Book value per common share, a financial measure often used by investors, is calculated using common shareholders’ equity, a non-GAAP financial measure, which represents total shareholders’ equity, a GAAP financial measure, reduced by the equity attributable to our preferred stock, which was issued during 2005. The common shareholders’ equity is divided by our common shares outstanding at each respective year end to derive book value per common share as reflected in the following table (in millions, except share amounts).
The U.S. Insurance division reported net favorable development for prior years of $39.0 million, $9.0 million, and $1.2 million for the years ended December 31, 2006, 2005, and 2004, respectively. For the year ended December 31, 2006, the reduction in prior year loss estimates is principally related to favorable emergence on medical malpractice business in 2006. For the year ended December 31, 2005, the reduction in prior year loss estimates is principally related to loss emergence less than expectations for medical malpractice and general liability exposures in the period.
reported during the period and the cumulative value since the date of our last reserve review. Variation in actual loss emergence from expectations may result in a change in our estimate of losses and LAE reserves. Any adjustments will be reflected in the periods in which they become known, potentially resulting in adverse effects to our financial results. Changes in expected claim payment rates, which represent one component of losses and LAE emergence, may impact our liquidity and capital resources, as discussed in “Liquidity and Capital Resources.”
When we purchase reinsurance protection, we cede to reinsurers a portion of our risks and pay premiums based upon the risk and exposure of the policies subject to the reinsurance. Although the reinsurer is liable to us for the reinsurance ceded, we retain the ultimate liability in the event the reinsurer is unable to meet its obligation at some later date.
On a quarterly basis, we review our investment portfolio for declines in value, and specifically consider securities, the market values of which have declined to less than 80% of their cost or amortized cost at the time of review. Generally, a change in the market or interest rate environment does not constitute an impairment of an investment, but rather a temporary decline in value. Temporary declines in investments will be recorded as unrealized depreciation in accumulated other comprehensive income. If we determine that a decline is “other-than-temporary,” the cost or amortized cost of the investment will be written down to the fair value and a realized loss will be recorded in our consolidated statements of operations.
Net Premiums Earned. Net premiums earned for the year ended December 31, 2006 decreased by $51.0 million, or 2.2%, to $2,225.8 million, from $2,276.8 million for the year ended December 31, 2005. Net premiums earned decreased in the Americas division by $76.1 million, or 7.2%, and in the London Market division by $52.6 million, or 13.6%, offset by increases in the EuroAsia division of $15.2 million, or 2.9%, and in the U.S. Insurance division of $62.5 million, or 19.3%. Included in net premiums earned are $2.5 million and $4.7 million of net reinstatement premiums received for the years ended December 31, 2006 and 2005, respectively, related to catastrophes. Excluding reinstatement premiums, net premiums earned decreased by $48.8 million, or 2.1%, for the year ended December 31, 2006 over 2005.
Losses and Loss Adjustment Expenses. Losses and LAE decreased $577.4 million, or 28.0%, to $1,484.2 million for the year ended December 31, 2006, from $2,061.6 million for the year ended December 31, 2005 as follows (in millions):
London Market. Gross premiums written in the London Market division for the year ended December 31, 2005 were $431.6 million, a decrease of $16.1 million or 3.6%, as compared to $447.7 million for the year ended December 31, 2004. These amounts represented 16.4% of our gross premiums written for the year ended December 31, 2005 and 16.9% in 2004. These amounts include reinstatement premiums of $33.2 million and
U.S. Insurance. Gross premiums written in the U.S. Insurance division for the year ended December 31, 2005 were $521.0 million, an increase of $129.1 million, or 32.9%, as compared to $391.9 million for the year ended December 31, 2004. These amounts represented 19.8% of our gross premiums written for the year ended December 31, 2005 and 14.8% in 2004. Growth in specialty insurance, which is distributed through program administrators, was primarily due to new program administrators which were added during 2004 and early 2005. Gross premiums written by our U.S. Insurance division are reduced by amounts which are ceded to the Americas division of $20.2 million and $20.1 million for the years ended December 31, 2005 and 2004, respectively. Excluding the impact of amounts ceded to the Americas division, gross premiums written for the year ended December 31, 2005 increased by $129.2 million, or 31.4%, over 2004. Gross premiums written across each line of business is as follows:
On October 12, 2005, we completed the sale of 4.1 million of our common shares at a price of $24.96 per share, resulting in total common shares outstanding as of December 31, 2005 of 69.1 million shares. Fairfax purchased 3.1 million shares in the offering. Net proceeds to us, net of underwriting discounts and commissions, were $102.1 million. On October 20, 2005, we completed the sale of $100.0 million of non-cumulative perpetual preferred shares through the sale of 2.0 million of our 8.125% Series A perpetual preferred shares, with a liquidation preference of $25.00 per share, and 2.0 million of our floating rate Series B preferred shares, with a liquidation preference of $25.00 per share. The aggregate net proceeds from the Series A and Series B perpetual preferred share offerings were $97.5 million. The proceeds from these transactions were used for general corporate purposes, including capital contributions to our operating subsidiaries.
Approximately $35.1 million of our total reinsurance recoverable is current billings, and $24.7 million is over 120 days past due. The change in the economic conditions of any of our retrocessionaires may impact their ability to meet their obligations and negatively impact our liquidity.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” to define existing fair value measurements, create a framework for measuring fair value, and expand disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the adoption of SFAS 157, if any, on our financial position or results of operations.
In connection with the swap transactions, we own SPDRs and XLF index call options at a cost of $9.4 million and $13.6 million, with a strike price of approximately 99.8% and 120.0% of the notional amount of the swap transactions as of December 31, 2006 and December 31, 2005, respectively. During the year ended December 31, 2006, call options, with a notional amount of $789.0 million, expired at a net realized loss of $7.2 million. These call options were replaced with call options purchased for $11.8 million and having a
In June 2006, the FASB issued FASB Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The Interpretation is effective for fiscal years beginning after
Losses and loss adjustment expenses incurred related to prior years were $139.9 million, $172.7 million and $190.0 million for the years ended December 31, 2006, 2005 and 2004, respectively. Prior period losses and loss adjustment expenses for the year ended December 31, 2006 include $42.6 million related to 2005 and prior catastrophe activity, principally related to greater than expected emergence in 2006 on Hurricanes Katrina, Rita and Wilma discussed above. In addition, prior period losses and loss adjustment expenses for the year ended December 31, 2006 for asbestos were increased $27.1 million due to greater than expected emergence during the year. The remaining amount of prior period losses of $70.2 million in 2006 was predominantly attributable to increased loss estimates due to loss emergence greater than expectations during the year on U.S. casualty classes of business written in 2001 and prior. This increase was partially offset by reduced loss estimates due to loss emergence less than expectations during the year on business written in more recent years. Prior period losses and loss adjustment expenses for the year ended December 31, 2005 include $15.0 million related to 2004 and prior catastrophe activity, principally related to greater than expected emergence in 2005 on the 2004 Florida Hurricanes, and the Indonesian earthquake and resulting tsunami and Typhoon Songda. In addition, prior period losses and loss adjustment expenses for the year ended December 31, 2005 for asbestos increased $41.2 million due to greater than expected loss emergence in the year. The remaining amount of prior period losses of $116.5 million in 2005 was predominantly attributable to increased loss estimates due to loss emergence greater than expectations during the year on U.S. casualty classes of business written in 2001 and prior. This increase was partially offset by reduced loss estimates due to loss emergence lower than expectations during the year on business written in more recent years. Prior period losses and loss adjustment expenses for the year ended December 31, 2004 include $7.6 million related to 2003 and prior catastrophe activity, principally related to greater than expected emergence in 2004 on the Mexican floods, Typhoon Maemi, and the Algerian earthquake, each of which occurred in 2003. In addition, prior period losses and loss adjustment expenses for the year ended December 31, 2004 for asbestos were increased $30.0 million due to greater than expected loss emergence during the year. The remaining amount of prior period losses of $152.4 million in 2004 was predominantly attributable to increased loss estimates due to loss emergence greater than expectations during the year on U.S. casualty classes of business written in 2001 and prior. This increase was partially offset by reduced loss estimates due to
The Company uses tabular reserving for workers’ compensation indemnity reserves, which are considered to be fixed and determinable, and discounts such reserves using an interest rate of 3.5%. Losses have been discounted using the Life Table for Total Population: United States, 2003. Reserves reported at the discounted value were $134.2 million and $126.1 million as of December 31, 2006 and 2005, respectively. The amount of case reserve discount was $64.9 million and $61.1 million as of December 31, 2006 and 2005, respectively. The amount of incurred but not reported reserve discount was $30.2 million and $29.2 million as of December 31, 2006 and 2005, respectively.
Dividends on each series are deferrable on a non-cumulative basis, provided that no dividends or other distributions have been declared or paid or set apart for payment on any other class or series of the Company’s capital shares ranking junior to or equal with the preferred shares. Dividends on Series A and Series B preferred shares will each be payable when, as and if declared by the Company’s Board of Directors, quarterly in arrears on the 20th day of January, April, July, and October of each year. Deferred dividends on either series will not accrue interest prior to the date of redemption. On November 29, 2006, the Company’s Board of Directors declared quarterly dividends of $0.5078125 per share on the Company’s 8.125% Series A preferred shares and $0.5389844 per share on the Company’s floating rate Series B preferred shares. The total dividends of
The aggregate adjustments relating to the adoption of SFAS 158, for all of the Company’s benefit plans, included in the consolidated balance sheet as of December 31, 2006 are as follows:
The investment policy for the Plan is to invest in highly rated, lower risk securities that preserve the investment asset value of the Plan while seeking to maximize the return on those invested assets. The Plan assets as of December 31, 2006 and 2005 are invested principally in highly rated fixed income securities. The long term rate of return assumption is based on the fixed income securities portfolio. The actual return on assets has historically been in line with the Company’s assumptions of expected returns. During 2006, the Company contributed $3.7 million to the Plan. Based on the Company’s current expectations, the 2007 contribution should approximate $3.7 million.
Net periodic benefit cost included in the Company’s consolidated statement of operations for the years ended December 31, 2006, 2005 and 2004 is comprised of the following components (in thousands):
The Company estimates that it will record $1.9 million in net loss to net periodic benefit cost during the year ended December 31, 2007. The Company does not expect any refunds of plan assets during the year ended December 31, 2007.
The accumulated benefit obligation for the postretirement benefit plan was $13.0 million and $11.1 million as of December 31, 2006 and 2005, respectively.
The Company has established three stock incentive plans (the “Plans”), the Odyssey Re Holdings Corp. 2002 Stock Incentive Plan (the “2002 Option Plan”), the Odyssey Re Holdings Corp. Stock Option Plan (the “2001 Option Plan”) and the Odyssey Re Holdings Corp. Restricted Share Plan (the “Restricted Share Plan”). The 2001 Option Plan and the Restricted Share Plan were each adopted during 2001. The Plans generally allow for the issuance of grants and exercises through newly issued shares, treasury stock, or any combination thereof.