, including potential legal and regulatory implications, creates substantial uncertainty and complexity in estimating these losses. Considerable time may elapse before the adequacy of our estimates can be determined. For the years ended December 31, 2009, 2008 and 2007, current year catastrophe events were $131.1 million, $264.7 million and $105.9 million, respectively.
Reinsurance recoverables are recorded as assets, based on our evaluation of the retrocessionaires’ ability to meet their obligations under the agreements. Premiums written and earned are stated net of reinsurance ceded in the consolidated statements of operations. Direct insurance, reinsurance assumed, reinsurance ceded and net amounts for these items follow (in millions):
The total amount of reinsurance recoverables on paid and unpaid losses as of December 31, 2009 and 2008 was $912.0 million and $773.2 million, respectively. We have established a reserve for potentially uncollectible reinsurance recoverables based upon an evaluation of each retrocessionaire and our assessment as to the collectability of individual balances. The reserve for uncollectible recoverables was $41.9 million and $44.5 million as of December 31, 2009 and 2008, respectively, and has been netted against reinsurance recoverables on
Total reinsurance gross premiums written for the year ended December 31, 2009 were $1,414.5 million, compared to $1,502.2 million for 2008, a decrease of 5.8%. Total insurance gross premiums written for the year ended December 31, 2009, which include our U.S. Insurance division and the insurance business underwritten by our London Market division, were $780.5 million, compared to $792.3 million for 2008, a decrease of 1.5%. U.S. Insurance division gross premiums written for the year ended December 31, 2009 included $16.5 million of business previously managed by and included in the results of the Americas division. For the year ended December 31, 2009, total reinsurance gross premiums written represented 64.4% (65.5% in 2008) of our business, while insurance represented the remaining 35.6% (34.5% in 2008) of our business.
Latin America - The decrease in gross premiums written was primarily due to decreases in treaty pro rata business and excess business of $12.7 million and $3.1 million, respectively, offset by an increase in facultative business of $3.9 million. Of the $11.9 million net decrease, $7.8 million was attributable to movement in foreign exchange rates during 2009 while the remainder related to decreased volume resulting from share reductions and non-renewal of business not meeting our underwriting standards.
The decrease in gross premiums written by the London branch was primarily attributable to marine and aviation business, which decreased by $11.3 million, or 23.9%, and casualty business, which decreased by $9.6 million, or 52.2%, due to the non-renewal of business not meeting our underwriting standards.
Net Premiums Earned. Net premiums earned for the year ended December 31, 2009 decreased by $149.0 million, or 7.2%, to $1,927.4 million, from $2,076.4 million for the year ended December 31, 2008. Net premiums earned decreased by $5.0 million, or 0.6%, in the Americas division, $23.8 million, or 4.2%, in the EuroAsia division, $63.0 million, or 20.0%, in the London Market division and $57.2 million, or 13.8%, in the U.S. Insurance division.
investment income from fixed income securities was $253.1 million for the year ended December 31, 2009, an increase of $56.0 million, or 28.4%, compared to the year ended December 31, 2008;
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 for excess of loss contracts of Newline Syndicate (1218) and an increase in cessions associated with a new program incepting in 2008.
The decrease in net premiums written consisted of an increase in gross premiums written of $7.4 million, offset by an increase in ceded premiums written of $37.0 million. The increase in ceded premiums written was attributable to cessions associated with a new program incepting in 2008 and increased cessions on the crop program and medical professional liability business due to an increase in quota share reinsurance ceded.
Other Underwriting Expenses. Other underwriting expenses for the year ended December 31, 2008 were $175.0 million, compared to $178.6 million for the year ended December 31, 2007. The other underwriting expense ratio, expressed as a percentage of net premiums earned, was 8.4% for both of the years ended December 31, 2008 and December 31, 2007.
a decrease of $3.3 million, or 8.8%, in net investment income from equity investments for the year ended December 31, 2008, compared to the corresponding period in 2007. Net income of common stocks, at equity, decreased by $12.8 million, partially due to the sale of shares of Hub International Limited (“Hub”) in June 2007, offset by an increase in dividends on common stocks of $9.5 million;
In December 2008, we entered into interest rate swaps, with an aggregate notional value of $140.0 million, to protect against adverse movements in interest rates. Under these swap contracts, we receive a floating interest rate of three-month London Interbank Offer Rate (“LIBOR”) and pay a fixed interest rate of 2.49% on the $140.0 million notional value of the contracts, for a five-year period ending in December 2013.
Our investment portfolio as of December 31, 2009 included $3.1 billion in U.S. taxable and tax exempt state and municipal bonds, most of which were purchased during 2008, and of which approximately $2.0 billion (63.8%) were fully insured by Berkshire Hathaway Assurance Corp. (“BHAC”) for the payment of interest and principal in the event of issuer default; we believe that the BHAC insurance significantly mitigates the credit risk associated with these bonds.
The following tables summarize the effect of the credit default swap hedging instruments and related hedged items on our historical financial position, results of operations and cash flows as of and for the years ended December 31, 2009 and 2008 (in millions):
valuation of investment assets denominated in foreign currencies would result in a $197.0 million decline in the fair value of our total investments and cash, before taxes.
transactions have been eliminated. The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions, which could differ materially from actual results that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Certain amounts from prior periods have been reclassified to conform to the current year’s presentations.
disclosure relate to amounts in the balance sheet, the method used to determine the fair value and significant assumptions used in the valuation. The Company adopted this accounting standard as of April 1, 2009, which had no impact on the Company’s disclosures.
For determining the fair value of its Level 1 investments, the Company utilizes quoted market prices. The majority of the Company’s Level 1 investments are common stocks that are actively traded in a public market. Short-term investments and cash equivalents, for which the cost basis approximates fair value, are also classified as Level 1 investments.
The following table presents realized investment gains (losses) included in net income related to Level 3 assets for the years ended December 31, 2009 and 2008 (in thousands):
During the fourth quarter of 2007, the Company recognized an impairment adjustment to its investment in Advent, under the equity method of accounting, and wrote-down Advent’s value to its publicly traded fair value as of December 31, 2007. Accordingly, the Company’s election of the FVO had no effect on Advent’s carrying value or the Company’s shareholders’ equity as of January 1, 2008. Upon the election of the FVO for Advent, the Company recorded a cumulative adjustment of $2.4 million, or $1.5 million net of tax, to reclassify foreign currency unrealized gains from the foreign currency translation account (included in accumulated other comprehensive income) to retained earnings as of January 1, 2008.
A summary of the Company’s investment portfolio as of December 31, 2009, excluding common stocks, at equity, other invested assets, fixed income securities held as trading securities, convertible preferred stock held as trading securities and short-term investments held as trading securities is as follows (in thousands):
Common stocks accounted for under the equity method of accounting were carried at $141.5 million as of December 31, 2008, reflecting gross unrealized appreciation of $26.6 million and gross unrealized depreciation of $2.1 million. Other invested assets were carried at $222.8 million as of December 31, 2008, reflecting no gross unrealized appreciation or depreciation. Fixed income securities held as trading securities were carried at fair value of $338.2 million as of December 31, 2008, with changes in fair value reflected as realized investment gains or losses in the consolidated statements of operations. Fixed income securities held as trading securities include corporate, foreign government securities, and mortgage-related securities, with fair values of $187.7 million, $84.1 million and $66.4 million, respectively, as of December 31, 2008.
The following tables summarize the effect of the hedging instruments and related hedged items on the Company’s historical financial position, results of operations and cash flows as of and for the years ended December 31, 2009 and 2008 (in thousands):
The Company has purchased equity index total return swaps as an “economic hedge” against a broad market downturn. During the fourth quarter of 2008, the Company had removed the then-existing economic hedge on its portfolio, closing all of its total return swap contracts for a gain. Since closing these positions, however, the Company has increased its holdings in equity securities through additional acquisitions. In addition, the equity markets have experienced significant appreciation in value since the end of 2008, further increasing the value of the Company’s holdings as well as the Company’s exposure to market volatility. As a result, in late September 2009, the Company initiated U.S. equity index total return swap contracts, which had a notional value of $818.4 million as of December 31, 2009, to protect against potential future broad market downturns. The collateral requirement related to entering the total return swaps was $78.5 million as of December 31, 2009. These total return swap transactions terminate during the third quarter of 2010. The equity index total return swaps, in the aggregate, were in a gain position as of December 31, 2009, and are recorded in other invested assets. Changes in the fair values of equity index and common stock total return swaps are recorded as realized gains or losses in the consolidated statements of operations in the period in which they occur.
In connection with the 2008 total return swap transactions, the Company owned a series of index call options on Standard & 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. The call options were recorded at fair value in other invested assets, and changes in the fair value were recorded as realized investment gains or losses in the consolidated statements of operations.
In June 2002, the Company issued $110.0 million aggregate principal amount of convertible senior debentures, due 2022 (the “Convertible Notes”). Interest accrued on the Convertible Notes at a fixed rate of 4.375% per annum, due semi-annually on June 15 and December 15. The Convertible Notes became redeemable at the Company’s option on June 22, 2005. Under certain conditions specified in the indenture under which the Convertible Notes were issued (the “Indenture”), each Convertible Notes holder had the right to request conversion of its Convertible Notes into 46.9925 of the Company’s common shares for every $1,000 principal
The amended Credit Agreement contains an option that permits the Company to request an increase in the aggregate amount of the facility by an amount up to $50.0 million, to a maximum facility size of $150.0 million. Following such a request, each lender has the right, but not the obligation, to commit to all or a portion of the proposed increase. As of December 31, 2009, there was $54.9 million outstanding under the Credit Agreement,all of which was in support of secured letters of credit, which included $21.0 million in letters of credit that were cancelled effective January 15, 2010 (see Note 17).
The components of the federal and foreign income tax provision (benefit) included in the consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007 are as follows (in thousands):
Deferred federal and foreign income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Components of federal and foreign income tax assets and liabilities as of December 31, 2009 and 2008 are as follows (in thousands):
The net amount recognized in the consolidated balance sheets related to the accrued pension cost of $15.8 million and $16.4 million, as of December 31, 2009 and 2008, respectively, is included in other liabilities. The net amount of accumulated other comprehensive loss recognized is $2.1 million and $2.2 million, before taxes, as of December 31, 2009 and 2008, respectively.
The Company also maintains a defined contribution profit sharing plan for all eligible employees. Each year, the Board of Directors may authorize payment of an amount equal to a percentage of each participant’s basic annual earnings based on the experience of the Company for that year. These amounts are credited to the employee’s account maintained by a third party, which has contracted to provide benefits under the plan. No contributions were authorized in 2009, 2008 or 2007.
The registrant’s investment in Odyssey America is accounted for under the equity method of accounting.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007