In addition to the Consolidated Balance Sheets and Consolidated Statement of Operations and Comprehensive Income (including net income), Management uses three key measures to evaluate its financial performance, as well as the overall growth in value generated for the Company’s common shareholders.
The Company evaluates the fair value of its investments on a periodic basis to determine whether a decline in fair value below the amortized cost basis (original cost basis for equities) is other-than-temporary. Effective January 1, 2006, the Company applied FASB Staff Position FAS 115-1 and FAS 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” to determine when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of the impairment loss. If the decline in fair value is judged to be other-than-temporary, the amortized cost of the individual security is written down to fair value and a new cost basis is established, with the amount of the write-down included as a realized investment loss in the period in which the determination of other-than-temporary impairment is made. The difference between the new cost basis established and the maturity (or par) value of the investment is accreted to net investment income over the remaining period of time to contractual maturity. While the cost basis cannot be adjusted upward through net income if the value of the security subsequently increases, the cost basis may be written down again if further other-than-temporary impairments are determined.
The Company utilizes derivative financial instruments as part of its overall currency risk management strategy. On the date the Company enters into a derivative contract, Management designates whether the derivative is to be used as a hedge of an identified underlying exposure (a designated hedge). As part of its overall strategy to manage the level of currency exposure, the Company uses currency derivatives to hedge the fair value of certain available for sale fixed income securities related to the Company’s liability funds (funds representing invested assets supporting net reinsurance liabilities, defined as the Company’s operating and reinsurance liabilities net of reinsurance assets). These derivatives have been designated as fair value hedges under SFAS 133, and accordingly, the changes in fair value of the derivative and the hedged item related to foreign currency are recognized in net realized investment gains and losses in the Consolidated Statements of Operations. Derivatives employed by the Company to hedge currency exposure related to other reinsurance assets and liabilities are not designated as hedges under SFAS 133. The changes in fair value of the non-designated hedges and the other reinsurance assets and liabilities are recognized in net foreign exchange gains and losses in the Consolidated Statements of Operations.
The analysis of the change in net unrealized gains (losses) on investments net of applicable taxes, reflected in accumulated other comprehensive income for the years ended December 31, 2006, 2005 and 2004, is as follows (in thousands of U.S. dollars):
For the Global (Non-U.S.) P&C sub-segment, the Company reported net favorable loss development for prior accident years in 2006 and 2005, and net adverse loss development in 2004. During 2006 and 2005, the Company observed an improvement in loss experience in the property and casualty lines and a deterioration in the motor line. Losses reported by cedants in 2006 and 2005 regarding prior accident years were lower than expected, which led the Company to decrease its expected ultimate loss ratios and loss estimates. During 2004, the Company observed a deterioration in loss experience in the motor and casualty lines. Losses reported by cedants regarding prior accident years were higher than expected, which led the Company to increase its expected ultimate loss ratios and loss reserves. Losses reported by cedants during each of these years regarding prior accident years included no significant loss or loss reductions but a series of attritional losses or loss reductions.
Currently, the plan permits the grant of up to 2.2 million shares, of which a total of 750,000 shares can be issued as either RS or RSU. If an award under the EEP is cancelled or forfeited without the delivery of the full number of shares underlying such award, only the net number of shares actually delivered to the participant will be counted against the EEP’s authorized shares. If an outstanding award under the Company’s predecessor equity plans is cancelled or forfeited without the delivery of the number of shares underlying such award, such undelivered shares will also be available for issuance under the EEP in addition to all other shares authorized for issuance. The number of shares that may be added back to the plan from net share settlement of stock appreciation rights and options is capped at 400,000 shares over the life of the plan. Under the EEP, the exercise price of the award will not be less than the fair market value of the award at the time of grant. The fair market value is defined in the EEP as the average of the highest and lowest sale prices reported on the date prior to the determination of the fair market value. Awards issued under the EEP generally vest over 3 years of continuous service, either
12. Debt Related to Capital Efficient Notes, Trust Preferred Securities and Mandatorily Redeemable Preferred Securities
During 2005, the Company repurchased in the open market 1.2 million of its common shares pursuant to the share repurchase program at a total cost of $75.5 million, or an average cost of $60.74. The repurchased shares were cancelled and are no longer outstanding.
careful monitoring of risk aggregations and accumulations and, at times, through the use of retrocessional reinsurance protection and the purchase of credit default swaps and total return and interest rate swaps.
The Company has exposure to credit risk related to reinsurance balances receivable and reinsurance recoverable on paid and unpaid losses (see Note 5). The credit risk exposure related to these balances is mitigated by several factors, including but not limited to, credit checks performed as part of the underwriting process and monitoring of aged receivable balances. As of December 31, 2006 and 2005, the Company has recorded a provision for uncollectible premiums receivable of $9.2 million and $8.0 million, respectively.
Fair value for fixed maturities, short-term investments, equities and trading securities are based on quoted market prices. Carrying value of other invested assets, excluding investments accounted for using the equity method, approximates fair value. Policy benefits for life and annuity contracts have a fair value equal to the cash value available to the policyholder should the policyholder surrender the policy. The fair value of the long-term debt and the debt related to the capital efficient notes have been calculated as the present value of estimated future cash flows using a discount rate reflective of current market cost of borrowing under similar terms and conditions. The fair value of the debt related to the trust preferred securities is based on the quoted market price of the underlying trust preferred securities.
The Company’s breach of any of the covenants would result in an event of default, upon which the Company may be required to repay any outstanding borrowings and replace or cash collateralize letters of credit issued under these facilities. At December 31, 2006 and 2005, the Company was not in breach of any of the covenants under its facilities. Its total debt to total capitalization ratio was 18.8% and 15.8%, respectively, and its consolidated tangible net worth was $3,356.3 million and $2,863.3 million, at December 31, 2006 and 2005, respectively.
The following tables provide a summary of the segment revenues and results for the years ended December 31, 2006, 2005 and 2004 (in millions of U.S. dollars, except ratios):
The Company produces its business both through brokers and through direct relationships with insurance company clients. None of the Company’s cedants accounted for more than 6% of total gross premiums written during the years ended December 31, 2006, 2005 and 2004.