The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this
Form 10-Q. References in this Form 10-Q to the terms "we," "us," "our," "the
company" or other similar terms mean the consolidated operations of Allied World
Assurance Company Holdings, AG, a Swiss holding company, and our consolidated
subsidiaries, unless the context requires otherwise. References in this Form
10-Q to the term "Allied World Switzerland" or "Holdings" means only Allied
World Assurance Company Holdings, AG. References to "Allied World Bermuda" mean
only Allied World Assurance Company Holdings, Ltd, a Bermuda holding company.
References to "our insurance subsidiaries" may include our reinsurance
subsidiaries. References in this Form 10-Q to $ are to the lawful currency of
the United States and to CHF are to the lawful currency of Switzerland.
References in this Form 10-Q to Holdings' "common shares" mean its registered
voting shares.
Note on Forward-Looking Statement
This Form 10-Q and other publicly available documents may include, and our
officers and representatives may from time to time make, projections concerning
financial information and statements concerning future economic performance and
events, plans and objectives relating to management, operations, products and
services, and assumptions underlying these projections and statements. These
projections and statements are forward-looking statements within the meaning of
The Private Securities Litigation Reform Act of 1995 and are not historical
facts but instead represent only our belief regarding future events, many of
which, by their nature, are inherently uncertain and outside our control. These
projections and statements may address, among other things, our strategy for
growth, product development, financial results and reserves. Actual results and
financial condition may differ, possibly materially, from these projections and
statements and therefore you should not place undue reliance on them. Factors
that could cause our actual results to differ, possibly materially, from those
in the specific projections and statements are discussed throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in "Risk Factors" in Item 1A. of Part I of our 2011 Annual Report
on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on
February 29, 2012 (the "2011 Form 10-K"). We are under no obligation (and
expressly disclaim any such obligation) to update or revise any forward-looking
statement that may be made from time to time, whether as a result of new
information, future developments or otherwise.
Overview
Our Business
We write a diversified portfolio of property and casualty insurance and
reinsurance internationally through our subsidiaries and branches based in
Bermuda, Europe, Hong Kong, Singapore and the United States as well as our
Lloyd's Syndicate 2232. We manage our business through three operating segments:
U.S. insurance, international insurance and reinsurance. As of June 30, 2012, we
had approximately $12.3 billion of total assets, $3.3 billion of total
shareholders' equity and $4.1 billion of total capital, which includes
shareholders' equity and senior notes.
During the three months ended June 30, 2012, we continued to experience rate
increases on property lines that had experienced significant loss activity in
the prior year. We also continued to see rate improvement during the quarter on
some of our casualty lines of business in certain jurisdictions. We believe that
there are opportunities where certain products have attractive premium rates and
that the expanded breadth of our operations allows us to target those classes of
business. Given these trends, we continue to be selective in the insurance
policies and reinsurance contracts we underwrite. Our consolidated gross
premiums written increased by $127.3 million, or 24.5%, for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011. Our net
income increased by $2.6 million to $96.4 million compared to the three months
ended June 30, 2011. The increase resulted from the improvement in underwriting
results due to significantly lower catastrophe losses. This was partially offset
by lower investment income and net realized investment gains. Net realized
investment gains decreased by $50.3 million for the three months ended June 30,
2012 compared to the same period in 2011.
Our consolidated gross premiums written increased by $247.5 million, or 22.9%,
for the six months ended June 30, 2012 compared to the six months ended June 30,
2011. Our net income increased by $212.1 million to $314.5 million compared to
the six months ended June 30, 2011, primarily as a result of lower net losses
and loss expenses. The six months ended June 30, 2011 include $199.7 million of
property catastrophe losses in the Asia-Pacific region and Midwestern United
States.
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Financial Highlights
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
($ in millions except share, per share and percentage data)
Gross premiums written $ 646.9 $ 519.6 $ 1,327.8 $ 1,080.3
Net income 96.4 93.8 314.5 102.4
Operating income 87.3 44.2 178.8 2.8
Basic earnings per share:
Net income $ 2.66 $ 2.45 $ 8.56 $ 2.69
Operating income $ 2.41 $ 1.15 $ 4.87 $ 0.08
Diluted earnings per share:
Net income $ 2.59 $ 2.36 $ 8.41 $ 2.57
Operating income $ 2.35 $ 1.11 $ 4.78 $ 0.07
Weighted average common shares
outstanding:
Basic 36,288,596 38,346,489 36,746,881 38,061,724
Diluted 37,189,722 39,800,753 37,395,559 39,873,418
Basic book value per common share $ 91.36 $ 80.23 $ 91.36 $ 80.23
Diluted book value per common
share $ 88.24 $ 76.68 $ 88.24 $ 76.68
Annualized return on average
equity (ROAE), net income 11.8 % 12.6 % 19.6 % 6.8 %
Annualized ROAE, operating income 10.7 % 6.0 % 11.1 % 0.2 %
Non-GAAP Financial Measures
In presenting the company's results, management has included and discussed
certain non-GAAP financial measures, as such term is defined in Item 10(e) of
Regulation S-K promulgated by the SEC. Management believes that these non-GAAP
measures, which may be defined differently by other companies, better explain
the company's results of operations in a manner that allows for a more complete
understanding of the underlying trends in the company's business. However, these
measures should not be viewed as a substitute for those determined in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP").
Operating income & operating income per share
Operating income is an internal performance measure used in the management of
our operations and represents after-tax operational results excluding, as
applicable, net realized investment gains or losses, net impairment charges
recognized in earnings, net foreign exchange gain or loss, impairment of
intangible assets and other non-recurring items. We exclude net realized
investment gains or losses, net impairment charges recognized in earnings, net
foreign exchange gain or loss and any other non-recurring items from our
calculation of operating income because these amounts are heavily influenced by
and fluctuate in part according to the availability of market opportunities and
other factors. We exclude impairment of intangible assets as these are
non-recurring charges. In addition to presenting net income determined in
accordance with U.S. GAAP, we believe that showing operating income enables
investors, analysts, rating agencies and other users of our financial
information to more easily analyze our results of operations and our underlying
business performance. Operating income should not be viewed as a substitute for
U.S. GAAP net income. The following is a reconciliation of operating income to
its most closely related U.S. GAAP measure, net income.
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Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
($ in millions except share, per share and percentage data)
Net income $ 96.4 $ 93.8 $ 314.5 $ 102.4
Add after tax effect of:
Net realized investment gains (8.1 ) (50.8 ) (134.6 ) (100.3 )
Foreign exchange (gain) loss (1.0 ) 1.2 (1.1 ) 0.7
Operating income $ 87.3 $ 44.2 $ 178.8 $ 2.8
Basic per share data:
Net income $ 2.66 $ 2.45 $ 8.56 $ 2.69
Add after tax effect of:
Net realized investment gains (0.22 ) (1.32 ) (3.66 ) (2.64 )
Foreign exchange (gain) loss (0.03 ) 0.02 (0.03 ) 0.03
Operating income $ 2.41 $ 1.15 $ 4.87 $ 0.08
Diluted per share data:
Net income $ 2.59 $ 2.36 $ 8.41 $ 2.57
Add after tax effect of:
Net realized investment gains (0.22 ) (1.28 ) (3.60 ) (2.52 )
Foreign exchange (gain) loss (0.02 ) 0.03 (0.03 ) 0.02
Operating income $ 2.35 $ 1.11 $ 4.78 $ 0.07
Diluted book value per share
We have included diluted book value per share because it takes into account the
effect of dilutive securities; therefore, we believe it is an important measure
of calculating shareholder returns.
As of June 30,
2012 2011
($ in millions except share and
per share data)
Price per share at period end $ 79.47 $ 57.58
Total shareholders' equity $ 3,283.9 $ 3,044.4
Basic common shares outstanding 35,942,964 37,945,043
Add:
Unvested restricted share units 185,809 473,967
Performance based equity awards 510,530 920,164
Dilutive options/warrants outstanding 1,365,245 1,124,438
Weighted average exercise price per share $ 46.04 $ 38.83
Deduct:
Options bought back via treasury method (790,888 ) (758,342 )
Common shares and common share equivalents outstanding 37,213,660
39,705,270
Basic book value per common share $ 91.36 $ 80.23
Diluted book value per common share $ 88.24
$ 76.68
Annualized return on average equity
Annualized return on average shareholders' equity ("ROAE") is calculated using
average equity, excluding the average after tax unrealized gains or losses on
investments. We present ROAE as a measure that is commonly recognized as a
standard of performance by investors, analysts, rating agencies and other users
of our financial information.
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Annualized operating return on average shareholders' equity is calculated using
operating income and average shareholders' equity, excluding the average after
tax unrealized gains or losses on investments.
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
($ in millions except percentage data)
Opening shareholders' equity $ 3,245.8 $ 2,951.0 $ 3,149.0 $ 3,075.8
Deduct: accumulated other
comprehensive income (2.3 ) (33.0 ) (14.5 ) (57.1 )
Adjusted opening shareholders' equity $ 3,243.5$ 2,918.0
$ 3,134.5$ 3,018.7
Closing shareholders' equity $ 3,283.9 $ 3,044.4 $ 3,283.9 $ 3,044.4
Deduct: accumulated other
comprehensive income (1.4 ) (23.1 ) (1.4 ) (23.1 )
Adjusted closing shareholders' equity $ 3,282.5$ 3,021.3
$ 3,282.5$ 3,021.3
Average shareholders' equity $ 3,263.0 $ 2,969.7
$ 3,208.5$ 3,020.0
Net income available to shareholders $ 96.4 $ 93.8
$ 314.5 $ 102.4
Annualized return on average
shareholders' equity - net income
available to shareholders 11.8 % 12.6 % 19.6 % 6.8 %
Operating income available to
shareholders $ 87.3 $ 44.2 $ 178.8 $ 2.8
Annualized return on average
shareholders' equity - operating
income available to shareholders 10.7 % 6.0 % 11.1 % 0.2 %
Relevant Factors
Revenues
We derive our revenues primarily from premiums on our insurance policies and
reinsurance contracts, net of any reinsurance or retrocessional coverage
purchased. Insurance and reinsurance premiums are a function of the amounts and
types of policies and contracts we write, as well as prevailing market prices.
Our prices are determined before our ultimate costs, which may extend far into
the future, are known. In addition, our revenues include income generated from
our investment portfolio, consisting of net investment income and net realized
investment gains or losses. Investment income is principally derived from
interest and dividends earned on investments, partially offset by investment
management expenses and fees paid to our custodian bank. Net realized investment
gains or losses include gains or losses from the sale of investments, as well as
the change in the fair value of investments that we mark-to-market through net
income.
Expenses
Our expenses consist largely of net losses and loss expenses, acquisition costs
and general and administrative expenses. Net losses and loss expenses incurred
are comprised of three main components:
• losses paid, which are actual cash payments to insureds and reinsureds,
net of recoveries from reinsurers;
• outstanding loss or case reserves, which represent management's best
estimate of the likely settlement amount for known claims, less the
portion that can be recovered from reinsurers; and
• reserves for losses incurred but not reported, or "IBNR", which are
reserves (in addition to case reserves) established by us that we believe
are needed for the future settlement of claims. The portion recoverable
from reinsurers is deducted from the gross estimated loss.
Acquisition costs are comprised of commissions, brokerage fees and insurance
taxes. Commissions and brokerage fees are usually calculated as a percentage of
premiums and depend on the market and line of business. Acquisition costs are
reported after (1) deducting commissions received on ceded reinsurance,
(2) deducting the part of acquisition costs relating to unearned premiums and
(3) including the amortization of previously deferred acquisition costs.
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General and administrative expenses include personnel expenses including
stock-based compensation expense, rent expense, professional fees, information
technology costs and other general operating expenses.
Ratios
Management measures results for each segment on the basis of the "loss and loss
expense ratio," "acquisition cost ratio," "general and administrative expense
ratio," "expense ratio" and the "combined ratio." Because we do not manage our
assets by segment, investment income, interest expense and total assets are not
allocated to individual reportable segments. General and administrative expenses
are allocated to segments based on various factors, including staff count and
each segment's proportional share of gross premiums written. The loss and loss
expense ratio is derived by dividing net losses and loss expenses by net
premiums earned. The acquisition cost ratio is derived by dividing acquisition
costs by net premiums earned. The general and administrative expense ratio is
derived by dividing general and administrative expenses by net premiums earned.
The expense ratio is the sum of the acquisition cost ratio and the general and
administrative expense ratio. The combined ratio is the sum of the loss and loss
expense ratio, the acquisition cost ratio and the general and administrative
expense ratio.
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our
financial position and results of operations. Our unaudited condensed
consolidated financial statements reflect determinations that are inherently
subjective in nature and require management to make assumptions and best
estimates to determine the reported values. If events or other factors cause
actual results to differ materially from management's underlying assumptions or
estimates, there could be a material adverse effect on our financial condition
or results of operations. We believe that some of the more critical judgments in
the areas of accounting estimates and assumptions that affect our financial
condition and results of operations are related to reserves for losses and loss
expenses, reinsurance recoverables, premiums and acquisition costs, valuation of
financial instruments and goodwill and other intangible asset impairment
valuation. For a detailed discussion of our critical accounting policies, please
refer to our 2011 Form 10-K. There were no material changes in the application
of our critical accounting estimates subsequent to that report.
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Results of Operations
The following table sets forth our selected consolidated statement of operations
data for each of the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
($ in millions)
Revenues
Gross premiums written $ 646.9 $ 519.6 $ 1,327.8 $ 1,080.3
Net premiums written $ 494.7 $ 395.8 $ 1,083.7 $ 876.7
Net premiums earned $ 429.7 $ 355.3 $ 831.6 $ 690.2
Net investment income 42.5 52.4 89.7 102.6
Net realized investment gains 8.6 58.9 142.2 109.3
$ 480.8 $ 466.6 $ 1,063.5 $ 902.1
Expenses
Net losses and loss expenses $ 240.4 $ 235.8 $ 465.6 $ 540.3
Acquisition costs 51.6 43.0 98.7 81.1
General and administrative expenses 73.9 67.2 144.3 135.2
Amortization and impairment of intangible assets 0.6 0.8 1.3 1.5
Interest expense 14.0 13.7 27.7 27.5
Foreign exchange (gain) loss (1.0 ) 1.2 (1.1 ) 0.7
$ 379.5 $ 361.7 $ 736.5 $ 786.3
Income before income taxes 101.3 104.9 327.0 115.8
Income tax expense 4.9 11.1 12.5 13.4
Net income $ 96.4 $ 93.8 $ 314.5 $ 102.4
Ratios
Loss and loss expense ratio 55.9 % 66.4 % 56.0 % 78.3 %
Acquisition cost ratio 12.0 % 12.1 % 11.9 % 11.7 %
General and administrative expense ratio 17.2 % 18.9 % 17.3 % 19.6 %
Expense ratio 29.2 % 31.0 % 29.2 % 31.3 %
Combined ratio 85.1 % 97.4 % 85.2 % 109.6 %
Comparison of Three Months Ended June 30, 2012 and 2011
Premiums
Gross premiums written increased by $127.3 million, or 24.5%, for the three
months ended June 30, 2012 compared to the three months ended June 30, 2011. The
overall increase in gross premiums written was primarily the result of the
following:
• Gross premiums written in our U.S. insurance segment increased by $39.3
million, or 17.3%. The increase in gross premiums written was primarily
due to increased new business across most lines, growth from premiums from
new products introduced in 2010 and 2011 and rate increases in all lines
of business. This growth was partially offset by non-recurring business,
the non-renewal of business that did not meet our underwriting
requirements (which included inadequate pricing and/or terms and
conditions) and continued competition;
• Gross premiums written in our international insurance segment increased by
$5.0 million, or 2.8%, primarily as a result of increased premiums from
new products and rate increases in select lines of business. This growth
was partially offset by the non-renewal of business that did not meet our
underwriting requirements (which included inadequate pricing and/or terms
and conditions) and continued competition; and
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• Gross premiums written in our reinsurance segment increased by $83.0
million, or 72.6%. The increase in gross premiums written was primarily
due to new business, both from new products and new regions, as well as
increased participation on renewing business combined with rate increases.
This growth was partially offset by the non-renewal of business that did
not meet our underwriting requirements (which included inadequate pricing
and/or terms and conditions) and continued competition.
The table below illustrates our gross premiums written by geographic location
for each of the periods indicated.
Three Months Ended June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
United States $ 349.5 $ 269.2 $ 80.3 29.8 %
Bermuda 193.3 177.9 15.4 8.7 %
Europe 60.0 58.2 1.8 3.1 %
Singapore 40.1 10.3 29.8 289.3 %
Hong Kong 4.0 4.0 - 0.0 %
$ 646.9 $ 519.6 $ 127.3 24.5 %
Net premiums written increased by $98.9 million, or 25.0%, for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011. The
increase in net premiums written was due to the increase in gross premiums
written. The difference between gross and net premiums written is the cost to us
of purchasing reinsurance coverage, including the cost of property catastrophe
reinsurance coverage. We ceded 23.5% of gross premiums written for the three
months ended June 30, 2012 compared to 23.8% for the same period in 2011.
Net premiums earned increased by $74.4 million, or 20.9%, for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011 as a result
of higher net premiums written in 2011 and 2012.
We evaluate our business by segment, distinguishing between U.S. insurance,
international insurance and reinsurance. The following table illustrates the mix
of our business on both a gross premiums written and net premiums earned basis.
Gross Premiums Net Premiums
Written Earned
Three Months Ended June 30, Three Months Ended June 30,
2012 2011 2012 2011
U.S. insurance 41.1 % 43.6 % 37.9 % 41.1 %
International insurance 28.4 % 34.4 % 19.2 % 22.5 %
Reinsurance 30.5 % 22.0 % 42.9 % 36.4 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
Net Investment Income
Net investment income decreased by $9.9 million, or 18.9%, for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011. The
decrease was due to lower yields on our fixed maturity investments as well as an
increased allocation to other invested assets that contribute to our total
return but carry little or no current yield. The annualized period book yield of
the investment portfolio for the three months ended June 30, 2012 and 2011 was
2.1% and 2.7%, respectively.
The decrease in the annualized period book yield was due to the reinvestment of
cash at lower rates and an increased allocation to lower risk asset classes
combined with lower market yields. As of June 30, 2012, we held 19.6% of our
total investments and cash equivalents in U.S. government or government agency
securities, compared to 14.4% as of June 30, 2011. Cash and cash equivalents
also increased to 12.4% of total investments and cash equivalents as we continue
to actively manage the duration of our investment portfolio, compared to 9.7% as
of June 30, 2011. Our average duration decreased to 2.0 years as of June 30,
2012 compared to 2.3 years as of June 30, 2011.
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Investment management expenses of $4.0 million and $3.4 million were incurred
during the three months ended June 30, 2012 and 2011, respectively. The increase
in investment management expenses was primarily due to the increase in the size
of our investment portfolio, as well as expenses from higher expense asset
classes.
As of June 30, 2012, approximately 91.4% of our fixed income investments
consisted of investment grade securities. As of June 30, 2012 and December 31,
2011, the average credit rating of our fixed income portfolio was AA- as rated
by Standard & Poor's and Aa3 as rated by Moody's.
Realized Investment Gains
During the three months ended June 30, 2012, we recognized $8.6 million in net
realized investment gains compared to $58.9 million during the three months
ended June 30, 2011. We did not recognize any net impairment charges during the
three months ended June 30, 2012 and 2011. Net realized investment gains for the
three months ended June 30, 2012 were comprised of the following:
• Net realized investment gains of $38.0 million primarily from the sale of
fixed maturity securities and equity securities, partially offset by
realized losses from the sale of other invested assets,
• Net realized and unrealized investment losses of $5.9 million on
derivatives, and
• Net realized investment losses of $23.5 million related to mark-to-market
adjustments for our other invested assets, equity securities and fixed
maturity investments that are accounted for as trading securities.
The following table shows the components of the mark-to-market adjustments for
the three months ended June 30, 2012.
Three Months Ended
June 30, 2012
($ in millions)Fixed maturity investments accounted for as trading
securities
$ (24.3 )
Other invested assets and equity securities 0.8
Total $ (23.5 )
Net realized investment gains of $58.9 million for the three months ended
June 30, 2011 were primarily comprised of the following:
• Net realized investment gains of $31.3 million from the sale of securities,
• Net realized and unrealized investment losses of $10.0 million from
derivatives, and
• Net realized investment gains of $37.6 million primarily related to the
mark-to-market adjustments for our other invested assets, equity
securities and fixed maturity investments that are accounted for as
trading securities.
The total return of our investment portfolio was 0.6% and 1.3% for the three
months ended June 30, 2012 and 2011, respectively.
Net Losses and Loss Expenses
Net losses and loss expenses increased by $4.6 million, or 2.0%, for the three
months ended June 30, 2012 compared to the three months ended June 30, 2011. The
loss and loss expense ratio decreased by 10.5 percentage points for the same
period. The increase in net loss and loss expenses was due to growth in net
premiums earned and lower net favorable prior year reserve development. This was
partially offset by the absence of significant catastrophe losses for the three
months ended June 30, 2012 compared to the same period in 2011 when we
recognized estimated losses from Asia-Pacific catastrophes and Midwestern U.S.
storms of $67.5 million. In 2011, we also incurred $11.5 million for the
commutation of prior year contracts. Excluding the prior year reserve
development, property catastrophe losses and the impact of the commutation, the
loss and loss expense ratios would have been 65.7% and 61.8% for the three
months ended June 30, 2012 and 2011, respectively.
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Three Months Ended Three Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE(2) Change Points
($ in millions)
Non-catastrophe $ 282.3 65.7 % $ 212.0 61.8 % $ 70.3 3.9 Pts
Property catastrophe - - 67.5 19.7 (67.5 ) (19.7 )
Current period 282.3 65.7 279.5 81.5 2.8 (15.8 )
Prior period (41.9 ) (9.8 ) (55.2 ) (16.1 ) 13.3 6.3
Impact of commutation(1) - - 11.5 1.0 (11.5 ) (1.0 )
Net losses and loss expenses $ 240.4 55.9 % $ 235.8 66.4 % $ 4.6 (10.5 )Pts
(1) Reflects the impact of the commutation of prior year contracts in the three
months ended June 30, 2011, which increased prior year net losses and loss
expenses by $11.5 million and increased net premiums earned by $12.4 million.
(2) Current period and prior period losses as a % of net premiums earned ("NPE")
are calculated excluding the effect of the commutation on net premiums
earned.
We recorded net favorable reserve development related to prior years of $41.9
million during the three months ended June 30, 2012 compared to net favorable
reserve development of $55.2 million for the three months ended June 30, 2011,
as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)U.S. insurance $ - $ (0.4 ) $ (1.5 ) $ (0.2 ) $ (3.9 ) $ (9.3 ) $ 0.8 $ (2.7 ) $ 4.5 $ 6.5 $ (6.2 )
International insurance 7.3 (1.1 ) (3.3 ) (7.5 ) (11.4 ) (7.5 ) (3.1 ) (1.2 ) - (1.3 ) (29.1 )
Reinsurance (0.4 ) 1.6 (1.7 ) (0.3 ) (4.8 ) (5.3 ) (0.7 ) 1.0 (5.8 ) 9.8 (6.6 )
$ 6.9 $ 0.1 $ (6.5 ) $ (8.0 ) $ (20.1 ) $ (22.1 ) $ (3.0 ) $ (2.9 ) $ (1.3 ) $ 15.0 $ (41.9 )
The net favorable reserve development is a result of actual loss emergence being
lower than anticipated. The unfavorable reserve development in our U.S.
insurance segment for the 2010 and 2011 loss years was due to adverse
development on a terminated program and certain errors and omissions products.
The unfavorable reserve development in our reinsurance segment for the 2011 loss
year was due to increased property losses and casualty non-standard auto risks.
The following table shows the net favorable reserve development by loss year for
each of our segments for the three months ended June 30, 2011.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)U.S. insurance $ - $ (0.7 ) $ (1.8 ) $ (6.7 ) $ (1.1 ) $ (2.2 ) $ 0.9 $ 0.8 $ 0.6 $ (10.2 )
International insurance (0.3 ) (1.4 ) (3.0 ) (6.3 ) (9.8 ) (14.0 ) 6.6 (6.0 ) 22.2 (12.0 )
Reinsurance (0.5 ) (0.8 ) (1.1 ) (12.9 ) (6.3 ) (3.9 ) (0.7 ) (0.8 ) (6.0 ) (33.0 )
$ (0.8 ) $ (2.9 ) $ (5.9 ) $ (25.9 ) $ (17.2 ) $ (20.1 ) $ 6.8 $ (6.0 ) $ 16.8 $ (55.2 )
The unfavorable reserve development in our international insurance segment for
the 2010 loss year was primarily due to a casualty claim emanating from an oil
field services risk.
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The following table shows the components of net losses and loss expenses for
each of the periods indicated.
Three Months
Ended June 30, Dollar
2012 2011 Change
($ in millions)
Net losses paid $ 205.2 $ 128.7 $ 76.5 Net change in reported case reserves 14.0 116.5 (102.5 )
Net change in IBNR 21.2 (9.4 ) 30.6
Net losses and loss expenses $ 240.4 $ 235.8 $ 4.6
The table below is a reconciliation of the beginning and ending reserves for
losses and loss expenses. Losses incurred and paid are reflected net of
reinsurance recoverables.
Three Months Ended
June 30,
2012 2011
($ in millions) Net reserves for losses and loss expenses, April 1$ 4,274.6$ 4,125.1
Incurred related to:
Commutation of variable-rated reinsurance contracts -
11.5
Current period non-catastrophe 282.3
212.0
Current period property catastrophe - 67.5
Prior period (41.9 ) (55.2 )
Total incurred 240.4 235.8
Paid related to:
Current period non-catastrophe 18.2 9.6
Current period property catastrophe - 9.9
Prior period 187.0 109.2
Total paid 205.2
128.7
Foreign exchange revaluation (5.9 )
5.2
Net reserve for losses and loss expenses, June 30 4,303.9 4,237.4
Losses and loss expenses recoverable 1,073.6
1,013.9
Reserve for losses and loss expenses, June 30$ 5,377.5$ 5,251.3
Acquisition Costs
Acquisition costs increased by $8.6 million, or 20.0%, for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011. The
increase in acquisition costs was primarily due to the increase in net premiums
earned. Acquisition costs as a percentage of net premiums earned were 12.0% for
the three months ended June 30, 2012 compared to 12.1% for the same period in
2011.
General and Administrative Expenses
General and administrative expenses increased by $6.7 million, or 10.0%, for the
three months ended June 30, 2012 compared to the same period in 2011. The
increase in general and administrative expenses was primarily due to increased
salary and related costs as average headcount increased by 8% to support our
continued growth, combined with higher stock compensation expense resulting from
the 15.7% increase in our share price during the quarter. This was partially
offset by $2.6 million in non-recurring costs incurred in 2011 related to the
proposed merger with Transatlantic Holdings, Inc.
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Our general and administrative expense ratio was 17.2% for the three months
ended June 30, 2012, which was lower than the 18.9% for the three months ended
June 30, 2011. The decrease was due to the growth in net premiums earned being
greater than the increase in expenses.
The expense ratio is the sum of the acquisition cost ratio and the general and
administrative expense ratio. Our expense ratio was 29.2% for the three months
ended June 30, 2012 compared to 31.0% for the three months ended June 30, 2011.
The decrease was primarily due to the 1.7 percentage point decrease in the
general and administrative expense ratio, as discussed above.
Amortization of Intangible Assets
The amortization of intangible assets decreased by $0.2 million, or 25.0%, for
the three months ended June 30, 2012 compared to the three months ended June 30,
2011. The decrease is due to certain intangible assets that were fully amortized
during 2011.
Interest Expense
Interest expense increased by $0.3 million, or 2.2%, for the three months ended
June 30, 2012 compared to the three months ended June 30, 2011. The increase was
due to fees associated with the termination of our $400 million unsecured credit
facility.
Net Income
Net income for the three months ended June 30, 2012 was $96.4 million compared
to net income of $93.8 million for the three months ended June 30, 2011. The
$2.6 million increase was primarily the result of significantly lower
catastrophe losses, partially offset by lower investment returns.
Comparison of Six Months Ended June 30, 2012 and 2011
Premiums
Gross premiums written increased by $247.5 million, or 22.9%, for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. The overall
increase in gross premiums written was primarily the result of the following:
• Gross premiums written in our U.S. insurance increased by $60.1 million,
or 14.7%. The increase in gross premiums written was primarily due to
increased new business across most lines, growth from new products
introduced in 2010 and 2011, and rate increases in all lines of business.
This growth was partially offset by non-recurring business, the
non-renewal of business that did not meet our underwriting requirements
(which included inadequate pricing and/or terms and conditions) and
continued competition;
• Gross premiums written in our international insurance segment increased by
$7.3 million, or 2.5%, primarily as a result of increased premiums from
new products, specifically our trade credit and small to mid-sized
enterprise ("SME") insurance products, and rate increases in select lines
of business. This growth was partially offset by non-recurring business,
the non-renewal of business that did not meet our underwriting
requirements (which included inadequate pricing and/or terms and
conditions) and continued competition; and
• Gross premiums written in our reinsurance segment increased by $180.1
million, or 47.4%. The increase in gross premiums written was primarily
due to new business, both from new products and new regions, as well as
increased participations on renewing business combined with rate
increases. This growth was partially offset by the non-renewal of business
that did not meet our underwriting requirements (which included inadequate
pricing and/or terms and conditions) and continued competition.
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The table below illustrates our gross premiums written by geographic location
for each of the periods indicated.
Six Months Ended June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
United States $ 738.5 $ 575.8 $ 162.7 28.3 %
Bermuda 375.4 348.3 27.1 7.8 %
Europe 135.4 122.3 13.1 10.7 %
Singapore 69.3 25.6 43.7 170.7 %
Hong Kong 9.2 8.3 0.9 10.8 %
$ 1,327.8 $ 1,080.3 $ 247.5 22.9 %
Net premiums written increased by $207.0 million, or 23.6%, for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. The increase
in net premiums written was due to the increase in gross premiums written. The
difference between gross and net premiums written is the cost to us of
purchasing reinsurance coverage, including the cost of property catastrophe
reinsurance coverage. We ceded 18.4% of gross premiums written for the six
months ended June 30, 2012 compared to 18.8% for the same period in 2011. This
decrease was due to higher writings in our reinsurance segment, where we retain
substantially all of the premiums written.
Net premiums earned increased by $141.4 million, or 20.5%, for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011 as a result
of higher net premiums written in 2011 and 2012.
We evaluate our business by segment, distinguishing between U.S. insurance,
international insurance and reinsurance. The following table illustrates the mix
of our business on both a gross premiums written and net premiums earned basis.
Gross Premiums Net Premiums
Written Earned
Six Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
U.S. insurance 35.4 % 38.0 % 38.1 % 40.8 %
International insurance 22.4 % 26.8 % 19.5 % 22.6 %
Reinsurance 42.2 % 35.2 % 42.4 % 36.6 %
Total 100.0 % 100.0 % 100.0 % 100.0 %
Net Investment Income
Net investment income decreased by $12.9 million, or 12.6%, for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. The decrease
was due to lower yields on our fixed maturity investments as well as an
increased allocation to other invested assets, which contribute to our total
return but carry little or no current yield. The annualized period book yield of
the investment portfolio for the six months ended June 30, 2012 and 2011 was
2.2% and 2.7%, respectively.
The decrease in the annualized period book yield was due to the reinvestment of
cash at lower rates and an increased allocation to lower risk asset classes
combined with lower market yields. As of June 30, 2012, we held 19.6% of our
total investments and cash equivalents in U.S. government or government agency
securities, compared to 14.4% as of June 30, 2011. Cash and cash equivalents
also increased to 12.4% of total investments and cash equivalents as we continue
to actively manage the duration of our investment portfolio, compared to 9.7% as
of June 30, 2011. Our average duration decreased to 2.0 years as of June 30,
2012 compared to 2.3 years as of June 30, 2011.
Investment management expenses of $8.3 million and $6.7 million were incurred
during the six months ended June 30, 2012 and 2011, respectively. The increase
in investment management expenses was primarily due to the increase in the size
of our investment portfolio, as well as expenses from higher expense asset
classes.
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Realized Investment Gains
During the six months ended June 30, 2012, we recognized $142.2 million in net
realized investment gains compared to net realized investment gains of $109.3
million during the six months ended June 30, 2011. During the six months ended
June 30, 2012 and 2011, we did not recognize any net impairment charges. Net
realized investment gains for the six months ended June 30, 2012 were comprised
of the following:
• Net realized investment gains of $55.3 million primarily from the sale of
fixed maturity securities and equity securities, partially offset by
realized losses on other invested assets,
• Net realized and unrealized investment gains of $0.8 million from
derivatives, and
• Net realized investment gains of $86.2 million related to mark-to-market
adjustments for other invested assets, equity securities and fixed
maturity investments accounted for as trading securities.
The following table shows the components of the mark-to-market adjustments for
the six months ended June 30, 2012.
Six Months Ended
June 30, 2012
($ in millions)
Fixed maturity investments accounted for as trading securities $ 44.2
Other invested assets and equity securities 42.0
Total $ 86.2
Net realized investment gains for the six months ended June 30, 2011 were
comprised primarily of the following:
• Net realized investment gains of $52.9 million from the sale of securities,
• Net realized and unrealized investment losses of $15.5 million on
derivatives, and
• Net realized investment gains of $71.9 million primarily related to the
mark-to-market adjustments for our other invested assets, equity
securities and fixed maturity investments that are accounted for as
trading securities.
The total return of our investment portfolio was 2.6% and 2.2% for the six
months ended June 30, 2012 and 2011, respectively.
Net Losses and Loss Expenses
Net losses and loss expenses decreased by $74.7 million, or 13.8%, for the six
months ended June 30, 2012 compared to the six months ended June 30, 2011. The
loss and loss expense ratio decreased by 22.3 percentage points for the same
period. The decrease in net loss and loss expenses was due to the absence of
significant catastrophe losses for the six months ended June 30, 2012 compared
to the same period in 2011, when we recognized estimated losses from
Asia-Pacific catastrophes and Midwestern U.S. storms of $199.7 million. This was
partially offset by lower net favorable prior year reserve development.
Excluding the prior year reserve development, property catastrophe losses and
the impact of the commutation, the loss and loss expense ratios would have been
65.8% and 63.2% for the six months ended June 30, 2012 and 2011, respectively.
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Six Months Ended Six Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE(2) Change Points
($ in millions)
Non-catastrophe $ 547.0 65.8 % $ 428.6 63.2 % $ 118.4 2.6 Pts
Property catastrophe - - 199.7 29.5 (199.7 ) (29.5 )
Current period 547.0 65.8 628.3 92.7 (81.3 ) (26.9 )
Prior period (81.4 ) (9.8 ) (99.5 ) (14.7 ) 18.1 4.9
Impact of commutation(1) - - 11.5 0.3 (11.5 ) (0.3 )
Net losses and loss expenses $ 465.6 56.0 % $ 540.3 78.3 % $ (74.7 ) (22.3 )Pts
(1) Reflects the impact of the commutation of prior year contracts in the six
months ended June 30, 2011, which increased prior year net losses and loss
expenses by $11.5 million and increased net premiums earned by $12.4 million.
(2) Current period and prior period losses as a % of NPE are calculated excluding
the effect of the commutation on net premiums earned.
We recorded net favorable reserve development related to prior years of $81.4
million during the six months ended June 30, 2012 compared to net favorable
reserve development of $99.5 million for the six months ended June 30, 2011, as
shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)U.S. insurance $ (0.1 ) $ - $ (1.2 ) $ (3.8 ) $ (10.4 ) $ (18.4 ) $ 1.1 $ (5.3 ) $ 9.3 $ 15.4 $ (13.4 )
International insurance 5.7 (2.4 ) (5.8 ) (10.5 ) (28.3 ) (17.4 ) (5.4 ) (1.8 ) (6.6 ) 23.1 (49.4 )
Reinsurance 0.1 0.7 (0.8 ) (7.6 ) (7.0 ) (11.5 ) (1.6 ) 1.9 (1.3 ) 8.5 (18.6 )
$ 5.7 $ (1.7 ) $ (7.8 ) $ (21.9 ) $ (45.7 ) $ (47.3 ) $ (5.9 ) $ (5.2 ) $ 1.4 $ 47.0 $ (81.4 )
The net favorable reserve development is a result of actual loss emergence being
lower than anticipated. The unfavorable reserve development in our U.S.
insurance segment for the 2010 and 2011 loss years was due to adverse
development on a terminated program and certain errors and omissions products.
The unfavorable reserve development in our international insurance segment for
the 2011 loss year was due to adverse development on an individual general
casualty claim, estimated to reach our full limit of $20.0 million, net of
reinsurance. The unfavorable reserve development in our reinsurance segment for
the 2011 loss year was due to increased property catastrophe losses.
The following table shows the net favorable reserve development by loss year for
each of our segments for the six months ended June 30, 2011.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)U.S. insurance $ (0.1 ) $ (1.4 ) $ (3.5 ) $ (12.7 ) $ 23.8 $ (2.1 ) $ (0.7 ) $ (0.3 ) $ 9.0 $ 12.0
International insurance 1.2 (4.0 ) (1.1 ) (23.5 ) (14.3 ) (21.7 ) 10.2 (7.4 ) 20.0 (40.6 )
Reinsurance (0.6 ) (3.0 ) (3.8 ) (24.7 ) (12.2 ) (7.1 ) (3.1 ) (9.5 ) (6.9 ) (70.9 )
$ 0.5 $ (8.4 ) $ (8.4 ) $ (60.9 ) $ (2.7 ) $ (30.9 ) $ 6.4 $ (17.2 ) $ 22.1 $ (99.5 )
The unfavorable reserve development of $23.8 million in our U.S. insurance
segment for the 2006 loss year was primarily due to directors and officers
claims within our professional liability line of business related to a class
action suit filed against a number of private equity firms alleging collusion.
The unfavorable reserve development in our international insurance segment for
the 2010 loss year was primarily due to a casualty claim emanating from an oil
field services risk.
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The following table shows the components of net losses and loss expenses for
each of the periods indicated.
Six Months Ended
June 30, Dollar
2012 2011 Change
($ in millions)
Net losses paid $ 382.3 $ 264.8 $ 117.5 Net change in reported case reserves 47.0 228.8 (181.8 )
Net change in IBNR 36.3 46.7 (10.4 )
Net losses and loss expenses $ 465.6 $ 540.3 $ (74.7 )
The table below is a reconciliation of the beginning and ending reserves for
losses and loss expenses. Losses incurred and paid are reflected net of
reinsurance recoverables
Six Months Ended
June 30,
2012 2011
($ in millions) Net reserves for losses and loss expenses, January 1$ 4,222.2$ 3,951.6
Incurred related to:
Commutation of variable rated reinsurance contracts -
11.5
Current period non-catastrophe 547.0
428.6
Current period property catastrophe - 199.7
Prior period (81.4 ) (99.5 )
Total incurred 465.6 540.3
Paid related to:
Current period non-catastrophe 19.8
11.1
Current period property catastrophe - 10.2
Prior period 362.5 243.5
Total paid 382.3 264.8
Foreign exchange revaluation (1.6 )
10.3
Net reserve for losses and loss expenses, June 30 4,303.9 4,237.4
Losses and loss expenses recoverable 1,073.6
1,013.9
Reserve for losses and loss expenses, June 30$ 5,377.5$ 5,251.3
Acquisition Costs
Acquisition costs increased by $17.6 million, or 21.7%, for the six months ended
June 30, 2012 compared to the six months ended June 30, 2011. The increase in
acquisition costs was primarily due to the increase in net premiums earned.
Acquisition costs as a percentage of net premiums earned were 11.9% for the six
months ended June 30, 2012 compared to 11.7% for the same period in 2011.
General and Administrative Expenses
General and administrative expenses increased by $9.1 million, or 6.7%, for the
six months ended June 30, 2012 compared to the same period in June 30, 2011. The
increase in general and administrative expenses was primarily due to increased
salary and related costs as average headcount increased by 6% to support our
continued growth, combined with increased stock compensation expense resulting
from the 26.3% increase in our share price during the six months ended June 30,
2012. This was partially offset by $2.6 million in non-recurring costs incurred
in 2011 related to the proposed merger with Transatlantic Holdings, Inc.
Our general and administrative expense ratio was 17.3% for the six months ended
June 30, 2012 compared to 19.6% for the six months ended June 30, 2011. The
decrease was due to the growth in net premiums earned being greater than the
increase in expenses.
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The expense ratio is the sum of the acquisition cost ratio and the general and
administrative expense ratio. Our expense ratio was 29.2% for the six months
ended June 30, 2012 compared to 31.3% for the six months ended June 30, 2011.
The decrease was primarily due to the 2.3 percentage point decrease in the
general and administrative expense ratio, as discussed above.
Amortization of Intangible Assets
The amortization and impairment of intangible assets decreased by $0.2 million,
or 13.3%, for the six months ended June 30, 2012 compared to the six months
ended June 30, 2011. The decrease is due to certain intangible assets that were
fully amortized during 2011.
Interest Expense
Interest expense increased by $0.2 million, or 0.7%, for the six months ended
June 30, 2012 compared to the six months ended June 30, 2011. The increase was
due to fees associated with the termination of our $400 million unsecured credit
facility.
Net Income
Net income for the six months ended June 30, 2012 was $314.5 million compared to
$102.4 million for the six months ended June 30, 2011. The $212.1 million
increase was primarily the result of lower net loss and loss expenses. The six
months ended June 30, 2011 included $199.7 million of property catastrophe
losses in the Asia-Pacific region and Midwestern United States.
Underwriting Results by Operating Segments
Our company is organized into three operating segments:
U.S. Insurance Segment. The U.S. insurance segment includes our direct specialty
insurance operations in the United States. This segment provides both direct
property and specialty casualty insurance primarily to non-Fortune 1000 North
American domiciled accounts.
International Insurance Segment. The international insurance segment includes
our direct insurance operations in Bermuda, Europe, Singapore and Hong Kong.
This segment provides both direct property and casualty insurance primarily to
Fortune 1000 North American domiciled accounts and non-North American domiciled
accounts.
Reinsurance Segment. Our reinsurance segment has operations in Bermuda, Europe,
Singapore and the United States. This segment includes the reinsurance of
property, general casualty, professional liability, specialty lines and property
catastrophe coverages written by insurance companies. We presently write
reinsurance on both a treaty and a facultative basis, targeting several niche
reinsurance markets.
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U.S. Insurance Segment
The following table summarizes the underwriting results and associated ratios
for the U.S. insurance segment for each of the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
($ in millions)
Revenues
Gross premiums written $ 266.0 $ 226.7 $ 470.2 $ 410.1
Net premiums written 196.7 172.9 350.5 312.8
Net premiums earned 162.8 145.9 316.1 281.3
Expenses
Net losses and loss expenses $ 103.1 $ 92.6 $ 200.8 $ 208.4
Acquisition costs 21.3 18.9 41.2 37.0
General and administrative expenses 34.7 31.3 65.8 62.0
Underwriting income (loss) 3.7 3.1 8.3 (26.1 )
Ratios
Loss and loss expense ratio 63.3 % 63.5 % 63.5 % 74.1 %
Acquisition cost ratio 13.1 % 12.9 % 13.0 % 13.1 %
General and administrative expense ratio 21.3 % 21.4 % 20.8 % 22.1 %
Expense ratio 34.4 % 34.3 % 33.8 % 35.2 %
Combined ratio 97.7 % 97.8 % 97.3 % 109.3 %
Comparison of Three Months Ended June 30, 2012 and 2011
Premiums. Gross premiums written increased by $39.3 million, or 17.3%, for the
three months ended June 30, 2012 compared to the same period in 2011. The
increase in gross premiums written was primarily due to increased new business
across most lines, growth from new products introduced in 2010 and 2011 and rate
increases in all lines of business. This growth was partially offset by
non-recurring business, the non-renewal of business that did not meet our
underwriting requirements (which included inadequate pricing and/or terms and
conditions) and continued competition.
The table below illustrates our gross premiums written by line of business for
each of the periods indicated.
Three Months Ended June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
General casualty $ 78.3 $ 56.5 $ 21.8 38.6 %
Professional liability 66.7 58.8 7.9 13.4 %
Healthcare 46.3 50.2 (3.9 ) (7.8 %)
General property 37.1 32.9 4.2 12.8 %
Programs 25.6 20.3 5.3 26.1 %
Other * 12.0 8.0 4.0 50.0 %
$ 266.0 $ 226.7 $ 39.3 17.3 %
* Includes our inland marine, environmental and mergers and acquisitions lines
of business
Net premiums written increased by $23.8 million, or 13.8%, for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011. The
increase in net premiums written was primarily due to higher gross premiums
written, partially offset by the impact of the commutation of prior year
contracts in 2011. The three months ended June 30, 2011 included a $12.4 million
reduction in premiums ceded due to the commutation of certain variable-rated
reinsurance contracts that have swing-rated
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provisions. We ceded 26.1% of gross premiums written for the three months ended
June 30, 2012 compared to 23.7% for the same period in 2011. The increase in the
cession percentage was due to the impact of the commutation of prior year
contracts in 2011.
Net premiums earned increased by $16.9 million, or 11.6%, for the three months
ended June 30, 2012 compared to the same period in 2011. The increase was
primarily due to the growth of our U.S. insurance operations during 2012 and
2011, partially offset by the $12.4 million impact of the commutation of prior
year contracts in 2011, which was fully earned.
Net losses and loss expenses. Net losses and loss expenses increased by $10.5
million, or 11.3%, for the three months ended June 30, 2012 compared to the
three months ended June 30, 2011. The loss and loss expense ratio decreased by
0.2 percentage points for the same period. The increase in net losses and loss
expenses was primarily due to growth in the U.S. insurance segment combined with
lower favorable prior year reserve development. We also incurred $6.5 million of
non-catastrophe property losses on two claims that added 4.0 percentage points
to the current period's loss and loss expense ratio. This was partially offset
by the $11.5 million impact of the commutation of prior year contracts in 2011.
Excluding the prior year reserve development, property catastrophe losses and
the impact of the commutation, the loss and loss expense ratios would have been
67.1% and 64.6% for the three months ended June 30, 2012 and 2011, respectively.
Three Months Ended Three Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE(2) Change Points
($ in millions)
Non-catastrophe $ 109.3 67.1 % $ 86.3 64.6 % $ 23.0 2.5 Pts
Property catastrophe - - 5.0 3.7 (5.0 ) (3.7 )
Current period 109.3 67.1 91.3 68.3 18.0 (1.2 )
Prior period (6.2 ) (3.8 ) (10.2 ) (7.6 ) 4.0 3.8
Impact of commutation(1) - - 11.5 2.8 (11.5 ) (2.8 )
Net losses and loss expenses $ 103.1 63.3 % $ 92.6 63.5 % $ 10.5 (0.2 )Pts
(1) Reflects the impact of the commutation of prior year contracts in the three
months ended June 30, 2011, which increased prior year net losses and loss
expenses by $11.5 million and increased net premiums earned by $12.4 million.
(2) Current period and prior period losses as a % of NPE are calculated excluding
the effect of the commutation on net premiums earned.
Overall, our U.S. insurance segment recorded net favorable reserve development
of $6.2 million during the three months ended June 30, 2012 compared to net
favorable reserve development of $10.2 million for the three months ended
June 30, 2011, as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)
Professional liability $ - $ - $ - $ (0.2 ) $ 0.2 $ (8.3 ) $ 0.6 $ (1.0 ) $ 0.8 $ 4.1 $ (3.8 )
Healthcare - (0.2 ) (1.6 ) 0.4 (0.3 ) (0.8 ) 1.1 (1.2 ) 0.1 0.5 (2.0 )
General casualty - (0.2 ) (0.3 ) (0.3 ) (3.7 ) (0.1 ) (1.2 ) (0.4 ) (0.1 ) - (6.3 )
General property - - 0.4 (0.1 ) - - 0.3 - (0.1 ) - 0.5
Programs - - - - (0.1 ) (0.1 ) - (0.1 ) 3.8 2.6 6.1
Other - - - - - - - - - (0.7 ) (0.7 )
$ - $ (0.4 ) $ (1.5 ) $ (0.2 ) $ (3.9 ) $ (9.3 ) $ 0.8 $ (2.7 ) $ 4.5 $ 6.5 $ (6.2 )
The unfavorable reserve development in our U.S. insurance segment for the 2010
and 2011 loss years was due to adverse development on a terminated program and
certain errors and omissions products.
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(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)Professional liability $ - $ (0.1 ) $ (0.1 ) $ (0.6 ) $ (0.2 ) $ (2.0 ) $ - $ (1.1 ) $ 0.6 $ (3.5 )
Healthcare (0.1 ) (0.4 ) (1.3 ) (0.7 ) (0.9 ) 0.3 (0.5 ) 0.7 (0.9 ) (3.8 )
General casualty 0.1 (0.2 ) (0.4 ) (5.4 ) - - - 0.1 - (5.8 )
General property - - - - - - 0.7 0.2 0.3 1.2
Programs - - - - - (0.5 ) 0.7 0.9 0.6 1.7
Other - - - - - - - - - -
$ - $ (0.7 ) $ (1.8 ) $ (6.7 ) $ (1.1 ) $ (2.2 ) $ 0.9 $ 0.8 $ 0.6 $ (10.2 )
Acquisition costs. Acquisition costs increased by $2.4 million, or 12.7%, for
the three months ended June 30, 2012 compared to the three months ended June 30,
2011. The increase was primarily caused by increased net premiums earned. The
acquisition cost ratio increased slightly to 13.1% for the three months ended
June 30, 2012 from 12.9% for the same period in 2011.
General and administrative expenses. General and administrative expenses
increased by $3.4 million, or 10.9%, for the three months ended June 30, 2012
compared to the three months ended June 30, 2011. The increase was due to the
continued growth of the U.S. insurance operations. The general and
administrative ratio decreased slightly to 21.3% for the three months ended
June 30, 2012 from 21.4% for the same period in 2011 due to the higher growth in
net premiums earned relative to expenses.
Comparison of Six Months Ended June 30, 2012 and 2011
Premiums. Gross premiums written increased by $60.1 million, or 14.7%, for the
six months ended June 30, 2012 compared to the same period in 2011. The increase
in gross premiums written was primarily due to increased new business across
most lines, growth from new products introduced in 2010 and 2011 and rate
increases in most lines of business. This growth was partially offset by the
non-renewal of business that did not meet our underwriting requirements (which
included inadequate pricing and/or terms and conditions) and continued
competition.
The table below illustrates our gross premiums written by line of business for
each of the periods indicated.
Six Months Ended
June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
General casualty $ 126.7 $ 97.5 $ 29.2 29.9 %
Professional liability 125.9 113.8 12.1 10.6 %
Healthcare 93.3 95.6 (2.3 ) (2.4 %)
General property 55.6 46.5 9.1 19.6 %
Programs 48.9 40.2 8.7 21.6 %
Other* 19.8 16.5 3.3 20.0 %
$ 470.2 $ 410.1 $ 60.1 14.7 %
* Includes our inland marine, environmental and mergers and acquisitions lines
of business
Net premiums written increased by $37.7 million, or 12.1%, for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. The increase
in net premiums written was primarily due to higher gross premiums written,
partially offset by the impact of the commutation of prior year contracts in
2011. The six months ended June 30, 2011 included a $12.4 million reduction in
premiums ceded due to the commutation of certain variable-rated reinsurance
contracts that had swing-rated provisions. We ceded 25.5% of gross premiums
written for the six months ended June 30, 2012 compared to 23.7% for the same
period in 2011. The increase in the cession percentage was due to the impact of
the commutation on the prior year.
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Net premiums earned increased by $34.8 million, or 12.4%, for the six months
ended June 30, 2012 compared to the same period in 2011. The increase was
primarily due to the growth of our U.S. insurance operations during 2012 and
2011, partially offset by the $12.4 million impact of the commutation of prior
year contracts in 2011, which was fully earned.
Net losses and loss expenses. Net losses and loss expenses decreased by $7.6
million, or 3.6%, for the six months ended June 30, 2012 compared to the six
months ended June 30, 2011. The loss and loss expense ratio decreased by 10.6
percentage points for the same period. The decrease in net losses and loss
expenses was primarily due to favorable prior year reserve development in 2012
compared to unfavorable prior year reserve development in 2011 and the $11.5
million impact of the commutation of prior year contracts in 2011. Excluding the
prior year reserve development, property catastrophe losses and the impact of
the commutation, the loss and loss expense ratios would have been 67.7% and
66.9% for the six months ended June 30, 2012 and 2011, respectively.
Six Months Ended Six Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE (2) Change Points
($ in millions)
Non-catastrophe $ 214.2 67.7 % $ 179.9 66.9 % $ 34.3 0.8 Pts
Property catastrophe - - 5.0 1.9 (5.0 ) (1.9 )
Current period 214.2 67.7 184.9 68.8 29.3 (1.1 )
Prior period (13.4 ) (4.2 ) 12.0 4.5 (25.4 ) (8.7 )
Impact of commutation (1) - - 11.5 0.8 (11.5 ) (0.8 )
Net losses and loss expenses $ 200.8 63.5 % $ 208.4 74.1 % $ (7.6 ) (10.6 )Pts
(1) Reflects the impact of the commutation of prior year contracts in the six
months ended June 30, 2011, which increased prior year net losses and loss
expenses by $11.5 million and increased net premiums earned by $12.4 million.
(2) Current period and prior period losses as a % of NPE are calculated excluding
the effect of the commutation on net premiums earned.
Overall, our U.S. insurance segment recorded net favorable reserve development
of $13.4 million during the six months ended June 30, 2012 compared to net
unfavorable reserve development of $12.0 million for the six months ended
June 30, 2011, as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)
Professional liability $ - $ - $ (0.1 ) $ (0.3 ) $ 0.1 $ (15.1 ) $ (0.1 ) $ (2.8 ) $ (0.9 ) $ 10.2 $ (9.0 )
Healthcare - 0.3 (2.7 ) (2.6 ) (2.3 ) (2.8 ) 1.1 (1.7 ) 3.5 0.5 (6.7 )
General casualty (0.1 ) (0.3 ) 0.9 (0.6 ) (8.1 ) (0.1 ) (1.0 ) (0.4 ) (0.1 ) - (9.8 )
General property - - 0.7 (0.3 ) - (0.2 ) 1.7 (0.4 ) (0.5 ) 1.1 2.1
Programs - - - - (0.1 ) (0.2 ) (0.6 ) - 7.3 3.8 10.2
Other - - - - - - - - - (0.2 ) (0.2 )
$ (0.1 ) $ - $ (1.2 ) $ (3.8 ) $ (10.4 ) $ (18.4 ) $ 1.1 $ (5.3 ) $ 9.3 $ 15.4 $ (13.4 )
The unfavorable reserve development in our U.S. insurance segment for the 2010
and 2011 loss years was due to adverse development on a terminated program and
certain errors and omissions products.
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(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)
Professional liability $ - $ (0.1 ) $ (0.2 ) $ (1.3 ) $ 24.1 $ (2.2 ) $ 0.5 $ (2.7 ) $ 6.9 $ 25.0
Healthcare (0.2 ) (0.9 ) (1.8 ) 0.3 (0.3 ) 0.7 (1.7 ) 1.2 (0.8 ) (3.5 )
General casualty 0.1 (0.4 ) (1.2 ) (11.1 ) - - - - - (12.6 )
General property - - (0.3 ) (0.6 ) - - (0.3 ) - 1.4 0.2
Programs - - - - - (0.6 ) 0.8 1.2 1.5 2.9
$ (0.1 ) $ (1.4 ) $ (3.5 ) $ (12.7 ) $ 23.8 $ (2.1 ) $ (0.7 ) $ (0.3 ) $ 9.0 $ 12.0
The unfavorable reserve development of $24.1 million for the 2006 loss year was
primarily due to directors and officers claims within our professional liability
line of business related to a class action suit filed against a number of
private equity firms alleging collusion.
Acquisition costs. Acquisition costs increased by $4.2 million, or 11.4%, for
the six months ended June 30, 2012 compared to the six months ended June 30,
2011. The increase was primarily caused by increased net premiums earned. The
acquisition cost ratio decreased to 13.0% for the six months ended June 30, 2012
from 13.1% for the same period in 2011.
General and administrative expenses. General and administrative expenses
increased by $3.8 million, or 6.1%, for the six months ended June 30, 2012
compared to the six months ended June 30, 2011, due to the continued growth of
our U.S. insurance operations. The general and administrative expense ratio
decreased to 20.8% for the six months ended June 30, 2012 from 22.1% in the same
period in 2011 as a result of our increased net premiums earned.
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International Insurance Segment
The following table summarizes the underwriting results and associated ratios
for the international insurance segment for each of the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
($ in millions)
Revenues
Gross premiums written $ 183.6 $ 178.6 $ 297.2 $ 289.9
Net premiums written 111.3 109.0 184.0 183.9
Net premiums earned 82.6 80.0 162.5 156.3
Expenses
Net losses and loss expenses $ 22.2 $ 72.1 $ 60.3 $ 143.3
Acquisition costs (0.6 ) (0.7 ) (1.1 ) (2.6 )
General and administrative expenses 21.7 20.7 44.0 41.4
Underwriting income (loss) 39.3 (12.1 ) 59.3 (25.8 )
Ratios
Loss and loss expense ratio 26.9 % 90.2 % 37.1 % 91.7 %
Acquisition cost ratio (0.7 %) (0.9 %) (0.7 %) (1.7 %)
General and administrative expense ratio 26.2 % 25.8 % 27.1 % 26.5 %
Expense ratio 25.5 % 24.9 % 26.4 % 24.8 %
Combined ratio 52.4 % 115.1 % 63.5 % 116.5 %
Comparison of Three Months Ended June 30, 2012 and 2011
Premiums. Gross premiums written increased by $5.0 million, or 2.8%, for the
three months ended June 30, 2012 compared to the same period in 2011. The
increase was primarily a result of new business and rate increases in select
lines of business. We saw continued growth from new products, specifically trade
credit which grew $3.5 million, and growth in Asia, which increased $1.0
million. However, this increase was partially offset by decreases in other lines
due to the non-renewal of business that did not meet our underwriting
requirements (which included inadequate pricing and/or terms and conditions),
continued competition and a reduction in limits deployed for the general
property line of business.
The table below illustrates our gross premiums written by line of business for
each of the periods indicated.
Three Months Ended June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
General property $ 61.2 $ 63.3 $ (2.1 ) (3.3 %)
Professional liability 52.8 48.2 4.6 9.5 %
General casualty 43.2 45.3 (2.1 ) (4.6 %)
Healthcare 20.3 19.2 1.1 5.7 %
Other * 6.1 2.6 3.5 134.6 %
$ 183.6 $ 178.6 $ 5.0 2.8 %
* Includes our trade credit line of business
Net premiums written increased by $2.3 million, or 2.1%, for the three months
ended June 30, 2012 compared to the three months ended June 30, 2011. We ceded
to reinsurers 39.4% of gross premiums written for the three months ended
June 30, 2012 compared to 39.0% for the three months ended June 30, 2011. Net
premiums written increased primarily due to an increase in gross premiums
written.
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Net premiums earned increased by $2.6 million, or 3.2%, primarily due to higher
net premiums written in the latter half of 2011 and first half of 2012.
Net losses and loss expenses. Net losses and loss expenses decreased by $49.9
million, or 69.2%, for the three months ended June 30, 2012 compared to the
three months ended June 30, 2011. The loss and loss expense ratio decreased by
63.3 percentage points for the same period. The decrease in net losses and loss
expenses was primarily due to the absence of significant catastrophe losses in
2012 compared to the same period in 2011, which included $30.5 million in
catastrophe losses. This was combined with higher net favorable prior year
reserve development in 2012 compared to the same period in 2011. Excluding the
prior year reserve development and property catastrophe losses, the loss and
loss expense ratios would have been 62.1% and 67.1% for the three months ended
June 30, 2012 and 2011, respectively.
Three Months Ended Three Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE Change Points
($ in millions)
Non-catastrophe $ 51.3 62.1 % $ 53.6 67.1 % $ (2.3 ) (5.0 )Pts
Property catastrophe - - 30.5 38.1 (30.5 ) (38.1 )
Current period 51.3 62.1 84.1 105.2 (32.8 ) (43.1 )
Prior period (29.1 ) (35.2 ) (12.0 ) (15.0 ) (17.1 ) (20.2 )
Net losses and loss expenses $ 22.2 26.9 % $ 72.1 90.2 % $ (49.9 ) (63.3 )Pts
Overall, our international insurance segment recorded net favorable reserve
development of $29.1 million during the three months ended June 30, 2012
compared to net favorable reserve development of $12.0 million for the three
months ended June 30, 2011, as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)
General property $ - $ - $ 0.1 $ (2.5 ) $ (0.2 ) $ 0.2 $ (2.1 ) $ (1.2 ) $ - $ (1.3 ) $ (7.0 )
Professional liability
- (0.1 ) (1.2 ) (1.4 ) (8.3 ) (1.1 ) 4.7 - - - (7.4 )
General casualty 7.4 (0.9 ) (1.9 )
(3.1 ) (2.5 ) (6.1 ) (3.1 ) - - - (10.2 )
Healthcare
(0.1 ) (0.1 ) (0.3 ) (0.5 ) (0.4 ) (0.5 ) (2.6 ) - - - (4.5 )
$ 7.3 $ (1.1 ) $ (3.3 ) $ (7.5 ) $ (11.4 ) $ (7.5 ) $ (3.1 ) $ (1.2 ) $ - $ (1.3 ) $ (29.1 )
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)
General property $ - $ - $ (0.3 ) $ (0.2 ) $ (0.4 ) $ (1.5 ) $ (7.4 ) $ (6.0 ) $ (0.3 ) $ (16.1 )
Professional liability
(0.1 ) (0.1 ) (1.4 ) (3.4 ) (1.8 ) (4.1 ) 14.0 - - 3.1
General casualty (0.2 ) (1.1 ) (0.8 ) (2.2 ) (7.1 ) (4.4 ) - - 22.5 6.7
Healthcare - (0.2 ) (0.5 ) (0.5 ) (0.5 ) (4.0 ) - - - (5.7 )
$ (0.3 ) $ (1.4 ) $ (3.0 ) $ (6.3 ) $ (9.8 ) $ (14.0 ) $ 6.6 $ (6.0 ) $ 22.2 $ (12.0 )
The unfavorable reserve development for the 2010 loss year was primarily due to
a casualty claim emanating from an oil field services risk.
Acquisition costs. Acquisition costs increased by $0.1 million, or 14.3%, for
the three months ended June 30, 2012 compared to the three months ended June 30,
2011. The negative cost represents ceding commissions received on ceded premiums
in excess of the brokerage fees and commissions paid on gross premiums written.
The acquisition cost ratio was negative 0.7% for the three months ended June 30,
2012 compared to negative 0.9% for the three months ended June 30, 2011.
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General and administrative expenses. General and administrative expenses
increased by $1.0 million, or 4.8%, for the three months ended June 30, 2012
compared to the three months ended June 30, 2011. The increase in general and
administrative expenses was primarily due to increased salary and related costs
incurred as we continue to expand internationally. The general and
administrative expense ratios for the three months ended June 30, 2012 and 2011
were 26.2% and 25.8%, respectively.
Comparison of Six Months Ended June 30, 2012 and 2011
Premiums. Gross premiums written increased by $7.3 million, or 2.5%, for the six
months ended June 30, 2012 compared to the same period in 2011. The increase was
primarily a result of new business, including $6.5 million from new products,
specifically our trade credit and SME insurance products, growth in Asia and
rate increases in select lines of business. However, this increase was partially
offset by decreases in other lines due to the non-renewal of business that did
not meet our underwriting requirements (which included inadequate pricing and/or
terms and conditions), continued competition and a reduction in limits deployed
for the general property line of business.
The table below illustrates our gross premiums written by line of business for
each of the periods indicated.
Six Months Ended June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
General property $ 98.0 $ 100.5 $ (2.5 ) (2.5 %)
Professional liability 83.8 77.1 6.7 8.7 %
General casualty 64.9 68.7 (3.8 ) (5.5 %)
Healthcare 40.3 39.9 0.4 1.0 %
Other * 10.2 3.7 6.5 175.7 %
$ 297.2 $ 289.9 $ 7.3 2.5 %
* Includes our trade credit line of business
Net premiums written increased by $0.1 million, or 0.1%, for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011. We ceded to
reinsurers 38.1% of gross premiums written for the six months ended June 30,
2012 compared to 36.6% for the six months ended June 30, 2011.
Net premiums earned increased by $6.2 million, or 4.0%, primarily due to higher
net premiums written in the latter half of 2011.
Net losses and loss expenses. Net losses and loss expenses decreased by $83.0
million, or 57.9%, for the three months ended June 30, 2012 compared to the
three months ended June 30, 2011. The loss and loss expense ratio decreased by
54.6 percentage points for the same period. The decrease in net losses and loss
expenses was due to the absence of significant catastrophe losses in 2012
compared to the same period in 2011, which included $73.7 million for
Asia-Pacific catastrophes and Midwestern U.S. storms. This was combined with
higher net favorable prior year reserve development in 2012 compared to the same
period in 2011. Excluding the prior year reserve development and property
catastrophe losses, the loss and loss expense ratios would have been 67.5% and
70.5% for the six months ended June 30, 2012 and 2011, respectively.
Six Months Ended Six Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE Change Points
($ in millions)
Non-catastrophe $ 109.7 67.5 % $ 110.2 70.5 % $ (0.5 ) (3.0 )Pts
Property catastrophe - - 73.7 47.2 (73.7 ) (47.2 )
Current period 109.7 67.5 183.9 117.7 (74.2 ) (50.2 )
Prior period (49.4 ) (30.4 ) (40.6 ) (26.0 ) (8.8 ) (4.4 )
Net losses and loss expenses $ 60.3 37.1 % $ 143.3 91.7 % $ (83.0 ) (54.6 )Pts
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Overall, our international insurance segment recorded net favorable reserve
development of $49.4 million during the six months ended June 30, 2012 compared
to net favorable reserve development of $40.6 million for the six months ended
June 30, 2011, as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)General property $ - $ - $ 0.2 $ (1.5 ) $ (1.0 ) $ 1.1 $ (2.2 ) $ (1.8 ) $ (6.6 ) $ 3.1 $ (8.7 )
Professional liability - (0.2 ) (2.3 ) (3.1 ) (15.1 ) (7.2 ) 7.0 - - - (20.9 )
General casualty 5.8 (1.6 ) (3.1 ) (4.8 ) (11.4 ) (7.2 ) (7.6 ) - - 20.0 (9.9 )
Healthcare (0.1 ) (0.6 ) (0.6 ) (1.1 ) (0.8 ) (4.1 ) (2.6 ) - - - (9.9 )
$ 5.7 $ (2.4 ) $ (5.8 ) $ (10.5 ) $ (28.3 ) $ (17.4 ) $ (5.4 ) $ (1.8 ) $ (6.6 ) $ 23.1 $ (49.4 )
The net favorable reserve development for loss years 2003 to 2010 is a result of
actual loss emergence being lower than anticipated. The unfavorable reserve
development in our general casualty line for loss year 2011 was due to adverse
development on an individual claim, estimated to reach our full limit of $20.0
million, net of reinsurance.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)General property $ - $ - $ (0.7 ) $ (2.3 ) $ 0.3 $ (1.6 ) $ (12.8 ) $ (14.6 ) $ (2.5 ) $ (34.2 )
Professional liability 2.0 (1.1 ) (3.9 ) (7.7 ) (10.0 ) (4.1 ) 23.0 - - (1.8 )
General casualty (0.7 ) (2.4 ) 4.4 (12.5 ) 4.2 (12.0 ) - 7.2 22.5 10.7
Healthcare (0.1 ) (0.5 ) (0.9 ) (1.0 ) (8.8 ) (4.0 ) - - - (15.3 )
$ 1.2 $ (4.0 ) $ (1.1 ) $ (23.5 ) $ (14.3 ) $ (21.7 ) $ 10.2 $ (7.4 ) $ 20.0 $ (40.6 )
The unfavorable reserve development for the 2010 loss year was primarily due to
a casualty claim emanating from an oil field services risk.
Acquisition costs. Acquisition costs increased by $1.5 million, or 57.7%, for
the six months ended June 30, 2012 compared to the six months ended June 30,
2011. The negative cost represents ceding commissions received on ceded premiums
in excess of the brokerage fees and commissions paid on gross premiums written.
The acquisition cost ratio was negative 0.7% for the six months ended June 30,
2012 and negative 1.7% for the six months ended June 30, 2011.
General and administrative expenses. General and administrative expenses
increased by $2.6 million, or 6.3%, for the six months ended June 30, 2012
compared to the six months ended June 30, 2011. The increase in general and
administrative expenses was primarily due to increased salary and related costs
incurred as we continue to expand internationally. The general and
administrative expense ratios for the six months ended June 30, 2012 and 2011
were 27.1% and 26.5%, respectively. The increase was due to higher expenses,
partially offset by higher net premiums earned.
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Reinsurance Segment
The following table summarizes the underwriting results and associated ratios
for the reinsurance segment for each of the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
($ in millions)
Revenues
Gross premiums written $ 197.3 $ 114.3 $ 560.4 $ 380.3
Net premiums written 186.7 113.9 549.2 380.0
Net premiums earned 184.3 129.4 353.0 252.6
Expenses
Net losses and loss expenses $ 115.1 $ 71.1 $ 204.5 $ 188.6
Acquisition costs 30.9 24.8 58.6 46.7
General and administrative expenses 17.5 15.3 34.5 31.7
Underwriting income (loss) 20.8 18.2 55.4 (14.4 )
Ratios
Loss and loss expense ratio 62.4 % 54.9 % 57.9 % 74.7 %
Acquisition cost ratio 16.8 % 19.2 % 16.6 % 18.5 %
General and administrative expense ratio 9.5 % 11.8 % 9.8 % 12.6 %
Expense ratio 26.3 % 31.0 % 26.4 % 31.1 %
Combined ratio 88.7 % 85.9 % 84.3 % 105.8 %
Comparison of Three Months Ended June 30, 2012 and 2011
Premiums. Gross premiums written increased by $83.0 million, or 72.6%, for the
three months ended June 30, 2012 compared to the same period in 2011.
Approximately $65.0 million, or 56.9%, of the increase was due to new business,
from both new products and new regions, as well as increased participations on
renewing business combined with rate increases. Within our specialty unit, crop
reinsurance premiums increased $8.7 million and marine reinsurance premiums
increased $3.3 million. Our North American property reinsurance business
increased $23.5 million due to a combination of new business opportunities and
rate increases. Our international book also continued to grow, with a $28.6
million increase from our Singapore branch. In addition, approximately $13.5
million of gross premiums written in the third quarter of 2011 was written in
the second quarter of 2012 as a result of the earlier timing of renewal
business. This was partially offset by the non-renewal of business that did not
meet our underwriting requirements (which included inadequate pricing and/or
terms and conditions) and continued competition.
The table below illustrates our gross premiums written by geographic location
for our reinsurance operations.
Three Months Ended June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
United States $ 83.6 $ 42.5 $ 41.1 96.7 %
Bermuda 59.6 55.0 4.6 8.4 %
Singapore 38.7 10.0 28.7 287.0 %
Europe 15.4 6.8 8.6 126.5 %
$ 197.3 $ 114.3 $ 83.0 72.6 %
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The table below illustrates our gross premiums written by line of business for
each of the periods indicated.
Three Months Ended
June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
Property $ 121.7 $ 64.0 $ 57.7 90.2 %
Casualty 52.8 38.8 14.0 36.1 %
Specialty 22.8 11.5 11.3 98.3 %
$ 197.3 $ 114.3 $ 83.0 72.6 %
Net premiums written increased by $72.8 million, or 63.9%, consistent with the
increase in gross premiums written.
Net premiums earned increased by $54.9 million, or 42.4%, as a result of the
increase in net premiums written during the year ended December 31, 2011 and the
six months ended June 30, 2012. Premiums related to our reinsurance business
earn at a slower rate than those related to our direct insurance business.
Direct insurance premiums typically earn ratably over the term of a policy.
Reinsurance premiums under a quota share reinsurance contract are typically
earned over the same period as the underlying policies, or risks, covered by the
contract. As a result, the earning pattern of a quota share reinsurance contract
may extend up to 24 months, reflecting the inception dates of the underlying
policies. Property catastrophe premiums, crop reinsurance premiums and premiums
for other treaties written on a losses occurring basis generally earn ratably
over the term of the reinsurance contract.
Net losses and loss expenses. Net losses and loss expenses increased by $44.0
million, or 61.9%, for the three months ended June 30, 2012 compared to the
three months ended June 30, 2011. The loss and loss expense ratio increased by
7.5 percentage points for the same period. The increase in net losses and loss
expenses was due to growth in net premiums earned and lower prior year net
favorable reserve development for the three months ended June 30, 2012 compared
to the same period in 2011. This was partially offset by the absence of
significant catastrophe losses in 2012 compared to the same period in 2011,
which included $32.0 million for the Asia-Pacific catastrophes and Midwestern
U.S. storms. Excluding the prior year reserve development and property
catastrophe losses, the loss and loss expense ratios would have been 66.0% and
55.7% for the three months ended June 30, 2012 and 2011, respectively. The
increase in the loss and loss expense ratio was due to $12.4 million in
non-catastrophe large losses, including U.S. weather related losses, for the
three months ended June 30, 2012 that increased the loss and loss expense ratio
by 6.7 percentage points.
Three Months Ended Three Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE Change Points
($ in millions)
Non-catastrophe $ 121.7 66.0 % $ 72.1 55.7 % $ 49.6 10.3 Pts
Property catastrophe - - 32.0 24.7 (32.0 ) (24.7 )
Current period 121.7 66.0 104.1 80.4 17.6 (14.4 )
Prior period (6.6 ) (3.6 ) (33.0 ) (25.5 ) 26.4 21.9
Net losses and loss expenses $ 115.1 62.4 % $ 71.1 54.9 % $ 44.0 7.5 Pts
Overall, our reinsurance segment recorded net favorable reserve development of
$6.6 million during the three months ended June 30, 2012 compared to net
favorable reserve development of $33.0 million for the three months ended
June 30, 2011, as shown in the tables below.
(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)
Specialty $ - $ (0.2 ) $ (1.1 ) $ (1.4 ) $ (1.3 ) $ (1.6 ) $ (0.1 ) $ - $ 0.2 $ (0.3 ) $ (5.8 )
Property - - (0.1 ) - (0.1 ) (0.1 ) - 1.1 (5.9 ) 5.4 0.3
Casualty (0.4 ) 1.8 (0.5 ) 1.1 (3.4 ) (3.6 ) (0.6 ) (0.1 ) (0.1 ) 4.7 (1.1 )
$ (0.4 ) $ 1.6 $ (1.7 ) $ (0.3 ) $ (4.8 ) $ (5.3 ) $ (0.7 ) $ 1.0 $ (5.8 ) $ 9.8 $ (6.6 )
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(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Three Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)
Specialty $ - $ - $ (0.2 ) $ 0.1 $ - $ (0.8 ) $ - $ 0.1 $ (1.3 ) $ (2.1 )
Property (0.1 ) (0.2 ) (0.5 ) (0.6 ) - (1.7 ) - (0.9 ) (4.7 ) (8.7 )
Casualty (0.4 ) (0.6 ) (0.4 ) (12.4 ) (6.3 ) (1.4 ) (0.7 ) - - (22.2 )
$ (0.5 ) $ (0.8 ) $ (1.1 ) $ (12.9 ) $ (6.3 ) $ (3.9 ) $ (0.7 ) $ (0.8 ) $ (6.0 ) $ (33.0 )
Acquisition costs. Acquisition costs increased by $6.1 million, or 24.6%, for
the three months ended June 30, 2012 compared to the three months ended 2011,
primarily due to the increase in net premiums earned. The acquisition cost ratio
was 16.8% for the three months ended June 30, 2012 compared to 19.2% for the
three months ended 2011, primarily due to the change in mix of business. The
proportion of premiums from excess of loss reinsurance contracts, which carry
lower acquisition costs, has increased compared to the prior year.
General and administrative expenses. General and administrative expenses
increased by $2.2 million, or 14.4%, for the three months ended June 30, 2012
compared to the same period in 2011. The increase was due to higher salary and
related costs due to higher headcount to support our growing operations. The
general and administrative expense ratios for the three months ended June 30,
2012 and 2011 were 9.5% and 11.8%, respectively, reflecting the higher growth in
net premiums earned relative to expenses in 2012.
Comparison of Six Months Ended June 30, 2012 and 2011
Premiums. Gross premiums written increased by $180.1 million, or 47.4%, for the
six months ended June 30, 2012 compared to the same period in 2011. The increase
in gross premiums written was primarily due to new business, from both new
products and new regions, as well as increased participations on renewing
business combined with rate increases. Within our specialty unit, crop
reinsurance premiums increased by $58.8 million while marine contributed a
further $16.3 million. Our North American property reinsurance business also
increased by $41.8 million due to a combination of new business opportunities
and rate increases. Our international book also continued to grow, with a $42.4
million increase from our Singapore branch. This was partially offset by the
non-renewal of business that did not meet our underwriting requirements (which
included inadequate pricing and/or terms and conditions) and continued
competition.
The table below illustrates our gross premiums written by geographic location
for our reinsurance operations.
Six Months Ended June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
United States $ 268.3 $ 165.8 $ 102.5 61.8 %
Bermuda 169.6 152.4 17.2 11.3 %
Singapore 67.3 24.9 42.4 170.3 %
Europe 55.2 37.2 18.0 48.4 %
$ 560.4 $ 380.3 $ 180.1 47.4 %
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The table below illustrates our gross premiums written by line of business for
each of the periods indicated.
Six Months Ended
June 30, Dollar Percentage
2012 2011 Change Change
($ in millions)
Property $ 275.3 $ 183.2 $ 92.1 50.3 %
Casualty 148.4 144.8 3.6 2.5 %
Specialty 136.7 52.3 84.4 161.4 %
$ 560.4 $ 380.3 $ 180.1 47.4 %
Net premiums written increased by $169.2 million, or 44.5%, consistent with the
increase in gross premiums written.
Net premiums earned increased by $100.4 million, or 39.7%, as a result of the
increase in net premiums written during the year ended December 31, 2011 and the
six months ended June 30, 2012. Premiums related to our reinsurance business
earn at a slower rate than those related to our direct insurance business.
Direct insurance premiums typically earn ratably over the term of a policy.
Reinsurance premiums under a quota share reinsurance contract are typically
earned over the same period as the underlying policies, or risks, covered by the
contract. As a result, the earning pattern of a quota share reinsurance contract
may extend up to 24 months, reflecting the inception dates of the underlying
policies. Property catastrophe premiums and premiums for other treaties written
on a losses occurring basis generally earn ratably over the term of the
reinsurance contract.
Net losses and loss expenses. Net losses and loss expenses increased by $15.9
million, or 8.4%, for the six months ended June 30, 2012 compared to the six
months ended June 30, 2011. The loss and loss expense ratio decreased by 16.8
percentage points for the same period. The increase in net losses and loss
expenses was due to growth in net premiums earned and lower prior year net
favorable reserve development for the six months ended June 30, 2012 compared to
the same period in 2011. This was partially offset by the absence of significant
catastrophe losses in 2012 compared to the same period in 2011, which included
$121.0 million for the Asia-Pacific catastrophes and Midwestern U.S. storms.
Excluding the prior year reserve development and property catastrophe losses,
the loss and loss expense ratios would have been 63.2% and 54.9% for the six
months ended June 30, 2012 and 2011, respectively. The higher loss and loss
expense ratio is due to the change in mix of business to specialty products with
higher attritional loss ratios, combined with $16.5 million in non-catastrophe
large losses for the six months ended June 30, 2012 that added 4.7 percentage
points to the loss and loss expense ratio.
Six Months Ended Six Months Ended Change in
June 30, 2012 June 30, 2011 Dollar Percentage
Amount % of NPE Amount % of NPE Change Points
($ in millions)
Non-catastrophe $ 223.1 63.2 % $ 138.5 54.9 % $ 84.6 8.3 Pts
Property catastrophe - - 121.0 47.9 (121.0 ) (47.9 )
Current period 223.1 63.2 259.5 102.8 (36.4 ) (39.6 )
Prior period (18.6 ) (5.3 ) (70.9 ) (28.1 ) 52.3 22.8
Net losses and loss expenses $ 204.5 57.9 % $ 188.6 74.7 % $ 15.9 (16.8 )Pts
Overall, our reinsurance segment recorded net favorable reserve development of
$18.6 million during the six months ended June 30, 2012 compared to net
favorable reserve development of $70.9 million for the six months ended June 30,
2011, as shown in the tables below.
(Favorable) and Unfavorable Loss
Reserve Development by Loss Year
For the Six Months Ended June 30, 2012
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total
($ in millions)
Specialty $ - $ (0.3 ) $ (3.2 ) $ (5.1 ) $ (1.8 ) $ (2.2 ) $ (0.1 ) $ - $ - $ (2.0 ) $ (14.7 )
Property - - (0.8 ) 0.2 (0.1 ) 0.1 (0.3 ) 2.0 (1.2 ) 5.5 5.4
Casualty 0.1 1.0 3.2 (2.7 ) (5.1 ) (9.4 ) (1.2 ) (0.1 ) (0.1 ) 5.0 (9.3 )
$ 0.1 $ 0.7 $ (0.8 ) $ (7.6 ) $ (7.0 ) $ (11.5 ) $ (1.6 ) $ 1.9 $ (1.3 ) $ 8.5 $ (18.6 )
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(Favorable) and Unfavorable Loss Reserve Development by Loss Year
For the Six Months Ended June 30, 2011
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
($ in millions)
Specialty $ - $ - $ (0.2 ) $ 0.1 $ - $ (0.8 ) $ (0.2 ) $ (5.7 ) $ (3.3 ) $ (10.1 )
Property (0.1 ) (0.7 ) (0.7 ) (2.0 ) (1.0 ) (3.9 ) (1.8 ) (3.8 ) (6.4 ) (20.4 )
Casualty (0.5 ) (2.3 ) (2.9 ) (22.8 ) (11.2 ) (2.4 ) (1.1 ) - 2.8 (40.4 )
$ (0.6 ) $ (3.0 ) $ (3.8 ) $ (24.7 ) $ (12.2 ) $ (7.1 ) $ (3.1 ) $ (9.5 ) $ (6.9 ) $ (70.9 )
Acquisition costs. Acquisition costs increased by $11.9 million, or 25.5%, for
the six months ended June 30, 2012 compared to the six months ended June 30,
2011 primarily due to the increase in net premiums earned. The acquisition cost
ratio was 16.6% for the six months ended June 30, 2012, compared to 18.5% for
the six months ended June 30, 2011, primarily due to the change in mix of
business. The proportion of premiums from excess-of-loss reinsurance contracts,
which carry lower acquisition costs, has increased compared to the prior year.
General and administrative expenses. General and administrative expenses
increased by $2.8 million, or 8.8%, for the six months ended June 30, 2012
compared to the six months ended June 30, 2011. The increase was due to higher
salary and related costs due to higher headcount to support our growing
operations. The general and administrative expense ratios for the six months
ended June 30, 2012 and 2011 were 9.8% and 12.6%, respectively, reflecting the
higher growth in net premiums earned relative to expenses in 2012.
Reserves for Losses and Loss Expenses
Reserves for losses and loss expenses by segment were comprised of the
following:
U.S. Insurance International Insurance Reinsurance Total
Jun. 30, Dec. 31, Jun. 30, Dec. 31, Jun. 30, Dec. 31, Jun. 30, Dec. 31,
2012 2011 2012 2011 2012 2011 2012 2011
($ in millions)
Case reserves $ 442.5 $ 387.6 $ 517.4 $ 522.6 $ 471.9 $ 456.2 $ 1,431.8 $ 1,366.4
IBNR 1,317.7 1,274.8 1,729.2 1,726.4 898.8 857.5 3,945.7 3,858.7
Reserve for losses and loss
expenses 1,760.2 1,662.4 2,246.6 2,249.0 1,370.7 1,313.7 5,377.5 5,225.1
Reinsurance recoverables (471.0 ) (438.3 ) (601.8 ) (564.3 ) (0.8 ) (0.3 ) (1,073.6 ) (1,002.9 )
Net reserve for losses and loss
expenses $ 1,289.2 $ 1,224.1 $ 1,644.8 $ 1,684.7 $ 1,369.9 $ 1,313.4 $ 4,303.9 $ 4,222.2
We participate in certain lines of business where claims may not be reported for
many years. Accordingly, management does not solely rely upon reported claims on
these lines for estimating ultimate liabilities. We also use statistical and
actuarial methods to estimate expected ultimate losses and loss expenses. Loss
reserves do not represent an exact calculation of liability. Rather, loss
reserves are estimates of what we expect the ultimate resolution and
administration of claims will cost. These estimates are based on various factors
including underwriters' expectations about loss experience, actuarial analysis,
comparisons with the results of industry benchmarks and loss experience to date.
Loss reserve estimates are refined as experience develops and as claims are
reported and resolved. Establishing an appropriate level of loss reserves is an
inherently uncertain process. Ultimate losses and loss expenses may differ from
our reserves, possibly by material amounts.
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The following tables provide our ranges of loss and loss expense reserve
estimates by business segment as of June 30, 2012:
Reserve for Losses and Loss Expenses
Gross of Reinsurance Recoverable
Carried Low High
Reserves Estimate Estimate
($ in millions)
U.S. insurance $ 1,760.2 $ 1,377.5 $ 1,995.1 International insurance 2,246.6 1,679.8
2,581.7
Reinsurance 1,370.7 1,114.9 1,591.3
Consolidated (1) 5,377.5 4,464.5 5,875.9
Reserve for Losses and Loss Expenses
Net of Reinsurance Recoverable
Carried Low High
Reserves Estimate Estimate
($ in millions)
U.S. insurance $ 1,289.2 $ 1,021.1 $ 1,458.6 International insurance 1,644.8 1,208.2
1,888.5
Reinsurance 1,369.9 1,114.1 1,590.0
Consolidated (1) 4,303.9 3,576.8 4,703.7
(1) For statistical reasons, it is not appropriate to add together the ranges of
each business segment in an effort to determine the low and high range around
the consolidated loss reserves.
Our range for each business segment was determined by utilizing multiple
actuarial loss reserving methods along with various assumptions of reporting
patterns and expected loss ratios by loss year. The various outcomes of these
techniques were combined to determine a reasonable range of required loss and
loss expense reserves. While we believe our approach to determine the range of
loss and loss expense is reasonable, there are no assurances that actual loss
experience will be within the ranges of loss and loss expense noted above.
Our selection of the actual carried reserves is generally above the midpoint of
the range. We believe that we should be prudent in our reserving practices due
to the lengthy reporting patterns and relatively large limits of net liability
for any one risk of our direct excess casualty business and of our casualty
reinsurance business. Thus, due to this uncertainty regarding estimates for
reserve for losses and loss expenses, we have carried our consolidated reserve
for losses and loss expenses, net of reinsurance recoverable, above the midpoint
of the low and high estimates for the consolidated net losses and loss expenses.
We believe that relying on the more prudent actuarial indications is appropriate
for these lines of business.
Reinsurance Recoverable
The following table illustrates our reinsurance recoverable as of June 30, 2012
and December 31, 2011:
June 30, December 31,
2012 2011
($ in millions)
Ceded case reserves $ 216.4 $ 196.5
Ceded IBNR reserves 857.2 806.4
Reinsurance recoverable $ 1,073.6 $ 1,002.9
We remain obligated for amounts ceded in the event our reinsurers do not meet
their obligations. Accordingly, we have evaluated the reinsurers that are
providing reinsurance protection to us and will continue to monitor their credit
ratings and financial stability. We generally have the right to terminate our
treaty reinsurance contracts at any time, upon prior written notice to the
reinsurer, under specified circumstances, including the assignment to the
reinsurer by A.M. Best of a financial strength rating of less than "A-."
Approximately 95% of ceded reserves as of June 30, 2012 were recoverable from
reinsurers who had an A.M. Best rating of "A-" or higher.
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Liquidity and Capital Resources
Liquidity
Liquidity is a measure of our ability to access sufficient cash flows to meet
the short-term and long-term cash requirements of our business operations. The
Company believes that its cash flows from operations and investments will
provide sufficient liquidity for the foreseeable future.
Holdings is a holding company and transacts no business of its own. Cash flows
to Holdings may comprise dividends, advances and loans from its subsidiary
companies. Holdings is therefore reliant on receiving dividends and other
permitted distributions from its subsidiaries to make dividend payments on its
common shares.
Our operating subsidiaries depend upon cash inflows from premium receipts, net
of commissions, investment income and proceeds from sales and redemptions of
investments. Cash outflows for our operating subsidiaries are in the form of
claims payments, reinsurance premium payments, purchase of investments,
operating expenses and income tax payments as well as dividend payments to the
holding company.
Historically, our operating subsidiaries have generated sufficient cash flows to
meet all of their obligations. Because of the inherent volatility of our
business, the seasonality in the timing of payments by insureds and cedents, the
irregular timing of loss payments, and the impact of a change in interest rates
and credit spreads on the investment income as well as seasonality in coupon
payment dates for fixed income securities, cash flows from operating activities
may vary between periods. In the unlikely event that paid losses exceed
operating cash flows in any given period, we would use our cash balances
available, or liquidate a portion of our investment portfolio in order to meet
our short-term liquidity needs. Our total investments and cash totaled $8.9
billion as of June 30, 2012, the main components of which were investment grade
fixed income securities and cash and cash equivalents.
Dividend Restrictions
The jurisdictions in which our operating subsidiaries are licensed to write
business impose regulations requiring companies to maintain or meet various
defined statutory ratios, including solvency and liquidity requirements. Some
jurisdictions also place restrictions on the declaration and payment of
dividends and other distributions. See Liquidity and Capital Resources in Item 7
of Part II of the Company's 2011 Form 10-K.
