UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|
|
|
(Mark one) |
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the fiscal year ended: December 31, 2006 |
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the transition period
from to |
Commission File Number: 1-16535
Odyssey Re Holdings Corp.
(Exact Name of Registrant as Specified in its Charter)
|
|
|
Delaware |
|
52-2301683 |
(State or Other Jurisdiction of
Incorporation or Organization) |
|
(I.R.S. Employer
Identification Number) |
|
Odyssey Re Holdings Corp.
300 First Stamford Place
Stamford, Connecticut
(Address of principal executive offices) |
|
06902
(Zip Code) |
Registrants telephone number, including area code:
(203) 977-8000
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class |
|
Name of Each Exchange on Which Registered |
|
|
|
Common Stock, par value $0.01 per share
|
|
New York Stock Exchange |
8.125% Series A Preferred Stock
|
|
New York Stock Exchange |
Floating Rate Series B Preferred Stock
|
|
New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes
o No
þ
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act. Yes
o No
þ
Indicate
by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated
filer in
Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2 of the
Act). Yes
o No
þ
The
aggregate market value of the shares of all classes of voting
shares of the registrant held by non-affiliates of the
registrant on June 30, 2006 was $343.3 million,
computed upon the basis of the closing sale price of the Common
Stock on that date. For purposes of this computation, shares
held by directors (and shares held by entities in which they
serve as officers) and officers of the registrant have been
excluded. Such exclusion is not intended, nor shall it be
deemed, to be an admission that such persons are affiliates of
the registrant.
As of
March 7, 2007, there were 70,992,738 outstanding shares of
Common Stock, par value $0.01 per share, of the registrant.
Documents Incorporated by Reference
Portions
of the registrants definitive proxy statement filed or to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A involving the election of directors at the
annual meeting of the shareholders of the registrant scheduled
to be held on or about April 25, 2007 are incorporated by
reference in Part III of this
Form 10-K.
ODYSSEY RE HOLDINGS CORP.
TABLE OF CONTENTS
References in this Annual Report on
Form 10-K to
OdysseyRe, the Company, we,
us and our refer to Odyssey Re Holdings
Corp. and, unless the context otherwise requires or otherwise as
expressly stated, its subsidiaries, including Odyssey America,
Clearwater, Newline, Hudson, Hudson Specialty and Clearwater
Select (as defined herein).
2
SAFE HARBOR DISCLOSURE
In connection with, and because we desire to take advantage of,
the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers regarding
certain forward-looking statements contained in this Annual
Report on
Form 10-K. This
Form 10-K contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act).
We have included in this
Form 10-K filing,
and from time to time our management may make, written or oral
statements that may include forward-looking statements that
reflect our current views with respect to future events and
financial performance. These forward-looking statements relate
to, among other things, our plans and objectives for future
operations. These forward-looking statements are subject to
uncertainties and other factors that could cause actual results
to differ materially from such statements. These uncertainties
and other factors include, but are not limited to:
|
|
|
|
|
a reduction in net income if our loss reserves are insufficient; |
|
|
|
the occurrence of catastrophic events with a frequency or
severity exceeding our estimates; |
|
|
|
the lowering or loss of one of our financial or claims-paying
ratings, including those of our subsidiaries; |
|
|
|
uncertainty related to estimated losses from recent
catastrophes, including Hurricanes Katrina, Rita and Wilma; |
|
|
|
an inability to realize our investment objectives; |
|
|
|
the risk that the current governmental investigations or related
proceedings involving the Company might impact us adversely; |
|
|
|
the risk that ongoing regulatory developments will disrupt our
business or mandate changes in industry practices in a fashion
that increases our costs or requires us to alter aspects of the
way we conduct our business; |
|
|
|
a decrease in the level of demand for our reinsurance or
insurance business, or increased competition in the industry; |
|
|
|
emerging claim and coverage issues, which could expand our
obligations beyond the amount we intend to underwrite; |
|
|
|
a change in the requirements of one or more of our current or
potential customers relating to counterparty financial strength,
claims-paying ratings, or collateral requirements; |
|
|
|
actions of our competitors, including industry consolidation,
and increased competition from alternative sources of risk
management products, such as the capital markets; |
|
|
|
risks relating to our controlling shareholders ability to
determine the outcome of our corporate actions requiring board
or shareholder approval; |
|
|
|
risks relating to our ability to raise additional capital if it
is required; |
|
|
|
risks related to covenants in our debt agreements; |
|
|
|
our inability to access our subsidiaries cash; |
|
|
|
loss of services of any of our key employees; |
|
|
|
risks related to our use of reinsurance brokers; |
|
|
|
changes in economic conditions, including interest rate,
currency, equity and credit conditions which could affect our
investment portfolio; |
|
|
|
failure of our reinsurers to honor their obligations to us; |
3
|
|
|
|
|
risks associated with the growth of our specialty insurance
business and the development of our infrastructure to support
this growth; |
|
|
|
operational and financial risks relating to our utilization of
program managers, third-party administrators, and other vendors
to support our specialty insurance operations; |
|
|
|
the passage of federal or state legislation subjecting our
business to additional supervision or regulation, including
additional tax regulation, in the United States or other
jurisdictions in which we operate; |
|
|
|
risks related to our computer and data processing
systems; and |
|
|
|
acts of war, terrorism or political unrest. |
The words believe, anticipate,
project, expect, intend,
will likely result, will seek to or
will continue and similar expressions identify
forward-looking statements. We caution readers not to place
undue reliance on these forward-looking statements, which speak
only as of their dates. We have described some important factors
that could cause our actual results to differ materially from
our expectations in this Annual Report on
Form 10-K,
including factors discussed below in Item 1A
Risk Factors. Except as otherwise required by
federal securities laws, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
4
The Company
OdysseyRe is a leading United States based underwriter of
reinsurance, providing a full range of property and casualty
products on a worldwide basis. We offer both treaty and
facultative reinsurance to property and casualty insurers and
reinsurers. We also write insurance business, primarily focused
on liability lines, in the United States and London. Our global
presence is established through 14 offices, with principal
locations in the United States, London, Paris, Singapore and
Latin America. We had gross premiums written of
$2.3 billion in 2006 and our shareholders equity as
of December 31, 2006 was $2.1 billion. For the year
ended December 31, 2006, reinsurance represented 69.5% of
our gross premiums written, and primary insurance represented
the remaining 30.5%.
The United States is our largest market, generating 54.2% of our
gross premiums written for the year ended December 31,
2006, with the remaining 45.8% comprised of international
business. Our operations are managed through four divisions:
Americas, EuroAsia, London Market and U.S. Insurance. The
Americas division is comprised of our reinsurance operations in
the United States, Canada and Latin America. The Americas
division primarily writes treaty property, general casualty,
specialty casualty, surety, and facultative casualty reinsurance
business, primarily through professional reinsurance brokers.
The EuroAsia division, headquartered in Paris, writes primarily
treaty and facultative property reinsurance. Our London Market
division operates through Newline Syndicate (1218) at
Lloyds and Newline Insurance Company Limited, where the
business focus is casualty insurance, and our London branch,
which focuses on worldwide property and casualty reinsurance.
The U.S. Insurance division writes specialty insurance in
the United States, including medical malpractice, professional
liability and non-standard personal auto. Across our operations,
57.4% of our gross premiums written were generated from casualty
business, 31.8% from property business and 10.8% from specialty
classes, including marine and aviation and surety and credit.
Odyssey Re Holdings Corp. was incorporated on March 21,
2001 in the state of Delaware. In June 2001, we completed our
initial public offering. Prior to our initial public offering,
we were wholly owned by Fairfax Financial Holdings Limited
(Fairfax), a publicly traded Canadian financial
services company. As of December 31, 2006, Fairfax owned
59.6% of our common shares.
Following is a summary of our principal operating subsidiaries:
|
|
|
|
|
Odyssey America Reinsurance Corporation (Odyssey
America), a Connecticut property and casualty reinsurance
company, is a direct subsidiary of the Company and is our
principal reinsurance subsidiary. Odyssey America underwrites
reinsurance on a worldwide basis. |
|
|
|
Odyssey UK Holdings Corp. (UK Holdings), a
subsidiary of Odyssey America, is a holding company with several
wholly-owned operating subsidiaries, including Newline
Underwriting Management Ltd., through which it owns and manages
Newline Syndicate 1218 at Lloyds and Newline Insurance
Company Limited (collectively, Newline). |
|
|
|
Clearwater Insurance Company (Clearwater), a
Delaware company, is a direct subsidiary of Odyssey America.
Clearwater holds active insurance licenses in 43 states. |
|
|
|
Hudson Insurance Company (Hudson), a Delaware
company, is a direct subsidiary of Clearwater. Hudson, based in
New York City, is the principal platform for our specialty
insurance business and holds active insurance licenses in
49 states. |
|
|
|
Hudson Specialty Insurance Company (Hudson
Specialty), a New York company, is a direct subsidiary of
Clearwater and is an eligible surplus lines insurer in
41 states. |
|
|
|
Clearwater Select Insurance Company (Clearwater
Select), a Delaware company, is a direct subsidiary of
Clearwater. Clearwater Select operates as an additional primary
insurer in the Hudson group of companies and is widely licensed
throughout the United States. |
5
Business Strategy
Our objective is to build shareholder value by achieving an
average annual growth in book value per common share of 15% over
the long-term by focusing on underwriting profitability and
generating superior investment returns. Our compounded annual
growth in book value per common share from December 31,
2001, the year we became publicly traded, to December 31,
2006 was 18.2%. We intend to continue to achieve our objective
through:
|
|
|
|
|
Adhering to a strict underwriting philosophy. We
emphasize disciplined underwriting over premium growth,
concentrating on carefully selecting the risks we reinsure and
determining the appropriate price for such risks. We seek to
achieve our principal objective of attracting and retaining high
quality business by centrally managing our diverse operations. |
|
|
|
Increasing our position in specialty insurance business.
We intend to continue expanding our specialty insurance business
by emphasizing underserved market segments or classes of
business. |
|
|
|
Pursuing attractive lines of business. We seek to take
advantage of opportunities to write new lines of business or
expand existing classes of business, based on market conditions
and expected profitability. We expect to expand our position
over time in domestic and international markets by delivering
high quality service through maintaining a local presence in the
markets that we serve. |
|
|
|
Maintaining our commitment to financial strength and
security. We are committed to maintaining a strong and
transparent balance sheet. We will sustain financial flexibility
through maintaining prudent operating and financial leverage and
investing our portfolio in high quality fixed income securities
and value-oriented equity securities. |
|
|
|
Achieving superior returns on invested assets. We manage
our investments using a total return philosophy, seeking to
maximize the economic value of our investments, as opposed to
current income. We apply a long-term value-oriented philosophy
to optimize the total returns on our invested assets consistent
with the risk profile of the assets. |
Overview of Reinsurance
Reinsurance is an arrangement in which the reinsurer agrees to
indemnify an insurance or reinsurance company, the ceding
company, against all or a portion of the insurance risks
underwritten by the ceding company under one or more insurance
or reinsurance contracts. Reinsurance can provide a ceding
company with several benefits, including a reduction in net
liability on individual risks or classes of risks, and
catastrophe protection from large or multiple losses.
Reinsurance also provides a ceding company with additional
underwriting capacity by permitting it to accept larger risks.
Reinsurance, however, does not discharge the ceding company from
its liability to policyholders. Rather, reinsurance serves to
indemnify a ceding company for losses payable by the ceding
company to its policyholders.
There are two basic types of reinsurance arrangements: treaty
and facultative reinsurance. In treaty reinsurance, the ceding
company is obligated to cede and the reinsurer is obligated to
assume a specified portion of a type or category of risks
insured by the ceding company. Treaty reinsurers do not
separately evaluate each of the individual risks assumed under
their treaties and are largely dependent on the individual
underwriting decisions made by the ceding company. Accordingly,
reinsurers will carefully evaluate the ceding companys
risk management and underwriting practices in deciding whether
to provide treaty reinsurance and in appropriately pricing the
treaty.
In facultative reinsurance, the ceding company cedes and the
reinsurer assumes all or part of the risk under a single
insurance or reinsurance contract. Facultative reinsurance is
negotiated separately for each contract that is reinsured.
Facultative reinsurance normally is purchased by ceding
companies for individual risks not covered by their reinsurance
treaties, for amounts in excess of the dollar limits of their
reinsurance treaties or for unusual risks.
Both treaty and facultative reinsurance can be written on either
a proportional, also known as pro rata, basis or on an excess of
loss basis. Under proportional reinsurance, the ceding company
and the reinsurer share the
6
premiums as well as the losses and expenses in an agreed
proportion. Under excess of loss reinsurance, the reinsurer
indemnifies the ceding company against all or a specified
portion of losses and expenses in excess of a specified dollar
amount, known as the ceding companys retention or the
reinsurers attachment point.
Excess of loss reinsurance is often written in layers. A
reinsurer accepts the risk just above the ceding companys
retention up to a specified amount, at which point that
reinsurer or another reinsurer accepts the excess liability up
to an additional specified amount, or such liability reverts to
the ceding company. The reinsurer taking on the risk just above
the ceding companys retention layer is said to write
working layer or low layer excess of loss reinsurance. A loss
that reaches just beyond the ceding companys retention
will create a loss for the lower layer reinsurer, but not for
the reinsurers on the higher layers. Loss activity in lower
layer reinsurance tends to be more predictable than in higher
layers.
Premiums payable by the ceding company to a reinsurer for excess
of loss reinsurance are not directly proportional to the
premiums that the ceding company receives because the reinsurer
does not assume a proportional risk. In contrast, premiums that
the ceding company pays to the reinsurer for proportional
reinsurance are proportional to the premiums that the ceding
company receives, consistent with the proportional sharing of
risk. In addition, in proportional reinsurance, the reinsurer
generally pays the ceding company a ceding commission. The
ceding commission generally is based on the ceding
companys cost of acquiring the business being reinsured
(commissions, premium taxes, assessments and administrative
expenses) and also may include a profit factor for producing the
business.
Reinsurance may be written for insurance or reinsurance
contracts covering casualty risks or property risks. In general,
casualty insurance protects against financial loss arising out
of an insureds obligation for loss or damage to a third
partys property or person. Property insurance protects an
insured against a financial loss arising out of the loss of
property or its use caused by an insured peril or event.
Property catastrophe coverage is generally all risk
in nature and is written on an excess of loss basis, with
exposure to losses from earthquake, hurricanes and other natural
or man made catastrophes such as storms, floods, fire or
tornados. There tends to be a greater delay in the reporting and
settlement of casualty reinsurance claims as compared to
property claims due to the nature of the underlying coverage and
the greater potential for litigation involving casualty risks.
Reinsurers may purchase reinsurance to cover their own risk
exposure. Reinsurance of a reinsurers business is called a
retrocession. Reinsurance companies cede risks under
retrocessional agreements to other reinsurers, known as
retrocessionaires, for reasons similar to those that cause
insurers to purchase reinsurance: to reduce net liability on
individual risks or classes of risks, to protect against
catastrophic losses, to stabilize financial ratios and to obtain
additional underwriting capacity.
Reinsurance can be written through professional reinsurance
brokers or directly with ceding companies.
Lines of Business
Our reinsurance operations primarily consist of the following
lines of business:
|
|
|
|
|
Casualty. Our casualty business includes a broad range of
specialty casualty products, including professional liability,
directors and officers liability, workers
compensation and accident and health, as well as general
casualty products, including general liability, and auto
liability and personal accident coverages written on both a
treaty proportional and excess of loss basis as well as on a
facultative basis. |
|
|
|
Property. Our property business includes reinsurance
coverage to insurers for property damage or business
interruption losses covered in industrial and commercial
property and homeowners policies. This business is written
on a treaty proportional and excess of loss basis. Outside the
U.S., we also write property reinsurance on a facultative basis.
Property reinsurance contracts are generally all
risk in nature. Our most significant exposure is typically
to losses from windstorms and earthquakes, although we are also
exposed to losses from events as diverse as freezes, riots,
floods, industrial explosions, fires, hail and a number of other
loss events. Our property reinsurance treaties generally exclude
certain risks such as losses resulting from acts of war,
nuclear, biological and chemical contamination, radiation and
environmental pollution. |
7
|
|
|
|
|
Marine and Aerospace. We provide reinsurance protection
for marine hull, cargo, transit and offshore oil and gas
operations on a proportional and non-proportional basis. We also
provide specialized reinsurance protection in airline, general
aviation and space insurance business primarily on a
non-proportional basis. |
|
|
|
Surety and Credit. Credit reinsurance, written primarily
on a proportional basis, provides coverage to commercial credit
insurers and the surety line relates primarily to bonds and
other forms of security written by specialized surety insurers. |
Our insurance operations primarily consist of the following
lines of business:
|
|
|
|
|
Medical Malpractice. Our medical malpractice business
primarily provides coverage for group and individual physicians
and small and medium sized hospital accounts. We offer
commercial general liability in conjunction with medical
malpractice coverage. |
|
|
|
Professional Liability. Our professional liability
business primarily consists of architects, engineers,
environmental consultants and media professionals, as well as
coverage for directors and officers liability. |
|
|
|
Non-Standard Personal and Commercial Automobile. Our
non-standard private passenger automobile book is primarily
focused on California, Florida and to a lesser extent, New York.
Our specialty commercial automobile book consists primarily of
off-duty liability for truckers, short-term automobile rentals
and West Coast regional waste haulers. |
|
|
|
Specialty Liability. Our specialty liability business
primarily focuses on casualty risks in the excess and surplus
markets. Our target classes include mercantile, manufacturing
and building/premises, with particular emphasis on commercial
and consumer products, miscellaneous general liability and other
niche markets. We also provide occupational benefit coverages
targeted to federally recognized tribes. |
|
|
|
Property and Package. Our property and package business
is primarily focused on New York commercial property. Also
included are risks of restaurant franchisees written throughout
the United States. |
8
The following table sets forth our gross premiums written, by
line of business, for each of the three years in the period
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
|
|
Property excess of loss
|
|
$ |
313.9 |
|
|
|
13.4 |
% |
|
$ |
355.1 |
|
|
|
13.5 |
% |
|
$ |
302.7 |
|
|
|
11.4 |
% |
Property proportional
|
|
|
361.9 |
|
|
|
15.5 |
|
|
|
438.7 |
|
|
|
16.7 |
|
|
|
386.8 |
|
|
|
14.6 |
|
Property facultative
|
|
|
16.9 |
|
|
|
0.7 |
|
|
|
27.3 |
|
|
|
1.0 |
|
|
|
65.0 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property reinsurance
|
|
|
692.7 |
|
|
|
29.6 |
|
|
|
821.1 |
|
|
|
31.2 |
|
|
|
754.5 |
|
|
|
28.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty excess of loss
|
|
|
316.7 |
|
|
|
13.6 |
|
|
|
287.8 |
|
|
|
11.0 |
|
|
|
299.2 |
|
|
|
11.3 |
|
Casualty proportional
|
|
|
273.1 |
|
|
|
11.7 |
|
|
|
404.1 |
|
|
|
15.4 |
|
|
|
557.2 |
|
|
|
21.0 |
|
Casualty facultative
|
|
|
94.1 |
|
|
|
4.0 |
|
|
|
105.1 |
|
|
|
4.0 |
|
|
|
101.1 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty reinsurance
|
|
|
683.9 |
|
|
|
29.3 |
|
|
|
797.0 |
|
|
|
30.4 |
|
|
|
957.5 |
|
|
|
36.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine and aerospace
|
|
|
144.4 |
|
|
|
6.2 |
|
|
|
141.8 |
|
|
|
5.4 |
|
|
|
138.3 |
|
|
|
5.2 |
|
Surety and credit
|
|
|
101.9 |
|
|
|
4.4 |
|
|
|
104.5 |
|
|
|
4.0 |
|
|
|
106.3 |
|
|
|
4.0 |
|
Miscellaneous
|
|
|
0.7 |
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
12.2 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance
|
|
|
1,623.6 |
|
|
|
69.5 |
|
|
|
1,863.6 |
|
|
|
71.0 |
|
|
|
1,968.8 |
|
|
|
74.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical malpractice
|
|
|
152.8 |
|
|
|
6.6 |
|
|
|
150.6 |
|
|
|
5.7 |
|
|
|
137.6 |
|
|
|
5.2 |
|
Professional liability
|
|
|
131.0 |
|
|
|
5.6 |
|
|
|
114.2 |
|
|
|
4.4 |
|
|
|
65.1 |
|
|
|
2.5 |
|
Personal auto
|
|
|
77.7 |
|
|
|
3.3 |
|
|
|
103.6 |
|
|
|
3.9 |
|
|
|
92.7 |
|
|
|
3.5 |
|
Specialty liability
|
|
|
81.8 |
|
|
|
3.5 |
|
|
|
90.5 |
|
|
|
3.5 |
|
|
|
50.5 |
|
|
|
1.9 |
|
Commercial auto
|
|
|
35.6 |
|
|
|
1.5 |
|
|
|
32.4 |
|
|
|
1.2 |
|
|
|
15.2 |
|
|
|
0.6 |
|
Property and package
|
|
|
30.7 |
|
|
|
1.3 |
|
|
|
29.7 |
|
|
|
1.1 |
|
|
|
30.8 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. insurance
|
|
|
509.6 |
|
|
|
21.8 |
|
|
|
521.0 |
|
|
|
19.8 |
|
|
|
391.9 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability lines Newline
|
|
|
198.9 |
|
|
|
8.5 |
|
|
|
234.9 |
|
|
|
8.9 |
|
|
|
254.3 |
|
|
|
9.6 |
|
Other lines Newline
|
|
|
3.6 |
|
|
|
0.2 |
|
|
|
7.4 |
|
|
|
0.3 |
|
|
|
10.9 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
|
712.1 |
|
|
|
30.5 |
|
|
|
763.3 |
|
|
|
29.0 |
|
|
|
657.1 |
|
|
|
24.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.9 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
2,335.7 |
|
|
|
100.0 |
% |
|
$ |
2,626.9 |
|
|
|
100.0 |
% |
|
$ |
2,650.8 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, total reinsurance
gross premiums written were $1,623.6 million, or 69.5% of
our gross premiums written, and the remaining
$712.1 million, or 30.5%, was insurance business. Our
insurance premiums include our U.S. Insurance division and
business written in our Lloyds syndicate, which is part of
our London Market division. Treaty reinsurance represents 64.8%
of our total gross premiums written and 93.2% of our total
reinsurance gross premiums written. Facultative reinsurance is
4.7% of our gross premiums written and 6.8% of our total
reinsurance business. During 2006, 51.1% of our total
reinsurance gross premiums written was proportional and 48.9%
was excess of loss.
We write property catastrophe excess of loss reinsurance,
covering loss or damage from unpredictable events such as
hurricanes, windstorms, hailstorms, freezes or floods, which
provides aggregate exposure limits and requires cedants to incur
losses in specified amounts before our obligation to pay is
triggered. For the year ended December 31, 2006,
$245.9 million, or 10.5%, of our gross premiums written
were derived from property catastrophe excess of loss
reinsurance. We also write property business, which has exposure
to catastrophes, on a proportional basis, in North America and
Latin America. In addition, the EuroAsia division writes largely
property business, with exposure to catastrophes, primarily in
Europe, Japan, the Pacific Rim and the Middle East.
9
Treaty casualty business accounted for $589.8 million, or
25.3%, of gross premiums written for the year ended
December 31, 2006, of which 46.3% was written on a
proportional basis and 53.7% was written on an excess of loss
basis. Our treaty casualty portfolio principally consists of
specialty casualty products, including professional liability,
directors and officers liability, workers
compensation and accident and health, as well as general
casualty products, including general liability and auto
liability. Treaty property business represented
$675.8 million, or 28.9%, of gross premiums written for the
year ended December 31, 2006, primarily consisting of
commercial property and homeowners coverage, of which
53.6% was written on a proportional basis and 46.4% was written
on an excess of loss basis. Marine and aerospace business
accounted for $144.4 million, or 6.2%, of gross premiums
written for the year ended December 31, 2006, of which
30.4% was written on an excess of loss basis and 69.6% on a
proportional basis. Surety, credit and other miscellaneous
reinsurance lines accounted for 4.4% of gross premiums written
in 2006.
Facultative reinsurance accounted for $111.0 million, or
4.7%, of gross premiums written for the year ended
December 31, 2006, with 97.0% derived from the Americas
division and 3.0% from the EuroAsia division. With respect to
facultative business in the United States, we write only
casualty reinsurance, including general liability, umbrella
liability, directors and officers liability,
professional liability and commercial auto lines; with respect
to facultative business in Latin America and EuroAsia, we write
primarily property reinsurance.
We operate at Lloyds through our wholly owned syndicate,
Newline, which is focused on casualty insurance. Our
Lloyds membership provides strong brand recognition,
extensive broker and distribution channels, worldwide licensing
and augments our ability to write insurance business on an
excess and surplus lines basis in the United States.
We provide insurance products through our U.S. Insurance
division. This business is comprised of specialty insurance
business underwritten on both an admitted and non-admitted
basis. Business is generated through national and regional
agencies and brokers, as well as through program administrators.
Each program administrator has strictly defined limitations on
lines of business, premium capacity and policy limits. Many
program administrators have limited geographic scope and all are
limited regarding the type of business they may accept on our
behalf. We underwrite medical malpractice insurance primarily on
a non-admitted basis. Coverage is written on a claims-made
basis, providing a wide range of limits and retentions.
As a general matter, we target specific classes of business
depending on the market conditions prevailing at any given point
in time. We actively seek to grow our participation in classes
experiencing improvements, and reduce or eliminate participation
in those classes suffering from intense competition or poor
fundamentals. Consequently, the classes of business for which we
provide reinsurance are diverse in nature and the product mix
within the reinsurance and insurance portfolios may change over
time. From time to time, we may consider opportunistic expansion
or entry into new classes of business or ventures, either
through organic growth or the acquisition of other companies or
books of business.
We currently expect our gross premiums written to decline by as
much as 5% for the year ended December 31, 2007 as compared
to 2006. This primarily reflects a reduction in the amount of
reinsurance business we will write in 2007 on a proportional
basis in certain classes of business, particularly for
catastrophe exposed property business in the United States.
Where appropriate, we intend to migrate proportional business to
an excess of loss basis, which has the effect of reducing
written premiums attributable to the coverage. We believe this
more effectively allocates our capital resources in line with
the underlying characteristics of the business. Proportional
business represented 51.1% of our reinsurance gross premiums
written for the year ended December 31, 2006, compared to
56.5% in 2005. While pricing generally remains adequate across
the casualty market, we expect a decline in casualty classes of
business, reflecting continued lower levels of reinsurance
purchased by our customers and increased competition in certain
specialty classes.
10
Divisions
Our business is organized across four operating divisions: the
Americas, EuroAsia, London Market, and U.S. Insurance
divisions. The table below illustrates gross premiums written by
division for each of the three years in the period ended
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In millions) | |
|
|
|
|
Americas
|
|
$ |
924.2 |
|
|
|
39.6 |
% |
|
$ |
1,130.5 |
|
|
|
43.1 |
% |
|
$ |
1,257.5 |
|
|
|
47.4 |
% |
EuroAsia
|
|
|
561.2 |
|
|
|
24.0 |
|
|
|
543.8 |
|
|
|
20.7 |
|
|
|
553.7 |
|
|
|
20.9 |
|
London Market
|
|
|
340.7 |
|
|
|
14.6 |
|
|
|
431.6 |
|
|
|
16.4 |
|
|
|
447.7 |
|
|
|
16.9 |
|
U.S. Insurance
|
|
|
509.6 |
|
|
|
21.8 |
|
|
|
521.0 |
|
|
|
19.8 |
|
|
|
391.9 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
2,335.7 |
|
|
|
100.0 |
% |
|
$ |
2,626.9 |
|
|
|
100.0 |
% |
|
$ |
2,650.8 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas is our largest division, accounting for
$924.2 million, or 39.6%, of our gross premiums written for
the year ended December 31, 2006. The Americas division is
organized into three major units: the United States, Latin
America and Canada. The Americas division writes treaty,
casualty and property, and facultative casualty reinsurance in
the United States and Canada. In Latin America we write treaty
and facultative property reinsurance along with other
predominantly short-tail lines. The Americas division currently
has 313 employees and operates through six offices: Stamford,
New York City, Mexico City, Miami, Santiago and Toronto. The
Americas divisions principal client base includes small to
medium-sized regional and specialty ceding companies, as well as
various specialized departments of major insurance companies.
Business is generated mainly through brokers.
The following table displays gross premiums written by each of
the units within the Americas division for each of the three
years in the period ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In millions) | |
|
|
|
|
United States
|
|
$ |
756.4 |
|
|
|
81.8 |
% |
|
$ |
929.9 |
|
|
|
82.3 |
% |
|
$ |
1,047.8 |
|
|
|
83.3 |
% |
Latin America
|
|
|
134.9 |
|
|
|
14.6 |
|
|
|
148.6 |
|
|
|
13.1 |
|
|
|
161.4 |
|
|
|
12.8 |
|
Canada
|
|
|
32.0 |
|
|
|
3.5 |
|
|
|
50.4 |
|
|
|
4.5 |
|
|
|
46.0 |
|
|
|
3.7 |
|
Other
|
|
|
0.9 |
|
|
|
0.1 |
|
|
|
1.6 |
|
|
|
0.1 |
|
|
|
2.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
924.2 |
|
|
|
100.0 |
% |
|
$ |
1,130.5 |
|
|
|
100.0 |
% |
|
$ |
1,257.5 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The United States unit provides treaty reinsurance of virtually
all classes of non-life insurance. In addition to the specialty
casualty and general casualty reinsurance lines, the unit also
writes commercial and personal property as well as marine and
aerospace, accident and health, and surety lines. Facultative
casualty reinsurance is also written in the United States unit,
mainly for general liability, umbrella liability,
directors and officers liability, professional
liability and commercial auto. The United States unit operates
out of offices in Stamford
11
and New York City. The following table displays gross premiums
written, by business segment, for the United States for each of
the last three years in the period ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In millions) | |
|
|
|
|
Specialty casualty
|
|
$ |
320.9 |
|
|
|
42.4 |
% |
|
$ |
339.6 |
|
|
|
36.5 |
% |
|
$ |
397.0 |
|
|
|
37.9 |
% |
Property
|
|
|
192.3 |
|
|
|
25.4 |
|
|
|
252.1 |
|
|
|
27.1 |
|
|
|
210.8 |
|
|
|
20.1 |
|
Facultative
|
|
|
94.1 |
|
|
|
12.4 |
|
|
|
104.9 |
|
|
|
11.3 |
|
|
|
100.0 |
|
|
|
9.5 |
|
General casualty
|
|
|
89.0 |
|
|
|
11.8 |
|
|
|
103.0 |
|
|
|
11.1 |
|
|
|
110.5 |
|
|
|
10.5 |
|
Alternative risk
|
|
|
(3.9 |
) |
|
|
(0.5 |
) |
|
|
54.8 |
|
|
|
5.9 |
|
|
|
67.9 |
|
|
|
6.5 |
|
Surety
|
|
|
39.3 |
|
|
|
5.2 |
|
|
|
47.4 |
|
|
|
5.1 |
|
|
|
43.6 |
|
|
|
4.2 |
|
Marine
|
|
|
25.2 |
|
|
|
3.3 |
|
|
|
25.4 |
|
|
|
2.7 |
|
|
|
24.0 |
|
|
|
2.3 |
|
Other
|
|
|
2.1 |
|
|
|
0.3 |
|
|
|
4.7 |
|
|
|
0.5 |
|
|
|
2.8 |
|
|
|
0.3 |
|
Specialty accounts
|
|
|
(2.6 |
) |
|
|
(0.3 |
) |
|
|
(2.0 |
) |
|
|
(0.2 |
) |
|
|
91.2 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
756.4 |
|
|
|
100.0 |
% |
|
$ |
929.9 |
|
|
|
100.0 |
% |
|
$ |
1,047.8 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Latin America unit writes primarily treaty and facultative
business throughout Latin America and the Caribbean. The
business is predominantly commercial property in nature, and
also includes auto, marine and other lines. The Latin America
unit has its principal office in Mexico City, with satellite
offices in Miami and Santiago. The Canadian unit, which is based
in Toronto, writes primarily property, crop hail and auto
coverage.
The following table displays gross premiums written for the
Americas division, by type of business, for each of the three
years in the period ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Property excess of loss
|
|
$ |
122.7 |
|
|
|
13.3 |
% |
|
$ |
135.7 |
|
|
|
12.0 |
% |
|
$ |
109.7 |
|
|
|
8.7 |
% |
Property proportional
|
|
|
158.1 |
|
|
|
17.1 |
|
|
|
227.4 |
|
|
|
20.1 |
|
|
|
188.3 |
|
|
|
15.0 |
|
Property facultative
|
|
|
13.7 |
|
|
|
1.5 |
|
|
|
24.1 |
|
|
|
2.2 |
|
|
|
60.5 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property reinsurance
|
|
|
294.5 |
|
|
|
31.9 |
|
|
|
387.2 |
|
|
|
34.3 |
|
|
|
358.5 |
|
|
|
28.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty excess of loss
|
|
|
231.1 |
|
|
|
25.0 |
|
|
|
203.4 |
|
|
|
18.0 |
|
|
|
224.6 |
|
|
|
17.9 |
|
Casualty proportional
|
|
|
221.2 |
|
|
|
23.9 |
|
|
|
345.8 |
|
|
|
30.6 |
|
|
|
479.7 |
|
|
|
38.1 |
|
Casualty facultative
|
|
|
94.1 |
|
|
|
10.2 |
|
|
|
105.2 |
|
|
|
9.3 |
|
|
|
101.1 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty reinsurance
|
|
|
546.4 |
|
|
|
59.1 |
|
|
|
654.4 |
|
|
|
57.9 |
|
|
|
805.4 |
|
|
|
64.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine and aerospace
|
|
|
36.2 |
|
|
|
3.9 |
|
|
|
37.5 |
|
|
|
3.3 |
|
|
|
33.6 |
|
|
|
2.7 |
|
Surety and credit
|
|
|
46.4 |
|
|
|
5.0 |
|
|
|
52.2 |
|
|
|
4.6 |
|
|
|
47.8 |
|
|
|
3.8 |
|
Miscellaneous lines
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
(0.8 |
) |
|
|
(0.1 |
) |
|
|
12.2 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
924.2 |
|
|
|
100.0 |
% |
|
$ |
1,130.5 |
|
|
|
100.0 |
% |
|
$ |
1,257.5 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The EuroAsia division accounted for $561.2 million, or
24.0%, of our gross premiums written for the year ended
December 31, 2006. The division primarily writes property
business and short tail treaty business. The EuroAsia division,
which currently has 91 employees, operates out of four offices,
with principal offices in Paris and Singapore and satellite
offices in Stockholm and Tokyo. Business is produced through a
strong network of global and regional brokers. The EuroAsia
division underwrites through brokers for 65.5% of the business
and
12
34.5% directly. Our top five brokers for the EuroAsia division
in 2006, Aon Corporation, Benfield Group, Ltd, Guy
Carpenter & Co., Inc., Willis Re Group Holdings, Ltd.
and Groupe Walbaum-IAR, generated 48.8% of the divisions
business in 2006.
The Paris branch office is the headquarters of the EuroAsia
division and the underwriting center in charge of Europe, the
Middle East and Africa, with an office in Stockholm, Sweden,
covering the Nordic countries and Russia. The Paris branch
writes primarily property, motor, credit and bond, accident and
health, marine and aerospace and liability business. The Asia
Pacific Rim unit, headquartered in Singapore with an office in
Tokyo, writes reinsurance on both a treaty and facultative
basis. The primary lines of business offered in the Asia Pacific
Rim unit include property, marine, motor, accident and health,
credit and bond coverages, and liability business. During 2006,
Europe represented 67.5% of gross premiums written while Asia
represented 19.4% and the Middle East, Africa and America
comprised the remaining 13.1%.
The following table displays gross premiums written for the
EuroAsia division, by type of coverage, for each of the last
three years in the period ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In millions) | |
|
|
|
|
Property
|
|
$ |
341.0 |
|
|
|
60.8 |
% |
|
$ |
326.0 |
|
|
|
60.0 |
% |
|
$ |
304.2 |
|
|
|
55.0 |
% |
Motor
|
|
|
85.0 |
|
|
|
15.1 |
|
|
|
88.4 |
|
|
|
16.3 |
|
|
|
79.6 |
|
|
|
14.4 |
|
Surety and credit
|
|
|
55.5 |
|
|
|
9.9 |
|
|
|
52.3 |
|
|
|
9.6 |
|
|
|
58.5 |
|
|
|
10.6 |
|
Marine
|
|
|
33.3 |
|
|
|
5.9 |
|
|
|
28.5 |
|
|
|
5.2 |
|
|
|
29.4 |
|
|
|
5.3 |
|
Liability
|
|
|
23.5 |
|
|
|
4.2 |
|
|
|
22.7 |
|
|
|
4.2 |
|
|
|
20.8 |
|
|
|
3.7 |
|
Aerospace
|
|
|
12.6 |
|
|
|
2.3 |
|
|
|
14.4 |
|
|
|
2.6 |
|
|
|
12.5 |
|
|
|
2.2 |
|
Accident and health
|
|
|
10.3 |
|
|
|
1.8 |
|
|
|
11.5 |
|
|
|
2.1 |
|
|
|
23.8 |
|
|
|
4.3 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.9 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
561.2 |
|
|
|
100.0 |
% |
|
$ |
543.8 |
|
|
|
100.0 |
% |
|
$ |
553.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The property business, including the property component of motor
business, in EuroAsia is 58.1% proportional, 41.0% excess of
loss and 0.9% facultative. Per risk coverages account for 54.6%
of the property business, while 25.1% relates to catastrophe
coverage.
The following table displays gross premiums written for the
EuroAsia division, by type of business, for each of the three
years in the period ended December 31, 2006. Gross premiums
written for the year ended December 31, 2004 included
$24.9 million attributable to the consolidation of First
Capital Insurance Limited
13
(First Capital), which writes business in Singapore.
In the fourth quarter of 2004, our economic interest in First
Capital declined to less than 50%, and First Capital is no
longer consolidated in our financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In millions) | |
|
|
|
|
Property excess of loss
|
|
$ |
143.7 |
|
|
|
25.6 |
% |
|
$ |
140.0 |
|
|
|
25.8 |
% |
|
$ |
126.8 |
|
|
|
22.9 |
% |
Property proportional
|
|
|
203.8 |
|
|
|
36.3 |
|
|
|
203.1 |
|
|
|
37.3 |
|
|
|
191.6 |
|
|
|
34.6 |
|
Property facultative
|
|
|
3.2 |
|
|
|
0.6 |
|
|
|
3.3 |
|
|
|
0.6 |
|
|
|
4.5 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
350.7 |
|
|
|
62.5 |
|
|
|
346.4 |
|
|
|
63.7 |
|
|
|
322.9 |
|
|
|
58.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty excess of loss
|
|
|
70.4 |
|
|
|
12.5 |
|
|
|
66.9 |
|
|
|
12.3 |
|
|
|
51.6 |
|
|
|
9.3 |
|
Casualty proportional
|
|
|
38.7 |
|
|
|
6.9 |
|
|
|
35.0 |
|
|
|
6.5 |
|
|
|
54.0 |
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty
|
|
|
109.1 |
|
|
|
19.4 |
|
|
|
101.9 |
|
|
|
18.8 |
|
|
|
105.6 |
|
|
|
19.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine and aerospace
|
|
|
45.9 |
|
|
|
8.2 |
|
|
|
43.2 |
|
|
|
7.9 |
|
|
|
41.8 |
|
|
|
7.5 |
|
Surety and credit
|
|
|
55.5 |
|
|
|
9.9 |
|
|
|
52.3 |
|
|
|
9.6 |
|
|
|
58.5 |
|
|
|
10.6 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.9 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
561.2 |
|
|
|
100.0 |
% |
|
$ |
543.8 |
|
|
|
100.0 |
% |
|
$ |
553.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The property and casualty components of motor business have been
included in the property and casualty amounts in the above table.
The London Market division accounted for $340.7 million, or
14.6%, of our gross written premiums for the year ended
December 31, 2006. The London Market division, with 76
employees in our London office, currently operates through
Newline Syndicate (1218) at Lloyds, Newline Insurance
Company Limited (these two entities are referred to collectively
as Newline) and the London branch. Newlines
business focus is international casualty insurance, while the
London branch writes worldwide treaty reinsurance. Our
underwriting platforms are run by an integrated management team
with a common business approach. Business is distributed through
a diverse group of brokers, with the top five brokers
representing 48.9% of gross premiums written. Our top London
Market division brokers include Aon Corporation, Marsh Inc.,
Integro Insurance Brokers, Ltd., Willis Re Group Holdings, Ltd.,
and Jardine, Lloyd, Thompson.
For the year ended December 31, 2006, the London branch had
gross premiums written of $138.2 million, or 40.6% of the
total London Market division. The London branch writes worldwide
treaty reinsurance through three business units: property,
marine and aerospace, and international casualty. The property
unit (comprising mainly retrocessional and catastrophe excess of
loss business) represents 34.3% of the total gross premiums
written for the year ended December 31, 2006.
Geographically, 85.5% of the branch business is located in the
United Kingdom, Western Europe and the United States.
For the year ended December 31, 2006, Newline had gross
premiums written of $202.5 million, or 59.4% of the total
London Market division. Newline writes international casualty
insurance in five sectors: professional indemnity,
directors and officers liability, crime, financial
institution professional indemnity and liability. Newlines
target market is generally small to medium sized accounts which
could be either private or public companies. The United Kingdom,
Australia and Western Europe represent 79.7% of Newlines
business.
14
The following table displays gross premiums written for the
London Market division, by type of business, for each of the
three years in the period ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Property excess of loss
|
|
$ |
47.5 |
|
|
|
13.9 |
% |
|
$ |
79.4 |
|
|
|
18.4 |
% |
|
$ |
66.2 |
|
|
|
14.9 |
% |
Property proportional
|
|
|
|
|
|
|
|
|
|
|
8.3 |
|
|
|
1.9 |
|
|
|
6.9 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property reinsurance
|
|
|
47.5 |
|
|
|
13.9 |
|
|
|
87.7 |
|
|
|
20.3 |
|
|
|
73.1 |
|
|
|
16.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty excess of loss
|
|
|
15.2 |
|
|
|
4.5 |
|
|
|
17.5 |
|
|
|
4.1 |
|
|
|
22.9 |
|
|
|
5.2 |
|
Casualty proportional
|
|
|
13.2 |
|
|
|
3.9 |
|
|
|
23.1 |
|
|
|
5.4 |
|
|
|
23.5 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty reinsurance
|
|
|
28.4 |
|
|
|
8.4 |
|
|
|
40.6 |
|
|
|
9.5 |
|
|
|
46.4 |
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine and aerospace
|
|
|
62.3 |
|
|
|
18.3 |
|
|
|
61.0 |
|
|
|
14.1 |
|
|
|
63.0 |
|
|
|
14.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance
|
|
|
138.2 |
|
|
|
40.6 |
|
|
|
189.3 |
|
|
|
43.9 |
|
|
|
182.5 |
|
|
|
40.8 |
|
Liability lines Newline
|
|
|
198.9 |
|
|
|
58.4 |
|
|
|
234.9 |
|
|
|
54.4 |
|
|
|
254.3 |
|
|
|
56.8 |
|
Other Newline
|
|
|
3.6 |
|
|
|
1.0 |
|
|
|
7.4 |
|
|
|
1.7 |
|
|
|
10.9 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
340.7 |
|
|
|
100.0 |
% |
|
$ |
431.6 |
|
|
|
100.0 |
% |
|
$ |
447.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarked as Hudson Insurance Group, the
U.S. Insurance division provides underwriting capacity on
an admitted and non-admitted basis to medical malpractice and
specialty insurance markets nationwide. The U.S. Insurance
division generated $509.6 million, or 21.8%, of our gross
premiums written for the year ended December 31, 2006. The
U.S. Insurance division employs 130 people and operates
from offices in New York, Chicago and Napa. Approximately 71.0%
of the divisions business is written in
10 states/territories, with the top five states/territories
representing 54.6% of the divisions total premiums.
Our medical malpractice business provides coverage principally
to small and medium sized hospitals, physicians and physician
groups, and is primarily focused on 12 states throughout
the United States. Coverage is generally offered on a
claims-made basis and is written on a surplus lines basis to
provide rate and form flexibility. This business is distributed
primarily through regional brokers.
In addition, the U.S. Insurance division provides primary
coverage for a variety of risks, including non-standard personal
auto, commercial auto, specialty liability and other niche
markets. We manage a limited number of active program
administrator relationships, with a majority of our business
concentrated in our top ten relationships. We perform extensive
due diligence on all new and existing program administrators and
look to do business with organizations that have a long and
well-documented track record in their area of expertise. Strong
monitoring processes are in place and our program administrators
are incentivized to produce profitable insurance business rather
than to merely generate volume.
15
The following table displays gross premiums written for the
U.S. Insurance division, by type of business, for each of
the three years in the period ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(In millions) | |
|
|
|
|
Medical malpractice
|
|
$ |
152.8 |
|
|
|
30.0 |
% |
|
$ |
150.6 |
|
|
|
28.9 |
% |
|
$ |
137.7 |
|
|
|
35.0 |
% |
Professional liability
|
|
|
131.0 |
|
|
|
25.7 |
|
|
|
114.2 |
|
|
|
21.9 |
|
|
|
65.0 |
|
|
|
16.6 |
|
Personal auto
|
|
|
77.7 |
|
|
|
15.2 |
|
|
|
103.6 |
|
|
|
19.9 |
|
|
|
92.7 |
|
|
|
23.7 |
|
Specialty liability
|
|
|
81.8 |
|
|
|
16.1 |
|
|
|
90.5 |
|
|
|
17.4 |
|
|
|
50.5 |
|
|
|
12.9 |
|
Commercial auto
|
|
|
35.6 |
|
|
|
7.0 |
|
|
|
32.4 |
|
|
|
6.2 |
|
|
|
15.2 |
|
|
|
3.9 |
|
Property and package
|
|
|
30.7 |
|
|
|
6.0 |
|
|
|
29.7 |
|
|
|
5.7 |
|
|
|
30.8 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
509.6 |
|
|
|
100.0 |
% |
|
$ |
521.0 |
|
|
|
100.0 |
% |
|
$ |
391.9 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides additional detail regarding our
medical malpractice business for each of the three years in the
period ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Physician groups and clinics
|
|
$ |
41.9 |
|
|
|
27.4 |
% |
|
$ |
50.3 |
|
|
|
33.4 |
% |
|
$ |
68.3 |
|
|
|
49.6 |
% |
Select markets
|
|
|
31.6 |
|
|
|
20.7 |
|
|
|
41.4 |
|
|
|
27.5 |
|
|
|
23.4 |
|
|
|
17.0 |
|
Hospitals
|
|
|
46.1 |
|
|
|
30.2 |
|
|
|
32.8 |
|
|
|
21.8 |
|
|
|
21.9 |
|
|
|
15.9 |
|
Individual physicians
|
|
|
24.0 |
|
|
|
15.7 |
|
|
|
20.4 |
|
|
|
13.5 |
|
|
|
15.7 |
|
|
|
11.4 |
|
Other healthcare providers
|
|
|
9.2 |
|
|
|
6.0 |
|
|
|
5.7 |
|
|
|
3.8 |
|
|
|
8.4 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical malpractice gross premiums written
|
|
$ |
152.8 |
|
|
|
100.0 |
% |
|
$ |
150.6 |
|
|
|
100.0 |
% |
|
$ |
137.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retention Levels and Retrocession Arrangements
We impose maximum retentions on a per risk basis. We believe
that the levels of gross capacity per property risk that are in
place are sufficient to achieve our objective of attracting
business in the international markets. The following table
illustrates the current gross capacity, cession (reinsurance
retrocession) and net retention generally applicable under our
underwriting guidelines. Larger limits may be written, subject
to the approval of senior management.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Retrocession/ | |
|
Net | |
|
|
Capacity | |
|
Reinsurance | |
|
Retention | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Treaty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
$ |
15.0 |
|
|
$ |
|
|
|
$ |
15.0 |
|
|
Casualty
|
|
|
7.5 |
|
|
|
|
|
|
|
7.5 |
|
Facultative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
5.0 |
|
|
|
1.6 |
|
|
|
3.4 |
|
|
Casualty
|
|
|
10.0 |
|
|
|
8.0 |
|
|
|
2.0 |
|
Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical malpractice
|
|
|
11.0 |
|
|
|
10.1 |
|
|
|
0.9 |
|
|
Other casualty
|
|
|
10.0 |
|
|
|
7.0 |
|
|
|
3.0 |
|
|
Property
|
|
|
10.0 |
|
|
|
8.0 |
|
|
|
2.0 |
|
|
Newline
|
|
|
19.6 |
|
|
|
14.7 |
|
|
|
4.9 |
|
16
We purchase reinsurance to increase our aggregate premium
capacity, to reduce and spread the risk of loss on insurance and
reinsurance underwritten and to limit our exposure with respect
to multiple claims arising from a single occurrence. We are
subject to accumulation risk with respect to catastrophic events
involving multiple treaties, facultative certificates and
insurance policies. To protect against this risk, we purchase
catastrophe excess of loss reinsurance protection. The
retention, the level of capacity purchased, the geographic scope
of the coverage and the cost vary from year to year. Specific
reinsurance protections are also placed to protect selected
portions of our portfolio. Our catastrophe excess of loss
reinsurance protection available for losses in the United States
for 2005 was exhausted by Hurricanes Katrina, Rita and Wilma
during the year ended December 31, 2005.
When we enter into retrocessional agreements, 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.
Our ten largest reinsurers represent 49.6% of our total
reinsurance recoverables as of December 31, 2006. Amounts
due from all other reinsurers are diversified, with no other
individual reinsurer representing more than $15.4 million
of reinsurance recoverables as of December 31, 2006, and
the average balance is less than $3.0 million. There were
no significant catastrophes during 2006. Our reinsurance
recoverables attributable to losses from Hurricanes Katrina,
Rita and Wilma were $11.5 million as of December 31,
2006, a decrease from $223.7 million as of
December 31, 2005.
The following table shows the total amount which is recoverable
from each of our ten largest reinsurers for paid and unpaid
losses as of December 31, 2006, the amount of collateral
held, and each reinsurers A.M. Best rating (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance | |
|
Percent of | |
|
|
|
A.M. Best | |
Reinsurer |
|
Recoverable | |
|
Total | |
|
Collateral | |
|
Rating | |
|
|
| |
|
| |
|
| |
|
| |
Underwriters Reinsurance Company (Barbados) Incorporated
|
|
$ |
120.1 |
|
|
|
15.0% |
|
|
$ |
120.1 |
|
|
|
NR |
|
Lloyds
|
|
|
63.3 |
|
|
|
7.9 |
|
|
|
0.4 |
|
|
|
A |
|
Federal Insurance Company
|
|
|
38.5 |
|
|
|
4.8 |
|
|
|
|
|
|
|
A++ |
|
Hannover Ruckversicherungs AG
|
|
|
33.9 |
|
|
|
4.3 |
|
|
|
0.4 |
|
|
|
A |
|
Partner Reinsurance Company of the US
|
|
|
29.0 |
|
|
|
3.6 |
|
|
|
0.9 |
|
|
|
A+ |
|
Ace Property and Casualty Insurance
|
|
|
24.9 |
|
|
|
3.1 |
|
|
|
0.2 |
|
|
|
A+ |
|
Transatlantic Reinsurance Company
|
|
|
24.6 |
|
|
|
3.1 |
|
|
|
0.1 |
|
|
|
A+ |
|
Arch Reinsurance Company
|
|
|
20.5 |
|
|
|
2.6 |
|
|
|
17.8 |
|
|
|
A- |
|
Swiss Reinsurance America Corp.
|
|
|
21.8 |
|
|
|
2.7 |
|
|
|
0.2 |
|
|
|
A+ |
|
GE Frankona Reinsurance Ltd.
|
|
|
19.6 |
|
|
|
2.5 |
|
|
|
0.1 |
|
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
396.2 |
|
|
|
49.6 |
|
|
|
140.2 |
|
|
|
|
|
|
All Other
|
|
|
402.6 |
|
|
|
50.4 |
|
|
|
98.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
798.8 |
|
|
|
100.0% |
|
|
$ |
238.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional information on our retrocession agreements,
please refer to Notes 11 and 12 to the consolidated
financial statements included in this report.
Claims
Reinsurance claims are managed by our professional claims staff,
whose responsibilities include the review of initial loss
reports, creation of claim files, determination of whether
further investigation is required, establishment and adjustment
of case reserves, and payment of claims. Claims staff recognize
that fair interpretation of our reinsurance agreements and
timely payment of covered claims is a valuable service to clients
17
and enhances our reputation. In addition to claims assessment,
processing and payment, our claims staff conducts comprehensive
claims audits of both specific claims and overall claims
procedures at the offices of selected ceding companies, which we
believe benefits all parties to the reinsurance arrangement.
Claims audits are conducted in the ordinary course of business.
In certain instances, a claims audit may be performed prior to
assuming reinsurance business.
A dedicated claims unit manages the claims related to
asbestos-related illness and environmental impairment
liabilities, due to the significantly greater uncertainty
involving these exposures. This unit performs audits of cedants
with significant asbestos and environmental exposure to assess
our potential liabilities. This unit also monitors developments
within the insurance industry that may have a potential impact
on our reserves.
For our medical malpractice business, written by the
U.S. Insurance division, we employ a professional claims
staff to confirm coverage, investigate, and administer all other
aspects of the adjusting process from the inception to the final
resolution of insurance claims. Insurance claims relating to our
specialty insurance business conducted through program
administrators are generally handled by third party
administrators, typically specialists in defined business, who
have limited authority and are subject to continuous oversight
and review by our internal professional claims staff.
Reserves for Unpaid Losses and Loss Adjustment Expenses
We establish reserves to recognize liabilities for unpaid losses
and loss adjustment expenses (LAE), which are
balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect
to insured events that have occurred on or before the balance
sheet date, including events which have not yet been reported to
us. Significant periods of time may elapse between the
occurrence of an insured loss, the reporting of the loss by the
insured to the ceding company, the reporting of the loss by the
ceding company to the reinsurer, the ceding companys
payment of that loss and subsequent payments to the ceding
company by the reinsurer.
We rely on loss information received from ceding companies to
establish our estimate of losses and LAE. The types of
information we receive from ceding companies generally vary by
the type of contract. Proportional contracts are generally
reported on at least a quarterly basis, providing premium and
loss activity as estimated by the ceding company. Our
experienced accounting staff have the primary responsibility for
managing the handling of information received on these types of
contracts. Our claims staff may also assist in the analysis,
depending on the size or type of individual loss reported on
proportional contracts. Cedant reporting for facultative and
treaty excess of loss contracts includes detailed individual
claim information, including the description of injury,
confirmation of cedant liability, and the cedants current
estimate of liability. Our experienced claims staff has the
responsibility for managing and analyzing the individual claim
information. Based on the claims staffs evaluation of the
claim, we may choose to establish additional case reserves over
that reported by the ceding company. Due to potential
differences in ceding company reporting practices, our
accounting, claims, and internal audit departments perform
reviews on ceding carriers to ensure that their underwriting and
claims procedures meet our standards.
We also establish reserves to provide for incurred but not
reported claims and the estimated expenses of settling claims
(IBNR), including legal and other fees, and the
general expenses of administering the claims adjustment process,
known as loss adjustment expenses. We periodically revise such
reserves to adjust for changes in the expected loss development
pattern over time.
We rely on the underwriting and claim information provided by
the ceding companies to compile our analysis of losses and LAE.
This data is aggregated by geographic region and type of
business to facilitate analysis. We calculate incurred but not
reported loss and LAE reserves using generally accepted
actuarial reserving techniques to project the ultimate liability
for losses and LAE. IBNR includes a provision for losses
incurred but not yet reported to us as well as anticipated
additional emergence on claims already reported by the ceding
companies or claimants. The actuarial techniques for projecting
loss and LAE reserves rely on historical paid and case reserve
loss emergence patterns and insurance and reinsurance pricing
and claim cost trends to establish the claims emergence of
future periods with respect to all reported and unreported
insured events that have occurred on or before the balance sheet
date.
18
Estimates of reserves for unpaid losses and LAE are contingent
upon legislative, regulatory, social, economic and legal events
that may or may not occur in the future, thereby affecting
assumptions of claims frequency and severity. The eventual
outcome of these events may be different from the assumptions
underlying our reserve estimates. In the event that loss trends
diverge from expected trends, we adjust our reserves to reflect
the actual emergence which is known during the period. On a
quarterly basis, we compare actual emergence in the quarter and
cumulatively since the implementation of the last reserve review
to the expectation of reported loss for the period. Variation in
actual emergence from expectations may result in a change in
loss and LAE reserve. 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 loss and
LAE emergence, may also impact our liquidity and capital
resources, as discussed in Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
The reserving process is complex and the inherent uncertainties
of estimating such reserves are significant, due primarily to
the longer-term nature of most reinsurance business, the
diversity of development patterns among different types of
reinsurance treaties or facultative contracts, the necessary
reliance on the ceding companies for information regarding
reported claims and differing reserving practices among ceding
companies. As a result, actual losses and LAE may deviate,
perhaps substantially, from estimates of reserves reflected in
our consolidated financial statements. During the loss
settlement period, which can be many years in duration,
additional facts regarding individual claims and trends usually
become known. As these become apparent, it usually becomes
necessary to refine and adjust the reserves upward or downward,
and even then, the ultimate net liability may be less than or
greater than the revised estimates.
We have exposure to asbestos, environmental pollution and other
latent injury damage claims on policies written prior to the mid
1980s. Included in our reserves are amounts related to
asbestos-related illnesses and environmental impairment, which,
net of related reinsurance recoverable, totaled
$215.7 million and $132.8 million as of
December 31, 2006 and 2005, respectively. The majority of
our asbestos and environmental related liabilities arise from
contracts entered into before 1986 that were underwritten as
standard general liability coverages where the contracts
contained terms which, for us and the industry overall, have
been interpreted by the courts to provide coverage for asbestos
and environmental exposures not contemplated by the original
pricing or reserving of the covers. Our estimate of our ultimate
liability for these exposures includes case basis reserves and a
provision for liabilities incurred but not yet reported. Case
basis reserves are a combination of reserves reported to us by
ceding companies and additional case reserves determined by our
dedicated asbestos and environmental claims unit. We rely on an
annual analysis of Company and industry loss emergence trends to
estimate the loss and LAE reserve for this exposure, including
projections based on historical loss emergence and loss
completion factors supplied from other company and industry
sources.
Estimation of ultimate liabilities is unusually difficult due to
several significant issues relating to asbestos and
environmental exposures. Among the issues are: (a) the long
period between exposure and manifestation of an injury;
(b) difficulty in identifying the sources of asbestos or
environmental contamination; (c) difficulty in allocating
responsibility or liability for asbestos or environmental
damage; (d) difficulty in determining whether coverage
exists; (e) changes in underlying laws and judicial
interpretation of those laws; and (f) uncertainty regarding
the identity and number of insureds with potential asbestos or
environmental exposure.
Several additional factors have emerged in recent years
regarding asbestos exposure that further compound the difficulty
in estimating ultimate losses for this exposure. These factors
include: (a) continued growth in the number of claims filed
due to a more aggressive plaintiffs bar; (b) an
increase in claims involving defendants formerly regarded as
peripheral; (c) growth in the use of bankruptcy filings by
companies as a result of asbestos liabilities, which companies
in some cases attempt to resolve asbestos liabilities in a
manner that is prejudicial to insurers; (d) the
concentration of claims in states with laws or jury pools
particularly favorable to plaintiffs; and (e) the potential
that states or the federal government may enact legislation
regarding asbestos litigation reform.
We believe these uncertainties and factors make projections of
these exposures, particularly asbestos, subject to less
predictability relative to non-asbestos and non-environmental
exposures. See Note 10 to the consolidated financial
statements for additional historical information on loss and LAE
reserves for these exposures.
19
In the event that loss trends diverge from expected trends, we
may have to adjust our reserves for loss and LAE accordingly.
Any adjustments will be reflected in the periods in which they
become known, potentially resulting in adverse effects to our
financial results. Management believes that the recorded
estimates represent the best estimate of unpaid losses and LAE
based on the information available at December 31, 2006.
Due to the uncertainty involving estimates of ultimate loss and
LAE, including asbestos and environmental exposures, management
does not attempt to produce a range around its best estimate of
loss.
|
|
|
Historical Loss Reserve Trends |
We have recognized significant increases to estimates for prior
years recorded loss liabilities. Net income was adversely
impacted in the calendar years where reserve estimates relating
to prior years were increased. It is not possible to assure that
adverse development on prior years losses will not occur
in the future. If adverse development does occur in future
years, it may have a material adverse impact on net income.
The Ten Year Analysis of Consolidated Net Losses and Loss
Adjustment Expense Reserve Development Table that follows
presents the development of balance sheet loss and LAE reserves
for calendar years 1996 through 2006. The upper half of the
table shows the cumulative amounts paid during successive years
related to the opening reserve. For example, with respect to the
net loss and LAE reserve of $1,992 million as of
December 31, 1996, by the end of 2006, $1,741 million
had actually been paid in settlement of those reserves. In
addition, as reflected in the lower section of the table, the
original reserve of $1,992 million was re-estimated to be
$2,243 million as of December 31, 2006. This change
from the original estimate would normally result from a
combination of a number of factors, including losses being
settled for different amounts than originally estimated. The
original estimates will also be increased or decreased, as more
information becomes known about the individual claims and
overall claim frequency and severity patterns. The net
deficiency or redundancy depicted in the table, for any
particular calendar year, shows the aggregate change in
estimates over the period of years subsequent to the calendar
year reflected at the top of the respective columns. For
example, the net deficiency of $251 million, which has been
reflected in our consolidated financial statements as of
December 31, 2006, related to December 31,
1996 net loss and LAE reserves of $1,992 million,
represents the cumulative amount by which net reserves for 1996
have developed unfavorably from 1997 through 2006.
Each amount other than the original reserves in the table below
includes the effects of all changes in amounts for prior
periods. For example, if a loss settled in 1999 for $150,000 was
first reserved in 1996 at $100,000 and remained unchanged until
settlement, the $50,000 deficiency (actual loss minus original
estimate) would be included in the cumulative net deficiency in
each of the years in the period 1996 through 1998 shown in the
following table. Conditions and trends that have affected
development of liability in the past may not
20
necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future development based on this
table.
Ten Year Analysis of Consolidated Losses and Loss Adjustment
Expense Reserve Development Table
Presented Net of Reinsurance With Supplemental Gross Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Reserves for unpaid losses and LAE
|
|
$ |
1,992 |
|
|
$ |
2,134 |
|
|
$ |
1,988 |
|
|
$ |
1,831 |
|
|
$ |
1,667 |
|
|
$ |
1,674 |
|
|
$ |
1,864 |
|
|
$ |
2,372 |
|
|
$ |
3,172 |
|
|
$ |
3,911 |
|
|
$ |
4,403 |
|
Paid (cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
457 |
|
|
|
546 |
|
|
|
594 |
|
|
|
609 |
|
|
|
596 |
|
|
|
616 |
|
|
|
602 |
|
|
|
632 |
|
|
|
914 |
|
|
|
787 |
|
|
|
|
|
|
Two years later
|
|
|
837 |
|
|
|
994 |
|
|
|
1,055 |
|
|
|
1,042 |
|
|
|
1,010 |
|
|
|
985 |
|
|
|
999 |
|
|
|
1,213 |
|
|
|
1,298 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
1,142 |
|
|
|
1,342 |
|
|
|
1,353 |
|
|
|
1,333 |
|
|
|
1,276 |
|
|
|
1,296 |
|
|
|
1,424 |
|
|
|
1,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
1,349 |
|
|
|
1,518 |
|
|
|
1,546 |
|
|
|
1,506 |
|
|
|
1,553 |
|
|
|
1,602 |
|
|
|
1,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
1,475 |
|
|
|
1,649 |
|
|
|
1,675 |
|
|
|
1,718 |
|
|
|
1,802 |
|
|
|
1,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
1,586 |
|
|
|
1,756 |
|
|
|
1,828 |
|
|
|
1,901 |
|
|
|
1,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
1,680 |
|
|
|
1,848 |
|
|
|
1,941 |
|
|
|
1,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
1,758 |
|
|
|
1,928 |
|
|
|
1,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
1,820 |
|
|
|
1,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
1,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
2,107 |
|
|
|
2,113 |
|
|
|
2,034 |
|
|
|
1,846 |
|
|
|
1,690 |
|
|
|
1,760 |
|
|
|
1,993 |
|
|
|
2,561 |
|
|
|
3,345 |
|
|
|
4,051 |
|
|
|
|
|
|
Two years later
|
|
|
2,121 |
|
|
|
2,151 |
|
|
|
2,043 |
|
|
|
1,862 |
|
|
|
1,787 |
|
|
|
1,935 |
|
|
|
2,240 |
|
|
|
2,828 |
|
|
|
3,537 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
2,105 |
|
|
|
2,131 |
|
|
|
2,044 |
|
|
|
1,951 |
|
|
|
2,018 |
|
|
|
2,194 |
|
|
|
2,573 |
|
|
|
3,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
2,074 |
|
|
|
2,128 |
|
|
|
2,104 |
|
|
|
2,144 |
|
|
|
2,280 |
|
|
|
2,514 |
|
|
|
2,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
2,066 |
|
|
|
2,169 |
|
|
|
2,246 |
|
|
|
2,332 |
|
|
|
2,581 |
|
|
|
2,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
2,085 |
|
|
|
2,237 |
|
|
|
2,345 |
|
|
|
2,572 |
|
|
|
2,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
2,098 |
|
|
|
2,284 |
|
|
|
2,475 |
|
|
|
2,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
2,133 |
|
|
|
2,372 |
|
|
|
2,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
2,213 |
|
|
|
2,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
2,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency)
|
|
$ |
(251 |
) |
|
$ |
(309 |
) |
|
$ |
(583 |
) |
|
$ |
(871 |
) |
|
$ |
(1,083 |
) |
|
$ |
(1,052 |
) |
|
$ |
(964 |
) |
|
$ |
(678 |
) |
|
$ |
(365 |
) |
|
$ |
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability end of year
|
|
$ |
2,647 |
|
|
$ |
2,894 |
|
|
$ |
2,692 |
|
|
$ |
2,570 |
|
|
$ |
2,566 |
|
|
$ |
2,720 |
|
|
$ |
2,872 |
|
|
$ |
3,400 |
|
|
$ |
4,225 |
|
|
$ |
5,118 |
|
|
$ |
5,142 |
|
Reinsurance recoverables
|
|
|
655 |
|
|
|
760 |
|
|
|
704 |
|
|
|
739 |
|
|
|
899 |
|
|
|
1,046 |
|
|
|
1,008 |
|
|
|
1,028 |
|
|
|
1,053 |
|
|
|
1,207 |
|
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability end of year
|
|
|
1,992 |
|
|
|
2,134 |
|
|
|
1,988 |
|
|
|
1,831 |
|
|
|
1,667 |
|
|
|
1,674 |
|
|
|
1,864 |
|
|
|
2,372 |
|
|
|
3,172 |
|
|
|
3,911 |
|
|
|
4,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated liability at December 31, 2006
|
|
|
3,220 |
|
|
|
3,464 |
|
|
|
3,712 |
|
|
|
3,952 |
|
|
|
4,129 |
|
|
|
4,256 |
|
|
|
4,252 |
|
|
|
4,273 |
|
|
|
4,709 |
|
|
|
5,296 |
|
|
|
|
|
Re-estimated recoverables at December 31, 2006
|
|
|
977 |
|
|
|
1,021 |
|
|
|
1,141 |
|
|
|
1,250 |
|
|
|
1,379 |
|
|
|
1,530 |
|
|
|
1,424 |
|
|
|
1,223 |
|
|
|
1,172 |
|
|
|
1,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated liability at December 31, 2006
|
|
|
2,243 |
|
|
|
2,443 |
|
|
|
2,571 |
|
|
|
2,702 |
|
|
|
2,750 |
|
|
|
2,726 |
|
|
|
2,828 |
|
|
|
3,050 |
|
|
|
3,537 |
|
|
|
4,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative deficiency
|
|
$ |
(573 |
) |
|
$ |
(570 |
) |
|
$ |
(1,020 |
) |
|
$ |
(1,382 |
) |
|
$ |
(1,563 |
) |
|
$ |
(1,536 |
) |
|
$ |
(1,380 |
) |
|
$ |
(873 |
) |
|
$ |
(484 |
) |
|
$ |
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The incurred loss and LAE liability re-estimate for the year
ended December 31, 2006 includes a $140 million
provision for an increase in loss and LAE on prior years.
Through December 31, 2006, the cumulative increases in
estimates of loss on outstanding loss liabilities held at year
end 2004, 2003 and 2002 were $365 million,
$678 million and $964 million, respectively. These
cumulative increases in loss estimates are principally
attributable to U.S. casualty business written in the late
1990s through early 2000s. The U.S. casualty classes of
business include general liability, professional liability and
excess workers compensation. Economic uncertainty,
competitive conditions and the proliferation of claims relating
to bankruptcies and other financial and management improprieties
in the United States during this period contribute to the
difficulty in estimating losses for these years.
21
For calendar years 2002 through 2006, we experienced claim
frequency and severity greater than expectations established
based on a review of the prior years loss trends, for
business written in the period 1997 through 2001. General
liability and excess workers compensation classes of
business during these years were adversely impacted by the
competitive conditions in the industry at that time, affecting
the ability of standard actuarial techniques to generate
reliable estimates of ultimate loss. Professional liability was
impacted by the increase in frequency and severity of claims
relating to bankruptcies and other financial and management
improprieties in the late 1990s through early 2000s.
The liability re-estimate reported for year end 1996 losses and
LAE at December 31, 2006 principally results from increased
reserves for asbestos liabilities and other latent injury damage
claims associated with United States casualty contracts
generally written prior to 1986. These contracts contained terms
that, for us and the industry overall, have been interpreted by
the courts to provide coverage for exposures that were not
contemplated by the original pricing or reserving of the covers.
We believe that the recorded estimates represent the best
estimate of unpaid losses and LAE based on the information
available at December 31, 2006. In the event that loss
trends diverge from expected trends, we may have to adjust our
reserves for loss and LAE accordingly. Any adjustments will be
reflected in the periods in which they become known, potentially
resulting in adverse effects to our financial results.
The following table is derived from the Ten Year Analysis
of Consolidated Net Losses and Loss Adjustment Expense Reserve
Development Table above. It summarizes the effect of
re-estimating prior year loss reserves, net of reinsurance, on
pre-tax income for the latest ten calendar years through
December 31, 2006. Each column represents the calendar year
development by each accident year. For example, in calendar year
2006, the impact of re-estimates of prior year loss reserves
reduced pre-tax income by $139.9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development in Calendar Year | |
|
|
| |
|
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(In millions) | |
|
|
|
|
|
|
|
|
Accident Year Contributing to Loss Reserve Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996 and Prior
|
|
$ |
(114.9 |
) |
|
$ |
(14.2 |
) |
|
$ |
16.0 |
|
|
$ |
30.4 |
|
|
$ |
7.4 |
|
|
$ |
(19.9 |
) |
|
$ |
(12.5 |
) |
|
$ |
(35.5 |
) |
|
$ |
(79.5 |
) |
|
$ |
(30.7 |
) |
|
1997
|
|
|
|
|
|
|
35.6 |
|
|
|
(54.3 |
) |
|
|
(11.0 |
) |
|
|
(5.0 |
) |
|
|
(22.0 |
) |
|
|
(55.0 |
) |
|
|
(10.8 |
) |
|
|
(8.7 |
) |
|
|
(40.8 |
) |
|
1998
|
|
|
|
|
|
|
|
|
|
|
(7.4 |
) |
|
|
(29.6 |
) |
|
|
(4.0 |
) |
|
|
(19.0 |
) |
|
|
(74.0 |
) |
|
|
(52.1 |
) |
|
|
(41.8 |
) |
|
|
(24.5 |
) |
|
1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.7 |
) |
|
|
(15.0 |
) |
|
|
(28.0 |
) |
|
|
(51.0 |
) |
|
|
(89.5 |
) |
|
|
(110.8 |
) |
|
|
(33.9 |
) |
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.5 |
) |
|
|
(9.0 |
) |
|
|
(38.0 |
) |
|
|
(74.6 |
) |
|
|
(59.3 |
) |
|
|
(39.8 |
) |
|
2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.4 |
|
|
|
56.0 |
|
|
|
2.5 |
|
|
|
(19.0 |
) |
|
|
(42.4 |
) |
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46.6 |
|
|
|
12.2 |
|
|
|
(13.8 |
) |
|
|
(42.3 |
) |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57.8 |
|
|
|
66.7 |
|
|
|
32.4 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93.5 |
|
|
|
29.6 |
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Calendar Year Effect on Pre-tax Income Resulting from
Reserve Re-estimation
|
|
$ |
(114.9 |
) |
|
$ |
21.4 |
|
|
$ |
(45.7 |
) |
|
$ |
(15.9 |
) |
|
$ |
(23.1 |
) |
|
$ |
(85.5 |
) |
|
$ |
(127.9 |
) |
|
$ |
(190.0 |
) |
|
$ |
(172.7 |
) |
|
$ |
(139.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant increases in reserves on accident years 1997
through 2002 relate principally to casualty reinsurance written
in the United States in the late 1990s and early 2000s. These
years experienced a proliferation of claims relating to
bankruptcies and corporate improprieties. This resulted in an
increase in the frequency and severity of claims in professional
liability lines. Additionally, general liability and excess
workers compensation classes of business in this period
reflected increasing competitive conditions. These factors have
impacted our ability to estimate loss and LAE for this exposure,
particularly in the 2002 through 2006 calendar year period.
Improvements in competitive conditions and economic environment
beginning in 2001 have resulted in a generally downward trend on
re-estimated reserves for accident years 2003 through 2005.
Initial loss estimates for these more recent accident years did
not fully anticipate the improvements in competitive and
economic conditions achieved since the late 1990s through the
early 2000s.
22
The following table summarizes our provision for unpaid losses
and LAE for the years ended December 31, 2006, 2005 and
2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Gross unpaid losses and LAE, beginning of year
|
|
$ |
5,117.7 |
|
|
$ |
4,224.6 |
|
|
$ |
3,399.5 |
|
Less: ceded unpaid losses and LAE, beginning of year
|
|
|
1,206.8 |
|
|
|
1,052.8 |
|
|
|
1,028.1 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, beginning of year
|
|
|
3,910.9 |
|
|
|
3,171.8 |
|
|
|
2,371.4 |
|
|
|
|
|
|
|
|
|
|
|
Add: Acquisition and disposition of net unpaid losses and LAE
|
|
|
|
|
|
|
|
|
|
|
77.1 |
|
|
|
|
|
|
|
|
|
|
|
Add: Losses and LAE incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,344.3 |
|
|
|
1,888.9 |
|
|
|
1,441.1 |
|
|
Prior years
|
|
|
139.9 |
|
|
|
172.7 |
|
|
|
190.0 |
|
|
|
|
|
|
|
|
|
|
|
Total losses and LAE incurred
|
|
|
1,484.2 |
|
|
|
2,061.6 |
|
|
|
1,631.1 |
|
|
|
|
|
|
|
|
|
|
|
Less: Paid losses and LAE related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
251.3 |
|
|
|
380.7 |
|
|
|
300.3 |
|
|
Prior years
|
|
|
787.3 |
|
|
|
913.7 |
|
|
|
632.4 |
|
|
|
|
|
|
|
|
|
|
|
Total paid losses and LAE
|
|
|
1,038.6 |
|
|
|
1,294.4 |
|
|
|
932.7 |
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes
|
|
|
46.6 |
|
|
|
(28.1 |
) |
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, end of year
|
|
|
4,403.1 |
|
|
|
3,910.9 |
|
|
|
3,171.8 |
|
Add: ceded unpaid losses and LAE, end of year
|
|
|
739.0 |
|
|
|
1,206.8 |
|
|
|
1,052.8 |
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE, end of year
|
|
$ |
5,142.1 |
|
|
$ |
5,117.7 |
|
|
$ |
4,224.6 |
|
|
|
|
|
|
|
|
|
|
|
The above amounts reflect tabular reserving for workers
compensation indemnity reserves that are considered fixed and
determinable. We discount such reserves using an interest rate
of 3.5% and standard mortality assumptions. The amount of loss
reserve discount as of December 31, 2006, 2005 and 2004 was
$95.1 million, $90.3 million and $76.7 million,
respectively.
23
Gross and net development for asbestos and environmental
reserves for the last three calendar years are provided in the
following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Asbestos
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE, beginning of year
|
|
$ |
274.7 |
|
|
$ |
242.2 |
|
|
$ |
216.1 |
|
Add: Gross losses and LAE incurred
|
|
|
62.4 |
|
|
|
54.2 |
|
|
|
54.2 |
|
Less: Gross calendar year paid losses and LAE
|
|
|
28.4 |
|
|
|
21.7 |
|
|
|
28.1 |
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE, end of year
|
|
$ |
308.7 |
|
|
$ |
274.7 |
|
|
$ |
242.2 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, beginning of year
|
|
$ |
119.3 |
|
|
$ |
82.7 |
|
|
$ |
52.7 |
|
Add: Net losses and LAE incurred
|
|
|
27.1 |
|
|
|
41.2 |
|
|
|
30.0 |
|
Less: Net calendar year paid losses and LAE
|
|
|
(42.6 |
) |
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, end of year
|
|
$ |
189.0 |
|
|
$ |
119.3 |
|
|
$ |
82.7 |
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE, beginning of year
|
|
$ |
40.4 |
|
|
$ |
29.9 |
|
|
$ |
33.3 |
|
Add: Gross losses and LAE incurred
|
|
|
(0.6 |
) |
|
|
9.7 |
|
|
|
2.8 |
|
Less: Gross calendar year paid losses and LAE
|
|
|
3.9 |
|
|
|
(0.8 |
) |
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE, end of year
|
|
$ |
35.9 |
|
|
$ |
40.4 |
|
|
$ |
29.9 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, beginning of year
|
|
$ |
13.5 |
|
|
$ |
16.3 |
|
|
$ |
37.4 |
|
Add: Net losses and LAE incurred
|
|
|
(2.2 |
) |
|
|
(0.9 |
) |
|
|
(21.1 |
) |
Less: Net calendar year paid losses and LAE
|
|
|
(15.4 |
) |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE, end of year
|
|
$ |
26.7 |
|
|
$ |
13.5 |
|
|
$ |
16.3 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred for asbestos
claims increased $27.1 million for the year ended
December 31, 2006. Included in this increase is a net
reserve increase of $40.6 million, a $17.3 million
benefit resulting from the amortization of the deferred gain
related to the 1995 Stop Loss Agreement and a loss of
$3.8 million related to the commutation of this agreement.
Also as a result of this commutation, net reserves were
increased by $49.9 million and net paid losses were
decreased by $63.4 million.
Net losses and loss adjustment expenses incurred for
environmental claims decreased $2.2 million for the year
ended December 31, 2006. Included in this reduction is a
net reserve decrease of $0.3 million, a $3.1 million
benefit resulting from the amortization of the deferred gain
related to the 1995 Stop Loss Agreement and a loss of
$1.2 million related to the commutation of this agreement.
Also as a result of this commutation, net reserves were
increased by $17.3 million and net paid losses were
decreased by $19.2 million.
Our survival ratio for asbestos and environmental-related
liabilities as of December 31, 2006 is 11 years. Our
underlying survival ratio for asbestos-related liabilities is
11 years and for environmental-related liabilities is
18 years. The survival ratio represents the asbestos and
environmental reserves, net of reinsurance, on December 31,
2006, divided by the average paid asbestos and environmental
claims for the last three years of $19.3 million, which is
net of reinsurance (see Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Reinsurance and
Retrocessions).
Investments
As of December 31, 2006, we held cash and investments
totaling $7.1 billion, with a net unrealized gain of
$36.0 million, before taxes. Our overall strategy is to
maximize the total return of the investment portfolio, while
prudently preserving invested capital and providing sufficient
liquidity for the payment of claims and other policy obligations.
24
Our investment guidelines stress preservation of capital, market
liquidity, diversification of risk and a long-term,
value-oriented strategy. We seek to invest in securities that we
believe are selling below their intrinsic value, in order to
protect capital from loss and generate above-average, long term
total returns.
No attempt is made to forecast the economy, the future level of
interest rates or the stock market. Equities are selected on the
basis of selling prices which are at a discount to their
estimated intrinsic values. Downside protection is obtained by
seeking a margin of safety in terms of a sound financial
position. Fixed income securities are selected on the basis of
yield spreads over Treasury bonds, subject to stringent credit
analysis. Securities meeting these criteria may not be readily
available, in which case Treasury bonds are emphasized.
Notwithstanding the foregoing, our investments are subject to
market risks and fluctuations, as well as to risks inherent in
particular securities.
As part of our review and monitoring process, we regularly test
the impact of a simultaneous substantial reduction in common
stock, preferred stock, and bond prices on our capital to ensure
that capital adequacy will be maintained at all times.
The investment portfolio is structured to provide a high level
of liquidity. The table below shows the aggregate amounts of
investments in fixed income securities, equity securities, cash
and cash equivalents and other invested assets comprising our
portfolio of invested assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
$ | |
|
% of Total | |
|
$ | |
|
% of Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Fixed income securities, at fair value
|
|
$ |
3,501.6 |
|
|
|
49.6 |
% |
|
$ |
2,594.9 |
|
|
|
43.5 |
% |
Equity securities, at fair value
|
|
|
607.6 |
|
|
|
8.6 |
|
|
|
601.7 |
|
|
|
10.1 |
|
Equity securities, at equity
|
|
|
245.4 |
|
|
|
3.5 |
|
|
|
567.0 |
|
|
|
9.5 |
|
Cash, cash equivalents and short-term investments
|
|
|
2,304.1 |
|
|
|
32.6 |
|
|
|
1,727.9 |
|
|
|
28.9 |
|
Other invested assets
|
|
|
165.2 |
|
|
|
2.3 |
|
|
|
238.1 |
|
|
|
4.0 |
|
Cash collateral for borrowed securities
|
|
|
242.2 |
|
|
|
3.4 |
|
|
|
240.7 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and invested assets
|
|
$ |
7,066.1 |
|
|
|
100.0 |
% |
|
$ |
5,970.3 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, our fixed income securities had a
dollar weighted average rating of AA, as measured by
Standard & Poors, and an average yield to
maturity, based on market values, of 5.1% before investment
expenses. As of December 31, 2006 the duration of our fixed
income securities was 7.7 years. Including short-term
investments, cash and cash equivalents, the duration was
4.7 years.
Market Sensitive Instruments. Our investment portfolio
includes investments that are subject to changes in market
values, such as changes in interest rates. The aggregate
hypothetical loss generated from an immediate adverse parallel
shift in the treasury yield curve of 100 or 200 basis
points would cause a decrease in total return of 7.3% and 13.6%,
respectively, which equates to a decrease in market value of
$255.4 million and $475.3 million, respectively, on a
fixed income portfolio valued at $3.5 billion as of
December 31, 2006. The foregoing reflects the use of an
immediate time horizon, since this presents the worst-case
scenario. Credit spreads are assumed to remain constant in these
hypothetical examples.
25
The following table summarizes the fair value of our investments
(other than common stocks at equity and other invested assets)
at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, | |
|
|
| |
Type of Investment |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
United States government, government agencies and authorities
|
|
$ |
2,517.4 |
|
|
$ |
1,568.8 |
|
States, municipalities and political subdivisions
|
|
|
181.0 |
|
|
|
184.2 |
|
Foreign governments
|
|
|
441.5 |
|
|
|
367.5 |
|
All other corporate
|
|
|
361.7 |
|
|
|
474.4 |
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
3,501.6 |
|
|
|
2,594.9 |
|
Common stocks, at fair value
|
|
|
607.6 |
|
|
|
601.7 |
|
Short-term investments
|
|
|
242.3 |
|
|
|
199.5 |
|
Cash collateral for borrowed securities
|
|
|
242.1 |
|
|
|
240.7 |
|
Cash and cash equivalents
|
|
|
2,061.8 |
|
|
|
1,528.4 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,655.4 |
|
|
$ |
5,165.2 |
|
|
|
|
|
|
|
|
The following table summarizes the fair value by contractual
maturities of our fixed income securities at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions) | |
Due in less than one year
|
|
$ |
43.3 |
|
|
$ |
165.7 |
|
Due after one through five years
|
|
|
1,080.5 |
|
|
|
295.1 |
|
Due after five through ten years
|
|
|
566.1 |
|
|
|
211.8 |
|
Due after ten years
|
|
|
1,811.7 |
|
|
|
1,922.3 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,501.6 |
|
|
$ |
2,594.9 |
|
|
|
|
|
|
|
|
The contractual maturities reflected above may differ from the
actual maturities due to the existence of call or put features.
As of December 31, 2006 and 2005, approximately 3% and 10%,
respectively, of the fixed income securities shown above had a
call feature which, at the issuers option, allowed the
issuer to repurchase the securities on one or more dates prior
to their maturity. As of December 31, 2006 and 2005,
approximately 4% and 5%, respectively, of the fixed income
securities shown above had a put feature, which, if exercised at
our option, would require the issuer to repurchase the
investments on one or more dates prior to their maturity. For
the investments shown above, if the call feature or put feature
is exercised, the actual maturities will be shorter than the
contractual maturities shown above. In the case of securities
that are subject to early call by the issuer, the actual
maturities will be the same as the contractual maturities shown
above if the issuer does not exercise its call feature. In the
case of securities containing put features, the actual
maturities will be the same as the contractual maturities shown
above if the investor elects not to exercise its put feature,
but to hold the securities to their final maturity dates.
26
Quality of Debt Securities in Portfolio. The following
table summarizes the composition of the fair value of our fixed
income securities portfolio at the dates indicated by rating as
assigned by Standard & Poors or Moodys,
using the higher of these ratings for any security where there
is a split rating.
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, | |
|
|
| |
Rating |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
AAA/ Aaa
|
|
|
85.6 |
% |
|
|
76.2 |
% |
AA/ Aa2
|
|
|
3.9 |
|
|
|
5.3 |
|
BBB/ Baa2
|
|
|
|
|
|
|
0.2 |
|
BB/ Ba2
|
|
|
0.3 |
|
|
|
4.8 |
|
B/ B2
|
|
|
0.4 |
|
|
|
0.9 |
|
CCC/ Caa or lower, or not rated
|
|
|
9.8 |
|
|
|
12.6 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
As of December 31, 2006, 10.5% of our fixed income
securities were rated BB/ Ba2 or lower, compared to 18.3% as of
December 31, 2005. We sold certain non investment grade
securities during 2006. In addition, during 2006, we increased
our holdings in investment grade fixed income securities.
Ratings
The Company and its subsidiaries are assigned financial strength
(insurance) and credit ratings from internationally
recognized rating agencies, which include A.M. Best Company,
Inc., Standard & Poors Insurance Rating Services
and Moodys Investors Service. Financial strength ratings
represent the opinions of the rating agencies of the financial
strength of a company and its capacity to meet the obligations
of insurance and reinsurance contracts. The rating agencies
consider many factors in determining the financial strength
rating of an insurance or reinsurance company, including the
relative level of statutory surplus necessary to support the
business operations of the company.
These ratings are used by insurers, reinsurers and
intermediaries as an important means of assessing the financial
strength and quality of reinsurers and insurers. The financial
strength ratings of our principal operating subsidiaries are:
A.M. Best: A (Excellent), Standard &
Poors: A- (Stable), and Moodys:
A3 (Stable).
Our senior unsecured debt is currently rated BBB- by
Standard & Poors, Baa3 by
Moodys and bbb by A.M. Best. Our Series A
and Series B preferred shares are currently rated
BB by Standard & Poors,
Ba2 by Moodys and bb+ by A.M. Best.
Following our announcement on March 16, 2006 that the
filing of our annual report on
Form 10-K would be
delayed in connection with the restatement of our consolidated
financial statements, Standard & Poors placed on
CreditWatch with negative implications our
counterparty credit, senior unsecured debt and preferred stock
ratings and the financial strength ratings of our principal
operating subsidiaries. In addition, Moodys revised from
stable to negative the outlook for our
senior debt and preferred stock and the insurance financial
strength ratings of our principal operating subsidiaries.
Further, A.M. Best placed under review with negative
implications our debt ratings and the financial strength
ratings of our principal operating subsidiaries. Following the
March 31, 2006 filing of our Annual Report on
Form 10-K,
Standard & Poors, Moodys and A.M. Best
Company removed our ratings from CreditWatch with negative
implications, negative outlook and under
review with negative implications, respectively, and
affirmed the financial strength ratings of our principal
operating subsidiaries at A- (Strong),
A3 (Good Financial Security) and A
(Excellent), respectively.
On July 28, 2006, Standard & Poors placed
several of its ratings of Fairfax and its subsidiaries on
CreditWatch with negative implications. The ratings
on CreditWatch included our BBB- counterparty credit
ratings, and our A- counterparty credit and
financial strength ratings of our subsidiaries. On
October 25, 2006, we were removed from Standard &
Poors CreditWatch with negative implications.
Our A- counterparty credit and financial strength
ratings of our subsidiaries were confirmed and placed on outlook
negative. Our BBB- counterparty credit rating and
BB preferred stock ratings were also confirmed and
placed on outlook
27
negative. On December 19, 2006, Standard &
Poors revised its outlook on us to stable from
negative and affirmed our subsidiaries
A- counterparty credit and financial strength
ratings, as well as our BBB- counterparty credit
rating.
Marketing
We provide property and casualty reinsurance capacity in the
United States market primarily through brokers, and in
international markets through brokers and directly to insurers
and reinsurers. We focus our marketing on potential clients and
brokers that have the ability and expertise to provide the
detailed and accurate underwriting information we need to
properly evaluate each piece of business. Further, we seek
relationships with new clients that will further diversify our
existing book of business without sacrificing our underwriting
discipline.
We believe that the willingness of a primary insurer or
reinsurer to use a specific reinsurer is not based solely on
pricing. Other factors include the clients perception of
the reinsurers financial security, its claims-paying
ability ratings, its ability to design customized products to
serve the clients needs, the quality of its overall
service, and its commitment to provide the client with
reinsurance capacity. We believe we have developed a reputation
with our clients for prompt response on underwriting submissions
and timely claims payments. Additionally, we believe our level
of capital and surplus demonstrates our strong financial
position and intent to continue providing reinsurance capacity.
The reinsurance broker market consists of several significant
national and international brokers and a number of smaller
specialized brokers. Brokers do not have the authority to bind
us with respect to reinsurance agreements, nor do we commit in
advance to accept any portion of the business that brokers
submit. Brokerage fees generally are paid by reinsurers and are
included as an underwriting expense in the consolidated
financial statements. Our five largest reinsurance brokers
accounted for an aggregate of 61.8% of our reinsurance gross
premiums written in 2006.
Direct distribution is an important channel for us in the
overseas markets served by the Latin America unit of the
Americas division and the EuroAsia division. Direct placement of
reinsurance enables us to access clients who prefer to place
their reinsurance directly with their reinsurers based upon the
reinsurers in-depth understanding of the ceding
companys needs.
Our primary insurance business generated through the
U.S. Insurance division is written principally through
national and regional agencies and brokers, as well as through
general agency relationships. Newlines primary market
business is written through agency and direct distribution
channels.
28
The following table shows our gross premiums written, by
distribution source, for the year ended December 31, 2006
(in millions).
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
December 31, 2006 | |
|
|
| |
|
|
$ | |
|
% | |
|
|
| |
|
| |
Aon Corporation
|
|
$ |
320.5 |
|
|
|
13.7 |
% |
Guy Carpenter & Co., Inc.
|
|
|
316.4 |
|
|
|
13.5 |
|
Willis Group
|
|
|
174.7 |
|
|
|
7.5 |
|
Benfield Group Limited
|
|
|
149.0 |
|
|
|
6.4 |
|
HRH Reinsurance Brokers, Ltd.
|
|
|
43.5 |
|
|
|
1.9 |
|
Other brokers
|
|
|
389.3 |
|
|
|
16.6 |
|
|
|
|
|
|
|
|
|
Total brokers
|
|
|
1,393.4 |
|
|
|
59.6 |
|
Direct
|
|
|
230.2 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
Total reinsurance
|
|
|
1,623.6 |
|
|
|
69.5 |
|
U.S. Insurance
|
|
|
509.6 |
|
|
|
21.8 |
|
Newline
|
|
|
202.5 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,335.7 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
Competition
The worldwide property and casualty reinsurance business is
highly competitive. Our competitors include independent
reinsurance companies, subsidiaries or affiliates of established
worldwide insurance companies, reinsurance departments of
certain primary insurance companies, and domestic and European
underwriting syndicates. Some of these competitors have longer
operating histories, larger capital bases and greater
underwriting, marketing, and administrative resources than
OdysseyRe.
Globally, the competitive marketplace of the 1990s resulted in
decreasing prices and broadening contract terms. Poor financial
results associated with those years, compounded by the
September 11, 2001 terrorist attack, resulted in changes in
management and ownership of several reinsurers, with some
competitors withdrawing from key markets. Improving trends,
which became apparent in 2001 and continued through 2004 for
nearly all classes, began to moderate considerably for certain
classes of business in 2005. Casualty lines, while still
providing adequate returns, began to see more challenging market
conditions in 2005 and continued to remain under pressure
throughout 2006. Casualty reinsurance business is experiencing
softening market conditions as insurers continue to increase
retentions and begin to encounter competitive pricing pressures.
Property catastrophe reinsurance rates, on the other hand, saw
the pricing pressures of 2005 reverse course following the 2005
storms (Hurricanes Katrina, Rita and Wilma) as rates increased
meaningfully in 2006. As property catastrophe reinsurance prices
increased throughout 2006, both property insurers and reinsurers
increased their retentions as a result.
In 2006, as previously mentioned, our U.S. property
reinsurance book experienced significant rate increases and
improving terms and conditions. The 2005 storms caused a
reevaluation of catastrophe risk pricing and monitoring across
the industry, driven by the rating agencies increased
capital requirements. With early predictions for an active
Atlantic hurricane season, a supply/demand imbalance caused
pricing to increase substantially and the industry to welcome an
influx of new capital in the first six months of 2006. Property
business impacted by the 2005 storms experienced the most
significant price increases, while regions and classes of
business not affected by the storms saw more moderate rate
increases. The largest rate increases occurred in wind-exposed
property business located in the Southeast United States and the
Gulf of Mexico, as well as offshore. The influx of new capital
was utilized in the peak catastrophe zones impacted most by the
2005 storms. As a result of the lack of storm activity in 2006,
many market participants, both insurers and reinsurers, recorded
record profits. Insurers continue to retain more business as
balance sheets strengthen and reinsurance pricing remains at
adequate levels. Reinsurers continue to refine their catastrophe
portfolios in light of the increased
29
capital requirements by the rating agencies and the revised
catastrophe models. Offsetting these increased capital
requirements will be the impact of the recently passed insurance
reform in Florida, which will likely result in the reallocation
of capital that was previously used to support Florida based
exposures. The Florida reform increases the availability of
reinsurance protection from the state-owned reinsurer (Florida
Hurricane Catastrophe Fund) and thereby will likely reduce the
amount of reinsurance purchased from the private market.
With the large profits earned in 2006 and the resulting
improvement in capital positions of industry participants, in
addition to the influx of new capital, we anticipate the rate of
price increases on property and property catastrophe reinsurance
business to moderate and possibly even decline in 2007 on select
exposures. Casualty reinsurance pricing is expected to remain
disciplined, with prices moderating in select lines. We believe
there are lines of business where current rates should provide
acceptable returns. The competitive landscape is still evolving
and the depth and breadth of market changes for the balance of
2007 remain uncertain.
United States insurance companies that are licensed to
underwrite insurance are also licensed to underwrite
reinsurance, making the commercial access into the reinsurance
business relatively uncomplicated. In addition, Bermuda
reinsurers that initially specialized in catastrophe reinsurance
are now broadening their product offerings. The potential for
securitization of reinsurance and insurance risks through
capital markets provides an additional source of potential
competition.
In our primary insurance business, we face competition from
independent insurance companies, subsidiaries or affiliates of
major worldwide companies and others, some of which have greater
financial and other resources than we do. Primary insurers
compete on the basis of various factors including distribution
channels, product, price, service, financial strength and
reputation. Throughout 2006 the specialty insurance marketplace
continued to grow more competitive as more participants looked
to either enter the market or increase their existing presence.
We expect the competitiveness to continue throughout 2007 as
results continue to be strong, balance sheets strengthen, and
participants compete aggressively for business. We continue to
see a positive flow of business in those states and business
lines we have chosen to target.
We also face competition from Lloyds syndicates, larger
multi-national insurance groups, and alternative risk management
programs. Pricing is a primary means of competition in the
specialty insurance and reinsurance business. We are committed
to maintaining our underwriting standards and as a result, our
premium volume will vary based on existing market conditions.
Employees
As of December 31, 2006, we had 610 employees. We believe
our relationship with our employees is satisfactory.
Regulatory Matters
We are subject to regulation under the insurance statutes,
including insurance holding company statutes, of various
jurisdictions, including Connecticut, the domiciliary state of
Odyssey America; Delaware, the domiciliary state of Clearwater,
Hudson and Clearwater Select; New York, the domiciliary state of
Hudson Specialty; and the United Kingdom, the domiciliary
jurisdiction of Newline. Newline is also subject to regulation
by the Council of Lloyds. In addition, we are subject to
regulation by the insurance regulators of other states and
foreign jurisdictions in which we or our operating subsidiaries
do business.
|
|
|
Regulation of Insurers and Reinsurers |
The terms and conditions of reinsurance agreements with respect
to rates or policy terms generally are not subject to regulation
by any governmental authority. This contrasts with primary
insurance policies and agreements issued by primary insurers
such as Hudson, the rates and policy terms of which are
generally regulated closely by state insurance departments. As a
practical matter, however, the rates charged by primary insurers
influence the rates that can be charged by reinsurers.
30
Our reinsurance operations are subject primarily to regulation
and supervision that relates to licensing requirements of
reinsurers, the standards of solvency that reinsurers must meet
and maintain, the nature of and limitations on investments,
restrictions on the size of risks that may be reinsured, the
amount of security deposits necessary to secure the faithful
performance of a reinsurers insurance obligations, methods
of accounting, periodic examinations of the financial condition
and affairs of reinsurers, the form and content of any financial
statements that reinsurers must file with state insurance
regulators and the level of minimal reserves necessary to cover
unearned premiums, losses and other purposes. In general, these
regulations are designed to protect ceding insurers and,
ultimately, their policyholders, rather than shareholders. We
believe that we and our subsidiaries are in material compliance
with all applicable laws and regulations pertaining to our
business and operations.
|
|
|
Insurance Holding Company Regulation |
State insurance holding company statutes provide a regulatory
apparatus which is designed to protect the financial condition
of domestic insurers operating within a holding company system.
All holding company statutes require disclosure and, in some
instances, prior approval of significant transactions between
the domestic insurer and an affiliate. Such transactions
typically include service arrangements, sales, purchases,
exchanges, loans and extensions of credit, reinsurance
agreements, and investments between an insurance company and its
affiliates, in some cases involving certain aggregate
percentages of a companys admitted assets or
policyholders surplus, or dividends that exceed certain
percentages. State regulators also require prior notice or
regulatory approval of acquisitions of control of an insurer or
its holding company.
Under the Connecticut, Delaware and New York Insurance laws and
regulations, no person, corporation or other entity may acquire
control of us or our operating subsidiaries unless such person,
corporation or entity has obtained the prior approval of the
Connecticut, Delaware and/or New York insurance commissioner or
commissioners, as the case may be, for the acquisition. For the
purposes of the Connecticut, Delaware and New York Insurance
laws, any person acquiring, directly or indirectly, 10% or more
of the voting securities of an insurance company is presumed to
have acquired control of that company. To obtain the
approval of any acquisition of control, any prospective acquirer
must file an application with the relevant insurance
commissioner. This application requires the acquirer to disclose
its background, financial condition, the financial condition of
its affiliates, the source and amount of funds by which it will
effect the acquisition, the criteria used in determining the
nature and amount of consideration to be paid for the
acquisition, proposed changes in the management and operations
of the insurance company and any other related matters.
The United Kingdom Financial Services Authority also requires an
insurance company or reinsurance company that carries on
business through a permanent establishment in the United
Kingdom, but which is incorporated outside the United Kingdom,
to notify it of any person becoming or ceasing to be a
controller or of a controller becoming a parent undertaking. Any
company or individual that holds 10% or more of the shares in
the insurance company or reinsurance company or its parent
undertaking, or is able to exercise significant influence over
the management of the insurance company or reinsurance company
or its parent undertaking through such shareholding, or is
entitled to exercise or control the exercise of 10% or more of
the voting power at any general meeting of the insurance company
or reinsurance company or of its parent undertaking, or is able
to exercise significant influence over the management of the
insurance company or reinsurance company or its parent
undertaking as a result of its voting power is a
controller. A purchaser of 10% or more of our
outstanding common shares will be a controller of
Odyssey America, which is authorized to carry on reinsurance
business in the United Kingdom through the London branch. Other
than our subsidiaries in the London market division, none of our
other insurance or reinsurance subsidiaries is authorized to
carry on business in the United Kingdom.
Under the byelaws made by Lloyds pursuant to the
Lloyds Act of 1982, the prior written approval of the
Franchise Board established by the Council of Lloyds is
required of anyone proposing to become a controller
of any Lloyds Managing Agent. Any company or individual
that holds 10% or more of the shares in the managing agent
company or its parent undertaking, or is able to exercise
significant influence over the management of the managing agent
or its parent undertaking through such shareholding, or is
entitled to exercise or control the exercise of 10% or more of
the voting power at any general meeting of the Lloyds
Managing Agent or its parent undertaking, or exercise
significant influence over its management or that of its parent
31
undertaking as a result of voting power is a
controller. A purchaser of more than 10% of our
outstanding common shares will be a controller of
the United Kingdom Lloyds Managing Agent subsidiary,
Newline.
The requirements under the Connecticut, Delaware and New York
insurance laws and the United Kingdom Financial Services
Authoritys rules (and other applicable states and foreign
jurisdictions), and the rules of the Council of Lloyds,
may deter, delay or prevent certain transactions affecting the
control or ownership of our common shares, including
transactions that could be advantageous to our shareholders.
Because our operations are conducted primarily at the subsidiary
level, we are dependent upon dividends from our subsidiaries to
meet our debt and other obligations and to declare and pay
dividends on our common shares in the future should our Board of
Directors decide to do so. The payment of dividends to us by our
operating subsidiaries is subject to limitations imposed by law
in Connecticut, Delaware, New York and the United Kingdom.
Under the Connecticut and Delaware Insurance Codes, before a
Connecticut or Delaware domiciled insurer, as the case may be,
may pay any dividend it must have given notice within five days
following the declaration thereof and 10 days prior to the
payment thereof to the Connecticut or Delaware Insurance
Commissioners, as the case may be. During this
10-day period, the
Connecticut or Delaware Insurance Commissioner, as the case may
be, may, by order, limit or disallow the payment of ordinary
dividends if he or she finds the insurer to be presently or
potentially in financial distress. Under Connecticut and
Delaware Insurance Regulations, the Insurance Commissioner may
issue an order suspending or limiting the declaration or payment
of dividends by an insurer if he or she determines that the
continued operation of the insurer may be hazardous to its
policyholders. A Connecticut domiciled insurer may only pay
dividends out of earned surplus, defined as the
insurers unassigned funds surplus reduced by
25% of unrealized appreciation in value or revaluation of assets
or unrealized profits on investments, as defined in such
insurers annual statutory financial statement. A Delaware
domiciled insurer may only pay cash dividends from the portion
of its available and accumulated surplus funds derived from
realized net operating profits and realized capital gains.
Additionally, a Connecticut or Delaware domiciled insurer may
not pay any extraordinary dividend or distribution
until (i) 30 days after the insurance commissioner has
received notice of a declaration of the dividend or distribution
and has not within that period disapproved the payment or
(ii) the insurance commissioner has approved the payment
within the 30-day
period. Under the Connecticut insurance laws, an
extraordinary dividend of a property and casualty
insurer is a dividend, the amount of which, together with all
other dividends and distributions made in the preceding
12 months, exceeds the greater of (i) 10% of the
insurers surplus with respect to policyholders as of the
end of the prior calendar year or (ii) the insurers
net income for the prior calendar year (not including pro rata
distributions of any class of the insurers own
securities). The Connecticut Insurance Department has stated
that the preceding
12-month period ends
the month prior to the month in which the insurer seeks to pay
the dividend. Under the Delaware insurance laws, an
extraordinary dividend of a property and casualty
insurer is a dividend, the amount of which, together with all
other dividends and distributions made in the preceding
12 months, exceeds the greater of (i) 10% of an
insurers surplus with respect to policyholders, as of the
end of the prior calendar year or (ii) the insurers
statutory net income, not including realized capital gains, for
the prior calendar year. Under these definitions, the maximum
amount that will be available for the payment of dividends by
Odyssey America for the year ending December 31, 2007
without requiring prior approval of regulatory authorities is
$561.7 million.
New York law provides that an insurer domiciled in New York must
obtain the prior approval of the state insurance commissioner
for the declaration or payment of any dividend that, together
with dividends declared or paid in the preceding 12 months,
exceeds the lesser of (i) 10% of policyholders
surplus, as shown by its last statement on file with the New
York Insurance Department and (ii) adjusted net investment
income (which does not include realized gains or losses) for the
preceding 12-month
period. Adjusted net investment income includes a carryforward
of undistributed net investment income for two years. Such
declaration or payment is further limited by earned surplus, as
determined in accordance with statutory accounting practices
prescribed or permitted in New York. Under New York law, an
insurer domiciled in New York may not pay dividends to
shareholders except out of earned surplus, which in
this case is defined as the portion of the surplus that
32
represents the net earnings, gains or profits, after the
deduction of all losses, that have not been distributed to the
shareholders as dividends or transferred to stated capital or
capital surplus or applied to other purposes permitted by law
but does not include unrealized appreciation of assets.
United Kingdom law prohibits any United Kingdom company,
including Newline, from declaring a dividend to its shareholders
unless such company has profits available for
distribution, which, in summary, are accumulated realized
profits less accumulated realized losses. The determination of
whether a company has profits available for distribution must be
made by reference to accounts that comply with the requirements
of the Companies Act 1985. While there are no statutory
restrictions imposed by the United Kingdom insurance regulatory
laws upon an insurers ability to declare dividends,
insurance regulators in the United Kingdom strictly control the
maintenance of each insurance companys solvency margin
within their jurisdiction and may restrict an insurer from
declaring a dividend beyond a level that the regulators
determine would adversely affect an insurers solvency
requirements. It is common practice in the United Kingdom to
notify regulators in advance of any significant dividend payment.
|
|
|
Credit for Reinsurance and Licensing |
A primary insurer ordinarily will enter into a reinsurance
agreement only if it can obtain credit for the reinsurance ceded
on its statutory financial statements. In general, credit for
reinsurance is allowed in the following circumstances:
(1) if the reinsurer is licensed in the state in which the
primary insurer is domiciled or, in some instances, in certain
states in which the primary insurer is licensed; (2) if the
reinsurer is an accredited or otherwise approved
reinsurer in the state in which the primary insurer is domiciled
or, in some instances, in certain states in which the primary
insurer is licensed; (3) in some instances, if the
reinsurer (a) is domiciled in a state that is deemed to
have substantially similar credit for reinsurance standards as
the state in which the primary insurer is domiciled and
(b) meets certain financial requirements; or (4) if
none of the above apply, to the extent that the reinsurance
obligations of the reinsurer are collateralized appropriately,
typically through the posting of a letter of credit for the
benefit of the primary insurer or the deposit of assets into a
trust fund established for the benefit of the primary insurer.
Therefore, as a result of the requirements relating to the
provision of credit for reinsurance, we are indirectly subject
to certain regulatory requirements imposed by jurisdictions in
which ceding companies are licensed.
State insurance laws contain rules governing the types and
amounts of investments that are permissible for domiciled
insurers. These rules are designed to ensure the safety and
liquidity of an insurers investment portfolio. Investments
in excess of statutory guidelines do not constitute
admitted assets (i.e., assets permitted by insurance
laws to be included in a domestic insurers statutory
financial statements) unless special approval is obtained from
the regulatory authority. Non-admitted assets are not considered
for the purposes of various financial ratios and tests,
including those governing solvency and the ability to write
premiums. An insurer may hold an investment authorized under
more than one provision of the insurance laws under the
provision of its choice (except as otherwise expressly provided
by law).
The liquidation of insurance companies, including reinsurers, is
generally conducted pursuant to state insurance law. In the
event of the liquidation of one of our operating insurance
subsidiaries, liquidation proceedings would be conducted by the
insurance regulator of the state in which the subsidiary is
domiciled, as the domestic receiver of its properties, assets
and business. Liquidators located in other states (known as
ancillary liquidators) in which we conduct business may have
jurisdiction over assets or properties located in such states
under certain circumstances. Under Connecticut, Delaware and New
York law, all creditors of our operating insurance subsidiaries,
including but not limited to reinsureds under their reinsurance
agreements, would be entitled to payment of their allowed claims
in full from the assets of the operating subsidiaries before we,
as a shareholder of our operating subsidiaries, would be
entitled to receive any distribution.
33
Some states have adopted and others are considering legislative
proposals that would authorize the establishment of an
interstate compact concerning various aspects of insurer
insolvency proceedings, including interstate governance of
receiverships and guaranty funds.
|
|
|
The National Association of Insurance Commissioners
(NAIC) and Accreditation |
The NAIC is an organization that assists state insurance
supervisory officials in achieving insurance regulatory
objectives, including the maintenance and improvement of state
regulation. From time to time various regulatory and legislative
changes have been proposed in the insurance industry, some of
which could have an effect on reinsurers. The NAIC has
instituted its Financial Regulation Standards and
Accreditation Program (FRSAP) in response to federal
initiatives to regulate the business of insurance. FRSAP
provides a set of standards designed to establish effective
state regulation of the financial condition of insurance
companies. Under FRSAP, a state must adopt certain laws and
regulations, institute required regulatory practices and
procedures, and have adequate personnel to enforce such items in
order to become an accredited state. If a state is
not accredited, accredited states are not able to accept certain
financial examination reports of insurers prepared solely by the
regulatory agency in such unaccredited state. Connecticut and
Delaware are accredited under FRSAP. New York, Hudson
Specialtys state of domicile, is not accredited under
FRSAP. There can be no assurance that, should New York remain
unaccredited, other states that are accredited will continue to
accept financial examination reports prepared solely by New
York. We do not believe that the refusal by an accredited state
to accept financial examination reports prepared by New York,
should that occur, would have a material adverse impact on our
insurance businesses.
|
|
|
Risk-Based Capital Requirements |
In order to enhance the regulation of insurer solvency, the NAIC
has adopted a formula and model law to implement risk-based
capital requirements for property and casualty insurance
companies. Connecticut, Delaware and New York have each adopted
risk-based capital legislation for property and casualty
insurance and reinsurance companies that is similar to the NAIC
risk-based capital requirement. These risk-based capital
requirements are designed to assess capital adequacy and to
raise the level of protection that statutory surplus provides
for policyholder obligations. The risk-based capital model for
property and casualty insurance companies measures three major
areas of risk facing property and casualty insurers:
(1) underwriting, which encompasses the risk of adverse
loss development and inadequate pricing; (2) declines in
asset values arising from credit risk; and (3) declines in
asset values arising from investment risks. Insurers having less
statutory surplus than required by the risk-based capital
calculation will be subject to varying degrees of company or
regulatory action, depending on the level of capital inadequacy.
The surplus levels (as calculated for statutory annual statement
purposes) of our operating insurance companies are above the
risk-based capital thresholds that would require either company
or regulatory action.
|
|
|
Codification of Statutory Accounting Principles |
The NAIC adopted the Codification of Statutory Accounting
Principles (Codification) which is intended to
standardize regulatory accounting and reporting for the
insurance industry. The Codification provides guidance for areas
where statutory accounting has been silent and changes current
statutory accounting in some areas. However, statutory
accounting principles will continue to be established by
individual state laws and permitted practices. The states of
Connecticut and Delaware have adopted the Codification. New York
has adopted the Codification, with certain modifications to
reflect provisions required by New York law or policy.
|
|
|
Guaranty Funds and Shared Markets |
Our operating subsidiaries that write primary insurance are
required to be members of guaranty associations in each state in
which they write business. These associations are organized to
pay covered claims (as defined and limited by various guaranty
association statutes) under insurance policies issued by primary
insurance companies that have become insolvent. These state
guaranty funds make assessments against member insurers to
obtain the funds necessary to pay association covered claims.
New York has a pre-assessment guaranty fund, which makes
assessments prior to the occurrence of an insolvency, in
contrast with other states, which make assessments after
34
an insolvency takes place. In addition, primary insurers are
required to participate in mandatory property and casualty
shared market mechanisms or pooling arrangements that provide
various coverages to individuals or other entities that are
otherwise unable to purchase such coverage in the commercial
insurance marketplace. Our operating subsidiaries
participation in such shared markets or pooling mechanisms is
generally proportionate to the amount of direct premiums written
in respect of primary insurance for the type of coverage written
by the applicable pooling mechanism.
|
|
|
Legislative and Regulatory Proposals |
From time to time various regulatory and legislative changes
have been proposed in the insurance and reinsurance industry
that could have an effect on reinsurers. Among the proposals
that in the past have been or are at present being considered is
the possible introduction of federal regulation in addition to,
or in lieu of, the current system of state regulation of
insurers. In addition, there are a variety of proposals being
considered by various state legislatures. We are unable to
predict whether any of these laws and regulations will be
adopted, the form in which any such laws and regulations would
be adopted, or the effect, if any, these developments would have
on our operations and financial condition.
The Fairness in Asbestos Injury Resolution Act of 2005
(FAIR) would have largely removed asbestos claims
from the courts in favor of an administrative process that would
pay awards out of a trust fund on a no fault basis
to claimants meeting asbestos exposure and medical criteria. The
proposed trust would have been funded by contributions from
corporate defendants, insurers and existing bankruptcy trusts.
In February 2006, the U.S. Senate effectively denied
passage of FAIR. At this time, we are unable to predict what
asbestos-related legislation, if any, may be proposed in the
future, or the impact such legislation may have on our
operations.
Government intervention in the insurance and reinsurance
markets, both in the U.S. and worldwide, continues to evolve.
Federal and state legislators and regulators have considered
numerous statutory and regulatory initiatives. While we cannot
predict the exact nature, timing, or scope of other such
proposals, if adopted they could adversely affect our business
by:
|
|
|
|
|
providing government supported insurance and reinsurance
capacity in markets and to consumers that we target; |
|
|
|
requiring our participation in pools and guaranty associations; |
|
|
|
regulating the terms of insurance and reinsurance
policies; or |
|
|
|
disproportionately benefiting the companies of one country or
jurisdiction over those of another. |
|
|
|
Terrorism Risk Insurance Act of 2002 |
The Terrorism Risk Insurance Act of 2002 (TRIA)
established a program under which the U.S. federal
government will share with the insurance industry the risk of
loss from certain acts of international terrorism. With the
enactment on December 22, 2005 of the Terrorism Risk
Insurance Extension Act of 2005, TRIA has now been modified and
extended through December 31, 2007. The program is
applicable to most commercial property and casualty lines of
business (with the notable exception of reinsurance), and
participation by insurers writing such lines is mandatory. Under
TRIA, all applicable terrorism exclusions contained in policies
in force on November 26, 2002 were voided. For policies in
force on or after November 26, 2002, insurers are required
to provide coverage for losses arising from acts of terrorism as
defined by TRIA on terms and in amounts which may not differ
materially from other policy coverages.
Under TRIA, the federal government will reimburse insurers for a
percentage of covered losses above a defined insurer deductible.
The deductible for each participating insurer is based on a
percentage of the combined direct earned premiums in the
preceding calendar year of the insurer, defined to include its
subsidiaries and affiliates. In 2006, the deductible is equal to
17.5% of the insurers combined direct earned premiums for
2005. Further, the 2005 amendments to TRIA established a per
event trigger for federal participation in aggregate insured
losses of $50 million for losses occurring after
March 31, 2006 and before January 1, 2007, and
$100 million for losses occurring in 2007. Under certain
circumstances, the federal government may require
35
insurers to levy premium surcharges on policyholders to recoup
for the federal government its reimbursements paid.
While the provisions of TRIA and the purchase of certain
terrorism reinsurance coverage mitigate our exposure in the
event of a large-scale terrorist attack, our effective
deductible is significant. Further, our exposure to losses from
terrorist acts is not limited to TRIA events since domestic
terrorism is generally not excluded from our policies and,
regardless of TRIA, some state insurance regulators do not
permit terrorism exclusions for various coverages or causes of
loss. Accordingly, we continue to monitor carefully our
concentrations of risk.
Primary insurance companies providing commercial property and
casualty insurance in the U.S., such as Hudson and Hudson
Specialty, are required to participate in the TRIA program. TRIA
generally does not purport to govern the obligations of
reinsurers, such as Odyssey America. The TRIA program is
scheduled to expire at the end of 2007, and it is unclear at
this time whether Congress will further extend the program
beyond 2007. It is possible that the non-renewal of TRIA could
adversely affect the industry, including us.
|
|
|
Other Industry Developments |
The New York Attorney Generals office and other
governmental and regulatory bodies are investigating allegations
relating to a wide range of practices in the insurance and
reinsurance industry, including contingent commissions payments
and allegations of price fixing, market allocation, or bid
rigging. As of the date hereof, we have not been contacted by
any of these parties with respect to these practices, although
we have received and responded to inquiries and informational
requests from several state insurance departments as part of the
industry-wide review being conducted by these states. We intend
to cooperate with these requests and others we may receive from
governmental and regulatory bodies.
We have undertaken to review our practices in light of the
matters being reviewed by the New York Attorney General and
other governmental authorities. This review is ongoing. We are
actively monitoring these ongoing, industry-wide investigations.
It is possible that these investigations or related regulatory
developments will mandate changes in industry practices in a
fashion that increases our costs of doing business or requires
us to alter aspects of the manner in which we conduct our
business.
Our Website
Our internet address is www.odysseyre.com. The information on
our website is not incorporated by reference into this Annual
Report on
Form 10-K. Our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and
amendments to those reports filed or furnished pursuant to
Sections 13(a) or 15(d) of the Exchange Act, are accessible
free of charge through our website as soon as reasonably
practicable after they have been electronically filed with or
furnished to the Securities and Exchange Commission. Our Code of
Business Conduct, Code of Ethics for Senior Financial Officers,
Corporate Governance Guidelines and the charters for our Audit,
Compensation and Transaction Review Committees are also
available on our website. In addition, you may obtain, free of
charge, copies of any of the above reports or documents upon
request to the Secretary of the Company.
Our annual, quarterly and current reports are accessible to view
or copy at the SECs Public Reference room at
100 F Street, NE, Washington, DC 20549, by calling
1-800-SEC-0330, or on
the SECs website at www.sec.gov.
Factors that could cause our actual results to differ materially
from those described in the forward-looking statements contained
in this Form 10-K
and other documents we file with the Securities and Exchange
Commission include the risks described below. You should also
refer to the other information in this Annual Report on
Form 10-K,
including the consolidated financial statements and accompanying
notes thereto.
36
|
|
|
Risks Relating to Our Business |
|
|
|
Our actual claims may exceed our claim reserves, causing us
to incur losses we did not anticipate. |
Our success is dependent upon our ability to assess accurately
the risks associated with the businesses that we reinsure or
insure. If we fail to accurately assess the risks we assume, we
may fail to establish appropriate premium rates and our reserves
may be inadequate to cover our losses, which could have a
material adverse effect on our financial condition or reduce our
net income.
As of December 31, 2006, we had net unpaid losses and loss
adjustment expenses of $4,403.1 million. We incurred losses
and loss adjustment expenses of $1,484.2 million,
$2,061.6 million and $1,631.1 million for the years
ended December 31, 2006, 2005 and 2004, respectively.
Reinsurance and insurance claim reserves represent estimates,
involving actuarial and statistical projections at a given point
in time, of our expectations of the ultimate settlement and
administration costs of claims incurred. The process of
establishing loss reserves is complex and imprecise because it
is subject to variables that are influenced by significant
judgmental factors. We utilize both proprietary and commercially
available actuarial models as well as our historical and
industry loss development patterns to assist in the
establishment of appropriate claim reserves. In contrast to
casualty losses, which frequently can be determined only through
lengthy and unpredictable litigation, non-casualty property
losses tend to be reported promptly and usually are settled
within a shorter period of time. Nevertheless, for both casualty
and property losses, actual claims and claim expenses paid may
deviate, perhaps substantially, from the reserve estimates
reflected in our consolidated financial statements.
In addition, because we, like other reinsurers, do not
separately evaluate each of the individual risks assumed under
our reinsurance treaties, we are largely dependent on the
original underwriting decisions made by ceding companies. We are
subject to the risk that the ceding companies may not have
adequately evaluated the risks to be reinsured and that the
premiums ceded may not adequately compensate us for the risks we
assume. If our claim reserves are determined to be inadequate,
we will be required to increase claim reserves with a
corresponding reduction in our net income in the period in which
the deficiency is recognized. It is possible that claims in
respect of events that have occurred could exceed our claim
reserves and have a material adverse effect on our results of
operations in a particular period or our financial condition.
Even though most insurance contracts have policy limits, the
nature of property and casualty insurance and reinsurance is
that losses can exceed policy limits for a variety of reasons
and could significantly exceed the premiums received on the
underlying policies.
|
|
|
Unpredictable natural and man-made catastrophic events could
cause unanticipated losses and reduce our net income. |
Catastrophes can be caused by various events, including natural
events such as hurricanes, windstorms, earthquakes, hailstorms,
severe winter weather and fires, and unnatural events such as
acts of war, terrorist attacks, explosions and riots. The
incidence and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the
area affected by the event and the severity of the event. Most
catastrophes are restricted to small geographic areas; however,
hurricanes, windstorms and earthquakes may produce significant
damage in large, heavily populated areas. Most of our past
catastrophe-related claims have resulted from severe storms.
Catastrophes can cause losses in a variety of property and
casualty lines for which we provide insurance or reinsurance.
Insurance companies are not permitted to reserve for a
catastrophe unless it has occurred. It is therefore possible
that a catastrophic event or multiple catastrophic events could
have a material adverse effect upon our results of operations
and financial condition. It is possible that our models have not
adequately captured some catastrophe risks or other risks. We
believe it is impossible to completely eliminate our exposure to
unforeseen or unpredictable events.
37
|
|
|
If we are unable to maintain a favorable financial strength
rating, certain existing business may be subject to termination,
and it may be more difficult for us to write new business. |
Rating agencies assess and rate the claims-paying ability of
reinsurers and insurers based upon criteria established by the
rating agencies. Periodically the rating agencies evaluate us to
confirm that we continue to meet the criteria of the ratings
previously assigned to us. The claims-paying ability ratings
assigned by rating agencies to reinsurance or insurance
companies represent independent opinions of financial strength
and ability to meet policyholder obligations, and are not
directed toward the protection of investors. Ratings by rating
agencies are not ratings of securities or recommendations to
buy, hold or sell any security. In the event our companies were
to be downgraded by any or all of the rating agencies, some of
our business would be subject to provisions which could cause,
among other things, early termination of contracts, or a
requirement to post collateral at the direction of our
counterparty. We cannot precisely estimate the amount of premium
that would be at risk to such a development, or the amount of
additional collateral that might be required to maintain
existing business, as these amounts would depend on the
particular facts and circumstances at the time, including the
degree of the downgrade, the time elapsed on the impacted
in-force policies, and the effects of any related catastrophic
event on the industry generally. We cannot assure you that our
premiums would not decline, or that our profitability would not
be affected, perhaps materially, following a ratings downgrade.
Our principal operating subsidiaries maintain a rating of
A (Stable) from A.M. Best, an A-
(Excellent) counterparty credit and financial strength rating
from Standard & Poors and an A3
(Stable) financial strength rating from Moodys. Financial
strength ratings are used by insurers and reinsurance and
insurance intermediaries as an important means of assessing the
financial strength and quality of reinsurers. See
Part I, Item 1
Business-Ratings for further detail regarding our and our
subsidiaries ratings.
The ratings by these agencies of our principal operating
subsidiaries may be based on a variety of factors, many of which
are outside of our control, including, but not limited to, the
financial condition of Fairfax and its other subsidiaries and
affiliates, the financial condition or actions of parties from
which we have obtained reinsurance, and factors relating to the
sectors in which we or they conduct business, and the statutory
surplus of our operating subsidiaries, which is adversely
affected by underwriting losses and dividends paid by them to
us. A downgrade of any of the debt or other ratings of Fairfax,
or of any of Fairfaxs other subsidiaries or affiliates, or
a deterioration in the financial markets view of any of
these entities, could have a negative impact on our ratings.
|
|
|
Uncertainty related to our estimated losses for Hurricanes
Katrina, Rita and Wilma may materially impact our financial
results. |
Our statements of operations for the year ended
December 31, 2006 and 2005, respectively, include pre-tax
underwriting losses of $46.4 and $436.0 million,
respectively, from Hurricanes Katrina, Rita and Wilma. The loss
estimate represents our best estimate based on the most recent
information available. We used various approaches in estimating
this loss, including a detailed review of exposed contracts and
information from ceding companies. As additional information
becomes available, such estimates may be revised, potentially
resulting in adverse effects to our financial results. The
extraordinary nature and scale of this loss, including legal and
regulatory implications, adds substantial uncertainty and
complexity to the estimating process. Considerable time may
elapse before the adequacy of our estimates can be determined.
Our estimates are subject to a high level of uncertainty arising
out of extremely complex and unique causation and coverage
issues, including the appropriate attribution of losses to flood
as opposed to other perils such as wind, fire or riot and civil
commotion. The underlying policies generally contain exclusions
for flood damage; however, water damage caused by wind may be
covered. We expect that causation and coverage issues may not be
resolved for a considerable period of time and may be influenced
by evolving legal and regulatory developments.
Our actual losses from Hurricanes Katrina, Rita and Wilma may
vary materially from our estimates as a result of, among other
things, an increase in industry insured loss estimates, the
receipt of additional information from clients, the attribution
of losses to coverages that for the purpose of our estimates we
assumed would not be exposed, the contingent nature of business
interruption exposures, and inflation in repair costs due to the
limited
38
availability of labor and materials, in which case our financial
results could be further materially adversely affected. In
addition, actual losses may increase if our reinsurers fail to
meet their obligations.
We have no retrocession protection remaining with respect to
Hurricane Katrina. Should our Hurricane Katrina losses prove to
be greater than currently estimated, it will have an adverse
effect on our financial results.
We cannot be sure that retrocessional coverage will be available
to us on acceptable terms, or at all, in the future.
|
|
|
If we are unable to realize our investment objectives, our
business, financial condition or results of operations may be
adversely affected. |
Investment returns are an important part of our overall
profitability, and our operating results depend in part on the
performance of our investment portfolio. Accordingly,
fluctuations in the fixed income or equity markets could impair
our profitability, financial condition or cash flows. We derive
our investment income from interest and dividends, together with
realized gains on the sale of investment assets. The portion
derived from realized gains generally fluctuates from year to
year. For the years ended December 31, 2006, 2005 and 2004,
net realized gains accounted for 28.0%, 21.4% and 42.6%,
respectively, of our total investment income (including realized
gains and losses). Realized gains are typically a less
predictable source of income than interest and dividends,
particularly in the short term.
The return on our portfolio and the risks associated with our
investments are also affected by our asset mix, which can change
materially depending on market conditions. Investments in cash
or short-term investments generally produce a lower return than
other investments. As of December 31, 2006, 32.6%, or
$2.3 billion, of our invested assets were held in cash and
short-term investments pending our identifying suitable
opportunities for reinvestment in line with our long-term
value-oriented investment philosophy.
The volatility of our claims submissions may force us to
liquidate securities, which may cause us to incur capital
losses. If we structure our investments improperly relative to
our liabilities, we may be forced to liquidate investments prior
to maturity at a significant loss to cover such liabilities.
Realized and unrealized investment losses resulting from an
other-than-temporary decline in value could significantly
decrease our assets, thereby affecting our ability to conduct
business.
Our operating results depend in part on the performance of our
investment portfolio. The ability to achieve our investment
objectives is affected by general economic conditions that are
beyond our control. General economic conditions can adversely
affect the markets for interest-rate-sensitive securities,
including the extent and timing of investor participation in
such markets, the level and volatility of interest rates and,
consequently, the value of fixed income securities. Interest
rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. General economic conditions, stock market conditions
and many other factors can also adversely affect the equities
markets and, consequently, the value of the equity securities we
own. We may not be able to realize our investment objectives,
which could reduce our net income significantly.
|
|
|
Investigations by U.S. government authorities may
adversely affect us. |
On September 7, 2005, we announced that we had been advised
by Fairfax, our majority shareholder, that it had received a
subpoena from the Securities and Exchange Commission
(SEC) requesting documents regarding any
non-traditional insurance and reinsurance transactions entered
into or offered by Fairfax and any of its affiliates, which
included OdysseyRe. The United States Attorneys Office for
the Southern District of New York is reviewing documents
provided to the SEC in response to the subpoena, and is
participating in the investigation into these matters. In
addition, we provided information and made a presentation to the
SEC and the U.S. Attorneys office relating to the
restatement of our financial results announced by us on
February 9, 2006 and responded to questions with respect to
transactions that were part of the restatement. We are
cooperating fully in addressing our obligations under this
subpoena. Fairfax, and Fairfaxs chairman and chief
executive officer, V. Prem Watsa, who is also the chairman
of OdysseyRe, have received subpoenas from the SEC in connection
with the answer to a question on Fairfaxs
February 10, 2006 investor conference call concerning the
review of
39
Fairfaxs finite contracts. Our independent registered
public accountants and our chief financial officer prior to
March 2005 have each received a subpoena relating to the above
matters.
This inquiry is ongoing, and we continue to comply with requests
from the SEC and the U.S. Attorneys office. We cannot
assure you that we will not be subject to further requests or
other regulatory proceedings of a similar kind. It is possible
that other governmental and enforcement agencies will seek to
review this information as well, or that we, or other parties
with whom we interact, such as customers or shareholders, may
become subject to direct requests for information or other
inquiries by such agencies.
At the present time, we cannot predict the outcome of these
matters or the ultimate effect on our consolidated financial
statements, which effect could be material and adverse. The
financial cost to us to address these matters has been and is
likely to continue to be significant. We expect that these
matters will continue to require significant management
attention, which could divert managements attention away
from our business. Our business, or the market price for our
securities, also could be materially adversely affected by
negative publicity related to this inquiry or similar
proceedings, if any.
|
|
|
Certain business practices of the insurance industry have
become the subject of investigations by government authorities
and the subject of class action litigation. |
In recent years, the insurance industry has been the subject of
a number of investigations, and increasing litigation and
regulatory activity by various insurance, governmental and
enforcement authorities, concerning certain practices within the
industry. These practices include the payment of contingent
commissions by insurance companies to insurance brokers and
agents and the extent to which such compensation has been
disclosed, the solicitation and provision of fictitious or
inflated quotes, the alleged illegal tying of the placement of
insurance business to the purchase of reinsurance, and the sale
and purchase of finite reinsurance or other non-traditional or
loss mitigation insurance products and the accounting treatment
for those products. We have received inquiries and informational
requests from insurance departments in certain states in which
our insurance subsidiaries operate. We cannot predict at this
time the effect that current investigations, litigation and
regulatory activity will have on the insurance or reinsurance
industry or our business. Our involvement in any investigations
and related lawsuits would cause us to incur legal costs and, if
we were found to have violated any laws, we could be required to
pay fines and damages, perhaps in material amounts. In addition,
we could be materially adversely affected by the negative
publicity for the insurance industry related to these
proceedings, and by any new industry-wide regulations or
practices that may result from these proceedings. It is possible
that these investigations or related regulatory developments
will mandate changes in industry practices in a fashion that
increases our costs of doing business or requires us to alter
aspects of the manner in which we conduct our business.
|
|
|
We operate in a highly competitive environment which could
make it more difficult for us to attract and retain business. |
The reinsurance industry is highly competitive. We compete, and
will continue to compete, with major United States and
non-United States reinsurers and certain underwriting syndicates
and insurers, some of which have greater financial, marketing
and management resources than we do. In addition, we may not be
aware of other companies that may be planning to enter the
reinsurance market or existing reinsurers that may be planning
to raise additional capital. Competition in the types of
reinsurance business that we underwrite is based on many
factors, including premiums charged and other terms and
conditions offered, services provided, financial ratings
assigned by independent rating agencies, speed of claims
payment, reputation, perceived financial strength and the
experience of the reinsurer in the line of reinsurance to be
written. Increased competition could cause us and other
reinsurance providers to charge lower premium rates and obtain
less favorable policy terms, which could adversely affect our
ability to generate revenue and grow our business.
We also are aware that other financial institutions, such as
banks, are now able to offer services similar to our own. In
addition, we have recently seen the creation of alternative
products from capital market participants that are intended to
compete with reinsurance products. We are unable to predict the
extent to which these new,
40
proposed or potential initiatives may affect the demand for our
products or the risks that may be available for us to consider
underwriting.
Our primary insurance is a business segment that is growing, and
the primary insurance business is also highly competitive.
Primary insurers compete on the basis of factors including
selling effort, product, price, service and financial strength.
We seek primary insurance pricing that will result in adequate
returns on the capital allocated to our primary insurance
business. Our business plans for these business units could be
adversely impacted by the loss of primary insurance business to
competitors offering competitive insurance products at lower
prices.
This competition could affect our ability to attract and retain
business.
|
|
|
Emerging claim and coverage issues could adversely affect our
business. |
Unanticipated developments in the law as well as changes in
social and environmental conditions could result in unexpected
claims for coverage under our insurance and reinsurance
contracts. These developments and changes may adversely affect
us, perhaps materially. For example, we could be subject to
developments that impose additional coverage obligations on us
beyond our underwriting intent, or to increases in the number or
size of claims to which we are subject. With respect to our
casualty businesses, these legal, social and environmental
changes may not become apparent until some time after their
occurrence. Our exposure to these uncertainties could be
exacerbated by the increased willingness of some market
participants to dispute insurance and reinsurance contract and
policy wordings.
The full effects of these and other unforeseen emerging claim
and coverage issues are extremely hard to predict. As a result,
the full extent of our liability under our coverages, and in
particular our casualty insurance policies and reinsurance
contracts, may not be known for many years after a policy or
contract is issued. Our exposure to this uncertainty will grow
as our long-tail casualty businesses grow, because
in these lines of business claims can typically be made for many
years, making them more susceptible to these trends than in the
property insurance business, which is more typically
short-tail. In addition, we could be adversely
affected by the growing trend of plaintiffs targeting
participants in the property-liability insurance industry in
purported class action litigation relating to claim handling and
other practices.
|
|
|
If our current and potential customers change their
requirements with respect to financial strength, claims paying
ratings or counterparty collateral requirements, our
profitability could be adversely affected. |
Insureds, insurers and insurance and reinsurance intermediaries
use financial ratings as an important means of assessing the
financial strength and quality of insurers and reinsurers. In
addition, the rating of a company purchasing reinsurance may be
affected by the rating of its reinsurer. For these reasons,
credit committees of insurance and reinsurance companies
regularly review and in some cases revise their requirements
with respect to the insurers and reinsurers from whom they
purchase insurance and reinsurance.
If one or more of our current or potential customers were to
raise their minimum required financial strength or claims paying
ratings above the ratings held by us or our insurance and
reinsurance subsidiaries, or if they were to materially increase
their collateral requirements, the demand for our products could
be reduced, our premiums could decline, and our profitability
could be adversely affected.
|
|
|
Consolidation in the insurance industry could lead to lower
margins for us and less demand for our reinsurance products. |
Many insurance industry participants are consolidating to
enhance their market power. These entities may try to use their
market power to negotiate price reductions for our products and
services. If competitive pressures compel us to reduce our
prices, our operating margins would decrease. As the insurance
industry consolidates, competition for customers will become
more intense and the importance of acquiring and properly
servicing each customer will become greater. We could incur
greater expenses relating to customer acquisition and retention,
further reducing our operating margins. In addition, insurance
companies that merge may be able to spread their risks across a
consolidated, larger capital base so that they require less
reinsurance.
41
|
|
|
A change in demand for reinsurance and insurance could lead
to reduced premium rates and less favorable contract terms,
which could reduce our net income. |
Historically, we have experienced fluctuations in operating
results due to competition, frequency of occurrence or severity
of catastrophic events, levels of capacity, general economic
conditions and other factors. Demand for reinsurance is
influenced significantly by underwriting results of primary
insurers and prevailing general economic conditions. In
addition, the larger insurers created by the consolidation
discussed above may require less reinsurance. The supply of
reinsurance is related to prevailing prices and levels of
surplus capacity that, in turn, may fluctuate in response to
changes in rates of return being realized in the reinsurance
industry. It is possible that premium rates or other terms and
conditions of trade could vary in the future, that the present
level of demand will not continue or that the present level of
supply of reinsurance could increase as a result of capital
provided by recent or future market entrants or by existing
reinsurers.
General pricing across the industry and other terms and
conditions have become less favorable than they have been in the
recent past, the degree to which varies by class of business and
region. All of these factors can reduce our profitability and we
have no way to determine to what extent they will impact us in
the future.
|
|
|
Fairfax Financial Holdings Limited owns a majority of our
common shares and can determine the outcome of our corporate
actions requiring board or shareholder approval. |
As of December 31, 2006, Fairfax beneficially owned,
through wholly-owned subsidiaries, 59.6% of our outstanding
common shares. Consequently, Fairfax can determine the outcome
of our corporate actions requiring board or shareholder
approval, such as:
|
|
|
|
|
appointing officers and electing members of our Board of
Directors; |
|
|
|
adopting amendments to our charter documents; and |
|
|
|
approving a merger or consolidation, liquidation or sale of all
or substantially all of our assets. |
In addition, Fairfax has provided us, and continues to provide
us, with certain services for which it receives customary
compensation. Through various subsidiaries, Fairfax engages in
the business of underwriting insurance as well as other
financial services; and from time to time, we may engage in
transactions with those other businesses in the ordinary course
of business under market terms and conditions. All of our
directors other than Andrew Barnard, Peter Bennett, Patrick
Kenny and Paul Wolff are directors or officers of Fairfax or
certain of its subsidiaries. Conflicts of interest could arise
between us and Fairfax or one of its other subsidiaries, and any
conflict of interest may be resolved in a manner that does not
favor us.
Fairfax has stated that it intends to retain control of us. In
order to retain control, Fairfax may decide not to enter into a
transaction in which our shareholders would receive
consideration for their shares that is much higher than the cost
of their investment in our common shares or the then current
market price of our common shares. Any decision regarding the
ownership of us that Fairfax may make at some future time will
be in its absolute discretion.
|
|
|
We may require additional capital in the future, which may
not be available or may be available only on unfavorable
terms. |
Our capital requirements depend on many factors, including our
ability to write business, and rating agency capital
requirements. To the extent that our existing capital is
insufficient to meet these requirements, we may need to raise
additional funds through financings. Any financing, if available
at all, may be on terms that are not favorable to us. If our
need for capital arises because of significant losses, the
occurrence of these losses may make it more difficult for us to
raise the necessary capital. If we cannot obtain adequate
capital on favorable terms or at all, our business, operating
results and financial condition would be adversely affected.
42
|
|
|
Failure to comply with the covenants in our debt agreements
could have an adverse effect on our financial condition. |
The current agreement governing our $150 million bank
credit facility contains certain covenants that limit our
ability to, among other things, borrow money, make particular
types of investments or other restricted payments, sell assets,
merge or consolidate. These agreements also require us to
maintain specific financial ratios. If we fail to comply with
these covenants or meet these financial ratios, the lenders
under our credit facility or our noteholders could declare a
default and demand immediate repayment of all amounts owed to
them.
|
|
|
We are a holding company and are dependent on dividends and
other payments from our operating subsidiaries, which are
subject to dividend restrictions. |
We are a holding company, and our principal source of funds is
cash dividends and other permitted payments from our operating
subsidiaries, principally Odyssey America. If we are unable to
receive dividends from our operating subsidiaries, or if they
are able to pay only limited amounts, we may be unable to pay
dividends or make payments on our indebtedness. The payment of
dividends by our operating subsidiaries is subject to
restrictions set forth in the insurance laws and regulations of
Connecticut, Delaware, New York and the United Kingdom. See
Regulatory Matters Regulation of Insurers and
Reinsurers Dividends.
|
|
|
Our business could be adversely affected by the loss of one
or more key employees. |
We are substantially dependent on a small number of key
employees, in particular Andrew Barnard, R. Scott Donovan
and Michael Wacek. We believe that the experience and
reputations in the reinsurance industry of Messrs. Barnard,
Donovan and Wacek are important factors in our ability to
attract new business. We have entered into employment agreements
with Messrs. Barnard, Donovan and Wacek. Our success has
been, and will continue to be, dependent on our ability to
retain the services of our existing key employees and to attract
and retain additional qualified personnel in the future. The
loss of the services of Messrs. Barnard, Donovan or Wacek
or any other key employee, or the inability to identify, hire
and retain other highly qualified personnel in the future, could
adversely affect the quality and profitability of our business
operations. We do not currently maintain key employee insurance
with respect to any of our employees.
|
|
|
Our business is primarily dependent upon a limited number of
unaffiliated reinsurance brokers and the loss of business
provided by them could adversely affect our business. |
We market our reinsurance products worldwide primarily through
reinsurance brokers, as well as directly to our customers. Five
reinsurance brokerage firms accounted for 61.8% of our
reinsurance gross premiums written for the year ended
December 31, 2006. Loss of all or a substantial portion of
the business provided by these brokers could have a material
adverse effect on us.
|
|
|
Our reliance on payments through reinsurance brokers exposes
us to credit risk. |
In accordance with industry practice, we frequently pay amounts
owing in respect of claims under our policies to reinsurance
brokers, for payment over to the ceding insurers. In the event
that a broker fails to make such a payment, depending on the
jurisdiction, we might remain liable to the ceding insurer for
the deficiency. Conversely, in certain jurisdictions, when the
ceding insurer pays premiums for such policies to reinsurance
brokers for payment over to us, such premiums will be deemed to
have been paid and the ceding insurer will no longer be liable
to us for those amounts, whether or not we have actually
received such premiums.
Consequently, in connection with the settlement of reinsurance
balances, we assume a degree of credit risk associated with
brokers around the world.
|
|
|
We may be adversely affected by foreign currency
fluctuations. |
Our reporting currency is the United States dollar. A portion of
our premiums are written in currencies other than the United
States dollar and a portion of our loss reserves are also in
foreign currencies. Moreover, we maintain a portion of our
investments in currencies other than the United States dollar.
We may, from time to
43
time, experience losses resulting from fluctuations in the
values of foreign currencies, which could adversely affect our
operating results.
|
|
|
We may not be able to alleviate risk successfully through
retrocessional arrangements and we are subject to credit risks
with respect to our retrocessionaires. |
We attempt to limit our risk of loss through retrocessional
arrangements, reinsurance agreements with other reinsurers
referred to as retrocessionaires. The availability and cost of
retrocessional protection is subject to market conditions, which
are beyond our control. As a result, we may not be able to
successfully alleviate risk through retrocessional arrangements.
In addition, we are subject to credit risk with respect to our
retrocessions because the ceding of risk to retrocessionaires
does not relieve us of our liability to the companies we
reinsured.
We purchase reinsurance coverage to insure against a portion of
our risk on policies we write directly. We expect that limiting
our insurance risks through reinsurance will continue to be
important to us. Reinsurance does not affect our direct
liability to our policyholders on the business we write. A
reinsurers insolvency or inability or unwillingness to
make timely payments under the terms of its reinsurance
agreements with us could have a material adverse effect on us.
In addition, we cannot assure you that reinsurance will remain
available to us to the same extent and on the same terms as are
currently available.
|
|
|
The growth of our primary insurance business, which is
regulated more comprehensively than reinsurance, increases our
exposure to adverse political, judicial and legal
developments. |
Hudson, which is licensed to write insurance in 49 states
and the District of Columbia on an admitted basis, is subject to
extensive regulation under state statutes that delegate
regulatory, supervisory and administrative powers to state
insurance commissioners. Such regulation generally is designed
to protect policyholders rather than investors, and relates to
such matters as: rate setting; limitations on dividends and
transactions with affiliates; solvency standards which must be
met and maintained; the licensing of insurers and their agents;
the examination of the affairs of insurance companies, which
includes periodic market conduct examinations by the regulatory
authorities; annual and other reports, prepared on a statutory
accounting basis; establishment and maintenance of reserves for
unearned premiums and losses; and requirements regarding
numerous other matters. We could be required to allocate
considerable time and resources to comply with these
requirements, and could be adversely affected if a regulatory
authority believed we had failed to comply with applicable law
or regulation. We plan to grow Hudsons business and,
accordingly, expect our regulatory burden to increase.
|
|
|
Our utilization of program managers and other third parties
to support our business exposes us to operational and financial
risks. |
Our primary insurance operations rely on program managers, and
other agents and brokers participating in our programs, to
produce and service a substantial portion of our business in
this segment. In these arrangements, we typically grant the
program manager the right to bind us to newly issued insurance
policies, subject to underwriting guidelines we provide and
other contractual restrictions and obligations. Should our
managers issue policies that contravene these guidelines,
restrictions or obligations, we could nonetheless be deemed
liable for such policies. Although we would intend to resist
claims that exceed or expand on our underwriting intention, it
is possible that we would not prevail in such an action, or that
our program managers would be unable to substantially indemnify
us for their contractual breach. We also rely on our managers,
or other third parties we retain, to collect premiums and to pay
valid claims. This exposes us to their credit and operational
risk, without necessarily relieving us of our obligations to
potential insureds. We could also be exposed to potential
liabilities relating to the claims practices of the third party
administrators we have retained to manage claims activity that
we expect to arise in our program operations. Although we have
implemented monitoring and other oversight protocols, we cannot
assure you that these measures will be sufficient to alleviate
all of these exposures.
We are also subject to the risk that our successful program
managers will not renew their programs with us. Our contracts
are generally for defined terms of as little as one year, and
either party can cancel the contract in a relatively short
period of time. We cannot assure you that we will retain the
programs that produce profitable
44
business or that our insureds will renew with us. Failure to
retain or replace these producers would impair our ability to
execute our growth strategy, and our financial results could be
adversely affected.
|
|
|
Our business could be adversely affected as a result of
political, regulatory, economic or other influences in the
insurance and reinsurance industries. |
The insurance industry is highly regulated and is subject to
changing political, economic and regulatory influences. These
factors affect the practices and operation of insurance and
reinsurance organizations. Federal and state legislatures have
periodically considered programs to reform or amend the United
States insurance system at both the federal and state level.
Recently, the insurance and reinsurance regulatory framework has
been subject to increased scrutiny in many jurisdictions,
including the United States and various states in the United
States.
Changes in current insurance regulation may include increased
governmental involvement in the insurance industry or may
otherwise change the business and economic environment in which
insurance industry participants operate. In the United States,
for example, the states of Hawaii and Florida have implemented
arrangements whereby property insurance in catastrophe prone
areas is provided through state-sponsored entities. The
California Earthquake Authority, the first privately financed,
publicly operated residential earthquake insurance pool,
provides earthquake insurance to California homeowners.
Such changes could cause us to make unplanned modifications of
products or services, or may result in delays or cancellations
of sales of products and services by insurers or reinsurers.
Insurance industry participants may respond to changes by
reducing their investments or postponing investment decisions,
including investments in our products and services. We cannot
predict the future impact of changing law or regulation on our
operations; any changes could have a material adverse effect on
us or the insurance industry in general.
Increasingly, governmental authorities in both the U.S. and
worldwide appear to be interested in the potential risks posed
by the reinsurance industry as a whole, and to commercial and
financial systems in general. While we cannot predict the exact
nature, timing or scope of possible governmental initiatives, we
believe it is likely there will be increased regulatory
intervention in our industry in the future.
For example, we could be adversely affected by governmental or
regulatory proposals that:
|
|
|
|
|
provide insurance and reinsurance capacity in markets and to
consumers that we target; |
|
|
|
require our participation in industry pools and guaranty
associations; |
|
|
|
mandate the terms of insurance and reinsurance policies; or |
|
|
|
disproportionately benefit the companies of one country or
jurisdiction over those of another. |
|
|
|
Our computer and data processing systems may fail or be
perceived to be insecure, which could adversely affect our
business and damage our customer relationships. |
Our business is highly dependent upon the successful and
uninterrupted functioning of our computer and data processing
systems. We rely on these systems to perform actuarial and other
modeling functions necessary for writing business, as well as to
process and make claims payments. We have a highly trained staff
that is committed to the continual development and maintenance
of these systems. However, the failure of these systems could
interrupt our operations or materially impact our ability to
rapidly evaluate and commit to new business opportunities. If
sustained or repeated, a system failure could result in the loss
of existing or potential business relationships, or compromise
our ability to pay claims in a timely manner. This could result
in a material adverse effect on our business results.
Our insurance may not adequately compensate us for material
losses that may occur due to disruptions in our service as a
result of computer and data processing systems failure. We do
not maintain redundant systems or facilities for all of our
services.
In addition, a security breach of our computer systems could
damage our reputation or result in liability. We retain
confidential information regarding our business dealings in our
computer systems. We may be required to
45
spend significant capital and other resources to protect against
security breaches or to alleviate problems caused by such
breaches. Any well-publicized compromise of security could deter
people from conducting transactions that involve transmitting
confidential information to our systems. Therefore, it is
critical that these facilities and infrastructure remain secure
and are perceived by the marketplace to be secure. Despite the
implementation of security measures, this infrastructure may be
vulnerable to physical break-ins, computer viruses, programming
errors, attacks by third parties or similar disruptive problems.
In addition, we could be subject to liability if hackers were
able to penetrate our network security or otherwise
misappropriate confidential information.
|
|
|
We could be adversely affected if the Terrorism Risk
Insurance Act of 2002 is not renewed beyond 2007, or is
adversely amended. |
In response to the tightening of supply in certain insurance and
reinsurance markets resulting from, among other things, the
September 11, 2001 terrorist attack, the Terrorism Risk
Insurance Act of 2002, or TRIA, was enacted to ensure the
availability of commercial insurance coverage for terrorist acts
in the United States. This law initially established a federal
assistance program through the end of 2005 to help the
commercial property and casualty insurance industry cover claims
related to future terrorism-related losses and required that
coverage for terrorist acts be offered by insurers. Although
TRIA recently has been modified and extended through 2007, it is
possible that TRIA will not be renewed beyond 2007, or could be
adversely amended, which could adversely affect the insurance
industry if a material subsequent event occurred. Given these
uncertainties, we are currently unable to determine with
certainty the impact that TRIAs amendment or non-renewal
could have on us.
|
|
|
Risks Related to Our Common Shares |
Because our controlling shareholder intends to retain
control, you may be unable to realize a gain on your investment
in our common shares in connection with an acquisition bid.
Fairfax, through its subsidiaries, TIG Insurance Group, TIG
Insurance Company, ORH Holdings Inc., United States Fire
Insurance Company, Fairfax Financial (US) LLC and Fairfax
Inc., owned 59.6% of our outstanding common shares as of
December 31, 2006. Consequently, Fairfax is in a position
to determine the outcome of corporate actions requiring board or
shareholder approval, including:
|
|
|
|
|
appointing officers and electing members of our Board of
Directors; |
|
|
|
adopting amendments to our charter documents; and |
|
|
|
approving a merger or consolidation, liquidation or sale of all
or substantially all of our assets. |
All of our directors other than Andrew Barnard, Peter Bennett,
Patrick Kenny and Paul Wolff are directors or officers of
Fairfax or certain of its subsidiaries. Conflicts of interest
could arise between us and Fairfax or one of its subsidiaries,
and any conflict of interest may be resolved in a manner that
does not favor us.
Fairfax has stated that it intends to retain control of us. In
order to retain control, Fairfax may decide not to enter into a
transaction in which our shareholders would receive
consideration for their shares that is much higher than the cost
of their investment in our common shares or the then current
market price of our common shares. Any decision regarding the
ownership of us that Fairfax may make at some future time will
be in its absolute discretion.
|
|
|
Significant fluctuation in the market price of our common
shares could result in securities class action claims against
us. |
Significant price and value fluctuations have occurred with
respect to the securities of insurance and insurance-related
companies. Our common share price is likely to be volatile in
the future. In the past, following periods of downward
volatility in the market price of a companys securities,
class action litigation has often been pursued against such
companies. If similar litigation were pursued against us, it
could result in substantial costs and a diversion of our
managements attention and resources.
46
|
|
|
Provisions in our charter documents and Delaware law may
impede attempts to replace or remove our management or inhibit a
takeover, which could adversely affect the value of our common
shares. |
Our certificate of incorporation and bylaws, as well as Delaware
corporate law, contain provisions that could delay or prevent
changes in our management or a change of control that a
shareholder might consider favorable and may prevent you from
receiving a takeover premium for your shares. These provisions
include, for example,
|
|
|
|
|
authorizing the issuance of preferred shares, the terms of which
may be determined at the sole discretion of our Board of
Directors; |
|
|
|
establishing advance notice requirements for nominations for
election to our Board of Directors or for proposing matters that
can be acted on by shareholders at meetings; and |
|
|
|
providing that special meetings of shareholders may be called
only by our Board of Directors, the chairman of our Board of
Directors, our president or our secretary. |
These provisions apply even if the offer may be considered
beneficial by some of our shareholders. If a change in
management or a change of control is delayed or prevented, the
market price of our common shares could decline.
|
|
Item 1B. |
Unresolved Staff Comments |
None.
Our corporate offices are located in 101,420 total square feet
of leased space in Stamford, Connecticut. Our other locations
occupy a total of 139,489 square feet, all of which are
leased. The Americas division operates out of offices in New
York, Stamford, Mexico City, Miami, Santiago and Toronto, the
EuroAsia division operates out of offices in Paris, Singapore,
Stockholm and Tokyo, the London Market division operates out of
offices in London and Bristol, and the U.S. Insurance
division operates out of offices in New York, Chicago and Napa.
In September 2004, we renewed the lease at our corporate offices
in Stamford, Connecticut, under a lease agreement beginning upon
the termination of the current lease in October 2007 and
expiring in October 2022. Upon signing the lease, we received a
construction allowance of $3.1 million. We have three
renewal options on the current premises that could extend the
lease through September 2032, if all renewal options are
exercised.
|
|
Item 3. |
Legal Proceedings |
Odyssey America participated in providing quota share
reinsurance to Gulf Insurance Company (Gulf) from
January 1, 1996 to December 31, 2002, under which Gulf
issued policies that guaranteed the residual value of automobile
leases incepting during this period (Treaties). In
March 2003, Gulf requested a payment of approximately
$30.0 million, which included a special payment
of $26.0 million, due on April 28, 2003, representing
Odyssey Americas purported share of a settlement
(Settlement) between Gulf and one of the insureds
whose policies, Gulf contends, were reinsured under the
Treaties. In July 2003, Gulf initiated litigation against
Odyssey America, demanding payment relating to the Settlement
and other amounts under the Treaties. Odyssey America answered
the complaint. Among other things, Odyssey America contends that
(i) Gulf breached its duty to Odyssey America of utmost
good faith when it placed the Treaties by failing to disclose
material information concerning the policy it issued to the
insured; and (ii) the Settlement is not covered under the
terms of the Treaties. Among the remedies Odyssey America seeks
is rescission of the Treaties. We are vigorously asserting our
claims and defending ourselves against any claims asserted by
Gulf. We estimate that the amount in dispute under the Treaties
that has not been recorded by us as of December 31, 2006,
could range between $35 million to $40 million, after
taxes. It is presently anticipated that the case will go to
trial in the latter half of 2007. It is not possible to make any
determination regarding the likely outcome of this matter at
this time.
In January 2004, two retrocessionaires of Odyssey America under
the common control of London Reinsurance Group Inc. (together,
London Life) filed for arbitration under a series of
aggregate stop loss agreements covering the years 1994 and
1996-2001 (the Agreements). On March 9, 2006,
the arbitration panel
47
issued its decision confirming the enforceability of the
Agreements and resolving in Odyssey Americas favor
substantially all issues in dispute regarding Odyssey
Americas administration of the Agreements. Effective
May 12, 2006, Odyssey America and London Life entered into
a commutation and release agreement pursuant to which all
rights, obligations and liabilities for the Agreements were
fully and finally settled without material effect to our net
income.
On September 7, 2005, we announced that we had been advised
by Fairfax, our majority shareholder, that it had received a
subpoena from the Securities and Exchange Commission
(SEC) requesting documents regarding any
non-traditional insurance and reinsurance transactions entered
into or offered by Fairfax and any of its affiliates, which
included OdysseyRe. The United States Attorneys Office for
the Southern District of New York is reviewing documents
provided to the SEC in response to the subpoena, and is
participating in the investigation into these matters. In
addition, we provided information and made a presentation to the
SEC and the U.S. Attorneys office relating to the
restatement of our financial results announced by us on
February 9, 2006 and responded to questions with respect to
transactions that were part of the restatement. We are
cooperating fully in addressing our obligations under this
subpoena. Fairfax, and Fairfaxs chairman and chief
executive officer, V. Prem Watsa, who is also the chairman
of OdysseyRe, have received subpoenas from the SEC in connection
with the answer to a question on Fairfaxs
February 10, 2006 investor conference call concerning the
review of Fairfaxs finite contracts. Our independent
registered public accountants and our chief financial officer
prior to March 2005 have each received a subpoena relating to
the above matters. This inquiry is ongoing, and we continue to
comply with requests from the SEC and the
U.S. Attorneys office. At the present time, we cannot
predict the outcome of these matters, or the ultimate effect on
our consolidated financial statements, which effect could be
material and adverse. No assurance can be made that we will not
be subject to further requests or other regulatory proceedings
of a similar kind.
On February 8, 2007, we were added as a co-defendant in an
amended complaint in an existing action against our majority
shareholder, Fairfax, and certain of Fairfaxs officers and
directors, who include certain of our current and former
directors. The amended and consolidated complaint has been filed
in the United States District Court for the Southern District of
New York by the lead plaintiffs, who seek to represent a class
of all purchasers and acquirers of securities of Fairfax between
May 21, 2003 and March 22, 2006, inclusive, and
allege, among other things, that the defendants violated
U.S. federal securities laws by making material
misstatements or failing to disclose certain material
information. The amended complaint seeks, among other things,
certification of the putative class, unspecified compensatory
damages, unspecified injunctive relief, reasonable costs and
attorneys fees and other relief. We intend to vigorously
defend against the allegations. At this early stage of the
proceedings, it is not possible to make any determination
regarding the likely outcome of this matter.
We and our subsidiaries are involved from time to time in
ordinary litigation and arbitration proceedings as part of our
business operations; in managements opinion, the outcome
of these suits, individually or collectively, is not likely to
result in judgments that would be material to our financial
condition or results of operations.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
48
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities |
Market Information and Holders of Common Shares
The principal United States market on which our common shares
are traded is the New York Stock Exchange (NYSE). As
of February 9, 2007, the approximate number of holders of
our common shares, including those whose common shares are held
in nominee name, was 14,750. Quarterly high and low sales prices
per share of our common shares, as reported by the New York
Stock Exchange composite for each quarter in the years ended
December 31, 2006 and 2005, are as follows:
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
High | |
|
Low | |
|
|
| |
|
| |
December 31, 2006
|
|
$ |
38.65 |
|
|
$ |
33.45 |
|
September 30, 2006
|
|
|
34.75 |
|
|
|
24.70 |
|
June 30, 2006
|
|
|
26.60 |
|
|
|
21.23 |
|
March 31, 2006
|
|
|
25.41 |
|
|
|
19.50 |
|
|
December 31, 2005
|
|
$ |
26.92 |
|
|
$ |
23.77 |
|
September 30, 2005
|
|
|
25.86 |
|
|
|
23.76 |
|
June 30, 2005
|
|
|
25.33 |
|
|
|
22.50 |
|
March 31, 2005
|
|
|
26.01 |
|
|
|
24.20 |
|
Fairfax owns 59.6% of our outstanding common shares, directly
(0.2%) and through its subsidiaries: TIG Insurance Group
(42.1%), TIG Insurance Company (5.5%), ORH Holdings Inc. (8.7%),
Fairfax Inc. (2.0%) and United States Fire Insurance Company
(1.1%).
Dividends
In each of the four quarters of 2006, we declared a dividend of
$0.03125 per common share, resulting in an aggregate annual
dividend of $0.125 per common share, totaling
$8.8 million. The dividends were paid on March 31,
2006, June 30, 2006, September 30, 2006 and
December 31, 2006. In each of the four quarters of 2005, we
declared a dividend of $0.03125 per common share, resulting
in an aggregate annual dividend of $0.125 per common share,
totaling $8.3 million. The dividends were paid on
March 31, 2005, June 30, 2005, September 30, 2005
and December 31, 2005.
While it is the intention of our Board of Directors to declare
quarterly cash dividends, the declaration and payment of future
dividends, if any, by us will be at the discretion of our Board
of Directors and will depend on, among other things, our
financial condition, general business conditions and legal
restrictions regarding the payment of dividends by us, and other
factors. On February 22, 2007, our Board of Directors
announced that it had increased our quarterly dividend to
$0.0625 per common share, double its previous level, and
declared a dividend payable on March 30, 2007 to common
shareholders of record at the close of business on
March 16, 2007. The payment of dividends by us is subject
to limitations imposed by laws in Connecticut, Delaware, New
York and the United Kingdom. For a detailed description of these
limitations, see Part I, Item 1
Business Regulatory Matters
Regulation of Insurers and Reinsurers
Dividends.
Issuer Purchases of Equity Securities
The following table sets forth purchases made by us of our
common shares during the three months ended December 31,
2006. We make open market repurchases of our common shares, from
time to time as necessary, to support the grant of restricted
shares and the exercise of stock options. Our stock incentive
plans allow for the issuance of grants and exercises through
newly issued shares, treasury stock, or a combination thereof.
As of
49
December 31, 2006, we had 77,668 common shares held in
treasury to support such grants and exercises. We do not have a
publicly announced repurchase plan for our common shares at this
time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number | |
|
|
|
|
|
|
|
|
of Shares | |
|
Maximum | |
|
|
|
|
|
|
Purchased as | |
|
Number of Shares | |
|
|
|
|
|
|
Part of Publicly | |
|
that may yet be | |
|
|
Total Number | |
|
Average Price | |
|
Announced | |
|
Purchased Under | |
|
|
of Shares | |
|
Paid Per | |
|
Plans or | |
|
the Plans or | |
Period |
|
Purchased | |
|
Share | |
|
Programs | |
|
Programs | |
|
|
| |
|
| |
|
| |
|
| |
October 1 October 31, 2006
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
November 1 November 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1 December 31, 2006
|
|
|
50,000 |
|
|
|
37.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,000 |
|
|
$ |
37.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2002, we issued $110.0 million aggregate principal
amount of 4.375% convertible senior debentures due 2022
(Convertible Notes). On August 14, 2006, in
accordance with the terms of the indenture under which the
Convertible Notes were issued, the Convertible Notes became
convertible, at the option of the holders, into shares of our
common stock at a fixed rate of 46.9925 shares per $1,000
principal amount of Convertible Notes, which represents a
conversion price of $21.28 per share. The convertibility
trigger was met as a result of our common shares trading at or
above $25.54 per share for a specified period of time.
Pursuant to the terms of the indenture, we are permitted to
satisfy our conversion obligations in stock or in cash, or in a
combination thereof. To date, we have elected to satisfy all
conversion obligations with common shares, and therefore, as of
December 31, 2006, we had issued a total of 1,838,151
common shares to satisfy conversions up to that date. During
February 2007, we issued 46,992 common shares related to
$1.0 million principal amount of Convertible Notes subject
to a notice of conversion received in December 2006. Subsequent
to December 31, 2006, we have not received any conversion
notices related to the remaining $22.5 million principal
value of Convertible Notes, which could be converted into cash
or 1.1 million shares of our common stock, or a combination
of cash and stock, at our election. In February 2007, the
Company announced that the Convertible Notes will continue to be
convertible during the period from February 14, 2007
through May 13, 2007. For more information regarding the
Convertible Notes, see Note 13 to the consolidated
financial statements included in this
Form 10-K.
|
|
Item 6. |
Selected Financial Data |
The following selected financial data should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto that are
included in this
Form 10-K.
Financial information in the table reflects the results of
operations and financial position of OdysseyRe.
We encourage you to read the consolidated financial statements
included in this
Form 10-K because
they contain our complete consolidated financial statements for
the years ended December 31, 2006, 2005, and 2004. The
results of operations for the year ended December 31, 2006
are not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
GAAP Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$ |
2,335,742 |
|
|
$ |
2,626,920 |
|
|
$ |
2,650,775 |
|
|
$ |
2,552,340 |
|
|
$ |
1,894,530 |
|
Net premiums written
|
|
|
2,160,935 |
|
|
|
2,301,669 |
|
|
|
2,361,805 |
|
|
|
2,156,079 |
|
|
|
1,643,661 |
|
Net premiums earned
|
|
$ |
2,225,826 |
|
|
$ |
2,276,820 |
|
|
$ |
2,333,511 |
|
|
$ |
1,971,924 |
|
|
$ |
1,446,277 |
|
Net investment income
|
|
|
487,119 |
|
|
|
220,092 |
|
|
|
164,248 |
|
|
|
134,808 |
|
|
|
123,995 |
|
Net realized investment gains
|
|
|
189,129 |
|
|
|
59,866 |
|
|
|
122,024 |
|
|
|
223,537 |
|
|
|
134,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,902,074 |
|
|
|
2,556,778 |
|
|
|
2,619,783 |
|
|
|
2,330,269 |
|
|
|
1,704,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
Losses and loss adjustment expenses
|
|
|
1,484,197 |
|
|
|
2,061,611 |
|
|
|
1,631,106 |
|
|
|
1,336,047 |
|
|
|
1,006,704 |
|
Acquisition costs
|
|
|
464,148 |
|
|
|
470,152 |
|
|
|
515,856 |
|
|
|
476,520 |
|
|
|
365,025 |
|
Other underwriting expenses
|
|
|
153,476 |
|
|
|
146,030 |
|
|
|
120,765 |
|
|
|
101,308 |
|
|
|
70,269 |
|
Other expense, net
|
|
|
21,120 |
|
|
|
27,014 |
|
|
|
17,153 |
|
|
|
7,556 |
|
|
|
4,985 |
|
Interest expense
|
|
|
37,515 |
|
|
|
29,991 |
|
|
|
25,609 |
|
|
|
12,656 |
|
|
|
8,689 |
|
Loss on early extinguishment of debt
|
|
|
2,403 |
|
|
|
3,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,162,859 |
|
|
|
2,738,620 |
|
|
|
2,310,489 |
|
|
|
1,934,087 |
|
|
|
1,455,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
739,215 |
|
|
|
(181,842 |
) |
|
|
309,294 |
|
|
|
396,182 |
|
|
|
249,308 |
|
Federal and foreign income tax provision (benefit)
|
|
|
231,309 |
|
|
|
(66,120 |
) |
|
|
104,093 |
|
|
|
136,900 |
|
|
|
83,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of a change in accounting
principle
|
|
|
507,906 |
|
|
|
(115,722 |
) |
|
|
205,201 |
|
|
|
259,282 |
|
|
|
165,430 |
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
507,906 |
|
|
|
(115,722 |
) |
|
|
205,201 |
|
|
|
259,282 |
|
|
|
213,762 |
|
Preferred dividends
|
|
|
(8,257 |
) |
|
|
(1,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$ |
499,649 |
|
|
$ |
(117,666 |
) |
|
$ |
205,201 |
|
|
$ |
259,282 |
|
|
$ |
213,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
Weighted average common shares outstanding
|
|
|
68,975,743 |
|
|
|
65,058,327 |
|
|
|
64,361,535 |
|
|
|
64,736,830 |
|
|
|
64,744,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share, before cumulative effect
of a change in accounting principle
|
|
$ |
7.24 |
|
|
$ |
(1.81 |
) |
|
$ |
3.19 |
|
|
$ |
4.01 |
|
|
$ |
2.55 |
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$ |
7.24 |
|
|
$ |
(1.81 |
) |
|
$ |
3.19 |
|
|
$ |
4.01 |
|
|
$ |
3.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
Weighted average common shares outstanding
|
|
|
72,299,050 |
|
|
|
65,058,327 |
|
|
|
69,993,136 |
|
|
|
70,279,467 |
|
|
|
67,919,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share, before cumulative
effect of a change in accounting principle
|
|
$ |
6.93 |
|
|
$ |
(1.81 |
) |
|
$ |
2.98 |
|
|
$ |
3.73 |
|
|
$ |
2.46 |
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share(1)(2)
|
|
$ |
6.93 |
|
|
$ |
(1.81 |
) |
|
$ |
2.98 |
|
|
$ |
3.73 |
|
|
$ |
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share data) | |
GAAP Underwriting Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expense ratio
|
|
|
66.7 |
% |
|
|
90.5 |
% |
|
|
69.9 |
% |
|
|
67.8 |
% |
|
|
69.6 |
% |
Underwriting expense ratio
|
|
|
27.7 |
|
|
|
27.1 |
|
|
|
27.3 |
|
|
|
29.3 |
|
|
|
30.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
94.4 |
% |
|
|
117.6 |
% |
|
|
97.2 |
% |
|
|
97.1 |
% |
|
|
99.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash
|
|
$ |
7,066,088 |
|
|
$ |
5,970,319 |
|
|
$ |
5,124,683 |
|
|
$ |
4,255,062 |
|
|
$ |
3,101,711 |
|
Total assets
|
|
|
8,953,712 |
|
|
|
8,646,612 |
|
|
|
7,555,693 |
|
|
|
6,454,919 |
|
|
|
5,316,008 |
|
Unpaid losses and loss adjustment expenses
|
|
|
5,142,159 |
|
|
|
5,117,708 |
|
|
|
4,224,624 |
|
|
|
3,399,535 |
|
|
|
2,871,552 |
|
Debt obligations
|
|
|
512,504 |
|
|
|
469,155 |
|
|
|
376,040 |
|
|
|
376,892 |
|
|
|
206,340 |
|
Total shareholders equity
|
|
|
2,083,579 |
|
|
|
1,639,455 |
|
|
|
1,568,236 |
|
|
|
1,356,271 |
|
|
|
1,027,001 |
|
Book value per common share(3)(4)
|
|
$ |
27.92 |
|
|
$ |
22.31 |
|
|
$ |
24.22 |
|
|
$ |
20.87 |
|
|
$ |
15.80 |
|
Dividends per common share(4)
|
|
|
0.13 |
|
|
|
0.13 |
|
|
|
0.13 |
|
|
|
0.11 |
|
|
|
0.10 |
|
|
|
(1) |
The Emerging Issues Task Force (EITF) Issue 4-08
The Effect of Contingently Convertible Instruments on
Diluted Earnings Per Share, which is effective for periods
ending after December 15, 2004, requires that the dilutive
effect of contingently convertible debt securities, with a
market price threshold, should be included in diluted earnings
per share. The terms of our convertible senior debentures, which
were issued in June 2002, (see Note 13 to our consolidated
financial statements) meet the criteria defined in EITF
Issue 4-08, and
accordingly, the effect of conversion of our convertible senior
debentures to common shares has been assumed when calculating
our diluted earnings per share for all years. See
Notes 3(l) and 6 to our consolidated financial statements
included in this
Form 10-K. |
|
(2) |
Inclusion of restricted common shares, stock options and the
effect of the conversion of our convertible debt to common
shares would have an antidilutive effect on the 2005 diluted
earnings per common share (i.e., the diluted earnings per common
share would be greater than the basic earnings per common
share). Accordingly, such common shares were excluded from the
calculations of the 2005 diluted earnings per common share. See
Notes 3(l) and 6 to our consolidated financial statements
included in this
Form 10-K. |
|
(3) |
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). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total shareholders equity
|
|
$ |
2,083.6 |
|
|
$ |
1,639.5 |
|
|
$ |
1,568.2 |
|
|
$ |
1,356.3 |
|
|
$ |
1,027.0 |
|
Less: equity related to preferred stock
|
|
|
97.5 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
$ |
1,986.1 |
|
|
$ |
1,542.0 |
|
|
$ |
1,568.2 |
|
|
$ |
1,356.3 |
|
|
$ |
1,027.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
71,140,948 |
|
|
|
69,127,532 |
|
|
|
64,754,978 |
|
|
|
64,996,166 |
|
|
|
65,003,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per common share
|
|
$ |
27.92 |
|
|
$ |
22.31 |
|
|
$ |
24.22 |
|
|
$ |
20.87 |
|
|
$ |
15.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
Based on our common shares outstanding of: 71,140,948 as of
December 31, 2006; 69,127,532 as of December 31, 2005;
64,754,978 as of December 31, 2004; 64,996,166 as of
December 31, 2003; and 65,003,963 as of December 31,
2002. |
52
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
Odyssey Re Holdings Corp. is a holding company, incorporated in
the state of Delaware, which owns all of the common shares of
Odyssey America Reinsurance Corporation, its principal operating
subsidiary. Odyssey America directly or indirectly owns all of
the capital stock of the following companies: Clearwater
Insurance Company; Clearwater Select Insurance Company; Odyssey
UK Holdings Corporation; Newline Underwriting Management Ltd.,
which owns and manages Newline Syndicate 1218, a member of
Lloyds of London; Newline Insurance Company Limited;
Hudson Insurance Company; Hudson Specialty Insurance Company;
and Napa River Insurance Services, Inc.
We are a leading United States based underwriter of reinsurance,
providing a full range of property and casualty products on a
worldwide basis. We offer a broad range of both treaty and
facultative reinsurance to property and casualty insurers and
reinsurers. We also write insurance in the United States and
through the Lloyds marketplace.
Our gross premiums written for the year ended December 31,
2006 were $2,335.7 million, a decrease of
$291.2 million, or 11.1%, compared to gross premiums
written for the year ended December 31, 2005 of
$2,626.9 million. Gross premiums written included
reinstatement premiums related to catastrophe events of
$5.4 million and $70.4 million for the years ended
December 31, 2006 and 2005, respectively. Our business
outside of the United States accounted for 45.8% of our gross
premiums written for the year ended December 31, 2006,
compared to 44.8% for the year ended December 31, 2005. For
the years ended December 31, 2006 and 2005, our net
premiums written were $2,160.9 million and
$2,301.7 million, respectively. For the year ended
December 31, 2006, we had net income available to common
shareholders of $499.6 million and for the year ended
December 31, 2005, we had a net loss available to common
shareholders of $117.7 million. As of December 31,
2006, we had total assets of $8.9 billion and total
shareholders equity of $2.1 billion.
The property and casualty reinsurance and insurance industries
use the combined ratio as a measure of underwriting
profitability. The GAAP combined ratio is the sum of losses and
loss adjustment expenses (LAE) incurred as a
percentage of net premiums earned, plus underwriting expenses,
which include acquisition costs and other underwriting expenses,
as a percentage of net premiums earned. The combined ratio
reflects only underwriting results, and does not include
investment results. Underwriting profitability is subject to
significant fluctuations due to catastrophic events,
competition, economic and social conditions, foreign currency
fluctuations and other factors. Our combined ratio was 94.4% for
the year ended December 31, 2006, compared to 117.6% for
the year ended December 31, 2005.
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. As additional
information becomes available, including information from ceding
companies, 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, 2006, 2005 and 2004, current year catastrophe
events were $34.9 million, $537.9 million and
$138.8 million, respectively.
For the year ended December 31, 2005, the total current
year catastrophe losses of $537.9 million include net
losses and LAE of $445.9 million, which is after
reinsurance of $241.1 million, related to Hurricanes
Katrina, Rita and Wilma, which occurred during the third and
fourth quarters of 2005. In addition to the net losses and LAE,
we assumed $9.9 million in net reinstatement premiums
received, resulting in an underwriting loss of
$436.0 million related to these three hurricanes. In
addition, for the year ended December 31, 2005, we incurred
losses of $25.6 million related to Windstorm Erwin. For the
year ended December 31, 2006, the loss estimates for
Hurricanes Katrina, Rita and Wilma were increased by
$49.4 million (11.1% of 2005 estimate) attributable to
unexpected loss emergence on marine and Florida proportional
property accounts. This increase was partially
53
offset by reduced loss estimates on other prior period property
catastrophes due to favorable emergence during the year.
For the year ended December 31, 2004, the total current
year catastrophe losses of $138.8 million include net
losses and LAE of $93.4 million, which is after reinsurance
of $77.8 million, related to Hurricanes Charley, Frances,
Ivan and Jeanne (the 2004 Florida Hurricanes). In
addition to the net losses and LAE, we ceded $4.0 million
in net reinstatement premiums paid, resulting in an underwriting
loss of $97.4 million from these storms. As a result of the
uncertainty and complexity in estimating losses from the 2004
Florida Hurricanes, we incurred additional underwriting losses
of $3.1 million and $12.6 million, net of applicable
reinstatement premiums, for the years ended December 31,
2006 and 2005, respectively.
We operate our business through four divisions: the
Americas, EuroAsia, London Market and U.S. Insurance.
The Americas division is our largest division and writes
casualty, surety and property treaty reinsurance, and
facultative casualty reinsurance, in the United States and
Canada, and primarily treaty and facultative property
reinsurance in Central and South America.
The EuroAsia division consists of our international reinsurance
business, which is geographically dispersed, mainly throughout
the European Union, followed by Japan, Eastern Europe, the
Pacific Rim, and the Middle East.
The London Market division is comprised of our Lloyds of
London business, in which we participate through our 100%
ownership of Newline, our London branch office and our recently
formed London-based casualty insurer Newline Insurance Company
Limited. The London Market division writes insurance and
reinsurance business worldwide, principally through brokers.
The U.S. Insurance division writes specialty insurance
lines and classes of business, such as medical malpractice,
professional liability and non-standard personal auto.
Restatement of Consolidated Financial Statements
On March 31, 2006, we restated our consolidated financial
statements as of and for the years ended December 31, 2000
through 2004, as well as our unaudited financial information as
of and for the nine months ended September 30, 2005, to
correct for accounting errors associated with certain
reinsurance contracts entered into by us between 1998 and 2004.
On August 28, 2006, we restated our unaudited financial
information as of March 31, 2006 and December 31, 2005
and for the three months ended March 31, 2006 and 2005, to
correct for accounting errors associated with certain
investments held by us, and on October 16, 2006 we filed an
Annual Report on
Form 10-K/ A to
reflect the impact of this restatement on our consolidated
financial statements as of and for the years ended
December 31, 2001 through 2005. The total cumulative impact
of these restatements through December 31, 2005 was to
decrease shareholders equity by $19.6 million, after
tax. The aggregate net effect of the restatements for the year
ended December 31, 2005 was to increase net loss available
to common shareholders by $17.3 million, and for the year
ended December 31, 2004 was to increase net income
available to common shareholders by $18.3 million. The
effects of the restatements are reflected in this
Managements Discussion and Analysis and our consolidated
financial statements and accompanying notes included in this
Form 10-K.
Critical Accounting Estimates
The consolidated financial statements and related notes included
in Item 8 of this
Form 10-K, have
been prepared in accordance with accounting principles generally
accepted in the United States (GAAP) and include the
accounts of Odyssey Re Holdings Corp. and its subsidiaries. For
a discussion of our significant accounting policies, see
Note 3 to our consolidated financial statements.
Critical accounting estimates are defined as those that are both
important to the portrayal of our financial condition and
results of operations and require us to exercise significant
judgment. The preparation of consolidated financial statements
in accordance with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of
material contingent
54
assets and liabilities, including litigation contingencies.
These estimates, by necessity, are based on assumptions about
numerous factors.
We review our critical accounting estimates and assumptions
quarterly. These reviews include the estimate of reinsurance
premiums and premium related amounts, establishing deferred
acquisition costs, an evaluation of the adequacy of reserves for
unpaid losses and LAE, review of our reinsurance and
retrocession agreements, an analysis of the recoverability of
deferred income tax assets and an evaluation of the investment
portfolio for other-than-temporary declines in estimated fair
value. Actual results may differ materially from the estimates
and assumptions used in preparing the consolidated financial
statements.
We derive our revenues from two principal sources:
(i) premiums from insurance placed and reinsurance assumed,
net of premiums ceded (net premiums written); and
(ii) income from investments. Net premiums written are
earned (net premiums earned) as revenue over the terms of the
underlying contracts or certificates in force. The relationship
between net premiums written and net premiums earned will,
therefore, vary depending on the volume and inception dates of
the business assumed and ceded and the mix of such business
between proportional and excess of loss reinsurance.
Consistent with our significant accounting policies, for our
reinsurance business we utilize estimates in establishing
premiums written, the corresponding acquisition expenses and
unearned premium reserves. These estimates are required to
reflect differences in the timing of the receipt of accounts
from the ceding company and the actual due dates of the accounts
at the close of each accounting period.
55
The following table displays, by division, the estimates
included in our consolidated financial statements as of and for
the years ended December 31, 2006, 2005 and 2004 related to
gross premiums written, acquisition costs, premiums receivable
and unearned premium reserves (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change For the Year Ended | |
|
|
As of December 31, | |
|
December 31, | |
|
|
| |
|
| |
Division |
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Gross Premiums Written |
Americas
|
|
$ |
218.5 |
|
|
$ |
278.9 |
|
|
$ |
274.1 |
|
|
$ |
(60.4 |
) |
|
$ |
4.8 |
|
|
$ |
3.4 |
|
EuroAsia
|
|
|
132.1 |
|
|
|
122.9 |
|
|
|
115.6 |
|
|
|
9.2 |
|
|
|
7.3 |
|
|
|
39.6 |
|
London Market
|
|
|
38.5 |
|
|
|
73.0 |
|
|
|
61.2 |
|
|
|
(34.5 |
) |
|
|
11.8 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
389.1 |
|
|
$ |
474.8 |
|
|
$ |
450.9 |
|
|
$ |
(85.7 |
) |
|
$ |
23.9 |
|
|
$ |
48.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Costs |
Americas
|
|
$ |
49.4 |
|
|
$ |
60.0 |
|
|
$ |
68.2 |
|
|
$ |
(10.6 |
) |
|
$ |
(8.2 |
) |
|
$ |
(28.1 |
) |
EuroAsia
|
|
|
40.6 |
|
|
|
36.5 |
|
|
|
34.5 |
|
|
|
4.1 |
|
|
|
2.0 |
|
|
|
10.9 |
|
London Market
|
|
|
3.0 |
|
|
|
6.6 |
|
|
|
8.9 |
|
|
|
(3.6 |
) |
|
|
(2.3 |
) |
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
93.0 |
|
|
$ |
103.1 |
|
|
$ |
111.6 |
|
|
$ |
(10.1 |
) |
|
$ |
(8.5 |
) |
|
$ |
(21.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Receivable |
Americas
|
|
$ |
169.1 |
|
|
$ |
218.9 |
|
|
$ |
205.9 |
|
|
$ |
(49.8 |
) |
|
$ |
13.0 |
|
|
$ |
11.5 |
|
EuroAsia
|
|
|
91.5 |
|
|
|
86.4 |
|
|
|
81.1 |
|
|
|
5.1 |
|
|
|
5.3 |
|
|
|
28.7 |
|
London Market
|
|
|
35.5 |
|
|
|
66.4 |
|
|
|
52.3 |
|
|
|
(30.9 |
) |
|
|
14.1 |
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
296.1 |
|
|
$ |
371.7 |
|
|
$ |
339.3 |
|
|
$ |
(75.6 |
) |
|
$ |
32.4 |
|
|
$ |
46.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned Premium Reserves |
Americas
|
|
$ |
139.1 |
|
|
$ |
172.4 |
|
|
$ |
162.7 |
|
|
$ |
(33.3 |
) |
|
$ |
9.7 |
|
|
$ |
(4.9 |
) |
EuroAsia
|
|
|
100.8 |
|
|
|
96.6 |
|
|
|
97.3 |
|
|
|
4.2 |
|
|
|
(0.7 |
) |
|
|
41.6 |
|
London Market
|
|
|
13.1 |
|
|
|
22.2 |
|
|
|
13.6 |
|
|
|
(9.1 |
) |
|
|
8.6 |
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
253.0 |
|
|
$ |
291.2 |
|
|
$ |
273.6 |
|
|
$ |
(38.2 |
) |
|
$ |
17.6 |
|
|
$ |
31.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written estimates, acquisition costs, premiums
receivable and unearned premium reserves are established on a
contract level for significant accounts due but not reported by
the ceding company at the end of each accounting period. The
estimated ultimate premium for the contract, actual accounts
reported by the ceding company, and our own experience on the
contract are considered in establishing the estimate at the end
of each accounting period. Subsequent adjustments, based on
actual results, are recorded in the period in which they become
known. The estimated premiums receivable balances are considered
fully collectible. The estimates primarily represent the most
current two underwriting years of account for which all
corresponding reported accounts have been settled within
contract terms. The estimates are considered critical
accounting estimates because changes in these estimates
can materially affect net income.
The difference between estimates and the actual accounts
received may be material as a result of different reporting
practices by ceding companies across geographic locations.
Estimates may be subject to material fluctuations on an
individual contract level compared to the actual information
received, and any differences are recorded in the respective
financial period in which they become known. Since the
assumptions used to determine the estimates are reviewed
quarterly and compared to the information received during the
quarter, the variance in the aggregate estimates compared to the
actual information when received is minimized. In addition,
during the quarters review of these contracts, any change
in original estimate compared to the new estimate is reflected
in the appropriate financial period.
56
In any specific financial period, the original estimated premium
for a specific contract may vary from actual premium reported
through the life of the contract by up to 10% to 15% due to the
reporting patterns of the ceding companies and, in some cases,
movements in foreign exchange rates over the period. However,
historically, the final reported premium compared to the
original estimated premium has deviated by smaller amounts.
Our estimates are based on contract and policy terms. Estimates
are based on information typically received in the form of a
bordereau, broker notifications and/or discussions with ceding
companies. These estimates, by necessity, are based on
assumptions regarding numerous factors. These can include
premium or loss trends, which can be influenced by local
conditions in a particular region, or other economic factors and
legal or legislative developments which can develop over time.
The risk associated with estimating the performance under our
contracts with our ceding companies is the impact of events or
trends that could not have been reasonably anticipated at the
time the estimates were performed. Our business is diversified
across ceding companies and there is no individual ceding
company which represents more than 2.4% of our gross premiums
written in 2006. As a result, we believe the risks of material
changes over time are mitigated.
We review information received from ceding companies for
reasonableness based on past experience with the particular
ceding company or our general experience across the subject
class of business. We also query information provided by ceding
companies for reasonableness. Reinsurance contracts under which
we assume business generally contain specific provisions which
allow us to perform audits of the ceding company to ensure
compliance with the terms and conditions of the contract,
including accurate and timely reporting of information.
Management must make judgments about the ultimate premiums
written and earned by us. Reported premiums written and earned
are based upon reports received from ceding companies,
supplemented by our internal estimates of premiums written for
which ceding company reports have not been received. We
establish our own estimates based on discussions and
correspondence with our ceding companies and brokers during the
contract negotiation process and over the contract risk period.
The determination of premium estimates requires a review of our
experience with the ceding companies, familiarity with each
market, an analysis and understanding of the characteristics of
each line of business and the ability to project the impact of
current economic indicators on the volume of business written
and ceded by our cedants. Premium estimates are updated when new
information is received. Differences between such estimates and
actual amounts are recorded in the period in which estimates are
changed or the actual amounts are determined.
|
|
|
Deferred Acquisition Costs |
Acquisition costs consist of commissions and brokerage expenses
incurred on insurance and reinsurance business written. These
costs are deferred and amortized over the period in which the
related premiums are earned, which is generally one year.
Deferred acquisition costs are limited to their estimated
realizable value based on the related unearned premiums, which
considers anticipated losses and LAE and estimated remaining
costs of servicing the business, all based on our historical
experience. The realizable value of our deferred acquisition
costs is determined without consideration of investment income.
The estimates are continually reviewed by us and any adjustments
are made in the accounting period in which an adjustment is
considered necessary.
|
|
|
Reserves for Unpaid Losses and Loss Adjustment
Expenses |
Our losses and LAE reserves, for both reported and unreported
claims obligations, are maintained to cover the estimated
ultimate liability for all of our insurance and reinsurance
obligations. Losses and LAE reserves are categorized in one of
three ways: (i) case reserves, which represent unpaid
losses and LAE as reported by cedants to us,
(ii) additional case reserves (ACRs), which are
reserves we establish in excess of the case reserves reported by
the cedant on individual claim events, and (iii) incurred
but not reported reserves (IBNR), which are reserves
for losses and LAE that have been incurred, but have not yet
been reported to us, as well as additional amounts relating to
losses already reported, that are in excess of case and ACR
reserves. Incurred but not reported reserves are estimates based
on all information currently available to us and are reevaluated
quarterly utilizing the most recent information supplied from
our cedants.
57
We rely on initial and subsequent claims reports received from
ceding companies to establish our estimates of losses and LAE.
The types of information that we receive from ceding companies
generally vary by the type of contract. Proportional, or quota
share, contracts are typically reported on a quarterly basis,
providing premium and loss activity as estimated by the ceding
company. Reporting for excess of loss and facultative contracts
includes detailed individual claim information, including a
description of the loss, confirmation of liability by the cedant
and the cedants current estimate of the ultimate liability
under the claim. Upon receipt of claim notices from cedants, we
review the nature of the claim against the scope of coverage
provided under the contract. Questions arise from time to time
regarding the interpretation of the characteristics of a
particular claim measured against the scope of contract terms
and conditions. Reinsurance contracts under which we assume
business generally contain specific dispute resolution
provisions in the event that there is a coverage dispute with
the ceding company. The resolution of any individual dispute may
impact estimates of ultimate claims liabilities. Reported claims
are in various stages of the settlement process. Each claim is
settled individually based on its merits, and certain claims may
take several years to ultimately settle, particularly where
legal action is involved. Based on an assessment of the
circumstances supporting the claim, we may choose to establish
additional case reserves over the amount reported by the ceding
company. Aggregate case reserves established in addition to
reserves reported by ceding companies were $17.2 million
and $17.3 million as of December 31, 2006 and
December 31, 2005, respectively. Due to potential
differences in ceding company reserving and reporting practices,
we perform periodic audits of our ceding companies to ensure the
underwriting and claims procedures of the cedant are consistent
with representations made by the cedant during the underwriting
process and meet the terms of the reinsurance contract. Our
estimates of ultimate loss liabilities make appropriate
adjustment for inconsistencies uncovered in this audit process.
We also monitor our internal processes to ensure that
information received from ceding companies is processed in a
timely manner.
The reserve methodologies employed by us are dependent on the
nature and quality of the data that we collect from ceding
companies. This data primarily consists of loss amounts reported
by the ceding companies, loss payments made by ceding companies,
and premiums written and earned reported by the ceding companies
or estimated by us. Underwriting and claim information provided
by our ceding companies is aggregated by the year in which each
treaty is written into groups of business by geographic region
and type of business to facilitate analysis, generally referred
to as reserve cells. These reserve cells are
reviewed annually and change over time as our business mix
changes. We supplement this information with claims and
underwriting audits of specific contracts, internally developed
pricing trends, as well as loss trend data developed from
industry sources. This information is used to develop point
estimates of carried reserves for each business segment. These
individual point estimates, when aggregated, represent the total
carried losses and LAE reserves carried in our consolidated
financial statements. Due to the uncertainty involving estimates
of ultimate loss exposures, we do not attempt to produce a range
around our point estimate of loss. The actuarial techniques for
projecting losses and LAE reserves by reserve cell rely on
historical paid and case reserve loss emergence patterns and
insurance and reinsurance pricing trends to establish the claims
emergence of future periods with respect to all reported and
unreported insured events that have occurred on or before the
balance sheet date.
Our estimate of ultimate loss is determined based on a review of
the results of several commonly accepted actuarial projection
methodologies incorporating the quantitative and qualitative
information described above. The specific methodologies we
utilize in our loss reserve review process include, but may not
be limited to (i) incurred and paid loss development
methods, (ii) incurred and paid Bornhuetter Ferguson
(BF) methods and (iii) loss ratio methods. The
incurred and paid loss development methods utilize loss
development patterns derived from historical loss emergence
trends usually based on cedant supplied claim information to
determine ultimate loss. These methods assume that the ratio of
losses in one period to losses in an earlier period will remain
constant in the future. Loss ratio methods multiply expected
loss ratios, derived from aggregated analyses of internally
developed pricing trends, by premium to determine ultimate loss.
The incurred and paid BF methods are a blend of the loss
development and loss ratio methods. These methods utilize both
loss development patterns, as well as expected loss ratios, to
determine ultimate loss. When using the BF methods, the initial
treaty year ultimate loss is based predominantly on expected
loss ratios. As loss experience matures, the estimate of
ultimate loss using this methodology is based predominantly on
loss development patterns. We generally do not utilize
methodologies that are dependent on claim counts reported, claim
counts settled or claim counts open. Due to the nature of our
business, this information is not routinely provided by the
ceding company for every treaty.
58
Consequently, actuarial methods utilizing this information
generally cannot be relied upon by us in our loss reserve
estimation process. As a result, for much or our business, the
separate analysis of frequency and severity loss activity
underlying overall loss emergence trends is not practical.
Generally, we rely on BF and loss ratio methods for estimating
ultimate loss liabilities for more recent treaty years. These
methodologies, at least in part, apply a loss ratio, determined
from aggregated analysis of internally developed pricing trends
across reserve cells, to premium earned on that business.
Adjustment to premium estimates generate appropriate adjustments
to ultimate loss estimates in the quarter in which they occur
using the BF and loss ratio methods. To estimate losses for more
mature treaty years, we generally rely on the incurred loss
development methodology, which does not rely on premium
estimates. In addition, we may use other methods to estimate
liabilities for specific types of claims. For property
catastrophe losses, we may utilize vendor catastrophe models to
estimate ultimate loss soon after a loss occurs, where loss
information is not yet reported to us from cedants. The
provision for asbestos loss liabilities is established based on
an annual review of internal and external trends in reported
loss and claim payments. IBNR is determined by subtracting the
total of paid loss and case reserves including ACRs from
ultimate loss.
We complete comprehensive reserve reviews, which include a
reassessment of loss development and expected loss ratio
assumptions, on an annual basis. The results of these reviews
are reflected in the period they are completed. Quarterly, we
compare actual loss emergence to expectations established by the
comprehensive loss reserve review process. In the event that
loss trends diverge from expected trends, we may have to adjust
our reserves for losses and LAE accordingly. Any adjustments
will be reflected in the periods in which they become known,
potentially resulting in adverse effects to our financial
results. We believe that the recorded estimates represent the
best estimate of unpaid losses and LAE based on the information
available at December 31, 2006.
Our most significant assumptions underlying our estimate of
losses and LAE reserves are as follows: (i) that historical
loss emergence trends are indicative of future loss development
trends; (ii) that internally developed pricing trends
provide a reasonable basis for determining loss ratio
expectations for recent underwriting years; and (iii) that
no provision is made for extraordinary future emergence of new
classes of loss or types of loss that are not sufficiently
represented in our historical database or that are not yet
quantifiable if not in our database.
We reported net adverse development for prior years of
$139.9 million, $172.7 million, and
$190.0 million for the years ended December 31, 2006,
2005, and 2004, respectively. The increases in prior year loss
estimates for these periods were due to a reevaluation of loss
reserve assumptions principally related to United States
casualty business written in 2001 and prior. Our actual loss
emergence reported in 2006, 2005, and 2004 for United States
casualty business written prior to 2002 was considerably greater
than expectations, which were based on historical loss emergence
information available prior to 2006, 2005, and 2004,
respectively. Upon consideration of this new loss emergence
information received during 2006, 2005, and 2004, we revised the
loss development assumptions used in our Untied States casualty
business loss reserving analyses and increased ultimate loss,
which had the effect of increasing our loss reserves for this
business.
The ultimate settlement value of loss and LAE related to
business written in prior periods, for the years ended
December 31, 2006, 2005, and 2004, exceeded our estimates
of reserves for losses and LAE as previously established at
December 31, 2005, 2004, and 2003 by 3.6%, 5.4%, and 8.0%,
respectively. Any future impact to income of changes in losses
and LAE estimates may vary considerably from historical
experience. Our estimates of ultimate loss exposures are based
upon the information we have available at any give point in time
and our assumptions based upon that information. Every 1% point
difference in the ultimate settlement value of loss exposures
compared to our estimate of reserves for losses and loss
adjustment expenses as of December 31, 2006 will impact
pre-tax income by $44.0 million.
59
If a change were to occur in the frequency and severity of
claims underlying our December 31, 2006 unpaid losses and
loss adjustment expenses, the approximate change in pre-tax
income would be as follows (in millions):
|
|
|
|
|
|
|
Decrease in | |
|
|
Pre-tax | |
|
|
Income | |
|
|
| |
2.50% unfavorable change
|
|
$ |
110.1 |
|
5.00% unfavorable change
|
|
|
220.2 |
|
7.50% unfavorable change
|
|
|
330.2 |
|
Historically, our actual results have varied considerably in
certain instances from our estimates of losses and LAE because
historical loss emergence trends have not been indicative of
future emergence for certain segments of our business. In recent
years, we experienced loss emergence, resulting from a
combination of higher claim frequency and severity as reported
by our cedants, greater than expectations that were established
based on a review of prior years loss emergence trends,
particularly for business written in the period 1997 through
2001. General liability and excess workers compensation
classes of business during these years were adversely impacted
by the highly competitive conditions in the industry at that
time. These competitive conditions resulted in price pressure
and relatively broader coverage terms, thereby affecting the
ability of standard actuarial techniques to generate reliable
estimates of ultimate loss. Similarly, directors and
officers professional liability lines were impacted by the
increase in frequency and severity of claims resulting from an
increase in shareholder lawsuits against corporations and their
officers and directors, corporate bankruptcies and other
financial and management improprieties in the 1990s through
early 2000s.
The following table provides detail on net adverse
(favorable) loss and LAE development for prior years, by
division, for the years ended December 31, 2006, 2005, and
2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Americas
|
|
$ |
212.7 |
|
|
$ |
213.2 |
|
|
$ |
184.8 |
|
EuroAsia
|
|
|
(9.0 |
) |
|
|
(8.7 |
) |
|
|
6.6 |
|
London Market
|
|
|
(24.8 |
) |
|
|
(22.8 |
) |
|
|
(0.2 |
) |
U.S. Insurance
|
|
|
(39.0 |
) |
|
|
(9.0 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total loss and LAE development
|
|
$ |
139.9 |
|
|
$ |
172.7 |
|
|
$ |
190.0 |
|
|
|
|
|
|
|
|
|
|
|
The Americas division reported net adverse loss development for
prior years of $212.7 million, $213.2 million, and
$184.8 million for the years ended December 31, 2006,
2005, and 2004, respectively. For the year ended
December 31, 2006, the increase in prior year loss
estimates includes a $43.0 million increase in loss
estimates for property catastrophes, principally due to
unexpected marine loss emergence on Hurricane Rita and the
triggering of industry loss warranty contracts written by us for
Hurricane Wilma due to unexpected deterioration in industry-wide
Wilma loss estimates as well as unexpected loss emergence on
Florida proportional property contracts in the period. In
addition, asbestos loss estimates were increased by
$27.1 million resulting from the annual review of these
liabilities. The remaining net adverse loss development on prior
years of $142.6 million is principally attributable to
increased loss estimates due to loss emergence greater than
expectations in 2006 on U.S. casualty business written in
2001 and prior. Partially offsetting this increase is a decline
in loss estimates due to loss emergence less than expectations
for United States casualty business in more recent years. For
the year ended December 31, 2005, the increase in prior
year loss estimates includes a $5.9 million increase in the
loss estimates for prior period catastrophe losses due to
greater than expected loss emergence on the 2004 Florida
Hurricanes, and $41.2 million for increased asbestos loss
estimates resulting from the annual review of these liabilities.
The remaining net adverse loss development on prior years of
$166.1 million is principally attributable to loss
emergence greater than expectations in 2005 on
U.S. casualty business written in 2001 and prior, partially
offset by a decline in loss estimates for United States casualty
business in more recent years due to loss emergence less than
expectations in the period. For the year ended December 31,
2004, the increase in prior year loss estimates includes a
$5.7 million increase in loss estimates for prior period
catastrophe losses due to greater than expected loss emergence
in 2004 on the Mexico floods which occurred in 2003, and
$30.0 million for increased asbestos loss estimates
resulting from the annual review of these liabilities.
60
The remaining net adverse loss development on prior years of
$149.1 million is principally attributable to loss
emergence greater than expectations in 2004 on
U.S. casualty business written in 2001 and prior, partially
offset by a decline in loss estimates for United States casualty
business in more recent years due to emergence less than
expectations in the period. The difficulty in anticipating the
ultimate losses attributable to U.S. casualty business is
due to calendar period emergence exceeding expectations that
were established based on information available in prior years.
This includes estimating the cost of known claims and, more
importantly, estimating the cost of claims where no reports have
yet been made. In addition, the ability to anticipate the
ultimate value of losses is made difficult by the long period of
time that elapses before an actual loss is known and
determinable, particularly for professional liability lines
where claims are often litigated to achieve settlement. In
particular, competitive market conditions during the 1997 to
2001 period have resulted in unexpectedly prolonged emergence
patterns as a result of: (i) an increasing level of
deductibles, (ii) expanded coverage, (iii) expanded
policy terms and (iv) a proliferation of corporate
improprieties and bankruptcies. Losses attributable to general
liability and excess workers compensation classes of
business during the 1997 to 2001 period have also demonstrated a
higher incidence of severity due to relatively broad coverage
available under policy forms used during these periods. These
factors have adversely impacted our ability to estimate losses
and LAE in subsequent periods attributable to business written
during this period.
The EuroAsia division reported net favorable loss development
for prior years of $9.0 million and $8.7 million for
the years ended December 31, 2006 and 2005, respectively,
and net adverse loss development of $6.6 million for the
year ended December 31, 2004. For the year ended
December 31, 2006, the reduction in prior year loss
estimates is driven by favorable emergence on prior period
catastrophe losses, marine and credit lines of business in the
period. For the year ended December 31, 2005, the reduction
in prior year loss estimates is principally attributable to
favorable loss emergence on liability and bond exposures,
partially offset by adverse development on prior year
catastrophes of $7.4 million predominantly attributable to
unexpected claim emergence in the period on Typhoon Songda and
the Indonesian earthquake and resulting tsunami. For the year
ended December 31, 2004, the increase in prior year loss
estimates is principally related to emergence exceeding our
expectations on bond exposures in 2004.
The London Market division reported net favorable development
for prior years of $24.8 million, $22.8 million, and
$0.2 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 loss emergence on
satellite, accident and health, non-catastrophe property, and
aviation exposures, partially offset by $3.6 million of net
adverse loss development on prior period catastrophe losses in
2006. For the year ended December 31, 2005, the reduction
in prior year loss estimates is principally due to favorable
emergence on aviation, satellite and non-catastrophe property
exposures, partially offset by $1.7 million of net adverse
loss development on prior period catastrophe losses in the
period.
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.
Estimates of reserves for unpaid losses and LAE are contingent
upon legislative, regulatory, social, economic and legal events
and trends that may or may not occur or develop in the future,
thereby affecting assumptions of claim frequency and severity.
Examples of emerging claim and coverage issues and trends in
recent years that could affect reserve estimates include:
(i) developments in tort liability law;
(ii) legislative attempts at asbestos liability reform;
(iii) uncertainties regarding the future scope of the
Terrorism Risk Insurance Act of 2002; (iv) an increase in
shareholder derivative suits against corporations and their
officers and directors; and (v) increasing governmental
focus on, and involvement in, the insurance and reinsurance
industry generally. The eventual outcome of these events and
trends may be different from the assumptions underlying our loss
reserve estimates. In the event that loss trends diverge from
expected trends during the period, we adjust our reserves to
reflect the change in losses indicated by revised expected loss
trends. On a quarterly basis, we compare actual emergence of the
total value of newly reported losses to the total value of
losses expected to be
61
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.
The following table summarizes, by type of reserve, the unpaid
losses and LAE reserve as of December 31, 2006 and 2005.
Case reserves represent unpaid claim reports provided by cedants
to us plus additional reserves determined by us. IBNR is the
estimate of unreported loss liabilities established by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Case | |
|
|
|
Total | |
|
Case | |
|
|
|
Total | |
|
|
Reserves | |
|
IBNR | |
|
Reserves | |
|
Reserves | |
|
IBNR | |
|
Reserves | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$ |
1,661.5 |
|
|
$ |
1,285.0 |
|
|
$ |
2,946.5 |
|
|
$ |
1,889.8 |
|
|
$ |
1,245.2 |
|
|
$ |
3,135.0 |
|
|
Ceded
|
|
|
(292.1 |
) |
|
|
(135.7 |
) |
|
|
(427.8 |
) |
|
|
(605.5 |
) |
|
|
(187.0 |
) |
|
|
(792.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
1,369.4 |
|
|
|
1,149.3 |
|
|
|
2,518.7 |
|
|
|
1,284.3 |
|
|
|
1,058.2 |
|
|
|
2,342.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EuroAsia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
322.3 |
|
|
|
258.5 |
|
|
|
580.8 |
|
|
|
267.5 |
|
|
|
212.1 |
|
|
|
479.6 |
|
|
Ceded
|
|
|
(3.4 |
) |
|
|
(1.8 |
) |
|
|
(5.2 |
) |
|
|
(9.7 |
) |
|
|
(5.3 |
) |
|
|
(15.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
318.9 |
|
|
|
256.7 |
|
|
|
575.6 |
|
|
|
257.8 |
|
|
|
206.8 |
|
|
|
464.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
London Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
395.2 |
|
|
|
649.8 |
|
|
|
1,045.0 |
|
|
|
345.6 |
|
|
|
664.3 |
|
|
|
1,009.9 |
|
|
Ceded
|
|
|
(67.4 |
) |
|
|
(69.5 |
) |
|
|
(136.9 |
) |
|
|
(112.8 |
) |
|
|
(110.6 |
) |
|
|
(223.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
327.8 |
|
|
|
580.3 |
|
|
|
908.1 |
|
|
|
232.8 |
|
|
|
553.7 |
|
|
|
786.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
160.6 |
|
|
|
409.2 |
|
|
|
569.8 |
|
|
|
121.6 |
|
|
|
371.6 |
|
|
|
493.2 |
|
|
Ceded
|
|
|
(48.2 |
) |
|
|
(120.9 |
) |
|
|
(169.1 |
) |
|
|
(49.6 |
) |
|
|
(126.3 |
) |
|
|
(175.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
112.4 |
|
|
|
288.3 |
|
|
|
400.7 |
|
|
|
72.0 |
|
|
|
245.3 |
|
|
|
317.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
2,539.6 |
|
|
|
2,602.5 |
|
|
|
5,142.1 |
|
|
|
2,624.5 |
|
|
|
2,493.2 |
|
|
|
5,117.7 |
|
|
Ceded
|
|
|
(411.1 |
) |
|
|
(327.9 |
) |
|
|
(739.0 |
) |
|
|
(777.6 |
) |
|
|
(429.2 |
) |
|
|
(1,206.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
2,128.5 |
|
|
$ |
2,274.6 |
|
|
$ |
4,403.1 |
|
|
$ |
1,846.9 |
|
|
$ |
2,064.0 |
|
|
$ |
3,910.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for IBNR in unpaid losses and LAE at December 31,
2006 is $2,274.6 million. For illustration purposes, a
change in the expected loss ratio expectations for recent treaty
years that increases the year ended December 31, 2006
calendar year loss ratio by 2.5 loss ratio points would increase
IBNR by $55.6 million. A change in loss emergence trends
that increases unpaid losses and LAE at December 31, 2006
by 2.5% would increase IBNR by $110.1 million.
We have exposure to asbestos, environmental pollution and other
latent injury damage claims resulting from policies written
prior to 1986. Exposure arises from reinsurance contracts under
which we assumed liabilities, on an indemnity or assumption
basis, from ceding companies, primarily in connection with
general liability insurance policies issued by such ceding
companies. Our estimate of our ultimate liability for such
exposures includes case basis reserves and a provision for IBNR
claims. The provision for asbestos loss liabilities is
established based on an annual review of Company and external
trends in reported loss and claim payments.
62
Estimation of ultimate asbestos and environmental liabilities is
unusually difficult due to several significant issues
surrounding these exposures. Among the issues are: (i) the
long period between exposure and manifestation of an injury;
(ii) difficulty in identifying the sources of asbestos or
environmental contamination; (iii) difficulty in allocating
responsibility or liability for asbestos or environmental
damage; (iv) difficulty determining whether coverage
exists; (v) changes in underlying laws and judicial
interpretation of those laws; and (vi) uncertainty
regarding the identity and number of insureds with potential
asbestos or environmental exposure.
Several additional factors have emerged in recent years
regarding asbestos exposure that further compound the difficulty
in estimating ultimate losses for this exposure. These factors
include: (i) continued growth in the number of claims filed
due to an increasingly aggressive plaintiffs bar;
(ii) an increase in claims involving defendants formerly
regarded as peripheral; (iii) growth in the use of
bankruptcy filings by companies as a result of asbestos
liabilities, which companies in some cases attempt to resolve
asbestos liabilities in a manner that is prejudicial to
insurers; (iv) concentration of claims in states with laws
or jury pools particularly favorable to plaintiffs; and
(v) the potential that states or the federal government may
enact legislation on asbestos litigation reform.
We believe that these uncertainties and factors make projections
of these exposures, particularly asbestos, subject to less
predictability relative to non-environmental and non-asbestos
exposures. Current estimates, as of December 31, 2006, of
our asbestos and environmental losses and LAE, net of
reinsurance, are $189.0 million and $26.7 million,
respectively. See Note 10 to the consolidated financial
statements for additional historical information on losses and
LAE reserves for these exposures.
The following tables provide the historical gross and net
asbestos and environmental losses and LAE incurred for the years
ending December 31, 2006, 2005 and 2004 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Asbestos
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross losses and LAE incurred
|
|
$ |
62.5 |
|
|
$ |
54.2 |
|
|
$ |
54.2 |
|
Net losses and LAE incurred
|
|
|
27.1 |
|
|
|
41.2 |
|
|
|
30.0 |
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross losses and LAE incurred
|
|
$ |
(0.6 |
) |
|
$ |
9.7 |
|
|
$ |
2.8 |
|
Net losses and LAE incurred
|
|
|
(2.2 |
) |
|
|
(0.9 |
) |
|
|
(21.1 |
) |
The asbestos open claim count as of December 31, 2006 was
1,553, amounting to $228.5 million in gross case losses and
LAE reserves. The largest 10 reported claims account for 15.2%
of the gross case reserves, with an average reserve of
$3.5 million. The asbestos open claim count as of
December 31, 2005 was 1,532, amounting to
$206.0 million in gross case losses and LAE reserves. The
largest 10 reported claims account for 15.7% of the gross case
reserves, with an average reserve of $3.2 million. Gross
case reserves increased in 2006, as newly reported claims and
additional reported reserves on existing claims more than offset
case reserve reductions associated with claim payments in the
year. Based on an aggregation of claims by insured, our 10
largest insured involvements account for 42.7% of our gross case
reserves at December 31, 2006, compared to 47.8% at year end
2005. Based on our annual reserve study, we increased net
asbestos loss reserves by $27.1 million based on the
observed trends in our internal loss data as well as external
loss trends.
The environmental open claim count as of December 31, 2006
was 738, amounting to $28.9 million in gross case losses
and LAE reserves. The largest 10 reported claims account for
28.0% of the gross case reserves, with an average case reserve
of $0.8 million. The environmental open claim count as of
December 31, 2005 was 1,373, amounting to
$32.2 million in gross case losses and LAE reserves. The
largest 10 reported claims account for 24.2% of the gross case
reserves, with an average case reserve of $0.8 million.
Overall gross case reserves decreased in 2006, as newly reported
claims and additional reported reserves on existing claims were
less than claim payments in the year. The environmental open
claim count decreased by 635, or 46%, during calendar year 2006
due to the closing of many small case reserved claims not
expected to generate a payment based on the most recent
information available to us. Based on an aggregation of claims
by insured, our 10 largest insured involvements account for
45.7% of our gross case reserve as of December 31, 2006,
compared to 45.1% as of
63
December 31, 2005. Based on our annual reserve study, we
decreased environmental net loss reserves by $2.2 million
based on the observed trends in our internal loss data.
The following table provides historical gross asbestos and
environmental outstanding claim information for the years ended
December 31, 2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
|
|
Aggregate | |
|
% of Total | |
|
Average | |
|
|
|
Aggregate | |
|
% of Total | |
|
Average | |
|
|
|
|
Case | |
|
Case | |
|
Case | |
|
|
|
Case | |
|
Case | |
|
Case | |
|
|
Count | |
|
Reserves | |
|
Reserves | |
|
Reserves | |
|
Count | |
|
Reserves | |
|
Reserves | |
|
Reserves | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Asbestos
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Largest 10 open claims
|
|
|
10 |
|
|
$ |
34.7 |
|
|
|
15.2 |
% |
|
$ |
3.5 |
|
|
|
10 |
|
|
$ |
32.3 |
|
|
|
15.7 |
% |
|
$ |
3.2 |
|
|
All other claims
|
|
|
1,543 |
|
|
|
193.8 |
|
|
|
84.8 |
|
|
|
0.1 |
|
|
|
1,522 |
|
|
|
173.7 |
|
|
|
84.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,553 |
|
|
$ |
228.5 |
|
|
|
100.0 |
% |
|
$ |
0.1 |
|
|
|
1,532 |
|
|
$ |
206.0 |
|
|
|
100.0 |
% |
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Insured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Largest 10 insureds on open claims
|
|
|
10 |
|
|
$ |
97.5 |
|
|
|
42.7 |
% |
|
$ |
9.8 |
|
|
|
10 |
|
|
$ |
98.4 |
|
|
|
47.8 |
% |
|
$ |
9.8 |
|
|
All other insureds
|
|
|
300 |
|
|
|
131.0 |
|
|
|
57.3 |
|
|
|
0.4 |
|
|
|
287 |
|
|
|
107.6 |
|
|
|
52.2 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
310 |
|
|
$ |
228.5 |
|
|
|
100.0 |
% |
|
$ |
0.7 |
|
|
|
297 |
|
|
$ |
206.0 |
|
|
|
100.0 |
% |
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Claim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Largest 10 open claims
|
|
|
10 |
|
|
$ |
8.1 |
|
|
|
28.0 |
% |
|
$ |
0.8 |
|
|
|
10 |
|
|
$ |
7.8 |
|
|
|
24.2 |
% |
|
$ |
0.8 |
|
|
All other claims
|
|
|
728 |
|
|
|
20.8 |
|
|
|
72.0 |
|
|
|
0.0 |
|
|
|
1,363 |
|
|
|
24.4 |
|
|
|
75.8 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
738 |
|
|
$ |
28.9 |
|
|
|
100.0 |
% |
|
$ |
0.0 |
|
|
|
1,373 |
|
|
$ |
32.2 |
|
|
|
100.0 |
% |
|
$ |
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Insured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Largest 10 insureds on open claims
|
|
|
10 |
|
|
$ |
13.2 |
|
|
|
45.7 |
% |
|
$ |
1.3 |
|
|
|
10 |
|
|
$ |
14.5 |
|
|
|
45.1 |
% |
|
$ |
1.5 |
|
|
All other insureds
|
|
|
375 |
|
|
|
15.7 |
|
|
|
54.3 |
|
|
|
0.0 |
|
|
|
577 |
|
|
|
17.7 |
|
|
|
54.9 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
385 |
|
|
$ |
28.9 |
|
|
|
100.0 |
% |
|
$ |
0.1 |
|
|
|
587 |
|
|
$ |
32.2 |
|
|
|
100.0 |
% |
|
$ |
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the event that loss trends diverge from expected trends, we
may have to adjust our reserves for asbestos and environmental
exposures accordingly. Any adjustments will be reflected in the
periods in which they become known, potentially resulting in
adverse effects on our financial results. Due to the uncertainty
involving estimates of ultimate asbestos and environmental
exposures, management does not attempt to produce a range around
its best estimate of loss.
Reinsurance and
Retrocessions
We purchase reinsurance to increase our aggregate premium
capacity, to reduce and spread the risk of loss on our insurance
and reinsurance business and to limit our exposure to multiple
claims arising from a single occurrence. We are subject to
accumulation risk with respect to catastrophic events involving
multiple contracts. To protect against this risk, we purchase
catastrophe excess of loss reinsurance protection. The
retention, the level of capacity purchased, the geographical
scope of the coverage and the costs vary from year to year.
Specific reinsurance protections are also placed to protect
selected portions of our business outside of the United States.
Our catastrophe excess of loss reinsurance protection available
for losses in the United States for 2005 was exhausted by
Hurricanes Katrina, Rita and Wilma during the year ended
December 31, 2005.
We seek to limit the probable maximum loss to a specific level
for severe catastrophic events. Currently, we generally seek to
limit the probable maximum loss, after tax, including the effect
of reinsurance protection and applicable reinstatement premiums,
to a maximum of approximately 15% of statutory surplus for a
severe
64
catastrophic event in any geographic zone that could be expected
to occur once in every 250 years, although this can change
based on market opportunities. There can be no assurances that
we will not incur losses greater than 15% of our statutory
surplus from one or more catastrophic events due to the inherent
uncertainties in estimating the frequency and severity of such
events, the margin of error in making such determinations
resulting from potential inaccuracies and inadequacies in the
data provided by clients and brokers, and the modeling
techniques and the application of such techniques.
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.
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, reinsurance assumed,
reinsurance ceded and net amounts (in millions) for these items
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Premiums Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
712.1 |
|
|
$ |
763.3 |
|
|
$ |
702.1 |
|
|
Add: assumed
|
|
|
1,623.6 |
|
|
|
1,863.7 |
|
|
|
1,948.7 |
|
|
Less: ceded
|
|
|
174.8 |
|
|
|
325.3 |
|
|
|
289.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
2,160.9 |
|
|
$ |
2,301.7 |
|
|
$ |
2,361.8 |
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
728.9 |
|
|
$ |
737.2 |
|
|
$ |
698.0 |
|
|
Add: assumed
|
|
|
1,706.6 |
|
|
|
1,873.1 |
|
|
|
1,936.4 |
|
|
Less: ceded
|
|
|
209.7 |
|
|
|
333.5 |
|
|
|
300.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
2,225.8 |
|
|
$ |
2,276.8 |
|
|
$ |
2,333.5 |
|
|
|
|
|
|
|
|
|
|
|
The total amount of reinsurance recoverables on paid and unpaid
losses as of December 31, 2006 and 2005 was
$798.8 million and $1,347.7 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 collectibility of
individual balances. The reserve for uncollectible recoverables
as of December 31, 2006 and 2005 was $42.5 million and
$30.9 million, respectively, and has been netted against
reinsurance recoverables on loss payments. We have also
established a reserve for potentially uncollectible assumed
reinsurance balances of $1.9 million and $6.3 million
as of December 31, 2006 and 2005, respectively, which has
been netted against premiums receivable.
Our reinsurance protection, which covered certain amounts of our
1995 and prior unpaid losses and loss adjustment expenses (the
1995 Stop Loss Agreement), provided by nSpire Re
Limited (nSpire Re), a wholly-owned subsidiary of
Fairfax, was commuted effective September 29, 2006, for
consideration of $63.2 million. In accordance with the
terms of the commutation agreement, we commuted ceded loss
reserves of $71.8 million, resulting in a pre-tax
commutation loss of $5.5 million, recorded in the third
quarter of 2006. The 1995 Stop Loss Agreement was originally
entered into with Skandia Insurance Company Ltd.
(Skandia) in conjunction with the purchase of
Clearwater in 1996. Pursuant to the agreement, we paid a premium
of $60.5 million in 1995 for protection of
$175.0 million in excess of Clearwaters
December 31, 1995 reserves for net unpaid losses and loss
adjustment expenses and reserves for uncollectible reinsurance.
In January 1999, the liabilities under the contract were
assigned by Skandia to nSpire Re for $97.0 million in
consideration. Following the assignment to nSpire Re, we
accounted for the 1995 Stop Loss Agreement as retroactive
reinsurance. Accordingly, losses ceded under the contract in
excess of $97.0 million in the aggregate had been recorded
as a deferred gain rather than as a benefit in the applicable
periods. The deferred gain had been amortized into income
65
over the estimated remaining settlement period of the underlying
claims. As of December 31, 2005, we have utilized the full
limit of $175.0 million under the 1995 Stop Loss Agreement.
We ceded losses of $17.5 million to the 1995 Stop Loss
Agreement for the years ended December 2005 and 2004, resulting
in income of $11.3 million ($7.3 million after tax)
and $8.7 million ($5.7 million after tax) for the
years ended December 31, 2005 and 2004, respectively. There
were no cessions to this agreement in 2006. We received
$78.0 million in cash from nSpire Re on March 29,
2006, which reduced the outstanding recoverable. As the
$78.0 million was received in advance of the payment of the
underlying claims by us, it is included as an adjustment to net
unpaid losses and loss adjustment expenses, which increased by
$78.0 million. In connection with the receipt of this cash,
for the three months ended March 31, 2006, we have
recognized $19.3 million ($12.5 million after tax) of
the cumulative deferred gain, an increase of $17.9 million
($11.7 million after tax) over the anticipated deferred
gain amortization, as a reduction in losses and loss adjustment
expenses. During the three months ended June 30, 2006, we
amortized an additional $1.1 million of the deferred gain.
For years ending December 31, 2001 and prior, we utilized
whole account aggregate excess of loss retrocessional coverage
(Whole Account Excess of Loss Agreements) to
manage our exposures, including catastrophic occurrences and the
potential accumulation of exposures. As further discussed below,
during the second quarter of 2006, we commuted certain Whole
Account Excess of Loss Agreements. In addition, Whole
Account Excess of Loss Agreements were purchased covering
underwriting years 2002 through 2004 though no losses were ceded
to these coverages. The Whole Account Excess of Loss
Agreements are broad in coverage, and include property and
casualty insurance and reinsurance business written on a
worldwide basis, as applicable. Classes of business excluded
from coverage primarily include non-traditional business. In
each calendar year, we have the ability to cede losses
attributable to certain prior periods to the Whole
Account Excess of Loss Agreements to the extent there are
limits remaining for the period. These agreements cover business
written or incepting during a defined period of time
(underwriting year), which is typically twelve months, or in
other cases, business earned during a defined period of time
(accident year). The Whole Account Excess of Loss
Agreements were purchased on an underwriting year basis for 1996
through 2004 and on an accident year basis for 1994 and 1995.
Accident year agreements were also purchased to supplement the
1996 and 1997 underwriting year agreements. All of these Whole
Account Excess of Loss Agreements covering prior
underwriting and accident years have been commuted except for
two agreements covering underwriting years 2000 and 2001. Loss
cession limits on these two covers still outstanding have been
fully utilized as of December 31, 2005. Each agreement
provides for recoveries from the retrocessionaires, subject to a
limit, in the event that the net subject business results in a
composite ratio (the sum of the commission and loss ratios), or
in some agreements a loss ratio, in excess of a specified
attachment point. The attachment point is net of other inuring
third party reinsurance. The premium paid, net of commission, by
us is calculated based on a contractual fixed rate that is
applied to the total premiums covered by the retrocession
agreements. Each agreement includes a provision for additional
premium, subject to a maximum, based on the amount of loss
activity under the agreement. Reinsurance recoverables on paid
and unpaid losses are fully secured by letters of credit or
funds held by us.
We have the ability to cede losses that are attributable to the
covered periods to these agreements in any future period, to the
extent there is remaining coverage, even in cases where the
losses emerge in periods long after the period when the business
was written. We have the ability to cede losses to multiple
agreements in a calendar period, to the extent that the losses
pertain to coverage periods with remaining limits. Our ability
to cede losses in any given calendar year that are attributable
to prior periods will depend on the nature of the risk which
generated the loss, the time period from which the losses
originate and whether there are limits remaining covering the
subject period. Losses attributable to prior periods are ceded
to the treaties and recorded in the period in which they are
ceded. Additional premiums are generally due under an agreement
if additional losses are ceded to the agreement, subject to a
maximum amount. Additional premiums, if any, are determined and
recorded in the period when losses are ceded. When additional
premiums are due, the interest on the funds attributable to the
additional premiums ceded is typically calculated based on the
inception period of the contract and the cumulative interest
expense is recognized in the period when additional premiums are
due.
During the second quarter of 2006, we commuted certain Whole
Account Excess of Loss Agreements for total consideration
of $80.6 million through the settlement of funds held under
reinsurance contracts (included as a liability on our
consolidated balance sheet) and the receipt of cash from the
reinsurer, net of the settlement of
66
outstanding commissions receivable. During the second quarter of
2006, the commutation of these contracts decreased our paid and
unpaid reinsurance recoverables as of December 31, 2005 by
$71.0 million. This commutation covered all outstanding
Whole Account Excess of Loss Agreements applicable to
underwriting and accident years 1999 and prior as well as the
reinsurers participation on underwriting years 2000 and
2001.
The following table shows the amount of loss and LAE
attributable to each coverage period ceded to the Whole
Account Excess of Loss Agreements for the years ended
December 31, 2006, 2005 and 2004 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coverage Period |
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Prior years
|
|
$ |
|
|
|
$ |
(2.3 |
) |
|
$ |
2.9 |
|
2000 underwriting year
|
|
|
0.2 |
|
|
|
2.4 |
|
|
|
(0.9 |
) |
2001 underwriting year
|
|
|
9.5 |
|
|
|
16.4 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9.7 |
|
|
$ |
16.5 |
|
|
$ |
5.1 |
|
|
|
|
|
|
|
|
|
|
|
The maximum coverage available under the Whole
Account Excess of Loss Agreements is based on a proportion
of net premiums earned during each of the coverage periods,
subject to a predetermined aggregate limit. The maximum coverage
available will increase or decrease as premium adjustments
applicable to a particular coverage period, if any, are
recognized. The attachment point represents the aggregate amount
of losses, and in certain cases, acquisition costs, expressed as
a proportion of net premiums earned, that will be retained by
us. Losses attributable to business written during a particular
period in excess of the attachment point, subject to a maximum
limit, are ceded to the reinsurer. The following table provides
a summary of the significant terms of the Whole
Account Excess of Loss Agreements that were in effect as of
December 31, 2006 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coverage Period |
|
Attachment Basis | |
|
Aggregate Limit | |
|
Remaining Limit | |
|
Attachment Point | |
|
|
| |
|
| |
|
| |
|
| |
2000 underwriting year
|
|
|
Composite ratio |
|
|
$ |
69.1 |
|
|
|
|
|
|
|
90.6 |
% |
2001 underwriting year
|
|
|
Composite ratio |
|
|
|
85.4 |
|
|
|
|
|
|
|
90.4 |
% |
The following table provides a summary of the cumulative
experience, including the income (loss) before income taxes,
under each agreement since its inception. Several of these
agreements were purchased by predecessor companies prior to the
period in which they were included in our consolidated financial
statements. As a result, amounts recorded in our consolidated
statement of operations include only the amounts ceded
subsequent to the date in which the covered company was included
in our consolidated financial statements (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded | |
|
Ceded | |
|
Ceded | |
|
Net | |
|
|
|
Income (Loss) | |
|
|
Earned | |
|
Acquisition | |
|
Loss and | |
|
Underwriting | |
|
Interest | |
|
Before Income | |
Coverage Period |
|
Premium | |
|
Costs | |
|
LAE | |
|
Income | |
|
Expense | |
|
Taxes | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
1994 accident year
|
|
$ |
32.6 |
|
|
$ |
9.8 |
|
|
$ |
37.3 |
|
|
$ |
14.5 |
|
|
$ |
26.6 |
|
|
$ |
(12.1 |
) |
1996 underwriting year
|
|
|
41.4 |
|
|
|
11.4 |
|
|
|
71.5 |
|
|
|
41.5 |
|
|
|
16.7 |
|
|
|
24.8 |
|
1997 accident year
|
|
|
25.8 |
|
|
|
|
|
|
|
50.0 |
|
|
|
24.2 |
|
|
|
10.8 |
|
|
|
13.3 |
|
1997 underwriting year
|
|
|
42.8 |
|
|
|
11.8 |
|
|
|
65.8 |
|
|
|
34.7 |
|
|
|
13.8 |
|
|
|
20.9 |
|
1998 accident year
|
|
|
11.6 |
|
|
|
|
|
|
|
25.0 |
|
|
|
13.4 |
|
|
|
4.0 |
|
|
|
9.4 |
|
1998 underwriting year
|
|
|
17.8 |
|
|
|
3.1 |
|
|
|
30.9 |
|
|
|
16.2 |
|
|
|
4.9 |
|
|
|
11.3 |
|
1999 underwriting year
|
|
|
43.3 |
|
|
|
8.3 |
|
|
|
69.8 |
|
|
|
34.8 |
|
|
|
13.9 |
|
|
|
20.8 |
|
2000 underwriting year
|
|
|
90.6 |
|
|
|
29.6 |
|
|
|
137.4 |
|
|
|
76.4 |
|
|
|
41.8 |
|
|
|
34.6 |
|
2001 underwriting year
|
|
|
58.0 |
|
|
|
14.5 |
|
|
|
94.9 |
|
|
|
51.4 |
|
|
|
25.3 |
|
|
|
26.1 |
|
The Whole Account Excess of Loss Agreements provide that we
may withhold a significant portion of the premium payable to the
retrocessionaires in funds held accounts, which, under certain
circumstances, may be set-off against the
retrocessionaires losses and other obligations owed to us.
These funds are shown as a liability in our consolidated balance
sheets as funds held under reinsurance contracts. Interest on
the funds held account, calculated using a contractual fixed
interest rate of approximately 7.0% for those agreements with
amounts ceded, is credited quarterly by us, which results in an
increase in the funds held account balance and is recorded as an
67
expense, reducing our investment income. Loss payments are
deducted from the funds held account balance, which reduces the
liability as such payments are made.
In addition to the Whole Account Excess of Loss Agreements,
we entered into a three-year aggregate excess of loss
reinsurance contract protecting our United States facultative
casualty business for underwriting years 1998 through 2000
(Facultative Excess of Loss Agreement) which
indemnified us for losses in excess of an annual retention,
subject to an annual limit of liability. During December 2006,
we entered into a commutation and release agreement related to
this contract, pursuant to which all rights, obligations and
liabilities were fully and finally settled. As a result of the
commutation, a pre-tax loss of $1.4 million was recognized.
Additionally, reinsurance recoverables have been reduced by
$16.1 million for the year ended December 31, 2006.
The aggregate limit for underwriting years 1998, 1999 and 2000
was equal to 40% of our total facultative net premiums written,
subject to a minimum annual dollar limit of $7.4 million,
and a maximum annual dollar limit of $18.5 million. The
aggregate limit of liability is $41.6 million across all
years, which has been fully utilized. The retention in each year
was equal to the greater of $9.3 million or 51.0% of the
subject written premium income, together with amounts
contributed to a loss payment account under the agreement. We
maintained a loss payment account for the benefit of the
reinsurer, equal to 18.5% of the subject written premium income
for underwriting year 1998, and 18.9% for 1999 and 2000. A
minimum interest credit is applied to the loss payment account,
equal to the one year U.S. Treasury Bill yield plus
75 basis points. As of December 31, 2006, the loss
payment account had a zero balance. The principal reinsurer
under these agreements is Underwriters Reinsurance Company
(Barbados) Inc.
The income (loss) before income taxes reflected in our
consolidated statements of operations related to our Whole
Account and Facultative Excess of Loss Agreements for the years
ended December 31, 2006, 2005, and 2004 is as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Ceded earned premium
|
|
$ |
(1.7 |
) |
|
$ |
(13.9 |
) |
|
$ |
(6.6 |
) |
Ceded acquisition costs
|
|
|
1.5 |
|
|
|
5.3 |
|
|
|
2.7 |
|
Ceded losses and LAE
|
|
|
8.3 |
|
|
|
18.7 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
Net underwriting income
|
|
|
8.1 |
|
|
|
10.1 |
|
|
|
1.7 |
|
Interest expense
|
|
|
(8.7 |
) |
|
|
(18.7 |
) |
|
|
(20.1 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$ |
(0.6 |
) |
|
$ |
(8.6 |
) |
|
$ |
(18.4 |
) |
|
|
|
|
|
|
|
|
|
|
We have recorded interest expense associated with other ceded
reinsurance agreements, and not reflected in the table above, of
$571 thousand, $372 thousand and $18 thousand for the years
ended December 31, 2006, 2005 and 2004, respectively.
As indicated by the table above, for the years ended
December 31, 2006, 2005 and 2004, we ceded
$8.3 million, $18.7 million and $5.6 million,
respectively, of losses and LAE, primarily to the 2001 aggregate
excess of loss treaty. The increase in losses ceded to our Whole
Account and Facultative Excess of Loss Agreements, for the years
ended December 31, 2006, 2005 and 2004, were primarily
attributable to adverse loss development on casualty business
written in 2001. Losses ceded to our Whole Account and
Facultative Excess of Loss Agreements represented 1.1% of our
pre-tax income in 2006, 10.3% of our pre-tax loss in 2005 and
1.8% in pre-tax income in 2004.
The reinsurance recoverables on paid and unpaid losses related
to the Whole Account and Facultative Excess of Loss Agreements
are $122.2 million and $251.9 million as of
December 31, 2006 and 2005, respectively. Funds held under
reinsurance contracts, related to these agreements, shown as a
liability on our consolidated balance sheets, reflect
$83.4 million and $150.7 million as of
December 31, 2006 and 2005, respectively. Other collateral
related to these agreements is $43.2 million and
$124.8 million as of December 31, 2006 and 2005,
respectively.
68
Deferred Income Taxes
We record deferred income taxes as net assets or liabilities on
our consolidated balance sheets to reflect the net tax effect of
the temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their
respective tax bases. As of December 31, 2006 and 2005, a
net deferred tax asset of $185.0 million and
$138.8 million, respectively, was recorded. In recording
this deferred tax asset, we have made estimates and judgments
that future taxable income will be sufficient to realize the
value of the net deferred tax asset. Accordingly, deferred tax
assets have not been reduced by a valuation allowance, as
management believes it is more likely than not that the deferred
tax assets will be realized.
Investments
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.
In assessing the value of our debt and equity securities held as
investments, and possible impairments of such securities, we
review (i) the issuers current financial position and
disclosures related thereto, (ii) general and specific
market and industry developments, (iii) the timely payment
by the issuer of its principal, interest and other obligations,
(iv) the outlook and expected financial performance of the
issuer, (v) current and historical valuation parameters for
the issuer and similar companies, (vi) relevant forecasts,
analyses and recommendations by research analysts, rating
agencies and investment advisors, and (vii) other
information we may consider relevant. In addition, we consider
our ability and intent to hold the security to recovery when
evaluating possible impairments. Risks and uncertainties are
inherent in our other-than-temporary decline in value assessment
methodology.
Risks and uncertainties include, but are not limited to,
incorrect or overly optimistic assumptions about financial
condition or liquidity, incorrect or overly optimistic
assumptions about future prospects, inadequacy of any underlying
collateral, unfavorable changes in economic or social conditions
and unfavorable changes in interest rates.
Results of Operations
Year Ended December 31,
2006 Compared to Year Ended December 31, 2005
Underwriting Results
Gross Premiums Written. Gross premiums written for the
year ended December 31, 2006 decreased by
$291.2 million, or 11.1%, to $2,335.7 million compared
to $2,626.9 million for the year ended December 31,
2005, as reflected in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Change | |
|
|
| |
|
| |
Division |
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Americas
|
|
$ |
924.2 |
|
|
$ |
1,130.5 |
|
|
$ |
(206.3 |
) |
|
|
(18.2 |
)% |
EuroAsia
|
|
|
561.2 |
|
|
|
543.8 |
|
|
|
17.4 |
|
|
|
3.2 |
|
London Market
|
|
|
340.7 |
|
|
|
431.6 |
|
|
|
(90.9 |
) |
|
|
(21.1 |
) |
U.S. Insurance
|
|
|
509.6 |
|
|
|
521.0 |
|
|
|
(11.4 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
2,335.7 |
|
|
$ |
2,626.9 |
|
|
$ |
(291.2 |
) |
|
|
(11.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance gross premiums written for the year ended
December 31, 2006 were $1,623.6 million compared to
$1,863.6 million for 2005, a decrease of 12.9%. Total
insurance gross premiums written for the year
69
ended December 31, 2006, which includes our
U.S. Insurance division and our Lloyds syndicate
(which is part of London Market), were $712.1 million,
compared to $763.3 million for 2005, a decrease of 6.7%.
For the year ended December 31, 2006, total reinsurance
gross premiums written represented 69.5% (71.0% in 2005) of our
business and insurance represented the remaining 30.5% (29.0% in
2005) of our business.
Gross premiums written include reinstatement premiums of
$5.4 million and $70.4 million for the years ended
December 31, 2006 and 2005, respectively. Reinstatement
premiums in 2005 were primarily related to reinstating the
coverage under property catastrophe excess of loss reinsurance
contracts following Hurricanes Katrina, Rita and Wilma. The
higher level of reinstatement premiums in 2005 was attributable
to the significant number of full limit losses resulting from
Hurricanes Katrina, Rita and Wilma in 2005. Excluding
reinstatement premiums in each period, gross premiums written
would be $2,330.3 million and $2,556.5 million for the
years ended December 31, 2006 and 2005, respectively,
representing a decrease of $226.2 million, or 8.8%.
Americas. Gross premiums written in the Americas division
for the year ended December 31, 2006 were
$924.2 million, a decrease of $206.3 million, or
18.2%, as compared to $1,130.5 million for the year ended
December 31, 2005. These amounts represent 39.6% of our
gross premiums written for the year ended December 31, 2006
and 43.1% in 2005. These amounts include reinstatement premiums
of $4.0 million and $32.0 million for the years ended
December 31, 2006 and 2005, respectively, which principally
relate to Hurricanes Katrina, Rita and Wilma in 2005. Excluding
reinstatement premiums in each period, gross premiums written
would be $920.2 million and $1,098.5 million for the
years ended December 31, 2006 and 2005, respectively,
representing a decrease of $178.3 million, or 16.2% over
the period. Gross premiums written across each geographic region
of the Americas are as follows:
|
|
|
|
|
United States Gross premiums written of
$756.4 million for the year ended December 31, 2006
decreased $173.5 million, or 18.7%, compared to
$929.9 million for the year ended December 31, 2005.
The decrease in the United States is in all classes of business.
Property business decreased by $59.8 million, or 23.7%, to
$192.3 million in 2006 from $252.1 million in 2005 as
we reduced our proportional catastrophe exposed business in
certain peak zones combined with a reduction in reinstatement
premiums. Alternative risk and specialty business decreased by
$58.7 million as we exited or reduced our writings in these
classes of business. Treaty and facultative casualty business
decreased by $43.5 million, or 7.9%, to $504.0 million
in 2006 from $547.5 million in 2005 due to an increase in
competitive market conditions and the cancellation of certain
business that did not meet our underwriting criteria. All other
classes of business accounted for the remaining decrease of
$11.5 million. |
|
|
|
Latin America Gross premiums written of
$134.9 million for the year ended December 31, 2006
decreased $13.7 million, or 9.2%, compared to
$148.6 million for the year ended December 31, 2005.
The decrease is principally due to a $6.3 million decrease
in property proportional business and a $2.8 million
decrease in property excess business. We continue to see
increased competition across our Latin America operations. |
|
|
|
Canada Gross premiums written of $32.0 million
for the year ended December 31, 2006 decreased
$18.4 million, or 36.5%, compared to $50.4 million for
the year ended December 31, 2005. The reduction in gross
premiums written was primarily due to the cancellation of
certain automobile business by ceding companies, based on their
decision to retain more business. In certain cases, this
included the return of unearned premiums to the ceding company. |
EuroAsia. Gross premiums written in the EuroAsia division
for the year ended December 31, 2006 were
$561.2 million, an increase of $17.4 million, or 3.2%,
as compared to $543.8 million for the year ended
December 31, 2005. These amounts represent 24.0% of our
gross premiums written for the year ended December 31, 2006
and 20.7% in 2005. These amounts include $5.2 million of
reinstatement premiums for the year ended December 31, 2005
compared to $0.5 million in 2006. The overall increase is
primarily attributable to increases in property, marine, credit
and bonds, and liability, offset by a decrease in motor
business, accident and health and aviation. Gross premiums
written from property business, which represents 60.8% of
EuroAsia in 2006, increased by $15.0 million, or 4.6%, for
the year ended December 31, 2006 driven by increases in the
European and Middle East markets. The increase in marine
business of $4.8 million, or 16.8%, and all other classes
of business of $4.0 million, or 5.3%, is related to
increases in new and renewal business throughout
70
Europe. Offsetting these increases is a decrease in motor
business of $3.4 million, or 3.8%, primarily related to
European and Asia business and accident and health and aerospace
business of $1.2 million and $1.8 million,
respectively.
London Market. Gross premiums written in the London
Market division for the year ended December 31, 2006 were
$340.7 million, a decrease of $90.9 million, or 21.1%,
as compared to $431.6 million for the year ended
December 31, 2005. These amounts represent 14.6% of our
gross premiums written for the year ended December 31, 2006
and 16.4% in 2005. These amounts include reinstatement premiums
of $0.9 million and $33.2 million (all related to the
London branch) for the years ended December 31, 2006 and
2005, respectively, which principally relate to Hurricanes
Katrina, Rita and Wilma in 2005. Excluding reinstatement
premiums in each period, gross premiums written would be
$339.8 million and $398.4 million for the years ended
December 31, 2006 and 2005, respectively, representing a
decrease of $58.6 million, or 14.7%, over the period. Gross
premiums written across each unit of the London Market division
are as follows:
|
|
|
|
|
London Branch Gross premiums written of
$138.2 million for the year ended December 31, 2006
decreased $51.1 million, or 27.0%, compared to
$189.3 million for the year ended December 31, 2005.
Excluding reinstatement premiums of $0.9 million in 2006
and $33.2 million in 2005, gross premiums written for the
year ended December 31, 2006 were $137.3 million, a
decrease of $18.8 million, or 12.0%, compared to
$156.1 million for the year ended December 31, 2005.
Excluding the effects of the reinstatement premium in both
periods, property business decreased $12.8 million, or
21.1%, due to the non-renewal of certain proportional business.
Casualty business decreased by $12.1 million, or 29.9%, in
2006 compared to 2005, primarily due to the non renewal of a
large proportional directors and officers contract and a large
motor quota share contract. These decreases were offset by an
increase in marine and aerospace business of $6.1 million,
or 11.0%, due to new business written in 2006. |
|
|
|
Newline Gross premiums written of
$202.5 million for the year ended December 31, 2006
decreased $39.8 million, or 16.4%, compared to
$242.3 million for the year ended December 31, 2005.
The decline in gross premiums written is primarily related to
financial lines, in particular liability and professional
indemnity, as well as the effects of currency movements during
the year. This decrease reflects the more competitive market
conditions where we are experiencing lower prices in certain
classes or choosing to non-renew business that does not meet our
underwriting criteria. |
U.S. Insurance. Gross premiums written in the
U.S. Insurance division for the year ended
December 31, 2006 were $509.6 million, a decrease of
$11.4 million, or 2.2%, as compared to $521.0 million
for the year ended December 31, 2005. These amounts
represent 21.8% of our gross premiums written for the year ended
December 31, 2006 and 19.8% in 2005. Gross premiums written
in our specialty insurance unit decreased by $13.6 million,
or 3.7%, offset by an increase in medical malpractice business
of $2.2 million, or 1.5%. Gross premiums written across
each line of business is as follows:
|
|
|
|
|
Professional liability gross premiums written increased
$16.8 million, or 14.7%, to $131.0 million for the
year ended December 31, 2006, from $114.2 million for
the year ended December 31, 2005. This primarily resulted
from expansion in the environmental specialists and architects
and engineers classes of business. |
|
|
|
Medical malpractice gross premiums written were
$152.8 million for the year ended December 31, 2006,
an increase of $2.2 million, or 1.5%, from
$150.6 million for the year ended December 31, 2005.
Medical malpractice, our largest line of business in the
U.S. Insurance division, represented 30.0% of gross
premiums written in U.S. Insurance for the year ended
December 31, 2006. |
|
|
|
Our personal auto business, which primarily includes
non-standard auto business written in California and Florida,
decreased $25.9 million, or 25.0%, to $77.7 million
for the year ended December 31, 2006 from
$103.6 million for the year ended December 31, 2005. |
Ceded Premiums Written. Ceded premiums written for the
year ended December 31, 2006 decreased by
$150.5 million, or 46.3%, to $174.8 million (7.5% of
gross premiums written) from $325.3 million (12.4% of gross
premiums written) for the year ended December 31, 2005.
These amounts include reinstatement premiums paid of
$2.9 million and $65.7 million for the years ended
December 31, 2006 and 2005, respectively. Excluding
71
reinstatement premiums in each period, ceded premiums written
were $171.9 million for the year ended December 31,
2006 a decrease of $87.7 million, or 33.8%, as compared to
$259.6 million for the year ended December 31, 2005.
Excluding the effect of reinstatement premiums in both 2006 and
2005, ceded premiums written decreased in all divisions.
Decreases in the Americas division of $16.2 million,
EuroAsia division of $10.5 million and London Market
division of $11.4 million is the result of a decrease in
retrocessional business purchased in 2006. The decrease in the
U.S. Insurance division of $49.6 million is due to
this division increasing its retentions on all classes of
business and purchasing more excess of loss reinsurance compared
to quota share reinsurance.
Net Premiums Written. Net premiums written for the year
ended December 31, 2006 decreased by $140.8 million,
or 6.1%, to $2,160.9 million from $2,301.7 million for
the year ended December 31, 2005. Net premiums written
represent gross premiums written less ceded premiums written.
Net premiums written decreased over 2005 at a lower rate than
gross premiums written, reflecting the significant decrease in
ceded premiums written in the period. Included in net premiums
written 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
written decreased by $138.6 million, or 6.0%, for the year
ended December 31, 2006 over 2005.
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.
Included in net premiums earned are premiums ceded to our Whole
Account and Facultative Excess of Loss Agreements. For the year
ended December 31, 2006, this represented
$1.7 million, a reduction of $12.2 million, or 87.8%,
compared to $13.9 million for the year ended
December 31, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Change | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Gross losses and LAE incurred
|
|
$ |
1,631.4 |
|
|
$ |
2,524.1 |
|
|
$ |
(892.7 |
) |
|
|
(35.4 |
)% |
Less: ceded losses and LAE incurred
|
|
|
147.2 |
|
|
|
462.5 |
|
|
|
(315.3 |
) |
|
|
(68.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE incurred
|
|
$ |
1,484.2 |
|
|
$ |
2,061.6 |
|
|
$ |
(577.4 |
) |
|
|
(28.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in losses and LAE was principally related to a
decline in current year catastrophe events of
$503.0 million, ($34.9 million for the year ended
December 31, 2006 compared to $537.9 million for the
year ended December 31, 2005), and a decline in net adverse
loss development on prior years of $32.8 million
($139.9 million for the year ended December 31, 2006
compared to $172.7 for the year ended December 31, 2005).
Losses and LAE for the year ended December 31, 2006 include
net adverse loss development of $139.9 million attributable to
2005 and prior years, which reflects $42.6 million for
prior year catastrophe events, principally due to an increase in
loss estimates on marine business for Hurricane Rita and the
triggering of industry loss warranty contracts for Hurricane
Wilma due to an unexpected deterioration in industry-wide Wilma
loss estimates as well as unexpected loss emergence on Florida
proportional accounts in the period. In addition, asbestos loss
estimates were increased by $27.1 million resulting from
the annual review of these liabilities. The remaining net
adverse loss development of $70.2 million is principally
attributable to loss emergence greater than expectations in 2006
on U.S. casualty classes of business. For the year ended
December 31, 2005, current year
72
catastrophe events of $537.9 million include
$445.9 million related to Hurricanes Katrina, Rita, and
Wilma, and $25.6 million related to Windstorm Erwin. Losses
and LAE incurred during the year ended December 31, 2005
include net adverse loss development of $172.7 million
attributable to 2004 and prior years, which includes
$15.0 million for prior year catastrophe events due
principally to greater than expected emergence on the 2004
Florida Hurricanes in the period and $41.2 million for
increased asbestos loss estimates resulting from the annual
review of these liabilities. The remaining net adverse loss
development of $116.5 million is principally attributable
to loss emergence greater than expectations in 2005 on
U.S. casualty classes of business.
Ceded losses and LAE incurred for the year ended
December 31, 2006 decreased by $315.3 million, or
68.2%, to $147.2 million, from $462.5 million for the
year ended December 31, 2005. This decrease is principally
attributable to a decrease of $281.6 million in property
catastrophe cessions due to the decline in current year
catastrophe events and a $46.8 million decrease in ceded
losses related to our U.S. insurance operations
($55.6 million for the year ended December 31, 2006
compared to $102.4 million for the year ended
December 31, 2005) due to increased retentions. Cessions to
the Whole Account Excess of Loss Agreements for the years
ended December 31, 2006 and 2005 were $9.7 million and
$16.5 million, respectively. As of December 31, 2006,
the aggregate limits on the Whole Account Excess of Loss
Agreements have been fully utilized.
The loss and LAE ratio for the years ended December 31,
2006 and 2005 and the percentage point change for each of our
divisions and in total are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Percentage | |
|
|
| |
|
Point | |
Division |
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
Americas
|
|
|
78.5 |
% |
|
|
112.8 |
% |
|
|
(34.3 |
) |
EuroAsia
|
|
|
60.3 |
|
|
|
63.2 |
|
|
|
(2.9 |
) |
London Market
|
|
|
54.7 |
|
|
|
90.3 |
|
|
|
(35.6 |
) |
U.S. Insurance
|
|
|
55.8 |
|
|
|
62.0 |
|
|
|
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
Total losses and LAE ratio
|
|
|
66.7 |
% |
|
|
90.5 |
% |
|
|
(23.8 |
) |
|
|
|
|
|
|
|
|
|
|
The following tables reflect total losses and LAE as reported
for each division and include the impact of catastrophe losses
and prior period reserve development, expressed as a percentage
of net premiums earned (NPE), for the years ended
December 31, 2006 and 2005 (in millions):
Year Ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas | |
|
EuroAsia | |
|
London Market | |
|
U.S. Insurance | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total losses and LAE
|
|
$ |
765.8 |
|
|
|
78.5 |
% |
|
$ |
320.4 |
|
|
|
60.3 |
% |
|
$ |
182.5 |
|
|
|
54.7 |
% |
|
$ |
215.5 |
|
|
|
55.8 |
% |
|
$ |
1,484.2 |
|
|
|
66.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 events
|
|
|
12.7 |
|
|
|
1.3 |
|
|
|
19.4 |
|
|
|
3.7 |
|
|
|
2.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
34.9 |
|
|
|
1.6 |
|
Hurricanes Katrina, Rita and Wilma
|
|
|
35.8 |
|
|
|
3.7 |
|
|
|
0.2 |
|
|
|
|
|
|
|
12.2 |
|
|
|
3.7 |
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
49.4 |
|
|
|
2.2 |
|
All other prior years
|
|
|
7.2 |
|
|
|
0.7 |
|
|
|
(4.2 |
) |
|
|
(0.8 |
) |
|
|
(8.6 |
) |
|
|
(2.6 |
) |
|
|
(1.2 |
) |
|
|
(0.3 |
) |
|
|
(6.8 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe losses
|
|
|
55.7 |
|
|
|
5.7 |
|
|
|
15.4 |
|
|
|
2.9 |
|
|
|
6.4 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
77.5 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior period loss development including prior period catastrophe
losses
|
|
$ |
212.7 |
|
|
|
21.8 |
% |
|
$ |
(9.0 |
) |
|
|
(1.7 |
)% |
|
$ |
(24.8 |
) |
|
|
(7.4 |
)% |
|
$ |
(39.0 |
) |
|
|
(10.1 |
)% |
|
$ |
139.9 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas | |
|
EuroAsia | |
|
London Market | |
|
U.S. Insurance | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total losses and LAE
|
|
$ |
1,186.2 |
|
|
|
112.8 |
% |
|
$ |
326.0 |
|
|
|
63.2 |
% |
|
$ |
348.8 |
|
|
|
90.3 |
% |
|
$ |
200.6 |
|
|
|
62.0 |
% |
|
$ |
2,061.6 |
|
|
|
90.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windstorm Erwin
|
|
|
|
|
|
|
|
|
|
|
23.1 |
|
|
|
4.5 |
|
|
|
2.5 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
25.6 |
|
|
|
1.1 |
|
India Floods
|
|
|
|
|
|
|
|
|
|
|
11.5 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5 |
|
|
|
0.5 |
|
Hurricanes Katrina, Rita, and Wilma
|
|
|
313.1 |
|
|
|
29.8 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
131.9 |
|
|
|
34.2 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
445.9 |
|
|
|
19.6 |
|
Other 2005 events
|
|
|
35.2 |
|
|
|
3.3 |
|
|
|
14.2 |
|
|
|
2.8 |
|
|
|
5.5 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
54.9 |
|
|
|
2.5 |
|
2004 Florida Hurricanes
|
|
|
2.8 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
3.4 |
|
|
|
0.1 |
|
All other prior years
|
|
|
3.1 |
|
|
|
0.3 |
|
|
|
7.4 |
|
|
|
1.4 |
|
|
|
1.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
11.6 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe losses
|
|
|
354.2 |
|
|
|
33.7 |
|
|
|
56.7 |
|
|
|
11.0 |
|
|
|
141.6 |
|
|
|
36.7 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
552.9 |
|
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior period loss development including prior period catastrophe
losses
|
|
$ |
213.2 |
|
|
|
20.3 |
% |
|
$ |
(8.7 |
) |
|
|
(1.7 |
)% |
|
$ |
(22.8 |
) |
|
|
(5.9 |
)% |
|
$ |
(9.0 |
) |
|
|
(2.8 |
)% |
|
$ |
172.7 |
|
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Division Losses and LAE decreased
$420.4 million, or 35.4%, to $765.8 million for the
year ended December 31, 2006, from $1,186.2 million
for the year ended December 31, 2005. This resulted in a
loss and LAE ratio of 78.5% for the year ended December 31,
2006, compared to 112.8% for the year ended December 31,
2005. The decrease in losses and LAE was principally due to a
decrease in current year catastrophes of $335.6 million and
a decline in net earned premium of $76.1 million, or 7.2%.
Losses and LAE for the year ended December 31, 2006 include
net adverse loss development of $212.7 million attributable
to 2005 and prior years, which reflect $43.0 million from
prior period catastrophe losses, principally Hurricanes Rita and
Wilma, due to loss emergence greater than expected in the
period. In addition, asbestos loss estimates were increased by
$27.1 million resulting from the annual review of these
liabilities. The remaining net adverse loss development of
$142.6 million is principally attributable to loss
emergence greater than expectations in 2006 on
U.S. casualty classes of business. Losses and LAE for the
year ended December 31, 2005 include net adverse loss
development of $213.2 million attributable to 2004 and
prior years, which reflect $5.9 million on prior period
catastrophes principally due to loss emergence greater than
expected in the period on the 2004 Florida Hurricanes and
$41.2 million for increased asbestos loss estimates
resulting from the annual review of these liabilities. The
remaining net adverse loss development of $166.1 million is
principally attributable to loss emergence greater than
expectations in 2005 on U.S. casualty classes of business.
EuroAsia Division Losses and LAE decreased
$5.6 million, or 1.7%, to $320.4 million for the year
ended December 31, 2006, from $326.0 million for the
year ended December 31, 2005. This resulted in a loss and
LAE ratio of 60.3% for the year ended December 31, 2006,
compared to 63.2% for the year ended December 31, 2005.
This decrease is principally due to a reduction in current year
catastrophe losses of $29.9 million, partially offset by an
increase in net premiums earned of $15.2 million, or 2.9%.
Losses and LAE for the year ended December 31, 2006 include
a benefit of $9.0 million attributable to 2005 and prior
years, principally due to favorable emergence on property,
marine and credit lines of business in the period.
Losses & LAE in the year ended December 31, 2005
include a decrease of $8.7 million attributable to 2004 and
prior years, principally related to favorable emergence on
liability and bond exposures in the period, and includes adverse
loss development on prior period catastrophes of
$7.4 million predominantly attributable to Typhoon Songda
and the Indonesian earthquake and resulting tsunami.
London Market Division Losses and LAE decreased
$166.3 million, or 47.7%, to $182.5 million for the
year ended December 31, 2006, from $348.8 million for
the year ended December 31, 2005. This resulted in a loss
and LAE ratio of 54.7% for the year ended December 31,
2006, compared to 90.3% for the year ended December 31,
2005. The decrease in losses and LAE was principally related to
a decrease in current year catastrophes of $137.1 million
and a decline in net premiums earned of $52.6 million, or
13.6%. Losses and LAE
74
in the 2006 period include a benefit of $24.8 million
attributable to 2005 and prior years, principally due to
favorable emergence on satellite, accident and health,
non-catastrophe property, and aviation exposures in the period,
and includes $3.6 million of unfavorable development on
prior period catastrophe losses, principally Hurricane Rita, due
to loss emergence greater than expectations in 2006. For the
year ended December 31, 2005, losses and LAE in the 2005
period include a benefit of $22.8 million attributable to
2004 and prior years, principally due to favorable emergence on
aviation, satellite and non-catastrophe property exposures in
the period, and includes $1.7 million of loss development
from prior period catastrophe losses due to loss emergence
greater than expectations.
U.S. Insurance Division Losses and LAE
increased $14.9 million, or 7.4%, to $215.5 million
for the year ended December 31, 2006, from
$200.6 million for the year ended December 31, 2005.
This resulted in a loss and LAE ratio of 55.8% for the year
ended December 31, 2006, compared to 62.0% for the year
ended December 31, 2005. The increase in losses and LAE was
related to a 19.3% increase in net premiums earned and was
partially offset by a decrease of $39.0 million on losses
and LAE attributable to 2005 and prior years, principally due to
favorable loss emergence on medical malpractice in the period.
For the year ended December 31, 2005, losses and LAE
related to 2004 and prior years decreased by $9.0 million,
principally due to loss emergence less than expectations in 2005
on medical malpractice and general liability exposures.
Acquisition Costs. Acquisition costs for the year ended
December 31, 2006 were $464.1 million, a decrease of
$6.1 million or 1.3%, compared to $470.2 million for
the year ended December 31, 2005. The resulting acquisition
expense ratio, expressed as a percentage of net premiums earned,
was 20.9% for the year ended December 31, 2006, compared to
20.6% for the year ended December 31, 2005, an increase of
0.3 points. The London Market and U.S. Insurance
divisions acquisition ratio increased by 2.1 points and
1.5 points respectively, due to the change in composition of the
mix of business written and increased retentions, while the
Americas and EuroAsia divisions had a slight decrease of 0.6
points and 0.1 points, respectively.
Acquisition costs are reduced by ceding commissions related to
our Whole Account and Facultative Excess of Loss Agreements, of
$1.5 million and $5.3 million for the years ended
December 31, 2006 and 2005, respectively. The decrease of
$3.8 million in 2006 over 2005 was attributable to reduced
premiums ceded to these agreements during 2006. Ceding
commissions due under certain of our Whole Account Excess
of Loss Agreements are deferred and will be received by us in
future periods. Ceding commissions have therefore been recorded
at their present value, with the discount amortized over the
expected collection period. For years ended December 31,
2006 and 2005, the discount recorded on ceding commissions is
$1.8 million and $0.8 million, respectively, which is
net of the amortization of the discount recorded in prior
periods.
Other Underwriting Expenses. Other underwriting expenses
for the year ended December 31, 2006 were
$153.5 million, compared to $146.0 million for the
year ended December 31, 2005. The other underwriting
expense ratio, expressed as a percentage of net premiums earned,
was 6.9% for the year ended December 31, 2006, compared to
6.4% for the year ended December 31, 2005. Other
underwriting expenses increased while net premiums earned
decreased, resulting in a higher other underwriting expense
ratio in 2006 as compared to 2005. This increase in other
underwriting expenses is attributable to an increase in
personnel related costs and benefits, particularly in our
Americas division.
The following table reflects the acquisition and other
underwriting expenses, expressed as a percentage of net premiums
earned, for the years ended December 31, 2006 and 2005 for
each of our divisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Percentage | |
|
|
| |
|
Point | |
Division |
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
Americas
|
|
|
30.8 |
% |
|
|
30.7 |
% |
|
|
0.1 |
|
EuroAsia
|
|
|
25.3 |
|
|
|
26.5 |
|
|
|
(1.2 |
) |
London Market
|
|
|
25.8 |
|
|
|
22.5 |
|
|
|
3.3 |
|
U.S. Insurance
|
|
|
25.3 |
|
|
|
21.7 |
|
|
|
3.6 |
|
Total acquisition costs and other underwriting expense ratio
|
|
|
27.7 |
% |
|
|
27.1 |
% |
|
|
0.6 |
|
75
The GAAP combined ratio is the sum of losses and LAE as a
percentage of net premiums earned, plus underwriting expenses,
which include acquisition costs and other underwriting expenses,
as a percentage of net premiums earned. The combined ratio
reflects only underwriting results, and does not include
investment results. Underwriting profitability is subject to
significant fluctuations due to catastrophic events,
competition, economic and social conditions, foreign currency
fluctuations and other factors. Our combined ratio was 94.4% for
the year ended December 31, 2006, compared to 117.6% for
the year ended December 31, 2005. The following table
reflects the combined ratio for the years ended
December 31, 2006 and 2005 for each of our divisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Percentage | |
|
|
| |
|
Point | |
Division |
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
Americas
|
|
|
109.3 |
% |
|
|
143.5 |
% |
|
|
(34.2 |
) |
EuroAsia
|
|
|
85.6 |
|
|
|
89.7 |
|
|
|
(4.1 |
) |
London Market
|
|
|
80.5 |
|
|
|
112.8 |
|
|
|
(32.3 |
) |
U.S. Insurance
|
|
|
81.1 |
|
|
|
83.7 |
|
|
|
(2.6 |
) |
Total combined ratio
|
|
|
94.4 |
% |
|
|
117.6 |
% |
|
|
(23.2 |
) |
Investment Results
Net Investment Income. Net investment income for the year
ended December 31, 2006 increased by $267.0 million,
or 121.3%, to $487.1 million, from $220.1 million for
the year ended December 31, 2005. Net investment income is
comprised of gross investment income of $517.4 million less
investment expenses of $30.3 million for the year ended
December 31, 2006, compared to gross investment income of
$247.8 million less investment expenses of
$27.7 million for the year ended December 31, 2005.
Higher net investment income for the year ended
December 31, 2006 is primarily attributable to the
following:
|
|
|
|
|
an increase of $970.7 million or 17.5% in average invested
assets for the year ended December 31, 2006 over 2005, and
higher short term rates over the period. Investment income from
cash and short-term investments was $122.5 million for the
year ended December 31, 2006, an increase of
$68.0 million, or 124.6%, over 2005. |
|
|
|
an increase of $135.7 million for the year ended
December 31, 2006 over 2005 related to HWIC Asia, an
investment vehicle which is included in common stock, at equity.
Net investment income on equity securities includes, in
accordance with the equity method of accounting, realized
investment gains attributable to our equity investment in HWIC
Asia. During 2006, we fully redeemed our interest in HWIC Asia.
Our equity in the net income of HWIC Asia Fund is comprised of
the following items (in millions): |
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Equity in net investment income of HWIC Asia
|
|
$ |
1.1 |
|
|
$ |
5.1 |
|
Equity in net realized capital gains of HWIC Asia
|
|
|
167.6 |
|
|
|
27.9 |
|
|
|
|
|
|
|
|
Equity in net income of HWIC Asia, before taxes
|
|
$ |
168.7 |
|
|
$ |
33.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
an increase of $16.5 million for the year ended
December 31, 2006 over 2005 in net income due to equity
accounting of Advent Capital (Holdings) PLC, a Lloyds
syndicate which is included in common stock, at equity. This
resulted in net income of $1.1 million for the year ended
December 31, 2006 compared to a net loss of
$15.4 million in 2005, primarily reflecting catastrophe
losses from Hurricanes Katrina, Rita and Wilma during 2005. |
|
|
|
an increase of $28.7 million for the year ended
December 31, 2006 over 2005 in net investment income on
other invested assets, which primarily reflects interest income
attributable to our total return swaps on equity indexes and
includes income from hedge funds and private equity investments
of $29.3 million and $15.6 million for the years ended
December 31, 2006 and December 31, 2005, respectively. |
76
Excluding the positive impact of realized capital gains
attributable to our equity investment in HWIC Asia and the
negative impact of the 2005 loss attributable to Advent, net
investment income for the year ended December 31, 2006 was
$319.5 million, an increase of $111.9 million or
53.9%, from $207.6 million for the year ended
December 31, 2005. We believe this figure is more
representative of investment income from our ongoing investment
activities.
Our total effective annualized yield on average invested assets,
net of expense but before the impact of interest expense from
funds held balances and the positive impact of realized gains
attributable to HWIC Asia, was 5.0% and 3.8% for the years ended
December 31, 2006 and 2005, respectively. Also excluding
the negative impact of the 2005 losses attributable to Advent,
our total effective annualized yield, net of expenses but before
the impact of interest expense from funds held balances, was
5.0% and 4.1% for each of the years ended December 31, 2006
and 2005, respectively.
Interest expense on funds held, which is included in investment
expenses, and primarily relates to our Whole Account and
Facultative Excess of Loss Agreements, was $8.7 million for
the year ended December 31, 2006, representing a decrease
of $10.0 million, or 53.5%, from $18.7 million for the
year ended December 31, 2005. The lower amount of interest
expense was due to reduced amounts ceded to the treaties in 2006
and 2005 and the commutation of several of these agreements
during 2006, which resulted in lower interest expense associated
with ceded amounts during the period.
Net Realized Investment Gains. Net realized investment
gains of $189.1 million for the year ended
December 31, 2006 increased by $129.2 million from
$59.9 million for the year ended December 31, 2005.
The increase in net realized investment gains is principally due
to higher gains from equity securities and other investments,
which were offset by lower gains from fixed income securities
and higher losses from derivative securities. The total net
realized investment gains for the year ended December 31,
2006 of $175.4 million on equity securities, primarily
reflect a net gain of $75.1 million related to the
redemption of shares of HWIC Asia and the sale of unrelated
equity securities. Net realized investment gains from equity
securities also include realized losses of $17.1 million
related to the other-than-temporary impairment of a security.
Net realized investment gains from other investments were
$86.5 million for the year ended December 31, 2006,
representing a positive change of $134.5 million over 2005,
primarily reflecting realized foreign exchange rate gains on
short term securities. Net realized investment gains from fixed
income securities of $30.4 million for the year ended
December 31, 2006 decreased by $51.6 million over
2005. Realized investment gains include
mark-to-market
movements on derivative securities, including credit default
swaps and total return swaps on equity indexes. The net
investment loss on derivative securities of $103.1 million
for the year ended December 31, 2006 increased by
$64.3 million over 2005.
During the year ended December 31, 2006, net realized
investment gains were reduced by other-than-temporary impairment
losses in the amount of $28.1 million, with
$11.0 million relating to fixed income securities and other
invested assets and $17.1 million relating to equity
securities. Other-than-temporary impairments reflect situations
where the market value was below the cost of the securities and
the ability of the security to recover its value could not be
reasonably determined. Other-than-temporary impairments related
to fixed income securities include $7.5 million for
security which has no quoted price, to reflect the deterioration
in the underlying financial position of the security. During the
year ended December 31, 2005, net realized investment gains
were reduced by other-than-temporary impairment losses in the
amount of $54.9 million, with $37.3 million relating
to fixed income securities and other invested assets and
$17.6 million relating to equity securities.
Other-than-temporary impairments related to fixed income
securities include $19.4 million for securities which have
no quoted prices, to reflect a deterioration in the underlying
financial position of the securities.
Other Results, Principally
Holding Company and Income Taxes
Other Expenses, Net. Other expenses, net, for the year
ended December 31, 2006, were $21.1 million, compared
to $27.0 million for the year ended December 31, 2005.
Other expenses are primarily comprised of operating expenses of
our holding company and includes audit related fees,
Sarbanes-Oxley compliance consulting fees, corporate-related
legal fees, consulting fees, and compensation expense, including
the amortiza-
77
tion of restricted share grants. The decrease of
$5.9 million for the year ended December 31, 2006 over
2005 is primarily comprised of: (i) a decrease of
$5.7 million related to consulting fees in implementing
procedures and documentation for Sarbanes-Oxley, (ii) a
decrease of $1.0 million related to the renewal of the
employment contract of our Chief Executive Officer, which is
reflected in 2005, offset by, (iii) an increase of
$1.4 million as a result of higher amortization expense of
restricted stock.
Interest Expense. We incurred interest expense, related
to our debt obligations, of $37.5 million and
$30.0 million for the years ended December 31, 2006
and 2005, respectively. The higher amount of interest expense
primarily reflects our $100.0 million senior notes offering
completed in February 2006.
Federal and Foreign Income Tax Benefit/ Provision. As a
result of our pre-tax income for the year ended
December 31, 2006, compared to a pre-tax loss for 2005, our
federal and foreign income tax provision for the year ended
December 31, 2006 increased by $297.4 million, to a
provision of $231.3 million, compared to a benefit of
$66.1 million for the year ended December 31, 2005.
Included in the income tax provision for the year ended
December 31, 2006 is a one-time tax benefit of
$16.5 million, which is attributable to the settlement of
tax issues related to the acquisition of Clearwater in 1996. Our
effective tax rates were 31.3% and 36.4% for the years ended
December 31, 2006 and 2005, respectively.
Preferred Dividends. We recorded preferred dividends
related to our Series A and Series B non-cumulative
perpetual preferred shares of $8.3 million and
$1.9 million for the years ended December 31, 2006 and
2005, respectively. The increase is due to the payment of a full
year of preferred dividends in 2006, as opposed to two and a
half months in 2005, as the preferred shares were first issued
in October 2005.
Year Ended December 31,
2005 Compared to Year Ended December 31, 2004
Underwriting Results
Gross Premiums Written. Gross premiums written for the
year ended December 31, 2005 decreased by
$23.9 million, or 0.9%, to $2,626.9 million compared
to $2,650.8 million for the year ended December 31,
2004, as reflected in the following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Change | |
|
|
| |
|
| |
Division |
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Americas
|
|
$ |
1,130.5 |
|
|
$ |
1,257.5 |
|
|
$ |
(127.0 |
) |
|
|
(10.1 |
)% |
EuroAsia
|
|
|
543.8 |
|
|
|
553.7 |
|
|
|
(9.9 |
) |
|
|
(1.8 |
) |
London Market
|
|
|
431.6 |
|
|
|
447.7 |
|
|
|
(16.1 |
) |
|
|
(3.6 |
) |
U.S. Insurance
|
|
|
521.0 |
|
|
|
391.9 |
|
|
|
129.1 |
|
|
|
32.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
2,626.9 |
|
|
$ |
2,650.8 |
|
|
$ |
(23.9 |
) |
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance gross premiums written for the year ended
December 31, 2005 were $1,863.6 million compared to
$1,968.8 million for 2004, a decrease of 5.3%. Total
insurance gross premiums written for the year ended
December 31, 2005, which includes our U.S. Insurance
division and our Lloyds syndicate (which is part of our
London Market division), were $763.3 million, compared to
$682.0 million for 2004, an increase of 11.9%. For the year
ended December 31, 2005, total reinsurance gross premiums
written represented 71.0% (74.3% in 2004) of our business and
insurance represented the remaining 29.0% (25.7% in 2004) of our
business.
Gross premiums written include reinstatement premiums of
$70.4 million and $16.8 million for the years ended
December 31, 2005 and 2004, respectively. Reinstatement
premiums were primarily related to reinstating the coverage
under property catastrophe excess of loss reinsurance contracts
following Hurricanes Katrina, Rita and Wilma in 2005 and the
2004 Florida Hurricanes. The higher level of reinstatement
premiums in 2005 as compared to 2004 was attributable to the
significant number of full limit losses resulting from
Hurricanes Katrina, Rita and Wilma in 2005. Excluding
reinstatement premiums in each period, gross premiums written
would be $2,556.5 million and $2,634.0 million for the
years ended December 31, 2005 and 2004, respectively,
representing a decrease of $77.5 million, or 2.9%.
78
Americas. Gross premiums written in the Americas division
for the year ended December 31, 2005 were
$1,130.5 million, a decrease of $127.0 million, or
10.1%, as compared to $1,257.5 million for the year ended
December 31, 2004. These amounts represented 43.1% of our
gross premiums written for the year ended December 31, 2005
and 47.4% in 2004. These amounts include reinstatement premiums
of $32.0 million and $5.0 million for the years ended
December 31, 2005 and 2004, respectively, which principally
relate to Hurricanes Katrina, Rita and Wilma in 2005, and the
2004 Florida Hurricanes. Excluding reinstatement premiums in
each period, gross premiums written would be
$1,098.5 million and $1,252.5 million for the years
ended December 31, 2005 and 2004, respectively,
representing a decrease of $154.0 million, or 12.3% over
the period. Gross premiums written across each geographic region
of the Americas are as follows:
|
|
|
|
|
United States Gross premiums written of
$929.9 million for the year ended December 31, 2005
decreased $117.9 million, or 11.3%, compared to
$1,047.8 million for the year ended December 31, 2004.
The decrease in the United States is primarily attributable to
the non-renewal of a large workers compensation quota share
treaty, which accounted for a decrease in gross premiums written
of $93.2 million in 2005. Gross premiums written across
casualty classes of business decreased by $64.9 million, or
13.0%, as compared to 2004, due to more competitive market
conditions, particularly in professional liability classes and
non standard auto. This decrease is partially offset by
increased gross premiums written relating to higher
reinstatement premiums of $28.0 for the year ended
December 31, 2005, compared to $3.2 million for 2004,
which contributed to the overall increase in property gross
premiums written of $41.3 million over the period. |
|
|
|
Latin America Gross premiums written of
$148.6 million for the year ended December 31, 2005
decreased $12.8 million, or 7.9%, compared to
$161.4 million for the year ended December 31, 2004.
The decrease was due to a $25.0 million reduction from the
non-renewal of a large facultative property contract, offset by
a general increase in proportional treaty business, led by
automobile business. We continue to see increased competition
across our Latin America operations. |
|
|
|
Canada Gross premiums written of $50.4 million
for the year ended December 31, 2005 increased
$4.4 million, or 9.6%, compared to $46.0 million for
the year ended December 31, 2004. The increase primarily
relates to exchange rate movements between December 31,
2005 and 2004 as the Canadian dollar strengthened. |
EuroAsia. Gross premiums written in the EuroAsia division
for the year ended December 31, 2005 were
$543.8 million, a decrease of $9.9 million, or 1.8%,
as compared to $553.7 million for the year ended
December 31, 2004. These amounts represented 20.7% of our
gross premiums written for the year ended December 31, 2005
and 20.9% in 2004. These amounts include $5.2 million of
reinstatement premiums for the year ended December 31,
2005, as compared to none in 2004. Gross premiums written for
the year ended December 31, 2004 included
$24.9 million related to the consolidation of a wholly
owned subsidiary, First Capital Insurance Limited (First
Capital), which writes business in Singapore. Starting in
the fourth quarter of 2004, our economic interest in First
Capital declined below 50% and it is no longer consolidated in
our consolidated financial statements. Excluding this amount,
gross premiums written for the year ended December 31, 2005
increased $15.0 million, or 2.8%, as compared to the year
ended December 31, 2004. This increase is primarily
attributable to higher volume of property and motor business,
offset by lower volume in accident and health and credit and
bonds. Gross premiums written from property business, which
represents 60.0% of EuroAsia in 2005, increased by
$21.8 million, or 7.2%, for the year ended
December 31, 2005 compared to 2004, driven by greater
penetration in the French market. Motor business, which
represents 16.3% of EuroAsia in 2005, increased
$8.8 million, or 11.1%, in 2005 and was primarily
attributable to a $17.3 million increase in France, offset
by a decline in other parts of Europe and the Middle East.
Accident and health business, which represents 2.1% of EuroAsia
in 2005, decreased $12.3 million, or 51.7%, in 2005 over
2004 primarily due to the non renewal of selected proportional
accounts.
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
79
$11.8 million (all related to the London branch) for the
years ended December 31, 2005 and 2004, respectively, which
principally relate to Hurricanes Katrina, Rita and Wilma in
2005, and the 2004 Florida Hurricanes. Excluding reinstatement
premiums in each period, gross premiums written would be
$398.4 million and $435.9 million for the years ended
December 31, 2005 and 2004, respectively, representing a
decrease of $37.5 million, or 8.6% over the period. Gross
premiums written across each unit of the London Market division
are as follows:
|
|
|
|
|
London Branch Gross premiums written of
$189.3 million for the year ended December 31, 2005
increased $6.8 million, or 3.8%, compared to
$182.5 million for the year ended December 31, 2004.
Excluding reinstatement premiums in each period, gross premiums
written for the year ended December 31, 2005 were
$156.2 million, a decrease of $14.5 million or 8.5%,
compared to $170.7 million for the year ended
December 31, 2004. Gross premiums written from property
business, which represents 46.3% of London branch in 2005,
increased by $14.6 million, or 20.0%, in 2005 over 2004,
entirely driven by higher reinstatement premiums in 2005 as
ceding companies are choosing to retain more business. Casualty
business showed little change in 2005 but reflects more business
written on an excess of loss basis than on a proportional basis. |
|
|
|
Newline Gross premiums written of
$242.3 million for the year ended December 31, 2005
decreased $22.9 million, or 8.6%, compared to
$265.2 million for the year ended December 31, 2004.
The decrease was primarily attributable to lower directors and
officers and error and omissions business. The decline in
premiums generally reflects more competitive conditions in the
market, where we were experiencing lower prices in certain
classes or choosing to non-renew business that does not meet our
underwriting criteria. |
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:
|
|
|
|
|
Professional liability gross premiums written increased
$49.1 million, or 75.5%, for the year ended
December 31, 2005 to $114.2 million for the year ended
December 31, 2005 from 2004. This primarily resulted from
expansion in the environmental specialists and architects and
engineers classes of business. |
|
|
|
Medical malpractice gross premiums written were
$150.6 million for the year ended December 31, 2005,
an increase of $12.9 million, or 9.4%, from
$137.7 million for the year ended December 31, 2004.
Medical malpractice, our largest line of business in the
U.S. Insurance division, represented 28.9% of gross
premiums written in the U.S. Insurance division for the
year ended December 31, 2005. Growth was driven by
increases in our select markets and hospital coverages and
partially offset by reductions in physician groups business,
which reflects more competitive market conditions. |
|
|
|
Our personal auto business, which primarily includes
non-standard auto business written in California and Florida,
increased $10.9 million, or 11.8%, to $103.6 million
for the year ended December 31, 2005 from 2004 due to the
full year effect of a program administrator which was added in
April 2004. |
Ceded Premiums Written. Ceded premiums written for the
year ended December 31, 2005 increased by
$36.3 million, or 12.6%, to $325.3 million (12.4% of
gross premiums written) from $289.0 million (10.9% of gross
premiums written) for the year ended December 31, 2004.
These amounts include reinstatement premiums paid of
$65.7 million and $20.8 million for the years ended
December 31, 2005 and 2004, respectively. Ceded premiums
written for the year ended December 31, 2004 included
$12.0 million related to First Capital. Excluding First
Capital and reinstatement premiums in each period, ceded
premiums written were $259.6 million
80
for the year ended December 31, 2005 an increase of
$3.4 million, or 1.3%, as compared to $256.2 million
for the year ended December 31, 2004.
Ceded premiums written relating to our Whole Account and
Facultative Excess of Loss Agreements were $11.9 million
and $5.9 million for the years ended December 31, 2005
and 2004, respectively. Premiums are payable by us based on the
amount of losses ceded under each of the agreements. The
increase of $6.0 million for the year ended
December 31, 2005 was primarily attributable to premiums
paid on a higher level of losses ceded during 2005 to the 2001
whole account excess of loss agreement. This was offset by
reduced cessions of Newline of $3.9 million in 2005 over
2004, primarily due to larger deductibles. In addition, there
were reduced cessions of our U.S. Insurance business of
$5.2 million in 2005 over 2004, primarily due to increased
retentions across the business.
Net Premiums Written. Net premiums written for the year
ended December 31, 2005 decreased by $60.1 million, or
2.5%, to $2,301.7 million from $2,361.8 million for
the year ended December 31, 2004. Net premiums written
represent gross premiums written less ceded premiums written.
Net premiums written decreased over 2004 at a higher rate than
gross premiums written, reflecting the increase in ceded
premiums written in the period. Included in net premiums written
are $4.7 million of net reinstatement premiums received for
the year ended December 31, 2005 and $4.0 million in
net reinstatement premiums paid in 2004, related to
catastrophes. Excluding reinstatement premiums, net premiums
written decreased by $68.8 million, or 2.9%, for the year
ended December 31, 2005 over 2004, which is consistent with
the 2.9% decrease in gross premiums written, excluding
reinstatement premiums.
Net Premiums Earned. Net premiums earned for the year
ended December 31, 2005 decreased by $56.7 million, or
2.4%, to $2,276.8 million, from $2,333.5 million for
the year ended December 31, 2004. Net premiums earned
decreased in the Americas division by $178.9 million, or
14.5%, and in the London Market division by $36.7 million,
or 8.7%, offset by increases in the EuroAsia division of
$33.8 million, or 7.0%, and in the U.S. Insurance
division of $125.0 million, or 63.0%. Included in net
premiums earned are $4.7 million of net reinstatement
premiums received for the year ended December 31, 2005 and
$4.0 million in net reinstatement premiums paid in 2004,
related to catastrophes. Excluding reinstatement premiums, net
premiums earned decreased by $65.4 million, or 2.8%, for
the year ended December 31, 2005 over 2004, which is
consistent with the decrease in gross and net premiums written.
Net premiums earned for the year ended December 31, 2005
were reduced by $13.9 million in premiums ceded to our
Whole Account and Facultative Excess of Loss Agreements, which
represent an increase of $7.3 million, or 110.8%, from
$6.6 million for the year ended December 31, 2004.
Losses and Loss Adjustment Expenses. Losses and LAE
increased $430.5 million, or 26.4%, to
$2,061.6 million for the year ended December 31, 2005,
from $1,631.1 million for the year ended December 31,
2004 as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Change | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
$ | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
Gross losses and LAE
|
|
$ |
2,524.1 |
|
|
$ |
1,954.0 |
|
|
$ |
570.1 |
|
|
|
29.2 |
% |
Less: ceded losses and LAE
|
|
|
462.5 |
|
|
|
322.9 |
|
|
|
139.6 |
|
|
|
43.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE
|
|
$ |
2,061.6 |
|
|
$ |
1,631.1 |
|
|
$ |
430.5 |
|
|
|
26.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in losses and LAE was principally related to losses
of $537.9 million related to current year catastrophe
events, of which $445.9 million is attributable to
Hurricanes Katrina, Rita and Wilma. The remaining catastrophe
losses are principally related to other events occurring in the
year, including Hurricanes Emily, Dennis and Stanley, Windstorm
Erwin and floods in India and Europe. Losses and LAE in 2005
include net adverse loss development of $172.7 million
attributable to 2004 and prior years, of which
$15.0 million is related to prior year catastrophe events,
principally the 2004 Florida Hurricanes, Typhoon Songda and the
Indonesian earthquake and resulting tsunami, due to loss
emergence greater than expectations in the period. In addition,
asbestos loss estimates were increased by $41.2 million
resulting from the annual review of these liabilities. The
remaining net adverse loss
81
development of $116.5 million is principally attributable
to loss emergence greater than expectations in 2005 on
U.S. casualty classes of business written in 2001 and
prior. For the year ended December 31, 2004, losses and LAE
reflect $138.8 million for property catastrophe events
occurring in calendar year 2004, including $93.4 million
related to the 2004 Florida Hurricanes. Losses and LAE in the
2004 period include net adverse loss development of
$190.0 million attributable to 2003 and prior years, of
which $30.0 million is related to increased asbestos
estimates resulting from the annual review of these liabilities,
and $7.6 million is related to prior year catastrophe
events due to loss emergence greater than expectations in the
period. The remaining net adverse development of $152.4 is
principally attributable to loss emergence greater than
expectations in 2004 on U.S. casualty classes of business
written in 2001 and prior, partially offset by a
$21.1 million reduction in environmental pollution
estimates due to better than expected loss emergence in the
period.
Ceded losses and LAE for the year ended December 31, 2005
increased by $139.6 million, or 43.2%, to
$462.5 million, from $322.9 million for the year ended
December 31, 2004. The increase in ceded incurred losses
and LAE primarily relates to increases in cessions to our
catastrophe program reinsurance recoverables of
$241.1 million relating to Hurricanes Katrina, Rita and
Wilma. Cessions to the Whole Account Excess of Loss
Agreements for the years ending December 31, 2005 and 2004
are $16.5 million and $5.1 million, respectively. As
of December 31, 2005, the 1994, 1998, 2000 and 2001 Whole
Account Excess of Loss Agreements have remaining aggregate
limits of $62.7 million, $9.6 million,
$0.9 million and $85.4 million, respectively.
The loss and LAE ratio for the years ended December 31,
2005 and 2004 and the percentage point change for each of our
divisions and in total are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Percentage | |
|
|
| |
|
Point | |
Division |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
Americas
|
|
|
112.8 |
% |
|
|
73.8 |
% |
|
|
39.0 |
|
EuroAsia
|
|
|
63.2 |
|
|
|
62.2 |
|
|
|
1.0 |
|
London Market
|
|
|
90.3 |
|
|
|
69.4 |
|
|
|
20.9 |
|
U.S. Insurance
|
|
|
62.0 |
|
|
|
65.6 |
|
|
|
(3.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total loss and LAE ratio
|
|
|
90.5 |
% |
|
|
69.9 |
% |
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
The following tables reflect total losses and LAE as reported
for each division and include the impact of catastrophe losses
and prior period reserve development, expressed as a percentage
of net premiums earned (NPE), for the years ended
December 31, 2005 and 2004 (in millions):
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas | |
|
EuroAsia | |
|
London Market | |
|
U.S. Insurance | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total losses and LAE
|
|
$ |
1,186.2 |
|
|
|
112.8 |
% |
|
$ |
326.0 |
|
|
|
63.2 |
% |
|
$ |
348.8 |
|
|
|
90.3 |
% |
|
$ |
200.6 |
|
|
|
62.0 |
% |
|
$ |
2,061.6 |
|
|
|
90.5 |
% |
Catastrophe Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Windstorm Erwin
|
|
|
|
|
|
|
|
|
|
|
23.1 |
|
|
|
4.5 |
|
|
|
2.5 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
25.6 |
|
|
|
1.1 |
|
India Floods
|
|
|
|
|
|
|
|
|
|
|
11.5 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.5 |
|
|
|
0.5 |
|
Hurricanes Katrina, Rita, and Wilma
|
|
|
313.1 |
|
|
|
29.8 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
131.9 |
|
|
|
34.2 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
445.9 |
|
|
|
19.6 |
|
Other 2005 Events
|
|
|
35.2 |
|
|
|
3.3 |
|
|
|
14.2 |
|
|
|
2.8 |
|
|
|
5.5 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
54.9 |
|
|
|
2.5 |
|
2004 Florida Hurricanes
|
|
|
2.8 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.6 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
3.4 |
|
|
|
0.1 |
|
All Other Prior Years
|
|
|
3.1 |
|
|
|
0.3 |
|
|
|
7.4 |
|
|
|
1.4 |
|
|
|
1.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
11.6 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe losses
|
|
|
354.2 |
|
|
|
33.7 |
|
|
|
56.7 |
|
|
|
11.0 |
|
|
|
141.6 |
|
|
|
36.7 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
552.9 |
|
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior period loss development including prior period catastrophe
losses
|
|
$ |
213.2 |
|
|
|
20.3 |
% |
|
$ |
(8.7 |
) |
|
|
(1.7 |
)% |
|
$ |
(22.8 |
) |
|
|
(5.9 |
)% |
|
$ |
(9.0 |
) |
|
|
(2.8 |
)% |
|
$ |
172.7 |
|
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Year Ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas | |
|
EuroAsia | |
|
London Market | |
|
U.S. Insurance | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
$ | |
|
NPE | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total losses and LAE
|
|
$ |
907.6 |
|
|
|
73.8 |
% |
|
$ |
299.8 |
|
|
|
62.2 |
% |
|
$ |
293.6 |
|
|
|
69.4 |
% |
|
$ |
130.1 |
|
|
|
65.6 |
% |
|
$ |
1,631.1 |
|
|
|
69.9 |
% |
Catastrophe Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Florida Hurricanes
|
|
|
68.0 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
25.4 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
93.4 |
|
|
|
4.0 |
|
Other 2004 Events
|
|
|
26.6 |
|
|
|
2.2 |
|
|
|
22.6 |
|
|
|
4.7 |
|
|
|
(3.7 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
45.4 |
|
|
|
2.0 |
|
All Other Prior Years
|
|
|
5.7 |
|
|
|
0.5 |
|
|
|
2.2 |
|
|
|
0.5 |
|
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
7.6 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total catastrophe losses
|
|
|
100.3 |
|
|
|
8.2 |
|
|
|
24.8 |
|
|
|
5.2 |
|
|
|
21.4 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
146.4 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior period loss development including prior period catastrophe
losses
|
|
$ |
184.8 |
|
|
|
15.0 |
% |
|
$ |
6.6 |
|
|
|
1.4 |
% |
|
$ |
(0.2 |
) |
|
|
|
% |
|
$ |
(1.2 |
) |
|
|
(0.6 |
)% |
|
$ |
190.0 |
|
|
|
8.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Division Losses and LAE increased
$278.6 million, or 30.7%, to $1,186.2 million for the
year ended December 31, 2005, from $907.6 million for
the year ended December 31, 2004. This resulted in a loss
and LAE ratio of 112.8% for the year ended December 31,
2005, compared to 73.8% for the year ended December 31,
2004. The increase in losses and LAE was due to losses of
$354.2 million related to catastrophe events, of which
$313.1 million is attributable to Hurricanes Katrina, Rita
and Wilma, with the remainder principally related to other
events occurring in 2005, including Hurricanes Emily and Dennis.
Losses and LAE in the 2005 period include net adverse loss
development of $213.2 million attributable to 2004 and
prior years, of which $41.2 million is related to increased
asbestos loss estimates resulting from the annual review of
these liabilities, and $5.9 million is related to prior
year catastrophe events due to loss emergence greater than
expectations in the period principally attributable to the 2004
Florida Hurricanes. The remaining net adverse loss development
of $166.1 million is principally attributable to loss
emergence greater than expectations in 2005 on
U.S. casualty classes of business. For the year ended
December 31, 2004, losses and LAE reflect
$100.3 million for property catastrophe events including
the 2004 Florida Hurricanes. Losses and LAE in the 2004 period
include net adverse loss development of $184.8 million
attributable to 2003 and prior years, of which
$30.0 million is related to increased asbestos loss
estimates resulting from the annual review of these liabilities,
and $5.7 million is related to prior year catastrophe
events due to loss emergence greater than expectations in the
period. The remaining net adverse development of
$149.1 million is principally attributable to loss
emergence greater than expectations in 2004 on
U.S. casualty classes of business, partially offset by a
$21.1 million reduction in environmental pollution
estimates due to better than expected emergence in the period.
EuroAsia Division Losses and LAE increased
$26.2 million, or 8.7%, to $326.0 million for the year
ended December 31, 2005, from $299.8 million for the
year ended December 31, 2004. This resulted in a loss and
LAE ratio of 63.2% for the year ended December 31, 2005,
compared to 62.2% for the year ended December 31, 2004. The
increase in losses and LAE was related to the 7.0% increase in
net premiums earned and $56.7 million of catastrophe
losses, principally Windstorm Erwin and floods in India and
Europe. Losses and LAE in the 2005 period include favorable loss
development of $8.7 million attributable to 2004 and prior
years, principally related to favorable emergence on liability
and bond exposures in the period, and include $7.4 million
of adverse development on prior period catastrophe losses
predominantly attributable to Typhoon Songda and the Indonesian
earthquake and resulting tsunami due to unexpected claims
emergence. For the year ended December 31, 2004, losses and
LAE include $24.8 million for property catastrophe events,
including Typhoon Songda and the Indonesian earthquake and
resulting tsunami. Losses and LAE in the 2004 period include net
adverse loss development of $6.6 million attributable to
2003 and prior years, principally related to unexpected loss
emergence on bond exposures in the period, and include
$2.2 million of net adverse development on prior period
catastrophe losses due to loss emergence greater than
expectations.
London Market Division Losses and LAE increased by
$55.2 million, or 18.8%, to $348.8 million for the
year ended December 31, 2005 from $293.6 million for
the year ended December 31, 2004. This resulted in a loss
and LAE ratio of 90.3% for the year ended December 31,
2005, compared to 69.4% for the year ended
83
December 31, 2004. The increase in losses and LAE was
related to losses of $141.6 million from catastrophe
events, of which $131.9 million is attributable to
Hurricanes Katrina, Rita and Wilma. Losses and LAE in the 2005
period include favorable loss development of $22.8 million
attributable to 2004 and prior years, principally related to
favorable emergence on aviation, satellite and non-catastrophe
property exposures in the period, and include $1.7 million
of net adverse development on prior period catastrophe losses
due to loss emergence greater than expectations. For the year
ended December 31, 2004, losses and LAE reflect
$21.4 million for property catastrophe events including the
2004 Florida Hurricanes. Losses and LAE in the 2004 period
include favorable loss development of $0.2 million
attributable to 2003 and prior years and include a benefit of
$0.3 million from prior period catastrophe losses.
U.S. Insurance Division Losses and LAE
increased by $70.5 million, or 54.2%, to
$200.6 million for the year ended December 31, 2005,
from $130.1 million for the year ended December 31,
2004. This resulted in a loss and LAE ratio of 62.0% for the
year ended December 31, 2005, compared to 65.6% for the
year ended December 31, 2004. The increase in losses and
LAE was related to the 63.0% increase in net premiums earned,
losses of $0.4 million related to Hurricane Katrina and
favorable loss development of $9.0 million on losses and
LAE attributable to 2004 and prior years due to favorable loss
emergence on medical malpractice and general liability exposures
in the period. For the year ended December 31, 2004, losses
and LAE related to 2003 and prior years include favorable loss
development of $1.2 million due to favorable loss emergence
on private passenger automobile liability in 2004.
Acquisition Costs. Acquisition costs for the year ended
December 31, 2005 were $470.2 million, a decrease of
$45.7 million or 8.9%, compared to $515.9 million for
the year ended December 31, 2004. The resulting acquisition
expense ratio, expressed as a percentage of net premiums earned,
was 20.6% for the year ended December 31, 2005, compared to
22.1% for the year ended December 31, 2004, a decrease of
1.5 points. The Americas and London Market divisions
acquisition ratios decreased by 2.1 points and 2.4 points
respectively, due to the change in composition of the mix of
business written, while the EuroAsia division had a slight
increase of 0.5 points. The U.S. Insurance division
increased 3.9 points due to a decrease in ceded commissions as
the division continues to increase its net retentions.
Acquisition costs are reduced by ceding commissions related to
our Whole Account and Facultative Excess of Loss Agreements, of
$5.3 million and $2.7 million for the years ended
December 31, 2005 and 2004, respectively. The increase of
$2.6 million in 2005 over 2004 was attributable to ceding
commissions on higher premiums ceded to these agreements during
2005. Ceding commissions due under certain of our Whole
Account Excess of Loss Agreements are deferred and will be
received by us in future periods. Ceding commissions have
therefore been recorded at their present value, with the
discount amortized over the expected collection period. For
years ended December 31, 2005 and 2004, the discount
recorded on ceding commissions is $0.8 million and
$2.1 million, respectively, which is net of the
amortization of the discount recorded in prior periods.
Other Underwriting Expenses. Other underwriting expenses
for the year ended December 31, 2005 were
$146.0 million, compared to $120.8 million for the
year ended December 31, 2004. The other underwriting
expense ratio, expressed as a percentage of net premiums earned,
was 6.4% for the year ended December 31, 2005, compared to
5.2% for the year ended December 31, 2004. Other
underwriting expenses increased while net premiums earned
decreased, resulting in a higher other underwriting expense
ratio in 2005 as compared to 2004. In addition, legal expenses
of $8.4 million for the year ending December 31, 2005,
primarily attributable to outstanding litigation matters,
increased by $4.5 million over 2004. This increase in other
underwriting expenses is also attributable to an increase in
personnel related costs and related benefits, particularly in
our U.S. Insurance division.
84
The following table reflects the acquisition and other
underwriting expenses, expressed as a percentage of net premiums
earned, for the years ended December 31, 2005 and 2004 for
each of our divisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Percentage | |
|
|
| |
|
Point | |
Division |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
Americas
|
|
|
30.7 |
% |
|
|
30.5 |
% |
|
|
0.2 |
|
EuroAsia
|
|
|
26.5 |
|
|
|
25.4 |
|
|
|
1.1 |
|
London Market
|
|
|
22.5 |
|
|
|
23.7 |
|
|
|
(1.2 |
) |
U.S. Insurance
|
|
|
21.7 |
|
|
|
19.3 |
|
|
|
2.4 |
|
Total acquisition costs and other underwriting expense ratio
|
|
|
27.1 |
% |
|
|
27.3 |
% |
|
|
(0.2 |
) |
The property and casualty reinsurance and insurance industry
uses the combined ratio as a measure of underwriting
profitability. The GAAP combined ratio is the sum of losses and
LAE as a percentage of net premiums earned, plus underwriting
expenses, which include acquisition costs and other underwriting
expenses, as a percentage of net premiums earned. The combined
ratio reflects only underwriting results, and does not include
investment results. Underwriting profitability is subject to
significant fluctuations due to catastrophic events,
competition, economic and social conditions, foreign currency
fluctuations and other factors. Our combined ratio was 117.6%
for the year ended December 31, 2005, compared to 97.2% for
the year ended December 31, 2004. The following table
reflects the combined ratio for the years ended
December 31, 2005 and 2004 for each of our divisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
December 31, | |
|
Percentage | |
|
|
| |
|
Point | |
Division |
|
2005 | |
|
2004 | |
|
Change | |
|
|
| |
|
| |
|
| |
Americas
|
|
|
143.5 |
% |
|
|
104.3 |
% |
|
|
39.2 |
|
EuroAsia
|
|
|
89.7 |
|
|
|
87.6 |
|
|
|
2.1 |
|
London Market
|
|
|
112.8 |
|
|
|
93.1 |
|
|
|
19.7 |
|
U.S. Insurance
|
|
|
83.7 |
|
|
|
84.9 |
|
|
|
(1.2 |
) |
Total combined ratio
|
|
|
117.6 |
% |
|
|
97.2 |
% |
|
|
20.4 |
|
Investment Results
Net Investment Income. Net investment income for the year
ended December 31, 2005 increased by $55.9 million, or
34.0%, to $220.1 million, from $164.2 million for the
year ended December 31, 2004 driven by an
$845.6 million or 16.5% increase in total investments and
cash over the period. Net investment income is comprised of
gross investment income of $247.8 million less investment
expenses of $27.7 million for the year ended
December 31, 2005, compared to gross investment income of
$194.8 million less investment expenses of
$30.6 million for the year ended December 31, 2004.
Higher net investment income for the year ended
December 31, 2005 is primarily attributable to the
following:
|
|
|
|
|
an increase of $857.6 million or 18.3% in average invested
assets for the year ended December 31, 2005 over 2004, and
higher short term rates over the period |
|
|
|
an increase of $26.7 million for the year ended
December 31, 2005 over 2004 in net income due to equity
accounting of HWIC Asia, an investment vehicle which is included
in common stock, at equity. Net investment income on equity
securities includes, in accordance with the equity method of
accounting, |
85
|
|
|
|
|
realized investment gains attributable to our equity investment
in HWIC Asia. Our equity in the net income of HWIC Asia is
comprised of the following items (in millions): |
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Equity in net investment income of HWIC Asia
|
|
$ |
5.1 |
|
|
$ |
4.9 |
|
Equity in net realized capital gains of HWIC Asia
|
|
|
27.9 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
Equity in net income of HWIC Asia, before taxes
|
|
$ |
33.0 |
|
|
$ |
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
a decrease of $18.6 million for the year ended
December 31, 2005 over 2004 in net income due to equity
accounting of Advent Capital (Holdings) PLC, a Lloyds
syndicate, which is included in common stock, at equity. This
resulted in a net loss of $15.4 million for the year ended
December 31, 2005 from net income of $3.2 million in
2004, primarily reflecting catastrophe losses from Hurricanes
Katrina, Rita and Wilma during 2005. |
|
|
|
an increase of $6.0 million for the year ended
December 31, 2005 over 2004 in net investment income on
other invested assets, which primarily reflects interest income
attributable to our total return swaps on equity indexes and
includes income from hedge funds and private equity investments
of $15.6 million and $15.9 million for the years ended
December 31, 2005 and December 31, 2004, respectively. |
Excluding the positive impact of realized capital gains
attributable to our equity investment in HWIC Asia and the
negative impact of the 2005 loss attributable to Advent, net
investment income for the year ended December 31, 2005 was
$207.6 million, an increase of $47.9 million or 30.0%,
from $159.7 million for the year ended December 31,
2004. We believe this figure is more representative of
investment income from our ongoing investment activities.
Our total effective annualized yield on average invested assets,
net of expense but before the impact of interest expense from
funds held balances and the positive impact of realized gains
attributable to HWIC Asia, was 3.8% and 3.9% for the years ended
December 31, 2005 and 2004, respectively. Also excluding
the negative impact of the 2005 losses attributable to Advent,
our total effective annualized yield, net of expenses but before
the impact of interest expense from funds held balances, was
4.1% and 3.8% for each of the years ended December 31, 2005
and 2004, respectively.
Interest expense on funds held, which is included in investment
expenses, and primarily relates to our Whole Account and
Facultative Excess of Loss Agreements, was $18.7 million
for the year ended December 31, 2005, representing a
decrease of $1.4 million, or 7.0%, from $20.1 million
for the year ended December 31, 2004. The lower amount of
interest expense was due to reduced amounts ceded to the
treaties in 2004, which resulted in lower interest expense
associated with ceded amounts during the period.
Net Realized Investment Gains. Net realized investment
gains of $59.9 million for the year ended December 31,
2005 decreased by $62.1 million from $122.0 million
for the year ended December 31, 2004. The decrease in net
realized investment gains is principally due to higher gains
from fixed income securities, which were offset by lower gains
from equity securities and higher losses from derivative
securities and other investments. The total net realized
investment gains for the year ended December 31, 2005 of
$64.7 million on equity securities, primarily reflect a
gain of $47.0 million related to the sale of Zenith
National Insurance Corp. (Zenith) securities and
also includes realized losses of $17.6 million related to
other-than-temporary impairments on selected securities. Net
realized investment gains from fixed income securities of
$82.0 million for the year ended December 31, 2005
increased by $28.5 million over 2004, primarily reflecting
gains on U.S. Treasury securities sold through the year.
Realized investment gains include
mark-to-market
movements on derivative securities, including credit default
swaps and total return swaps on equity indexes. The net
investment loss on derivative securities of $38.8 million
for the year ended December 31, 2005 increased by
$11.7 million over 2004. Net realized investment losses
from other securities were $48.0 million for the year ended
December 31, 2005, representing an adverse change of
$51.2 million over 2004, primarily reflecting unrealized
86
foreign exchange rate losses on short term securities and
impairment of certain investments included in other invested
assets.
During the year ended December 31, 2005, net realized
investment gains were reduced by other-than-temporary impairment
losses in the amount of $54.9 million, with
$37.3 million relating to fixed income securities and other
invested assets and $17.6 million relating to equity
securities. Other-than temporary impairments reflect situations
where the market value was below the cost of the securities and
the ability of the security to recover its value could not be
reasonably determined. Other-than temporary impairments also
include $19.4 million for securities which have no quoted
prices, to reflect the deterioration in the underlying financial
position of the securities. There were no other-than-temporary
impairment losses during the year ended December 31, 2004.
Other Results, Principally
Holding Company and Income Taxes
Other Expenses, Net. Other expenses, net, for the year
ended December 31, 2005, were $27.0 million, compared
to $17.2 million for the year ended December 31, 2004.
The other expense is primarily comprised of operating expenses
of our holding company and includes audit related fees,
Sarbanes-Oxley compliance consulting fees, corporate-related
legal fees, consulting fees, and compensation expense, including
the amortization of restricted share grants. The increase of
$9.8 million for the year ended December 31, 2005 over
2004 is primarily comprised of: (i) an increase of
$4.1 million related to consulting fees in implementing
procedures and documentation for Sarbanes-Oxley, (ii) an
increase of $1.4 million as a result of higher amortization
expense of restricted stock, (iii) $2.1 million
related to the renewal of the employment contract of our Chief
Executive Officer, which is reflected in 2005 and
(iv) $1.7 million related to the amortization of
information technology development costs during 2005.
Interest Expense. We incurred interest expense, related
to our debt obligations, of $30.0 million and
$25.6 million for the years ended December 31, 2005
and 2004, respectively. The higher amount of interest expense
primarily reflects our $125.0 million senior notes offering
completed in May 2005.
Federal and Foreign Income Tax Benefit/ Provision. As a
result of our loss for the year ended December 31, 2005,
our federal and foreign income tax provision for the year ended
December 31, 2005 decreased by $170.2 million, to a
benefit of $66.1 million, compared to a provision of
$104.1 million for the year ended December 31, 2004.
Our effective tax rates were 36.4% and 33.7% for the years ended
December 31, 2005 and 2004, respectively.
Preferred Dividends. We recorded preferred dividends
related to our Series A and Series B non-cumulative
perpetual preferred shares of $1.9 million after-tax for
the year ended December 31, 2005. There were no amounts in
2004, as the preferred shares were first issued in October 2005.
Liquidity and Capital Resources
Our shareholders equity increased by $444.1 million,
or 27.1%, to $2,083.6 million as of December 31, 2006,
from $1,639.5 million as of December 31, 2005. The net
increase as of December 31, 2006 compared to
December 31, 2005 was primarily attributable to net income
of $507.9 million and an increase to additional paid in
capital of $43.7 million principally resulting from the
conversion of a portion of our convertible debt into our common
stock. These increases were offset by a decrease in accumulated
other comprehensive income of $93.7 million, after-tax, of
which $82.8 million relates to a decrease in unrealized
appreciation and $10.2 million relates to the adoption of
SFAS 158 (see Note 19 to our consolidated financial
statements included in this
Form 10-K). Our
book value per common share was $27.92 as of December 31,
2006, representing an increase of $5.61 from the book value per
common share of $22.31 as of December 31, 2005 and an
increase of $0.88 from the book value per common share of $27.04
as of September 30, 2006.
The following table reconciles total shareholders equity,
a GAAP financial measure, to common shareholders equity, a
non-GAAP financial measure, as used in the book value per common
share calculation. We believe
87
this presentation may be useful to investors who utilize common
shareholders equity in their return on equity calculation.
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In millions, except per share | |
|
|
and share amounts) | |
Total shareholders equity
|
|
$ |
2,083.6 |
|
|
$ |
1,639.5 |
|
Less: equity related to preferred stock
|
|
|
97.5 |
|
|
|
97.5 |
|
|
|
|
|
|
|
|
Total common shareholders equity
|
|
$ |
1,986.1 |
|
|
$ |
1,542.0 |
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
71,140,948 |
|
|
|
69,127,532 |
|
|
|
|
|
|
|
|
Book value per common share
|
|
$ |
27.92 |
|
|
$ |
22.31 |
|
|
|
|
|
|
|
|
On November 28, 2006, we completed the private sale of
$40.0 million aggregate principal amount of floating rate
senior debentures, Series C (the Notes),
maturing on December 15, 2021. Interest on the Notes
accrues at a rate per annum equal to three-month London
Interbank Offer Rate (LIBOR), reset quarterly, plus
2.50%, and is payable quarterly in arrears on March 15,
June 15, September 15 and December 15 of each year starting
on March 15, 2007. We have the option to redeem the Notes
at par, plus accrued and unpaid interest, in whole or in part on
any interest payment date on or after December 15, 2011.
The proceeds were used to retire, in November 2006, our
7.49% Senior Notes.
On February 22, 2006, we issued $100.0 million
aggregate principal amount of floating rate senior debentures,
pursuant to a private placement. The net proceeds from the
offering, after fees and expenses, were $99.3 million. Use
of proceeds was for general corporate purposes, including a
capital contribution to Odyssey America. The debentures were
sold in two tranches, $50.0 million of Series A due
March 15, 2021, and $50.0 million of Series B due
March 15, 2016. Interest on each series of debentures is
due quarterly on March 15, June 15, September 15 and
December 15. The interest rate on each series of debentures is
equal to the three-month LIBOR, which is calculated on a
quarterly basis, plus 2.20%. The interest rate from
February 22, 2006 through March 16, 2006 on each
series of debentures was 6.97% per annum. Pursuant to the
terms of the indentures, as a result of the delay in filing our
2005 Annual Report on
Form 10-K, the
annual interest rate on each series of debentures was increased,
as of March 17, 2006, to the three-month LIBOR as of
March 15, 2006 plus 3.20%, which equaled 8.12%. This
interest rate remained in effect until the filing of our Annual
Report on
Form 10-K on
March 31, 2006, after which it reverted to 6.97% through
June 14, 2006. As of December 31, 2006, the current
annual interest rate on each series of debentures is 7.56%. The
Series A debentures are callable by us in 2011 at their par
value, plus accrued and unpaid interest, and the Series B
debentures are callable by us in 2009 at their par value, plus
accrued and unpaid interest.
During the second quarter of 2005, we issued $125.0 million
aggregate principal amount of senior notes due May 1, 2015.
The issue was sold at a discount of $0.8 million, which is
being amortized over the life of the notes. Interest accrues on
the senior notes at a fixed rate of 6.875% per annum which
is due semi-annually on May 1 and November 1. These senior
notes are reflected on our December 31, 2006 consolidated
balance sheet at a value of $124.3 million.
In June 2002, we issued $110.0 million aggregate principal
amount of 4.375% convertible senior debentures due 2022
(Convertible Notes). On August 14, 2006, in
accordance with the terms of the indenture under which the
Convertible Notes were issued, the Convertible Notes became
convertible, at the option of the holders, into shares of our
common stock at a fixed rate of 46.9925 shares per $1,000
principal amount of Convertible Notes, which represents a
conversion price of $21.28 per share. The convertibility
trigger was met as a result of our common shares trading at or
above $25.54 per share for a specified period of time.
Pursuant to the terms of the indenture, we are permitted to
satisfy our conversion obligations in stock or in cash, or in a
combination thereof. To date, we have elected to satisfy all
conversion obligations with common shares, and therefore, as of
December 31, 2006, we had issued a total of 1,838,151
common shares to satisfy conversions up to that date. During
February 2007, we issued 46,992 common shares related to
$1.0 million principal amount of Convertible Notes subject
to a notice of conversion received in December 2006. Subsequent
to December 31, 2006, we have
88
not received conversion notices related to the remaining
$22.5 million principal value of Convertible Notes, which
could be converted into cash or 1.1 million shares of our
common stock, or a combination of cash and stock, at our
election. In February 2007, we announced that the Convertible
Notes will continue to be convertible during the period from
February 14, 2007 through May 13, 2007. For more
information regarding the Convertible Notes, see Note 13 to
the consolidated financial statements included in this
Form 10-K.
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.
Please see Note 13 to our consolidated financial statements
included in this
Form 10-K for
complete disclosure of our debt obligations, common shares and
preferred shares.
During 2005, we contributed $185.0 million to Odyssey
America. Effective December 31, 2005, we received approval
from the Connecticut Insurance Commissioner to make a
$200.0 million capital contribution to Odyssey America, to
be completed prior to February 28, 2006. In February 2006,
we completed the $200.0 million capital contribution to
Odyssey America, funded with holding company cash resources,
including the proceeds from our financing transactions completed
in October 2005 and February 2006.
Holding company cash and cash equivalents equaled
$58.8 million as of December 31, 2006, as compared to
$102.4 million as of December 31, 2005, with the lower
amount primarily due to capital contributions made to Odyssey
America. As a holding company, our assets are principally
comprised of the shares of Odyssey America, and our principal
sources of funds are cash dividends and other permitted payments
from our operating subsidiaries, primarily Odyssey America. If
our subsidiaries are unable to make payments to us, or are able
to pay only limited amounts, we may be unable to pay dividends
on our common or preferred shares or make payments on our
indebtedness. The payment of dividends by our operating
subsidiaries is subject to restrictions set forth in the
insurance laws and regulations of Connecticut, Delaware, New
York and the United Kingdom. During 2007, Odyssey America can
pay dividends to the holding company of $561.7 million
without prior regulatory approval. Odyssey America paid a
dividend of $60.0 million to the holding company during
2006.
Odyssey Americas liquidity requirements are principally
met by cash flows from operating activities, which principally
result from collections of premiums, reinsurance recoverables
and investment income, net of paid losses, acquisition costs and
underwriting and investment expenses. We seek to maintain
sufficient liquidity to satisfy the timing of projected claim
payments and operating expenses. The estimate, timing and
ultimate amount of actual claim payments is inherently uncertain
and will vary based on many factors including the frequency and
severity of losses across various lines of business. Claim
payments can accelerate due to a variety of factors, including
losses stemming from catastrophic events, which are typically
paid out in a short period of time, legal settlements or
emerging claim issues. We estimate claim payments, net of
associated reinsurance recoveries, of approximately
$1.3 billion during 2007. The timing and certainty of
associated reinsurance collections which may be due to us can
add uncertainty to our liquidity position to the extent amounts
are not received on a timely basis. As of December 31,
2006, our operating subsidiaries maintained cash and cash
equivalents of $2.0 billion, which is readily available for
expected claim payments. In addition, our liquidity is enhanced
through the collection of premiums on new business written
through the year. We believe our cash resources, together with
readily marketable securities, are sufficient to satisfy
expected payment obligations, including any unexpected
acceleration in claim payments or timing differences in
collecting reinsurance recoverables.
Although the obligations of our reinsurers to make payments to
us are based on specific contract provisions, these amounts only
become recoverable when we make a payment of the associated loss
amount, which may be several years, or in some cases decades,
after the actual loss occurred. Reinsurance recoverables on
unpaid losses, which represent 92.5% of our total reinsurance
recoverables as of December 31, 2006, will not be due for
89
collection until some time in the future, and over this period
of time, economic conditions and the operational performance of
a particular reinsurer may negatively impact its ability to meet
its future obligations to us. We manage our exposure by entering
into reinsurance transactions with companies that have a strong
capital position and a favorable long term financial profile.
Our total reinsurance recoverable on paid losses as of
December 31, 2006, net of the reserve for uncollectible
paid and unpaid reinsurance, which is established based on an
evaluation of each reinsurer or retrocessionaire and historical
experience, is $59.8 million. The top ten reinsurers
measured on total reinsurance recoverables represent
$35.6 million, or 59.5% of the total paid loss recoverable,
of which $12.1 million is collateralized and the remaining
$23.5 million is with highly rated companies. The remaining
$24.2 million recoverable on paid losses is with numerous
companies, and no single company has a balance greater than
$4.4 million net of the reserve on uncollectible
reinsurance.
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.
Cash provided by operations was $752.3 million for the year
ended December 31, 2006, compared to $395.7 million
for the year ended December 31, 2005.
Total investments and cash amounted to $7.1 billion as of
December 31, 2006, an increase of $1.1 billion
compared to December 31, 2005. Our average invested assets
were $6.5 billion for the year ended December 31,
2006, as compared to $5.5 billion for the year ended
December 31, 2005. It is anticipated that our cash and cash
equivalents will continue to be reinvested on a basis consistent
with our long-term, value oriented investment philosophy. Cash
and short-term investments, excluding our cash collateral for
borrowed securities, represented 32.6% and 28.9%, respectively,
of our total investments and cash as of December 31, 2006
and December 31, 2005. Total fixed income securities were
$3.5 billion as of December 31, 2006. The fixed income
securities portfolio has a weighted average security rating of
AA as measured by Standard and Poors. The
duration of our investment portfolio, including cash and cash
equivalents, was 4.7 years, which exceeds the duration of
our liabilities. We believe this difference is mitigated by the
significant amount of cash and cash equivalents maintained
within our portfolio.
Total investments and cash exclude amounts receivable for
securities sold and amounts payable for securities purchased,
representing the timing between the trade date and settlement
date of securities sold and purchased. As of December 31,
2006 and 2005, we had a receivable for securities sold of
$21.3 million and $2.9 million, respectively, which is
included in other assets, and a payable for securities purchased
of $13.0 million and $9.5 million, respectively, which
is included in other liabilities.
We participate in Lloyds through our 100% ownership of
Newline Syndicate 1218 (Syndicate 1218), where we
provide 100% of the capacity for Newline. The results of
Syndicate 1218 are consolidated in our consolidated financial
statements. In support of its capacity at Lloyds, Odyssey
America has pledged U.S. Treasury Notes and cash, with a
fair value of $247.7 million as of December 31, 2006,
in a deposit trust account in favor of the Society and Council
of Lloyds. These securities may be substituted with other
securities at our discretion, subject to approval by
Lloyds. The securities are carried at fair value and are
included in investments and cash in our consolidated balance
sheets. Interest earned on the securities is included in
investment income. The pledge of assets in support of Syndicate
1218 provides us with the ability to participate in writing
business through Lloyds, which remains an important part
of our business. The pledged assets effectively secure the
contingent obligations of Syndicate 1218 should it not meet its
obligations. Odyssey Americas contingent liability to the
Society and Council of Lloyds is limited to the aggregate
amount of the pledged assets. We have the ability to remove
funds at Lloyds annually, subject to certain minimum
amounts required to support its outstanding liabilities as
determined under risk based capital models and approved by
Lloyds. The funds used to support outstanding liabilities
are adjusted annually and our obligation to support these
liabilities will continue until they are settled or the
liabilities are reinsured by a third party approved by
Lloyds. We expect to continue to actively operate
Syndicate 1218 and support its requirements at Lloyds. We
believe that Syndicate 1218 maintains sufficient liquidity and
financial resources to support its ultimate liabilities and we
do not anticipate that the pledged assets will be utilized.
90
During the second quarter of 2004, Odyssey America pledged
U.S. Treasury Notes with a par value of $162.0 million
(the pledged assets), or approximately
£110.0 million equivalent, to the Society and Council
of Lloyds on behalf of Advent Capital (Holdings) PLC
(Advent) to support Advents underwriting
activities for the 2001 to 2005 underwriting years of account.
Advent is 44.5% owned by Fairfax and its affiliates, which
includes 8.1% held by us. nSpire Re Limited (nSpire
Re), a subsidiary of Fairfax, had previously pledged
assets at Lloyds on behalf of Advent pursuant to a
November 2000 agreement with Advent. Advent is responsible for
the payment of any losses to support its underwriting activities
and the capital resources of Advent, including its newly
deposited funds at Lloyds, are first available to support
any losses prior to a draw down of Odyssey Americas
pledged assets. In consideration of Odyssey America pledging the
assets, nSpire Re agreed to pay Odyssey America a fee equal to
2.0% per annum of the pledged assets, which we consider to
be representative of commercial market terms. The pledged assets
continue to be owned by Odyssey America, and Odyssey America
receives any investment income thereon. The securities are
carried at fair value and are included in investments and cash
in our consolidated balance sheets. Interest earned on the
securities is included in investment income. As additional
consideration for, and further protection of, the pledged
assets, nSpire Re has provided Odyssey America with
indemnification in the event of a draw down on the pledged
assets. Odyssey America retains the right to withdraw the
pledged assets at any time upon 180 days advance written
notice to nSpire Re. nSpire Re retains the obligation to pledge
assets on behalf of Advent. In any event, the placement of funds
at Lloyds will automatically terminate effective no later
than December 31, 2008 and any remaining pledged assets
will revert to Odyssey America at that time. The pledge of
assets is not considered material to our liquidity and capital
resources. In January 2006, Odyssey America received assets with
a par value of $48.6 million, representing a permanent
reduction and unconditional release of such amount, prior to the
stated termination date, following the deposit by Advent of
£38.0 million in new funds at Lloyds. In
September 2006, Odyssey America received assets with a par value
of $10.7 million, representing a permanent reduction and
unconditional release of such amount, prior to the stated
termination date, following the deposit by Advent of such amount
in new funds at Lloyds. Following these returns of assets,
and as of December 31, 2006, Odyssey America continues to
have a par value of $102.7 million, or approximately
£52.5 million equivalent, pledged to Lloyds in
support of Advent and will continue to receive a fee for these
pledged assets. The fair market value of the pledged assets is
$128.2 million, or approximately £65.5 million
equivalent. We believe that the financial resources of Advent
provide adequate protection to support its liabilities in the
ordinary course of business.
On November 29, 2006, our Board of Directors declared a
quarterly cash dividend of $0.03125 per common share to be
paid on December 29, 2006 to all common shareholders of
record as of December 15, 2006. During each of the four
quarters of 2006, our Board of Directors declared quarterly cash
dividends of $0.03125 per common share, resulting in an
aggregate dividend of $2.2 million paid in each quarter. On
February 22, 2007, our Board of Directors announced that it
had increased our quarterly dividend to $0.0625 per common
share, double its previous level, and declared a dividend
payable on March 30, 2007 to shareholders of record at the
close of business on March 16, 2007.
On November 29, 2006, the Board of Directors declared
quarterly dividends of $0.5078125 per share on our 8.125%
Series A preferred shares and $0.5389844 per share on
our floating rate Series B preferred shares. The total
dividends of $2.1 million were paid on January 22,
2007 to Series A and Series B preferred shareholders
of record on December 31, 2006.
On September 23, 2005, we entered into a credit agreement
that provides for a three-year revolving credit facility of
$150.0 million, which is available for direct, unsecured
borrowings. The credit facility is available for working capital
and other corporate purposes, and for the issuance of secured or
unsecured letters of credit. Wachovia Bank, N.A. is the
administrative agent for the credit facility and is one of a
group of lenders thereunder. As of December 31, 2006, there
was $55.0 million outstanding under the credit agreement,
all of which was in support of letters of credit. Loans under
the credit facility will bear interest at a fluctuating rate per
annum equal to the higher of (a) the federal funds rate
plus 0.5% and (b) Wachovia Bank, N.A.s publicly
announced prime rate. Alternatively, at our option, loans will
bear interest at the LIBOR, which is the offered rate that
appears on the page of the Telerate screen that displays an
average British Bankers Association Interest Settlement Rate for
deposits in dollars, plus 0.85%. This credit facility replaced
our $90.0 million facility, which terminated on
September 23, 2005.
91
Financial Strength and Credit Ratings
The Company and its subsidiaries are assigned financial strength
(insurance) and credit ratings from internationally
recognized rating agencies, which include A.M. Best Company,
Inc., Standard & Poors Insurance Rating Services
and Moodys Investors Service. Financial strength ratings
represent the opinions of the rating agencies of the financial
strength of a company and its capacity to meet the obligations
of insurance and reinsurance contracts. The rating agencies
consider many factors in determining the financial strength
rating of an insurance or reinsurance company, including the
relative level of statutory surplus necessary to support the
business operations of the company.
These ratings are used by insurers, reinsurers and
intermediaries as an important means of assessing the financial
strength and quality of reinsurers. A reduction in our financial
strength ratings could limit or prevent us from writing new
reinsurance or insurance business. The financial strength
ratings of our principal operating subsidiaries are: A.M. Best:
A (Excellent); Standard & Poors:
A- (Strong); and Moodys: A3 (Good
Financial Security). These ratings are based upon factors
relevant to policyholders, agents and intermediaries and are not
directed toward the protection of investors, nor are they
recommendations to buy, sell or hold securities.
Our senior unsecured debt is currently rated BBB- by
Standard & Poors, Baa3 by
Moodys and bbb by A.M. Best. Our Series A
and Series B preferred shares are currently rated
BB by Standard & Poors,
Ba2 by Moodys and bb+ by A.M.
Best. See Part I, Item 1
Business-Ratings for further detail regarding our and our
subsidiaries ratings.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of SFAS 133 and
140. SFAS 155 amends SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, and
SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and
clarifies SFAS 133 Implementation Issue D1,
Application of Statement 133 to Beneficial Interests
in Securitized Financial Assets. SFAS 155 applies to
certain hybrid financial instruments, which are
instruments that contain embedded derivatives. The standard
establishes a requirement to evaluate beneficial interests in
securitized financial assets to determine if the interests
represent freestanding derivatives or are hybrid financial
instruments containing embedded derivatives requiring
bifurcation. SFAS 155 also permits an election for fair
value measurement of any hybrid financial instrument containing
an embedded derivative that otherwise would have required
bifurcation under SFAS 133, including financial instruments
previously recorded by us under SFAS 133. The fair value
election can be applied to existing instruments on an
instrument-by-instrument basis at the date of adoption and can
be applied to new instruments on a prospective basis.
SFAS 155 will be effective in fiscal years that begin after
September 15, 2006. We expect to elect fair value
measurement of hybrid financial instruments under SFAS 155
effective with its adoption on January 1, 2007. Prior to
January 1, 2007, we bifurcated the embedded derivatives in
its investments in convertible securities and changes in the
fair value of the host instrument will be recorded as unrealized
investment gains and losses while changes in the fair value of
the embedded derivative will be recorded as realized investment
gains and losses. As of December 31, 2006, the fair value
of the host instruments included in fixed income securities was
$268.1 million and the fair value of embedded derivatives
included in other invested assets was $15.1 million. Upon
adopting SFAS 155, we will record a cumulative adjustment
of $16.5 million to reclassify unrealized investment gains,
net of tax, to opening retained earnings. Subsequent to
January 1, 2007, changes in the fair value of securities
accounted for in accordance with SFAS 155 will be recorded
in realized investment gains or losses.
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 companys
financial statements in accordance with SFAS 109,
Accounting for Income Taxes. Specifically, the
Interpretation 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
92
December 15, 2006. We have completed a thorough analysis of
FIN 48 and do not expect any material effect on our
consolidated financial statements.
In August 2006, the SEC issued a final rule entitled
Executive Compensation and Related Person
Disclosure. The rule amends the disclosure requirements
for executive and director compensation, related person
transactions, director independence and other corporate
governance matters and security ownership of officers and
directors. These amendments apply to disclosure in proxy and
information statements, periodic reports, current reports and
other filings. The rule is effective in current reports on
Form 8-K for
reportable events that occur on or after November 7, 2006
and in annual filings for fiscal years ending on or after
December 15, 2006. We will provide this information in its
2006 Proxy Statement and other relevant filings.
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 September 2006, the FASB issued SFAS 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of
SFAS 87, 88, 106, and 132(R). SFAS 158 required,
as of December 31, 2006, us to recognize the overfunded or
underfunded status of a defined benefit postretirement plan,
including pension plans, as an asset or liability in its balance
sheet and to recognize changes in that funded status in the year
in which the changes occur through comprehensive income. We
adopted the recognition provisions of SFAS 158. As a result
of the adoption, we recorded a one-time charge of
$15.7 million to increase other liabilities, a
$5.5 million deferred tax asset and a $10.2 million
decrease to accumulated other comprehensive income on our
balance sheet. In addition, SFAS 158 requires that, as of
December 31, 2008, employers measure plan assets and
liabilities as of the date of their financial statements.
SFAS 158 does not require retrospective application.
In September 2006, the SEC issued Staff Accounting
Bulletin 108 (SAB 108) Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.
SAB 108 provides guidance on evaluating a misstatement and
determining its materiality using the iron curtain (balance
sheet analysis) and rollover (income statement analysis)
approaches, as well as correcting errors under the approaches
and transition guidance. SAB 108 is effective for fiscal
years ending on or after November 15, 2006. There was no
effect to our consolidated financial statements resulting from
the adoption of SAB 108.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115, which provides a fair value option to
measure many financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis.
SFAS No. 159 is effective for us beginning in the
first quarter of 2008. We are evaluating the impact of the
adoption of SFAS 159 on our consolidated financial
statements.
Off-Balance Sheet Arrangements
We have certain business arrangements with affiliated companies
that have financial implications. A description of these
arrangements is provided in Note 16 to our consolidated
financial statements included in this
Form 10-K.
Market Sensitive Instruments
The term market risk refers to the risk of loss
arising from adverse changes in prices. We believe that we are
principally exposed to four types of market risk related to our
investment operations. These risks are interest rate risk,
credit risk, equity price risk and foreign currency risk. Market
sensitive instruments discussed in this section principally
relate to our fixed income securities and common stocks carried
at fair value which are classified as available for sale. As of
December 31, 2006, our total investments and cash of
$7.1 billion includes $3.5 billion of fixed income
securities that are subject primarily to interest rate risk and
credit risk.
93
Interest Rate Risk
The table below displays the potential impact (in millions) of
market value fluctuations on our fixed income securities
portfolio as of December 31, 2006 and December 31,
2005, based on parallel 200 basis point shifts in interest
rates up and down in 100 basis point increments. This
analysis was performed on each security individually.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 | |
|
As of December 31, 2005 | |
|
|
| |
|
| |
|
|
Fair Value | |
|
|
|
Fair Value | |
|
|
|
|
of Fixed | |
|
|
|
of Fixed | |
|
|
|
|
Income | |
|
Hypothetical | |
|
Hypothetical | |
|
Income | |
|
Hypothetical | |
|
Hypothetical | |
Percent Change in Interest Rates |
|
Portfolio | |
|
$ Change | |
|
% Change | |
|
Portfolio | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
200 basis point rise
|
|
$ |
3,026.2 |
|
|
$ |
(475.3 |
) |
|
|
(13.6 |
)% |
|
$ |
2,155.1 |
|
|
$ |
(439.8 |
) |
|
|
(16.9 |
)% |
100 basis point rise
|
|
|
3,246.2 |
|
|
|
(255.4 |
) |
|
|
(7.3 |
) |
|
|
2,355.3 |
|
|
|
(239.6 |
) |
|
|
(9.2 |
) |
Base Scenario
|
|
|
3,501.6 |
|
|
|
|
|
|
|
|
|
|
|
2,594.9 |
|
|
|
|
|
|
|
|
|
100 basis point decline
|
|
|
3,805.9 |
|
|
|
304.3 |
|
|
|
8.7 |
|
|
|
2,882.4 |
|
|
|
287.5 |
|
|
|
11.1 |
|
200 basis point decline
|
|
|
4,156.7 |
|
|
|
655.1 |
|
|
|
18.7 |
|
|
|
3,221.3 |
|
|
|
626.4 |
|
|
|
24.1 |
|
The preceding table indicates an asymmetric market value
response to equivalent basis point shifts, up and down, in
interest rates. This partly reflects exposure to fixed income
securities containing a put feature. In total, securities with a
put feature represent approximately 4% and 5% of the fair market
value of the total fixed income portfolio as of
December 31, 2006 and December 31, 2005, respectively.
The asymmetric market value response reflects our ability to put
these bonds back to the issuer for early maturity in a rising
interest rate environment (thereby limiting market value loss)
but to hold these bonds to their much longer full maturity dates
in a falling interest rate environment (thereby maximizing the
full benefit of higher market values in that environment).
As of December 31, 2006, we had net unrealized gains of
$36.0 million, before taxes, related to our total
investments and cash. This net amount was comprised of gross
unrealized appreciation of $150.1 million, offset by gross
unrealized depreciation of $114.1 million, which includes
gross unrealized appreciation of $123.3 million and gross
unrealized depreciation of $109.9 million related to fixed
income securities and common stocks carried at fair value.
We purchase interest rate options from time to time to protect
us from movements in interest rates. During the first quarter of
2006, we purchased a
20-year swaption
contract with a notional amount of $550.0 million, which
provides an economic hedge against a decline in our fixed income
portfolio as a result of an increase in interest rates. This
contract replaced a
10-year swaption with a
notional amount of $1.0 billion, initially purchased during
the second quarter of 2005, which was closed during the first
quarter of 2006 for consideration of $4.1 million,
resulting in a realized loss of $1.7 million. The swaption
gives us the option, but not the obligation, to enter into an
interest rate swap contract under which we would receive a
floating interest rate and pay a fixed interest rate based on
the notional amount of the contract of $550.0 million. The
cost of the swaption was $9.6 million. This contract was
closed and not replaced during the third quarter of 2006 for
consideration of $8.2 million, resulting in a realized loss
of $1.4 million.
Disclosure About Limitations
of Interest Rate Sensitivity Analysis
Computations of the prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including the
maintenance of the existing level and composition of fixed
income security assets, and should not be relied on as
indicative of future results.
Certain shortcomings are inherent in the method of analysis used
in the computation of the fair value of fixed rate instruments.
Actual values may differ from those projections presented should
market conditions vary from assumptions used in the calculation
of the fair value of individual securities, including
non-parallel shifts in the term structure of interest rates and
a change in individual issuer credit spreads.
94
Credit Risk
We have exposure to credit risk, primarily as a holder of fixed
income securities. We control this exposure by emphasizing
investment grade ratings in the fixed income securities we
purchase. We also have exposure to credit risk associated with
the collection of current and future amounts owing from our
reinsurers. We control this exposure by emphasizing reinsurers
with financial strength.
As of December 31, 2006 and December 31, 2005, 89.5%
and 81.7%, respectively, of the aggregate fair value of our
fixed income securities consisted of securities rated investment
grade, with 10.5% and 18.3%, respectively, rated below
investment grade.
We have purchased credit default swaps, which are included in
other invested assets, that provide a hedge against adverse
movements in the fair value of investments and other corporate
assets resulting from systemic financial and credit risk. Under
a credit default swap, we agree to pay at specified periods
fixed premium amounts based on an agreed notional principal
amount in exchange for the credit default protection on a
specified asset. Credit default swaps are recorded at fair
value, with the related changes in fair value recognized as a
realized gain or loss in the period in which they occur. The
total cost of the credit default swaps was $75.6 million as
of December 31, 2006 and 2005, and the fair value was
$13.5 million and $36.2 million, as of
December 31, 2006 and 2005, respectively. The notional
amount of credit default swaps was $3.3 billion as of
December 31, 2006 and 2005. The net change in the fair
value of the credit default swaps resulted in a net realized
loss of $22.6 million, $36.2 million and
$4.5 million for the years ended December 31, 2006,
2005 and 2004, respectively.
As of December 31, 2006, our holdings of financial
instruments without quoted prices, or non-traded
investments, included a collateral loan, which was fully
impaired during 2005. We routinely evaluate the carrying value
of these investments by reviewing the respective borrowers
current financial positions, and the timeliness of their
interest and principal payments. As a result of this review, we
recognized an other-than-temporary write-down of
$17.0 million for the year ended December 31, 2005
related to one of the loans. In addition, a collateral loan,
which had a value of $7.3 million as of December 31,
2005, was fully paid during 2006. As of December 31, 2005,
our holdings consisted of these two collateral loans totaling
$7.3 million. These collateral loans, which are included in
other investments, were valued at their unpaid principal
balances, reduced by amounts recorded as an other-than-temporary
write-down.
Equity Price Risk
In the third quarter of 2004, we sold short Standard &
Poors 500 depository receipts (SPDRs) and the
Financial Select SPDR Fund (XLF) as an economic
hedge against a general decline in our equity portfolio. In
order to reduce the margin maintenance requirements for these
short positions, we replaced the short positions with total
return swaps, which had aggregate notional amounts of
$581.4 million and $451.8 million as of
December 31, 2006 and December 31, 2005, respectively.
The margin maintenance requirement related to the total return
swaps was $10.5 million and $96.4 million as of
December 31, 2006 and December 31, 2005, respectively.
During the year ended December 31, 2006, total return swap
contracts with an aggregate notional amount of
$969.8 million expired at a net realized loss of
$73.0 million. These total return swap contracts were
replaced by total return swap contracts with an aggregate
notional amount of $1,099.4 million. The swap transactions
terminate during 2007. As of December 31, 2006 and
December 31, 2005, we have provided $52.1 million and
$104.3 million, respectively, of U.S. Treasury bills
as collateral for the swap transactions. The swap transactions
are recorded at fair value in other liabilities and changes in
the fair value are recorded as realized gains or losses in the
consolidated statement of operations in the period in which they
occur. For the twelve months ended December 31, 2006, 2005
and 2004, the net change in the fair value of the swap
transactions resulted in a net realized loss of
$73.5 million, $11.8 million and $44.9 million,
respectively.
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
95
notional amount of $830.2 million. 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. Our maximum potential loss on the swap and option
transactions was $0.9 million and $90.4 million as of
December 31, 2006 and December 31, 2005, respectively.
We plan to continue to purchase short-dated call options in 2007
in an effort to reduce the maximum potential loss on the swaps
to approximately 20% of the swap notional value. The call
options are recorded at fair value in other invested assets, and
changes in the fair value are recorded as a realized gain or
loss in the consolidated statement of operations. For the year
ended December 31, 2006, 2005 and 2004, the net change in
the fair value of these call options resulted in a net realized
loss of $0.4 million, $10.6 million and, a net
realized gain of $6.7 million, respectively.
In addition, as of December 31, 2006 and December 31,
2005, we had short positions of $115.3 million and
$83.5 million, respectively, of primarily equity
securities, for which we recorded a liability equal to the
underlying fair value of the securities of $119.8 million
and $82.5 million, respectively. A net realized gain of
$3.0 million and $4.3 million for the twelve months
ended December 31, 2006, 2005, respectively, and a net
realized loss of $13.3 million for 2004 were recognized in
our consolidated statements of operations. As of
December 31, 2006 and December 31, 2005, we provided
cash and fixed income securities of $208.6 million and
$161.7 million, respectively, as collateral for the
borrowed securities. Our net investment income for the years
ended December 31, 2006, 2005 and 2004 was reduced by
$7.2 million, $5.0 million and $2.7 million,
respectively, related to dividend and interest payments
associated with the borrowed securities.
In connection with the short sales described above, we purchased
a SPDR call option as protection at a cost of $0.4 million.
The call option is recorded at fair value in other invested
assets in the consolidated balance sheet and changes in the fair
value are recorded as a realized gain or loss in the
consolidated statements of operations in the period in which
they occur. For the years ended December 31, 2006 and 2005,
the net change in the fair market value of the call option
resulted in a net realized loss of $0.1 million and
$1.2 million, respectively, and a net realized gain of
$0.4 million for 2004.
We hold options on certain securities within our fixed income
portfolio, which allow us to extend the maturity date of fixed
income securities or convert fixed income securities to equity
securities. The par value and the imputed cost of the options on
these securities were $289.8 million and $19.6 million
as of December 31, 2006, respectively, and
$385.2 million and $33.1 million as of
December 31, 2005, respectively. The options are recorded
at fair value of $15.1 million and $34.9 million as of
December 31, 2006 and December 31, 2005, respectively,
in other invested assets and the change in fair value is
recorded as a realized gain or loss in the consolidated
statement of operations. For the twelve months ended
December 31, 2006, 2005 and 2004, the change in the fair
value of the options resulted in a realized gain of
$1.1 million, $21.0 million and $9.2 million,
respectively.
As of December 31, 2006 and December 31, 2005, 12.0%
and 19.6%, respectively, of our total investments and cash was
in common stocks (unaffiliated and affiliated). Marketable
equity securities, which represented 10.2% and 17.5% as of
December 31, 2006 and December 31, 2005, respectively,
of our total investments and cash, are exposed to equity price
risk, defined as the potential for loss in market value owing to
a decline in equity prices. A 10% decline in the price of each
of these marketable equity securities would result in a decline
of $72.3 million and $104.4 million as of
December 30, 2006 and December 31, 2005, respectively,
in the fair market value of our total investments and cash.
Foreign Currency Risk
Through investment in securities denominated in foreign
currencies, we are exposed to foreign
(i.e., non-U.S.)
currency risk. Foreign currency exchange rate risk creates the
potential for loss in market value owing to a decline in the
U.S. dollar value of these investments resulting from a
decline in the exchange rate of the foreign currency in which
these assets are denominated. As of December 31, 2006 and
December 31, 2005, our total exposure to foreign
denominated securities in U.S. dollar terms was
approximately $1.6 billion and $1.3 billion,
respectively, or 22.8% and 21.2%, respectively, of our total
investments and cash. The primary foreign currency exposures
were from securities denominated in the British pound, which
represented 7.7% and 8.5% of our total investments and cash as
of December 31, 2006 and December 31, 2005,
respectively, from
96
German securities denominated in the Euro, which represented
7.0% and 5.5%, respectively, and from securities denominated in
the Canadian dollar, which represented 4.7% and 4.9% of our
total investments and cash as of December 31, 2005 and
December 31, 2004, respectively. As of December 31,
2006, the potential impact of a 10% decline in each of the
foreign exchange rates on the valuation of investment assets
denominated in those respective foreign currencies would result
in a $161.3 million decline in the fair value of our total
investments and cash, before taxes.
Investment Impairment
Risk
We review our investment portfolio on a quarterly basis for
declines in value, and specifically consider securities, the
market value of which have declined to less than 80% of their
amortized cost at the time of review. 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 carrying value
of the investment will be written down to the fair value and a
realized loss will be recorded in our consolidated statements of
operations.
In assessing the value of our debt and equity securities held as
investments and possible impairments of such securities, we
review (i) the issuers current financial position and
disclosures related thereto, (ii) general and specific
market and industry developments, (iii) the timely payment
by the issuer of its principal, interest and other obligations,
(iv) the outlook and expected financial performance of the
issuer, (v) current and historical valuation parameters for
the issuer and similar companies, (vi) relevant forecasts,
analyses and recommendations by research analysts, rating
agencies and investment advisors, and (vii) other
information we may consider relevant. In addition, we consider
our intent and ability to hold the security to recovery when
evaluating possible impairments.
Based on our review, we recognized other-than-temporary
impairment losses in the amount of $28.1 million, before
taxes, which were recognized in our consolidated statement of
operations as a reduction to our net realized gains for the year
ended December 31, 2006.
The following tables reflect the fair value and gross unrealized
depreciation of our fixed income securities and common stock
investments, aggregated by investment category and length of
time that individual securities
97
have been in a continuous unrealized loss position, as of
December 31, 2006 and December 31, 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration of Unrealized Loss | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Less than 12 Months | |
|
Greater than 12 Months | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
December 31, 2006 |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Fixed income securities investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
$ |
1,167.6 |
|
|
$ |
(13.2 |
) |
|
|
15 |
|
|
$ |
1,264.2 |
|
|
$ |
(90.2 |
) |
|
|
39 |
|
|
$ |
2,431.8 |
|
|
$ |
(103.4 |
) |
|
|
54 |
|
|
States, municipalities and political subdivisions
|
|
|
38.8 |
|
|
|
(0.2 |
) |
|
|
4 |
|
|
|
37.5 |
|
|
|
(0.5 |
) |
|
|
11 |
|
|
|
76.3 |
|
|
|
(0.7 |
) |
|
|
15 |
|
|
Foreign governments
|
|
|
282.2 |
|
|
|
(3.1 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282.2 |
|
|
|
(3.1 |
) |
|
|
12 |
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
1,488.6 |
|
|
|
(16.5 |
) |
|
|
31 |
|
|
|
1,302.2 |
|
|
|
(90.7 |
) |
|
|
51 |
|
|
|
2,790.8 |
|
|
|
(107.2 |
) |
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities non-investment grade, corporate
|
|
|
7.3 |
|
|
|
(0.3 |
) |
|
|
3 |
|
|
|
62.1 |
|
|
|
(1.6 |
) |
|
|
2 |
|
|
|
69.4 |
|
|
|
(1.9 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,495.9 |
|
|
|
(16.8 |
) |
|
|
34 |
|
|
|
1,364.3 |
|
|
|
(92.3 |
) |
|
|
53 |
|
|
|
2,860.2 |
|
|
|
(109.1 |
) |
|
|
87 |
|
Common stocks, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.8 |
|
|
|
(0.8 |
) |
|
|
1 |
|
|
|
13.8 |
|
|
|
(0.8 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$ |
1,495.9 |
|
|
$ |
(16.8 |
) |
|
|
34 |
|
|
$ |
1,378.1 |
|
|
$ |
(93.1 |
) |
|
|
54 |
|
|
$ |
2,874.0 |
|
|
$ |
(109.9 |
) |
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration of Unrealized Loss | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Less than 12 Months | |
|
Greater than 12 Months | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
December 31, 2005 |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Fixed income securities investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
$ |
1,071.9 |
|
|
$ |
(33.0 |
) |
|
|
40 |
|
|
$ |
395.7 |
|
|
$ |
(15.9 |
) |
|
|
6 |
|
|
$ |
1,467.6 |
|
|
$ |
(48.9 |
) |
|
|
46 |
|
|
States, municipalities and political subdivisions
|
|
|
46.3 |
|
|
|
(0.3 |
) |
|
|
10 |
|
|
|
21.6 |
|
|
|
(0.6 |
) |
|
|
5 |
|
|
|
67.9 |
|
|
|
(0.9 |
) |
|
|
15 |
|
|
Foreign governments
|
|
|
1.0 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
1 |
|
|
Corporate
|
|
|
0.3 |
|
|
|
|
|
|
|
1 |
|
|
|
0.5 |
|
|
|
|
|
|
|
1 |
|
|
|
0.8 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
1,119.5 |
|
|
|
(33.3 |
) |
|
|
52 |
|
|
|
417.8 |
|
|
|
(16.5 |
) |
|
|
12 |
|
|
|
1,537.3 |
|
|
|
(49.8 |
) |
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities non-investment grade, corporate
|
|
|
224.9 |
|
|
|
(30.5 |
) |
|
|
27 |
|
|
|
136.1 |
|
|
|
(20.2 |
) |
|
|
8 |
|
|
|
361.0 |
|
|
|
(50.7 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,344.4 |
|
|
|
(63.8 |
) |
|
|
79 |
|
|
|
553.9 |
|
|
|
(36.7 |
) |
|
|
20 |
|
|
|
1,898.3 |
|
|
|
(100.5 |
) |
|
|
99 |
|
Common stocks, at fair value
|
|
|
167.4 |
|
|
|
(16.6 |
) |
|
|
9 |
|
|
|
137.4 |
|
|
|
(17.1 |
) |
|
|
2 |
|
|
|
304.8 |
|
|
|
(33.7 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$ |
1,511.8 |
|
|
$ |
(80.4 |
) |
|
|
88 |
|
|
$ |
691.3 |
|
|
$ |
(53.8 |
) |
|
|
22 |
|
|
$ |
2,203.1 |
|
|
$ |
(134.2 |
) |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe the gross unrealized depreciation is temporary in
nature and we have not recorded a realized investment loss
related to these securities. Given the size of our investment
portfolio and capital position, we have the ability and intent
to hold these securities until the fair value recovers the gross
unrealized depreciation.
Disclosure of Contractual Obligations
The following table provides a payment schedule of present and
future obligations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period | |
|
|
| |
|
|
|
|
Less than | |
|
|
|
More than | |
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long term debt principal
|
|
$ |
513.5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
513.5 |
|
Long term debt interest
|
|
|
344.2 |
|
|
|
37.9 |
|
|
|
75.8 |
|
|
|
75.8 |
|
|
|
154.7 |
|
Operating leases
|
|
|
86.2 |
|
|
|
8.5 |
|
|
|
15.3 |
|
|
|
13.8 |
|
|
|
48.6 |
|
Losses and LAE
|
|
|
5,142.1 |
|
|
|
1,463.9 |
|
|
|
1,643.7 |
|
|
|
856.5 |
|
|
|
1,178.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,086.0 |
|
|
$ |
1,510.3 |
|
|
$ |
1,734.8 |
|
|
$ |
946.1 |
|
|
$ |
1,894.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For further detail on our long term debt principal and interest
payments, see Note 13 to our consolidated financial
statements included in this
Form 10-K. For
further detail on our operating lease payments, see Note 16
to our consolidated financial statements included in this
Form 10-K.
For further detail on our losses and LAE, see Note 9 to our
consolidated financial statements included in this
Form 10-K. Our
reserves for losses and LAE do not have contractual maturity
dates. However, based on historical payment patterns, we have
included an estimate of when we expect our losses and LAE to be
paid in the table above. The exact timing of the payment of
claims cannot be predicted with certainty. We maintain a
portfolio of
99
investments with varying maturities and a substantial amount of
short-term investments to provide adequate cash flows for the
payment of claims. The reserves for unpaid losses and LAE
reflected in the table above have not been reduced for
reinsurance recoverables on unpaid losses which are reflected in
our consolidated balance sheet as an asset of
$739.0 million as of December 31, 2006. Based on
historical patterns, we estimate that we will collect the
recoveries as follows: $210.2 million in less than one
year; $222.8 million in one to three years;
$118.4 million between three and five years and
$187.6 million in more than five years.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
See Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations.
100
ITEM 8. Financial Statements and Supplementary Data
ODYSSEY RE HOLDINGS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
102 |
|
|
|
|
104 |
|
|
|
|
105 |
|
|
|
|
106 |
|
|
|
|
107 |
|
|
|
|
108 |
|
|
|
|
169 |
|
Schedules:
|
|
|
|
|
|
|
|
170 |
|
|
|
|
171 |
|
|
|
|
175 |
|
|
|
|
176 |
|
|
|
|
177 |
|
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Odyssey Re
Holdings Corp.
We have completed integrated audits of Odyssey Re Holdings
Corp.s consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2006, in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Odyssey Re Holdings Corp. and its
subsidiaries at December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2006 in conformity
with accounting principles generally accepted in the United
States of America. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Controls over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
102
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, NY
March 9, 2007
103
ODYSSEY RE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands, | |
|
|
except share amounts) | |
ASSETS |
Investments and cash:
|
|
|
|
|
|
|
|
|
Fixed income securities, available for sale, at fair value
(amortized cost $3,547,656 and $2,645,682, respectively)
|
|
$ |
3,501,580 |
|
|
$ |
2,594,937 |
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Common stocks, at fair value (cost $548,138 and $586,394,
respectively)
|
|
|
607,613 |
|
|
|
601,721 |
|
|
Common stocks, at equity
|
|
|
245,416 |
|
|
|
566,996 |
|
Short-term investments, at cost which approximates fair value
|
|
|
242,340 |
|
|
|
199,503 |
|
Cash and cash equivalents
|
|
|
2,061,796 |
|
|
|
1,528,427 |
|
Cash collateral for borrowed securities
|
|
|
242,096 |
|
|
|
240,642 |
|
Other invested assets
|
|
|
165,247 |
|
|
|
238,093 |
|
|
|
|
|
|
|
|
|
|
Total investments and cash
|
|
|
7,066,088 |
|
|
|
5,970,319 |
|
Accrued investment income
|
|
|
50,930 |
|
|
|
46,843 |
|
Premiums receivable
|
|
|
475,453 |
|
|
|
550,496 |
|
Reinsurance recoverable on paid losses
|
|
|
59,768 |
|
|
|
140,881 |
|
Reinsurance recoverable on unpaid losses
|
|
|
739,019 |
|
|
|
1,206,785 |
|
Prepaid reinsurance premiums
|
|
|
50,486 |
|
|
|
84,696 |
|
Funds held by reinsureds
|
|
|
154,573 |
|
|
|
172,896 |
|
Deferred acquisition costs
|
|
|
149,886 |
|
|
|
171,350 |
|
Federal and foreign income taxes
|
|
|
116,920 |
|
|
|
234,871 |
|
Other assets
|
|
|
90,589 |
|
|
|
67,475 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
8,953,712 |
|
|
$ |
8,646,612 |
|
|
|
|
|
|
|
|
LIABILITIES |
Unpaid losses and loss adjustment expenses
|
|
$ |
5,142,159 |
|
|
$ |
5,117,708 |
|
Unearned premiums
|
|
|
741,328 |
|
|
|
834,485 |
|
Reinsurance balances payable
|
|
|
102,711 |
|
|
|
160,185 |
|
Funds held under reinsurance contracts
|
|
|
96,854 |
|
|
|
167,020 |
|
Debt obligations
|
|
|
512,504 |
|
|
|
469,155 |
|
Obligation to return borrowed securities
|
|
|
119,798 |
|
|
|
82,543 |
|
Other liabilities
|
|
|
154,779 |
|
|
|
176,061 |
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,870,133 |
|
|
|
7,007,157 |
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 16)
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
Preferred shares, $0.01 par value; 200,000,000 shares
authorized; 2,000,000 Series A shares and 2,000,000
Series B shares issued and outstanding
|
|
|
40 |
|
|
|
40 |
|
Common shares, $0.01 par value; 500,000,000 shares
authorized; 71,218,616 and 69,242,857 shares issued,
respectively
|
|
|
712 |
|
|
|
692 |
|
Additional paid-in capital
|
|
|
1,029,349 |
|
|
|
984,571 |
|
Treasury shares, at cost (77,668 and 115,325 shares,
respectively)
|
|
|
(2,528 |
) |
|
|
(2,916 |
) |
Unearned stock compensation
|
|
|
|
|
|
|
(1,770 |
) |
Accumulated other comprehensive income, net of deferred income
taxes
|
|
|
25,329 |
|
|
|
119,039 |
|
Retained earnings
|
|
|
1,030,677 |
|
|
|
539,799 |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,083,579 |
|
|
|
1,639,455 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
8,953,712 |
|
|
$ |
8,646,612 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
104
ODYSSEY RE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per share | |
|
|
amounts) | |
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$ |
2,335,742 |
|
|
$ |
2,626,920 |
|
|
$ |
2,650,775 |
|
Ceded premiums written
|
|
|
174,807 |
|
|
|
325,251 |
|
|
|
288,970 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
2,160,935 |
|
|
|
2,301,669 |
|
|
|
2,361,805 |
|
(Increase) decrease in unearned premiums
|
|
|
64,891 |
|
|
|
(24,849 |
) |
|
|
(28,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$ |
2,225,826 |
|
|
$ |
2,276,820 |
|
|
$ |
2,333,511 |
|
Net investment income
|
|
|
487,119 |
|
|
|
220,092 |
|
|
|
164,248 |
|
Net realized investment gains
|
|
|
189,129 |
|
|
|
59,866 |
|
|
|
122,024 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,902,074 |
|
|
|
2,556,778 |
|
|
|
2,619,783 |
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
1,484,197 |
|
|
|
2,061,611 |
|
|
|
1,631,106 |
|
Acquisition costs
|
|
|
464,148 |
|
|
|
470,152 |
|
|
|
515,856 |
|
Other underwriting expenses
|
|
|
153,476 |
|
|
|
146,030 |
|
|
|
120,765 |
|
Other expense, net
|
|
|
21,120 |
|
|
|
27,014 |
|
|
|
17,153 |
|
Interest expense
|
|
|
37,515 |
|
|
|
29,991 |
|
|
|
25,609 |
|
Loss on early extinguishment of debt
|
|
|
2,403 |
|
|
|
3,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,162,859 |
|
|
|
2,738,620 |
|
|
|
2,310,489 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
739,215 |
|
|
|
(181,842 |
) |
|
|
309,294 |
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
144,967 |
|
|
|
(13,319 |
) |
|
|
118,791 |
|
|
Deferred
|
|
|
86,342 |
|
|
|
(52,801 |
) |
|
|
(14,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total federal and foreign income tax provision (benefit)
|
|
|
231,309 |
|
|
|
(66,120 |
) |
|
|
104,093 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
507,906 |
|
|
|
(115,722 |
) |
|
|
205,201 |
|
Preferred dividends
|
|
|
(8,257 |
) |
|
|
(1,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
|
|
$ |
499,649 |
|
|
$ |
(117,666 |
) |
|
$ |
205,201 |
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
68,975,743 |
|
|
|
65,058,327 |
|
|
|
64,361,535 |
|
Basic earnings (loss) per common share
|
|
$ |
7.24 |
|
|
$ |
(1.81 |
) |
|
$ |
3.19 |
|
DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
72,299,050 |
|
|
|
65,058,327 |
|
|
|
69,993,136 |
|
Diluted earnings (loss) per common share
|
|
$ |
6.93 |
|
|
$ |
(1.81 |
) |
|
$ |
2.98 |
|
DIVIDENDS
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$ |
0.125 |
|
|
$ |
0.125 |
|
|
$ |
0.125 |
|
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
507,906 |
|
|
$ |
(115,722 |
) |
|
$ |
205,201 |
|
Other comprehensive income (loss), net of tax
|
|
|
(83,474 |
) |
|
|
(3,179 |
) |
|
|
22,815 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
424,432 |
|
|
$ |
(118,901 |
) |
|
$ |
228,016 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
105
ODYSSEY RE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except share amounts) | |
PREFERRED SHARES (par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
|
|
Issued during the year
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON SHARES (par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
692 |
|
|
|
651 |
|
|
|
651 |
|
Issued during the year
|
|
|
20 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
712 |
|
|
|
692 |
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
984,571 |
|
|
|
791,896 |
|
|
|
793,586 |
|
Common shares issued during the year
|
|
|
43,735 |
|
|
|
102,095 |
|
|
|
|
|
Cumulative effects of change in accounting for unearned share
compensation
|
|
|
(1,770 |
) |
|
|
|
|
|
|
|
|
Preferred shares issued during the year
|
|
|
|
|
|
|
97,471 |
|
|
|
|
|
Net effect of share-based compensation
|
|
|
2,813 |
|
|
|
(6,891 |
) |
|
|
(1,690 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,029,349 |
|
|
|
984,571 |
|
|
|
791,896 |
|
|
|
|
|
|
|
|
|
|
|
TREASURY SHARES (at cost)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(2,916 |
) |
|
|
(9,426 |
) |
|
|
(2,549 |
) |
Purchases during the year
|
|
|
(4,733 |
) |
|
|
(4,130 |
) |
|
|
(10,090 |
) |
Reissuance during the year
|
|
|
5,121 |
|
|
|
10,640 |
|
|
|
3,213 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(2,528 |
) |
|
|
(2,916 |
) |
|
|
(9,426 |
) |
|
|
|
|
|
|
|
|
|
|
UNEARNED STOCK COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(1,770 |
) |
|
|
(2,818 |
) |
|
|
(3,439 |
) |
Cumulative effects of change in accounting for unearned share
compensation
|
|
|
1,770 |
|
|
|
|
|
|
|
|
|
Forfeitures of restricted shares during the year
|
|
|
|
|
|
|
439 |
|
|
|
|
|
Amortization of restricted shares during the year
|
|
|
|
|
|
|
609 |
|
|
|
621 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
|
|
|
|
(1,770 |
) |
|
|
(2,818 |
) |
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED
INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
119,039 |
|
|
|
122,218 |
|
|
|
99,403 |
|
Unrealized net appreciation (depreciation) on securities,
net of reclassification adjustments
|
|
|
(82,760 |
) |
|
|
37,641 |
|
|
|
9,052 |
|
Foreign currency translation adjustments
|
|
|
(660 |
) |
|
|
(40,840 |
) |
|
|
13,766 |
|
Minimum pension liability
|
|
|
(54 |
) |
|
|
20 |
|
|
|
(3 |
) |
Effect of a change in accounting due to the adoption of
SFAS 158
|
|
|
(10,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
25,329 |
|
|
|
119,039 |
|
|
|
122,218 |
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
539,799 |
|
|
|
665,715 |
|
|
|
468,621 |
|
Net income (loss)
|
|
|
507,906 |
|
|
|
(115,722 |
) |
|
|
205,201 |
|
Dividends declared to preferred shareholders
|
|
|
(8,257 |
) |
|
|
(1,944 |
) |
|
|
|
|
Dividends paid to common shareholders
|
|
|
(8,771 |
) |
|
|
(8,250 |
) |
|
|
(8,107 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
1,030,677 |
|
|
|
539,799 |
|
|
|
665,715 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
$ |
2,083,579 |
|
|
$ |
1,639,455 |
|
|
$ |
1,568,236 |
|
|
|
|
|
|
|
|
|
|
|
COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
69,127,532 |
|
|
|
64,754,978 |
|
|
|
64,996,166 |
|
Issued during the year
|
|
|
1,975,759 |
|
|
|
4,100,000 |
|
|
|
|
|
Net treasury shares reissued (acquired)
|
|
|
37,657 |
|
|
|
272,554 |
|
|
|
(241,188 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
71,140,948 |
|
|
|
69,127,532 |
|
|
|
64,754,978 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
106
ODYSSEY RE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
507,906 |
|
|
$ |
(115,722 |
) |
|
$ |
205,201 |
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in premiums receivable and funds held, net
|
|
|
46,837 |
|
|
|
(23,008 |
) |
|
|
(152,587 |
) |
|
Increase (decrease) in unearned premiums
|
|
|
(58,947 |
) |
|
|
18,807 |
|
|
|
20,865 |
|
|
Increase in unpaid losses and loss adjustment expenses
|
|
|
492,217 |
|
|
|
739,031 |
|
|
|
716,602 |
|
|
(Increase) decrease in federal and foreign income taxes
receivable
|
|
|
171,960 |
|
|
|
(129,483 |
) |
|
|
(13,051 |
) |
|
(Increase) decrease in deferred acquisition costs
|
|
|
21,464 |
|
|
|
(1,831 |
) |
|
|
(2,993 |
) |
|
Other assets and liabilities, net
|
|
|
(232,273 |
) |
|
|
(28,846 |
) |
|
|
(48,998 |
) |
|
Net realized investment gains
|
|
|
(189,129 |
) |
|
|
(59,866 |
) |
|
|
(122,024 |
) |
|
Bond discount amortization, net
|
|
|
(15,790 |
) |
|
|
(11,312 |
) |
|
|
(11,715 |
) |
|
Amortization of stock-based compensation
|
|
|
5,642 |
|
|
|
4,153 |
|
|
|
2,781 |
|
|
Loss on early extinguishment of debt
|
|
|
2,403 |
|
|
|
3,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
752,290 |
|
|
|
395,745 |
|
|
|
594,081 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of fixed income securities
|
|
|
165,397 |
|
|
|
58,600 |
|
|
|
106,654 |
|
Sales of fixed income securities
|
|
|
386,306 |
|
|
|
1,408,068 |
|
|
|
1,437,226 |
|
Purchases of fixed income securities
|
|
|
(1,403,114 |
) |
|
|
(1,545,521 |
) |
|
|
(2,293,582 |
) |
Sales of equity securities
|
|
|
1,058,644 |
|
|
|
210,442 |
|
|
|
335,954 |
|
Purchases of equity securities
|
|
|
(487,137 |
) |
|
|
(328,259 |
) |
|
|
(363,017 |
) |
Net purchases of other invested assets
|
|
|
(54,331 |
) |
|
|
(23,209 |
) |
|
|
(59,647 |
) |
Net change in cash collateral for borrowed securities
|
|
|
(1,454 |
) |
|
|
(64,124 |
) |
|
|
39,042 |
|
Net change in obligation to return borrowed securities
|
|
|
31,019 |
|
|
|
23,176 |
|
|
|
(176,518 |
) |
Net increase in short-term investments
|
|
|
312 |
|
|
|
(4,182 |
) |
|
|
(26,046 |
) |
Acquisitions and dispositions of subsidiaries, net of cash
acquired
|
|
|
|
|
|
|
|
|
|
|
(36,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(304,358 |
) |
|
|
(265,009 |
) |
|
|
(1,036,777 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from common share issuance
|
|
|
1,300 |
|
|
|
102,135 |
|
|
|
|
|
Net proceeds from preferred share issuance
|
|
|
|
|
|
|
97,511 |
|
|
|
|
|
Net proceeds from debt issuance
|
|
|
138,966 |
|
|
|
123,168 |
|
|
|
|
|
Repayment of debt
|
|
|
(59,333 |
) |
|
|
(34,202 |
) |
|
|
(101 |
) |
Purchase of treasury shares
|
|
|
(3,095 |
) |
|
|
(4,130 |
) |
|
|
(10,090 |
) |
Dividends paid to preferred shares
|
|
|
(8,107 |
) |
|
|
|
|
|
|
|
|
Dividends paid to common shares
|
|
|
(8,771 |
) |
|
|
(8,250 |
) |
|
|
(8,107 |
) |
Proceeds from exercise of stock options
|
|
|
1,438 |
|
|
|
1,503 |
|
|
|
404 |
|
Excess tax benefit from stock-based compensation
|
|
|
671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
63,069 |
|
|
|
277,735 |
|
|
|
(17,894 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
22,368 |
|
|
|
(30,792 |
) |
|
|
22,679 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
533,369 |
|
|
|
377,679 |
|
|
|
(437,911 |
) |
Cash and cash equivalents, beginning of year
|
|
|
1,528,427 |
|
|
|
1,150,748 |
|
|
|
1,588,659 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
2,061,796 |
|
|
$ |
1,528,427 |
|
|
$ |
1,150,748 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
37,131 |
|
|
$ |
28,463 |
|
|
$ |
25,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$ |
59,278 |
|
|
$ |
63,370 |
|
|
$ |
116,557 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash activity (see Note 13):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of 4.375% convertible debentures
|
|
$ |
(39,116 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
$ |
39,116 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
107
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Odyssey Re Holdings Corp. (together with its subsidiaries, the
Company or OdysseyRe) is an underwriter
of reinsurance, providing a full range of property and casualty
products on a worldwide basis, and an underwriter of specialty
insurance, primarily in the United States. Odyssey Re Holdings
Corp. was formed as a holding company and incorporated in
Delaware in 2001 in conjunction with its initial public
offering. Odyssey Re Holdings Corp. owns all of the common
shares of Odyssey America Reinsurance Corporation (Odyssey
America), its principal operating subsidiary, which is
domiciled in the state of Connecticut. Odyssey America directly
or indirectly owns all of the common shares of the following
domestic and foreign subsidiaries: Clearwater Insurance Company
(Clearwater); Clearwater Select Insurance Company
(Clearwater Select); Odyssey UK Holdings Corporation
(UK Holdings); Newline Underwriting Management Ltd.,
which owns and manages Newline Syndicate 1218, a member of
Lloyds of London (collectively, Newline);
Newline Insurance Company Limited; Hudson Insurance Company
(Hudson); Hudson Specialty Insurance Company
(Hudson Specialty) and Napa River Insurance
Services, Inc. The Companys majority shareholder, Fairfax
Financial Holdings Limited (Fairfax), a publicly
traded financial services holding company based in Canada,
reduced its ownership of OdysseyRe from 78.5% as of
September 30, 2006 to 59.6% as of December 31, 2006.
|
|
2. |
Restatement of Financial Results |
On March 31, 2006, the Company restated its consolidated
financial statements as of and for the years ended
December 31, 2000 through 2004, as well as its unaudited
financial information as of and for the nine months ended
September 30, 2005, to correct for accounting errors
associated with certain reinsurance contracts entered into by
the Company between 1998 and 2004. On August 28, 2006, the
Company restated its balance sheets as of March 31, 2006
(unaudited) and December 31, 2005 and its statements
of operations, shareholders equity and cash flows for the three
months ended March 31, 2006 and 2005 (unaudited), to
correct for accounting errors associated with certain
investments held by the Company, and on October 16, 2006
the Company filed an Annual Report on
Form 10-K/ A to
reflect the impact of this restatement on its consolidated
financial statements as of and for the years ended
December 31, 2001 through 2005. The total cumulative impact
of these restatements through December 31, 2005 was to
decrease shareholders equity by $19.6 million, after
tax. The aggregate net effect of the restatements for the year
ended December 31, 2005 was to increase net loss available
to common shareholders by $17.3 million and for the year
ended December 31, 2004, was to increase net income
available to common shareholders by $18.3 million. The
effects of the restatements are reflected in the Companys
consolidated financial statements and accompanying notes
included herein.
|
|
3. |
Summary of Significant Accounting Policies |
(a) Basis of Presentation. The accompanying
consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). The consolidated
financial statements include the accounts of the Company and its
subsidiaries. Intercompany transactions have been eliminated.
The preparation of the consolidated financial statements in
conformity with GAAP requires management 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 with current presentations.
(b) Investments. The Companys investments in
fixed income securities and common stocks not accounted for
under the equity method, are categorized as available for
sale, and are recorded at their estimated fair value based
on quoted market prices. Investment transactions are recorded on
their trade date with balances pending settlement reflected in
the consolidated balance sheet as a component of other assets or
other liabilities. Short-term investments, which have a maturity
of one year or less from the date of purchase, are carried at
cost, which
108
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximates fair value. The Company considers all highly liquid
debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Common stocks of affiliates are accounted for under the equity
method of accounting, under which OdysseyRe records its
proportionate share of income or loss from such investments.
Other invested assets include limited partnerships and
investment funds, which are accounted for under the equity
method of accounting. The Company routinely evaluates the
carrying value of these investments. In the case of limited
partnerships and investment funds, the carrying value is
generally established on the basis of the net valuation criteria
as determined by the managers of the investments. Such
valuations could differ significantly from the values that would
have been available had markets existed for the securities.
Income from equity investees, including realized gains or
losses, is recorded in net investment income in the period in
which it is known. Unrealized appreciation and depreciation are
recorded through accumulated other comprehensive income. In the
case of hedge funds and private equity investments, unrealized
appreciation and depreciation is recorded in net investment
income in the period in which it is known. Other invested assets
also include trust accounts relating to the Companys
benefit plans and derivative securities which are each carried
at fair value. Due to the timing of when financial information
is reported by equity investees, including limited partnerships
and investment funds, results attributable to these investments
are generally reported by OdysseyRe on a one month or one
quarter lag. If the Company becomes aware of a significant
event, it will assess the impact, if any, on the carrying value
of the investment.
The net amount of unrealized appreciation or depreciation of the
Companys investments, net of applicable deferred income
taxes, is reflected in shareholders equity in accumulated
other comprehensive income. A decline in the fair value of an
investment below its cost or amortized cost that is deemed
other-than-temporary is charged to net income as a realized
capital loss, resulting in a new cost or amortized cost basis
for the investment. Realized investment gains or losses are
determined on the basis of average cost. Investment income,
which is reported net of applicable investment expenses, is
recorded as earned.
(c) Premium Revenue Recognition. Reinsurance assumed
premiums written and related costs are based upon reports
received from ceding companies. Where reinsurance assumed
premiums written have not been reported by the ceding company,
they are estimated, at the individual contract level, based on
historical patterns and experience from the ceding company and
judgments of the Company. Subsequent adjustments to premiums
written, based on actual results or revised estimates from the
ceding company, are recorded in the period in which they become
known. Reinsurance assumed premiums written related to
proportional treaty business are established on a basis that is
consistent with the coverage periods under the terms of the
underlying insurance contracts. Reinsurance assumed premiums
written related to excess of loss and facultative reinsurance
business are recorded over the coverage term of the contracts,
which is generally one year. Unearned premium reserves are
established for the portion of reinsurance assumed premiums
written to be recognized over the remaining contract period.
Unearned premium reserves related to proportional treaty
contracts are computed based on reports received from ceding
companies, which show premiums written but not yet earned.
Premium adjustments made over the life of the contract are
recognized as earned premiums based on the applicable contract
period to which they apply. Insurance premiums are earned on a
pro rata basis over the policy period, which is generally one
year. A reserve for uncollectible premiums is established when
considered appropriate.
The cost of reinsurance purchased by the Company (reinsurance
premiums ceded) is reported as prepaid reinsurance premiums and
amortized over the contract period in proportion to the amount
of insurance protection provided. The ultimate amount of
premiums, including adjustments, is recognized as premiums
ceded, and amortized over the applicable contract period to
which they apply. Reserves are established for the unexpired
portion of premiums ceded and recorded as an asset in prepaid
reinsurance premiums. Premiums earned are reported net of
reinsurance ceded premiums earned in the consolidated statements
of operations. Amounts paid by the Company for retroactive
reinsurance that meets the conditions for reinsurance accounting
are reported as reinsurance receivables to the extent those
amounts do not exceed the associated recorded liabilities. If the
109
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recorded liabilities exceed the amounts paid, reinsurance
receivables are increased to reflect the difference, and the
resulting gain is deferred and amortized over the estimated
settlement period. If the amounts paid for retroactive
reinsurance exceed the recorded liabilities, the Company will
increase the related liabilities or reduce the reinsurance
receivable, or both, at the time the reinsurance contract is
effective, and the excess is charged to net income. Changes in
the estimated amount of liabilities relating to the underlying
reinsured contracts are recognized in net income in the period
of the change. Prospective and retroactive provisions within a
single contract are accounted for separately unless
impracticable, in which case, the contract will be accounted for
as a retroactive contract.
(d) Deferred Acquisition Costs. Acquisition costs,
which are reported net of acquisition costs ceded, consist of
commissions and brokerage expenses incurred on insurance and
reinsurance business written, and are deferred and amortized
over the period in which the related premiums are earned, which
is generally one year. Commission adjustments are accrued based
on changes in premiums and losses recorded by the Company in the
period in which they become known. Deferred acquisition costs
are limited to their estimated realizable value based on the
related unearned premium, which considers anticipated losses and
loss adjustment expenses and estimated remaining costs of
servicing the business, all based on historical experience. The
realizable value of the Companys deferred acquisition
costs is determined without consideration of investment income.
(e) Goodwill and Intangible Assets. The Company
accounts for goodwill and intangible assets in accordance with
SFAS 141, Business Combinations. A purchase
price paid that is in excess of net assets
(goodwill) arising from a business combination is
recorded as an asset, and is not amortized. Intangible assets
with a finite life are amortized over the estimated useful life
of the asset. Intangible assets with an indefinite useful life
are not amortized. Goodwill and intangible assets are tested for
impairment on an annual basis or more frequently if events or
changes in circumstances indicate that the carrying amount may
not be recoverable. If the goodwill or intangible asset is
impaired, it is written down to its realizable value with a
corresponding expense reflected in the consolidated statements
of operations. Unimpaired goodwill and intangible assets with an
indefinite useful life are carried at $30.5 million and are
reflected in other assets as of both December 31, 2006 and
2005, respectively. As of December 31, 2006 and 2005,
intangible assets with a finite life are also reflected in other
assets with a value of $5.1 million and $5.9 million,
respectively. For the years ended December 31, 2006, 2005
and 2004, the Company amortized $0.8 million,
$0.8 million and $0.9 million, respectively, related
to its intangible assets with a finite life.
(f) Unpaid losses and loss adjustment expenses. The
reserves for losses and loss adjustment expenses are estimates
of amounts needed to pay reported and unreported claims and
related loss adjustment expenses. The estimates are based on
assumptions related to the ultimate cost to settle such claims.
The inherent uncertainties of estimating reserves are greater
for reinsurers than for primary insurers, due to the diversity
of development patterns among different types of reinsurance
contracts and the necessary reliance on ceding companies for
information regarding reported claims. As a result, there can be
no assurance that the ultimate liability will not exceed amounts
reserved, with a resulting adverse effect on the Company.
The reserve for unpaid losses and loss adjustment expenses is
based on the Companys evaluations of reported claims and
individual case estimates received from ceding companies for
reinsurance business or the estimates advised by the
Companys outside claims adjusters for insurance business.
The Company utilizes generally accepted actuarial methodologies
to determine reserves for losses and loss adjustment expenses on
the basis of historical experience and other estimates. The
reserves are reviewed continually during the year and changes in
estimates in losses and loss adjustment expenses are reflected
as an expense in the consolidated statements of operations in
the period the adjustment is made. Reinsurance recoverables on
unpaid losses and loss adjustment expenses are reported as
assets. A reserve for uncollectible reinsurance recoverables is
established based on an evaluation of each reinsurer or
retrocessionaire and historical experience. The Company uses
tabular reserving for workers compensation indemnity
reserves, which are considered to be fixed and determinable, and
110
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discounts such reserves using an interest rate of 3.5%. Losses
have been discounted using the Life Table for Total Population,
United States, 2003.
(g) Deposit Assets and Liabilities. The Company may
enter into assumed and ceded reinsurance contracts that contain
certain loss limiting provisions and, as a result, do not meet
the risk transfer provisions of SFAS 113, Accounting
for Reinsurance of Short-Duration and Long-Duration
Contracts. These contracts are accounted for using the
deposit accounting method in accordance with Statement of
Position 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer
Risk (SOP 98-7). Under the deposit method
of accounting, revenues and expenses from reinsurance contracts
are not recognized as written premium and incurred losses.
Instead, the profits or losses from these contracts are
recognized net, as other income or expense over the contract or
contractual settlement periods. In accordance with
SOP 98-7, these contracts are deemed as either transferring
only significant timing risk or transferring neither significant
timing nor underwriting risk.
For such contracts, the Company initially records the amount of
consideration paid or received as a deposit liability. Revenue
or expense is recognized over the term of the contract, with any
deferred amount recorded as a component of assets or liabilities
until such time it is earned. The ultimate asset or liability
under these contracts is estimated, and the asset or liability
is initially established, which represents consideration
received, is increased or decreased over the term of the
contracts. The change during the period is recorded in the
Companys consolidated statements of operations, where
increases and decreases in the ultimate asset or liability are
shown in other expense, net. As of December 31, 2006 and
2005, the Company had reflected in other assets
$8.5 million and $0.5 million, respectively, and in
other liabilities $0.7 million and $2.5 million,
respectively, related to deposit contracts. In cases where
cedants retain the consideration on a funds held basis, the
Company records those assets in other assets, and records the
related investment income on the assets in the Companys
consolidated statements of operations as investment income.
(h) Income Taxes. The Company records deferred
income taxes to provide for the net tax effect of temporary
differences between the carrying values of assets and
liabilities in the Companys consolidated financial
statements and their tax bases. Such differences relate
principally to deferred acquisition costs, unearned premiums,
unpaid losses and loss adjustment expenses, investments and tax
credits. Deferred tax assets are reduced by a valuation
allowance when the Company believes it is more likely than not
that all or a portion of deferred taxes will not be realized. As
of December 31, 2006 and 2005, a valuation allowance was
not required. During the third quarter of 2006, Fairfax reduced
its ownership of the Company to below 80%, and as a result, the
Company has been deconsolidated from the United States tax group
of Fairfax. Accordingly, the Company will file a separate
consolidated tax return for the period August 29, 2006 to
December 31, 2006 and for each subsequent tax year. The
deconsolidation has no effect on the Companys tax position.
(i) Derivatives. The Company utilizes derivative
instruments to manage against adverse changes in the value of
its assets and liabilities. Derivatives include credit default
swaps, total return swaps, interest rate swaps, and other equity
and credit derivatives. In addition, the Company holds options
on certain securities within its fixed income portfolio, which
allows the Company to extend the maturity date on fixed income
securities or convert fixed income securities to equity
securities. Conversion options and maturity extension features
are bifurcated from the fixed income security and measured
separately at fair value. All derivative instruments are
recognized as either assets or liabilities on the consolidated
balance sheet and are measured at their fair value. Gains or
losses from changes in the derivative values are accounted for
based on how the derivative is used and whether it qualifies for
hedge accounting. As the Companys derivative instruments
do not qualify for hedge accounting, changes in fair value are
included in realized investment gains and losses in the
consolidated statements of operations. Margin balances required
by counterparties in support of derivative positions are
included in collateral for borrowed securities.
111
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(j) Operating Segments. The Company has four
operating segments to reflect the manner in which management
monitors and evaluates the Companys financial performance.
The Companys four segments include: Americas, EuroAsia,
London Market and U.S. Insurance (See Note 14).
(k) Foreign Currency. The Company translates the
financial statements of its foreign subsidiaries to United
States dollars by translating balance sheet accounts at the
balance sheet date exchange rate and income statement accounts
at the average exchange rate for the year. Translation gains or
losses are recorded, net of deferred income taxes, as a
component of accumulated other comprehensive income. Foreign
currency transaction gains or losses are reflected in the
consolidated statement of operations in the period in which they
are realized.
(l) Earnings Per Share. Basic earnings per common
share are calculated by dividing net income (loss) available to
common shareholders by the weighted average number of common
shares outstanding, excluding those non-vested shares granted
under the OdysseyRe Restricted Share Plan. Diluted earnings
(loss) per common share are calculated by dividing net income
(loss) available to common shareholders by the weighted average
number of common shares outstanding, inclusive of: vested and
non-vested shares, granted under the OdysseyRe Restricted Share
Plan, as determined using the treasury stock method; stock
options that would be assumed to be exercised on the balance
sheet date, as determined using the treasury stock method; and
the effect of the conversion of the Companys convertible
debt to equity securities. Restricted shares, stock options or
the effect of the conversion of the convertible debt and the
related interest expense would not be included in the
calculation of diluted earnings per common share, if the effect
would be antidilutive. (See Note 6).
(m) Stock Compensation Plans. In April 2002, the
Companys shareholders approved the Odyssey Re Holdings
Corp. 2002 Stock Incentive Plan (the 2002 Plan).
Effective January 1, 2003, the Company adopted the expense
recognition provisions of SFAS 123, Accounting for
Stock-Based Compensation, on a prospective basis, in
accordance with SFAS 148, Accounting for Stock-Based
Compensation Transaction and Disclosure with
respect to the 2002 Plan. The prospective method requires the
application of the fair value based method to compensation
awards granted, modified, or settled on or after the date of
adoption. Accordingly, net income (loss) for the years ended
December 31, 2005 and 2004 reflects stock-based
compensation expense related to stock options granted in 2003
and subsequent. For stock options granted during 2002, the
Company accounted for stock-based compensation based on the
intrinsic-value method prescribed in Accounting Principles Board
Opinion (APB) 25, Accounting for Stock
Issued to Employees and related interpretations, as
permitted under SFAS 123. In December 2004, the Financial
Accounting Standards Board issued SFAS 123R (revised 2004),
Share-Based Payment, which is a revision of
SFAS 123 and supersedes APB 25. The approach to
account for share-based payments in SFAS 123R is similar to
the approach described in SFAS 123. SFAS 123R requires
all share-based payments to employees, including grants of
employee stock options, to be recognized in the consolidated
financial statements based on their fair values. Pro forma
disclosure of the impact of fair value of share-based payments
is no longer an alternative to financial statement recognition.
The Company adopted SFAS 123R, on a prospective basis,
effective January 1, 2006. SFAS 123(R) requires that
the deferred stock-based compensation on the consolidated
balance sheet on the date of adoption be netted against
additional paid-in capital. As of December 31, 2005, there
was approximately $1.8 million of deferred stock-based
compensation that was netted against additional paid-in capital
on January 1, 2006.
(n) Payments. Payments of claims by the Company, as
reinsurer, to a broker on behalf of a reinsured company, are
recorded on the Companys books as a paid loss at the time
the cash is disbursed. The payment is treated as a paid claim to
the reinsured. Premiums due to the Company from the reinsured
are recorded as receivables from the reinsured until the cash is
received by the Company, either directly from the reinsured or
from the broker.
(o) Funds Held Balances. Funds held under
reinsurance contracts is an account used to record a liability,
in accordance with the contractual terms, arising from the
Companys receipt of a deposit from a reinsurer or the
withholding of a portion of the premiums due as a guarantee that
a reinsurer will meet its loss and other
112
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligations. Interest generally accrues on withheld funds in
accordance with contract terms. Funds held by reinsureds is an
account used to record an asset resulting from the ceding
company, in accordance with the contractual terms, withholding a
portion of the premium due the Company as a guarantee that the
Company will meet its loss and other obligations.
(p) Fixed Assets. Fixed assets, with a net book
value of $10.3 million and $12.2 million as of
December 31, 2006 and 2005, respectively, are included in
other assets. Property and equipment are recorded at cost.
Depreciation and amortization are computed on a straight-line
basis over the following estimated useful lives:
|
|
|
|
|
Leasehold improvements
|
|
|
10 years or term of lease, if shorter |
|
Electronic data processing equipment and furniture
|
|
|
5 years |
|
Personal computers and software
|
|
|
3 years |
|
Depreciation and amortization expense for the years ended
December 31, 2006, 2005 and 2004 was $5.0 million,
$7.3 million and $5.1 million, respectively.
|
|
4. |
Recent Accounting Pronouncements |
In February 2006, the FASB issued SFAS 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of SFAS 133 and
140. SFAS 155 amends SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, and
SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and
clarifies SFAS 133 Implementation Issue D1,
Application of Statement 133 to Beneficial Interests
in Securitized Financial Assets. SFAS 155 applies to
certain hybrid financial instruments, which are
instruments that contain embedded derivatives. The standard
establishes a requirement to evaluate beneficial interests in
securitized financial assets to determine if the interests
represent freestanding derivatives, or are hybrid financial
instruments containing embedded derivatives requiring
bifurcation. SFAS 155 also permits an election for fair
value measurement of any hybrid financial instrument containing
an embedded derivative that otherwise would have required
bifurcation under SFAS 133, including financial instruments
previously recorded by the Company under SFAS 133. The fair
value election to existing instruments on an
instrument-by-instrument basis at the date of adoption and can
be applied to new instruments on a prospective basis.
SFAS 155 will be effective in fiscal years that begin after
September 15, 2006. The Company expects to elect fair value
measurement of hybrid financial instruments under SFAS 155
effective with its adoption on January 1, 2007. As of
January 1, 2007, the Company will no longer bifurcate the
embedded derivatives in its investments in convertible
securities, changes in the fair value of the host instrument
will be recorded as unrealized investment gains and losses, and
changes in the fair value of the embedded derivative will be
recorded as realized investment gains and losses. As of
December 31, 2006, the fair value of the host instruments
included in fixed income securities was $268.1 million and
the fair value of embedded derivatives included in other
invested assets was $15.1 million. Upon adopting
SFAS 155, the Company will record a cumulative adjustment
of $16.5 million to reclassify unrealized investment gains,
net of tax, to retained earnings as of January 1, 2007.
Subsequent to January 1, 2007, changes in the fair value of
securities accounted for in accordance with SFAS 155 will
be recorded in realized investment gains or losses.
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 companys
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
113
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 15, 2006. The Company has completed an analysis of
FIN 48 and does not expect any material effect on its
consolidated financial statements.
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. The Company is currently
evaluating the impact of the adoption of SFAS 157, if any,
on the Companys financial position or results of
operations.
In September 2006, the FASB issued SFAS 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of
SFAS 87, 88, 106, and 132(R). SFAS 158 requires,
as of December 31, 2006, the Company to recognize the
overfunded or underfunded status of a defined benefit
postretirement plan, including pension plans, as an asset or
liability in its balance sheet, and to recognize changes in that
funded status in the year in which the changes occur through
comprehensive income. The Company adopted the recognition
provisions of SFAS 158. As a result of the adoption, the
Company has recorded a one-time charge of $15.7 million to
increase other liabilities, a $5.5 million deferred tax
asset and a $10.2 million decrease to accumulated other
comprehensive income on its balance sheet. In addition,
SFAS 158 requires that, as of December 31, 2008,
employers measure plan assets and liabilities as of the date of
their financial statements. SFAS 158 does not require
retrospective application.
In September 2006, the SEC issued Staff Accounting
Bulletin 108 (SAB 108) Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.
SAB 108 provides guidance on evaluating a misstatement and
determining its materiality using the iron curtain (balance
sheet analysis) and rollover (income statement analysis)
approaches, as well as correcting errors under the approaches
and transition guidance. SAB 108 is effective for fiscal
years ending on or after November 15, 2006. There was no
effect to the Companys consolidated financial statements
resulting from the adoption of SAB 108.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115, which provides a fair value option to
measure many financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis.
SFAS No. 159 is effective for the Company beginning in
the 2008 first quarter. The Company is evaluating the impact of
the adoption of SFAS 159 on its consolidated financial
statements.
On November 15, 2004, the Company acquired Overseas
Partners US Reinsurance Company (Opus Re), a
reinsurance company domiciled in the state of Delaware, the name
of which has been changed to Clearwater Select Insurance
Company. The purchase price of $43.0 million, which was
based on the fair value of the net assets of Opus Re at the date
of acquisition, was comprised of $237.8 million of assets,
principally investments, and $194.8 million of liabilities,
principally unpaid losses and loss adjustment expense reserves.
The Company recorded an intangible asset with an indefinite life
of $5.8 million, which as of December 31, 2006 and
2005 was not impaired. There was no goodwill recognized related
to the acquisition of Opus Re. Following the acquisition,
Clearwater Select was contributed to Clearwater.
On October 1, 2004, the Company exchanged all of its common
shares of First Capital Insurance Ltd. (First
Capital), which represented 97.7% of the total common
shares of First Capital, for Class B non-voting common
shares of Fairfax Asia Limited (Fairfax Asia),
representing a 44.0% economic interest in Fairfax Asia.
Following the transaction, Fairfax Asia owns 97.7% of the common
shares of First Capital. The transaction valued the
Companys interest in First Capital at $38.6 million,
which was based on First Capitals GAAP shareholders
equity as of September 30, 2004, subject to certain
adjustments, in exchange for Class B shares of Fairfax Asia
based on its fair value as of September 30, 2004. In
recording the exchange, there was no gain or loss recorded by
the Company. Fairfax owns the remaining Class A and
Class B common shares of Fairfax Asia.
114
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the exchange, the Companys interest in First
Capital was consolidated in the Companys financial
statements. Following the exchange, the Company records its
investment in Fairfax Asia in accordance with the equity method
of accounting. Subsequent to the exchange, the results of First
Capital, including its underwriting activity, are reflected in
the Companys investment income through its proportionate
share of the net income of Fairfax Asia.
|
|
6. |
Earnings Per Common Share |
Basic earnings per common share is calculated by dividing net
income (loss) available to common shareholders for the period by
the weighted-average number of common shares outstanding during
the period, excluding those non-vested shares granted under the
OdysseyRe Restricted Share Plan. Diluted earnings (loss) per
common share is calculated by dividing net income (loss)
available to common shareholders for the period, adjusted for
interest expense on the 4.375% convertible senior
debentures, by the weighted-average number of common shares
outstanding during the period, inclusive of: vested and
non-vested shares granted under the OdysseyRe Restricted Share
Plan, as determined using the treasury stock method; stock
options that would be assumed to be exercised on the balance
sheet date, as determined using the treasury stock method; and
the effect of the conversion of the Companys convertible
debt to equity securities. Restricted shares, stock options or
the effect of the conversion of the convertible debt and the
related interest expense are not included in the calculation of
dilutive earnings per common share, if the effect would be
antidilutive.
Net income (loss) per common share for the years ended
December 31, 2006, 2005 and 2004 has been computed in the
following table based upon weighted average common shares
outstanding (in thousands, except share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income (loss)
|
|
$ |
507,906 |
|
|
$ |
(115,722 |
) |
|
$ |
205,201 |
|
Preferred dividends
|
|
|
(8,257 |
) |
|
|
(1,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
basic
|
|
|
499,649 |
|
|
|
(117,666 |
) |
|
|
205,201 |
|
Interest on 4.375% convertible senior debentures, net of tax
|
|
|
1,603 |
|
|
|
|
|
|
|
3,128 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
diluted
|
|
$ |
501,252 |
|
|
$ |
(117,666 |
) |
|
$ |
208,329 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
68,975,743 |
|
|
|
65,058,327 |
|
|
|
64,361,535 |
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
4.375% convertible senior debentures
|
|
|
2,817,825 |
|
|
|
|
|
|
|
5,168,405 |
|
Stock options
|
|
|
146,584 |
|
|
|
|
|
|
|
167,620 |
|
Restricted shares
|
|
|
358,898 |
|
|
|
|
|
|
|
295,576 |
|
|
|
|
|
|
|
|
|
|
|
Total effect of dilutive shares
|
|
|
3,323,307 |
|
|
|
|
|
|
|
5,631,601 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
72,299,050 |
|
|
|
65,058,327 |
|
|
|
69,993,136 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
7.24 |
|
|
$ |
(1.81 |
) |
|
$ |
3.19 |
|
|
Diluted
|
|
|
6.93 |
|
|
|
(1.81 |
) |
|
|
2.98 |
|
115
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In calculating diluted earnings per share, the Company is
required to evaluate each stock option and restricted stock
grant to determine if it is dilutive or antidilutive in nature.
For the year ended December 31, 2006, 140,153 existing
stock options and restricted stock awards outstanding were
excluded from the computation of weighted average common shares
for diluted earnings per common share, due to the antidilutive
effect. For the year ended December 31, 2005, the Company
incurred a loss; therefore, all stock options, restricted stock
awards and shares related to the 4.375% convertible senior
debentures were excluded from the weighted average shares for
diluted earnings per common share, due to the antidilutive
effect during the year. Had a loss not been recorded, the
Company would have evaluated the dilutive effect of
6,049,782 shares for the year ended December 31, 2005.
For the year ended December 31, 2004, all outstanding stock
options and restricted shares were dilutive, and were included
in the calculation of diluted earnings per common share.
A summary of the Companys investment portfolio as of
December 31, 2006, excluding common stocks at equity and
other invested assets, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or | |
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
|
|
Cost | |
|
Appreciation | |
|
Depreciation | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
$ |
2,613,336 |
|
|
$ |
7,434 |
|
|
$ |
103,398 |
|
|
$ |
2,517,372 |
|
|
States, municipalities and political subdivisions
|
|
|
175,541 |
|
|
|
6,172 |
|
|
|
687 |
|
|
|
181,026 |
|
|
Foreign governments
|
|
|
435,927 |
|
|
|
8,638 |
|
|
|
3,113 |
|
|
|
441,452 |
|
|
All other corporate
|
|
|
322,852 |
|
|
|
40,794 |
|
|
|
1,916 |
|
|
|
361,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
3,547,656 |
|
|
|
63,038 |
|
|
|
109,114 |
|
|
|
3,501,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies
|
|
|
162,065 |
|
|
|
34,136 |
|
|
|
781 |
|
|
|
195,420 |
|
|
Industrial, miscellaneous and all other
|
|
|
386,073 |
|
|
|
26,120 |
|
|
|
|
|
|
|
412,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stocks, at fair value
|
|
|
548,138 |
|
|
|
60,256 |
|
|
|
781 |
|
|
|
607,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments, corporate and other
|
|
|
242,340 |
|
|
|
|
|
|
|
|
|
|
|
242,340 |
|
Cash and cash equivalents
|
|
|
2,061,796 |
|
|
|
|
|
|
|
|
|
|
|
2,061,796 |
|
Cash collateral for borrowed securities
|
|
|
242,096 |
|
|
|
|
|
|
|
|
|
|
|
242,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,642,026 |
|
|
$ |
123,294 |
|
|
$ |
109,895 |
|
|
$ |
6,655,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks accounted for under the equity method of
accounting were carried at $245.4 million as of
December 31, 2006, reflecting gross unrealized appreciation
of $25.7 million and gross unrealized depreciation of
$4.1 million. Other invested assets, including amounts that
were accounted for under the equity method of accounting, were
carried at $165.2 million as of December 31, 2006,
reflecting gross unrealized appreciation of $1.1 million
and gross unrealized depreciation of $0.1 million.
116
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys investment portfolio as of
December 31, 2005, excluding common stocks at equity and
other invested assets, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or | |
|
Gross | |
|
Gross | |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
|
|
Cost | |
|
Appreciation | |
|
Depreciation | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
$ |
1,603,484 |
|
|
$ |
14,214 |
|
|
$ |
48,902 |
|
|
$ |
1,568,796 |
|
|
States, municipalities and political subdivisions
|
|
|
181,110 |
|
|
|
3,931 |
|
|
|
875 |
|
|
|
184,166 |
|
|
Foreign governments
|
|
|
351,267 |
|
|
|
16,258 |
|
|
|
4 |
|
|
|
367,521 |
|
|
All other corporate
|
|
|
509,821 |
|
|
|
15,384 |
|
|
|
50,751 |
|
|
|
474,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,645,682 |
|
|
|
49,787 |
|
|
|
100,532 |
|
|
|
2,594,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks, trusts and insurance companies
|
|
|
223,338 |
|
|
|
41,061 |
|
|
|
286 |
|
|
|
264,113 |
|
|
Industrial, miscellaneous and all other
|
|
|
363,056 |
|
|
|
7,949 |
|
|
|
33,397 |
|
|
|
337,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stocks, at fair value
|
|
|
586,394 |
|
|
|
49,010 |
|
|
|
33,683 |
|
|
|
601,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
|
6,564 |
|
|
|
|
|
|
|
|
|
|
|
6,564 |
|
|
All other
|
|
|
192,939 |
|
|
|
|
|
|
|
|
|
|
|
192,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
199,503 |
|
|
|
|
|
|
|
|
|
|
|
199,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
1,528,427 |
|
|
|
|
|
|
|
|
|
|
|
1,528,427 |
|
Cash collateral for borrowed securities
|
|
|
240,642 |
|
|
|
|
|
|
|
|
|
|
|
240,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,200,648 |
|
|
$ |
98,797 |
|
|
$ |
134,215 |
|
|
$ |
5,165,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks accounted for under the equity method of
accounting were carried at $567.0 million as of
December 31, 2005, reflecting gross unrealized appreciation
of $199.0 million and gross unrealized depreciation of
$4.0 million. Other invested assets, including amounts that
were accounted for under the equity method of accounting, were
carried at $238.1 million as of December 31, 2005,
reflecting gross unrealized appreciation of $5.8 million
and gross unrealized depreciation of $2.1 million.
The fair values of fixed income securities and common stocks are
based on the quoted market prices of the investments as of the
close of business on December 31 of the respective years.
117
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(a) |
Fixed Income Maturity Schedule |
The amortized cost and fair value of fixed income securities as
of December 31, 2006, by contractual maturity, are shown
below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized | |
|
|
|
% of Total | |
|
|
Cost | |
|
Fair Value | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
Due in one year or less
|
|
$ |
41,437 |
|
|
$ |
43,279 |
|
|
|
1.2 |
% |
Due after one year through five years
|
|
|
1,070,312 |
|
|
|
1,080,485 |
|
|
|
30.9 |
|
Due after five years through ten years
|
|
|
558,059 |
|
|
|
566,122 |
|
|
|
16.2 |
|
Due after ten years
|
|
|
1,877,848 |
|
|
|
1,811,694 |
|
|
|
51.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$ |
3,547,656 |
|
|
$ |
3,501,580 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Actual maturities may differ from the contractual maturities
shown in the table above due to the existence of call or put
options. In the case of securities containing call options, the
actual maturity will be the same as the contractual maturity if
the issuer elects not to exercise its call option. Total
securities subject to the call option represent approximately 3%
of the total fair value. In the case of securities containing
put options, the actual maturity will be the same as the
contractual maturity if the Company elects not to exercise its
put option. Total securities containing the put option represent
approximately 4% of the total fair value.
|
|
(b) |
Net Investment Income and Realized Gains (Losses) |
The following table sets forth the components of net investment
income for the years ended December 31, 2006, 2005, and
2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Interest on fixed income securities
|
|
$ |
141,763 |
|
|
$ |
131,570 |
|
|
$ |
125,326 |
|
Dividends on common stocks, at fair value
|
|
|
15,210 |
|
|
|
13,638 |
|
|
|
13,766 |
|
Net income of common stocks, at equity
|
|
|
181,327 |
|
|
|
20,214 |
|
|
|
14,222 |
|
Interest on cash and short-term investments
|
|
|
122,531 |
|
|
|
54,567 |
|
|
|
19,623 |
|
Other invested assets
|
|
|
56,577 |
|
|
|
27,829 |
|
|
|
21,910 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income
|
|
|
517,408 |
|
|
|
247,818 |
|
|
|
194,847 |
|
Less: investment expenses
|
|
|
21,022 |
|
|
|
8,980 |
|
|
|
10,484 |
|
Less: interest on funds held under reinsurance contracts
|
|
|
9,267 |
|
|
|
18,746 |
|
|
|
20,115 |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
487,119 |
|
|
$ |
220,092 |
|
|
$ |
164,248 |
|
|
|
|
|
|
|
|
|
|
|
118
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the components of net realized
investment gains and losses for the years ended
December 31, 2006, 2005, and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
$ |
49,798 |
|
|
$ |
111,813 |
|
|
$ |
55,899 |
|
|
Realized investment losses
|
|
|
19,393 |
|
|
|
29,816 |
|
|
|
2,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
30,405 |
|
|
|
81,997 |
|
|
|
53,547 |
|
|
|
|
|
|
|
|
|
|
|
Preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
Realized investment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
|
222,355 |
|
|
|
98,506 |
|
|
|
94,840 |
|
|
Realized investment losses
|
|
|
47,006 |
|
|
|
33,879 |
|
|
|
2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
|
175,349 |
|
|
|
64,627 |
|
|
|
92,415 |
|
|
|
|
|
|
|
|
|
|
|
Derivative securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
|
18,582 |
|
|
|
33,360 |
|
|
|
25,757 |
|
|
Realized investment losses
|
|
|
121,704 |
|
|
|
72,168 |
|
|
|
52,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment losses
|
|
|
(103,122 |
) |
|
|
(38,808 |
) |
|
|
(27,110 |
) |
|
|
|
|
|
|
|
|
|
|
Other securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
|
130,290 |
|
|
|
23,104 |
|
|
|
19,450 |
|
|
Realized investment losses
|
|
|
43,793 |
|
|
|
71,080 |
|
|
|
16,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
|
86,497 |
|
|
|
(47,976 |
) |
|
|
3,172 |
|
|
|
|
|
|
|
|
|
|
|
Total realized investment gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains
|
|
|
421,025 |
|
|
|
266,809 |
|
|
|
195,946 |
|
|
Realized investment losses
|
|
|
231,896 |
|
|
|
206,943 |
|
|
|
73,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains
|
|
$ |
189,129 |
|
|
$ |
59,866 |
|
|
$ |
122,024 |
|
|
|
|
|
|
|
|
|
|
|
Included in gross realized investment losses for the years ended
December 31, 2006 and 2005 are $28.1 million and
$54.9 million, respectively, related to realized investment
losses on the other-than-temporary write-down of fixed income,
equity and other investments. The amount for 2006 reflects
$8.1 million attributable to other invested assets and a
$2.9 million and $17.1 million write-down on fixed
income and equity securities, respectively. The amount for 2005
reflects $17.9 million attributable to fixed income
securities, $17.6 million related to equity securities and
$19.4 million attributable to other securities. The Company
did not recognize any other-than-temporary write-down of
investments for the year ended December 31, 2004.
119
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(c) |
Unrealized Appreciation (Depreciation) |
The following table sets forth the changes in unrealized net
appreciation (depreciation) of investments, and the related
tax effect, reflected in accumulated other comprehensive income
for the years ended December 31, 2006, 2005, and 2004 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Fixed income securities
|
|
$ |
4,670 |
|
|
$ |
(54,102 |
) |
|
$ |
24,044 |
|
Equity securities
|
|
|
(129,180 |
) |
|
|
110,298 |
|
|
|
(12,361 |
) |
Other invested assets
|
|
|
(2,813 |
) |
|
|
1,713 |
|
|
|
2,243 |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized net appreciation of investments
|
|
|
(127,323 |
) |
|
|
57,909 |
|
|
|
13,926 |
|
Provision for deferred income taxes
|
|
|
44,563 |
|
|
|
(20,268 |
) |
|
|
(4,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized net appreciation of investments
|
|
$ |
(82,760 |
) |
|
$ |
37,641 |
|
|
$ |
9,052 |
|
|
|
|
|
|
|
|
|
|
|
The Company reviews, on a quarterly basis, its investment
portfolio for declines in value, and specifically considers
securities with market values that 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, net of tax, in
accumulated other comprehensive income. If the Company
determines 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
the Companys consolidated statements of operations.
In assessing the value of the Companys debt and equity
securities held as investments and possible impairments of such
securities, the Company reviews (i) the issuers
current financial position and disclosures related thereto,
(ii) general and specific market and industry developments,
(iii) the timely payment by the issuer of its principal,
interest and other obligations, (iv) the outlook and
expected financial performance of the issuer, (v) current
and historical valuation parameters for the issuer and similar
companies, (vi) relevant forecasts, analyses and
recommendations by research analysts, rating agencies and
investment advisors, and (vii) other information the
Company may consider relevant. In addition, the Company
considers its ability and intent to hold the security to
recovery when evaluating possible impairments.
The facts and circumstances involved in making a decision
regarding an other-than-temporary-impairment are those that
exist at that time. Should the facts and circumstances change
such that an other-than-temporary impairment is considered
appropriate, the Company will recognize the impairment, by
reducing the cost or amortized cost of the investment to its
fair value, recording a realized investment loss in its
consolidated statement of operations. Upon the disposition of a
security where an other-than-temporary impairment has been
taken, the Company will record a gain or loss based on the
adjusted cost or amortized cost of the investment.
120
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables reflect the fair value and gross unrealized
depreciation of the Companys fixed income securities and
common stocks, at fair value, aggregated by investment category
and length of time that individual securities have been in a
continuous unrealized depreciation position, as of
December 31, 2006 and December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration of Unrealized Loss | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Less than 12 Months | |
|
Greater than 12 Months | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
December 31, 2006 |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Fixed income securities investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
$ |
1,167,570 |
|
|
$ |
(13,236 |
) |
|
|
15 |
|
|
$ |
1,264,244 |
|
|
$ |
(90,162 |
) |
|
|
39 |
|
|
$ |
2,431,814 |
|
|
$ |
(103,398 |
) |
|
|
54 |
|
|
States, municipalities and political subdivisions
|
|
|
38,785 |
|
|
|
(168 |
) |
|
|
4 |
|
|
|
37,507 |
|
|
|
(519 |
) |
|
|
11 |
|
|
|
76,292 |
|
|
|
(687 |
) |
|
|
15 |
|
|
Foreign governments
|
|
|
282,170 |
|
|
|
(3,113 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,170 |
|
|
|
(3,113 |
) |
|
|
12 |
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
491 |
|
|
|
(9 |
) |
|
|
1 |
|
|
|
491 |
|
|
|
(9 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
1,488,525 |
|
|
|
(16,517 |
) |
|
|
31 |
|
|
|
1,302,242 |
|
|
|
(90,690 |
) |
|
|
51 |
|
|
|
2,790,767 |
|
|
|
(107,207 |
) |
|
|
82 |
|
|
Fixed income securities non-investment grade, corporate
|
|
|
7,399 |
|
|
|
(295 |
) |
|
|
3 |
|
|
|
62,073 |
|
|
|
(1,612 |
) |
|
|
2 |
|
|
|
69,472 |
|
|
|
(1,907 |
) |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,495,924 |
|
|
|
(16,812 |
) |
|
|
34 |
|
|
|
1,364,315 |
|
|
|
(92,302 |
) |
|
|
53 |
|
|
|
2,860,239 |
|
|
|
(109,114 |
) |
|
|
87 |
|
Common stocks, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,797 |
|
|
|
(781 |
) |
|
|
1 |
|
|
|
13,797 |
|
|
|
(781 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$ |
1,495,924 |
|
|
$ |
(16,812 |
) |
|
|
34 |
|
|
$ |
1,378,112 |
|
|
$ |
(93,083 |
) |
|
|
54 |
|
|
$ |
2,874,036 |
|
|
$ |
(109,895 |
) |
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration of Unrealized Loss | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Less than 12 Months | |
|
Greater than 12 Months | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
Gross | |
|
Number | |
|
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
|
|
|
Unrealized | |
|
of | |
December 31, 2005 |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
Fair Value | |
|
Depreciation | |
|
Securities | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Fixed income securities investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
$ |
1,071,890 |
|
|
$ |
(32,947 |
) |
|
|
40 |
|
|
$ |
395,707 |
|
|
$ |
(15,955 |
) |
|
|
6 |
|
|
$ |
1,467,597 |
|
|
$ |
(48,902 |
) |
|
|
46 |
|
|
States, municipalities and political subdivisions
|
|
|
46,336 |
|
|
|
(317 |
) |
|
|
10 |
|
|
|
21,646 |
|
|
|
(558 |
) |
|
|
5 |
|
|
|
67,982 |
|
|
|
(875 |
) |
|
|
15 |
|
|
Foreign governments
|
|
|
997 |
|
|
|
(4 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
997 |
|
|
|
(4 |
) |
|
|
1 |
|
|
Corporate
|
|
|
299 |
|
|
|
|
|
|
|
1 |
|
|
|
487 |
|
|
|
(10 |
) |
|
|
1 |
|
|
|
786 |
|
|
|
(10 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
1,119,522 |
|
|
|
(33,268 |
) |
|
|
52 |
|
|
|
417,840 |
|
|
|
(16,523 |
) |
|
|
12 |
|
|
|
1,537,362 |
|
|
|
(49,791 |
) |
|
|
64 |
|
|
Fixed income securities non-investment grade, corporate
|
|
|
224,892 |
|
|
|
(30,536 |
) |
|
|
27 |
|
|
|
136,064 |
|
|
|
(20,205 |
) |
|
|
8 |
|
|
|
360,956 |
|
|
|
(50,741 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,344,414 |
|
|
|
(63,804 |
) |
|
|
79 |
|
|
|
553,904 |
|
|
|
(36,728 |
) |
|
|
20 |
|
|
|
1,898,318 |
|
|
|
(100,532 |
) |
|
|
99 |
|
Common stocks, at fair value
|
|
|
167,374 |
|
|
|
(16,580 |
) |
|
|
9 |
|
|
|
137,429 |
|
|
|
(17,103 |
) |
|
|
2 |
|
|
|
304,803 |
|
|
|
(33,683 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$ |
1,511,788 |
|
|
$ |
(80,384 |
) |
|
|
88 |
|
|
$ |
691,333 |
|
|
$ |
(53,831 |
) |
|
|
22 |
|
|
$ |
2,203,121 |
|
|
$ |
(134,215 |
) |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company believes the gross unrealized depreciation is
temporary in nature and has not recorded a realized investment
loss in its statement of operations related to these securities.
Given the size of its investment portfolio and capital position,
the Company has the ability and intent to hold these securities
until the fair value recovers to its original cost.
|
|
(d) |
Common Stocks, at Equity |
Common stocks, at equity, totaled $245.4 million as of
December 31, 2006, compared to $567.0 million as of
December 31, 2005. The following table shows the components
of common stocks, at equity, as of December 31, 2006 and
2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
HWIC Asia Fund, Class A Shares
|
|
$ |
|
|
|
$ |
371,895 |
|
Hub International Limited
|
|
|
95,993 |
|
|
|
54,548 |
|
Fairfax Asia Limited
|
|
|
47,545 |
|
|
|
46,405 |
|
TRG Holding Corporation
|
|
|
79,859 |
|
|
|
75,580 |
|
Advent Capital (Holdings) PLC
|
|
|
19,718 |
|
|
|
16,014 |
|
MFXchange Holdings Inc.
|
|
|
1,926 |
|
|
|
2,210 |
|
Other common stock
|
|
|
375 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
Total common stock, at equity
|
|
$ |
245,416 |
|
|
$ |
566,996 |
|
|
|
|
|
|
|
|
For common stocks, at equity, as of December 31, 2006, the
relative ownership held by the Company is: Hub International
Limited (26.1% owned by Fairfax, which includes 13.3% owned by
the Company), Fairfax Asia Limited (100% owned by Fairfax, which
includes a 29.5% economic interest owned by the Company),
TRG Holding Corporation (100% owned by Fairfax, which
includes 13.0% owned by the Company), Advent Capital (Holdings)
PLC (44.5% owned by Fairfax, which includes 8.1% owned by the
Company) and
122
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
MFXchange Holdings Inc. (MFX) (100% owned by
Fairfax, which includes 7.4% owned by the Company). Common
stocks, at equity, and certain other invested assets, are
recorded under the equity method of accounting based on the
Companys proportionate share of income or loss and changes
in shareholders equity of the investee. Due to the timing
of when financial information is reported by investees, results
attributable to the investments are generally reported by the
Company on a one month or one quarter lag. Dividends received by
the Company from these entities were $6.0 million,
$6.0 million, and $6.1 million for the years ended
December 31, 2006, 2005, and 2004, respectively. The
Company routinely evaluates the carrying value of these
investments by reviewing, among other things, each
investees current and expected operating performance and
current and historical trading values of the issuers
securities, where applicable.
During 2006, the Company redeemed its interest in HWIC Asia, an
investment vehicle that primarily invests in public foreign
equities, resulting in a realized gain of $75.1 million.
HWIC Asia had been reflected in the Companys consolidated
financial statements in accordance with the equity method of
accounting since the second quarter of 2005. The carrying value
of investments reflected in the value of HWIC Asia is
established at their fair value based on quoted market prices.
In accordance with the equity method of accounting, interest and
dividend income, and realized gains and losses of HWIC Asia are
included in net investment income. Prior to the redemption of
HWIC Asia, the net amount of unrealized appreciation or
depreciation of the Companys proportional interest in
investments held by HWIC Asia, net of applicable deferred income
taxes, was reflected in the Companys shareholders
equity in accumulated other comprehensive income. The Company
recorded unrealized appreciation, net of deferred income taxes,
of $112.2 million as of December 31, 2005 related to
its interest in HWIC Asia.
The following table reflects the effect of the Companys
redemption of HWIC Asia shares during the year ended
December 31, 2006 (in thousands):
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
2006 | |
|
|
| |
Shares redeemed
|
|
|
6,016 |
|
Consideration
|
|
$ |
424,372 |
|
Realized gain, pre-tax
|
|
$ |
75,149 |
|
The Companys equity in the net income of HWIC Asia is
included in pre-tax net investment income and is comprised of
the following items for the years ended December 31, 2006,
2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Equity in net investment income of HWIC Asia
|
|
$ |
1,061 |
|
|
$ |
5,069 |
|
|
$ |
4,866 |
|
Equity in net realized capital gains of HWIC Asia
|
|
|
167,646 |
|
|
|
27,906 |
|
|
|
1,377 |
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of HWIC Asia, before taxes
|
|
$ |
168,707 |
|
|
$ |
32,975 |
|
|
$ |
6,243 |
|
|
|
|
|
|
|
|
|
|
|
Including realized investment gains of $75.1 million for
the year ended December 31, 2006, related to the redemption
of HWIC Asia shares, total realized investment gains from the
Companys interest in HWIC Asia were $242.8 million,
$27.9 million and $1.4 million, pre-tax for the years
ended December 31, 2006, 2005 and 2004, respectively.
A summary of HWIC Asias financial information, and the
Companys proportionate share of HWIC Asia as of
August 16, 2006, the date of the Companys redemption
of HWIC Asia, and December 31, 2005, and for the
123
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
period January 1, 2006 through August 16, 2006 and the
years ended December 31, 2005 and 2004, follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investee Financial Statements | |
|
Company Share | |
|
|
| |
|
| |
|
|
August 16, | |
|
December 31, | |
|
August 16, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Invested assets
|
|
$ |
121,460 |
|
|
$ |
661,817 |
|
|
$ |
48,075 |
|
|
$ |
371,902 |
|
Total assets
|
|
|
121,482 |
|
|
|
661,872 |
|
|
|
48,083 |
|
|
|
371,933 |
|
Total liabilities
|
|
|
61 |
|
|
|
69 |
|
|
|
24 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$ |
121,421 |
|
|
$ |
661,803 |
|
|
$ |
48,059 |
|
|
$ |
371,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investee Financial Statements | |
|
Company Share | |
|
|
| |
|
| |
|
|
January 1 | |
|
Year Ended | |
|
January 1 | |
|
Year Ended | |
|
|
through | |
|
December 31, | |
|
through | |
|
December 31, | |
|
|
August 16, | |
|
| |
|
August 16, | |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
373,318 |
|
|
$ |
61,068 |
|
|
$ |
12,001 |
|
|
$ |
169,829 |
|
|
$ |
34,511 |
|
|
$ |
7,004 |
|
Total expenses
|
|
|
1,407 |
|
|
|
2,463 |
|
|
|
1,219 |
|
|
|
1,122 |
|
|
|
1,536 |
|
|
|
761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
371,911 |
|
|
$ |
58,605 |
|
|
$ |
10,782 |
|
|
$ |
168,707 |
|
|
$ |
32,975 |
|
|
$ |
6,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate of the Companys equity investees
summarized financial information, and the Companys
proportionate share thereof, as of December 31, 2006 and
2005 and for the years ended December 31, 2006, 2005 and
2004, follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investee Financial Statements | |
|
Company Share | |
|
|
| |
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Invested assets
|
|
$ |
1,500,883 |
|
|
$ |
2,002,263 |
|
|
$ |
226,114 |
|
|
$ |
619,284 |
|
Total assets
|
|
|
3,013,571 |
|
|
|
3,214,896 |
|
|
|
455,599 |
|
|
|
825,606 |
|
Total liabilities
|
|
|
1,445,099 |
|
|
|
1,375,939 |
|
|
|
210,183 |
|
|
|
258,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$ |
1,568,472 |
|
|
$ |
1,838,957 |
|
|
$ |
245,416 |
|
|
$ |
566,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investee Financial Statements | |
|
Company Share | |
|
|
| |
|
| |
|
|
Year Ended December 31, | |
|
Year Ended December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
1,054,178 |
|
|
$ |
621,542 |
|
|
$ |
460,539 |
|
|
$ |
290,492 |
|
|
$ |
147,640 |
|
|
$ |
80,045 |
|
Total expenses
|
|
|
590,665 |
|
|
|
633,201 |
|
|
|
424,199 |
|
|
|
109,165 |
|
|
|
127,426 |
|
|
|
65,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
463,513 |
|
|
$ |
(11,659 |
) |
|
$ |
36,340 |
|
|
$ |
181,327 |
|
|
$ |
20,214 |
|
|
$ |
14,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the timing of when financial information is reported by
equity investees, results attributable to these investments are
generally reported in the Companys consolidated financial
statements on a one month or one quarter lag.
124
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(e) |
Other Invested Assets |
Other invested assets totaled $165.2 million as of
December 31, 2006, compared to $238.1 million as of
December 31, 2005. The following table shows the components
of other invested assets as of December 31, 2006 and 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Hedge funds, at equity
|
|
$ |
40,333 |
|
|
$ |
43,904 |
|
Private equity partnerships, at equity
|
|
|
22,767 |
|
|
|
24,387 |
|
Mutual funds, at fair value
|
|
|
26,421 |
|
|
|
35,978 |
|
Derivatives, at fair value
|
|
|
53,355 |
|
|
|
99,122 |
|
Benefit plan funds, at fair value
|
|
|
15,641 |
|
|
|
13,222 |
|
Other investments
|
|
|
6,730 |
|
|
|
21,480 |
|
|
|
|
|
|
|
|
|
Total other invested assets
|
|
$ |
165,247 |
|
|
$ |
238,093 |
|
|
|
|
|
|
|
|
Many of the Companys hedge fund and private equity
investments are subject to restrictions on redemptions or sales,
which are determined by the governing documents thereof, and
limit the Companys ability to liquidate these investments
in the short term. Due to a time lag in reporting by a majority
of hedge fund and private equity fund managers, valuations for
these investments are reported by OdysseyRe on a one month or
one quarter lag. Income from hedge funds and private equity
investments included in net investment income totaled
$29.3 million, $15.6 million and $15.9 million
for the years ended December 31, 2006, 2005 and 2004,
respectively. With respect to the Companys
$22.8 million in private equity partnerships included in
other invested assets as of December 31, 2006, the Company
has commitments that may require additional funding of up to
$23.1 million over the next four years. Interest and
dividend income, and realized and unrealized gains and losses of
hedge funds and private equity partnerships are generally
included in net investment income. Other invested assets include
$6.7 million related to the Companys investment in
O.R.E Holdings Limited, which is net of a other-than-temporary
write-down of $9.9 million, of which $7.5 million and
$2.4 million was recognized during the years ended
December 31, 2006 and 2005, respectively.
As of December 31, 2006, the Companys holdings of
financial instruments without quoted prices, or non-traded
investments, included a collateral loan, which was fully
impaired during 2005. The Company routinely evaluates the
carrying values of these investments by reviewing the
borrowers current financial position and the timeliness of
their interest and principal payments. As a result of this
review, the Company recognized an other-than-temporary
write-down of $17.0 million for the year ended
December 31, 2005 related to this loan. In addition, a
collateral loan, which had a value of $7.3 million as of
December 31, 2005, was fully paid during 2006. As of
December 31, 2005, the Companys holdings consisted of
these two collateral loans totaling $7.3 million. These
collateral loans, which are included in other investments, were
valued at their unpaid principal balances, reduced by amounts
recorded as an other-than-temporary impairments.
|
|
(f) |
Derivative Investments and Short Sales |
The Company uses credit default swaps, total return swaps,
interest rate swaps, call option contracts and short sales to
manage against adverse changes in the values of assets and
liabilities.
In the third quarter of 2004, the Company sold short
Standard & Poors 500 depository receipts
(SPDRs) and the Financial Select SPDR Fund
(XLF) as an economic hedge against a general decline
in our equity portfolio. In order to reduce the margin
maintenance requirements for these short positions, the Company
replaced the short positions with total return swaps, which had
aggregate notional amounts of $581.4 million and
$451.8 million as of December 31, 2006 and
December 31, 2005, respectively. The margin maintenance
requirement related to the total return swaps was
$10.5 million and $96.4 million as of
December 31, 2006 and
125
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2005, respectively. During the year ended
December 31, 2006, total return swap contracts with an
aggregate notional amount of $969.8 million expired at a
net realized loss of $73.0 million. These total return swap
contracts were replaced by total return swap contracts with an
aggregate notional amount of $1,099.4 million. The swap
transactions terminate during the first half of 2007. As of
December 31, 2006 and December 31, 2005, the Company
has provided $52.1 million and $104.3 million,
respectively, of U.S. Treasury bills as collateral for the
swap transactions. The swap transactions are recorded at fair
value in other liabilities and changes in the fair value are
recorded as realized gains or losses in the consolidated
statement of operations in the period in which they occur. For
the twelve months ended December 31, 2006, 2005 and 2004,
the net change in the fair value of the swap transactions
resulted in a net realized loss of $73.5 million,
$11.8 million and $44.9 million, respectively.
In connection with the swap transactions, the Company owns SPDRs
and XLF index call options at a cost of $9.4 million and
$13.6 million, respectively, 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 notional
amount of $830.2 million. 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.
Our maximum potential loss on the swap and option transactions
was $0.9 million and $90.4 million as of
December 31, 2006 and December 31, 2005, respectively.
The call options are recorded at fair value in other invested
assets, and changes in the fair value are recorded as a realized
gain or loss in the consolidated statement of operations. For
the year ended December 31, 2006, 2005 and 2004, the net
change in the fair value of these call options resulted in a net
realized loss of $0.4 million, $10.6 million and, a
net realized gain of $6.7 million, respectively.
In addition, as of December 31, 2006 and 2005, the Company
had sold short $115.3 million and $83.5 million,
respectively, primarily equity securities, for which it recorded
a liability equal to the underlying fair value of the securities
of $119.8 million and $82.5 million, respectively. A
net realized gain of $3.0 million and $4.3 million for
the years ended December 31, 2006 and 2005, respectively,
and a net realized loss of $13.3 million for the year ended
December 31, 2004 were recognized in the Companys
statements of operations. As of December 31, 2006 and 2005,
the Company provided cash and fixed income securities of
$208.6 million and $161.7 million, respectively, as
collateral for the borrowed securities. The Companys net
investment income for the years ended December 31, 2006,
2005 and 2004 was reduced by $7.2 million,
$5.0 million and $2.7 million, respectively, related
to dividend and interest payments associated with the borrowed
securities.
In connection with the short sales described above, the Company
purchased a SPDR call option as protection against a decline in
the value of the short positions, at a cost of
$0.4 million. The call option is recorded at fair value in
other invested assets in the consolidated balance sheet and
changes in the fair value are recorded as a realized gain or
loss in the consolidated statements of operations in the period
in which they occur. For the years ended December 31, 2006
and 2005, the net change in the fair value of the call option
resulted in a net realized loss of $0.1 million and
$1.2 million respectively, and a net realized gain of
$0.4 million for the year ended December 31, 2004.
The Company has purchased credit default swaps, which are
included in other invested assets, that provide a hedge against
adverse movements in the fair value of investments and other
corporate assets resulting from systemic financial and credit
risk. Under a credit default swap, the Company agrees to pay at
specified periods fixed premium amounts based on an agreed
notional principal amount in exchange for the credit default
protection on a specified asset. Credit default swaps are
recorded at fair value, with the related changes in fair value
recognized as a realized gain or loss in the period in which
they occur. The total cost of the credit default swaps was
$75.6 million as of December 31, 2006 and 2005, and
the fair value was $13.5 million and $36.2 million, as
of December 31, 2006 and 2005, respectively. The notional
amount of the credit default swaps was $3.3 billion as of
December 31, 2006 and 2005. The net change in the fair
value of the credit default swaps
126
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
resulted in a net realized loss of $22.6 million,
$36.2 million and $4.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
The Company purchases interest rate options from time to time to
protect it from movements in interest rates. During the first
quarter of 2006, the Company purchased a
20-year swaption
contract with a notional amount of $550.0 million, which
provides an economic hedge against a decline in our fixed income
portfolio as a result of an increase in interest rates. This
contract replaced a
10-year swaption with
the notional amount of $1.0 billion, initially purchased
during the second quarter of 2005, which was closed during the
first quarter of 2006 for consideration of $4.1 million,
resulting in a realized loss of $1.7 million. The swaption
gives the Company the option, but not the obligation, to enter
into an interest rate swap contract under which we would receive
a floating interest rate and pay a fixed interest rate based on
the notional amount of the contract of $550.0 million. The
cost of the swaption was $9.6 million. This contract was
closed and not replaced, during the third quarter of 2006 for
consideration of $8.2 million resulting in a realized loss
of $1.4 million.
The Company has investments in warrants, which are contracts
that grant the holder the right to purchase an underlying
financial instrument at a given price and time or at a series of
prices and times. The total cost of the warrants was
$6.2 million and $7.0 million, and the fair value was
$7.5 million and $11.9 million as of December 31,
2006 and 2005, respectively. The notional amount of the warrants
was $189.7 million and $219.2 million as of
December 31, 2006 and 2005, respectively. Warrants, which
are included in other invested assets, are recorded at fair
value with the related changes in fair value recognized as a
realized gain or loss in the period in which they occur. As of
December 31, 2006, 2005 and 2004, the net change in the
fair value of the warrants resulted in a net realized loss of
$4.4 million and a net realized gain of $6.9 million
and $6.1 million, respectively.
The Company holds options on certain securities within its fixed
income portfolio, which allows the Company to extend the
maturity date of fixed income securities or convert fixed income
securities to equity securities. The par value and the imputed
cost of the options on these securities were $289.8 million
and $19.6 million as of December 31, 2006,
respectively, and $385.2 million and $33.1 million as
of December 31, 2005, respectively. The options are
recorded at fair value of $15.1 million and
$34.9 million as of December 31, 2006 and 2005,
respectively, in other invested assets and the change in fair
value is recorded as a realized gain or loss in the consolidated
statement of operations. For the years ended December 31,
2006, 2005 and 2004, the change in the fair value of the options
resulted in a realized gain of $1.1 million,
$21.0 million and $9.2 million, respectively.
Counterparties to the derivative instruments expose the Company
to credit risk in the event of non-performance. The Company
believes this risk is low, given the diversification among
various highly rated counterparties. The credit risk exposure is
represented by the fair value of the derivative instruments.
The Company is required to maintain assets on deposit with
various regulatory authorities to support its insurance and
reinsurance operations. These requirements are generally
promulgated in the statutes and regulations of the individual
jurisdictions. The assets on deposit are available to settle
insurance and reinsurance liabilities. The Company utilizes
trust funds in certain transactions where the trust funds are
set up for the benefit of the ceding companies and generally
take the place of letter of credit requirements. As of
December 31, 2006, restricted assets totaled
$1.1 billion, with $738.3 million included in fixed
income securities and the remaining balance of
$370.7 million included in short term investments, cash and
cash equivalents. Of the $1.1 billion held in restricted
assets, $209.9 million was held for foreign regulatory
requirements, which included $86.5 million in fixed income
securities and the remaining balance of $123.4 million held
in short term investments, cash and cash equivalents.
127
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8. |
Accumulated Other Comprehensive Income |
The following table shows the components of the change in
accumulated other comprehensive income, net of deferred income
taxes, for the years ending December 31, 2006, 2005 and
2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Beginning balance of accumulated other comprehensive income
|
|
$ |
119,039 |
|
|
$ |
122,218 |
|
|
$ |
99,403 |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance of unrealized net appreciation on securities
|
|
|
106,137 |
|
|
|
68,496 |
|
|
|
59,444 |
|
Ending balance of unrealized net appreciation on securities
|
|
|
23,377 |
|
|
|
106,137 |
|
|
|
68,496 |
|
|
|
|
|
|
|
|
|
|
|
Current period change in unrealized net appreciation on
securities
|
|
|
(82,760 |
) |
|
|
37,641 |
|
|
|
9,052 |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance of foreign currency translation adjustments
|
|
|
14,107 |
|
|
|
54,947 |
|
|
|
41,181 |
|
Ending balance of foreign currency translation adjustments
|
|
|
13,447 |
|
|
|
14,107 |
|
|
|
54,947 |
|
|
|
|
|
|
|
|
|
|
|
Current period change in foreign currency translation adjustments
|
|
|
(660 |
) |
|
|
(40,840 |
) |
|
|
13,766 |
|
|
|
|
|
|
|
|
|
|
|
Beginning balance of minimum pension liability
|
|
|
(1,205 |
) |
|
|
(1,225 |
) |
|
|
(1,222 |
) |
Ending balance of minimum pension liability
|
|
|
(1,259 |
) |
|
|
(1,205 |
) |
|
|
(1,225 |
) |
|
|
|
|
|
|
|
|
|
|
Current period change of minimum pension liability
|
|
|
(54 |
) |
|
|
20 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(83,474 |
) |
|
|
(3,179 |
) |
|
|
22,815 |
|
|
|
|
|
|
|
|
|
|
|
Effect of a change in accounting due to the adoption of
SFAS 158 (Note 19)
|
|
|
(10,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance of accumulated other comprehensive income
|
|
$ |
25,329 |
|
|
$ |
119,039 |
|
|
$ |
122,218 |
|
|
|
|
|
|
|
|
|
|
|
128
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of comprehensive income (loss) for the years
ending December 31, 2006, 2005 and 2004 are shown in the
following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income (loss)
|
|
$ |
507,906 |
|
|
$ |
(115,722 |
) |
|
$ |
205,201 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net appreciation on securities arising during the
period
|
|
|
26,550 |
|
|
|
125,801 |
|
|
|
73,404 |
|
Reclassification adjustment for realized gains included in net
income (loss)
|
|
|
(153,873 |
) |
|
|
(67,892 |
) |
|
|
(59,478 |
) |
Foreign currency translation adjustments
|
|
|
(1,015 |
) |
|
|
(62,831 |
) |
|
|
21,178 |
|
Minimum pension liability
|
|
|
(84 |
) |
|
|
30 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax
|
|
|
(128,422 |
) |
|
|
(4,892 |
) |
|
|
35,099 |
|
|
|
|
|
|
|
|
|
|
|
Tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net appreciation on securities arising during the
period
|
|
|
(9,292 |
) |
|
|
(44,030 |
) |
|
|
(25,691 |
) |
Reclassification adjustment for realized gains included in net
income (loss)
|
|
|
53,855 |
|
|
|
23,762 |
|
|
|
20,817 |
|
Foreign currency translation adjustments
|
|
|
355 |
|
|
|
21,991 |
|
|
|
(7,412 |
) |
Minimum pension liability
|
|
|
30 |
|
|
|
(10 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total tax benefit (expense)
|
|
|
44,948 |
|
|
|
1,713 |
|
|
|
(12,284 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
(83,474 |
) |
|
|
(3,179 |
) |
|
|
22,815 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
424,432 |
|
|
$ |
(118,901 |
) |
|
$ |
228,016 |
|
|
|
|
|
|
|
|
|
|
|
129
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9. |
Unpaid Losses and Loss Adjustment Expenses |
The following table sets forth the activity in the liability for
unpaid losses and loss adjustment expenses for the years ended
December 31, 2006, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Gross unpaid losses and loss adjustment expenses, beginning of
year
|
|
$ |
5,117,708 |
|
|
$ |
4,224,624 |
|
|
$ |
3,399,535 |
|
Less: ceded unpaid losses and loss adjustment expenses,
beginning of year
|
|
|
1,206,785 |
|
|
|
1,052,733 |
|
|
|
1,028,090 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses, beginning of year
|
|
|
3,910,923 |
|
|
|
3,171,891 |
|
|
|
2,371,445 |
|
|
|
|
|
|
|
|
|
|
|
Add: Acquisition and disposition of net unpaid losses and loss
adjustment expenses
|
|
|
|
|
|
|
|
|
|
|
77,074 |
|
|
|
|
|
|
|
|
|
|
|
Add: Losses and loss adjustment expenses incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,344,322 |
|
|
|
1,888,946 |
|
|
|
1,441,086 |
|
|
Prior years
|
|
|
139,875 |
|
|
|
172,665 |
|
|
|
190,020 |
|
|
|
|
|
|
|
|
|
|
|
Total losses and loss adjustment expenses incurred
|
|
|
1,484,197 |
|
|
|
2,061,611 |
|
|
|
1,631,106 |
|
|
|
|
|
|
|
|
|
|
|
Less: Paid losses and loss adjustment expenses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
251,254 |
|
|
|
380,767 |
|
|
|
300,273 |
|
|
Prior years
|
|
|
787,311 |
|
|
|
913,684 |
|
|
|
632,373 |
|
|
|
|
|
|
|
|
|
|
|
Total paid losses and loss adjustment expenses
|
|
|
1,038,565 |
|
|
|
1,294,451 |
|
|
|
932,646 |
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes
|
|
|
46,585 |
|
|
|
(28,128 |
) |
|
|
24,912 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses, end of year
|
|
|
4,403,140 |
|
|
|
3,910,923 |
|
|
|
3,171,891 |
|
Add: ceded unpaid losses and loss adjustment expenses, end of
year
|
|
|
739,019 |
|
|
|
1,206,785 |
|
|
|
1,052,733 |
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss adjustment expenses, end of year
|
|
$ |
5,142,159 |
|
|
$ |
5,117,708 |
|
|
$ |
4,224,624 |
|
|
|
|
|
|
|
|
|
|
|
Estimates of reserves for unpaid losses and loss adjustment
expenses are contingent on many events that may or may not occur
in the future. The eventual outcome of these events may be
different from the assumptions underlying the Companys
reserve estimates. In the event that the business environment
and loss trends diverge from expected trends, the Company may
have to adjust its reserves accordingly. The Company believes
that the recorded estimate represents the best estimate of
unpaid losses and loss adjustment expenses based on the
information available as of December 31, 2006. The estimate
is reviewed on a quarterly basis and the ultimate
liability may be more or less than the amounts provided, for
which any adjustments will be reflected in the periods in which
they become known.
The Company is exposed to losses arising from a variety of
catastrophic events, such as hurricanes, windstorms and floods.
The loss estimates for these events represent the Companys
best estimate based on the most recent information available.
The Company uses various approaches in estimating its loss,
including a detailed review of exposed contracts and information
from ceding companies. As additional information becomes
available, including information from ceding companies, actual
losses may exceed the Companys estimated
130
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
losses, potentially resulting in adverse effects to the
Companys 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 the Companys estimates can be determined.
Losses and loss adjustment expenses incurred related to the
current year were $1,344.3 million, $1,888.9 million
and $1,441.1 million for the years ended December 31,
2006, 2005 and 2004, respectively. The higher current year
losses and loss adjustment expenses in 2005 were principally
related to catastrophe events. For the years ended
December 31, 2006, 2005 and 2004, current year catastrophe
events were $34.9 million, $537.9 million and
$138.8 million, respectively.
For the year ended December 31, 2005, the total catastrophe
losses of $537.9 million include net losses and loss
adjustment expenses of $445.9 million, net of reinsurance
of $241.1 million, related to Hurricanes Katrina, Rita and
Wilma, which occurred during the third and fourth quarters of
2005. In addition, for the year ended December 31, 2005,
the Company incurred losses of $25.6 million related to
Windstorm Erwin. For the year ended December 31, 2006, the
loss estimates for Hurricanes Katrina, Rita and Wilma were
increased by $49.4 million (11.1% of 2005 estimate)
principally attributable to unexpected loss emergence in 2006 on
marine and Florida proportional property accounts and due to the
triggering of industry loss warranty contracts written by the
Company resulting from deterioration in industry-wide Wilma loss
estimates.
For the year ended December 31, 2004, the total catastrophe
losses of $138.8 million include net losses and loss
adjustment expenses of $93.4 million, net of reinsurance of
$77.8 million, related to the 2004 Florida Hurricanes. For
the years ended December 31, 2006 and 2005, incurred loss
estimates for the 2004 Florida Hurricanes were increased
$2.0 million and $3.4 million due to unexpected loss
emergence during these years.
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
131
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
loss emergence lower than expectations during the year on
environmental pollution and business written in more recent
years.
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.
|
|
10. |
Asbestos and Environmental Losses and Loss Adjustment
Expenses |
The Company has exposure to losses from asbestos, environmental
pollution and other latent injury damage claims. Gross unpaid
asbestos and environmental losses and loss adjustment expenses
as of December 31, 2006 were $344.7 million,
representing 6.7% of total gross unpaid losses and loss
adjustment expenses. Exposure arises from reinsurance contracts
under which the Company has assumed liabilities, on an indemnity
or assumption basis, from ceding companies, primarily in
connection with general liability insurance policies issued by
such ceding companies. The Companys estimate of its
ultimate liability for such exposures includes case
basis reserves and a provision for liabilities incurred
but not reported. Case basis reserves are a combination of
reserves reported to the Company by ceding companies and
additional case reserves determined by the Company. The
provision for liabilities incurred but not reported is
established based on an annual review of Company and external
trends in reported loss and claim payments.
Estimation of ultimate asbestos and environmental liabilities is
unusually difficult due to several significant issues
surrounding these exposures. Among the issues are: (i) the
long period between exposure and manifestation of an injury;
(ii) difficulty in identifying the sources of asbestos or
environmental contamination; (iii) difficulty in allocating
responsibility or liability for asbestos or environmental
damage; (iv) difficulty determining whether coverage
exists; (v) changes in underlying laws and judicial
interpretation of those laws; and (vi) uncertainty
regarding the identity and number of insureds with potential
asbestos or environmental exposure.
Several additional factors have emerged in recent years
regarding asbestos exposure that further compound the difficulty
in estimating ultimate losses for this exposure. These factors
include: (i) continued growth in the number of claims filed
due to an increasingly aggressive plaintiffs bar;
(ii) an increase in claims involving defendants formerly
regarded as peripheral; (iii) growth in the use of
bankruptcy filings by companies as a result of asbestos
liabilities, which companies in some cases attempt to resolve
asbestos liabilities in a manner that is prejudicial to
insurers; (iv) the concentration of claims in states with
laws or jury pools particularly favorable to plaintiffs; and
(v) the potential that states or the federal government may
enact legislation on asbestos litigation reform.
The Companys reserves for asbestos and environmental
related liabilities displayed below are from business written in
years 1985 and prior. The Companys asbestos and
environmental reserve development, gross and net
132
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of reinsurance, for the years ended December 31, 2006, 2005
and 2004, is set forth in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Asbestos
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss adjustment expenses, beginning of
year
|
|
$ |
274,724 |
|
|
$ |
242,151 |
|
|
$ |
216,070 |
|
Add: Gross losses and loss adjustment expenses incurred
|
|
|
62,460 |
|
|
|
54,212 |
|
|
|
54,197 |
|
Less: Gross calendar year paid losses and loss adjustment
expenses
|
|
|
28,437 |
|
|
|
21,639 |
|
|
|
28,116 |
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss adjustment expenses, end of year
|
|
$ |
308,747 |
|
|
$ |
274,724 |
|
|
$ |
242,151 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses, beginning of year
|
|
$ |
119,268 |
|
|
$ |
82,710 |
|
|
$ |
52,747 |
|
Add: Net losses and loss adjustment expenses incurred
|
|
|
27,127 |
|
|
|
41,165 |
|
|
|
29,963 |
|
Less: Net calendar year paid losses and loss adjustment expenses
|
|
|
(42,620 |
) |
|
|
4,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses, end of year
|
|
$ |
189,015 |
|
|
$ |
119,268 |
|
|
$ |
82,710 |
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss adjustment expenses, beginning of
year
|
|
$ |
40,420 |
|
|
$ |
29,898 |
|
|
$ |
33,321 |
|
Add: Gross losses and loss adjustment expenses incurred
|
|
|
(628 |
) |
|
|
9,748 |
|
|
|
2,741 |
|
Less: Gross calendar year paid losses and loss adjustment
expenses
|
|
|
3,857 |
|
|
|
(774 |
) |
|
|
6,164 |
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss adjustment expenses, end of year
|
|
$ |
35,935 |
|
|
$ |
40,420 |
|
|
$ |
29,898 |
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses, beginning of year
|
|
$ |
13,522 |
|
|
$ |
16,251 |
|
|
$ |
37,398 |
|
Add: Net losses and loss adjustment expenses incurred
|
|
|
(2,170 |
) |
|
|
(846 |
) |
|
|
(21,147 |
) |
Less: Net calendar year paid losses and loss adjustment expenses
|
|
|
(15,393 |
) |
|
|
1,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses, end of year
|
|
$ |
26,745 |
|
|
$ |
13,522 |
|
|
$ |
16,251 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred for asbestos
claims increased $27.1 million for the year ended
December 31, 2006. Included in this increase is a net
reserve increase of $40.6 million, a $17.3 million
benefit resulting from the amortization of the deferred gain
related to the 1995 Stop Loss Agreement and a loss of
$3.8 million related to the commutation of this agreement.
Also as a result of this commutation, net reserves were
increased by $49.9 million and net paid losses were
decreased by $63.4 million.
Net losses and loss adjustment expenses incurred for
environmental claims decreased $2.2 million for the year
ended December 31, 2006. Included in this reduction is a
net reserve decrease of $0.3 million, a $3.1 million
benefit resulting from the amortization of the deferred gain
related to the 1995 Stop Loss Agreement and a loss of
$1.2 million related to the commutation of this agreement.
Also as a result of this commutation, net reserves were
increased by $17.3 million and net paid losses were
decreased by $19.2 million.
The Companys survival ratio for asbestos and environmental
related liabilities as of December 31, 2006 is
11 years. The Companys underlying survival ratio for
asbestos related liabilities is 11 years and for
environmental related liabilities is 18 years. The survival
ratio represents the asbestos and environmental reserves,
133
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net of reinsurance, on December 31, 2006, divided by the
average paid asbestos and environmental claims for the last
three years of $19.3 million which are net of reinsurance
but prior to amounts subject to cession to the 1995 Stop Loss
Agreement.
|
|
11. |
Reinsurance and Retrocessions |
The Company utilizes retrocessional agreements principally to
reduce and spread the risk of loss on its insurance and
reinsurance business and to limit its exposure to multiple
claims arising from a single occurrence. There is a credit risk
with respect to reinsurance, which would become an ultimate
liability of the Company in the event that such reinsuring
companies are unable, at some later date, to meet their
obligations under the reinsurance agreements in force.
Reinsurance recoverables are recorded as assets and a reserve
for uncollectible reinsurance recoverables is established, based
on the Companys evaluation of each 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, reinsurance
assumed, reinsurance ceded and net amounts for the years ended
December 31, 2006, 2005 and 2004 follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Premiums Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
712,149 |
|
|
$ |
763,270 |
|
|
$ |
702,127 |
|
|
Add: assumed
|
|
|
1,623,593 |
|
|
|
1,863,650 |
|
|
|
1,948,648 |
|
|
Less: ceded
|
|
|
174,807 |
|
|
|
325,251 |
|
|
|
288,970 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
2,160,935 |
|
|
$ |
2,301,669 |
|
|
$ |
2,361,805 |
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
728,949 |
|
|
$ |
737,165 |
|
|
$ |
697,998 |
|
|
Add: assumed
|
|
|
1,706,589 |
|
|
|
1,873,119 |
|
|
|
1,936,377 |
|
|
Less: ceded
|
|
|
209,712 |
|
|
|
333,464 |
|
|
|
300,864 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$ |
2,225,826 |
|
|
$ |
2,276,820 |
|
|
$ |
2,333,511 |
|
|
|
|
|
|
|
|
|
|
|
The total amount of reinsurance recoverable on paid and unpaid
losses as of December 31, 2006 and 2005 was
$798.8 million and $1,347.7 million, respectively. The
Company has established a reserve for potentially uncollectible
reinsurance recoverables based upon an evaluation of each
retrocessionaire and the Companys assessment as to the
collectibility of individual balances. The reserve for
uncollectible recoverables as of December 31, 2006 and 2005
was $42.5 million and $30.9 million, respectively, and
has been netted against reinsurance recoverables on loss
payments in the consolidated balance sheets. The Company has
also established a reserve for potentially uncollectible assumed
reinsurance balances of $1.9 million and $6.3 million
as of December 31, 2006 and 2005, respectively, which has
been netted against premiums receivable.
The Companys reinsurance protection, which covered certain
amounts of its 1995 and prior unpaid losses and loss adjustment
expenses (the 1995 Stop Loss Agreement), provided by
nSpire Re Limited (nSpire Re), a wholly-owned
subsidiary of Fairfax, was commuted effective September 29,
2006, for consideration of $63.2 million. In accordance
with the terms of the commutation agreement, the Company
commuted ceded loss reserves of $71.8 million, resulting in
a commutation loss of $5.5 million, pre-tax, for the year
ended December 31, 2006. The 1995 Stop Loss Agreement was
originally entered into with Skandia Insurance Company Ltd.
(Skandia) in conjunction with the purchase of
Clearwater in 1996. Pursuant to the agreement, the Company paid
a premium of $60.5 million in 1995 for protection of
$175.0 million in excess of Clearwaters
December 31, 1995 reserves for net unpaid losses and loss
adjustment expenses and reserves for uncollectible reinsurance.
In January 1999, the liabilities under the contract were
assigned by Skandia to nSpire Re for $97.0 million in
consideration. Following the assignment to nSpire Re, the
Company accounted for the 1995 Stop
134
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loss Agreement as retroactive reinsurance. Accordingly, losses
ceded under the contract in excess of $97.0 million in the
aggregate had been recorded as a deferred gain rather than as a
benefit in the applicable periods. The deferred gain had been
amortized into income over the estimated remaining settlement
period of the underlying claims. As of December 31, 2005,
the Company has utilized the full limit of $175.0 million
under the 1995 Stop Loss Agreement. The Company ceded losses of
$17.5 million to the 1995 Stop Loss Agreement in each of
the years ended December 31, 2005 and 2004, resulting in
income of $11.3 million ($7.3 million after tax) and
$8.7 million ($5.7 million after tax) for the years
ended December 31, 2005 and 2004, respectively. There were
no cessions to this agreement in 2006. The Company received
$78.0 million in cash from nSpire Re on March 29,
2006, which reduced the outstanding recoverable. As the
$78.0 million was received in advance of the payment of the
underlying claims by the Company, it is included as an
adjustment to net unpaid losses and loss adjustment expenses,
which increased by $78.0 million. In connection with the
receipt of this cash, for the three months ended March 31,
2006, the Company has recognized $19.3 million
($12.5 million after tax) of the cumulative deferred gain,
an increase of $17.9 million ($11.7 million after tax)
over the anticipated deferred gain amortization, as a reduction
in losses and loss adjustment expenses.
For the years ending December 31, 2001 and prior, the
Company utilized whole account aggregate excess of loss
retrocessional coverage (Whole Account Excess of Loss
Agreements) to manage its exposures, including
catastrophic occurrences and the potential accumulation of
exposures. As further discussed below, during the second quarter
of 2006, the Company commuted certain whole account excess of
loss agreements. In addition, Whole Account Excess of Loss
Agreements were purchased covering underwriting years 2002
through 2004 though no losses were ceded to these coverages. In
each calendar year, the Company has the ability to cede losses
attributable to certain prior periods to the Whole
Account Excess of Loss Agreements to the extent there are
limits remaining for the period. These agreements cover business
written or incepting during a defined period of time
(underwriting year), which is typically twelve months, or in
other cases, business earned during a defined period of time
(accident year). The Whole Account Excess of Loss
Agreements were purchased on an underwriting year basis for 1996
through 2004 and on an accident year basis for 1994 and 1995.
Accident year agreements were also purchased to supplement the
1996 and 1997 underwriting year agreements. All of these Whole
Account Excess of Loss Agreements covering underwriting and
accident years have been commuted except for two agreements
covering underwriting years 2000 and 2001. Loss cession limits
on these two covers still outstanding have been fully utilized
as of December 31, 2005. Each agreement provides for
recoveries from the retrocessionaires, subject to a limit, in
the event that the net subject business results in a composite
ratio (the sum of the commission and loss ratios), or in some
agreements a loss ratio, in excess of a specified attachment
point. The attachment point is net of other inuring third party
reinsurance. The premium paid, net of commission, by the Company
is calculated based on a contractual fixed rate that is applied
to the total premiums covered by the retrocession agreements.
Each agreement includes a provision for additional premium,
subject to a maximum, based on the amount of loss activity under
the agreement. Reinsurance recoverables on paid and unpaid
losses are fully secured by letters of credit or funds held by
the Company.
In each calendar year, subject to certain limits, the Company
has the ability to cede losses that are attributable to the
covered period until all applicable losses are paid and settled,
which is typically several years beyond the covered period, or
until the contract is terminated by the Company. The ability of
the Company to cede losses in any given calendar year that are
attributable to prior periods will depend on the nature of the
risk which generated the loss, the time period from which the
losses originate and whether there are limits remaining covering
the subject period. Losses attributable to prior periods are
ceded to the treaties and recorded in the period in which they
are ceded. Additional premiums, if any, are determined and
recorded in the period when losses are ceded. When additional
premiums are due, the interest on the funds attributable to the
additional premiums ceded is typically calculated based on the
inception period of the contract and the cumulative interest
expense is recognized in the period when additional premiums are
due. As of December 31, 2006, the limits for the other
retrocessional agreements have been fully utilized or commuted.
135
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Whole Account Excess of Loss Agreements provide that
the Company may withhold a significant portion of the premium
payable to the retrocessionaires in funds held accounts, which,
under certain circumstances, may be set-off against the
retrocessionaires losses and other obligations owed to the
Company. These funds are shown as a liability in the
Companys consolidated balance sheets as funds held under
reinsurance contracts. Interest on the funds held account,
calculated using a contractual fixed interest rate of
approximately 7.0% for those agreements with amounts ceded, is
credited quarterly by the Company, which results in an increase
in the funds held account balance and is recorded as an expense,
reducing the Companys investment income. Loss payments are
deducted from the funds held account balance, which reduces the
liability as such payments are made.
During the second quarter of 2006, the Company commuted certain
Whole Account Excess of Loss Agreements for total
consideration of $80.6 million through the settlement of
funds held under reinsurance contracts and the receipt of cash
from the reinsurer, net of the settlement of outstanding
commissions receivable. During the second quarter of 2006, the
commutation of these contracts decreased the Companys paid
and unpaid reinsurance recoverables by $71.0 million,
resulting in a commutation gain of $9.5 million. This
commutation covered all outstanding Whole Account Excess of Loss
Agreements applicable to underwriting and accident years 1999
and prior, as well as the reinsurers participation on
underwriting years 2000 and 2001.
In addition to the Whole Account Excess of Loss Agreements, the
Company entered into a three-year aggregate excess of loss
reinsurance contracts protecting its United States facultative
casualty business for underwriting years 1998 through 2000
(Facultative Excess of Loss Agreement) which
indemnified the Company for losses in excess of an annual
retention, subject to an annual limit of liability. The
aggregate limit for underwriting years 1998, 1999 and 2000 was
equal to 40% of the Companys total facultative net
premiums written, subject to a minimum annual dollar limit of
$7.4 million, and a maximum annual dollar limit of
$18.5 million. The aggregate limit of liability is
$41.6 million across all years, which has been fully
utilized. The retention in each year was equal to the greater of
$9.3 million or 51.0% of the subject written premium
income, together with amounts contributed to a loss payment
account under the agreement. The Company maintained a loss
payment account for the benefit of the reinsurer, equal to 18.5%
of the subject written premium income for underwriting year
1998, and 18.9% for each of 1999 and 2000. A minimum interest
credit was applied to the loss payment account, equal to the one
year U.S. Treasury Bill yield plus 75 basis points.
During December 2006, the Company entered into a commutation and
release agreement related to this contract, pursuant to which
all rights, obligations and liabilities were fully and finally
settled. As a result of the commutation, a pre-tax loss of
$1.4 million was recognized. Additionally, reinsurance
recoverables have been reduced by $16.1 million for the
year ended December 31, 2006.
The income (loss) before income taxes reflected in the
Companys statements of operations related to the
Companys Whole Account Excess of Loss Agreements and
Facultative Excess of Loss Agreement, including the effect of
commutations, for the years ended December 31, 2006, 2005
and 2004 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Ceded earned premium
|
|
$ |
(1,695 |
) |
|
$ |
(13,921 |
) |
|
$ |
(6,603 |
) |
Ceded acquisition costs
|
|
|
1,500 |
|
|
|
5,262 |
|
|
|
2,696 |
|
Ceded losses and loss adjustment expenses
|
|
|
8,287 |
|
|
|
18,725 |
|
|
|
5,611 |
|
|
|
|
|
|
|
|
|
|
|
Net underwriting income
|
|
|
8,092 |
|
|
|
10,066 |
|
|
|
1,704 |
|
Interest expense
|
|
|
(8,696 |
) |
|
|
(18,702 |
) |
|
|
(20,097 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$ |
(604 |
) |
|
$ |
(8,636 |
) |
|
$ |
(18,393 |
) |
|
|
|
|
|
|
|
|
|
|
The Company has recorded interest expense associated with other
ceded reinsurance agreements, and not reflected in the table
above, of $571 thousand, $372 thousand and
$18 thousand for the years ended December 31, 2006,
2005 and 2004, respectively.
136
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As indicated by the table above, for the years ended
December 31, 2006, 2005 and 2004, the Company ceded
$8.3 million, $18.7 million and $5.6 million,
respectively, of losses and LAE, primarily to the 2001 aggregate
excess of loss treaty. The increases in losses ceded to the
Companys Whole Account and Facultative Excess of Loss
Agreements, for the years ended December 31, 2006, 2005 and
2004 were primarily attributable to adverse loss development on
casualty business written in 2001. Losses ceded to the
Companys Whole Account and Facultative Excess of Loss
Agreements represented 1.1% of the Companys pre-tax income
in 2006, 10.3% of the Companys pre-tax loss in 2005 and
1.8% of pre-tax income in 2004.
The reinsurance recoverables on paid and unpaid losses related
to the Whole Account Excess of Loss Agreements and Facultative
Excess of Loss Agreement are $122.2 million and
$251.9 million as of December 31, 2006 and 2005,
respectively. Funds held under reinsurance contracts related to
these agreements, shown as a liability on the Companys
consolidated balance sheets, reflect $83.4 million and
$150.7 million as of December 31, 2006 and 2005,
respectively. Other collateral related to these agreements is
$43.2 million and $124.8 million as of
December 31, 2006 and 2005, respectively.
|
|
12. |
Reinsurance Recoverables |
The Companys ten largest reinsurers represent 49.6% of its
total reinsurance recoverables as of December 31, 2006.
Amounts due from all other reinsurers are diversified, with no
other individual reinsurer representing more than
$15.4 million, or 1.9%, of reinsurance recoverables as of
December 31, 2006, and the average balance is less than
$3.0 million. The Company held total collateral of
$238.2 million as of December 31, 2006, representing
29.8% of total reinsurance recoverables. The following table
shows the total amount that is recoverable from each of the
Companys ten largest reinsurers for paid and unpaid losses
as of December 31, 2006, the amount of collateral held, and
each reinsurers A.M. Best rating (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance | |
|
Percent | |
|
|
|
A.M. Best | |
Reinsurer |
|
Recoverables | |
|
of Total | |
|
Collateral | |
|
Rating | |
|
|
| |
|
| |
|
| |
|
| |
Underwriters Reinsurance Company (Barbados) Incorporated
|
|
$ |
120,074 |
|
|
|
15.0 |
% |
|
$ |
120,074 |
|
|
|
NR |
|
Lloyds
|
|
|
63,301 |
|
|
|
7.9 |
|
|
|
430 |
|
|
|
A |
|
Federal Insurance Company
|
|
|
38,520 |
|
|
|
4.8 |
|
|
|
|
|
|
|
A++ |
|
Hannover Ruckversicherungs AG
|
|
|
33,906 |
|
|
|
4.3 |
|
|
|
396 |
|
|
|
A |
|
Partner Reinsurance Company of the US
|
|
|
28,999 |
|
|
|
3.6 |
|
|
|
910 |
|
|
|
A+ |
|
Ace Property and Casualty Insurance
|
|
|
24,920 |
|
|
|
3.1 |
|
|
|
220 |
|
|
|
A+ |
|
Transatlantic Reinsurance Company
|
|
|
24,617 |
|
|
|
3.1 |
|
|
|
65 |
|
|
|
A+ |
|
Arch Reinsurance Company
|
|
|
20,489 |
|
|
|
2.6 |
|
|
|
17,820 |
|
|
|
A- |
|
Swiss Reinsurance America Corp.
|
|
|
21,753 |
|
|
|
2.7 |
|
|
|
144 |
|
|
|
A+ |
|
GE Frankona Reinsurance Ltd.
|
|
|
19,604 |
|
|
|
2.5 |
|
|
|
114 |
|
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub total
|
|
|
396,183 |
|
|
|
49.6 |
|
|
|
140,173 |
|
|
|
|
|
All other
|
|
|
402,604 |
|
|
|
50.4 |
|
|
|
97,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
798,787 |
|
|
|
100.0 |
% |
|
$ |
238,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables were $1,347.7 million and
collateral was $755.7 million, or 56.1% of the reinsurance
recoverable balance, as of December 31, 2005.
Several individual reinsurers are part of the same corporate
group. The following table shows the five largest aggregate
amounts that are recoverable from all individual entities that
form part of the same corporate group as of December 31,
2006 and the amount of collateral held from each group (in
thousands).
137
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance | |
|
Percent of | |
|
|
Reinsurer |
|
Recoverable | |
|
Total | |
|
Collateral | |
|
|
| |
|
| |
|
| |
Swiss Re Group
|
|
$ |
197,624 |
|
|
|
24.7 |
% |
|
$ |
120,195 |
|
Lloyds
|
|
|
63,301 |
|
|
|
7.9 |
|
|
|
430 |
|
Ace INA Group
|
|
|
38,295 |
|
|
|
4.8 |
|
|
|
167 |
|
Chubb Group
|
|
|
39,215 |
|
|
|
4.9 |
|
|
|
|
|
HDI Group
|
|
|
37,180 |
|
|
|
4.7 |
|
|
|
2,487 |
|
|
|
|
|
|
|
|
|
|
|
Sub total
|
|
|
375,615 |
|
|
|
47.0 |
|
|
|
123,279 |
|
All other
|
|
|
423,172 |
|
|
|
53.0 |
|
|
|
114,873 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
798,787 |
|
|
|
100.0 |
% |
|
$ |
238,152 |
|
|
|
|
|
|
|
|
|
|
|
The Company is the beneficiary of letters of credit, cash, and
other forms of collateral to secure certain amounts due from its
reinsurers. The total amount of collateral held by the Company
as of December 31, 2006 is $238.2 million, which
represents 29.8% of the total amount of reinsurance
recoverables, comprised of the following forms of collateral (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of | |
Form of Collateral |
|
Collateral | |
|
Recoverables | |
|
|
| |
|
| |
Letters of credit
|
|
$ |
96,960 |
|
|
|
12.1 |
% |
Funds withheld from reinsurers
|
|
|
96,854 |
|
|
|
12.1 |
|
Trust agreements
|
|
|
44,338 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
238,152 |
|
|
|
29.8 |
% |
|
|
|
|
|
|
|
Each reinsurance contract between the Company and the reinsurer
describes the losses which are covered under the contract and
terms upon which payments are to be made. The Company generally
has the ability to utilize collateral to settle unpaid balances
due under its reinsurance contracts when it determines that the
reinsurer has not met its contractual obligations. Letters of
credit are for the sole benefit of the Company to support the
obligations of the reinsurer, providing the Company with the
unconditional ability, in its sole discretion, to draw upon the
letters of credit in support of any unpaid amounts due under the
relevant contracts. Cash and investments supporting funds
withheld from reinsurers are included in the Companys
invested assets. Funds withheld from reinsurers are typically
used to automatically offset payments due to the Company in
accordance with the terms of the relevant reinsurance contracts.
Amounts held under trust agreements are typically comprised of
cash and investment grade fixed income securities and are not
included in the Companys invested assets. The ability of
the Company to draw upon funds held under trust agreements to
satisfy any unpaid amounts due under the relevant reinsurance
contracts is typically unconditional and at the sole discretion
of the Company.
138
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13. |
Debt Obligations, Common Shares and Preferred Shares |
The components of debt obligations as of December 31, 2006
and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
7.49% Senior Notes due 2006
|
|
$ |
|
|
|
$ |
40,729 |
|
7.65% Senior Notes due 2013
|
|
|
224,703 |
|
|
|
224,659 |
|
6.875% Senior Notes due 2015
|
|
|
124,327 |
|
|
|
124,247 |
|
Series A Floating Rate Senior Debentures due 2021
|
|
|
50,000 |
|
|
|
|
|
Series B Floating Rate Senior Debentures due 2016
|
|
|
50,000 |
|
|
|
|
|
Series C Floating Rate Senior Debentures due 2021
|
|
|
40,000 |
|
|
|
|
|
4.375% Convertible Senior Debentures due 2022
|
|
|
23,474 |
|
|
|
79,520 |
|
|
|
|
|
|
|
|
Total debt obligations
|
|
$ |
512,504 |
|
|
$ |
469,155 |
|
|
|
|
|
|
|
|
On November 28, 2006, the Company completed the private
sale of $40.0 million aggregate principal amount of
floating rate senior debentures, Series C (the
Series C Notes), maturing on December 15,
2021. Interest on the Series C Notes accrues at a rate per
annum equal to the three-month London Interbank Offer Rate
(LIBOR), reset quarterly, plus 2.50%, and is payable
quarterly in arrears on March 15, June 15,
September 15 and December 15 of each year starting on
March 15, 2007. The Company has the option to redeem the
Series C Notes at par, plus accrued and unpaid interest, in
whole or in part on any interest payment date on or after
December 15, 2011. As of December 31, 2006, the
current annual interest rate on the Series C Notes is
7.87%. The proceeds from the Series C Notes were used to
retire, in November 2006, the Companys 7.49% senior
notes.
On February 22, 2006, the Company issued
$100.0 million aggregate principal amount of floating rate
senior debentures, pursuant to a private placement. The net
proceeds from the offering of $99.3 million, after fees and
expenses, were used for general corporate purposes, including a
capital contribution to Odyssey America. The debentures were
sold in two tranches, $50.0 million of Series A due
March 15, 2021 and $50.0 million of Series B due
March 15, 2016. Interest on each series of debentures is
due quarterly on March 15, June 15, September 15
and December 15. The interest rate on each series of
debentures is equal to the three-month LIBOR, which is
calculated on a quarterly basis, plus 2.20%. The interest rate
from February 22, 2006 through March 16, 2006 on each
series of debentures was 6.97% per annum. Pursuant to the
terms of the indentures, as a result of the delay in filing the
Companys 2005 Annual Report on
Form 10-K, the
annual interest rate on each series of debentures was increased,
as of March 17, 2006, to the three-month LIBOR as of
March 15, 2006 plus 3.20%, which equaled 8.12%. This
interest rate remained in effect until the filing of the
Companys Annual Report on
Form 10-K on
March 31, 2006, after which it reverted to the initial
annual rate of 6.97% through June 14, 2006. As of
December 31, 2006, the current annual interest rate on each
series of debentures is 7.56%. The Series A debentures are
callable by the Company in 2011 at their par value, plus accrued
and unpaid interest, and the Series B debentures are
callable by the Company in 2009 at their par value, plus accrued
and unpaid interest.
During the second quarter of 2005, the Company issued
$125.0 million aggregate principal amount of senior notes
due May 1, 2015. The issue was sold at a discount of
$0.8 million, which is being amortized over the life of the
notes. Interest accrues on the senior notes at a fixed rate of
6.875% per annum, which is due semi-annually on May 1
and November 1.
During the fourth quarter of 2003, the Company issued
$225.0 million aggregate principal amount of senior notes
due November 1, 2013. The issue was sold at a discount of
$0.4 million, which is being amortized over the life of the
notes. Interest accrues on the senior notes at a fixed rate of
7.65% per annum, which is due semi-annually on May 1
and November 1.
139
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2002, the Company issued $110.0 million aggregate
principal amount of convertible senior debentures due 2022 (the
Convertible Notes). Interest accrues on the
Convertible Notes at a fixed rate of 4.375% per annum,
which is due semi-annually on June 15 and December 15.
The Convertible Notes have been redeemable at the Companys
option since June 22, 2005. Each holder of Convertible
Notes may, at its option, require the Company to repurchase all
or a portion of its Convertible Notes on June 22, 2007,
2009, 2012 and 2017. Under certain conditions specified in the
indenture under which the Convertible Notes were issued (the
Indenture), each Convertible Notes holder has the
right to request conversion of its Convertible Notes into
46.9925 of the Companys common shares for every
$1,000 principal amount of the Convertible Notes held by
such holder, which represents a conversion price of
$21.28 per share. These conditions include the common stock
of the Company trading at or above $25.54 per share for a
specified period of time. Pursuant to the terms of the
Indenture, the Company is permitted to satisfy the conversion
obligations in stock or in cash, or in a combination thereof.
The conversion conditions were first satisfied on August 9,
2006, and in accordance with the Indenture, the Convertible
Notes have continued to be convertible, at the option of the
holders, since August 14, 2006. As of December 31,
2006, 1.8 million shares of the Companys common stock
were issued to the Convertible Notes holders who elected to
convert their Convertible Notes, resulting in a decrease to
Convertible Notes and a corresponding increase to
shareholders equity of $39.1 million. During February
2007, 46,992 common shares were issued related to
$1.0 million principal amount of Convertible Notes subject
to a notice of conversion received in December 2006.
During the years ended December 31, 2006 and 2005, the
Company repurchased portions of its Convertible Notes, as
reflected in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Principal value repurchased
|
|
$ |
16,930 |
|
|
$ |
30,380 |
|
Cost of repurchase
|
|
|
19,333 |
|
|
|
34,202 |
|
|
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
$ |
(2,403 |
) |
|
$ |
(3,822 |
) |
|
|
|
|
|
|
|
In December 2001, the Company issued $100.0 million
aggregate principal amount of 7.49% senior notes due
November 30, 2006, pursuant to a private placement. In
November 2003 and June 2002, the Company prepaid
$50.0 million and $10.0 million, respectively,
aggregate principal amount of the 7.49% senior notes.
Immediately following the issuance of the 7.49% senior
notes, the Company entered into an interest rate swap agreement
that effectively converted the fixed 7.49% interest rate into a
variable rate of interest. In May 2003, the Company settled the
interest rate swap for a pre-tax gain of $6.4 million. In
accordance with hedge accounting, a basis adjustment equivalent
to the $6.4 million pre-tax gain was made, increasing the
carrying value of the 7.49% senior notes. The basis
adjustment was recognized into income over the remaining life of
the 7.49% senior notes. On November 30, 2006, the
7.49% senior notes matured and the Company settled the
remaining $40.0 million of outstanding notes.
Aggregate maturities of the Companys debt obligations, at
face value, are as follows (in thousands):
|
|
|
|
|
Year |
|
Amount | |
|
|
| |
2013
|
|
$ |
225,000 |
|
2015
|
|
|
125,000 |
|
2016
|
|
|
50,000 |
|
2021
|
|
|
90,000 |
|
2022
|
|
|
23,474 |
|
|
|
|
|
Total
|
|
$ |
513,474 |
|
|
|
|
|
140
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 23, 2005, the Company entered into a credit
agreement that provides for a three-year revolving credit
facility of $150.0 million, which is available for direct,
unsecured borrowings. The credit facility is available for
working capital and other corporate purposes, and for the
issuance of secured or unsecured letters of credit. Wachovia
Bank, N.A. is the administrative agent for the credit
facility, and is one of a group of lenders thereunder. As of
December 31, 2006, there was $55.0 million outstanding
under the credit agreement, all of which was in support of
letters of credit. Loans under the credit facility will bear
interest at a fluctuating rate per annum equal to the higher of
(a) the federal funds rate plus 0.5% and (b) Wachovia
Bank, N.A.s publicly announced prime rate.
Alternatively, at the Companys option, loans will bear
interest at the LIBOR, which is the offered rate that appears on
the page of the Telerate screen that displays an average British
Bankers Association Interest Settlement Rate for deposits in
dollars, plus 0.85%. This credit facility replaced the
Companys $90.0 million facility, which was terminated
on September 23, 2005.
During the fourth quarter of 2006, Fairfax sold or exchanged an
aggregate of 13.1 million shares of the Companys
common shares to third parties. As a result, Fairfaxs
ownership in the Company was reduced from 78.5% as of
September 30, 2006 to 59.6% as of December 31, 2006.
The Company did not receive any proceeds related to these
transactions.
On October 12, 2005, the Company completed the sale of
4.1 million of its 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 the Company, net of underwriting
discounts and commissions, were $102.1 million.
On October 20, 2005, the Company completed the sale of
$100.0 million of non-cumulative perpetual preferred
shares. The Company sold 2.0 million shares of 8.125%
Series A perpetual preferred stock and 2.0 million
shares of floating rate Series B perpetual preferred stock,
for total net proceeds of $97.5 million. The Series A
preferred shares have a liquidation preference of
$25.00 per share and are redeemable at $25.00 per
share at the Companys option, in whole, or in part from
time to time, starting on or after October 20, 2010.
Dividends on the Series B preferred shares are payable at
an annual rate equal to 3.25% above the three-month LIBOR on the
applicable determination date. The Series B preferred
shares have a liquidation preference of $25.00 per share
and are redeemable at the redemption prices below (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Redemption Price | |
|
|
| |
Period |
|
Per Share | |
|
In Aggregate | |
|
|
| |
|
| |
October 20, 2010 through October 19, 2011
|
|
$ |
25.375 |
|
|
$ |
50,750 |
|
October 20, 2011 through October 19, 2012
|
|
|
25.250 |
|
|
|
50,500 |
|
October 20, 2012 through October 19, 2013
|
|
|
25.125 |
|
|
|
50,250 |
|
October 20, 2013 and thereafter
|
|
|
25.000 |
|
|
|
50,000 |
|
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 Companys 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 Companys 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 Companys Board
of Directors declared quarterly dividends of $0.5078125 per
share on the Companys 8.125% Series A preferred
shares and $0.5389844 per share on the Companys
floating rate Series B preferred shares. The total
dividends of
141
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2.1 million were paid on January 22, 2007 to
Series A and Series B preferred shareholders of record
on December 31, 2006.
As of December 31, 2006, a subsidiary of Fairfax owned
253,599 shares and 70,000 shares of the Companys
Series A and Series B preferred stock, respectively.
The Companys operations are managed through four operating
segments: Americas, EuroAsia, London Market and
U.S. Insurance. The Americas division is comprised of the
Companys reinsurance operations in the United States,
Canada and Latin America, and writes property and casualty
business on a treaty and facultative basis. The EuroAsia
division writes primarily treaty and facultative property
business. The London Market division operates through three
distribution channels, Newline at Lloyds, which focuses on
casualty insurance, Newline Insurance Company Limited, the
Companys recently formed London-based casualty insurer,
and the London branch, which focuses on worldwide property and
casualty reinsurance. The U.S. Insurance division writes
specialty insurance lines and classes of business, such as
medical malpractice, professional liability and non-standard
automobile.
The financial results of these divisions for the years ended
December 31, 2006, 2005 and 2004 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
Americas | |
|
EuroAsia | |
|
London Market | |
|
U.S. Insurance | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gross premiums written
|
|
$ |
924,213 |
|
|
$ |
561,232 |
|
|
$ |
340,653 |
|
|
$ |
509,644 |
|
|
$ |
2,335,742 |
|
Net premiums written
|
|
|
897,819 |
|
|
|
542,454 |
|
|
|
312,524 |
|
|
|
408,138 |
|
|
|
2,160,935 |
|
Net premiums earned
|
|
$ |
975,039 |
|
|
$ |
531,378 |
|
|
$ |
333,508 |
|
|
$ |
385,901 |
|
|
$ |
2,225,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
765,787 |
|
|
|
320,434 |
|
|
|
182,478 |
|
|
|
215,498 |
|
|
|
1,484,197 |
|
Acquisition costs and other underwriting expenses
|
|
|
299,557 |
|
|
|
134,590 |
|
|
|
86,064 |
|
|
|
97,413 |
|
|
|
617,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting deductions
|
|
|
1,065,344 |
|
|
|
455,024 |
|
|
|
268,542 |
|
|
|
312,911 |
|
|
|
2,101,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
$ |
(90,305 |
) |
|
$ |
76,354 |
|
|
$ |
64,966 |
|
|
$ |
72,990 |
|
|
|
124,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,119 |
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,129 |
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,120 |
) |
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,515 |
) |
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
739,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
78.5 |
% |
|
|
60.3 |
% |
|
|
54.7 |
% |
|
|
55.8 |
% |
|
|
66.7 |
% |
|
Acquisition costs and other underwriting expenses
|
|
|
30.8 |
|
|
|
25.3 |
|
|
|
25.8 |
|
|
|
25.3 |
|
|
|
27.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
109.3 |
% |
|
|
85.6 |
% |
|
|
80.5 |
% |
|
|
81.1 |
% |
|
|
94.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 |
|
Americas | |
|
EuroAsia | |
|
London Market | |
|
U.S. Insurance | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gross premiums written
|
|
$ |
1,130,512 |
|
|
$ |
543,761 |
|
|
$ |
431,665 |
|
|
$ |
520,982 |
|
|
$ |
2,626,920 |
|
Net premiums written
|
|
|
1,043,797 |
|
|
|
512,704 |
|
|
|
375,249 |
|
|
|
369,919 |
|
|
|
2,301,669 |
|
Net premiums earned
|
|
$ |
1,051,162 |
|
|
$ |
516,175 |
|
|
$ |
386,076 |
|
|
$ |
323,407 |
|
|
$ |
2,276,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
1,186,196 |
|
|
|
326,043 |
|
|
|
348,759 |
|
|
|
200,613 |
|
|
|
2,061,611 |
|
Acquisition costs and other underwriting expenses
|
|
|
322,308 |
|
|
|
136,880 |
|
|
|
86,943 |
|
|
|
70,051 |
|
|
|
616,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting deductions
|
|
|
1,508,504 |
|
|
|
462,923 |
|
|
|
435,702 |
|
|
|
270,664 |
|
|
|
2,677,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
$ |
(457,342 |
) |
|
$ |
53,252 |
|
|
$ |
(49,626 |
) |
|
$ |
52,743 |
|
|
|
(400,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,092 |
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,866 |
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,014 |
) |
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,991 |
) |
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(181,842 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
112.8 |
% |
|
|
63.2 |
% |
|
|
90.3 |
% |
|
|
62.0 |
% |
|
|
90.5 |
% |
|
Acquisition costs and other underwriting expenses
|
|
|
30.7 |
|
|
|
26.5 |
|
|
|
22.5 |
|
|
|
21.7 |
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
143.5 |
% |
|
|
89.7 |
% |
|
|
112.8 |
% |
|
|
83.7 |
% |
|
|
117.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 |
|
Americas | |
|
EuroAsia | |
|
London Market | |
|
U.S. Insurance | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gross premiums written
|
|
$ |
1,257,475 |
|
|
$ |
553,671 |
|
|
$ |
447,681 |
|
|
$ |
391,948 |
|
|
$ |
2,650,775 |
|
Net premiums written
|
|
|
1,205,585 |
|
|
|
530,774 |
|
|
|
389,803 |
|
|
|
235,643 |
|
|
|
2,361,805 |
|
Net premiums earned
|
|
$ |
1,230,016 |
|
|
$ |
482,359 |
|
|
$ |
422,777 |
|
|
$ |
198,359 |
|
|
$ |
2,333,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
907,623 |
|
|
|
299,791 |
|
|
|
293,560 |
|
|
|
130,132 |
|
|
|
1,631,106 |
|
Acquisition costs and other underwriting expenses
|
|
|
375,391 |
|
|
|
122,587 |
|
|
|
100,369 |
|
|
|
38,274 |
|
|
|
636,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting deductions
|
|
|
1,283,014 |
|
|
|
422,378 |
|
|
|
393,929 |
|
|
|
168,406 |
|
|
|
2,267,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
$ |
(52,998 |
) |
|
$ |
59,981 |
|
|
$ |
28,848 |
|
|
$ |
29,953 |
|
|
|
65,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,248 |
|
Net realized investment gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,024 |
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,153 |
) |
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
309,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
73.8 |
% |
|
|
62.2 |
% |
|
|
69.4 |
% |
|
|
65.6 |
% |
|
|
69.9 |
% |
|
Acquisition costs and other underwriting expenses
|
|
|
30.5 |
|
|
|
25.4 |
|
|
|
23.7 |
|
|
|
19.3 |
|
|
|
27.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
104.3 |
% |
|
|
87.6 |
% |
|
|
93.1 |
% |
|
|
84.9 |
% |
|
|
97.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Premiums Written by Major Unit/ Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
756,425 |
|
|
$ |
929,951 |
|
|
$ |
1,047,759 |
|
Latin America
|
|
|
134,947 |
|
|
|
148,619 |
|
|
|
161,360 |
|
Canada
|
|
|
32,041 |
|
|
|
50,371 |
|
|
|
46,028 |
|
London branch
|
|
|
800 |
|
|
|
1,571 |
|
|
|
2,328 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Americas
|
|
|
924,213 |
|
|
|
1,130,512 |
|
|
|
1,257,475 |
|
EuroAsia
|
|
|
561,232 |
|
|
|
543,761 |
|
|
|
553,671 |
|
London Market
|
|
|
340,653 |
|
|
|
431,665 |
|
|
|
447,681 |
|
U.S. Insurance
|
|
|
509,644 |
|
|
|
520,982 |
|
|
|
391,948 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
2,335,742 |
|
|
$ |
2,626,920 |
|
|
$ |
2,650,775 |
|
|
|
|
|
|
|
|
|
|
|
144
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Gross Premiums Written by Type of Business/ Business Unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
Property excess of loss
|
|
$ |
122,689 |
|
|
$ |
135,690 |
|
|
$ |
109,736 |
|
Property proportional
|
|
|
158,116 |
|
|
|
227,387 |
|
|
|
188,303 |
|
Property facultative
|
|
|
13,747 |
|
|
|
24,065 |
|
|
|
60,468 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal property
|
|
|
294,552 |
|
|
|
387,142 |
|
|
|
358,507 |
|
Casualty excess of loss
|
|
|
231,141 |
|
|
|
203,419 |
|
|
|
224,641 |
|
Casualty proportional
|
|
|
221,163 |
|
|
|
345,833 |
|
|
|
479,671 |
|
Casualty facultative
|
|
|
94,103 |
|
|
|
105,140 |
|
|
|
101,067 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal casualty
|
|
|
546,407 |
|
|
|
654,392 |
|
|
|
805,379 |
|
Marine and aerospace
|
|
|
36,199 |
|
|
|
37,583 |
|
|
|
33,564 |
|
Surety and credit
|
|
|
46,388 |
|
|
|
52,192 |
|
|
|
47,825 |
|
Miscellaneous lines
|
|
|
667 |
|
|
|
(797 |
) |
|
|
12,200 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
924,213 |
|
|
|
1,130,512 |
|
|
|
1,257,475 |
|
|
|
|
|
|
|
|
|
|
|
EuroAsia
|
|
|
|
|
|
|
|
|
|
|
|
|
Property excess of loss
|
|
|
143,640 |
|
|
|
140,046 |
|
|
|
126,739 |
|
Property proportional
|
|
|
203,827 |
|
|
|
203,062 |
|
|
|
191,621 |
|
Property facultative
|
|
|
3,220 |
|
|
|
3,266 |
|
|
|
4,482 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal property
|
|
|
350,687 |
|
|
|
346,374 |
|
|
|
322,842 |
|
Casualty excess of loss
|
|
|
70,422 |
|
|
|
66,860 |
|
|
|
51,642 |
|
Casualty proportional
|
|
|
38,697 |
|
|
|
35,033 |
|
|
|
54,029 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal casualty
|
|
|
109,119 |
|
|
|
101,893 |
|
|
|
105,671 |
|
Marine and aerospace
|
|
|
45,888 |
|
|
|
43,166 |
|
|
|
41,756 |
|
Surety and credit
|
|
|
55,538 |
|
|
|
52,328 |
|
|
|
58,462 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
24,940 |
|
|
|
|
|
|
|
|
|
|
|
|
Total EuroAsia
|
|
|
561,232 |
|
|
|
543,761 |
|
|
|
553,671 |
|
|
|
|
|
|
|
|
|
|
|
London Market
|
|
|
|
|
|
|
|
|
|
|
|
|
Property excess of loss
|
|
|
47,467 |
|
|
|
79,393 |
|
|
|
66,159 |
|
Property proportional
|
|
|
(20 |
) |
|
|
8,273 |
|
|
|
6,900 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal property
|
|
|
47,447 |
|
|
|
87,666 |
|
|
|
73,059 |
|
Casualty excess of loss
|
|
|
15,193 |
|
|
|
17,531 |
|
|
|
22,889 |
|
Casualty proportional
|
|
|
13,193 |
|
|
|
23,149 |
|
|
|
23,531 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal casualty
|
|
|
28,386 |
|
|
|
40,680 |
|
|
|
46,420 |
|
Marine and aerospace
|
|
|
62,315 |
|
|
|
61,031 |
|
|
|
63,003 |
|
Liability lines Newline
|
|
|
198,880 |
|
|
|
234,929 |
|
|
|
254,318 |
|
Other Newline
|
|
|
3,625 |
|
|
|
7,359 |
|
|
|
10,881 |
|
|
|
|
|
|
|
|
|
|
|
|
Total London Market
|
|
|
340,653 |
|
|
|
431,665 |
|
|
|
447,681 |
|
|
|
|
|
|
|
|
|
|
|
145
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
U.S. Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical malpractice
|
|
|
152,811 |
|
|
|
150,654 |
|
|
|
137,704 |
|
Professional liability
|
|
|
131,034 |
|
|
|
114,172 |
|
|
|
65,069 |
|
Personal auto
|
|
|
77,673 |
|
|
|
103,619 |
|
|
|
92,701 |
|
Specialty liability
|
|
|
81,832 |
|
|
|
90,490 |
|
|
|
50,464 |
|
Commercial auto
|
|
|
35,545 |
|
|
|
32,374 |
|
|
|
15,173 |
|
Property and package
|
|
|
30,749 |
|
|
|
29,673 |
|
|
|
30,837 |
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. Insurance
|
|
|
509,644 |
|
|
|
520,982 |
|
|
|
391,948 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross premiums written
|
|
$ |
2,335,742 |
|
|
$ |
2,626,920 |
|
|
$ |
2,650,775 |
|
|
|
|
|
|
|
|
|
|
|
The Company does not maintain separate balance sheet data for
each of its operating segments. Accordingly, the Company does
not review and evaluate the financial results of its operating
segments based upon balance sheet data.
|
|
15. |
Federal and Foreign Income Taxes |
The components of the federal and foreign income tax provision
(benefit) included in the consolidated statements of operations
for the years ended December 31, 2006, 2005 and 2004 follow
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
126,693 |
|
|
$ |
(34,811 |
) |
|
$ |
114,958 |
|
|
Foreign
|
|
|
18,274 |
|
|
|
21,492 |
|
|
|
3,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax provision (benefit)
|
|
|
144,967 |
|
|
|
(13,319 |
) |
|
|
118,791 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
47,979 |
|
|
|
(60,260 |
) |
|
|
(32,166 |
) |
|
Foreign
|
|
|
38,363 |
|
|
|
7,459 |
|
|
|
17,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax provision (benefit)
|
|
|
86,342 |
|
|
|
(52,801 |
) |
|
|
(14,698 |
) |
|
|
|
|
|
|
|
|
|
|
Total federal and foreign income tax provision (benefit)
|
|
$ |
231,309 |
|
|
$ |
(66,120 |
) |
|
$ |
104,093 |
|
|
|
|
|
|
|
|
|
|
|
146
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2006, and 2005 follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Unpaid losses and loss adjustment expenses
|
|
$ |
163,404 |
|
|
$ |
178,012 |
|
Unearned premiums
|
|
|
43,295 |
|
|
|
47,094 |
|
Reserve for potentially uncollectible balances
|
|
|
11,714 |
|
|
|
12,529 |
|
Pension and benefit accruals
|
|
|
5,902 |
|
|
|
1,052 |
|
Investments
|
|
|
33,930 |
|
|
|
22,720 |
|
Alternative minimum tax credit
|
|
|
16,372 |
|
|
|
|
|
Foreign tax credit
|
|
|
83,365 |
|
|
|
17,166 |
|
Other
|
|
|
2,563 |
|
|
|
2,080 |
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
360,545 |
|
|
|
280,653 |
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
52,594 |
|
|
|
60,611 |
|
Foreign deferred items
|
|
|
55,529 |
|
|
|
17,166 |
|
Investment in subsidiaries
|
|
|
53,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
161,942 |
|
|
|
77,777 |
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
198,603 |
|
|
|
202,876 |
|
Deferred income taxes on accumulated other comprehensive income
|
|
|
(13,628 |
) |
|
|
(64,098 |
) |
|
|
|
|
|
|
|
Deferred federal and foreign income tax asset
|
|
|
184,975 |
|
|
|
138,778 |
|
Current taxes (payable) recoverable
|
|
|
(68,055 |
) |
|
|
96,093 |
|
|
|
|
|
|
|
|
Federal and foreign income taxes recoverable
|
|
$ |
116,920 |
|
|
$ |
234,871 |
|
|
|
|
|
|
|
|
Management believes that it is more likely than not that the
Company will realize the benefits of its net deferred tax assets
and, accordingly, no valuation allowance has been recorded as of
December 31, 2006 and 2005.
147
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reconciles federal and foreign income taxes
at the statutory federal income tax rate to the Companys
tax provision (benefit) for the years ended December 31,
2006, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
Pre-tax | |
|
|
|
Pre-tax | |
|
|
|
Pre-tax | |
|
|
Amount | |
|
Income | |
|
Amount | |
|
Loss | |
|
Amount | |
|
Income | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income (loss) before income taxes
|
|
$ |
739,215 |
|
|
|
|
|
|
$ |
(181,842 |
) |
|
|
|
|
|
$ |
309,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes provision (benefit) computed on pre-tax income
(loss)
|
|
$ |
258,725 |
|
|
|
35.0 |
% |
|
$ |
(63,645 |
) |
|
|
35.0 |
% |
|
$ |
108,253 |
|
|
|
35.0 |
% |
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend received deduction and tax-exempt income
|
|
|
(4,505 |
) |
|
|
(0.6 |
) |
|
|
(5,053 |
) |
|
|
2.8 |
|
|
|
(3,322 |
) |
|
|
(1.1 |
) |
Prior year tax settlement
|
|
|
(16,543 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(6,368 |
) |
|
|
(0.9 |
) |
|
|
2,578 |
|
|
|
(1.4 |
) |
|
|
(838 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federal and foreign income tax provision (benefit)
|
|
$ |
231,309 |
|
|
|
31.3 |
% |
|
$ |
(66,120 |
) |
|
|
36.4 |
% |
|
$ |
104,093 |
|
|
|
33.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the income tax provision for the year ended
December 31, 2006 is a one-time tax benefit of
$16.5 million, which is attributable to the settlement of
tax issues related to the acquisition of Clearwater in 1996.
Domestic pre-tax income (loss) was $513.2 million,
($225.9) million and $203.4 million for the years
ended December 31, 2006, 2005 and 2004, respectively.
Foreign pre-tax income was $226.0 million,
$44.0 million and $105.9 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
As a result of Fairfax reducing its ownership of the Company to
below 80% during the third quarter of 2006, the Company was
deconsolidated from the United States tax group of Fairfax, and,
accordingly, the Company will file a separate consolidated tax
return for the period August 29, 2006 to December 31,
2006 and for each subsequent tax year. The deconsolidation has
no effect on the Companys tax position. Prior to
August 29, 2006, the Company was a member of the United
States tax group of Fairfax and made payments to Fairfax in
accordance with its tax sharing agreements. The Company paid
federal and foreign income taxes of $59.3 million,
$63.4 million and $116.6 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The
Company, as of December 31, 2006, has a current tax payable
of $68.1 million, which reflects $75.8 million payable
to Fairfax, principally offset by foreign tax payables and
receivables from the federal government. The Companys tax
recoverable was $96.1 million as of December 31, 2005.
The federal income tax provision is allocated to each of the
Companys subsidiaries in the consolidated group pursuant
to a written agreement, on the basis of each subsidiarys
separate taxable income.
|
|
16. |
Commitments and Contingencies |
On September 7, 2005, the Company announced that it had
been advised by Fairfax, the Companys majority
shareholder, that Fairfax had received a subpoena from the
Securities and Exchange Commission (SEC) requesting
documents regarding any non-traditional insurance and
reinsurance transactions entered into or offered by Fairfax and
any of its affiliates, which included OdysseyRe. The United
States Attorneys Office for the Southern District of New
York is reviewing documents provided to the SEC in response to
the subpoena, and is participating in the investigation into
these matters. In addition, the Company provided information and
made a presentation to the SEC and the U.S. Attorneys
office relating to the restatement of the Companys
financial results announced by it on February 9, 2006 and
responded to questions with respect to transactions that were
148
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
part of the restatement. The Company is cooperating fully in
addressing its obligations under this subpoena. This inquiry is
ongoing, and the Company continues to comply with requests from
the SEC and the U.S. Attorneys office. At the present
time, the Company cannot predict the outcome of these matters,
or the ultimate effect on the Companys consolidated
financial statements, which effect could be material and
adverse. No assurance can be made that the Company will not be
subject to further requests or other regulatory proceedings of a
similar kind.
In January 2004, two retrocessionaires of Odyssey America under
the common control of London Reinsurance Group Inc. (together,
London Life) filed for arbitration under a series of
aggregate stop loss agreements covering the years 1994 and
1996-2001 (the Agreements). On March 9, 2006,
the arbitration panel issued its decision, confirming the
enforceability of the Agreements and resolving in Odyssey
Americas favor substantially all issues in dispute
regarding Odyssey Americas administration of the
Agreements. Effective May 12, 2006, Odyssey America and
London Life entered into a commutation and release agreement
pursuant to which all rights, obligations and liabilities for
the Agreements were fully and finally settled without material
effect to the results of operations or financial position of the
Company.
Odyssey America participated in providing quota share
reinsurance to Gulf Insurance Company (Gulf) from
January 1, 1996 to December 31, 2002, under which Gulf
issued policies that guaranteed the residual value of automobile
leases incepting during this period (Treaties). In
March 2003, Gulf requested a payment of approximately
$30.0 million, which included a special payment
of $26.0 million, due on April 28, 2003, representing
Odyssey Americas purported share of a settlement
(Settlement) between Gulf and one of the insureds
whose policies, Gulf contends, were reinsured under the
Treaties. In July 2003, Gulf initiated litigation against
Odyssey America, demanding payment relating to the Settlement
and other amounts under the Treaties. Odyssey America answered
the complaint. Among other things, Odyssey America contends that
(i) Gulf breached its duty to Odyssey America of utmost
good faith when it placed the Treaties by failing to disclose
material information concerning the policy it issued to the
insured; and (ii) the Settlement is not covered under the
terms of the Treaties. Among the remedies Odyssey America seeks
is rescission of the Treaties. The Company is vigorously
asserting its claims and defending itself against any claims
asserted by Gulf. The Company estimates that the amount in
dispute under the Treaties that has not been recorded by the
Company as of December 31, 2006 could range between
$35 million to $40 million, after taxes. It is
presently anticipated that the case will go to trial in the
second half of 2007. It is not possible to make any
determination regarding the likely outcome of this matter at
this time.
During the second quarter of 2004, Odyssey America pledged
U.S. Treasury Notes with a par value of $162.0 million
(the pledged assets), or approximately
£110.0 million equivalent, to the Society and Council
of Lloyds on behalf of Advent Capital (Holdings) PLC
(Advent) to support Advents underwriting
activities for the 2001 to 2005 underwriting years of account.
Advent is 44.5% owned by Fairfax and its affiliates, which
includes 8.1% held by OdysseyRe. nSpire Re Limited (nSpire
Re), a subsidiary of Fairfax, had previously pledged
assets at Lloyds on behalf of Advent pursuant to a
November 2000 agreement with Advent. Advent is responsible for
the payment of any losses to support its underwriting activities
and the capital resources of Advent, including its newly
deposited funds at Lloyds, are first available to support
any losses prior to a draw down of Odyssey Americas
pledged assets. In consideration of Odyssey America pledging the
assets, nSpire Re agreed to pay Odyssey America a fee equal to
2.0% per annum of the pledged assets, which the Company
considers to be representative of commercial market terms. The
pledged assets continue to be owned by Odyssey America, and
Odyssey America receives any investment income thereon. The
securities are carried at fair value and are included in
investments and cash in OdysseyRes consolidated balance
sheets. Interest earned on the securities is included in
investment income. As additional consideration for, and further
protection of, the pledged assets, nSpire Re has provided
Odyssey America with indemnification in the event of a draw down
on the pledged assets. Odyssey America retains the right to
withdraw the pledged assets at any time upon 180 days
advance written notice to nSpire Re. nSpire Re retains the
obligation to pledge assets on behalf of Advent. In any event,
the placement of funds at Lloyds will automatically
terminate effective no later than December 31, 2008 and any
remaining pledged assets will revert to Odyssey America at that
time. The pledge of assets is not considered
149
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
material to the OdysseyRes liquidity and capital
resources. In January 2006, Odyssey America received assets with
a par value of $48.6 million, representing a permanent
reduction and unconditional release of such amount, prior to the
stated termination date, following the deposit by Advent of
£38.0 million equivalent, in new funds at
Lloyds. In September 2006, Odyssey America received assets
with a par value of $10.7 million, representing a permanent
reduction and unconditional release of such amount, prior to the
stated termination date, following the deposit by Advent of such
amount in new funds at Lloyds. Following these returns of
assets, and as of December 31, 2006, Odyssey America
continues to have a par value of $102.7 million, or
approximately £52.5 million equivalent, pledged to
Lloyds in support of Advent and will continue to receive a
fee for these pledged assets. The fair market value of the
pledged assets as of December 31, 2006 is
$128.2 million, or approximately £65.5 million
equivalent. OdysseyRe believes that the financial resources of
Advent provide adequate protection to support its liabilities in
the ordinary course of business.
The Company participates in Lloyds through its 100%
ownership of Newline where the Company provides 100% of the
capacity for Newline Syndicate 1218 (Syndicate
1218). The results of Syndicate 1218 are consolidated in
the financial statements of the Company. In support of its
capacity at Lloyds, Odyssey America has pledged
U.S. Treasury Notes and cash with a fair value of
$247.7 million as of December 31, 2006, in a deposit
trust account in favor of the Society and Council of
Lloyds. These securities may be substituted with other
securities at the discretion of the Company, subject to approval
by Lloyds. The securities are carried at fair value and
are included in investments and cash in the Companys
consolidated balance sheets. Interest earned on the securities
is included in investment income. The pledge of assets in
support of Syndicate 1218 provides the Company with the ability
to participate in writing business through Lloyds, which
remains an important part of the Companys business. The
pledged assets effectively secure the contingent obligations of
Syndicate 1218 should it not meet its obligations. Odyssey
Americas contingent liability to the Society and Council
of Lloyds is limited to the aggregate amount of the
pledged assets. The Company has the ability to remove funds at
Lloyds annually, subject to certain minimum amounts
required to support its outstanding liabilities as determined
under risk based capital models and approved by Lloyds.
The funds used to support outstanding liabilities are adjusted
annually and the obligations of the Company to support these
liabilities will continue until they are settled or the
liabilities are reinsured by a third party approved by
Lloyds. The Company expects to continue to actively
operate Syndicate 1218 and support its requirements at
Lloyds. The Company believes that Syndicate 1218 maintains
sufficient liquidity and financial resources to support its
ultimate liabilities and the Company does not anticipate that
the pledged assets will be utilized.
Clearwater agreed to allow Ranger Insurance Company
(Ranger), a subsidiary of Fairfax that is now known
as Fairmont Specialty Insurance Company, to attach an assumption
of liability endorsement of Clearwater to certain Ranger
policies issued from July 1, 1999 to April 30, 2004,
the effective termination date of the agreement. Should Ranger
fail to meet its obligations, Clearwater is ultimately liable
for any unpaid losses, pursuant to the terms of the
endorsements. This arrangement enabled Ranger to provide
additional security to its customers as a result of
Clearwaters financial strength ratings and capital
resources. The agreement to provide the endorsements was
provided by Clearwater while each company was 100% owned by
Fairfax. The potential exposure in connection with these
endorsements is currently estimated at $4.7 million, based
on the subject policies outstanding case loss reserves as
of December 31, 2006. Ranger has met and continues to meet
all of its obligations, including those subject to this
agreement, in the normal course of business, and Clearwater does
not anticipate making any payments under this guarantee. The
Company believes that the financial resources of Ranger provide
adequate protection to support its liabilities in the ordinary
course of business. In addition, Fairfax has indemnified
Clearwater for any obligations under this agreement. The Company
does not consider its potential exposure under this guarantee to
be material to its liquidity and capital resources.
As of July 14, 2000, Odyssey America agreed to guarantee
the performance of all the insurance and reinsurance contract
obligations, whether incurred before or after the agreement, of
Compagnie Transcontinentale de Réassurance
(CTR), a subsidiary of Fairfax, in the event CTR
became insolvent and CTR was not otherwise indemnified under its
guarantee agreement with a Fairfax affiliate. The guarantee,
which was entered into while
150
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Odyssey America and CTR were each 100% owned by Fairfax, was
provided by Odyssey America to facilitate the transfer of
renewal rights to CTRs business, together with certain CTR
employees, to Odyssey America in 2000 in order to further expand
the Companys international reinsurance business. The
guarantee was terminated effective December 31, 2001. There
were no amounts received from CTR under the guarantee, and the
Company did not provide any direct consideration for the renewal
rights to the business of CTR. CTR was dissolved and its assets
and liabilities were assumed by subsidiaries of Fairfax that
have the responsibility for the run-off of its liabilities.
Although CTRs liabilities were assumed by Fairfax
subsidiaries, the guarantee only pertains to those liabilities
attaching to the policies written by CTR. Fairfax has agreed to
indemnify Odyssey America for all its obligations incurred under
its guarantee. The Company believes that the financial resources
of the Fairfax subsidiaries that have assumed CTRs
liabilities provide adequate protection to satisfy the
obligations that are subject to this guarantee. The Company does
not expect to make payments under this guarantee and does not
consider its potential exposure under this guarantee to be
material to its liquidity and capital resources.
Odyssey America agreed, as of April 1, 2002, to guarantee
the payment of all of the insurance contract obligations (the
Subject Contracts), whether incurred before or after
the agreement, of Falcon Insurance Company (Hong Kong) Limited
(Falcon), a subsidiary of Fairfax Asia Limited
(Fairfax Asia), in the event Falcon becomes
insolvent. Fairfax Asia is 100% owned by Fairfax, which includes
a 29.5% economic interest owned by the Company. The guarantee by
Odyssey America was made to assist Falcon in writing business
through access to Odyssey Americas financial strength
ratings and capital resources. Odyssey America is paid a fee for
this guarantee of one percent of all gross premiums earned
associated with the Subject Contracts on a quarterly basis.
Odyssey America was given the option to reinsure a portion of
the business written by Falcon. The option was not exercised and
terminated on December 31, 2005. For the years ended
December 31, 2006 and 2005, Falcon paid $0.5 million
and $0.6 million, respectively, to Odyssey America in
connection with this agreement. Odyssey Americas potential
exposure in connection with this agreement is estimated to be
$56.1 million, based on Falcons loss reserves at
December 31, 2006. Falcons shareholders equity
on a U.S. GAAP basis is estimated to be $49.8 million
as of December 31, 2006. Fairfax has agreed to indemnify
Odyssey America for any obligation under this agreement. The
Company believes that the financial resources of Falcon provide
adequate protection to support its liabilities in the ordinary
course of business. The Company anticipates that Falcon will
meet all of its obligations in the normal course of business and
does not expect to make any payments under this guarantee. The
Company does not consider its exposure under this guarantee to
be material to its liquidity and capital resources.
The Company organized O.R.E Holdings Limited (ORE),
a corporation domiciled in Mauritius, on December 30, 2003
to act as a holding company for various investments in India. On
January 29, 2004, ORE was capitalized by the Company in the
amount of $16.7 million. ORE is consolidated in the
Companys consolidated financial statements. During 2004,
ORE entered into a joint venture agreement relating to the
purchase by ORE of 45% of Cheran Enterprises Private Limited
(CEPL). CEPL is a corporation domiciled in India,
engaged in the purchase, development and sale of commercial real
estate properties. The joint venture agreement governing CEPL
contains a provision whereby Odyssey America could be called
upon to provide a guarantee of a credit facility, if such
facility were established by CEPL, in an amount up to
$65.0 million for the funding of proposed developments. The
credit agreement was never established, and the requisite
conditions for any future provision of the guarantee no longer
exist. OREs Indian joint venture partner is claiming that
the guarantee should be available and is pursuing legal actions
against the Company. The Company finds this claim without merit
and is vigorously defending the legal actions. The Company
recognized an other-than-temporary write-down of
$7.5 million and $2.4 million in the carrying value of
ORE for the years ended December 31, 2006 and 2005,
respectively.
The Company and its subsidiaries are involved from time to time
in ordinary litigation and arbitration proceedings as part of
the Companys business operations. In managements
opinion, the outcome of these suits, individually or
collectively, is not likely to result in judgments that would be
material to the financial condition or results of operations of
the Company.
151
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company and its subsidiaries lease office space and
furniture and equipment under long-term leases expiring through
the year 2022. Minimum annual rentals follow (in thousands):
|
|
|
|
|
|
|
|
Amount | |
|
|
| |
2007
|
|
$ |
8,516 |
|
2008
|
|
|
7,799 |
|
2009
|
|
|
7,495 |
|
2010
|
|
|
7,193 |
|
2011 and thereafter
|
|
|
55,201 |
|
|
|
|
|
|
Total
|
|
$ |
86,204 |
|
|
|
|
|
The amounts above are reduced by an aggregate minimum rental
recovery of $1.5 million resulting from the sublease of
space to other companies.
Rental expense, before sublease income under these operating
leases, was $9.8 million, $11.1 million and
$9.9 million in 2006, 2005 and 2004, respectively. The
Company recovered pre-tax amounts of $0.1 million,
$0.2 million and $0.4 million in 2006, 2005 and 2004,
respectively, from subleases.
|
|
17. |
Statutory Information and Dividend Restrictions |
Odyssey America, the Companys principal operating
subsidiary, is subject to state regulatory restrictions that
limit the maximum amount of dividends payable. In any
12-month period,
Odyssey America may pay dividends equal to the greater of
(i) 10% of statutory capital and surplus as of the prior
year end or (ii) net income for such prior year without
prior approval of the Insurance Commissioner of the State of
Connecticut (the Connecticut Commissioner). The
maximum amount of dividends which Odyssey America may pay in
2007, without such prior approval is $561.7 million, based
on Odyssey Americas separate financial statements.
Connecticut law further provides that (i) Odyssey America
must report to the Connecticut Commissioner, for informational
purposes, all dividends and other distributions within five
business days after the declaration thereof and at least ten
days prior to payment and (ii) Odyssey America may not pay
any dividend or distribution in excess of its earned surplus, as
reflected in its most recent statutory annual statement on file
with the Connecticut Commissioner, without the Connecticut
Commissioners approval.
Odyssey America paid dividends to the Company of
$60.0 million, $22.5 million and $55.0 million
during 2006, 2005 and 2004, respectively. During 2005, the
Company contributed $185.0 million to Odyssey America and
there were no contributions made in 2006. Effective
December 31, 2005, the Company received approval from the
Connecticut Insurance Commissioner to make a $200.0 million
capital contribution to Odyssey America, to be completed prior
to February 28, 2006. In February 2006, the Company
completed the $200.0 million capital contribution to
Odyssey America.
The following is the consolidated statutory basis net income
(loss) and policyholders surplus of Odyssey America and
its subsidiaries, for each of the years ended and as of
December 31, 2006, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income (loss)
|
|
$ |
608,031 |
|
|
$ |
(161,172 |
) |
|
$ |
114,174 |
|
Policyholders surplus
|
|
$ |
2,501,582 |
|
|
$ |
2,073,701 |
|
|
$ |
1,675,858 |
|
The statutory provision for potentially uncollectible
reinsurance recoverables due from unauthorized companies is
reduced to the extent collateral is held by Clearwater or
Hudson. Pursuant to indemnification agreements between the
Company and Clearwater, and between the Company and Hudson, the
Company provides letters of credit and/or cash in respect of
uncollateralized balances due from unauthorized reinsurers.
152
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The use of such collateral provided by the Company is a
permitted accounting practice approved by the Insurance
Department of the State of Delaware, the domiciliary state of
Clearwater and Hudson. The Company has provided a
$20.5 million letter of credit to Clearwater and a
$0.5 million letter of credit to Hudson as of
December 31, 2006, which have been used as collateral in
regard to the indemnification agreements. The indemnification
agreements do not affect the accompanying consolidated financial
statements.
|
|
18. |
Related Party Transactions |
The Company has entered into various reinsurance arrangements
with Fairfax and its affiliates. The approximate amounts
included in or deducted from income, expense, assets and
liabilities in the accompanying consolidated financial
statements, with respect to reinsurance assumed and ceded, as of
and for the years ended December 31, 2006, 2005 and 2004
follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$ |
33,082 |
|
|
$ |
53,265 |
|
|
$ |
138,805 |
|
Premiums earned
|
|
|
38,128 |
|
|
|
53,654 |
|
|
|
199,924 |
|
Losses and loss adjustment expenses
|
|
|
27,110 |
|
|
|
95,711 |
|
|
|
137,500 |
|
Acquisition costs
|
|
|
9,858 |
|
|
|
16,454 |
|
|
|
44,027 |
|
Reinsurance payable on loss payments
|
|
|
3,318 |
|
|
|
9,559 |
|
|
|
5,752 |
|
Reinsurance balances receivable
|
|
|
4,715 |
|
|
|
12,404 |
|
|
|
21,005 |
|
Unpaid losses and loss adjustment expenses
|
|
|
226,165 |
|
|
|
302,119 |
|
|
|
295,903 |
|
Unearned premiums
|
|
|
15,440 |
|
|
|
20,485 |
|
|
|
20,874 |
|
|
Ceded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written
|
|
$ |
10,141 |
|
|
$ |
30,255 |
|
|
$ |
28,773 |
|
Premiums earned
|
|
|
13,051 |
|
|
|
29,684 |
|
|
|
35,257 |
|
Losses and loss adjustment expenses
|
|
|
21,531 |
|
|
|
79,694 |
|
|
|
32,349 |
|
Acquisition costs
|
|
|
2,114 |
|
|
|
4,693 |
|
|
|
4,908 |
|
Ceded reinsurance balances payable
|
|
|
1,454 |
|
|
|
12,540 |
|
|
|
9,044 |
|
Reinsurance recoverables on loss payments
|
|
|
1,715 |
|
|
|
6,377 |
|
|
|
1,481 |
|
Reinsurance recoverables on unpaid losses
|
|
|
30,166 |
|
|
|
228,438 |
|
|
|
178,580 |
|
Prepaid reinsurance premiums
|
|
|
589 |
|
|
|
3,500 |
|
|
|
2,929 |
|
All amounts are assumed and ceded from Fairfaxs affiliates
at commercial market terms, the prices and terms of which are
often established by other third party reinsurers that
participate in the contracts. Written premiums assumed from
Fairfaxs affiliates in 2006 represent 1.4% of
OdysseyRes total gross premiums written for the year ended
December 31, 2006. Ceded premiums written represent 5.8% of
OdysseyRes total ceded premiums written for the year ended
December 31, 2006. The largest amounts of related party
assumed business in 2006 were received from Commonwealth
Insurance Company and ICICI Lombard General Insurance Co. Ltd.
Odyssey previously assumed business from Zenith National
Insurance Corp (Zenith) through December 31,
2004. Assumed premiums written reflect $91.6 million from
Zenith for the year ended December 31, 2004. The largest
amounts of business ceded to related parties in 2005 involved
nSpire Re and Commonwealth Insurance Company, each relating to a
proportional catastrophe treaty covering various classes of
worldwide catastrophe business written by OdysseyRe.
The Companys subsidiaries have entered into investment
management agreements with Fairfax and its wholly-owned
subsidiary, Hamblin Watsa Investment Counsel Ltd. These
agreements provide for an annual base
153
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fee of 0.20% (20 basis points), calculated and paid
quarterly based upon the subsidiarys average invested
assets for the preceding three months. The agreements also
include incentive fees of 0.10% (10 basis points), which
are payable if realized gains exceed 1% of the average
investment portfolio in any given year, subject to cumulative
realized gains on investments exceeding 1% of the average
investment portfolio. Additional incentive fees are paid based
upon the performance of the subsidiarys equity portfolio
equal to 10% of the return on equities (subject to an annual
maximum) in excess of the Standard & Poors 500
index plus 200 basis points, provided that the equity
portfolio has achieved such excess on a cumulative basis. If the
performance of the equity portfolio does not equal or exceed
this benchmark in a given year, the annual base fee is reduced
to 0.18% (18 basis points). The aggregate annual investment
management fee payable by each subsidiary, including incentive
fees, is capped at 0.40% (40 basis points) of its
investment portfolio, with any excess amounts carried into the
following year. These agreements may be terminated by either
party on 30 days notice. For the years ended
December 31, 2006, 2005 and 2004, total fees, including
incentive fees, of $17.6 million, $16.2 million and
$7.5 million, respectively, are included in the
consolidated statements of operations.
For each of the years ended December 31, 2005 and 2004, the
Company paid $0.3 million of intranet fees, to MFXchange,
an affiliate. For the year ended December 31, 2006, the
Company did not pay intranet fees to MFXchange.
Included in other expense, net, for the years ended
December 31, 2006, 2005 and 2004, respectively, are
incurred charitable contributions of $1.7 million,
$0.7 million and $2.8 million related to the Sixty
Four Foundation, a not-for-profit entity affiliated with Fairfax.
In connection with the acquisition of Opus Re (now known as
Clearwater Select Insurance Company), the Company incurred a
$2.5 million pre-tax expense for each of the years ended
December 31, 2005 and 2004, which is included in other
expense, net, to RiverStone Group LLC, an affiliate, for
services provided to the Company in connection with the
acquisition.
Due to expense sharing and investment management agreements with
Fairfax and its affiliates, the Company has accrued on its
consolidated balance sheet amounts receivable from affiliates of
$0.9 million and $1.1 million as of December 31,
2006 and 2005, respectively, and amounts payable to affiliates
of $4.3 million and $4.5 million as of
December 31, 2006 and 2005, respectively.
In connection with the 2004 sale of Old Lyme Insurance Company,
Ltd. (OLIC) by an affiliate of the Company to an
unrelated entity, OdysseyRe provided a loan to the unrelated
entity in the amount of $9.0 million to finance this
transaction. This loan had a term of five years, bearing
interest at a rate of prime plus 3% and was collateralized by
the shares of OLICs common stock. The balance of the loan
as of March 2006 was $4.1 million following a February 2006
principal payment of $3.2 million. In the fourth quarter,
the Company received a principal payment of $4.1 million
and the loan was retired.
As of December 31, 2006, the Company has invested
$26.4 million in a Canadian investment fund managed by an
officer of Fairfax. The fund is 23.8% owned by Fairfax, which
includes 4.7% owned by the Company. Certain subsidiaries of
Fairfax have also invested in the fund. The officer receives no
remuneration or benefits associated with his position as an
officer of Fairfax, and derives all of his compensation from his
management of the investment fund. In the ordinary course of the
Companys investment activities, the Company makes
investments in investment funds, limited partnerships and other
investment vehicles in which Fairfax or its affiliates may also
be investors.
OdysseyRe believes that the revenues and expenses related to the
transactions with affiliated entities would not be materially
different if such transactions were with unaffiliated entities.
154
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(SFAS) 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an amendment of SFAS 87, 88, 106, and
132(R). SFAS 158 requires, as of December 31,
2006, the Company to recognize the overfunded or underfunded
status of a defined benefit postretirement plan, including
pension plans, as an asset or liability in its balance sheet and
to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. The Company
adopted the recognition provisions of SFAS 158 and has
recognized the results of adoption within its financial
statements as of December 31, 2006, as reflected in the
table below. In addition, SFAS 158 requires that, as of
December 31, 2008, employers measure plan assets and
liabilities as of the date of their financial statements.
SFAS 158 does not require retrospective application.
The aggregate adjustments relating to the adoption of
SFAS 158, for all of the Companys benefit plans,
included in the consolidated balance sheet as of
December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before | |
|
|
|
After | |
|
|
Application | |
|
|
|
Application | |
|
|
of SFAS 158 | |
|
Adjustments | |
|
of SFAS 158 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign income taxes
|
|
$ |
111,409 |
|
|
$ |
5,511 |
|
|
$ |
116,920 |
|
Total assets
|
|
|
8,948,201 |
|
|
|
5,511 |
|
|
|
8,953,712 |
|
Other liabilities
|
|
|
139,032 |
|
|
|
15,747 |
|
|
|
154,779 |
|
Total liabilities
|
|
|
6,854,386 |
|
|
|
15,747 |
|
|
|
6,870,133 |
|
Accumulated other comprehensive income, net of deferred income
taxes
|
|
|
35,565 |
|
|
|
(10,236 |
) |
|
|
25,329 |
|
Total shareholders equity
|
|
|
2,093,815 |
|
|
|
(10,236 |
) |
|
|
2,083,579 |
|
Defined Benefit Pension
Plan
The Company maintains a qualified, non-contributory, defined
benefit pension plan (Plan) covering substantially
all employees who have reached age twenty-one and who have
completed one year of service. Employer contributions to the
Plan are in accordance with the minimum funding requirements of
the Employee Retirement Income Security Act of 1974, as amended.
The amortization period for unrecognized pension costs and
credits, including prior service costs, if any, and actuarial
gains and losses, is based on the remaining service period for
those employees expected to receive pension benefits. Actuarial
gains and losses result when actual experience differs from that
assumed or when actuarial assumptions are changed.
155
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables set forth the Plans funded status,
which uses a measurement date of October 1, and amounts
recognized in the Companys consolidated financial
statements as of December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
52,313 |
|
|
$ |
42,454 |
|
|
Service cost
|
|
|
4,396 |
|
|
|
3,342 |
|
|
Interest cost
|
|
|
2,667 |
|
|
|
2,360 |
|
|
Actuarial loss
|
|
|
590 |
|
|
|
5,156 |
|
|
Benefits paid
|
|
|
(1,125 |
) |
|
|
(999 |
) |
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$ |
58,841 |
|
|
$ |
52,313 |
|
|
|
|
|
|
|
|
Change in Plan assets:
|
|
|
|
|
|
|
|
|
|
Fair value of Plan assets at beginning of year
|
|
$ |
44,170 |
|
|
$ |
41,055 |
|
|
Actual return on Plan assets
|
|
|
1,319 |
|
|
|
914 |
|
|
Actual contributions during the year
|
|
|
3,654 |
|
|
|
3,200 |
|
|
Benefits paid
|
|
|
(1,125 |
) |
|
|
(999 |
) |
|
|
|
|
|
|
|
|
Fair value of Plan assets at end of year
|
|
$ |
48,018 |
|
|
$ |
44,170 |
|
|
|
|
|
|
|
|
Fair value of Plan assets consists of:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$ |
48,018 |
|
|
$ |
44,170 |
|
|
|
|
|
|
|
|
Unfunded status
|
|
$ |
(10,823 |
) |
|
$ |
(8,143 |
) |
Unrecognized prior service cost
|
|
|
|
|
|
|
503 |
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
11,173 |
|
|
|
|
|
|
|
|
(Accrued) prepaid pension cost
|
|
$ |
(10,823 |
) |
|
$ |
3,533 |
|
|
|
|
|
|
|
|
The net amount recognized in the consolidated balance sheets
related to the accrued pension cost of $10.8 million and
prepaid pension cost of $3.5 million, as of
December 31, 2006 and 2005, respectively, is included in
other liabilities. The net amount of pre-tax accumulated other
comprehensive loss is $12.7 million as of December 31,
2006.
The weighted average assumptions used to calculate the benefit
obligation as of December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Discount rate
|
|
|
5.25 |
% |
|
|
5.25 |
% |
Rate of compensation increase
|
|
|
5.73 |
% |
|
|
5.66 |
% |
The discount rate represents the Companys estimate of the
interest rate at which the Plans benefits could be
effectively settled. The discount rates are used in the
measurement of the expected and accumulated postretirement
benefit obligations and the service and interest cost components
of net periodic postretirement benefit cost.
156
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic benefit cost included in the Companys
consolidated statements of operations for the years ended
December 31, 2006, 2005 and 2004 is comprised of the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
4,396 |
|
|
$ |
3,342 |
|
|
$ |
2,210 |
|
|
Interest cost
|
|
|
2,667 |
|
|
|
2,360 |
|
|
|
2,105 |
|
|
Return on plan assets
|
|
|
(2,434 |
) |
|
|
(2,287 |
) |
|
|
(1,645 |
) |
|
Net amortization and deferral
|
|
|
667 |
|
|
|
101 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
5,296 |
|
|
$ |
3,516 |
|
|
$ |
2,680 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used to calculate the net
periodic benefit cost for the years ended December 31,
2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.25% |
|
|
|
5.75% |
|
|
|
6.00% |
|
Rate of compensation increase
|
|
|
5.66% |
|
|
|
5.76% |
|
|
|
5.69% |
|
Expected long term rate of return on Plan assets
|
|
|
5.50% |
|
|
|
5.75% |
|
|
|
6.00% |
|
The accumulated benefit obligation for the Plan is
$45.8 million and $41.1 million as of the 2006 and
2005 measurement dates, respectively. As the fair value of the
Plan assets exceeds the accumulated benefit obligation, the
Company did not recognize an additional minimum pension
liability under SFAS 132 as of the 2006 and 2005
measurement dates.
The Plans expected future benefit payments are shown below
(in thousands):
|
|
|
|
|
Year |
|
Amount | |
|
|
| |
2007
|
|
$ |
4,160 |
|
2008
|
|
|
3,050 |
|
2009
|
|
|
2,420 |
|
2010
|
|
|
3,150 |
|
2011
|
|
|
3,050 |
|
2012 2015
|
|
|
33,260 |
|
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 Companys
assumptions of expected returns. During 2006, the Company
contributed $3.7 million to the Plan. Based on the
Companys current expectations, the 2007 contribution
should approximate $3.7 million.
As a result of the adoption of SFAS 158, the Company
recognized an $8.3 million, after tax, reduction in
accumulated other comprehensive income related to the Plan, as
of December 31, 2006, of which, on an after tax basis,
$8.0 million related to net losses, while $0.3 million
related to prior service cost. The Company estimates that it
will record $0.7 million in net loss and $0.1 million
in prior service cost 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.
157
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Excess Benefit Plans
The Company also maintains two non-qualified excess benefit
plans (Excess Plans) that provide more highly
compensated officers and employees with defined retirement
benefits in excess of qualified plan limits imposed by federal
tax law. The following tables set forth the combined amounts
recognized for the Supplemental Plan, which has a measurement
date of October 1, and the Supplemental Employee Retirement
Plan, which has a measurement date of December 31, in the
Companys consolidated financial statements as of
December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
15,724 |
|
|
$ |
14,401 |
|
|
Service cost
|
|
|
774 |
|
|
|
690 |
|
|
Interest cost
|
|
|
801 |
|
|
|
800 |
|
|
Actuarial loss
|
|
|
(334 |
) |
|
|
509 |
|
|
Benefits paid
|
|
|
(713 |
) |
|
|
(676 |
) |
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$ |
16,252 |
|
|
$ |
15,724 |
|
|
|
|
|
|
|
|
Change in Excess Plans assets:
|
|
|
|
|
|
|
|
|
|
Fair value of Excess Plans assets at beginning of year
|
|
$ |
|
|
|
$ |
|
|
|
Actual contributions during the year
|
|
|
713 |
|
|
|
676 |
|
|
Benefits paid
|
|
|
(713 |
) |
|
|
(676 |
) |
|
|
|
|
|
|
|
|
|
Fair value of Excess Plans assets at end of year
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Unfunded status
|
|
$ |
(16,252 |
) |
|
$ |
(15,724 |
) |
|
Unrecognized transition obligation
|
|
|
|
|
|
|
74 |
|
|
Unrecognized net actuarial loss
|
|
|
|
|
|
|
5,193 |
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
(449 |
) |
|
|
|
|
|
|
|
|
|
Accrued pension cost
|
|
$ |
(16,252 |
) |
|
$ |
(10,906 |
) |
|
|
|
|
|
|
|
The net amount recognized in the consolidated balance sheets
related to the accrued pension cost of $16.3 million and
$10.9 million, as of December 31, 2006 and 2005,
respectively, is included in other liabilities. The net amount
of pre-tax accumulated other comprehensive loss is
$4.1 million as of December 31, 2006.
The weighted average assumptions used to calculate the benefit
obligation as of December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Discount rate
|
|
|
5.25 |
% |
|
|
5.25 |
% |
Rate of compensation increase
|
|
|
5.73 |
% |
|
|
5.66 |
% |
158
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net periodic benefit cost included in the Companys
consolidated statement of operations for the years ended
December 31, 2006, 2005 and 2004 is comprised of the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
774 |
|
|
$ |
689 |
|
|
$ |
700 |
|
|
Interest cost
|
|
|
802 |
|
|
|
800 |
|
|
|
740 |
|
|
Recognized net actuarial loss
|
|
|
342 |
|
|
|
331 |
|
|
|
208 |
|
|
Recognized prior service cost
|
|
|
(37 |
) |
|
|
(37 |
) |
|
|
(37 |
) |
|
Other
|
|
|
69 |
|
|
|
69 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$ |
1,950 |
|
|
$ |
1,852 |
|
|
$ |
1,680 |
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used to calculate the net
periodic benefit cost for the years ended December 31,
2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.25 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
Rate of compensation increase
|
|
|
5.66 |
% |
|
|
5.76 |
% |
|
|
6.00 |
% |
The accumulated benefit obligation for the Excess Plans is
$11.7 million and $11.4 million as of
December 31, 2006 and 2005, respectively.
The Excess Plans expected benefit payments are shown below
(in thousands):
|
|
|
|
|
Year |
|
Amount | |
|
|
| |
2007
|
|
$ |
870 |
|
2008
|
|
|
1,370 |
|
2009
|
|
|
970 |
|
2010
|
|
|
1,320 |
|
2011
|
|
|
830 |
|
2012 2016
|
|
|
6,430 |
|
The Company established a trust fund, which invests in
U.S. government securities, related to the Excess Plans.
The trust fund, which is included in other invested assets, had
a fair value of $6.5 million and $6.3 million as of
December 31, 2006 and 2005, respectively. Plan benefits are
paid by the Company as they are incurred by the participants,
accordingly, there are no assets held directly by the Excess
Plans.
The Company expects to contribute $0.9 million to the
Excess Plans during the year ended December 31, 2007, which
represents the amount necessary to fund the 2007 expected
benefit payments.
As a result of the adoption of SFAS 158, the Company
recognized a $1.4 million, after-tax, reduction in
accumulated other comprehensive income related to the Excess
Plans as of December 31, 2006, of which, on an after tax
basis, $1.7 million related to net losses, while
$0.3 million related to net prior service credit.
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.
159
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Postretirement Benefit
Plan
The Company provides certain health care and life insurance
(postretirement) benefits for retired employees.
Substantially all employees may become eligible for these
benefits if they reach retirement age while working for the
Company. The Companys cost for providing postretirement
benefits other than pensions is accounted for in accordance with
SFAS 106 Employers Accounting for
Postretirement Benefits Other Than Pensions. The following
tables set forth the amounts recognized for the postretirement
benefit plan, which has a measurement date of January 1, in
the Companys consolidated financial statements as of
December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
11,097 |
|
|
$ |
8,519 |
|
|
Service cost
|
|
|
1,541 |
|
|
|
1,311 |
|
|
Interest cost
|
|
|
604 |
|
|
|
490 |
|
|
Actuarial loss
|
|
|
|
|
|
|
964 |
|
|
Benefits paid
|
|
|
(269 |
) |
|
|
(196 |
) |
|
Other
|
|
|
38 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$ |
13,011 |
|
|
$ |
11,097 |
|
|
|
|
|
|
|
|
|
Unfunded status
|
|
$ |
(13,011 |
) |
|
$ |
(11,097 |
) |
|
Unrecognized prior service cost
|
|
|
|
|
|
|
(547 |
) |
|
Unrecognized net loss
|
|
|
|
|
|
|
1,325 |
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
$ |
(13,011 |
) |
|
$ |
(10,319 |
) |
|
|
|
|
|
|
|
The net amount recognized in the consolidated balance sheets
related to the accrued benefit cost of $13.0 million and
$10.3 million, as of December 31, 2006 and 2005,
respectively, is included in other liabilities. The net amount
of pre-tax accumulated other comprehensive loss is
$0.9 million as of December 31, 2006.
The weighted average assumptions used to calculate the benefit
obligation as of December 31, 2006 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Discount rate
|
|
|
5.50 |
% |
|
|
5.50 |
% |
Rate of compensation increase
|
|
|
4.00 |
% |
|
|
4.00 |
% |
Net periodic benefit cost included in the Companys
consolidated statements of operations for the years ended
December 31, 2006, 2005 and 2004 is comprised of the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Service cost
|
|
$ |
1,541 |
|
|
$ |
1,311 |
|
|
$ |
1,061 |
|
Interest cost
|
|
|
604 |
|
|
|
490 |
|
|
|
447 |
|
Curtailment credit
|
|
|
|
|
|
|
|
|
|
|
(582 |
) |
Net amortization and deferral
|
|
|
(83 |
) |
|
|
(104 |
) |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net benefit cost
|
|
$ |
2,062 |
|
|
$ |
1,697 |
|
|
$ |
863 |
|
|
|
|
|
|
|
|
|
|
|
160
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average assumptions used to calculate the net
periodic benefit cost for the years ended December 31,
2006, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
Rate of compensation increase
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
6.00 |
% |
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 postretirement plans expected benefit payments are
shown below (in thousands):
|
|
|
|
|
Year |
|
Amount | |
|
|
| |
2007
|
|
$ |
288 |
|
2008
|
|
|
342 |
|
2009
|
|
|
381 |
|
2010
|
|
|
453 |
|
2011
|
|
|
524 |
|
2012 2016
|
|
|
4,484 |
|
The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is assumed
to be 9.0% in 2006 and decreasing to 5.0% in 2013 and remaining
constant thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated
postretirement benefit obligation by $2.3 million (17.4% of
benefit obligation as of December 31, 2006) and the service
and interest cost components of net periodic postretirement
benefit costs by $0.5 million for 2006. Decreasing the
assumed health care cost trend rates by one percentage point in
each year would decrease the accumulated postretirement benefit
obligation, and the service and interest cost components of net
periodic postretirement benefit cost for 2006 by
$1.8 million and $0.4 million, respectively.
As a result of the adoption of SFAS 158, the Company
recognized a $0.5 million, after-tax, reduction in
accumulated other comprehensive income related to the
postretirement plan, as of December 31, 2006, of which, on
an after tax basis, $0.8 million related to net losses,
while $0.3 million related to prior service credit. The
Company estimates that it will record $0.1 million in prior
service cost to net periodic benefit cost during the year ended
December 31, 2007.
Other Plans
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 participants basic annual earnings
based on the experience of the Company for that year. These
amounts are credited to the employees account maintained
by a third party, which has contracted to provide benefits under
the plan. No contributions were authorized in 2006, 2005, or
2004.
The Company maintains a qualified deferred compensation plan
pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended. Employees may contribute up to 50% of base
salary on a pre-tax basis, subject to annual maximum
contributions set by law ($15,000 in 2006). The Company
contributes an amount equal to 100% of each employees
pre-tax contribution up to certain limits. The maximum matching
contribution is 4% of annual base salary, with certain
government mandated restrictions on contributions to highly
compensated employees. The Company also maintains a
non-qualified deferred compensation plan to allow for
161
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contributions in excess of qualified plan limitations. The
Company contributed $1.6 million, $1.6 million and
$1.3 million to these plans in 2006, 2005 and 2004,
respectively, which is included in other underwriting expenses
in the consolidated statements of operations.
|
|
20. |
Stock Based Compensation Plans |
Effective January 1, 2006, the Company adopted, on a
prospective basis, SFAS 123(R) Share-Based
Payments, which is a revision of SFAS 123
Accounting for Stock Based Compensation and
supersedes Accounting Principles Board Opinion (APB)
25. The prospective method requires the application of the fair
value based method to compensation awards granted, modified or
settled on or after the date of adoption. The approach to
account for share-based payments in SFAS 123(R) is similar
to the approach described in SFAS 123, however,
SFAS 123(R) requires the expense related to all share-based
payments to employees, including grants of employee stock
options, to be recognized in the consolidated financial
statements. Pro forma disclosure of the impact of fair value
share-based payments is no longer an alternative to financial
statement recognition. The Company had previously adopted the
expense recognition provisions of SFAS 123, on a
prospective basis, effective January 1, 2003, and since
that date has included the expense related to stock options
granted subsequent to January 1, 2003 in its statements of
operations. In addition, the Company has historically expensed
the compensation cost associated with its restricted shares plan
beginning with the initial grant in 2001. Accordingly, the
effect of adopting SFAS 123(R) did not have a material
effect on the Companys results of operations or financial
position. Subsequent to January 1, 2006, deferred
compensation related to restricted stock grants will be
recognized in additional paid-in capital. In accordance with
SFAS 123(R), compensation cost associated with stock
options recognized during 2006 includes: 1) quarterly
amortization related to the remaining unvested portion of all
stock option awards granted prior to January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of SFAS 123; and 2) quarterly
amortization related to all stock option awards granted on or
after December 31, 2005, based on the grant-date fair value
estimated.
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.
2002 Option Plan
In 2002, the Company adopted the 2002 Option Plan, which
provides for the grant of non-qualified stock options to
officers, key employees and directors who are employed by, or
provide services to the Company. Options for an aggregate of
1,500,000 of the Companys common shares may be granted
under the 2002 Option Plan. Pursuant to the 2002 Option Plan,
25% of the options granted become exercisable on each
anniversary of the grant in each of the four years following the
date of grant and all options expire 10 years from the date
of grant. Stock options are exercisable at the grant price.
As of December 31, 2006, there was $0.3 million of
unrecognized compensation cost related to unvested options from
the 2002 Option Plan, which is expected to be recognized over a
remaining weighted-average vesting period of 0.9 years. The
total intrinsic value of options exercised during the year ended
December 31, 2006 was approximately $1.7 million, as
compared to $0.5 million and $0.1 million of total
intrinsic value of options exercised during the year ended
December 31, 2005 and 2004, respectively.
162
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option activity for the
2002 Option Plan for the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Options outstanding as of December 31, 2005
|
|
|
649,249 |
|
|
$ |
18.78 |
|
Granted
|
|
|
10,000 |
|
|
|
24.04 |
|
Forfeited
|
|
|
(7,249 |
) |
|
|
19.78 |
|
Exercised
|
|
|
(148,050 |
) |
|
|
18.50 |
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2006
|
|
|
503,950 |
|
|
$ |
18.96 |
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of December 31, 2006
|
|
|
419,950 |
|
|
$ |
18.64 |
|
|
|
|
|
|
|
|
|
|
The fair value of options granted during the year ended
December 31, 2006 and 2005, estimated as of the grant date
using the Black-Scholes option pricing model, was $9.21 and
$6.89 per share, respectively. The Company did not grant
stock options during the year ended December 31, 2004. The
weighted-average remaining contractual term for options
outstanding as of December 31, 2006, 2005 and 2004 was
5.9 years, 6.8 years and 7.7 years, respectively.
The weighted-average remaining contractual term for options
vested and exercisable as of December 31, 2006 was
5.7 years. As of December 31, 2006, the aggregate
intrinsic value was $9.2 million for options outstanding
and $7.8 million for options vested and exercisable.
The assumptions used in the Black-Scholes option pricing model
to determine the fair value of options granted under the 2002
Option Plan follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year | |
|
|
Ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Risk-free interest rate
|
|
|
4.9 |
% |
|
|
1.9 |
% |
Expected life (years)
|
|
|
6.0 |
|
|
|
5.0 |
|
Expected volatility
|
|
|
32.0 |
% |
|
|
30.0 |
% |
Expected dividend yield
|
|
|
0.6 |
% |
|
|
0.6 |
% |
The risk-free interest rate is based on a bond equivalent yield
at the time of the grant with maturity dates that coincide with
the expected life of the options. The expected life of the
options is based on a calculation which estimates future
exercise patterns based on the Companys historical
experience. The expected volatility for grants is based on the
historical volatility of the Companys stock price using
weekly closing prices of the Companys stock since the
initial public offering of the Company in June 2001 and the
volatility of others in the industry.
2001 Option Plan
In 2001, the Company adopted the 2001 Option Plan, which
provides for the grant of stock options with a grant price of
zero to officers and key employees of the Company employed
outside of the United States. Options granted under the 2001
Option Plan generally vest and become exercisable in equal
installments over three or five years from the date of grant.
Amounts granted in 2001 vest and become exercisable in two equal
installments on the fifth and tenth anniversary of the grant
dates. Awards under each of the 2001 Option Plan and the
Restricted Share Plan (described below) may not exceed an
aggregate of 10% of the Companys issued and outstanding
shares of common stock as of the last business day of the
previous calendar year. The Company had 69,127,532 issued and
outstanding shares of common stock as of December 31, 2005.
163
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006, there was $1.6 million of
unrecognized compensation cost related to unvested options
granted from the 2001 Option Plan, which is expected to be
recognized over a remaining weighted-average vesting period of
2.1 years. The total fair value of the options exercised
from the 2001 Option Plan during the year ended
December 31, 2006 was $1.1 million, as compared to the
total fair value of the options exercised during the year ended
December 31, 2005 of $0.1 million and was immaterial
for the year ended December 31, 2004.
The following table summarizes stock option activity for the
2001 Option Plan for the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
|
|
|
Fair Value | |
|
|
Shares | |
|
at Grant Date | |
|
|
| |
|
| |
Options outstanding as of December 31, 2005
|
|
|
142,295 |
|
|
$ |
22.13 |
|
Granted
|
|
|
49,613 |
|
|
|
23.63 |
|
Forfeited
|
|
|
(6,086 |
) |
|
|
22.89 |
|
Exercised
|
|
|
(43,844 |
) |
|
|
20.97 |
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2006
|
|
|
141,978 |
|
|
$ |
22.98 |
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of December 31, 2006
|
|
|
22,449 |
|
|
$ |
22.73 |
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual term for options
outstanding as of December 31, 2006, 2005 and 2004 was
7.4 years, 7.1 years and 7.1 years, respectively.
The weighted-average remaining contractual term for options
vested and exercisable as of December 31, 2006 was
6.3 years. As of December 31, 2006, the aggregate fair
value was $5.3 million for options outstanding and
$0.8 million for options vested and exercisable.
Restricted Share Plan
In 2001, the Company adopted the Restricted Share Plan, which
provides for the grant of restricted shares of the
Companys common stock to directors, officers and key
employees of the Company. Shares granted under the Restricted
Share Plan generally vest and become exercisable in equal
installments over three years or five years from the grant
dates. Amounts granted in 2001 vest and become exercisable in
two equal installments on the fifth and tenth anniversary of the
grant dates. Awards under each of the Restricted Share Plan and
the 2001 Option Plan (described above) may not exceed an
aggregate of 10% of the Companys issued and outstanding
shares of common stock as of the last business day of the
previous calendar year. The Company had 69,127,532 issued and
outstanding shares of common stock as of December 31, 2005.
In accordance with SFAS 123(R), the fair value of
restricted share awards is estimated on the date of grant based
on the market price of the Companys stock and is amortized
to compensation expense on a straight-line basis over the
related vesting periods. As of December 31, 2006, there was
$10.5 million of unrecognized compensation cost related to
unvested restricted share awards, which is expected to be
recognized over a remaining weighted-average vesting period of
3.2 years. SFAS 123(R) requires that the deferred
stock-based compensation on the consolidated balance sheet on
the date of adoption be netted against additional paid-in
capital. As of December 31, 2005, there was approximately
$1.8 million of deferred stock-based compensation that was
netted against additional paid-in capital on January 1,
2006. The total fair value of the restricted share awards vested
during the year ended December 31, 2006, 2005 and 2004 was
$5.8 million, $1.8 million and $1.8 million,
respectively. As of December 31, 2006, the aggregate fair
value was $25.5 million for restricted share awards
outstanding.
164
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes restricted share activity for the
Restricted Share Plan for the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
|
|
|
Fair Value at | |
|
|
Shares | |
|
Grant Date | |
|
|
| |
|
| |
Restricted share awards outstanding as of December 31, 2005
|
|
|
784,314 |
|
|
$ |
19.54 |
|
Granted
|
|
|
154,867 |
|
|
|
26.76 |
|
Vested
|
|
|
(234,304 |
) |
|
|
18.97 |
|
Forfeited
|
|
|
(21,495 |
) |
|
|
26.61 |
|
|
|
|
|
|
|
|
Restricted shares outstanding as of December 31, 2006
|
|
|
683,382 |
|
|
$ |
21.15 |
|
|
|
|
|
|
|
|
|
|
(c) |
Employee Share Purchase Plan |
In 2001, the Company established the Employee Share Purchase
Plan (the ESPP). Under the terms of the ESPP,
eligible employees may elect to purchase Company common shares
in an amount up to 10% of their annual base salary. The Company
issues or purchases, on the employees behalf, the
Companys common shares equal to 30% of the employees
contribution. In the event that the Company achieves a return on
equity of at least 15% in any calendar year, as computed in
accordance with GAAP, additional shares are purchased by the
Company for the employees benefit in an amount equal to
20% of the employees contribution during that year. During
the years ended December 31, 2006, 2005 and 2004, the
Company purchased 83,046 shares, 74,764 shares and
67,819 shares, respectively, on behalf of employees
pursuant to the ESPP, at average purchase prices of $27.58,
$24.93 and $24.20, respectively. The compensation expense
recognized by the Company for purchases of the Companys
common shares under the ESPP was $0.5 million,
$0.4 million and $0.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
For the years ended December 31 2006, 2005 and 2004, the
Company received $2.7 million, $1.5 million and
$0.4 million, respectively, in cash from employees for the
exercise of stock options. For the year ended December 31
2006, 2005 and 2004, the Company recognized an expense related
to all stock based compensation of $5.6 million,
$4.2 million and $2.8 million, respectively. Of the
$5.6 million expense for the year ended December 31,
2006, $0.6 million relates to the adoption of
SFAS 123(R). The total tax benefit recognized for the year
ended December 31, 2006, 2005 and 2004 was
$2.0 million, $1.5 million and $1.0 million,
respectively. For the year ended December 31, 2006, the
additional stock based compensation expense as a result of the
adoption of SFAS 123(R) caused income before income taxes
to decrease by $0.6 million, net income to decrease by
$0.4 million, and basic and diluted earnings per share to
decrease by $0.01.
Had compensation costs of option awards and employees
purchase rights been determined under a fair value alternative
method as stated in SFAS 148 Accounting for
Stock-Based Compensation Transition and Disclosure,
an amendment of SFAS 123, the Company would have been
required to prepare a fair value model for such options and
employees purchase rights and record such amount in the
consolidated financial statements as compensation expense, and
the Companys net income (loss) and income (loss) per
common share for the years ended December 31, 2005 and 2004
would have been reduced to the following pro forma amounts (in
thousands, except per share data):
165
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net income (loss) as reported:
|
|
$ |
(117,666 |
) |
|
$ |
205,201 |
|
Add: Stock-based employee compensation expense included in net
income, net of related tax effects
|
|
|
316 |
|
|
|
308 |
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(690 |
) |
|
|
(681 |
) |
|
|
|
|
|
|
|
Pro forma net income (loss), basic earnings per share
|
|
|
(118,040 |
) |
|
|
204,828 |
|
Effect of dilutive securities, 4.375% convertible senior
debentures interest, net of tax
|
|
|
|
|
|
|
3,128 |
|
|
|
|
|
|
|
|
Pro forma net income (loss) available to common shareholders,
diluted
|
|
$ |
(118,040 |
) |
|
$ |
207,956 |
|
|
|
|
|
|
|
|
Basic income (loss) per common share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(1.81 |
) |
|
$ |
3.19 |
|
Pro forma
|
|
|
(1.81 |
) |
|
|
3.18 |
|
Diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(1.81 |
) |
|
$ |
2.98 |
|
Pro forma
|
|
|
(1.81 |
) |
|
|
2.97 |
|
|
|
21. |
Financial Guaranty Reinsurance |
The Company previously underwrote assumed financial guaranty
reinsurance. The maximum exposure to loss, in the event of
nonperformance by the underlying insured and assuming underlying
collateral proved to be of no value, related to this business
was $31.0 million and $35.3 million as of
December 31, 2006 and 2005, respectively. It is the
responsibility of the ceding insurer to collect and maintain
collateral under financial guaranty reinsurance. The Company
ceased writing financial guaranty business in 1992.
As of December 31, 2006, financial guaranty reinsurance in
force had a remaining maturity term of one (1) to
20 years. The approximate distribution of the estimated
debt service (principal and interest) of bonds, by type and
unearned premiums, for the years ended December 31, 2006
and 2005 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Municipal obligations:
|
|
|
|
|
|
|
|
|
|
General obligation bonds
|
|
$ |
12 |
|
|
$ |
15 |
|
|
Special revenue bonds
|
|
|
18 |
|
|
|
20 |
|
|
Industrial development bonds
|
|
|
1 |
|
|
|
|
|
Corporate obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
31 |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
166
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has been provided with a geographic distribution of
the debt service from all of its cedants. The following table
summarizes the information which has been received by the
Company from its cedants (in millions):
|
|
|
|
|
|
|
|
2006 | |
State |
|
Debt Service | |
|
|
| |
Florida
|
|
$ |
5.0 |
|
Arizona
|
|
|
3.2 |
|
New Jersey
|
|
|
2.1 |
|
Kentucky
|
|
|
2.6 |
|
New York
|
|
|
1.8 |
|
Alabama
|
|
|
1.8 |
|
Indiana
|
|
|
1.6 |
|
|
|
|
|
|
Subtotal
|
|
|
18.1 |
|
States less than $1.5 million exposure per state
|
|
|
12.9 |
|
|
|
|
|
|
Total
|
|
$ |
31.0 |
|
|
|
|
|
|
|
22. |
Quarterly Financial Information (Unaudited) |
A summary of selected quarterly financial information follows
for each of the quarters in the years ended December 31,
2006 and 2005 (in thousands, except share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended | |
|
|
|
|
| |
|
|
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
|
|
2006 | |
|
2006 | |
|
2006 | |
|
2006 | |
|
Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gross premiums written
|
|
$ |
592,811 |
|
|
$ |
584,059 |
|
|
$ |
619,972 |
|
|
$ |
538,900 |
|
|
$ |
2,335,742 |
|
Net premiums written
|
|
|
536,000 |
|
|
|
542,819 |
|
|
|
573,465 |
|
|
|
508,651 |
|
|
|
2,160,935 |
|
Net premiums earned
|
|
|
553,452 |
|
|
|
584,609 |
|
|
|
545,370 |
|
|
|
542,395 |
|
|
|
2,225,826 |
|
Net investment income
|
|
|
124,392 |
|
|
|
195,561 |
|
|
|
83,194 |
|
|
|
83,972 |
|
|
|
487,119 |
|
Net realized investment gains
|
|
|
78,645 |
|
|
|
80,789 |
|
|
|
1,439 |
|
|
|
28,256 |
|
|
|
189,129 |
|
Total revenues
|
|
|
756,489 |
|
|
|
860,959 |
|
|
|
630,003 |
|
|
|
654,623 |
|
|
|
2,902,074 |
|
Total expenses
|
|
|
523,938 |
|
|
|
572,077 |
|
|
|
538,523 |
|
|
|
528,321 |
|
|
|
2,162,859 |
|
Income before income taxes
|
|
|
232,551 |
|
|
|
288,882 |
|
|
|
91,480 |
|
|
|
126,302 |
|
|
|
739,215 |
|
Net income available to common shareholders
|
|
|
150,414 |
|
|
|
207,569 |
|
|
|
57,893 |
|
|
|
83,773 |
|
|
|
499,649 |
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.20 |
|
|
$ |
3.03 |
|
|
$ |
0.84 |
|
|
$ |
1.19 |
|
|
$ |
7.24 |
|
|
Diluted
|
|
$ |
2.08 |
|
|
$ |
2.87 |
|
|
$ |
0.81 |
|
|
$ |
1.16 |
|
|
$ |
6.93 |
|
167
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended | |
|
|
|
|
| |
|
|
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
|
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
Year | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gross premiums written
|
|
$ |
673,477 |
|
|
$ |
601,657 |
|
|
$ |
734,134 |
|
|
$ |
617,652 |
|
|
$ |
2,626,920 |
|
Net premiums written
|
|
|
609,535 |
|
|
|
537,479 |
|
|
|
631,629 |
|
|
|
523,026 |
|
|
|
2,301,669 |
|
Net premiums earned
|
|
|
564,124 |
|
|
|
568,187 |
|
|
|
590,504 |
|
|
|
554,005 |
|
|
|
2,276,820 |
|
Net investment income
|
|
|
65,819 |
|
|
|
50,614 |
|
|
|
47,642 |
|
|
|
56,017 |
|
|
|
220,092 |
|
Net realized investment gains (losses)
|
|
|
(3,989 |
) |
|
|
22,608 |
|
|
|
51,364 |
|
|
|
(10,117 |
) |
|
|
59,866 |
|
Total revenues
|
|
|
625,954 |
|
|
|
641,409 |
|
|
|
689,510 |
|
|
|
599,905 |
|
|
|
2,556,778 |
|
Total expenses
|
|
|
579,241 |
|
|
|
562,447 |
|
|
|
874,401 |
|
|
|
722,531 |
|
|
|
2,738,620 |
|
Income (loss) before income taxes
|
|
|
46,713 |
|
|
|
78,962 |
|
|
|
(184,891 |
) |
|
|
(122,626 |
) |
|
|
(181,842 |
) |
Net income (loss) available to common shareholders
|
|
|
31,488 |
|
|
|
51,723 |
|
|
|
(121,652 |
) |
|
|
(79,225 |
) |
|
|
(117,666 |
) |
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.49 |
|
|
$ |
0.80 |
|
|
$ |
(1.90 |
) |
|
$ |
(1.17 |
) |
|
$ |
(1.81 |
) |
|
Diluted
|
|
$ |
0.46 |
|
|
$ |
0.75 |
|
|
$ |
(1.90 |
) |
|
$ |
(1.17 |
) |
|
$ |
(1.81 |
) |
Due to changes in the number of weighted average common shares
outstanding during 2006 and 2005, the sum of quarterly earnings
per common share amounts will not equal the total for the year.
Hub International Limited (Hub), which is 13.3%
owned by the Company (see Note 7(d)), announced on
February 26, 2007 that it has agreed to be acquired by a
group of private equity firms. The private equity firms have
agreed to pay $40.00 per share in cash for Hub. The
transaction is subject to Hub shareholder approval, Canadian
court approval, and regulatory approvals in the United States
and Canada, and is expected to be completed toward the end of
the second quarter of 2007. The Company expects to recognize
pre-tax income of approximately $110.0 million
($71.5 million, after tax), principally through realized
gains, related to the sale of its ownership in Hub.
On February 8, 2007, the Company was added as a
co-defendant in an amended complaint in an existing action
against its majority shareholder, Fairfax Financial Holdings
Limited, and certain of Fairfaxs officers and directors,
who include certain current and former directors of the Company.
The amended and consolidated complaint has been filed in the
United States District Court for the Southern District of
New York by the lead plaintiffs, who seek to represent a
class of all purchasers and acquirers of securities of Fairfax
between May 21, 2003 and March 22, 2006, inclusive,
and allege, among other things, that the defendants violated
U.S. federal securities laws by making material
misstatements or failing to disclose certain material
information. The amended complaint seeks, among other things,
certification of the putative class, unspecified compensatory
damages, unspecified injunctive relief, reasonable costs and
attorneys fees and other relief. The Company intends to
vigorously defend against the allegations. At this early stage
of the proceedings, it is not possible to make any determination
regarding the likely outcome of this matter.
168
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders of Odyssey Re
Holdings Corp.
Our audits of the consolidated financial statements, of
managements assessment of the effectiveness of internal
control over financial reporting and of the effectiveness of
internal control over financial reporting referred to in our
report dated March 9, 2007 appearing in the 2006 Annual
Report to Shareholders of Odyssey Re Holdings Corp. (which
report, consolidated financial statements and assessment are
incorporated by reference in this Annual Report on
Form 10-K) also
included an audit of the financial statement schedules listed in
Item 8 of this
Form 10-K. In our
opinion, these financial statement schedules present fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 9, 2007
169
SCHEDULE I
ODYSSEY RE HOLDINGS CORP.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 | |
|
|
| |
|
|
|
|
Amount at | |
|
|
Cost or | |
|
|
|
Which Shown | |
|
|
Amortized | |
|
|
|
in the | |
Type of Investment |
|
Cost | |
|
Fair Value | |
|
Balance Sheet | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government, government agencies and authorities
|
|
$ |
2,613,336 |
|
|
$ |
2,517,372 |
|
|
$ |
2,517,372 |
|
|
|
States, municipalities and political subdivisions
|
|
|
175,541 |
|
|
|
181,026 |
|
|
|
181,026 |
|
|
|
Foreign governments
|
|
|
435,927 |
|
|
|
441,452 |
|
|
|
441,452 |
|
|
|
All other corporate
|
|
|
322,852 |
|
|
|
361,730 |
|
|
|
361,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available for sale
|
|
|
3,547,656 |
|
|
|
3,501,580 |
|
|
|
3,501,580 |
|
|
|
|
|
|
|
|
|
|
|
Equity securities, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank, trusts and insurance companies
|
|
|
162,065 |
|
|
|
195,420 |
|
|
|
195,420 |
|
|
|
Industrial and miscellaneous and all other
|
|
|
386,073 |
|
|
|
412,193 |
|
|
|
412,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities, at fair value
|
|
|
548,138 |
|
|
|
607,613 |
|
|
|
607,613 |
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
242,340 |
|
|
|
242,340 |
|
|
|
242,340 |
|
|
|
|
|
|
|
|
|
|
|
Other invested assets
|
|
|
164,334 |
|
|
|
165,247 |
|
|
|
165,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4,502,468 |
|
|
$ |
4,516,780 |
|
|
$ |
4,516,780 |
|
|
|
|
|
|
|
|
|
|
|
170
SCHEDULE II
ODYSSEY RE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(In thousands, | |
|
|
except share amounts) | |
ASSETS
|
|
|
|
|
|
|
|
|
Investments and cash:
|
|
|
|
|
|
|
|
|
|
Fixed income securities, available for sale, at fair value
(amortized cost $22,359 and $22,475, respectively)
|
|
$ |
22,362 |
|
|
$ |
22,380 |
|
|
Investment in subsidiary, at equity
|
|
|
2,599,736 |
|
|
|
2,218,910 |
|
|
Cash and cash equivalents
|
|
|
36,409 |
|
|
|
80,053 |
|
|
|
|
|
|
|
|
|
|
Total investments and cash
|
|
|
2,658,507 |
|
|
|
2,321,343 |
|
Accrued investment income
|
|
|
105 |
|
|
|
522 |
|
Other assets
|
|
|
4,588 |
|
|
|
3,637 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,663,200 |
|
|
$ |
2,325,502 |
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$ |
512,504 |
|
|
$ |
469,155 |
|
Income taxes payable
|
|
|
44,876 |
|
|
|
758 |
|
Interest payable
|
|
|
4,866 |
|
|
|
4,624 |
|
Payable for acquisition of subsidiary common stock
|
|
|
|
|
|
|
200,000 |
|
Other liabilities
|
|
|
17,375 |
|
|
|
11,510 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
579,621 |
|
|
|
686,047 |
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred shares, $0.01 par value; 200,000,000 shares
authorized; 2,000,000 Series A shares and 2,000,000
Series B shares issued and outstanding
|
|
|
40 |
|
|
|
40 |
|
Common shares, $0.01 par value; 500,000,000 shares
authorized; 71,218,616 and 69,242,857 shares issued,
respectively
|
|
|
712 |
|
|
|
692 |
|
Additional paid-in capital
|
|
|
1,029,349 |
|
|
|
984,571 |
|
Treasury shares, at cost (77,668 and 115,325 shares,
respectively)
|
|
|
(2,528 |
) |
|
|
(2,916 |
) |
Unearned stock compensation
|
|
|
|
|
|
|
(1,770 |
) |
Accumulated other comprehensive income, net of deferred income
taxes
|
|
|
25,329 |
|
|
|
119,039 |
|
Retained earnings
|
|
|
1,030,677 |
|
|
|
539,799 |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,083,579 |
|
|
|
1,639,455 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
2,663,200 |
|
|
$ |
2,325,502 |
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction
with the accompanying notes and with the consolidated financial
statements and notes thereto.
171
SCHEDULE II
ODYSSEY RE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
1,461 |
|
|
$ |
2,757 |
|
|
$ |
10 |
|
Net realized capital gains (losses)
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Equity in net income (loss) of subsidiary
|
|
|
534,599 |
|
|
|
(76,051 |
) |
|
|
229,283 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
536,060 |
|
|
|
(73,294 |
) |
|
|
229,294 |
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
16,938 |
|
|
|
23,882 |
|
|
|
13,477 |
|
Interest expense
|
|
|
37,910 |
|
|
|
29,991 |
|
|
|
25,609 |
|
Loss on early extinguishment of debt
|
|
|
2,403 |
|
|
|
3,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
57,251 |
|
|
|
57,695 |
|
|
|
39,086 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
478,809 |
|
|
|
(130,989 |
) |
|
|
190,208 |
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(1,340 |
) |
|
|
5,205 |
|
|
|
(3,452 |
) |
|
Deferred
|
|
|
(27,757 |
) |
|
|
(20,472 |
) |
|
|
(11,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total federal and foreign income tax benefit
|
|
|
(29,097 |
) |
|
|
(15,267 |
) |
|
|
(14,993 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
507,906 |
|
|
|
(115,722 |
) |
|
|
205,201 |
|
Preferred dividends
|
|
|
(8,257 |
) |
|
|
(1,944 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$ |
499,649 |
|
|
$ |
(117,666 |
) |
|
$ |
205,201 |
|
Retained earnings, beginning of year
|
|
|
539,799 |
|
|
|
665,715 |
|
|
|
468,621 |
|
Dividends to common shareholders
|
|
|
(8,771 |
) |
|
|
(8,250 |
) |
|
|
(8,107 |
) |
|
|
|
|
|
|
|
|
|
|
Retained earnings, end of year
|
|
$ |
1,030,677 |
|
|
$ |
539,799 |
|
|
$ |
665,715 |
|
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction
with the accompanying notes and with the consolidated financial
statements and notes thereto.
172
SCHEDULE II
ODYSSEY RE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
507,906 |
|
|
$ |
(115,722 |
) |
|
$ |
205,201 |
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss of subsidiary
|
|
|
(534,599 |
) |
|
|
76,051 |
|
|
|
(229,283 |
) |
|
Federal and foreign income taxes
|
|
|
47,619 |
|
|
|
21,276 |
|
|
|
10,655 |
|
|
Other assets and liabilities, net
|
|
|
4,257 |
|
|
|
(2,746 |
) |
|
|
5,402 |
|
|
Bond premium amortization, net
|
|
|
(252 |
) |
|
|
(83 |
) |
|
|
|
|
|
Amortization of restricted shares
|
|
|
5,642 |
|
|
|
2,869 |
|
|
|
1,778 |
|
|
Net realized investment (gains) losses
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Loss on early extinguishment of debt
|
|
|
2,403 |
|
|
|
3,822 |
|
|
|
|
|
|
Dividend from subsidiary
|
|
|
60,000 |
|
|
|
22,500 |
|
|
|
55,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
92,976 |
|
|
|
7,967 |
|
|
|
48,752 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of fixed income securities
|
|
|
22,642 |
|
|
|
|
|
|
|
|
|
Purchases of fixed income securities
|
|
|
(22,331 |
) |
|
|
(22,392 |
) |
|
|
|
|
Acquisition of subsidiary
|
|
|
|
|
|
|
|
|
|
|
(43,029 |
) |
Capital contribution to subsidiary
|
|
|
(200,000 |
) |
|
|
(185,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(199,689 |
) |
|
|
(207,392 |
) |
|
|
(43,029 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from common share issuance
|
|
|
1,300 |
|
|
|
102,135 |
|
|
|
|
|
Net proceeds from preferred share issuance
|
|
|
|
|
|
|
97,511 |
|
|
|
|
|
Net proceeds from debt issuance
|
|
|
138,966 |
|
|
|
123,168 |
|
|
|
|
|
Repayment of debt
|
|
|
(59,333 |
) |
|
|
(34,202 |
) |
|
|
(101 |
) |
Purchase of treasury shares
|
|
|
(3,095 |
) |
|
|
(4,130 |
) |
|
|
(10,090 |
) |
Dividends paid on preferred shares
|
|
|
(8,107 |
) |
|
|
|
|
|
|
|
|
Dividends paid on common shares
|
|
|
(8,771 |
) |
|
|
(8,250 |
) |
|
|
(8,107 |
) |
Proceeds from the exercise of stock options
|
|
|
1,438 |
|
|
|
1,503 |
|
|
|
404 |
|
Excess tax benefit from stock-based compensation
|
|
|
671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
63,069 |
|
|
|
277,735 |
|
|
|
(17,894 |
) |
Increase (decrease) in cash and cash equivalents
|
|
|
(43,644 |
) |
|
|
78,310 |
|
|
|
(12,171 |
) |
Cash and cash equivalents, beginning of year
|
|
|
80,053 |
|
|
|
1,743 |
|
|
|
13,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
36,409 |
|
|
$ |
80,053 |
|
|
$ |
1,743 |
|
|
|
|
|
|
|
|
|
|
|
The condensed financial statements should be read in conjunction
with the accompanying notes and with the consolidated financial
statements and notes thereto.
173
ODYSSEY RE HOLDINGS CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY
(1) Dividends received from subsidiaries, which were
previously reported as a financing activity, have been
appropriately classified as an operating activity beginning in
2006, with conforming changes in 2005 and 2004.
(2) The registrants investment in Odyssey America is
accounted for under the equity method of accounting.
174
SCHEDULE III
ODYSSEY RE HOLDINGS CORP.
SUPPLEMENTAL INSURANCE INFORMATION
AS OF DECEMBER 31, 2006 AND 2005 AND
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization | |
|
|
|
|
|
|
Net unpaid | |
|
|
|
|
|
|
|
|
|
|
|
of net | |
|
|
|
|
Deferred | |
|
losses and | |
|
|
|
|
|
|
|
|
|
Net losses | |
|
deferred | |
|
|
|
|
policy | |
|
loss | |
|
Gross | |
|
Net | |
|
Net | |
|
Net | |
|
and loss | |
|
policy | |
|
Net | |
|
|
acquisition | |
|
adjustment | |
|
unearned | |
|
premiums | |
|
premiums | |
|
investment | |
|
adjustment | |
|
acquisition | |
|
underwriting | |
Segment |
|
costs | |
|
expenses | |
|
premiums | |
|
written | |
|
earned | |
|
income | |
|
expenses | |
|
costs | |
|
expenses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
68,245 |
|
|
$ |
2,518,721 |
|
|
$ |
275,322 |
|
|
$ |
897,819 |
|
|
$ |
975,039 |
|
|
$ |
412,097 |
|
|
$ |
765,787 |
|
|
$ |
222,298 |
|
|
$ |
77,259 |
|
EuroAsia
|
|
|
39,973 |
|
|
|
575,573 |
|
|
|
140,909 |
|
|
|
542,454 |
|
|
|
531,378 |
|
|
|
11,131 |
|
|
|
320,434 |
|
|
|
117,043 |
|
|
|
17,547 |
|
London Market
|
|
|
14,153 |
|
|
|
908,153 |
|
|
|
109,333 |
|
|
|
312,524 |
|
|
|
333,508 |
|
|
|
46,166 |
|
|
|
182,478 |
|
|
|
56,549 |
|
|
|
29,515 |
|
U.S. Insurance
|
|
|
27,515 |
|
|
|
400,693 |
|
|
|
215,764 |
|
|
|
408,138 |
|
|
|
385,901 |
|
|
|
16,264 |
|
|
|
215,498 |
|
|
|
68,258 |
|
|
|
29,155 |
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
149,886 |
|
|
$ |
4,403,140 |
|
|
$ |
741,328 |
|
|
$ |
2,160,935 |
|
|
$ |
2,225,826 |
|
|
$ |
487,119 |
|
|
$ |
1,484,197 |
|
|
$ |
464,148 |
|
|
$ |
153,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
90,939 |
|
|
$ |
2,342,604 |
|
|
$ |
357,760 |
|
|
$ |
1,043,797 |
|
|
$ |
1,051,162 |
|
|
$ |
165,891 |
|
|
$ |
1,186,196 |
|
|
$ |
246,250 |
|
|
$ |
76,058 |
|
EuroAsia
|
|
|
37,120 |
|
|
|
464,561 |
|
|
|
133,984 |
|
|
|
512,704 |
|
|
|
516,175 |
|
|
|
7,694 |
|
|
|
326,043 |
|
|
|
114,333 |
|
|
|
22,547 |
|
London Market
|
|
|
21,205 |
|
|
|
786,457 |
|
|
|
127,906 |
|
|
|
375,249 |
|
|
|
386,076 |
|
|
|
34,347 |
|
|
|
348,759 |
|
|
|
57,218 |
|
|
|
29,725 |
|
U.S. Insurance
|
|
|
22,086 |
|
|
|
317,301 |
|
|
|
214,835 |
|
|
|
369,919 |
|
|
|
323,407 |
|
|
|
9,403 |
|
|
|
200,613 |
|
|
|
52,351 |
|
|
|
17,700 |
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
171,350 |
|
|
$ |
3,910,923 |
|
|
$ |
834,485 |
|
|
$ |
2,301,669 |
|
|
$ |
2,276,820 |
|
|
$ |
220,092 |
|
|
$ |
2,061,611 |
|
|
$ |
470,152 |
|
|
$ |
146,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
93,511 |
|
|
$ |
2,014,130 |
|
|
$ |
366,902 |
|
|
$ |
1,205,585 |
|
|
$ |
1,230,016 |
|
|
$ |
137,169 |
|
|
$ |
907,623 |
|
|
$ |
314,195 |
|
|
$ |
61,196 |
|
EuroAsia
|
|
|
35,796 |
|
|
|
369,185 |
|
|
|
133,847 |
|
|
|
530,774 |
|
|
|
482,359 |
|
|
|
6,409 |
|
|
|
299,791 |
|
|
|
104,365 |
|
|
|
18,222 |
|
London Market
|
|
|
25,815 |
|
|
|
589,125 |
|
|
|
151,884 |
|
|
|
389,803 |
|
|
|
422,777 |
|
|
|
14,654 |
|
|
|
293,560 |
|
|
|
72,948 |
|
|
|
27,421 |
|
U.S. Insurance
|
|
|
14,397 |
|
|
|
199,451 |
|
|
|
172,123 |
|
|
|
235,643 |
|
|
|
198,359 |
|
|
|
6,006 |
|
|
|
130,132 |
|
|
|
24,348 |
|
|
|
13,926 |
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
169,519 |
|
|
$ |
3,171,891 |
|
|
$ |
824,756 |
|
|
$ |
2,361,805 |
|
|
$ |
2,333,511 |
|
|
$ |
164,248 |
|
|
$ |
1,631,106 |
|
|
$ |
515,856 |
|
|
$ |
120,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
SCHEDULE IV
ODYSSEY RE HOLDINGS CORP.
REINSURANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed | |
|
Ceded to | |
|
|
|
Percentage of | |
|
|
|
|
from other | |
|
other | |
|
|
|
amount | |
|
|
Direct | |
|
companies | |
|
companies | |
|
Net Amount | |
|
assumed to net | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
Accident and health insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
|
712,149 |
|
|
|
1,623,593 |
|
|
|
174,807 |
|
|
|
2,160,935 |
|
|
|
75.1 |
|
|
Title insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$ |
712,149 |
|
|
$ |
1,623,593 |
|
|
$ |
174,807 |
|
|
$ |
2,160,935 |
|
|
|
75.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
Accident and health insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
|
763,270 |
|
|
|
1,863,650 |
|
|
|
325,251 |
|
|
|
2,301,669 |
|
|
|
81.0 |
|
|
Title insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$ |
763,270 |
|
|
$ |
1,863,650 |
|
|
$ |
325,251 |
|
|
$ |
2,301,669 |
|
|
|
81.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
Accident and health insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
|
702,127 |
|
|
|
1,948,648 |
|
|
|
288,970 |
|
|
|
2,361,805 |
|
|
|
82.5 |
|
|
Title insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$ |
702,127 |
|
|
$ |
1,948,648 |
|
|
$ |
288,970 |
|
|
$ |
2,361,805 |
|
|
|
82.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
SCHEDULE VI
ODYSSEY RE HOLDINGS CORP.
SUPPLEMENTAL INFORMATION (FOR PROPERTY-CASUALTY INSURANCE
UNDERWRITERS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves for | |
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss | |
|
Amortization | |
|
|
|
|
|
|
unpaid | |
|
Discount, | |
|
|
|
|
|
|
|
|
|
adjustment expenses | |
|
of net | |
|
Net paid | |
|
|
Deferred | |
|
losses and | |
|
if any | |
|
|
|
|
|
|
|
|
|
incurred related to: | |
|
deferred | |
|
losses and | |
Affiliation |
|
policy | |
|
loss | |
|
deducted | |
|
Gross | |
|
Net | |
|
Net | |
|
Net | |
|
| |
|
policy | |
|
loss | |
with |
|
acquisition | |
|
adjustment | |
|
in previous | |
|
unearned | |
|
premiums | |
|
premiums | |
|
investment | |
|
current | |
|
prior | |
|
acquisition | |
|
adjustment | |
Registrant |
|
costs | |
|
expenses | |
|
column | |
|
premiums | |
|
written | |
|
earned | |
|
income | |
|
Year | |
|
Year | |
|
costs | |
|
expenses | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Consolidated property-casualty insurance entities
|
|
$ |
149,886 |
|
|
$ |
5,142,159 |
|
|
$ |
95,129 |
|
|
$ |
741,328 |
|
|
$ |
2,160,935 |
|
|
$ |
2,225,826 |
|
|
$ |
487,119 |
|
|
$ |
1,344,322 |
|
|
$ |
139,875 |
|
|
$ |
464,148 |
|
|
$ |
153,476 |
|
(b) Unconsolidated property-casualty insurance entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Consolidated property-casualty insurance entities
|
|
$ |
171,350 |
|
|
$ |
5,117,708 |
|
|
$ |
90,342 |
|
|
$ |
834,485 |
|
|
$ |
2,301,669 |
|
|
$ |
2,276,820 |
|
|
$ |
220,092 |
|
|
$ |
1,888,946 |
|
|
$ |
172,665 |
|
|
$ |
470,152 |
|
|
|
1,294,451 |
|
(b) Unconsolidated property-casualty insurance entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Consolidated property-casualty insurance entities
|
|
$ |
169,519 |
|
|
$ |
4,224,624 |
|
|
$ |
76,725 |
|
|
$ |
824,756 |
|
|
$ |
2,361,805 |
|
|
$ |
2,333,511 |
|
|
$ |
164,248 |
|
|
$ |
1,441,086 |
|
|
$ |
190,020 |
|
|
$ |
515,856 |
|
|
$ |
932,646 |
|
(b) Unconsolidated property-casualty insurance entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures |
None.
|
|
Item 9A. |
Controls and Procedures |
|
|
(a) |
Evaluation of Disclosure Controls and Procedures |
The Companys management, with the participation of the
Chief Executive Officer and Chief Financial Officer, completed
an evaluation of the effectiveness of the design and operation
of the Companys disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange
Act)). Disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange
Commissions (the SEC) rules and forms, and
that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. Based on this evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of the fiscal year
covered by this
Form 10-K, the
Companys disclosure controls and procedures were effective.
|
|
(b) |
Managements Report on Internal Control over Financial
Reporting |
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and 15d-15(f) of the
Exchange Act and for assessing the effectiveness of internal
control over financial reporting.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness of
internal control over financial reporting to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Management, including our Chief Executive Officer and Chief
Financial Officer, has assessed the effectiveness of our
internal control over financial reporting as of
December 31, 2006. In making its assessment of internal
control over financial reporting, management used the criteria
established in Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). This assessment
included an evaluation of the design of our internal control
over financial reporting and testing of the operational
effectiveness of those controls. Based on the results of this
assessment, management has concluded that the Companys
internal control over financial reporting was effective as of
December 31, 2006.
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which is included
herein.
|
|
(c) |
Remediation of Material Weaknesses |
As disclosed in the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, initially filed with the SEC
on March 31, 2006 (the
2005 10-K),
and Amendment No. 1 to the 2005
Form 10-K, filed
with the SEC on October 16, 2006, and the Companys
Quarterly Reports on
Form 10-Q as of
and for each of the quarters in the nine months ended
September 30, 2006, management of the Company had
determined that, as of December 31, 2005, the
Companys disclosure controls and procedures were
ineffective, and had identified two material weaknesses. A
material weakness is a control deficiency or combination of
control deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. As
discussed in more detail below, the first material weakness
related to controls over the accounting for complex reinsurance
transactions, and the second material weakness related to
internal controls over the accounting for certain investment
transactions. As of
178
December 31, 2006, the Company has remediated the two
reported material weaknesses. The reported material weaknesses
and remediation results are as follows:
Material weakness related to the controls over the accounting
for complex reinsurance transactions. Management concluded
that the Company did not maintain effective controls over the
accurate accounting for complex reinsurance transactions as of
December 31, 2005. Specifically, the Company did not have
effective controls designed and in place over the consideration
and application of relevant generally accepted accounting
principles and the evaluation and documentation of risk transfer
for complex reinsurance transactions. This control deficiency
resulted in the restatement of the Companys consolidated
financial statements as of and for the years ended
December 31, 2004 and 2003 and as of and for each of the
quarters in the nine months ended September 30, 2005, as
well as audit adjustments in the fourth quarter of 2005 to the
Companys consolidated financial statements as of and for
the year ended December 31, 2005, to correct gross premiums
written, net premiums written, net premiums earned, losses and
loss adjustment expenses, acquisition costs, other underwriting
expenses, and the related balance sheet accounts.
Remediation of Material Weakness. The Company has taken
the following actions to remediate the material weakness related
to control over the accounting for complex reinsurance
transactions and the evaluation and documentation of risk
transfer for complex reinsurance transactions:
|
|
|
|
|
implementation of enhancements to the underwriting guidelines,
evaluation procedures and documentation of the risk transfer
assessment process; |
|
|
|
establishment of controls to assure compliance with underwriting
guidelines has been enhanced, including improved communication
with the accounting and actuarial functions on issues that give
rise to unusual and/or complex accounting and risk transfer
issues; |
|
|
|
implementation of the requirement that all ceded contracts
incepted since January 1, 2006 be assessed for risk
transfer and reviewed for unusual and/or complex features by the
actuarial and accounting departments; |
|
|
|
enhancements to the Companys underwriting system to allow
monitoring of the risk transfer evaluation process; and |
|
|
|
implementation of the requirement that the Companys
underwriters certify, on a quarterly basis, that the contracts
for which they are responsible comply with the Companys
underwriting guidelines, and that the existence, if any, of all
complex features or unique terms has been disclosed. |
Based upon the significant actions taken, as listed above, and
the testing and evaluation of the effectiveness of the controls,
management has concluded that the material weakness described
above has been remediated as of December 31, 2006.
Material weakness related to the accounting treatment for
certain investment transactions. As of December 31,
2005, management concluded that the Company did not maintain
effective controls, review procedures and communications related
to investment accounting to ensure conformity with generally
accepted accounting principles. Specifically, communications and
effective controls were not in place surrounding the
consideration and application of relevant generally accepted
accounting principles to the identification, valuation and
presentation of: 1) derivatives embedded in certain debt
securities, and 2) certain equity method investments. This
material weakness resulted in adjustments to the Companys
consolidated financial statements as of and for the periods
ended December 31, 2001 through 2005, and as of and for
each of the related quarters therein. Additionally, this
weakness could result in a misstatement of net investment
income, net realized investment gains (losses), fixed income
securities, common stocks, federal and foreign income taxes,
other liabilities, shareholders equity, earnings per share
and other comprehensive income, and the related accounts and
disclosures that would be material to the Companys annual
or interim financial statements and would not be prevented or
detected.
179
Remediation of Material Weakness. The Company has taken
the following actions to remediate the material weakness related
to the accounting for certain investment transactions:
|
|
|
|
|
strengthening of existing controls and addition of controls
(i) to detect investments with complex features, including
embedded derivatives and securities that would require
accounting other than under FAS 115, (ii) to determine
the accounting appropriate for those investments, and
(iii) to value any of the underlying components of these
investments containing these features consistent with applicable
accounting rules; |
|
|
|
implementation of monitoring controls to ensure that the
determination of the accounting treatment has been performed
appropriately, consistently and timely; |
|
|
|
improvement in the Companys ability to assess the
applicability of existing and new accounting pronouncements
affecting the accounting treatment of investment
transactions; and |
|
|
|
strengthening of existing internal controls to ensure improved
communication (including frequency and timeliness) with the
Companys investment manager. |
Based upon the significant actions taken, as listed above, and
the testing and evaluation of the effectiveness of the controls,
management has concluded that the material weakness described
above has been remediated as of December 31, 2006.
|
|
(d) |
Changes in Internal Controls over Financial Reporting |
There were changes, as described above, in the Companys
internal control over financial reporting during the quarter
ended December 31, 2006, related to the remediation of the
material weaknesses described above, that have materially
affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
|
|
Item 9B. |
Other Information |
No information required to be disclosed in a current report on
Form 8-K during
the three months ended December 31, 2006 was not so
reported.
Mr. Robert Giammarco previously resigned as Chief Financial
Officer of OdysseyRe, effective as of August 15, 2006, and
as OdysseyRes Executive Vice President, effective
October 31, 2006. On March 9, 2007, OdysseyRe entered
into a resignation and separation agreement with
Mr. Giammarco. Under the terms of the agreement,
Mr. Giammarco will receive a payment of $2,000,000 as
consideration for services performed while an executive of the
Company, and will forfeit all rights to shares of OdysseyRe
restricted stock that were previously granted or contemplated.
Mr. Giammarco will be subject to (i) a
12-month
non-solicitation covenant restricting him from soliciting
OdysseyRe employees and clients and (ii) a
36-month
confidentiality covenant. The agreement includes a mutual waiver
and release of all claims arising out of
Mr. Giammarcos employment relationship with OdysseyRe.
The foregoing description is qualified by reference to the full
text of the resignation and separation agreement, which is
included as Exhibit 10.32 to this Annual Report on
Form 10-K.
PART III
|
|
Item 10. |
Directors, Executive Officers and Corporate
Governance |
Reference is made to the sections captioned Election of
Directors, Information Concerning Nominees,
Information Concerning Executive Officers,
Audit Committee Financial Expert, Audit
Committee and Compliance with Section 16(a) of
the Exchange Act in our proxy statement (Proxy Statement)
for the 2007 Annual General Meeting of Shareholders, which will
be filed with the Securities and Exchange Commission within
120 days of the close of our fiscal year ended
December 31, 2006, which sections are incorporated herein
by reference.
180
Code of Ethics
Reference is made to the section captioned Code of Ethics
for Senior Financial Officers in our Proxy Statement,
which section is incorporated herein by reference.
|
|
Item 11. |
Executive Compensation |
Reference is made to the section captioned Executive
Compensation in our 2007 Proxy Statement, which is
incorporated herein by reference.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters |
Reference is made to the sections captioned Common Share
Ownership by Directors and Executive Officers and Principal
Stockholders in our Proxy Statement, which are
incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth information regarding securities
issued under our equity compensation plans as of
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
|
|
|
|
|
to Be Issued upon | |
|
Weighted Average | |
|
Number of Securities | |
|
|
Exercise of | |
|
Exercise Price of | |
|
Remaining Available | |
|
|
Outstanding Options | |
|
Outstanding Options | |
|
for Future Issuance | |
|
|
| |
|
| |
|
| |
Equity Compensation Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved by shareholders
|
|
|
503,950 |
|
|
$ |
18.96 |
|
|
|
8,712,193 |
(1) |
|
|
(1) |
Includes options to purchase 743,084 of our common shares
available for future grant under the Odyssey Re Holdings Corp.
2002 Stock Incentive Plan and 351,064 of our common shares
available for future grant under the Odyssey Re Holdings Corp.
(Non-Qualified) Employee Share Purchase Plan. In addition, under
the terms of the Odyssey Re Holdings Corp. Restricted Share Plan
and the Odyssey Re Holdings Corp. Stock Option Plan (the
Plans), we are authorized to grant awards of
restricted shares and stock options that together do not exceed
10% of our issued and outstanding common shares as of the last
business day of each calendar year. As of December 31,
2006, the number of our restricted common shares authorized for
future grant together with the number of our common shares
underlying options authorized for future grant was 7,114,095. |
|
|
Item 13. |
Certain Relationships and Related Transactions, and
Director Independence |
Reference is made to the sections captioned Certain
Relationships and Related Transactions and
Controlled Company Status in our Proxy Statement,
which are incorporated herein by reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
Reference is made to the section captioned Independent
Registered Public Accounting Firm in our Proxy Statement,
which is incorporated herein by reference.
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
Financial Statements and Schedules
The Financial Statements and schedules listed in the
accompanying index to consolidated financial statements in
Item 8 are filed as part of this report. Schedules not
included in the index have been omitted because they are not
applicable.
181
Exhibits
The exhibits listed on the accompanying Exhibits Index are
filed as a part of this Report.
182
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
ODYSSEY RE HOLDINGS CORP. |
|
|
|
|
By: |
/s/ ANDREW A. BARNARD |
|
|
|
|
Title: |
President, Chief Executive Officer |
Date: March 9, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date | |
|
|
|
|
| |
|
/s/ ANDREW A. BARNARD
Andrew
A. Barnard |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
|
March 9, 2007 |
|
|
/s/ R. SCOTT DONOVAN
R.
Scott Donovan |
|
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
March 9, 2007 |
|
|
*
V.
Prem Watsa |
|
Director |
|
|
March 9, 2007 |
|
|
*
James
F. Dowd |
|
Director |
|
|
March 9, 2007 |
|
|
*
Peter
M. Bennett |
|
Director |
|
|
March 9, 2007 |
|
|
*
Anthony
F. Griffiths |
|
Director |
|
|
March 9, 2007 |
|
|
*
Patrick
W. Kenny |
|
Director |
|
|
March 9, 2007 |
|
|
*
Samuel
A. Mitchell |
|
Director |
|
|
March 9, 2007 |
|
|
*
Brandon
Sweitzer |
|
Director |
|
|
March 9, 2007 |
|
|
*
Paul
M. Wolff |
|
Director |
|
|
March 9, 2007 |
|
|
|
|
*By: |
/s/ ANDREW A. BARNARD |
|
|
|
|
|
Andrew A. Barnard
|
|
Attorney-in-fact |
|
183
EXHIBIT INDEX
|
|
|
|
|
Number |
|
Title of Exhibit |
|
|
|
|
3.1 |
|
|
Amended and Restated Certificate of Incorporation (incorporated
herein by reference to the Registrants Amendment
No. 1 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on May 4,
2001). Also see Exhibits 4.7 and 4.8 hereto. |
|
3.2 |
|
|
Amended and Restated By-Laws (incorporated herein by reference
to the Registrants Amendment No. 1 to Registration
Statement on Form S-1 (No. 333-57642), filed with the
Commission on May 4, 2001). |
|
4.1 |
|
|
Specimen Certificate representing Common Stock (incorporated
herein by reference to the Registrants Amendment
No. 2 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on May 29,
2001). |
|
4.2 |
|
|
Indenture dated June 18, 2002 between Odyssey Re Holdings
Corp. and The Bank of New York regarding the
4.375% Convertible Senior Debentures due 2022 (incorporated
herein by reference to Exhibit 4.3 of the Registrants
registration statement on Form S-3, filed on August 8,
2002). |
|
4.3 |
|
|
Indenture dated October 31, 2003 between Odyssey Re
Holdings Corp. and The Bank of New York regarding the
6.875% Senior Notes due 2015 and the 7.65% Senior
Notes due 2013 (incorporated by reference to Exhibit 4.1 of
the Registrants Quarterly Report on Form 10-Q filed
with the Commission on November 3, 2003). |
|
4.4 |
|
|
Global Security dated October 31, 2003 representing
$150,000,000 aggregate principal amount of 7.65% Senior
Notes due 2013 (incorporated by reference to Exhibit 4.2 of
the Registrants Quarterly Report on Form 10-Q filed
with the Commission on November 3, 2003). |
|
4.5 |
|
|
Global Security dated November 18, 2003 representing
$75,000,000 aggregate principal amount of 7.65% Senior
Notes due 2013 (incorporated by reference to Exhibit 4.6 of
the Registrants Annual Report on Form 10-K filed with
the Commission on February 18, 2004). |
|
4.6 |
|
|
Global Security dated May 13, 2005, representing
$125,000,000 aggregate principal amount of 6.875% Senior
Notes due 2015 (incorporated by reference to Exhibit 4.7 of
the Registrants Quarterly Report on Form 10-Q filed
on August 9, 2005). |
|
4.7 |
|
|
Certificate of Designations setting forth the specific rights,
preferences, limitations and other terms of the Series A
Preferred Shares (incorporated by reference to the
Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 18, 2005). |
|
4.8 |
|
|
Certificate of Designations setting forth the specific rights,
preferences, limitations and other terms of the Series B
Preferred Shares (incorporated by reference to the
Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 18, 2005). |
|
4.9 |
|
|
Form of Stock Certificate evidencing the Series A Preferred
Shares (incorporated by reference to the Registrants
Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 18, 2005). |
|
4.10 |
|
|
Form of Stock Certificate evidencing the Series B Preferred
Shares (incorporated by reference to the Registrants
Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 18, 2005). |
|
4.11 |
|
|
Indenture dated as of February 22, 2006 between Odyssey Re
Holdings Corp. and Wilmington Trust Company regarding the
Floating Rate Senior Debentures, Series A (incorporated by
reference to the Registrants Annual Report on
Form 10-K filed with the Commission on March 31, 2006). |
|
4.12 |
|
|
Indenture dated as of February 22, 2006 between Odyssey Re
Holdings Corp. and Wilmington Trust Company regarding the
Floating Rate Senior Debentures, Series B (incorporated by
reference to the Registrants Annual Report on
Form 10-K filed with the Commission on March 31, 2006). |
|
4.13 |
|
|
Indenture dated as of November 28, 2006 between Odyssey Re
Holdings Corp. and Wilmington Trust Company regarding the
Floating Rate Senior Debentures, Series C (incorporated
herein by reference to the Registrants Current Report on
Form 8-K filed with the Commission on November 29,
2006). |
|
10.1 |
|
|
Affiliate Guarantee by Odyssey America Reinsurance Corporation
dated as of July 14, 2000 relating to Compagnie
Transcontinentale de Réassurance (incorporated herein by
reference to the Registrants Registration Statement on
Form S-1 (No. 333-57642), filed with the Commission on
March 26, 2001). |
184
|
|
|
|
|
Number |
|
Title of Exhibit |
|
|
|
|
10.2 |
|
|
Blanket Assumption Endorsement Agreement between Ranger
Insurance Company and Odyssey Reinsurance Corporation dated as
of July 1, 1999 (incorporated herein by reference to the
Registrants Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on
March 26, 2001). |
|
10.3 |
|
|
Tax Allocation Agreement effective as of June 19, 2001
among Fairfax Inc., Odyssey Re Holdings Corp., Odyssey America
Reinsurance Corporation, Odyssey Reinsurance Corporation, and
Hudson Insurance Company (incorporated herein by reference to
the Registrants Annual Report on Form 10-K filed with
the Commission on March 6, 2002), Inter-Company Tax
Allocation Agreement among TIG Holdings, Inc. and the subsidiary
corporations party thereto and Agreement for the Allocation and
Settlement of Consolidated Federal Income Tax Liability as
amended (each incorporated herein by reference to the
Registrants Amendment No. 2 to Registration Statement
on Form S-1 (No. 333-57642), filed with the Commission
on May 29, 2001) and Inter-Company Tax Allocation Agreement
effective as of March 4, 2003 between Odyssey Re Holdings
Corp. and Fairfax Inc. (incorporated herein by reference to the
Registrants Registration Statement on Form S-1
(No. 333-138340), filed with the Commission on
October 31, 2006). |
|
10.4 |
|
|
Employment Agreement dated as of September 14, 2005 between
Andrew A. Barnard and Odyssey Re Holdings Corp. (incorporated
herein by reference to the Registrants Quarterly Report on
Form 10-Q, filed with the Commission on September 16,
2005.** |
|
10.5 |
|
|
Employment Agreement dated as of May 23, 2001 between
Michael Wacek and Odyssey Re Holdings Corp (incorporated herein
by reference to the Registrants Amendment No. 2 to
Registration Statement on Form S-1 (No. 333-57642),
filed with the Commission on May 29, 2001).** |
|
10.6 |
|
|
Employment Agreement dates as of August 24, 2006 between R.
Scott Donovan and Odyssey Re Holdings Corp (incorporated herein
by reference to the Registrants Current Report on
Form 8-K, filed with the Commission on August 25,
2006). |
|
10.7 |
|
|
Third Amended and Modified Office Lease Agreement in relation to
300 First Stamford Place, Stamford, Connecticut and guarantee of
Odyssey Re Holdings Corp. executed in connection therewith
(incorporated herein by reference to the Registrants
Quarterly Report on Form 10-Q filed with the Commission on
November 4, 2004) which amends the Lease Agreement between
TIG Insurance Company and First Stamford Place Company, as
amended (incorporated herein by reference to the
Registrants Amendment No. 2 to Registration Statement
on Form S-1 (No. 333-57642), filed with the Commission
on May 29, 2001). |
|
10.8 |
|
|
Registration Rights Agreement dated as of June 19, 2001
among Odyssey Re Holdings Corp., TIG Insurance Company and ORH
Holdings Inc. (incorporated herein by reference to the
Registrants Annual Report on Form 10-K filed with the
Commission on March 6, 2002). |
|
10.9 |
|
|
Investment Agreement dated as of January 1, 2002 between
Hamblin Watsa Investment Counsel Ltd., Fairfax Financial
Holdings Limited and Odyssey America Reinsurance Corporation
(incorporated herein by reference to the Registrants
Annual Report on Form 10-K filed with the Commission on
March 4, 2003). |
|
10.10 |
|
|
Investment Agreement dated as of January 1, 2003 between
Hamblin Watsa Investment Counsel Ltd., Fairfax Financial
Holdings Limited and Clearwater Insurance Company (incorporated
by reference to the Registrants Annual Report on
Form 10-K filed with the Commission on March 31, 2006). |
|
10.11 |
|
|
Investment Agreement dated as of January 1, 2003 between
Hamblin Watsa Investment Counsel Ltd., Fairfax Financial
Holdings Limited and Hudson Insurance Company (incorporated by
reference to the Registrants Annual Report on
Form 10-K filed with the Commission on March 31, 2006). |
|
10.12 |
|
|
Investment Agreement dated as of January 1, 2003 between
Hamblin Watsa Investment Counsel Ltd., Fairfax Financial
Holdings Limited and Newline Underwriting Management Ltd.
(incorporated by reference to the Registrants Annual
Report on Form 10-K filed with the Commission on
March 31, 2006). |
|
10.13 |
|
|
Stop Loss Agreement dated December 31, 1995 among Skandia
America Reinsurance Corporation and Skandia Insurance Company
Ltd., as amended (incorporated herein by reference to the
Registrants Amendment No. 1 to Registration Statement
on Form S-1 (No. 333-57642), filed with the Commission on
May 4, 2001). |
185
|
|
|
|
|
Number |
|
Title of Exhibit |
|
|
|
|
10.14 |
|
|
Indemnification Agreements between Odyssey Re Holdings Corp. and
each of its directors and officers dated as of March 21,
2001 (incorporated herein by reference to the Registrants
Annual Report on Form 10-K filed with the Commission on
March 6, 2002). |
|
10.15 |
|
|
Indemnification Agreement in favor of Odyssey Reinsurance
Corporation and Hudson Insurance Company from Fairfax Financial
Holdings Limited dated as of March 22, 2001 (incorporated
herein by reference to the Registrants Amendment
No. 1 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on May 4,
2001). |
|
10.16 |
|
|
Indemnification Agreement in favor of Odyssey Reinsurance
Corporation from Fairfax Financial Holdings Limited dated as of
March 20, 2001 (incorporated herein by reference to the
Registrants Amendment No. 1 to Registration Statement
on Form S-1 (No. 333-57642), filed with the Commission
on May 4, 2001). |
|
10.17 |
|
|
Odyssey America Reinsurance Corporation Restated Employees
Retirement Plan, as amended (incorporated herein by reference to
the Registrants Amendment No. 2 to Registration
Statement on Form S-1 (No. 333-57642), filed with the
Commission on May 29, 2001).** |
|
10.18 |
|
|
Odyssey America Reinsurance Corporation Profit Sharing Plan, as
amended (incorporated herein by reference to the
Registrants Amendment No. 2 to Registration Statement
on Form S-1 (No. 333-57642), filed with the Commission on
May 29, 2001).** |
|
10.19 |
|
|
Odyssey Re Holdings Corp. Restricted Share Plan (incorporated
herein by reference to the Registrants Amendment
No. 3 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on June 7,
2001).** |
|
10.20 |
|
|
Odyssey Re Holdings Corp. Stock Option Plan (incorporated herein
by reference to the Registrants Amendment No. 3 to
Registration Statement on Form S-1 (No. 333-57642),
filed with the Commission on June 7, 2001).** |
|
10.21 |
|
|
Odyssey Re Holdings Corp. Long-Term Incentive Plan (incorporated
herein by reference to the Registrants Amendment
No. 3 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on June 7,
2001).** |
|
10.22 |
|
|
Odyssey Re Holdings Corp. Employee Share Purchase Plan
(incorporated herein by reference to the Registrants
Amendment No. 3 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on June 7,
2001).** |
|
10.23 |
|
|
Odyssey America Reinsurance Corporation 401(k) Excess Plan, as
amended (incorporated herein by reference to the
Registrants Amendment No. 2 to Registration Statement
on Form S-1 (No. 333-57642), filed with the Commission on
May 29, 2001).** |
|
10.24 |
|
|
Odyssey America Reinsurance Corporation Restated Supplemental
Retirement Plan, as amended (incorporated herein by reference to
the Registrants Amendment No. 2 to Registration
Statement on Form S-1 (No. 333-57642), filed with the
Commission on May 29, 2001).** |
|
10.25 |
|
|
Exchange Agreement among TIG Insurance Company, ORH Holdings
Inc. and Odyssey Re Holdings Corp dated as of June 19, 2001
(incorporated herein by reference to the Registrants
Annual Report on Form 10-K filed with the Commission on
March 6, 2002). |
|
10.26 |
|
|
Tax Services Agreement between Fairfax Inc., Odyssey America
Reinsurance Corporation, Odyssey Reinsurance Corporation and
Hudson Insurance Company dated as of May 10, 2001
(incorporated herein by reference to the Registrants
Amendment No. 2 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on May 29,
2001). |
|
10.27 |
|
|
Tax Services Agreement between Fairfax Inc. and Odyssey Re
Holdings Corp. dated as of May 10, 2001 (incorporated
herein by reference to the Registrants Amendment
No. 2 to Registration Statement on Form S-1
(No. 333-57642), filed with the Commission on May 29,
2001). |
|
10.28 |
|
|
Note Purchase Agreement dated as of November 15, 2001
among Odyssey Re Holdings Corp. and the purchasers listed in
Schedule A attached thereto, including the form of Notes
issued in connection therewith (incorporated herein by reference
to the Registrants Annual Report on Form 10-K filed
with the Commission on March 6, 2002). |
|
10.29 |
|
|
Odyssey Re Holdings Corp. 2002 Stock Incentive Plan
(incorporated herein by reference to Appendix A of the
Registrants definitive proxy statement filed on
March 21, 2002).** |
186
|
|
|
|
|
Number |
|
Title of Exhibit |
|
|
|
|
10.30 |
|
|
Credit Agreement dated as of September 23, 2005 among
Odyssey Re Holdings Corp., Wachovia Bank, National Association,
and the other parties thereto, and the promissory notes executed
in connection therewith (incorporated herein by reference to the
Registrants Quarterly Report on Form 10-Q filed with
the Commission on November 9, 2005). |
|
10.31 |
|
|
Commutation and Release Agreement effective as of
September 29, 2006 between Clearwater Insurance Company and
nSpire Re Limited (incorporated herein by reference to the
Registrants Registration Statement on Form S-1
(No. 333-138340), filed with the Commission on
October 31, 2006). |
|
*10.32 |
|
|
Resignation and Separation Agreement dated March 9, 2007 by and
between Odyssey Re Holdings Corp. and Robert Giammarco.** |
|
*21.1 |
|
|
List of the Registrants Subsidiaries. |
|
*23 |
|
|
Consent of PricewaterhouseCoopers LLP. |
|
*24 |
|
|
Powers of Attorney. |
|
*31.1 |
|
|
Certification of President and Chief Executive Officer pursuant
to Rule 13a-15(e) or 15d-15(e), as enacted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
*31.2 |
|
|
Certification of Executive Vice President and Chief Financial
Officer pursuant to Rule 13a-15(e) or 15d-15(e), as enacted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
*32.1 |
|
|
Certification of President and Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
*32.2 |
|
|
Certification of Executive Vice President and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as enacted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
* |
Filed herewith. |
|
** |
Management contract or compensatory plan or arrangement |
187
Exhibit 10.32
RESIGNATION AND SEPARATION AGREEMENT
THIS
RESIGNATION AND SEPARATION AGREEMENT, dated March 9, 2007 (the Agreement), by
and between ODYSSEY RE HOLDINGS CORP. (the Company) and Robert Giammarco (the
Executive).
WHEREAS, the Executive resigned from his position as Chief Financial Officer of the Company
effective August 15, 2006, and resigned from his position as Executive Vice President of the
Company, effective October 31, 2006 (the Effective Date); and
WHEREAS, the parties intend that this Agreement shall set forth the terms of the Executives
resignation and separation from the Company, and that this Agreement shall supersede all prior
agreements between the parties regarding the subject matter contained herein including, without
limitation, any agreements that may be implied by or inferred from any public or nonpublic
disclosure made by the Company pursuant to the Securities Act of 1933, the Securities Exchange Act
of 1934 or any other applicable law or regulation.
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth in this
Agreement, the parties hereto hereby agree as follows:
1. Resignation. Effective August 15, 2006, the Executive resigned from his position
as Chief Financial Officer of the Company, and the Executive hereby resigns from his position as
Executive Vice President of the Company and from all other offices and positions with the Company
and its subsidiaries, effective as of the Effective Date (or prior to such date, as applicable and
noted above). Until and including the Effective Date, the Executive shall continue to serve in his
capacity as Executive Vice President and shall perform transition services to the extent reasonably
requested by the Company.
2. Payments. In consideration of the covenants set forth herein and the waiver and
release of claims set forth below, the Company shall provide the Executive with the following
payments:
(a) Payments. In consideration for services performed while an executive of the
Company, a cash payment in the amount of $2,000,000 payable within 10 days following the
Executives execution and delivery of this Agreement.
(b) Restricted Stock. In connection with the Executives employment with the Company,
the Company previously granted the Executive 12,959 shares of restricted common stock (the
Restricted Shares pursuant to the Companys 2001 Restricted Share Plan (the
Plan). The Restricted Shares shall be forfeited without any payment to the Executive
pursuant to the terms of the Plan, effective as of the close of business on the Effective Date.
(c) No Other Compensation or Benefits. Except as otherwise specifically provided
herein or as required by Section 4980B(f) of the Internal Revenue Code of 1986, as amended
(relating to COBRA coverage) or other applicable law, the Executive shall not be
entitled to any compensation or benefits or to participate in any past, present or future
employee benefit programs or arrangements of the Company on or after the Effective Date;
provided, however, that nothing herein shall be construed to affect the Executives
right to his vested accounts under the Odyssey America Reinsurance Corporation Profit Sharing Plan
and the Odyssey America Reinsurance Corporation 401(k) Excess Plan, pursuant to the terms of such
plans.
3. Return of Property. The Executive represents that he has returned to the Company
all property of the Company, its subsidiaries and the companies set forth on the list attached
hereto as Exhibit A (the Company Group) in his possession and all property made available
to the Executive in connection with his employment by the Company, including, without limitation,
any and all Company Group credit cards, keys, security access codes, records, manuals, customer
lists, notebooks, computers, computer programs and files, papers, electronically stored information
and documents kept or made by the Executive in connection with his employment; provided,
however, that the Executive is not required to return any such documents that do not
contain any Confidential Information (as defined below).
4. Cooperation. From and after the Effective Date, the Executive shall cooperate in
all reasonable respects with the Company Group and its respective directors, officers, attorneys
and experts in connection with the conduct of any action, proceeding, investigation or litigation
involving the Company Group, including any such action, proceeding, investigation or litigation in
which the Executive is called to testify. The Company shall reimburse the Executive for all of his
travel and other direct expenses reasonably incurred by him to comply with his obligations under
this Section 4.
5. Confidentiality, Restrictive Covenants.
(a) Confidentiality. For a period of three years following the Effective Date, the
Executive agrees that all confidential and proprietary information relating to the business of the
Company Group (Confidential Information) shall be kept and treated as confidential,
except where the Company gives its prior written consent to the Executive to release specific
information. The phrase Confidential Information shall not include information that (i) is or
becomes generally available to the public other than as a result of a disclosure by, or at the
direction of, the Executive or (ii) becomes available to the Executive on a non-confidential basis
from a source other than the Company Group or any of its representatives, provided that such source
is not known to the Executive to be bound by a confidentiality agreement with or other contractual,
legal or fiduciary obligation of confidentiality to the Company Group with respect to such
information. Notwithstanding anything in this Section 5(a) to the contrary, in the event that the
Executive receives a request to disclose Confidential Information, under (A) the terms of a
subpoena (or an interrogatory or other discovery document the failure to respond to which would
subject the Executive to legal sanctions), or (B) an order issued by a court of competent
jurisdiction or by a governmental body, or the Executive otherwise becomes legally compelled to
disclose any Confidential Information, the Executive shall provide the Company with prompt written
notice so that the Company may seek a protective order or other appropriate remedy.
Notwithstanding anything herein to the contrary, the Executive may consult with his personal
attorney in connection with his compliance with the actions described in clauses (A) and (B) above.
2
(b) Non-Solicitation. The Executive agrees that during the period commencing on the
Effective Date and ending on the 12-month anniversary of the Effective Date (the Restricted
Period), the Executive shall not directly or indirectly (i) solicit, induce or attempt to
solicit or induce any person who is, or during the then most recent 12-month period was, an
employee or officer of the Company Group, and who the Executive knows or reasonably should know is
or was such a person, to leave the employ of the Company Group or violate the terms of his or her
contract, or any employment arrangement, with the Company Group; or (ii) induce or attempt to
induce any customer, client, supplier, licensee or other business relation of the Company Group
that the Executive knows or reasonably should know is such a person or entity to cease doing
business with the Company Group. As used herein the term indirectly shall include, without
limitation, the Executives permitting the use of the Executives name by any competitor of the
Company Group in violation of this Section 5(b). For purposes of clarification, this Section 5(b)
shall not apply to a solicitation by a subsequent employer of the Executive that is part of a
general solicitation for employment to the general public.
6. Exclusive Property. Subject to Section 5(a), the Executive confirms that all
Confidential Information is and shall remain the exclusive property of the Company. All business
records, papers and documents containing Confidential Information kept or made by the Executive
relating to the business of the Company Group is and shall remain the property of the Company.
(a) Remedies. Without intending to limit the remedies available to the Company Group,
the Executive agrees that a breach of any of the covenants contained in this Agreement may result
in material and irreparable injury to the Company Group for which there is no adequate remedy at
law, that it will not be possible to measure damages for such injuries precisely and that, in the
event of such a breach or threat thereof, any member of the Company Group shall be entitled to seek
a temporary restraining order or a preliminary or permanent injunction, or both, without bond or
other security, restraining the Executive from engaging in activities prohibited by the covenants
contained in this Agreement or such other relief as may be required specifically to enforce any of
the covenants contained in this Agreement. Such injunctive relief in any court shall be available
to the Company Group in lieu of, or prior to or pending determination in, any arbitration
proceeding.
7. Release.
(a) Release by Executive. In consideration of the payments provided to the Executive
under this Agreement and after opportunity to consult with counsel, the Executive, and each of the
Executives respective heirs, executors, administrators, spouse, successors and assigns
(collectively, the Releasors) hereby irrevocably and unconditionally release and forever
discharge the Company, its subsidiaries, Fairfax Financial Holdings Limited, Fairfax Inc., and
Hamblin Watsa Investment Counsel Ltd. (the Released Company Group) and each of their
respective officers, employees, directors, and agents from any and all claims, actions, causes of
action, rights, judgments, obligations, damages, demands, accountings or liabilities of whatever
kind or character (collectively, Claims), including, without limitation, any Claims under
any federal, state, local or foreign law, that the Releasors may have, or in the future may
possess, arising out of the Executives employment relationship with and service as an employee or
officer of the Released Company Group, including, without limitation, any representation,
3
action or event relating to his hiring by the Released Company Group or (ii) the Executives
resignation from the Released Company Group (Released Executive Claims);
provided, however, that the release set forth in this Section 7(a) shall not apply
to any of the obligations of the Company under this Agreement. The Releasors further agree that
the payments described in this Agreement shall be in full satisfaction of any and all Released
Executive Claims for payments or benefits, whether express or implied, that the Releasors may have
against the Released Company Group arising out of the Executives employment relationship or the
Executives service as an employee or officer of the Released Company Group and Executives
resignation.
(b) No Assignment. The Executive represents and warrants that he has not assigned any
of the Released Executive Claims. The Company represents and warrants that it has not assigned any
of the Released Company Claims (as defined below).
(c) Claims. The Executive agrees that prior to the date hereof, he has not
instituted, assisted or otherwise participated in connection with, any action, complaint, claim,
charge, grievance, arbitration, lawsuit, or administrative agency proceeding, or action at law or
otherwise against any member of the Released Company Group or any of their respective officers,
employees, directors or agents.
(d) Release by the Released Company Group. In consideration of the covenants provided
by the Executive under this Agreement, the Released Company Group hereby irrevocably and
unconditionally releases and forever discharges the Executive and his heirs, executors,
administrators, spouse, agents, successors and assigns (the Executive Released Parties)
from any and all Claims that the Released Company Group may have, or in the future may possess,
arising out of (i) the Executives employment relationship with the Released Company Group or his
resignation therefrom or (ii) any other matter, cause or thing whatsoever from the first date of
the Executives employment with the Company to the Effective Date (the Released Company
Claims); provided, however, notwithstanding the generality of the foregoing,
nothing herein shall be deemed to release the Executive from (A) any rights or claims of the
Released Company Group arising out of or attributable to the Executives actions or omissions
involving or arising from fraud, theft, willful bad faith or intentional or gross negligent conduct
or material violations of any law, rule statute or regulation while employed by the Released
Company Group, with any action to be taken against the Executive to be determined by a majority of
the members of the Board of Directors of the Company; and (B) the Executives obligations under
this Agreement.
8. Miscellaneous.
(a) Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties hereto with respect to the matters covered hereby and supersedes and
replaces any express or implied, written or oral, prior agreement or plans or arrangement with
respect to the terms of the Executives employment or the Executives resignation from the Company
Group which the Executive may have had with the Company Group, including, without limitation, any
agreements that may be implied by or inferred from any public or nonpublic disclosure made by the
Company pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934 or any other
applicable law or regulation. This Agreement may be
4
amended only by a written document signed by the parties hereto.
(b) Withholding Taxes and Payroll Deductions. Any payments made or benefits provided
to the Executive under this Agreement shall be reduced by any applicable withholding taxes and
payroll deductions.
(c) Indemnification. Notwithstanding any provision herein to the contrary, the
Indemnification Agreement between the Executive and the Company dated as of June 15, 2006, which is
attached as Exhibit B, is incorporated by reference into this Agreement and shall continue in full
force and effect in accordance with its terms.
(d) Governing Law. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York, without giving effect to the conflicts of laws principles
thereof.
(e) Waiver. The failure of any party to this Agreement to enforce any of its terms,
provisions or covenants shall not be construed as a waiver of the same or of the right of such
party to enforce the same. Waiver by any party hereto of any breach or default by another party of
any term or provision of this Agreement shall not operate as a waiver of any other breach or
default.
(f) Severability. In the event that any one or more of the provisions of this
Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remainder of the Agreement shall not in any way be affected or impaired
thereby. Moreover, if any one or more of the provisions contained in this Agreement shall be held
to be excessively broad as to duration, activity or subject, such provisions shall be construed by
limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable law.
(g) Section 409A Savings Clause. If any provision of this Agreement contravenes
Section 409A of the Code, the regulations promulgated thereunder or any related guidance issued by
the U.S. Treasury Department, the Company may, in consultation with the Executive, amend this
Agreement or any provision hereof to maintain to the maximum extent practicable the original intent
of the provision without violating the provisions of Section 409A of the Code.
(h) Descriptive Headings. The paragraph headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of this Agreement.
(i) Counterparts. This Agreement may be executed in one or more counterparts, which,
together, shall constitute one and the same agreement.
(j) Successors and Assigns. Except as otherwise provided herein, this Agreement shall
inure to the benefit of and be enforceable by the Executive and the Company and their respective
successors and assigns.
(k) Arbitration. Any dispute or controversy arising under or in connection
5
with this Agreement that cannot be mutually resolved by the parties hereto shall be submitted
to final and binding arbitration to be conducted in New York, New York under the employment
arbitration rules of the American Arbitration Association before a single arbitrator of exemplary
qualifications and stature, who shall be selected jointly by the Company and the Executive, or, if
the Company and the Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association. The arbitrator shall issue a confidential written opinion
stating the essential findings and conclusions upon which the arbitrators award is based. The
arbitrator will be bound by the substantive law of the State of New York but will not be bound by
the rules of procedure customary in courts of law. The parties consent to the jurisdiction of the
State and Federal District Courts in and for New York City, New York, for all purposes in
connection with arbitration, including the entry of judgment on any award. The arbitrator shall
have no power to alter or modify any express provision of this Agreement or to render an award
which has the effect of altering or modifying any express provision hereof. Nothing in this
paragraph shall affect either partys ability to seek from a court injunctive or equitable relief
at any time.
[NOTHING FURTHER ON THIS PAGE]
6
IN WITNESS WHEREOF, the Company and the Released Company Group have executed this Agreement as
of the date first set forth above and the Executive has executed this Agreement as of the date set
forth below.
ODYSSEY RE HOLDINGS CORP.
By:
Name:
Title:
FAIRFAX FINANCIAL HOLDINGS LIMITED
(AS TO ARTICLE 7 ONLY)
By
Name:
Title:
FAIRFAX INC.
(AS TO ARTICLE 7 ONLY)
By:
Name:
Title:
HAMBLIN WATSA INVESTMENT COUNSEL LTD.
(AS TO ARTICLE 7 ONLY)
By:
Name:
Title:
THE EXECUTIVE HEREBY ACKNOWLEDGES THAT THE EXECUTIVE HAS READ THIS AGREEMENT, THAT THE EXECUTIVE
FULLY KNOWS, UNDERSTANDS AND APPRECIATES ITS CONTENTS, AND THAT THE EXECUTIVE HEREBY ENTERS INTO
THIS AGREEMENT VOLUNTARILY AND OF HIS OWN FREE WILL.
ACCEPTED AND AGREED:
Robert Giammarco
Date:
7
EXHIBIT A
Fairfax Financial Holdings Limited
Fairfax Inc.
Hamblin Watsa Investment Counsel Ltd.
Northbridge Financial Corporation and its operating insurance subsidiaries
Crum & Forster Holdings Corp. and its operating insurance subsidiaries
TIG Insurance Company
nSpire Re Limited
RiverStone Insurance (UK) Limited
CRC (Bermuda) Reinsurance Limited
Wentworth Insurance Company Ltd.
Falcon Insurance Company (Hong Kong) Ltd.
First Capital Insurance Limited
ICICI Lombard General Insurance Company Limited
RiverStone Group LLC/RiverStone Holdings Limited
TRG Holding Corporation
Cunningham Lindsey Group Inc.
MFXchange Holdings Inc./MFXchange US, Inc.
8
EXHIBIT B
Indemnification Agreement
9
Exhibit 21.1
List of the Registrants Subsidiaries
|
|
|
Name |
|
Jurisdiction of Incorporation |
Odyssey America Reinsurance Corporation
|
|
Connecticut |
Clearwater Insurance Company |
|
Delaware |
Hudson Insurance Company
|
|
Delaware |
Hudson Specialty Insurance Company
|
|
New York |
Clearwater Select Insurance Company |
|
Delaware |
Napa
River Insurance Services, Inc. |
|
California |
O.R.E. Holdings Limited
|
|
Mauritius |
Odyssey UK Holdings Corp.
|
|
Delaware |
Newline Holdings UK Limited
|
|
United Kingdom |
Newline
Underwriting Management Limited |
|
United Kingdom |
Newline
Insurance Company Limited |
|
United Kingdom |
Newline Corporate Name Limited
|
|
United Kingdom |
Newline Underwriting Limited
|
|
United Kingdom |
Odyssey Holdings Latin America, Inc.
|
|
Delaware |
Odyssey Latin America Inc.
|
|
Delaware |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on
Form S-3 (No. 333-97819, No. 333-113026) and Form S-8 (No. 333-140964, No. 333-138892,
No. 333-103969, No. 333-75162)
of Odyssey Re Holdings Corp. of our reports dated
March 9, 2007 relating to the financial
statements, financial statement schedules, managements assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal control over
financial reporting, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 9, 2007
Exhibit 24
ODYSSEY RE HOLDINGS CORP.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and
appoints, jointly and severally, V. Prem Watsa, Andrew A. Barnard and
R. Scott Donovan, his or
her true and lawful attorneys-in-fact and agents, each of whom may act alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign (1) an annual report on Form 10-K, or such other form as may be recommended by
counsel, to be filed with the Securities and Exchange Commission (the "Commission"), and
any and all amendments thereto, and any and all instruments and documents filed as a part of or in
connection with the said annual report or amendments thereto, and (2) any reports and applications
relating thereto to be filed by the Company with the Commission and/or any national securities
exchanges under the Securities Exchange Act of 1934, as amended, and any and all amendments
thereto, and any and all instruments and documents filed as part of or in connection with such
reports or amendments thereto; granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing requisite and necessary to
be done, as fully for all intents and purposes as he might or could do in person, and hereby
ratifying and confirming all that the said attorneys-in-fact and agents or any of them, may
lawfully do or cause to be done by virtue hereof.
IN
WITNESS WHEREOF, the undersigned have executed this power of
attorney as of the 9th day of March, 2007.
|
|
|
|
|
|
/s/ Andrew A. Barnard
|
|
/s/ R. Scott Donovan |
|
|
|
Andrew A. Barnard
|
|
R. Scott Donovan |
|
|
|
/s/ V. Prem Watsa
|
|
/s/ James F. Dowd |
|
|
|
V. Prem Watsa
|
|
James F. Dowd |
|
|
|
/s/ Peter M. Bennett
|
|
/s/ Anthony F. Griffiths |
|
|
|
Peter M. Bennett
|
|
Anthony F. Griffiths |
|
|
|
/s/ Patrick W. Kenny
|
|
/s/ Samuel A. Mitchell |
|
|
|
Patrick W. Kenny
|
|
Samuel A. Mitchell |
|
|
|
/s/ Brandon W. Sweitzer
|
|
/s/ Paul M. Wolff |
|
|
|
Brandon W. Sweitzer
|
|
Paul M. Wolff |
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Andrew A. Barnard, President and Chief Executive Officer of Odyssey Re Holdings Corp., certify
that:
1. |
I have reviewed this annual report on Form 10-K of the registrant, Odyssey Re Holdings Corp.; |
|
2. |
Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
annual report; |
|
4. |
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this annual report is being
prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this annual report based on
such evaluation; and |
|
(d) |
disclosed in this annual report any change in the registrants internal control over
financial reporting that occurred during the registrants fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
|
5. |
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
|
|
|
|
|
|
|
|
Date: March 9, 2007 |
By: |
/s/ ANDREW A. BARNARD
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, R. Scott Donovan, Executive Vice President and Chief Financial Officer of Odyssey Re Holdings
Corp., certify that:
1. |
I have reviewed this annual report on Form 10-K of the registrant, Odyssey Re Holdings Corp.; |
|
2. |
Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
annual report; |
|
4. |
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and we have: |
|
(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this annual report is being
prepared; |
|
(b) |
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this annual report based on
such evaluation; and |
|
(d) |
disclosed in this annual report any change in the registrants internal control over
financial reporting that occurred during the registrants fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrants internal
control over financial reporting; and |
|
5. |
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions): |
|
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and |
|
(b) |
any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting. |
|
|
|
|
|
|
|
|
Date: March 9, 2007 |
By: |
/s/
R. SCOTT DONOVAN
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-K of Odyssey Re Holdings Corp. (the Company)
containing the financial statements of the Company for the fiscal
year ended December 31, 2005
(the Report) as filed with the Securities and Exchange Commission on the date hereof, I, Andrew
A. Barnard, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and |
|
2. |
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
/s/ ANDREW A. BARNARD
Andrew A. Barnard
President and Chief Executive Officer
March 9, 2007
A signed original of this written statement required by Section 906 has been provided to Odyssey Re
Holdings Corp. and will be retained by Odyssey Re Holdings Corp. and furnished to the Securities
and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report on Form 10-K of Odyssey Re Holdings Corp. (the Company)
containing the financial statements of the Company for the fiscal
year ended December 31, 2005 (the
Report) as filed with the Securities and Exchange
Commission on the date hereof, I, R. Scott Donovan, Executive Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. §
1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and |
|
2. |
the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
/s/ R. SCOTT DONOVAN
R. Scott Donovan
Executive Vice President and Chief Financial Officer
March 9, 2007
A signed original of this written statement required by Section 906 has been provided to Odyssey Re
Holdings Corp. and will be retained by Odyssey Re Holdings Corp. and furnished to the Securities
and Exchange Commission or its staff upon request.