We estimate our valuation allowance by applying specific percentages against each recovery based on our counterparty’s credit rating. The percentages applied are based on historical industry default statistics developed by major rating agencies and are then adjusted by us based on industry knowledge and our judgment and estimates. We also apply case-specific valuation allowances against certain recoveries that we deem unlikely to be collected in full. We then evaluate the overall adequacy of the valuation allowance based on other qualitative and judgmental factors. The valuation allowance recorded against losses recoverable was $8.9 million at December 31, 2007 (2006 - $21.9 million), with the decrease principally driven by the payment of claims in 2007 as well as the write-off of balances previously provided for in the valuation allowance. The reinsurers with the three largest balances accounted for 19.5%, 17.7% and 10.0%, respectively, of our losses recoverable balance at December 31, 2007 (2006 - 24.5%, 12.7% and 6.4%, respectively). The three largest company-specific components of the valuation allowance represented 39.4%, 22.5% and 10.5% of our total valuation allowance at December 31, 2007 (2006 - 14.8%, 13.2% and 8.6%).
Reinsurance Segment Underwriting Results - In 2007, we generated underwriting income of $528.7 million and recorded a net claims and claim expense ratio of 25.2%, an expense ratio of 19.6%, and a combined ratio of 44.8%, compared to $636.2 million of underwriting income, a net claims and claim expense ratio of 15.2%, an expense ratio of 19.3% and a combined ratio of 34.5%, in 2006. The decrease in underwriting income in 2007 was principally driven by an increase in net claims and claims expenses which was principally driven by $217.5 million of net claims and claim expenses from Kyrill, the U.K. floods and sub-prime related casualty losses and partially offset by a $69.1 million increase in favorable development on prior year reserves. Hurricanes Katrina, Rita and Wilma resulted in $1,076.1 million of net claims and claim expenses in 2005 and added 113.6 percentage points to our net claims and claim expense ratio in
2005. There was an absence of large, land falling hurricanes and other catastrophes impacting the insurance industry in 2007 and 2006, which substantially contributed to the significant improvement in our underwriting profits in 2007 and 2006, compared to 2005.
(1) Includes gross premiums written ceded from the Individual Risk segment to the catastrophe unit of $37.0 million, $64.6 million and $43.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Our specialty reinsurance unit has experienced favorable development on prior year reserves of $101.3 million, $139.2 million and $169.6 million, in 2007, 2006 and 2005, respectively. The reductions in our prior year reserves in 2007 and 2006 were principally driven by the application of our formulaic reserving methodology used for this book of business with the decrease being due to actual paid and reported loss activity coming in better than what we anticipated when setting the initial reserve estimates. Our 2007 accident year was also favorably impacted by a reduction to our initial expected loss ratios for two lines of business. In addition, during 2006, our specialty reinsurance unit experienced $46.0 million of the favorable development, driven by a reduction in carried reserves due to commutations. In 2005, we completed a review of our specialty reinsurance reserves. As a result of this review, we reduced prior year reserves for our specialty reinsurance unit by $129.9 million, which reduced our 2005 net claims and claim expense ratio by 32.3 percentage points. After adjusting for the impact of minority interest, our 2005 net loss was reduced by $117.6 million as a result of the specialty reinsurance reserve review. The 2005 reserve review changes for our specialty reinsurance business were principally due to a reassessment of our estimated loss reporting patterns. Since establishing the specialty reinsurance business unit in 2002, reported claim activity has been less than expected and therefore we have adjusted our estimated loss reporting patterns to reflect this experience. We cannot provide assurance that favorable reserve releases will continue, or that we will not experience unfavorable reserve development in the future.
which have not yet been paid (“case reserves”), adding the costs for additional case reserves (“additional case reserves”) which represent our estimates for claims previously reported to us which we believe may not be adequately reserved as of that date, and adding estimates for the anticipated cost of claims incurred but not yet reported to us (“IBNR”).
On December 13, 2007, Standard & Poor’s raised its counterparty credit rating on RenaissanceRe “A” from “A-”. At the same time, Standard & Poor’s raised its counterparty credit and FSR on Renaissance
We also hold a significant amount of short term investments. Short term investments are managed as part of our investment portfolio and have a maturity of one year or less when purchased. Short term investments are carried at cost which approximates fair value. As of December 31, 2007, we had $1,821.5 million of short term investments compared to $2,411.0 million as of December 31, 2006.
During the fourth quarter of 2007, the Company invested $25.5 million in the preferred equity of Aladdin, representing a 14.6% ownership interest.