The combined ratio related to the property and casualty operations is the sum of the loss and loss expense ratio and the underwriting expense ratio. A combined ratio under 100% represents an underwriting profit and over 100% represents an underwriting loss.
Effective April 1, 2009 the Company adopted final authoritative guidance that addressed the treatment of credit losses on investments. This guidance was not applied retroactively. For additional information see Item 8, Note 2(r) to the Consolidated Financial Statements, “Recent Accounting Pronouncements.”
higher losses in 2010 than during 2009. In contrast, the Company’s improved underwriting results for 2009 as compared to 2008 were largely due to minimal large loss activity in 2009 compared to the catastrophe and property risk losses experienced in 2008. For further analysis, see “Results of Operations” below.
One way that the Company evaluates the performance of its insurance and reinsurance operations is the underwriting profit or loss. The Company does not measure performance based on the amount of gross premiums written. Underwriting profit or loss is calculated from premiums earned less net losses incurred and expenses related to underwriting activities. The Company’s underwriting profit in the year ended December 31, 2010 was primarily reflective of the combined ratio discussed below.
In 2009, ROE was 3.1%, significantly higher than for the same period in the prior year when it was negative, mainly as a result of the closing of the Master Agreement in August 2008, see Item 8, Note 4 to the Consolidated Financial Statements, “Syncora Holdings Ltd.” Shareholders’ equity increased over the past twelve months mainly as a result of the decreases in unrealized losses on investments and favorable foreign exchange translation adjustments during this period.
The following table provides further detail regarding the movements in the global credit markets, as well as in government interest rates using some sample market indices:
Credit Spread Movement for the year ended December 31, 2010 (2)
The Company also imposes limits for each natural catastrophe peril region at a 1% tail value at risk (“TVaR”) probability. This statistic indicates the average amount of net loss expected to be incurred given that a loss above the 1% exceedance probability level has occurred.
For planning purposes and to calibrate risk tolerances for business to be written from September 30, 2010 through September 30, 2011, the Company set its underwriting limits as a percent of September 30, 2010 Tangible Shareholders’ Equity (hereafter, “Tangible Shareholders’ Equity”). Tangible Shareholders’ Equity is defined as Total Shareholders’ Equity less Goodwill and Other Intangible Assets. These limits
There are factors that would cause reserves to increase or decrease within the context of the range provided. The magnitude of any change in ultimate losses would be determined by the magnitude of any changes to the Company’s assumptions or combined impact of changes in assumptions. Factors that would
Credit loss on structured credit securities is determined through a comparison of the security’s discounted cash flow to the amortized cost of the security. To the extent that the discounted cash flow is estimated to be lower than the amortized cost of the security, the security is impaired to the discounted cash flow value of all security cash flows, including both coupon and principal repayment, discounted at the current accretion rate of the securities.
The Company evaluates the performance of both the Insurance and Reinsurance segments based on underwriting profit and the performance of the Life Operations segment based on its contribution to net income. Other items of revenue and expenditure of the Company are not evaluated at the segment level for reporting purposes. In addition, the Company does not allocate investment assets by segment for its P&C operations. Investment assets related to the Company’s Life Operations and certain structured products included in the Insurance and Reinsurance segments and in Corporate are held in separately identified portfolios. As such, net investment income from these assets is included in the contribution from each of these segments. See Item 8, Note 6 to the Consolidated Financial Statements, “Segment Information,” for a reconciliation of segment data to the Company’s consolidated financial statements.
Gross premiums written relating to annuity business decreased by $7.1 million during the year ended December 31, 2010 as compared to the same period in 2009 mainly due to unfavorable foreign exchange rate movements of $6.5 million and $0.6 million lower premiums from expected premium movements as defined by the treaties. Ceded premiums written decreased by $1.6 million.
Net investment income related to P&C operations decreased in the year ended December 31, 2010 by $102.5 million as compared to the same period in 2009 due primarily to declining portfolio yields. Overall, portfolio yields have decreased as a result of the impact of declines in U.S. interest rates. Net investment income related to P&C operations decreased in the year ended December 31, 2009 as compared to the same period in 2008 by $398.6 million due primarily to the declining portfolio yields as outlined above.
Equity portfolio is negligible in 2010 and, accordingly, performance returns are not presented.
U.S. Government and Government-Related/Supported and Non U.S. Sovereign Government, Supranational and Government-Related include government-related securities with an amortized cost of $319.8 million and fair value of $329.0 million and U.S. Agencies with an amortized cost of $130.2 million and fair value of $140.1 million.
The following table summarizes the fair value, gross unrealized losses, credit rating and asset class of securities in a gross unrealized loss position within the Company’s structured credit and corporate portfolios, which comprised $1.7 billion of the Company’s total gross unrealized loss position of $1.8 billion at December 31, 2009:
Unpaid losses and loss expenses reserves relate primarily to the casualty insurance and reinsurance business written by the Company. The balance was $20.5 billion at December 31, 2010, which is a decrease of $0.3 billion from December 31, 2009. The decrease was due primarily to favorable prior year reserve development reducing losses and loss expenses incurred during 2010.
sufficient capital to enable its regulated subsidiaries to meet the regulatory capital levels required in the U.S., the U.K., Bermuda, Ireland, Switzerland and other key markets;
See Item 8, Note 2 to the Consolidated Financial Statements, “Significant Accounting Policies,” for a discussion of recent accounting pronouncements.
The Company has periodically written retroactive loss portfolio transfer (“LPT”) contracts. These contracts are evaluated to determine whether they meet the established criteria for reinsurance accounting,
Funding agreements, when previously written by the Company, were initially recorded at an amount equal to the value of assets received. In relation to the payments to be made under these contracts, the Company used derivative instruments in order to hedge the Company’s exposure to fluctuations in interest rates related to these contracts. As described in Note 2(g), in relation to hedges in place on the remaining funding agreements, changes in the fair value of the hedging instrument are recognized in income. The change in the fair value of the hedged item, attributable to the hedged risk, is recorded as an adjustment to the carrying amount of the hedged item and is recognized in income.
gross unrealized losses of $181.8 million related to the corporate holdings within the Company’s non-life fixed income portfolios, which had a fair value of $8.9 billion as at December 31, 2010. During the year ended December 31, 2010, as a result of declining credit spreads, the gross unrealized losses on these holdings has decreased. Of the gross unrealized losses noted above $73.3 million relate to financial institutions. In addition, $49.7 million relate to medium term notes primarily supported by pools of investment grade European credit with varying degrees of leverage. These had a fair value of $429.5 million at December 31, 2010. Management believes that expected cash flows over the expected holding period from these bonds is sufficient to support the remaining reported amortized cost.
The Company’s investment portfolio includes certain investments over which the company is considered to have significant influence and which, therefore, are accounted for using the equity method. Significant influence is generally deemed to exist where the Company has an investment of 20% or more in the common stock of a corporation or an investment of 3% or more in closed end funds, limited partnerships, LLCs or similar investment vehicles. The Company records its alternative and private fund affiliates on a one month and three month lag, respectively, and its operating affiliates on a three month lag. See Note 10, “Other Investments” for investments in alternative and private equity funds in which the Company generally owns less than 3% and are accounted for as “Other Investments.”
The fair value of the Company’s holdings in funds that could potentially have lockups or gates imposed as at December 31, 2010 and 2009 was $406.5 million and $263.3 million, respectively. The fair value of the Company’s holdings in funds where a gate has been imposed as at December 31, 2010 and 2009 was $45.9 million and $45.7 million, respectively. In those funds where gates have been imposed, the underlying assets are expected to be liquidated by the investees over a period ranging between approximately one to three years.
The estimation of loss and loss expense liabilities for asbestos and environmental exposures is subject to much greater uncertainty than is normally associated with the establishment of liabilities for certain other exposures due to several factors, including: (i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; (ii) the lack of reliability of available historical claims data as an indicator of future claims development; (iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and (iv) the potential of insurers and reinsurers to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of loss and loss expense liabilities beyond recorded reserves can be established. As the Company’s net unpaid loss and loss expense reserves related to asbestos and environmental exposures are less than 1% of the total net reserves at December 31, 2010 and 2009, further adverse development is not expected to be material to the Company’s overall net loss reserves. The Company believes it has made reasonable provision for its asbestos and environmental exposures and is unaware of any specific issues that would significantly affect its estimate for loss and loss expenses.
The 6.5% Guaranteed Senior Notes indenture contains a cross default provision. In general, in the event that the Company defaults in the payment of indebtedness in the amount of $50.0 million or more, an event of default would be triggered under both the 6.5% Guaranteed Senior Notes indentures.
The Company utilizes foreign exchange contracts to hedge the fair value of certain net investments in foreign operations. During 2010 and 2009, the Company entered into foreign exchange contracts that were formally designated as hedges of the investment in foreign subsidiaries with functional currencies of U.K. sterling and the Euro. The weighted average U.S. dollar equivalent of foreign denominated net assets of approximately $834 million and $425 million was hedged during 2010 and 2009, respectively, which resulted in a derivative loss of $16.5 million and a derivative gain of $7.5 million being recorded in the cumulative translation adjustment account within AOCI for each period, respectively. There was no ineffectiveness resulting from these transactions.
The Company invests in CDOs, and other investment vehicles that are issued through variable interest entities as part of the Company’s investment portfolio. The activities of these VIEs are generally limited to holding the underlying collateral used to service investments therein. Our involvement in these entities is
In addition, certain former employees have received benefit type guarantees, not formally a part of any established plan. The liability recorded with respect to these agreements as at December 31, 2010 and 2009 was $3.0 million and $3.3 million, respectively, representing the entire unfunded projected benefit obligations.
At December 31, 2010, the Company owned minority stakes in seven independent investment management companies (“Investment Manager Affiliates”). At December 31, 2009 and 2008, the Company owned minority stakes in nine independent investment management companies. The Company sought to develop relationships with specialty investment management organizations, generally acquiring an equity interest in the business. The Company also invests in certain of the funds and limited partnerships and other legal entities managed by these affiliates and through these funds and partnerships pay management and performance fees to the Company’s Investment Manager Affiliates.
In the normal course of business, the Company enters into certain quota share reinsurance contracts with a subsidiary of one of its other strategic affiliates, ARX Holding Corporation. During the year ended December 31, 2010, these contracts resulted in reported net premiums written of $71.1 million, net losses incurred of $33.1 million and reported acquisition costs of $32.8 million. During the year ended December 31, 2009, these contracts resulted in reported net premiums written of $44.1 million, net losses incurred of $20.1 million and reported acquisition costs of $19.1 million. During the year ended December 31, 2008, these contracts resulted in reported net premiums written of $60.1 million, net reported claims of $31.5 million and reported acquisition costs of $37.2 million. Management believes that these transactions are conducted at market rates consistent with negotiated arms-length contracts.