Unless otherwise indicated or unless the context otherwise requires, all
references in this Quarterly Report on Form 10-Q to "we," "us," "our" and
similar expressions are references to Alterra and its consolidated subsidiaries.
The following is a discussion and analysis of our results of operations for the
quarter and six months ended June 30, 2012 compared to the quarter and six
months ended June 30, 2011 and our financial condition as of June 30, 2012. This
discussion and analysis should be read in conjunction with the attached
unaudited interim consolidated financial statements and related notes and the
audited consolidated financial statements and related notes contained in our
Annual Report on Form 10-K for the year ended December 31, 2011.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, or Exchange Act. We intend that the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 apply
to these forward-looking statements. Forward-looking statements are not
statements of historical fact but rather reflect our current expectations,
estimates and predictions about future results and events.
Statements that include the words "expect," "intend," "plan," "believe,"
"project," "anticipate," "will," "may" and similar statements of a future or
forward-looking nature identify forward-looking statements. All forward-looking
statements address matters that involve risks and uncertainties. Accordingly,
there are or will be important factors that could cause actual results to differ
materially from those indicated in such statements and you should not place
undue reliance on any such statements. These factors include, but are not
limited to, the following:
• the adequacy of loss and benefit reserves and the need to adjust such
reserves as claims develop over time;
• the failure of any of the loss limitation methods employed;
• the effect of cyclical trends, including with respect to demand and
pricing in the insurance and reinsurance markets;
• changes in general economic conditions, including changes in capital and
credit markets;
• any lowering or loss of financial ratings;
• the occurrence of natural or man-made catastrophic events with a frequency
or severity exceeding expectations;
• actions by competitors, including consolidation;
• the effects of emerging claims and coverage issues;
• the loss of business provided to Alterra by its major brokers;
• the effect on Alterra's investment portfolio of changing financial market
conditions including inflation, interest rates, liquidity and other
factors;
• tax and regulatory changes and conditions;
• retention of key personnel;
• the integration of new business ventures Alterra may enter into; and
• management's response to any of the aforementioned factors.
The foregoing review of important factors should not be construed as exhaustive
and should be read in conjunction with the other cautionary statements that are
included herein and elsewhere, including the risk factors included in our most
recent Annual Report on Form 10-K and other documents on file with the
Securities and Exchange Commission. Any forward-looking statements made in this
Quarterly Report on Form 10-Q are qualified by these cautionary statements, and
there can be no assurance that the actual results or developments anticipated
will be realized or, even if substantially realized, that they will have the
expected consequences to, or effects on, our business or operations. We
undertake no obligation to update publicly or revise any forward-looking
statement, whether as a result of new information, future developments or
otherwise.
Generally, our policy is to communicate events that we believe may have a
material adverse impact on our operations or financial position, including
property and casualty catastrophic events and material losses in our investment
portfolio, in a timely manner through a public announcement. It is also our
policy not to make public announcements regarding events that we believe have no
material impact on our operations or financial position based on management's
current estimates and available information, other than through regularly
scheduled calls, press releases or filings.
Overview
We are a Bermuda headquartered global enterprise dedicated to providing
diversified specialty insurance and reinsurance products to corporations, public
entities and property and casualty insurers. As of June 30, 2012, we had
$2,851.7 million in consolidated shareholders' equity.
In Bermuda, we conduct our insurance and reinsurance operations through Alterra
Bermuda, which is registered as a Class 4 commercial and Class C long-term
insurer under the insurance laws of Bermuda.
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In Europe, we conduct our non-Lloyd's operations through Alterra Europe. Alterra
Europe principally operates from Dublin and also operates branches in London and
Zurich. Our Lloyd's operations are conducted through the Syndicates. Alterra at
Lloyd's operations are based primarily in London, with branches in Dublin and
Zurich. As of June 30, 2012, our proportionate share of Syndicates 1400, 2525
and 2526 was 100%, approximately 2%, and approximately 20%, respectively.
In the United States, our U.S. reinsurance operations are conducted through
Alterra Re USA, a Connecticut-domiciled reinsurance company. Our insurance
operations in the U.S. are conducted through Alterra E&S, a Delaware-domiciled
excess and surplus insurance company, and Alterra America, a Delaware domiciled
admitted insurance company. Through Alterra E&S and Alterra America, we write
both admitted and non-admitted business throughout the United States and Puerto
Rico.
In Latin America, we provide reinsurance to clients through Alterra at Lloyd's
in Rio de Janeiro, using Lloyd's admitted status, through Alterra Europe using a
representative office in Bogotá and a service company in Buenos Aires and
through our local reinsurance company in Brazil. Our local reinsurance company
in Brazil commenced writing business in the first quarter of 2012.
We employ certain personnel and hold certain assets within our global service
companies incorporated and located in Bermuda, Ireland, the United Kingdom and
the United States, which we believe improves the efficiency of providing
corporate services across the Company.
To manage our insurance and reinsurance liability exposure, make our investment
decisions and assess our overall enterprise risk, we model our underwriting and
investing activities on an integrated basis. Our integrated risk management, as
well as terms and conditions of our products, provide flexibility in making
decisions regarding investments. Our investments comprise three high grade fixed
maturities securities portfolios (one held for trading, one held as available
for sale and one held to maturity) and a diversified alternative asset
portfolio. Our investment portfolios are designed to provide diversification and
to generate positive returns while attempting to reduce the frequency and
severity of credit losses. Based on fair values as of June 30, 2012, the
allocation of invested assets was 95.4% in cash and fixed maturities and 4.6% in
other investments, principally hedge funds.
Key Performance Indicators
Our principal objective as a global specialty insurance and reinsurance company
is to meet our obligations to policyholders, while generating returns on capital
that appropriately reward our shareholders for the risk that we assume under our
insurance and reinsurance contracts. In an effort to achieve this objective, we
assess the potential losses associated with the risks that we insure and
reinsure, diversify our risk exposure by product class and by geographic
location, manage our investment portfolio risk appropriately and control costs
throughout our organization. The financial measures that we believe are most
meaningful in analyzing our performance and assessing whether we are achieving
our objective are growth in book value per share, net operating income, combined
ratio, annualized return on average shareholders' equity and annualized net
operating return on average shareholders' equity.
As a diversified insurer and reinsurer, which includes underwriting property
catastrophe risks, we have substantial exposure to losses resulting from natural
and man-made catastrophes. The frequency and severity of catastrophes are
inherently unpredictable, but the loss experience of property catastrophe
insurers and reinsurers has been generally characterized as low frequency and
high severity in nature. Potential claims from catastrophic events may cause
substantial volatility in our financial results for any fiscal quarter. As a
result, the financial measures that we use to analyze our performance will
reflect this volatility in the short term; however, we believe these measures
should demonstrate less volatility over the long term.
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The table below illustrates our key performance indicators as of June 30, 2012
and December 31, 2011, and for the quarter and six months ended June 30, 2012
and 2011:
As of March 31, As of December 31,
As of June 30, 2012 2012 2011 As of June 30, 2011
Book value per share (1) $ 29.44 $ 28.31 $ 27.51 $ 26.40
Diluted book value per
share (1) $ 28.68 $ 27.67 $ 26.91 $ 25.98
Quarter Ended June Quarter Ended June Six Months Ended Six Months Ended June
30, 2012 30, 2011 June 30, 2012 30, 2011
(in thousands of U.S. Dollars, except percentages)
Net operating income (2) $ 68,960 $ 39,558 $ 136,683 $ 14,833
Combined ratio (3) 86.6 % 93.7 % 89.5 % 103.5 %
Annualized return on average
shareholders' equity (4) 11.1 % 4.7 % 11.1 % (1.0 )%
Annualized net operating return on
average shareholders' equity (2)(4) 9.7 % 5.7 % 9.6 % 1.1 %
(1) Book value per share is calculated as shareholders' equity divided by the
number of common shares outstanding. Diluted book value per share is
calculated as shareholders' equity divided by the number of diluted common
shares outstanding using the treasury stock method.
(2) Net operating income and annualized net operating return on average
shareholders' equity are non-GAAP financial measures as defined by SEC Regulation G. See "Non-GAAP financial measures" for reconciliation to the
nearest U.S. GAAP financial measure.
(3) Combined ratio is calculated by dividing the sum of net losses and loss
expenses, acquisition costs and general and administrative expenses by net
premiums earned for the property and casualty business.
(4) Annualized return on average shareholders' equity and annualized net
operating return on average shareholders' equity are calculated by dividing net income and net operating income, respectively, by average
shareholders' equity (determined using the quarterly average shareholders'
equity balances).
We consider growth in book value per share to be the most important financial
performance measure in assessing whether we are meeting our business objectives.
For the twelve months ended June 30, 2012, our book value per share on a basic
and diluted basis increased by 11.5% and 10.4%, respectively. During the quarter
ended June 30, 2012, our book value per share on a basic and diluted basis
increased by 4.0% and 3.7%, respectively, and during the six months ended June
30, 2012, our book value per share on a basic and diluted basis increased 7.0%
and 6.6%, respectively. We also distributed $0.14 per share and $0.56 per share
in dividends to our shareholders in the quarter and twelve months ended June 30,
2012, respectively, which provided tangible value to shareholders and reduced
our excess capital. We believe that a comparison of book value per share and
diluted book value per share growth should be adjusted for these distributions
to fully reflect the return generated for shareholders. Adding back $0.14 per
share to our June 30, 2012 diluted book value per share of $28.68 would result
in $28.82 per share, an increase of 4.2% over March 31, 2012. Adding back $0.56
per share to our June 30, 2012 diluted book value per share of $28.68 would
result in $29.24 per share, an increase of 12.5% over June 30, 2011. The
increase in diluted book value per share, as adjusted, was principally due to a
combination of positive operating results, unrealized gains on our investment
portfolio and share repurchases at a discount to diluted book value per share.
Our net operating income for the quarter and six months ended June 30, 2012
improved compared with the prior year periods, principally due to the
significant decline in property catastrophe losses. Property catastrophe losses
in the quarter and six months ended June 30, 2012 were within our attritional
loss expectations and there has been no significant development in the current
year in our loss estimates for the major 2011 property catastrophe events.
Property catastrophe losses of $49.6 million and $155.8 million, net of
reinsurance and reinstatement premiums, for the quarter and six months ended
June 30, 2011, respectively, resulting from natural disasters in 2011, had an
adverse effect on our results of operations for the 2011 periods.
We seek to manage and monitor our short tail catastrophe exposed business so
that the estimated maximum impact of a catastrophic event in any geographic zone
is less than 25% of our beginning of year shareholders' equity for a modeled 1
in 250 year event. As of June 30, 2012, our aggregate exposure was below this
target. We intend to continue to monitor the pricing environment and believe we
have the capital and operational flexibility to adjust our aggregate exposure
should market conditions change materially over the course of 2012.
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Net operating income in 2012 increased compared to 2011 due to improved
underwriting income and reduced general and administrative expenses.
Underwriting income for the quarter and six months ended June 30, 2012
principally was derived from our global insurance and reinsurance segments. Net
favorable development of prior year loss reserves was $20.4 million and $31.2
million for the quarter and six months ended June 30, 2012, respectively,
principally within our global insurance and reinsurance segments, which reduced
the combined ratio by 5.8 and 4.5 percentage points, respectively.
The absence of significant property catastrophe events in 2012 was the principal
contributor to the decrease in our combined ratio and the increase in our
annualized net return on average shareholders' equity and annualized net
operating return on average shareholders' equity for the quarter and six months
ended June 30, 2012 compared to the prior year periods. We target a long-term
net operating return on average shareholders' equity, or net operating ROE, of
the risk free rate plus 10% over the cycle. We believe that in the current stage
of the cycle, our net operating ROE is consistent with this long-term target.
We continued to actively manage our capital during the quarter by taking
advantage of select opportunities to purchase our common shares. We spent $88.0
million to repurchase an aggregate of 3.9 million common shares during the
quarter at an average price of $22.74 per common share, a 17.8% discount to our
March 31, 2012 diluted book value per share. For the six months ended June 30,
2012, we spent $136.8 million to repurchase 5.9 million common shares at an
average price of $23.02 per common share. As of June 30, 2012, our outstanding
share repurchase authorization was $123.0 million. On August 7, 2012, our Board
of Directors increased our share repurchase authorization by $100.0 million. We
expect to continue to consider share repurchases as an effective tool to manage
capital in a soft cycle and to increase book value per share for our
shareholders.
During July 2012, high temperatures and low rainfall resulted in deteriorating
agriculture conditions in certain parts of the United States. The drought
conditions have the potential to cause material losses within the agriculture
insurance and reinsurance industry. Based on recent reports on current and
expected crop conditions and crop prices in the United States, and our
geographical spread of risk, we estimate a net underwriting loss for the third
quarter of 2012 on our agriculture reinsurance business in the range of $15.0
million to $25.0 million, pretax and net of reinsurance. Actual losses may vary
materially from this estimate due to the inherent uncertainties in making such
determinations resulting from several factors, including but not limited to, the
preliminary nature of available information and the potential inaccuracies and
inadequacies in the data provided by clients and brokers.
Business Outlook
The markets in which we operate historically have been cyclical. During periods
of excess underwriting capacity, competition can result in lower pricing and
less favorable policy terms for insurers and reinsurers. During periods of
reduced underwriting capacity, pricing and policy terms are generally more
favorable for insurers and reinsurers. We believe that the industry has had
sustained excess underwriting capacity and, while 2011's property catastrophe
events likely eroded some of that capacity, there has not been sufficient
pressure on the industry to materially improve pricing across all lines of
business in 2012. The industry is also operating in a low interest rate
environment, which makes it more difficult to generate significant investment
income. Both of these factors generally result in lower net operating income,
return on average shareholders' equity and net operating ROE.
Although there remains uncertainty regarding the timing, location and scale of a
favorable turn in the market, we believe that the industry has shown and will
likely continue to show signs of improvement for the foreseeable future.
However, we intend to maintain our disciplined underwriting efforts while
actively managing our expenses. We believe that, overall, market pricing is
currently more attractive in short-tail lines. Accordingly, we expect to write
more premiums in our short-tail lines of business than our long-tail casualty
lines of business for the year ending December 31, 2012. We are also taking
advantage of favorable market conditions for short-tail property business
through our participation in New Point Re IV, which reinsures property
catastrophe risks. Our participation in New Point Re IV enables us to earn fee
income for underwriting services and to participate in the underwriting results
of attractively-priced property catastrophe reinsurance business.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP,
which require management to make estimates and assumptions. We have performed a
current assessment of our critical accounting policies in connection with
preparing our interim unaudited consolidated financial statements as of and for
the quarter ended June 30, 2012. We believe that the critical accounting
policies set forth in our Annual Report on Form 10-K for the year ended
December 31, 2011 continue to describe the significant judgments and estimates
used in the preparation of our consolidated financial statements. These
accounting policies pertain to revenue recognition, loss and benefit expenses
and investment valuation. If actual events differ significantly from the
underlying judgments or estimates used by management in the application of these
accounting policies, there could be a material adverse effect on our results of
operations and financial condition.
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Consolidated Results of Operations-For the quarter and six months ended June 30,
2012 and 2011
Our consolidated results of operations for the quarter and six months ended June
30, 2012 and 2011 are summarized below:
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 % change June 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Gross premiums $ 1,228,187 $ 1,191,755 3.1 %
written $ 566,857 $ 563,907 0.5 %
Reinsurance (414,341 ) (273,983 ) 51.2 %
premiums ceded (189,879 ) (136,626 ) 39.0 %
Net premiums $ 813,846 $ 917,772 (11.3 )%
written $ 376,978 $ 427,281 (11.8 )%
Net premiums earned $ 350,778$ 348,941 0.5 % $
688,953 $ 728,828 (5.5 )%
Net investment 113,407 117,431 (3.4 )%
income 54,729 59,665 (8.3 )%
Net realized and
unrealized gains
(losses) on
investments 13,481 (5,774 ) n/m 38,974 (24,592 ) n/m
Net impairment
losses recognized
in earnings (570 ) (353 ) 61.5 % (5,939 ) (1,382 ) 329.7 %
Other income 1,928 591 226.2 % 7,290 1,906 282.5 %
Total revenues 420,346 403,070 4.3 % 842,685 822,191 2.5 %
Net losses and loss
expenses 196,764 211,133 (6.8 )% 402,793 515,539 (21.9 )%
Claims and policy
benefits 13,272 15,570 (14.8 )% 26,738 30,280 (11.7 )%
Acquisition costs 62,171 64,680 (3.9 )% 121,895 135,288 (9.9 )%
Interest expense 9,635 10,630 (9.4 )% 18,263 19,089 (4.3 )%
Net foreign
exchange losses
(gains) 25 3,090 (99.2 )% (7 ) 2,212 (100.3 )%
General and
administrative
expenses 58,777 69,659 (15.6 )% 118,859 140,862 (15.6 )%
Total losses and 688,541 843,270 (18.3 )%
expenses 340,644 374,762 (9.1 )%
Income (loss) 154,144 (21,079 ) n/m
before taxes 79,702 28,308 181.6 %
Income tax expense (3,820 ) (7,027 ) (45.6 )%
(benefit) 762 (4,327 ) n/m
Net income (loss) $ 78,940$ 32,635 141.9 % $
157,964 $ (14,052 ) n/m
Loss ratio (a) 56.2 % 60.7 % 58.6 % 70.9 %
Acquisition cost
ratio (b) 17.7 % 18.5 % 17.7 % 18.6 %
General and
administrative
expense ratio (c) 12.6 % 14.5 % 13.3 % 14.1 %
Combined ratio (d) 86.6 % 93.7 % 89.5 % 103.5 %
(a) The loss ratio is calculated by dividing net losses and loss expenses by
net premiums earned for the property and casualty business.
(b) The acquisition cost ratio is calculated by dividing acquisition costs by
net premiums earned for the property and casualty business.
(c) The general and administrative expense ratio is calculated by dividing
general and administrative expenses by net premiums earned for the
property and casualty business.
(d) The combined ratio is calculated by dividing the sum of net losses and loss expenses, acquisition costs and general and administrative expenses
by net premiums earned for the property and casualty business.
n/m Not meaningful.
Premiums. Gross premiums written for the quarter and six months ended June 30,
2012 increased by 0.5% and 3.1%, respectively, compared to the prior year
periods. The principal reason for the increase was strategic growth in our U.S.
insurance, Alterra at Lloyd's and Latin America segments. For the six months
ended June 30, 2012, this increase was partially offset by a decline in business
written by our reinsurance segment.
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The ratio of reinsurance premiums ceded to gross premiums written for the
quarter and six months ended June 30, 2012 was 33.5% and 33.7%, respectively,
compared to 24.2% and 23.0% in the prior year periods. The increase in the ratio
for both the quarter and six month period was principally due to additional
property reinsurance purchased in our reinsurance segment. The ratio for the six
months ended June 30, 2012 was also impacted by the 100% retrocession of the
business written through our contracted general agent distribution channel (our
"contract binding" business) in our U.S. insurance segment starting from
August 1, 2011. We ceased writing the contract binding business in the second
quarter of 2012.
During the past several quarters, principally in response to market conditions,
we have shifted our mix of business written from long-tail business to
short-tail business. This greater emphasis on short-tail lines of business, with
property being the largest component, has increased our probable maximum loss
from property catastrophe events. The industry's adoption of new external vendor
catastrophe models has also contributed to the increase in our aggregate
exposure estimates for property catastrophe events. To manage this increased
exposure and operate within our risk tolerances, we have increased our purchase
of reinsurance, with an emphasis on property reinsurance. As a result of these
factors, our net premiums written decreased for the quarter and six months ended
June 30, 2012 compared to the prior year periods despite an increase in gross
premiums written. Overall, we expect our ratio of reinsurance premiums ceded to
gross premiums written to increase in 2012 compared to 2011. We regularly
monitor our need for reinsurance based on aggregate risk exposures.
Net premiums earned is a function of the earning of gross premiums written and
reinsurance premiums ceded over the last several quarters and, therefore,
changes in net premiums earned generally lag quarterly increases and decreases
in gross premiums written and reinsurance premiums ceded.
Net investment income. Net investment income for the quarter and six months
ended June 30, 2012 decreased by 8.3% and 3.4%, respectively, compared to the
prior year periods. As investments in our fixed maturity portfolio mature, lower
reinvestment yields on new purchases have reduced the weighted average book
yield of our portfolio. In addition, the average amortized cost of our fixed
maturity portfolio, including cash, has decreased for the current year periods
compared to the prior year periods, resulting in a lower investment base.
Net realized and unrealized gains (losses) on investments. Net realized and
unrealized gains and losses on investments may vary significantly from period to
period. The quarter ended June 30, 2012 included net realized gains on available
for sale fixed maturities of $12.0 million compared to $nil realized gains in
the prior year period. Most of the realized gains in the current quarter related
to sales of longer duration securities, taking advantage of gains caused by
declining long term interest rates and at the same time reducing our exposure to
longer duration securities. The quarter also included income from equity method
investments of $5.6 million, principally related to our investment in New Point
IV, compared to $nil in the prior year period. For the six months ended June 30,
2012, the principal components of the net gain was $19.7 million of net realized
gains on available for sale fixed maturities and $10.5 million of income from
equity method investments, principally related to our investment in New Point
IV. The principal component of the net loss for the six months ended June 30,
2011 was a $25.0 million loss on a catastrophe bond with exposure to the Japan
earthquake and tsunami.
Other income. Other income for the quarter and six months ended June 30, 2012
principally comprised underwriting fees and profit commission earned from New
Point Re IV.
Net losses and loss expenses. The loss ratio decreased for the quarter and six
months ended June 30, 2012 by 4.5 and 12.3 percentage points, respectively,
compared to the prior year periods. Significant items impacting the loss ratio
were:
• Net favorable development of prior year loss reserves in the quarter and
six months ended June 30, 2012 of $20.4 million and $31.2 million,
respectively, compared to $48.5 million and $78.7 million in the quarter
and six months ended June 30, 2011, respectively. The net favorable
development in the six months ended June 30, 2012 was principally
recognized on long-tail lines in our global insurance and reinsurance
segments, with the decrease compared to the prior year period due to a
decrease in favorable development in our property line of business. In
2010, our actual property loss experience was below our original loss
estimates, which resulted in favorable development being recognized in
2011. During 2011, actual loss experience was above our expected attritional losses due to the significant worldwide property catastrophe
events and, therefore, we would not expect the same level of favorable
development on property reserves being recognized in 2012;
• Net favorable development was recognized in our global insurance ($10.1
million) and reinsurance ($13.3 million) segments in the quarter ended
June 30, 2012 partially offset by net unfavorable development in our Latin
America segment ($3.0 million). Net favorable development for the six
months ended June 30, 2012 was recognized in our global insurance ($28.4
million) and reinsurance ($12.4 million) segments partially offset by net
unfavorable development in our Alterra at Lloyd's ($4.5 million), U.S.
insurance ($1.0 million) and Latin America ($4.2 million) segments;
• Excluding the net favorable loss development, the loss ratio for the
quarter and six months ended June 30, 2012 was 62.1% and 63.1%,
respectively, compared to 74.6% and 81.7% for the quarter and six months
ended June 30, 2011, respectively. The decrease in the loss ratio was
principally due to the decrease in property catastrophe losses in 2012
compared to 2011, partially offset by changes in the mix of business; and
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• For the quarter and six months ended June 30, 2012, our results included
no significant losses related to property catastrophe events. For the
quarter and six months ended June 30, 2011, our results included $50.5 million and $165.9 million, respectively, of losses net of reinsurance
related to significant property catastrophe events. The significant
property catastrophe event net losses for the quarter and six months ended
June 30, 2011 included the Australia floods, Cyclone Yasi, the New Zealand
earthquake and the Japan earthquake and tsunami.
Our loss estimates for property catastrophe losses are based on proprietary
modeling analyses, industry assessments of exposure, claims information obtained
from our clients and brokers to date, and a review of in-force contracts. Our
actual losses from such events may vary materially from the estimates due to the
inherent uncertainties in making such determinations resulting from several
factors, including the preliminary nature of available information, the
potential inaccuracies and inadequacies in the data provided by clients and
brokers, the modeling techniques employed and the application of such
techniques, the contingent nature of business interruption exposures, the
effects of any resultant demand surge on claims activity, and the attendant
coverage issues.
Acquisition costs. Our acquisition cost ratio for the quarter and six months
ended June 30, 2012 decreased by 0.8 and 0.9 percentage points, respectively,
compared with the prior year periods. The insurance and reinsurance contracts we
write have a wide range of acquisition cost ratios. Changes in the mix of
business written and earned impact our acquisition cost ratio from quarter to
quarter. The acquisition cost ratio increased in our reinsurance and Latin
America segments and decreased in our U.S. insurance and Alterra at Lloyd's
segments.
Interest expense. Interest expense reflects interest on our senior notes,
interest on funds withheld from reinsurers, and accretion on deposit liability
contracts. Interest expense for the quarter and six months ended June 30, 2012
decreased compared to the prior year periods principally due to a reduction in
the funds withheld from Grand Central Re.
General and administrative expenses. General and administrative expenses for the
quarter and six months ended June 30, 2012 decreased by $10.9 million and $22.0
million, respectively, compared to the prior year periods. This decrease was
principally due to a decrease in long-term stock-based compensation expense,
including a reduction in awards granted to retirement eligible employees.
Income tax expense (benefit). Corporate income tax expense or benefit is
generated through our foreign operations outside of Bermuda, principally in the
United States, Europe and Latin America. The effective tax rate was 1.0% and
negative 2.5% for the quarter and six months ended June 30, 2012, respectively,
compared with negative 15.3% and 33.3% for the prior year periods, respectively.
Our effective income tax rate, which we calculate as income tax expense or
benefit divided by income or loss before taxes, may fluctuate significantly from
period to period depending on the geographic distribution of pre-tax income or
loss in any given period between different jurisdictions with different tax
rates.
Segment Results of Operations-For the quarter and six months ended June 30, 2012
and 2011
We monitor the performance of our underwriting operations in six segments:
• Global insurance (formerly the insurance segment)-We offer property and
casualty excess of loss capacity from our offices in Bermuda, Dublin and
London primarily to U.S. and international Fortune 1000 companies.
Insurance offered from our U.S. offices is included within our U.S.
insurance segment. Principal lines of business include aviation, excess
liability, professional lines and property.
• U.S. insurance (formerly the U.S. specialty segment)-We offer property and
casualty insurance coverage from our offices in the United States
primarily to Fortune 3000 companies. Principal lines of business include
general/excess liability, marine, professional liability and property.
• Reinsurance-We offer property and casualty quota share and excess of loss
reinsurance from our offices in Bermuda, Dublin, London and the United
States to insurance and reinsurance companies worldwide. Principal lines
of business include agriculture, auto, aviation, credit/surety, general
casualty, marine & energy, medical malpractice, professional liability,
property, whole account and workers' compensation.
• Alterra at Lloyd's-We offer property and casualty quota share and excess
of loss insurance and reinsurance from our offices in London, Dublin and
Zurich, primarily to medium- to large- sized international clients. This
segment comprises our proportionate share of the underwriting results of
the Syndicates, and the results of our managing agent, Alterra at Lloyd's.
The Syndicates underwrite a diverse portfolio of specialty risks,
including accident & health, agriculture, aviation, financial
institutions, international casualty, marine, professional liability and
property.
• Latin America-We offer property and casualty quota share and excess of
loss reinsurance from our offices in Rio de Janeiro, Bogotá and Buenos
Aires. Principal lines of business include aviation, general liability,
marine, property and surety.
• Life and annuity reinsurance-We previously offered reinsurance products
focusing on blocks of life and annuity
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business, which took the form of co-insurance transactions whereby the risks are
reinsured on the same basis as the original policies. We have determined not to
write any new life and annuity contracts in the foreseeable future.
We also have a corporate function that includes our investment and financing
activities.
We manage our invested assets on an aggregated basis, and do not allocate
investment income and realized and unrealized gains on investments to the
property and casualty segments. Because of the longer duration of liabilities on
life and annuity reinsurance business, and the accretion of the discounted
carrying value of life and annuity benefits, investment returns are important in
evaluating the profitability of this segment. Consequently, we allocate
investment returns based on a notional allocation of invested assets from the
consolidated portfolio using durations that are determined based on estimated
cash flows for the life and annuity reinsurance segment. The balance of
investment returns from this consolidated portfolio is allocated to the
corporate function for the purposes of segment reporting.
We monitor the performance of all of our segments other than life and annuity
reinsurance on the basis of underwriting income, loss ratio, acquisition ratio,
general and administrative expense ratio and combined ratio along with other
metrics. We monitor the performance of our life and annuity reinsurance business
on the basis of income before taxes for the segment, which includes revenue from
net premiums earned and allocated net investment income, and expenses from
claims and policy benefits, acquisition costs and general and administrative
expenses.
Effective January 1, 2012, we redefined certain of our operating and reporting
segments. Reinsurance business written within Latin America, which was
previously reported within the reinsurance or Alterra at Lloyd's segments, has
been reclassified to a new Latin America segment. In addition, business written
by our recently incorporated Brazilian reinsurance company, Alterra Brazil, is
included in the Latin America segment. Insurance business written by Alterra
Insurance USA, which was previously reported within the global insurance
segment, has been reclassified to the U.S. insurance segment. Alterra Insurance
USA is a managing general underwriter for Alterra E&S and Alterra America, as
well as various third party insurance companies, and is our principal insurance
underwriting platform for retail distribution in the United States. Segment
disclosures for comparative periods have been revised to reflect this
reclassification.
Global Insurance Segment
Quarter Ended Quarter Ended June Six Months Ended Six Months Ended
June 30, 2012 30, 2011 % change June 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Gross premiums written $ 125,276 $ 130,909 (4.3 )% $ 192,047 $ 194,804 (1.4 )%
Reinsurance premiums
ceded (53,224 ) (55,133 ) (3.5 )% (96,475 ) (93,657 ) 3.0 %
Net premiums written $ 72,052 $ 75,776 (4.9 )% $ 95,572 $ 101,147 (5.5 )%
Net premiums earned $ 47,436 $ 45,606 4.0 % $ 94,406 $ 95,478 (1.1 )%
Net losses and loss
expenses (22,745 ) (23,689 ) (4.0 )% (40,806 ) (55,313 ) (26.2 )%
Acquisition costs (239 ) 1,117 (121.4 )% (298 ) 853 (134.9 )%
General and
administrative expenses (6,913 ) (6,774 ) 2.1 % (13,394 ) (14,726 ) (9.0 )%
Other income 1 85 (98.8 )% 816 814 0.2 %
Underwriting income $ 17,540 $ 16,345 7.3 % $ 40,724 $ 27,106 50.2 %
Loss ratio (a) 47.9 % 51.9 % 43.2 % 57.9 %
Acquisition cost ratio
(b) 0.5 % (2.4 )% 0.3 % (0.9 )%
General and
administrative expense
ratio (c) 14.6 % 14.9 % 14.2 % 15.4 %
Combined ratio (d) 63.0 % 64.3 % 57.7 % 72.5 %
(a) The loss ratio is calculated by dividing net losses and loss expenses by
net premiums earned.
(b) The acquisition cost ratio is calculated by dividing acquisition costs by
net premiums earned.
(c) The general and administrative expense ratio is calculated by dividing
general and administrative expenses by net premiums earned.
(d) The combined ratio is calculated by dividing the sum of net losses and
loss expenses, acquisition costs and general and administrative expenses
by net premiums earned.
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% of % of
Quarter Ended Premium Quarter Ended Premium
June 30, 2012 Written % Ceded June 30, 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
Aviation $ 3,954 3.2 % 54.8 % $ 3,814 2.9 % 24.2 %
Excess liability 31,435 25.1 % 55.6 % 34,659 26.5 % 57.6 %
Professional liability 59,407 47.4 % 35.6 % 62,402 47.7 % 31.7 %
Property 30,480 24.3 % 40.9 % 30,034 22.9 % 48.1 %
$ 125,276 100.0 % 42.5 % $ 130,909 100.0 % 42.1 %
% of Six Months % of
Six Months Ended Premium Ended June 30, Premium
June 30, 2012 Written % Ceded 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
Aviation $ 5,256 2.7 % 110.5 % $ 5,230 2.7 % 35.6 %
Excess liability 56,621 29.5 % 56.9 % 56,936 29.2 % 54.7 %
Professional liability 83,873 43.7 % 42.5 % 86,931 44.6 % 41.1 %
Property 46,297 24.1 % 49.3 % 45,707 23.5 % 54.4 %
$ 192,047 100.0 % 50.2 % $ 194,804 100.0 % 48.1 %
Premiums. Gross premiums written for the quarter and six months ended June 30,
2012 decreased by 4.3% and 1.4%, respectively, compared to the prior year
periods. The decreases in professional liability gross premiums written in both
periods were principally due to continuing competitive pricing conditions in
this line of business.
The ratio of reinsurance premiums ceded to gross premiums written for the
quarter and six months ended June 30, 2012 was 42.5% and 50.2%, respectively,
compared to 42.1% and 48.1% in the prior year periods. The amount of reinsurance
that we purchase can vary significantly by line of business and within lines of
business. The increase in the percentage of reinsurance premiums ceded on our
aviation line of business was due principally to premium adjustments on an
excess of loss reinsurance treaty in the quarter and six months ended June 30,
2012.
Net premiums earned is a function of the earning of gross premiums written and
reinsurance premiums ceded over the last several quarters and, therefore,
changes in net premiums earned generally lag quarterly increases and decreases
in gross premiums written and reinsurance premiums ceded.
Net losses and loss expenses. The loss ratio for the quarter and six months
ended June 30, 2012 decreased by 4.0 and 14.7 percentage points, respectively,
compared to the prior year periods. Significant items impacting the loss ratio
were:
• Net favorable development of prior year loss reserves in the quarter and
six months ended June 30, 2012 of $10.1 million and $28.4 million,
respectively, compared to $14.7 million and $22.1 million in the quarter
and six months ended June 30, 2011;
• Net favorable loss development was recorded in all four lines of business
in the quarter and six months ended June 30, 2012, principally in the
following lines of business and accident years: professional liability
(2006) and excess liability (2006). Net favorable loss development in the
quarter and six months ended June 30, 2011 was principally in the
following lines of business and accident years: property (2009), excess
liability (2005) and aviation (2009-2010).
• Excluding the net favorable loss development, the loss ratio was 69.3% and
73.3% for the quarter and six months ended June 30, 2012, respectively,
compared to 84.2% and 81.0% for the quarter and six months ended June 30,
2011, respectively. This decrease was principally due to a decrease in net
losses related to property catastrophe events and lower than expected
attritional net losses on our shorter tail lines of business; and
• For the quarter and six months ended June 30, 2012, we had no significant
losses associated with significant property catastrophe events. For the
quarter and six months ended June 30, 2011, our results included $3.7 million and $6.5 million of net losses, respectively, related to property
catastrophe events in Japan and Australia. A portion of these losses in
the prior year periods fell within our attritional loss ratio, as we
expect a certain level of property losses in each period.
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Acquisition costs. Acquisition costs are presented net of ceding commission
income associated with reinsurance premiums ceded. These ceding commissions are
designed to compensate us for the costs of producing the portfolio of risks
ceded to our reinsurers. Acquisition costs generally fluctuate based on shifts
in business mix quarter over quarter.
General and administrative expenses. General and administrative expenses for the
quarter ended June 30, 2012 were consistent with the prior year period. For the
six months ended June 30, 2012, general and administrative expenses decreased
9.0% compared to the prior year period. The decrease was principally due to a
reduction in incentive-based compensation expense.
U.S. Insurance Segment
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 % change June 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Gross premiums $ 216,468 $ 187,559 15.4 %
written
$ 112,186 $ 109,794 2.2 %
Reinsurance premiums (122,018 ) (66,544 ) 83.4 %
ceded (51,524 ) (28,227 ) 82.5 %
Net premiums written $ 60,662$ 81,567 (25.6 )% $
94,450 121,015 (22.0 )%
Net premiums earned $ 55,810$ 58,409 (4.4 )% $
111,595 112,078 (0.4 )%
Net losses and loss (74,897 ) (72,427 ) 3.4 %
expenses (37,333 ) (38,012 ) (1.8 )%
Acquisition costs (6,169 ) (10,400 ) (40.7 )% (13,865 ) (18,386 ) (24.6 )%
General and
administrative
expenses (12,215 ) (11,374 ) 7.4 % (24,472 ) (22,644 ) 8.1 %
Other income - 54 (100.0 )% 81 137 (40.9 )%
Underwriting (loss) $ (1,558 ) (1,242 ) 25.4 %
income $ 93 $ (1,323 ) (107.0 )%
Loss ratio (a) 66.9 % 65.1 % 67.1 % 64.6 %
Acquisition cost 12.4 % 16.4 %
ratio (b) 11.1 % 17.8 %
General and 21.9 % 20.2 %
administrative
expense ratio (c) 21.9 % 19.5 %
Combined ratio (d) 99.8 % 102.4 % 101.5 % 101.2 %
(a) The loss ratio is calculated by dividing net losses and loss expenses by
net premiums earned.
(b) The acquisition cost ratio is calculated by dividing acquisition costs by
net premiums earned.
(c) The general and administrative expense ratio is calculated by dividing
general and administrative expenses by net premiums earned.
(d) The combined ratio is calculated by dividing the sum of net losses and
loss expenses, acquisition costs and general and administrative expenses
by net premiums earned.
n/m Not meaningful.
% of % of
Quarter Ended Premium Quarter Ended Premium
June 30, 2012 Written % Ceded June30, 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
General/ Excess
Liability $ 23,683 21.1 % 51.9 % $ 25,118 22.9 % 16.9 %
Marine 28,634 25.5 % 48.0 % 25,389 23.1 % 40.6 %
Professional Liability 13,133 11.7 % 38.0 % 8,509 7.7 % 19.7 %
Property 46,736 41.7 % 43.9 % 50,778 46.3 % 23.6 %
$ 112,186 100.0 % 45.9 % $ 109,794 100.0 % 25.7 %
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% of % of
Six Months Ended Premium Six Months Ended Premium
June 30, 2012 Written % Ceded June 30, 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
General/ Excess
Liability $ 58,350 27.0 % 58.5 % $ 48,111 25.7 % 22.5 %
Marine 53,835 24.9 % 38.4 % 42,498 22.7 % 39.3 %
Professional Liability 24,341 11.2 % 37.5 % 15,131 8.1 % 30.8 %
Property 79,942 36.9 % 72.7 % 81,819 43.5 % 42.0 %
216,468 100.0 % 56.4 % 187,559 100.0 % 35.5 %
During the quarter ended September 30, 2011, Alterra E&S sold the renewal rights
to our contract binding business. However, under an agreement with the
purchaser, commencing August 1, 2011, the contract binding business continued to
be written by Alterra E&S and 100% of the premiums and losses were ceded to the
purchaser. The 100% quota share reinsurance of this business meant that we did
not retain any written and earned premium or net losses, but earned a ceding
commission, on new and renewal policies incepting after August 1, 2011. During
the quarter ended June 30, 2012 we stopped writing and ceding this business.
Premiums. Gross premiums written for the quarter and six months ended June 30,
2012 increased 2.2% and 15.4%, respectively, compared to the prior year periods.
Excluding the contract binding business which we no longer write, gross premiums
written increased 19.9% and 29.4% for the quarter and six months ended June 30,
2012, respectively, compared to the prior year periods. Significant factors
affecting gross premiums written were:
• Growth in wholesale excess casualty business (which is included within our
general/excess liability line of business) of $12.2 million and $22.2
million for the quarter and six months ended June 30, 2012, respectively.
We commenced writing wholesale excess casualty business in the third
quarter of 2011;
• Continued expansion of our retail Alterra Insurance USA platform,
principally in the professional liability line of business;
• Improved pricing conditions across all lines of business compared to the
prior year periods; and
• A decrease in general liability insurance written through the brokerage
distribution channel of $4.3 million and $6.4 million for the quarter and
six months ended June 30, 2012, respectively, compared to the prior year
periods. We ceased writing this product line in the first quarter of 2012.
The ratio of reinsurance premiums ceded to gross premiums written for the
quarter and six months ended June 30, 2012 was 45.9% and 56.4%, respectively,
compared to 25.7% and 35.5% in the prior year periods. The increase in the
percentage of premiums ceded in the quarter ended June 30, 2012 was due
principally to the new quota share reinsurance treaty covering our
brokerage-sourced property business that was entered into in the first quarter
of 2012 and an increase in excess liability business written, which is ceded at
a higher percentage than the general liability business written in the prior
year period. In addition, the 100% cession of $18.7 million of gross premiums
written from the contract binding business affected both general liability and
property lines for the six months ended June 30, 2012. Overall, we expect our
ratio of reinsurance premiums ceded to gross premiums written to increase for
the 2012 year compared to the 2011 year as we purchase reinsurance to manage the
aggregate risk on our increased property exposures.
Net premiums earned is a function of the earning of gross premiums written and
reinsurance premiums ceded over the last several quarters and, therefore,
changes in net premiums earned generally lag quarterly increases and decreases
in gross premiums written and reinsurance premiums ceded.
Net losses and loss expenses. The loss ratio for the quarter and six months
ended June 30, 2012 increased 1.8 and 2.5 percentage points, respectively,
compared to the prior year periods. Significant items that impacted the loss
ratio were:
• Net unfavorable prior year loss development of $nil and $1.0 million for
the quarter and six months ended June 30, 2012, respectively, compared to
loss development of $nil for the prior year periods;
• Excluding the net loss development, the loss ratio was 66.9% and 66.2% for
the quarter and six months ended June 30, 2012, respectively, compared to
65.1% and 64.6% for the quarter and six months ended June 30, 2011,
respectively. The slight increase was due principally to changes in the
mix of business, particularly an increase in the marine, excess casualty
and professional liability lines of business. These lines of business have
a higher average loss ratio than property lines, which declined as a
percentage of net premiums earned; and
• Our results for both the quarter and six months ended June 30, 2011
included net losses of $4.5 million for property catastrophe losses and
significant per risk losses. These large loss events included losses for
natural disasters in the
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U.S., including the series of tornadoes, other severe weather and flooding along
the Mississippi River. These losses fell within our attritional loss ratio, as
we expect a certain level of property losses each period.
Acquisition expenses. Acquisition costs decreased for both the quarter and six
months ended June 30, 2012 compared to the prior year periods. The decrease was
due partly to a decrease in net premiums earned, along with changes in the mix
of business with an increase in excess casualty business earned which has more
favorable commission rates. In addition, the quarter and six months ended June
30, 2012 benefited from commission income on the contract binding business that
was 100% ceded.
General and administrative expenses. General and administrative expenses
increased for both the quarter and six months ended June 30, 2012 compared to
the prior year periods. The increase was principally due to increased
compensation costs resulting from the growth of our wholesale excess casualty
and professional liability teams.
Reinsurance Segment
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 % change June 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Gross premiums written $ 246,838 $ 244,899 0.8 % $ 565,192 $ 605,626 (6.7 )%
Reinsurance premiums (112,678 ) (62,927 ) 79.1 %
ceded (53,185 ) (27,675 ) 92.2 %
Net premiums written $ 193,653 $ 217,224 (10.9 )% $ 452,514 $ 542,699 (16.6 )%
Net premiums earned $ 181,316 $ 191,655 (5.4 )% $ 349,224 $ 416,094 (16.1 )%
Net losses and loss (190,802 ) (306,484 ) (37.7 )%
expenses (89,607 ) (122,576 ) (26.9 )%
Acquisition costs (42,708 ) (42,947 ) (0.6 )% (81,369 ) (90,707 ) (10.3 )%
General and
administrative expenses (14,339 ) (21,647 ) (33.8 )% (31,391 ) (43,919 ) (28.5 )%
Other income 1,895 548 245.8 % 6,336 548 n/m
Underwriting income $ 51,998 $ (24,468 ) n/m
(loss) $ 36,557 $ 5,033 n/m
Loss ratio (a) 49.4 % 64.0 % 54.6 % 73.7 %
Acquisition cost ratio 23.3 % 21.8 %
(b) 23.6 % 22.4 %
General and 9.0 % 10.6 %
administrative expense
ratio (c) 7.9 % 11.3 %
Combined ratio (d) 80.9 % 97.7 % 86.9 % 106.0 %
(a) The loss ratio is calculated by dividing net losses and loss expenses by
net premiums earned.
(b) The acquisition cost ratio is calculated by dividing acquisition costs by
net premiums earned.
(c) The general and administrative expense ratio is calculated by dividing
general and administrative expenses by net premiums earned.
(d) The combined ratio is calculated by dividing the sum of net losses and
loss expenses, acquisition costs and general and administrative expenses
by net premiums earned.
n/m Not meaningful.
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% of % of
Quarter Ended Premium Quarter Ended Premium
June 30, 2012 written % Ceded June 30, 2011 written % Ceded
(Expressed in thousands of U.S Dollars)
Gross Premiums Written
by Type of Risk:
Agriculture $ 5,299 2.1 % (1.1 )% $ 8,713 3.6 % -
Auto 39,584 16.0 % - 55,072 22.5 % -
Aviation 5,809 2.4 % 14.1 % 80 - % 127.5 %
Credit/surety 2,625 1.1 % - 571 0.2 % -
General casualty 24,054 9.7 % - 22,045 9.0 % -
Marine & energy 6,256 2.5 % 3.1 % (678 ) (0.3 )% 1.6 %
Medical malpractice 8,105 3.3 % - 11,223 4.6 % 0.5 %
Other 549 0.2 % - 447 0.2 % -
Professional liability 36,968 15.0 % - 39,462 16.1 % -
Property 108,994 44.2 % 47.9 % 103,390 42.2 % 26.4 %
Whole account 191 0.1 % - 268 0.1 % -
Workers' compensation 8,404 3.4 % - 4,306 1.8 % 4.6 %
$ 246,838 100.0 % 21.5 % $ 244,899 100.0 % 11.3 %
% of % of
Six Months Ended Premium SixMonths Ended Premium
June 30, 2012 written % Ceded June 30, 2011 written % Ceded
(Expressed in thousand of U.S Dollars)
Gross Premiums Written
by Type of Risk:
Agriculture $ 22,803 4.0 % (0.2 )% $ 29,498 4.9 % 0.3 %
Auto 40,102 7.1 % - 70,096 11.6 % -
Aviation 11,271 2.0 % 17.9 % 984 0.2 % 26.2 %
Credit/surety 33,628 6.0 % - 23,278 3.8 % -
General casualty 36,689 6.5 % - 37,472 6.2 % -
Marine & energy 17,969 3.2 % 3.6 % 15,871 2.6 % -
Medical malpractice 19,381 3.4 % - 28,805 4.8 % 1.3 %
Other 4,986 0.9 % - 2,140 0.3 % 0.4 %
Professional liability 96,704 17.1 % - 99,146 16.4 % -
Property 253,408 44.8 % 43.4 % 242,256 40.0 % 25.6 %
Whole account 1,599 0.3 % - 35,338 5.8 % 0.1 %
Workers' compensation 26,652 4.7 % 0.2 % 20,742 3.4 % 1.0 %
$ 565,192 100.0 % 19.9 % $ 605,626 100.0 % 10.4 %
Premiums. Gross premiums written for the quarter and six months ended June 30,
2012 increased by 0.8% and decreased by 6.7%, respectively, compared to the
prior year periods. Significant factors affecting the gross premiums written
were:
For the quarter ended June 30, 2012:
• Gross premiums written in our property line of business increased $5.6
million principally in our international property business, where we
continued to experience improvement in pricing conditions and in our U.S.
property business as a result of improved pricing, increased line sizes on
existing programs and new business. Partially off-setting this growth was
$7.4 million of gross premiums written on multi-year contracts which were
recorded in the prior year period and which were not renewable in the
quarter. In addition, the quarter ended June 30, 2012 included positive
premium adjustments of $2.5 million compared to negative premium
adjustments of $7.4 million in the prior year period;
• Gross premiums written in our marine & energy and aviation lines of
business increased $6.9 million and $5.7 million,
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respectively, principally due to new business written;
• Gross premiums written in our workers' compensation lines of business
increased $4.1 million principally due to new business written; and
• Partially off-setting these increases was a decrease in gross premiums
written in our auto line of business of $15.5 million principally relating
to reductions in premiums written on two contracts renewed in the quarter
compared to the prior year period. These reductions related to increased
rates charged by our cedants to their clients that resulted in a lower
premium volume of better priced business ceded to us.
For the six months ended June 30, 2012 :
• Gross premiums written in our whole account line of business decreased
$33.7 million principally due to the non-renewal of two contracts totaling
$28.5 million due to unfavorable pricing;
• Gross premiums written in our auto line of business decreased $30.0
million. The six months ended June 30, 2012 included negative premium
adjustments of $7.8 million compared to positive premiums adjustments of
$13.3 million in the prior year period. Excluding the impact of these
adjustments, the gross premiums written for the six months ended June 30,
2012 were $47.9 million compared to $56.8 million in the prior year
period. This decrease was principally related to reductions in premiums
written on two contracts renewed in the quarter compared to the prior year
period. These reductions related to increased rates charged by our cedants
to their clients that resulted in a lower premium volume of better priced
business ceded to us;
• Gross premiums written in our medical malpractice line of business
decreased $9.4 million. The six months ended June 30, 2012 included positive premium adjustments of $1.2 million compared to $6.4 million in
the prior year period. Excluding the impact of these adjustments, the
gross premiums written for the six months ended June 30, 2012 were $18.2 million compared to $22.4 million in the prior year period. This decrease
principally was due to the non-renewal of a significant contract;
• Gross premiums written in our property line of business increased $11.2
million principally in our international property business where we
continued to experience improvement in pricing conditions. Partially
off-setting this growth was $7.4 million of gross premiums written on
multi-year contracts which were recorded in the prior year period and
which were not renewable in the period. In addition, the six months ended
June 30, 2011 included $15.2 million of reinstatement premiums related to
catastrophe events compared to insignificant amounts for the six months
ended June 30, 2012;
• Gross premiums written in our aviation line of business increased $10.3
million due to new business written and positive premiums adjustments in
the period;
• Gross premiums written in our credit/surety line of business increased
$10.3 million principally due to the renewal of two multi-year residential
mortgage contracts that were originally written two years ago; and
• Gross premiums written in our workers' compensation line of business
increased $5.9 million principally due to an improved pricing environment
which has resulted in some new business opportunities.
The ratio of reinsurance premiums ceded to gross premiums written for the
quarter and six months ended June 30, 2012 was 21.5% and 19.9%, respectively,
compared to 11.3% and 10.4% in the prior year periods. The increase was
principally due to changes in our property reinsurance program, including an
increase in the ceding percentage on our property quota share treaties and the
purchase of an excess of loss reinsurance treaty in the previous quarter. We
regularly monitor our need for reinsurance based on aggregate risk exposures.
Net premiums earned is a function of the earning of gross premiums written and
reinsurance premiums ceded over the last several quarters and, therefore,
changes in net premiums earned generally lag quarterly increases and decreases
in gross premiums written and reinsurance premiums ceded.
Net losses and loss expenses. The loss ratio decreased by 14.6 and 19.1
percentage points for the quarter and six months ended June 30, 2012,
respectively, compared to the prior year periods. Significant items impacting
the loss ratio were:
• Net favorable development of prior year loss reserves in the quarter and
six months ended June 30, 2012 of $13.3 million and $12.4 million,
respectively, compared $23.9 million and $46.7 million in the quarter and
six months ended June 30, 2011;
• Prior year loss development in the quarter and six months ended June 30,
2012 came from most of our lines of business, with favorable development
in general casualty (2002-2007), whole account (2006-2007) and
professional liability (2002-2005) partially offset by unfavorable
development principally in medical malpractice (2008-2010) and workers
compensation (2008-2010). Prior year loss development in the quarter and
six months ended June 30, 2011 was principally on the following lines of
business and accident years: net favorable development on property
(2007-2010), whole account (2006-2007), agriculture (2009) and aviation
(2006-2009), partially offset by net unfavorable development on general
casualty (2006-2007) and medical malpractice (2008-2010);
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• Excluding the net favorable loss development, the loss ratio was 56.8% and
58.2% for the quarter and six months ended June 30, 2012, respectively,
compared to 76.4% and 84.9% for the quarter and six months ended June 30,
2011. The decrease in the loss ratio was due principally to the
significant decrease in property catastrophe and significant per-risk
losses; and
• The quarter and six months ended June 30, 2012 included no significant
losses related to significant property catastrophe events. The quarter and
six months ended June 30, 2011 included $33.3 million and $118.0 million,
respectively, in significant losses related to property catastrophe
events. The quarter ended June 30, 2011 included losses resulting from
tornadoes and flooding in the United States. The six months ended June 30,
2011 also included losses resulting from the Australia floods, Cyclone
Yasi, the New Zealand earthquake and the Japan earthquake and tsunami.
Acquisition costs. Acquisition costs for the quarter and six months ended June
30, 2012 decreased consistent with decreases in net premiums earned compared to
the prior year periods; however, the acquisition cost ratios for the quarter and
six months ended June 30, 2012 increased slightly compared to the prior year
periods. The reinsurance contracts we write have a range of acquisition cost
ratios and the variance is the result of shifts in the mix of business written
and earned. In addition, the quarter and six months ended June 30, 2011 included
$5.0 million and $15.2 million, respectively, of reinstatement premiums related
to catastrophe events compared to insignificant reinstatement premiums in the
current year periods. These reinstatement premiums had low acquisition costs
associated with them thereby reducing the acquisition cost ratio for the prior
year periods.
General and administrative expenses. General and administrative expenses for the
quarter and six months ended June 30, 2012 decreased by $7.3 million and $12.5
million, respectively, compared to the prior year periods. The decreases were
due principally to a reduction in compensation expense compared to the prior
year periods, resulting from fewer employees and a lower level of stock based
compensation granted to retirement eligible employees.
Other income. Other income for the quarter and six months ended June 30, 2012
principally related to underwriting fees and profit commission earned from New
Point Re IV.
Alterra at Lloyd's Segment
Our Alterra at Lloyd's segment comprises all of our Lloyd's operating
businesses, other than underwriting activity related to Latin America, which is
now included within our Latin America segment.
Quarter Ended June Quarter Ended June Six Months Ended Six Months Ended
30, 2012 30, 2011 % change June 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Gross premiums $ 218,151 $ 180,318 21.0 %
written $ 72,008 $ 72,428 (0.6 )%
Reinsurance premiums (65,658 ) (48,097 ) 36.5 %
ceded (27,068 ) (24,918 ) 8.6 %
Net premiums written $ 44,940 $ 47,510 (5.4 )% 152,493 $ 132,221 15.3 %
Net premiums earned $ 46,222 $ 43,577 6.1 % 99,072 86,161 15.0 %
Net losses and loss (71,705 ) (69,515 ) 3.2 %
expenses (33,030 ) (21,072 ) 56.7 %
Acquisition costs (7,443 ) (9,946 ) (25.2 )% (16,877 ) (22,598 ) (25.3 )%
General and
administrative
expenses (7,856 ) (7,773 ) 1.1 % (16,951 ) (16,026 ) 5.8 %
Other income 7 165 (95.8 )% 7 380 (98.2 )%
Underwriting (loss) $ (6,454 ) $ (21,598 ) (70.1 )%
income $ (2,100 ) $ 4,951 (142.4 )%
Loss ratio (a) 71.5 % 48.4 % 72.4 % 80.7 %
Acquisition cost 17.0 % 26.2 %
ratio (b) 16.1 % 22.8 %
General and
administrative
Expense ratio (c) 17.0 % 17.8 % 17.1 % 18.6 %
Combined ratio (d) 104.6 % 89.0 % 106.5 % 125.5 %
(a) The loss ratio is calculated by dividing net losses and loss expenses by
net premiums earned.
(b) The acquisition cost ratio is calculated by dividing acquisition costs by
net premiums earned.
(c) The general and administrative expense ratio is calculated by dividing
general and administrative expenses by net premiums earned.
(d) The combined ratio is calculated by dividing the sum of net losses and
loss expenses, acquisition costs and general and administrative expenses
by net premiums earned.
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% of % of
Quarter Ended Premium Quarter Ended Premium
June 30, 2012 Written % Ceded June30, 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
Accident & health $ 8,250 11.5 % 20.6 % $ 8,380 11.6 % 2.7 %
Agriculture 613 0.8 % - - - -
Aviation 3,220 4.5 % 30.4 % 1,810 2.5 % 118.8 %
Financial institutions 5,400 7.5 % (14.4 )% 6,441 8.9 % 10.0 %
International casualty 8,423 11.7 % 17.6 % 8,263 11.4 % 0.5 %
Marine 2,282 3.2 % 1.6 % - - -
Professional liability 6,108 8.5 % 28.5 % 10,466 14.4 % 6.4 %
Property 37,712 52.3 % 58.1 % 37,068 51.2 % 57.1 %
$ 72,008 100.0 % 37.6 % $ 72,428 100.0 % 34.4 %
% of % of
Six Months Ended Premium SixMonths Ended Premium
June 30, 2012 Written % Ceded June 30, 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
Accident & health $ 25,682 11.8 % 31.8 % $ 21,924 12.2 % 20.3 %
Agriculture 20,983 9.6 % - % - - % - %
Aviation 5,706 2.6 % 124.5 % 3,577 2.0 % 92.2 %
Financial institutions 12,304 5.6 % 28.8 % 15,477 8.6 % 32.6 %
International casualty 57,691 26.4 % 9.9 % 42,052 23.3 % 4.7 %
Marine 5,008 2.3 % (4.2 )% - - % - %
Professional liability 11,536 5.3 % 34.9 % 18,388 10.2 % 8.6 %
Property 79,241 36.4 % 47.1 % 78,900 43.7 % 40.2 %
$ 218,151 100.0 % 30.1 % $ 180,318 100.0 % 26.7 %
Premiums. Gross premiums written for the quarter ended June 30, 2012 decreased
0.6% compared to the prior year period. Gross premiums written in our
professional liability and financial institution lines decreased compared to the
prior year period due to competitive market conditions. These declines were
offset by increased gross premiums written in our marine business, which
commenced business in the fourth quarter of 2011.
Gross premiums written for the six months ended June 30, 2012 increased 21.0%
compared to the prior year period. The increase in gross premiums written was
primarily due to:
• An increase of $21.0 million in our agriculture line of business. Our
Alterra at Lloyd's segment commenced writing agriculture business in the
first quarter of 2012. The majority of this business was previously written in our reinsurance segment and was renewed in 2012 in our Alterra
at Lloyd's segment;
• An increase of $15.6 million in our international casualty line of
business. The increase reflects the continued expansion of our client base
as well as favorable market conditions, particularly in motor liability;
and
• Partially offsetting these increases were declines of gross premiums
written in our professional liability and financial institution lines of
business principally due to competitive market conditions.
The ratio of reinsurance premiums ceded to gross premiums written for the
quarter and six months ended June 30, 2012 was 37.6% and 30.1%, respectively,
compared to 34.4% and 26.7% for the prior year periods. The increase in the
ratio was principally due to changes in mix of business and the timing of
renewal of certain reinsurance treaties.
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Net premiums earned is a function of the earning of gross premiums written and
reinsurance premiums ceded over the last several quarters and, therefore,
changes in net premiums earned generally lag quarterly increases and decreases
in gross premiums written and reinsurance premiums ceded.
Net losses and loss expense. The loss ratio for the quarter ended June 30, 2012
increased 23.1 percentage points compared to the prior year period. The loss
ratio for the six months ended June 30, 2012 decreased 8.3 percentage points
compared to the prior year period. Significant items impacting the loss ratios
were:
• Net favorable development of prior year loss reserves in the quarter and
six months ended June 30, 2012 of $nil and $4.5 million, respectively,
compared to net favorable development of $9.9 million in the quarter and
six months ended June 30, 2011;
• The favorable development in the quarter ended June 30, 2012 was
principally on our property line of business, offset by unfavorable
development on our accident & health line of business. The net favorable
development in the six months ended June 30, 2012 was principally on our
property and pre-2008 discontinued lines of business partially offset by
net unfavorable development in our accident & health and financial
institutions lines of business;
• Excluding the net favorable loss development, the loss ratio was 71.5% and
67.8% for the quarter and six months ended June 30, 2012, respectively,
compared to 71.1% and 92.2% for the quarter and six months ended June 30,
2011. The prior year period loss ratios were impacted by losses related to
significant property catastrophe events. The current year period loss
ratios were impacted by changes in the mix of business, particularly an
increase in casualty and agriculture lines of business. These lines of
business have a higher average loss ratio than property lines, which have
declined as a percentage of net premiums earned; and
• The quarter and six months ended June 30, 2012 included no significant
losses related to significant property catastrophe events. The quarter and
six months ended June 30, 2011 included $9.1 million and $37.0 million,
respectively, in significant property catastrophe-related losses. The
quarter ended June 30, 2011 included losses resulting from tornadoes and
flooding in the United States. The six months ended June 30, 2011 also included losses resulting from the Australia floods, Cyclone Yasi, the New
Zealand earthquake and the Japan earthquake and tsunami. A portion of
these losses in the prior year period fell within our attritional loss
ratio, as we expect a certain level of property losses in each period.
Acquisition expenses. The acquisition cost ratio decreased 6.7 percentage points
and 9.2 percentage points, respectively, for the quarter and six months ended
June 30, 2012 compared to the prior year periods. The decreases in both periods
were principally attributable to changes in the mix of business written with a
higher proportion of net earned premiums from our international casualty and
agriculture lines of business, which generally have lower acquisition cost
ratios compared to other lines.
General and administrative expenses. General and administrative expenses for the
quarter and six months ended June 30, 2012 increased $0.1 million and $0.9
million, respectively, compared to prior year periods, principally due to growth
in the products offered by the segment. Net premiums earned also increased,
which resulted in the general and administrative expense ratio for the quarter
ended June 30, 2012 remaining relatively consistent with the prior year period,
and decreasing 1.5 percentage points for the six months ended June 30, 2012
compared to the prior year period.
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Latin America Segment
Quarter Ended June Quarter Ended June Six Months Ended Six Months Ended
30, 2012 30, 2011 % change June 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Gross premiums $ 34,835 $ 22,083 57.7 %
written $ 9,495 $ 4,947 91.9 %
Reinsurance premiums (17,339 ) (2,637 ) n/m
ceded (4,723 ) (572 ) n/m
Net premiums written $ 4,772 $ 4,375 9.1 % $ 17,496 $ 19,446 (10.0 )%
Net premiums earned $ 19,095 $ 8,865 115.4 % $ 33,335 $ 17,773 87.6 %
Net losses and loss (24,583 ) (11,800 ) 108.3 %
expenses (14,049 ) (5,784 ) 142.9 %
Acquisition costs (5,456 ) (2,382 ) 129.1 % (9,211 ) (4,169 ) 120.9 %
General and (2,722 ) (3,053 ) (10.8 )% (4,981 ) (5,509 ) (9.6 )%
administrative
expenses
Underwriting loss $ (3,132 ) $ (2,354 ) 33.1 % $ (5,440 ) $ (3,705 ) 46.8 %
Loss ratio (a) 73.6 % 65.2 % 73.7 % 66.4 %
Acquisition cost 27.6 % 23.5 %
ratio (b) 28.6 % 26.9 %
General and 14.9 % 31.0 %
administrative
expense ratio (c) 14.3 % 34.4 %
Combined ratio (d) 116.4 % 126.6 % 116.3 % 120.8 %
(a) The loss ratio is calculated by dividing net losses and loss expenses by
net premiums earned.
(b) The acquisition cost ratio is calculated by dividing acquisition costs by
net premiums earned.
(c) The general and administrative expense ratio is calculated by dividing
general and administrative expenses by net premiums earned.
(d) The combined ratio is calculated by dividing the sum of net losses and
loss expenses, acquisition costs and general and administrative expenses
by net premiums earned.
n/m Not meaningful.
% of % of
Quarter Ended June Premium Quarter Ended Premium
30, 2012 Written % Ceded June 30, 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
Aviation $ 9 0.1 % - $ - - -
General casualty (543 ) (5.7 )% 3.6 % 223 4.5 % -
Marine 348 3.7 % 11.6 % 59 1.2 % -
Property 8,634 90.9 % 46.6 % 3,681 74.4 % 15.5 %
Surety 1,047 11.0 % 64.1 % 984 19.9 % -
$ 9,495 100.0 % 49.7 % $ 4,947 100.0 % 11.6 %
% of % of
Six Months Ended Premium SixMonths Ended Premium
June 30, 2012 Written % Ceded June 30, 2011 Written % Ceded
(Expressed in thousands of U.S. Dollars)
Gross Premiums Written
by Type of Risk:
Aviation $ 74 0.2 % 12.2 % $ - - % -
General casualty 1,892 5.4 % (0.1 )% 1,180 5.3 % 0.6 %
Marine 2,036 5.8 % 2.0 % 603 2.7 % -
Property 25,345 72.8 % 48.1 % 17,616 79.8 % 14.9 %
Surety 5,488 15.8 % 92.9 % 2,684 12.2 % -
$ 34,835 100.0 % 49.8 % $ 22,083 100.0 % 11.9 %
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The Latin America segment is a new operating segment, effective January 1, 2012.
This segment comprises Latin American reinsurance business written from our
various operations in Latin America. Reinsurance business written within Latin
America in 2011, which was previously reported within the reinsurance and
Alterra at Lloyd's segments, has been reclassified for comparative purposes to
the new Latin America segment. In addition, reinsurance business written by
Alterra Brazil is also included within the Latin America segment. Alterra Brazil
commenced underwriting operations in the first quarter of 2012.
Premiums. Gross premiums written for the quarter and six months ended June 30,
2012 increased 91.9% and 57.7%, respectively, compared to the prior year
periods. The increase in gross premiums written was primarily due to continued
expansion of our product offerings in Latin America and growth in our client
base. Pricing for property risks did not improve as much as expected since the
end of 2011, but increased during the current year and pricing for the other
lines of business was stable. We expect that property reinsurance will continue
to be our largest line of business, while also diversifying our exposure into
casualty and specialty lines, as we have done in our other segments.
The ratio of reinsurance premiums ceded to gross premiums written for the
quarter and six months ended June 30, 2012 was 49.7% and 49.8%, respectively,
compared to 11.6% and 11.9% for the prior year periods. The increase in the
ratio for the quarter and six months ended June 30, 2012 was principally due to
the purchase of additional property excess of loss reinsurance and quota share
reinsurance covering our surety line of business.
Net premiums earned is a function of the earning of gross premiums written and
reinsurance premiums ceded over the last several quarters and, therefore,
changes in net premiums earned generally lag quarterly increases and decreases
in gross premiums written and reinsurance premiums ceded. Ceded premiums earned
increased significantly in the quarter and six months ended June 30, 2012
compared to previous quarters due principally to the surety quota share
reinsurance treaty, which was written on a retroactive basis, with premiums
related to the period from June 2010 to December 2011 being fully earned in the
quarter ended March 31, 2012.
Net losses and loss expense. The loss ratio for the quarter and six months ended
June 30, 2012 increased 8.4 and 7.3 percentage points, respectively, compared to
the prior year periods. This was principally due to net unfavorable development
of prior year loss reserves in the quarter and six months ended June 30, 2012 of
$3.0 million and $4.2 million, respectively, due to higher than expected
property per-risk losses in Argentina. There was no prior year loss development
in the prior year periods.
Acquisition expenses. The acquisition cost ratio increased 1.7 and 4.1
percentage points, respectively, for the quarter and six months ended June 30,
2012 compared to the prior year periods. The increase was attributable to
changes in the mix of business written. Over the last several quarters, we have
increased the amount of surety, general casualty and marine business written,
all of which have higher acquisition cost ratios, on average, than property
business.
General and administrative expenses. General and administrative expenses for the
quarter and six months ended June 30, 2012 decreased compared to the prior
periods due to lower than expected incentive-based compensation expenses. This
decrease, together with the growing base of net premiums earned, resulted in the
general and administrative expense ratio declining by 20.1 and 16.1 percentage
points, respectively, for the quarter and six months ended June 30, 2012,
compared to the prior periods.
Life and Annuity Reinsurance Segment
Quarter Ended June 30, Quarter Ended June Six Months Ended June Six Months Ended
2012 30, 2011 % change 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Net premiums earned $ 899 $ 829 8.4 % $ 1,321 $ 1,244 6.2 %
Net investment 28,242 24,888 13.5 %
income 13,466 12,545 7.3 %
Net realized and
unrealized gains on
investments - (1,299 ) (100.0 )% - 1,508 (100.0 )%
Claims and policy (26,738 ) (30,280 ) (11.7 )%
benefits (13,272 ) (15,570 ) (14.8 )%
Acquisition costs (156 ) (122 ) 27.9 % (275 ) (281 ) (2.1 )%
General and
administrative
expenses (119 ) (259 ) (54.1 )% (153 ) (436 ) (64.9 )%
Other income - (23 ) (100.0 )% - (23 ) (100.0 )%
Net income (loss) $ 818 $ (3,899 ) (121.0 )% $ 2,397 $ (3,380 ) (170.9 )%
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There were no new life and annuity contracts written during the quarter and six
months ended June 30, 2012 or 2011. We have decided not to write any new life
and annuity contracts for the foreseeable future. This decision does not affect
our existing life and annuity reinsurance contracts and we continue to service
our existing life and annuity customer base.
Our life and annuity benefit reserves are recorded on a discounted present value
basis. This discount is amortized through income as a claims and policy benefits
expense over the term of the underlying policies. As a result, income is derived
primarily from the spread between the actual rate of return on our investments
and the interest expense related to the discount on our reserves. Income can
also be impacted by changes in estimated and actual claims, premiums, expenses
and persistency of the underlying policies.
For periods prior to January 1, 2012, we allocated a portion of our net
investment income from fixed maturities investments as well as a portion of our
realized and unrealized gains/losses from hedge fund investments to this
segment. Effective from January 1, 2012, only net investment income from fixed
maturities investments is allocated to this segment. Due to our strategic
decision to cease writing new life reinsurance business, our level of claims and
policy benefits expense is relatively stable and predictable. Similarly, fixed
maturity investments provides a more stable and predictable level of investment
income compared to hedge fund returns, resulting in a better match with our
claims and policy benefits expense stream.
Gross premiums written, reinsurance premiums ceded, net premiums earned,
acquisition costs and general and administrative expenses represent ongoing
premium receipts or adjustments and related administration expenses on existing
contracts. Claims and policy benefits in each period represent reinsured policy
claims payments net of the change in policy and claim liabilities.
Net investment income and net realized and unrealized gains (losses) on
investments are discussed within the investing activities section as we manage
investments for this segment on a consolidated basis with our other segments.
Investing Activities
The results of investing activities discussed below include net investment
income, net realized and unrealized gains (losses) on investments and net
impairment losses recognized in earnings for the consolidated group, including
amounts that are allocated to the life and annuity segment.
Quarter Ended June Quarter Ended June Six Months Ended Six Months Ended
30, 2012 30, 2011 % change June 30, 2012 June 30, 2011 % change
(Expressed in thousands of U.S. Dollars)
Net investment
income $ 54,729 $ 59,665 (8.3 )% $ 113,407 $ 117,431 (3.4 )%
Net realized and
unrealized gains
(losses) on
investments $ 13,481 $ (5,774 ) n/m $ 38,974 $ (24,592 ) n/m
Net impairment
losses recognized in
earnings $ (570 ) $ (353 ) 61.5 % $ (5,939 ) $ (1,382 ) 329.7 %
Average annualized
yield on cash and
fixed maturities 2.92 % 3.11 % 3.02 % 3.12 %
Net investment income. Net investment income for the quarter and six months
ended June 30, 2012 decreased compared to the respective prior year periods. As
investments in our fixed maturity portfolio mature, lower reinvestment yields on
new purchases have reduced the weighted average book yield of our portfolio. In
addition, the average amortized cost of our fixed maturity portfolio, including
cash, has decreased for the current year periods compared to the prior year
periods, resulting in a lower investment base.
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Net realized and unrealized gains (losses) on investment include the following:
Quarter Ended June Quarter Ended June Six Months Ended Six Months Ended
30, 2012 30, 2011 June 30, 2012 June 30, 2011
(Expressed in thousands of U.S. Dollars)
(Decrease) increase in fair value $ 785 $ 1,288
of hedge funds $ (2,894 ) $ (1,879 )
(Decrease) increase in fair value 6,567 (3,160 )
of derivatives (1,130 ) (3,834 )
Decrease in fair value of - (25,641 )
catastrophe bonds - (251 )
(Decrease) increase in fair value (655 ) (1,284 ) (290 ) 50
of structured deposit
Income (loss) from equity method 10,510 (157 )
investments 5,583 (12 )
Increase (decrease) in fair value
of other investments 904 (7,260 ) 17,572 (27,620 )
Net realized gains on available for
sale securities 11,990 54 19,749 3,423
Net realized and unrealized gains
(losses) on trading securities 587 1,432 1,653 (395 )
Net realized and unrealized gains
(losses) on investments $ 13,481 $ (5,774 ) $ 38,974 $ (24,592 )
Change in fair value of other investments. Our investments in hedge funds
comprises the majority of other investments. The decrease in fair value of the
hedge fund portfolio was $2.9 million, or a negative 0.91% rate of return, for
the quarter ended June 30, 2012, compared to a decrease of $1.9 million, or a
negative 0.45% rate of return, for the quarter ended June 30, 2011. The increase
in fair value of the hedge fund portfolio was $0.8 million, or a 0.41% rate of
return for the six months ended June 30, 2012 compared to $1.3 million, or a
0.53% rate of return for the six months ended June 30, 2011. The rate of return
of 0.41% for the six months ended June 30, 2012 compares to the HFRI Fund of
Funds Composite Index returning 1.09% over the same period, which we believe is
our most relevant benchmark.
The allocation of invested assets to our hedge fund portfolio as of June 30,
2012 was 3.2%, which is consistent with our expected ongoing allocation. The
objective of our hedge fund portfolio is to achieve a market neutral/absolute
return strategy, with diversification by strategy and underlying fund. A market
neutral strategy strives to generate consistent returns in both up and down
markets by selecting long and short positions with a total net exposure of zero.
Returns are derived from the long/short spread, or the amount by which long
positions outperform short positions. The objective of an absolute return
strategy is to provide stable performance regardless of market conditions, with
minimal correlation to market benchmarks.
The fair value of derivatives decreased by $1.1 million and increased by $6.6
million for the quarter and six months ended June 30, 2012, respectively,
compared to decreases in fair value of $3.8 million and $3.2 million for the
quarter and six months ended June 30, 2011, respectively. We hold various
derivative instruments, including convertible bond equity call options, interest
rate linked derivative instruments and foreign exchange forward contracts. The
majority of the loss for the quarter and the gain for the six months ended June
30, 2012 resulted from interest rate swap positions taken as part of a total
return strategy followed by a portion of our investment portfolio.
The decrease in fair value of the catastrophe bonds during the six months ended
June 30, 2011, principally was due to a $25.0 million loss on one catastrophe
bond with exposure to the earthquake and tsunami in Japan. During the second
quarter of 2011, we disposed of all catastrophe bond holdings.
As of June 30, 2012, we held an index-linked structured deposit. The deposit has
a guaranteed minimum redemption amount of $24.3 million and a scheduled
redemption date of December 18, 2013. The fair value of the structured deposit
decreased by $0.7 million and $0.3 million, respectively, during the quarter and
six months ended June 30, 2012 due to a decrease in the reference index.
Income from equity method investments for the quarter and six months ended June
30, 2012 principally comprised our equity share of net income from New Point IV.
Net realized and unrealized gains and losses on available for sale and trading
securities. Our total fixed maturities portfolio is split into three portfolios:
• an available for sale portfolio;
• a held to maturity portfolio; and
• a trading portfolio.
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Our available for sale portfolio is recorded at fair value with unrealized gains
and losses recorded in other comprehensive income as part of total shareholders'
equity. Our available for sale fixed maturities investment strategy is not
generally intended to generate significant realized gains and losses as more
fully discussed below in the Financial Condition section. Our held to maturity
portfolio includes securities for which we have the ability and intent to hold
to maturity or redemption, and is recorded at amortized cost. There should be no
realized gains or losses related to this portfolio unless there is an other than
temporary impairment loss. Our trading portfolio is recorded at fair value with
unrealized gains and losses recorded in net income.
Net realized and unrealized gains on our fixed maturities portfolios for the
quarter and six months ended June 30, 2012 were $12.6 million and $21.4 million,
respectively, compared to gains of $1.5 million and $3.0 million for the quarter
and six months ended June 30, 2011, respectively. Most of the realized gains in
the current quarter related to sales of longer duration securities, taking
advantage of gains caused by declining long term interest rates and at the same
time reducing our exposure to longer duration securities.
Net impairment losses recognized in earnings. As a result of our quarterly
review of securities in an unrealized loss position, we recorded
other-than-temporary impairment losses through earnings of $0.6 million and $5.9
million for the quarter and six months ended June 30, 2012, respectively, and
$0.4 million and $1.4 million for the quarter and six months ended June 30,
2011, respectively. These impairment losses are presented separately from all
other net realized and unrealized gains and losses on investments. Of the $0.6
million of impairment losses during the quarter ended June 30, 2012, only $0.2
million were due to estimated credit losses. The remainder was recognized as
impairment losses due to our decision to sell our holdings of convertible bond
securities prior to any recovery in value. Most of our convertible bond
portfolio was sold in April 2012 for a net realized gain. A discussion of our
process for estimating other-than-temporary impairments is included in Note 5 of
our unaudited consolidated interim financial statements included herein.
Financial Condition
Cash and invested assets. Aggregate invested assets, comprising cash and cash
equivalents, fixed maturities and other investments, were $7,886.0 million as of
June 30, 2012 compared to $7,814.7 million as of December 31, 2011, an increase
of 0.9%. The modest increase in cash and invested assets resulted principally
from the combination of the timing of the settlement of premiums and losses, the
increase in fair value of our available for sale portfolio offset by payments
for share repurchases and dividends.
We hold an available for sale portfolio, a trading portfolio and a held to
maturity portfolio of fixed maturities securities. In an effort to match the
expected cash flow requirements of our long-term liabilities, we invest a
portion of our fixed maturity investments in longer duration securities. Because
we intend to hold a number of these longer duration securities to maturity, we
classify these securities as held to maturity in our consolidated balance sheet.
This held to maturity portfolio is recorded at amortized cost. As a result, we
do not record changes in the fair value of this portfolio, which should reduce
the impact on shareholders' equity of fluctuations in fair value of those
investments.
Fixed maturities are subject to fluctuations in fair value due to changes in
interest rates, changes in issuer specific circumstances, such as credit rating
changes, and changes in industry specific circumstances, such as movements in
credit spreads based on the market's perception of industry risks. As a result
of these fluctuations, it is possible to have significant unrealized gains or
losses on a security. Our strategy for our fixed maturities portfolios is to
tailor the maturities of the portfolios to the timing of expected loss and
benefit payments. At maturity, absent any credit loss, a fixed maturity's
amortized cost will equal its fair value and no realized gain or loss will be
recognized in income. If, due to an unforeseen change in loss payment patterns,
we need to sell available for sale fixed maturity securities before maturity, we
could realize significant gains or losses in any period, which could result in a
meaningful effect on reported net income for such period.
In order to reduce the likelihood of needing to sell investments before
maturity, especially given the unpredictable and potentially significant cash
flow requirements of our property catastrophe business, we maintain significant
cash and cash equivalent balances. We believe it is more likely than not that we
will not be required to sell those fixed maturities securities in an unrealized
loss position until such time as they reach maturity or the fair value
increases.
We perform regular reviews of our fixed maturities portfolio and utilize a
process that considers numerous indicators in order to identify investments that
show signs of potential other than temporary impairments. The indicators include
the issuer's financial condition and ability to make future scheduled interest
and principal payments, benchmark yield spreads, the nature of collateral or
other credit support and significant economic events that have occurred that
affect the industry in which the issuer participates.
Our fixed maturity portfolio comprises high quality, liquid securities. As of
June 30, 2012, our fixed maturities investments had a dollar-weighted average
credit rating of Aa2/AA. Under our fixed maturities investment guidelines, a
minimum weighted average credit rating of Aa3/AA-, or its equivalent, must be
maintained for our fixed maturities investment portfolio as a whole. Our fixed
maturities investment guidelines also provide that we cannot leverage our fixed
maturities investments. Further details of the credit ratings on our fixed
maturities investments is included in Note 5 of our unaudited consolidated
interim financial statements included herein.
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Our portfolio of investment grade fixed maturities includes mortgage-backed and
asset-backed securities and collateralized mortgage obligations. These types of
securities have cash flows that are backed by the principal and interest
payments of a group of underlying mortgages or other receivables. As a result of
the increasing default rates of borrowers, there currently is a greater risk of
defaults on mortgage-backed and asset-backed securities and collateralized
mortgage obligations than historically existed, especially those that are
non-investment grade. These factors make estimating the fair value of these
securities more uncertain. We obtain fair value estimates from multiple
independent pricing sources in an effort to mitigate some of the uncertainty
surrounding the fair value estimates. If we need to liquidate these securities
within a short period of time, the actual realized proceeds may be significantly
different from the fair values estimated as of June 30, 2012.
We performed a review of securities in an unrealized loss position as of
June 30, 2012 for other-than-temporary impairments, which included the
consideration of relevant factors, including prepayment rates, subordination
levels, default rates, credit ratings, weighted average life and cash flow
testing. Together with our investment managers, we continue to monitor our
potential exposure to credit losses in mortgage-backed and asset-backed
securities, and we will make adjustments to the investment portfolio, if and
when we deem necessary.
We continue to monitor the ongoing uncertainty over the financial health of
certain European governments and corporate institutions and our exposure to the
credit risk of investments in these entities. As of June 30, 2012, we held
European government securities with a fair value of $750.4 million, distributed
as follows:
As of June 30, 2012
Fair Value % of Total
(in thousands
of U.S. Dollars)
France $ 266,621 35.5 %
Germany 256,424 34.2 %
Netherlands 146,068 19.5 %
United Kingdom 44,971 6.0 %
Belgium 20,579 2.7 %
Norway 7,075 0.9 %
Denmark 4,253 0.6 %
All others 4,401 0.6 %
European government holdings $ 750,392 100.0 %
As of June 30, 2012, we held no government securities issued by Greece, Ireland,
Italy, Portugal or Spain.
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As of June 30, 2012, we held corporate securities issued by European
institutions with a fair value of $744.3 million. The distribution by country
was as follows:
As of June 30, 2012
Other
Banking Financial Other
Institutions Institutions Corporate Total
(in thousands of U.S. Dollars)
United Kingdom $ 96,898 29,384 98,154 224,436
Netherlands 42,027 9,045 50,978 102,050
Germany 84,557 - 11,359 95,916
France 37,999 - 50,401 88,400
Supranational 72,269 - - 72,269
Switzerland 61,979 - 2,038 64,017
Sweden 19,309 3,994 - 23,303
Norway 16,392 - 20,253 36,645
Ireland 1,104 9,369 4,984 15,457
Luxembourg - - 11,950 11,950
Denmark 5,020 - - 5,020
New Zealand - - 4,363 4,363
Spain - - 509 509
European corporate holdings $ 437,554 51,792 254,989 744,335
The distribution by investment rating (provided by major rating agencies) was as
follows:
As of June 30, 2012
Other
Banking Financial Other
Institutions Institutions Corporate Total
(in thousands of U.S. Dollars)
AAA $ 250,192 29,420 402 280,014
AA 46,168 8,885 48,214 103,267
A 123,667 12,993 175,584 312,244
BBB 11,432 - 17,536 28,968
BB 4,429 494 7,747 12,670
B 1,666 - 5,506 7,172
European corporate holdings $ 437,554 51,792 254,989 744,335
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As of June 30, 2012, we held securities issued by European banking institutions
with a fair value of $437.6 million, distributed as follows:
As of June 30, 2012
Fair Value % of Total
(in thousands
of U.S. Dollars)
European Investment Bank $ 67,735 15.5 %
KFW 58,980 13.5 %
Credit Suisse Group 36,410 8.3 %
Barclays plc 29,076 6.6 %
UBS AG 28,097 6.4 %
Lloyds Banking Group plc 27,689 6.3 %
BNP Paribas SA 18,304 4.2 %
HSBC Holdings plc 17,895 4.1 %
Cooperatieve Central Raiffeisen-Voerenlee 16,289 3.7 %
All other 137,079 31.4 %
European banking institution holdings $ 437,554 100.0 %
All of our European government and corporate holdings are included within our
review procedures for other-than-temporary impairments.
A discussion of our process for estimating other-than-temporary impairments is
included in Note 5 of our unaudited interim consolidated financial statements
included herein.
As described in Note 6 of our unaudited interim consolidated financial
statements, our available for sale and trading fixed maturities investments and
the majority of our other investments are carried at fair value.
Fair value prices for all securities in our fixed maturities portfolio are
independently provided by our investment custodians, our investment accounting
service provider and our investment managers, with each utilizing
internationally recognized independent pricing services. We record the
unadjusted price provided by the investment custodian, investment accounting
service provider or investment manager after validating the prices. Our
validation process includes: (i) comparison of prices between two independent
sources, with significant differences requiring additional price sources;
(ii) quantitative analysis (e.g., comparing the quarterly return for each
managed portfolio to its target benchmark, with significant differences
identified and investigated); (iii) evaluation of methodologies used by external
parties to calculate fair value including a review of the inputs used for
pricing; and (iv) comparing the price to our knowledge of the current investment
market.
The independent pricing services used by our investment custodians, investment
accounting service provider and investment managers obtain actual transaction
prices for securities that have quoted prices in active markets. Each pricing
service has its own proprietary method for determining the fair value of
securities that are not actively traded. In general, these methods involve the
use of "matrix pricing" in which the independent pricing service uses observable
market inputs including, but not limited to, reported trades, benchmark yields,
broker/dealer quotes, interest rates, prepayment speeds, default rates and such
other inputs as are available from market sources to determine a reasonable fair
value. In addition, pricing services use valuation models, such as an Option
Adjusted Spread model, to develop prepayment and interest rate scenarios. The
Option Adjusted Spread model is commonly used to estimate fair value for
securities such as mortgage-backed and asset-backed securities. The ability to
obtain quoted market prices is reduced in periods of decreasing liquidity, which
generally increases the use of matrix pricing methods and the uncertainty
surrounding the fair value estimates.
Investments in hedge funds comprise a portfolio of limited partnerships and
stock investments in trading entities, or funds, which invest in a wide range of
financial products. The units of account that we value are our interests in the
funds and not the underlying holdings of such funds. As a result, the inputs we
use to value our investments in each of the funds may differ from the inputs
used to value the underlying holdings of such funds. These funds are stated at
fair value, which ordinarily will be the most recently reported net asset value
as advised by the fund manager or administrator, where the fund's underlying
holdings can be in various quoted and unquoted investments. We believe the
reported net asset value represents the fair value market participants would
apply to an interest in the fund. The fund managers value their underlying
investments at fair value in accordance with policies established by each fund,
as described in each of their financial statements and offering memoranda.
We have designed ongoing due diligence processes with respect to funds in which
we invest and their managers. These processes are designed to assist us in
assessing the quality of information provided by, or on behalf of, each fund and
in determining whether such information continues to be reliable or whether
further review is necessary. While reported net asset
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value is the primary input to the review, when the net asset value is deemed not
to be indicative of fair value, we may incorporate adjustments to the reported
net asset value. These adjustments may involve significant judgment. We obtain
the audited financial statements for each fund annually and regularly review and
discuss the fund performance with the fund managers to corroborate the
reasonableness of the reported net asset values.
We are able to redeem the hedge fund portfolio on the same terms that the
underlying funds can be liquidated. In general, the funds in which we are
invested require at least 30 days notice of redemption, and may be redeemed on a
monthly, quarterly, semi-annual, annual or longer basis, depending on the fund.
The timing of the redemption maybe be impacted if the funds in which we invest
have a lock up period (this refers to the initial amount of time an investor is
contractually required to invest before having the ability to redeem), a gate
imposed (where the fund has denied or delayed a redemption in order to allow the
execution of an orderly redemption process) or the fund has invested a portion
of their assets in illiquid securities, such as private equity and convertible
debt, through a side pocket. The majority of our hedge fund portfolio is
redeemable within one year, and the imposition of gates by certain funds is not
expected to significantly impact our cash flow needs. Based upon information
provided by the fund managers, as of June 30, 2012, we estimate that over 72.0%
of the underlying assets held by our hedge fund portfolio are traded securities
or have broker quotes available.
Due to the uncertainty surrounding the timing of the redemption of the
underlying assets within funds with gates and side-pockets, we have included
these funds in the greater than 365 days category in the table below. If we
requested full redemptions for all of our holdings in the funds, the tables
below indicate our best estimate of the earliest date from June 30, 2012 on
which such redemptions might be received. This estimate is based on available
information from the funds and is subject to significant change.
As of June 30, 2012
% of Hedge fund
Fair Value portfolio
(in thousands of U.S. Dollars)
Liquidity:
Within 90 days $ 60,549 24.0 %
Between 91 to 180 days 22,968 9.1 %
Between 181 to 365 days 97,728 38.8 %
Greater than 365 days 70,914 28.1 %
Total hedge funds $ 252,159 100.0 %
Although we believe that our significant cash balances, fixed maturities
investments and credit facilities provide sufficient liquidity to satisfy the
claims of insureds and ceding clients, in the event that we were required to
access assets invested in the hedge fund investment portfolio, our ability to do
so may be limited by these liquidity constraints.
Additional information about the hedge fund portfolio can be found in Notes 5
and 6 to our unaudited interim consolidated financial statements included
herein.
Losses and benefits recoverable from reinsurers. Losses and benefits recoverable
from reinsurers totaled $1,083.8 million as of June 30, 2012 compared to
$1,068.1 million as of December 31, 2011, an increase of 1.5%. This increase
resulted principally from additional losses ceded under our reinsurance and
retrocessional agreements resulting from net earned premiums during the six
months ended June 30, 2012.
Losses recoverable from reinsurers on property and casualty business were
$1,051.2 million and $1,034.9 million as of June 30, 2012 and December 31, 2011,
respectively. Benefits recoverable from reinsurers on life and annuity business
were $32.6 million and $33.2 million as of June 30, 2012 and December 31, 2011,
respectively.
As of June 30, 2012, 86.7% of our losses and benefits recoverable were with
reinsurers rated "A" or above by A.M. Best Company, 7.7% were rated "A-" and the
remaining 5.6% were with "NR-not rated" reinsurers. Grand Central Re, a Bermuda
domiciled reinsurance company in which Alterra Bermuda has a 7.5% equity
investment, is our largest "NR-not rated" retrocessionaire and accounted for
3.2% of our losses and benefits recoverable as of June 30, 2012. As security for
outstanding loss obligations, we retain funds from Grand Central Re amounting to
137.6% of its loss recoverable obligations. Of the remaining amounts with
"NR-not rated" retrocessionaires, we retain collateral equal to 70.2% of the
losses and benefits recoverable. Our losses and benefits recoverable are not due
for payment until the underlying loss has been paid. As of June 30, 2012, 97.1%
of our losses and benefits recoverable were not due for payment.
Liabilities for property and casualty losses. Property and casualty losses
totaled $4,308.3 million as of June 30, 2012 compared to $4,216.5 million as of
December 31, 2011, an increase of 2.2%. During the six months ended June 30,
2012, we incurred gross losses of $500.3 million and we paid $408.3 million in
property and casualty losses. Included in gross losses was gross favorable
development on prior year reserves of $79.0 million, excluding reserve movements
related to changes in
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premium estimates. Net of reinsurance, we paid $325.1 million in property and
casualty losses during the six months ended June 30, 2012.
As of June 30, 2012 and December 31, 2011 our gross property and casualty loss
reserves by type and by segment were as follows:
As of June 30, 2012 As of December 31, 2011
Case IBNR Total Case IBNR Total
(Expressed in thousands of U.S. Dollars)
Global Insurance
Casualty $ 347,306 $ 803,126 $ 1,150,432 $ 314,812 $ 822,820 $ 1,137,632
Property 92,357 54,127 146,484 104,644 43,707 148,351
439,663 857,253 1,296,916 419,456 866,527 1,285,983
U.S. Insurance
Casualty 104,258 215,869 320,127 87,089 190,437 277,526
Property 24,243 49,511 73,754 41,614 37,926 79,540
128,501 265,380 393,881 128,703 228,363 357,066
Reinsurance
Casualty 465,593 987,728 1,453,321 523,074 1,130,029 1,653,103
Property 308,482 332,223 640,705 245,691 189,469 435,160
774,075 1,319,951 2,094,026 768,765 1,319,498 2,088,263
Alterra at Lloyd's
Casualty 41,663 198,869 240,532 43,169 166,508 209,677
Property 100,515 126,735 227,250 116,427 124,939 241,366
142,178 325,604 467,782 159,596 291,447 451,043
Latin America
Casualty 1,351 8,206 9,557 720 5,714 6,434
Property 27,392 18,762 46,154 13,896 13,853 27,749
28,743 26,968 55,711 14,616 19,567 34,183
Total $ 1,513,160 $ 2,795,156 $ 4,308,316 $ 1,491,136 $ 2,725,402 $ 4,216,538
Casualty $ 960,171 $ 2,213,798 $ 3,173,969 $ 968,864 $ 2,315,508 $ 3,284,372
Property 552,989 581,358 1,134,347 522,272 409,894 932,166
Total $ 1,513,160 $ 2,795,156 $ 4,308,316 $ 1,491,136 $ 2,725,402 $ 4,216,538
In the above table, the following lines of business are included within
property: agriculture, aviation, marine & energy, property and other. The
following lines of business are included within casualty: accident & health,
auto, credit, excess liability, financial institutions, general casualty,
international casualty, medical malpractice, professional liability surety,
whole account and workers compensation.
The liability for property and casualty losses, including loss adjustment
expenses, represents estimates of the ultimate cost of all losses incurred but
not paid as of the balance sheet date. The reserves are estimated on an
undiscounted basis. Case reserves are reserves established for individual
claims. IBNR represents incurred but not reported reserves. We utilize a variety
of standard actuarial methods to estimate our reserves. Although these actuarial
methods have been developed over time,
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assumptions about anticipated size of loss and loss emergence patterns are
subject to fluctuations. We review our estimate of reserves on a quarterly basis
and consider all significant facts and circumstances then known. New reported
loss information from clients or insureds is the principal contributor to
adjustments to our loss reserve estimates. These adjustments are recognized in
the period in which they are determined, and therefore can impact that period's
results either favorably (when reserve estimates established in prior periods
prove to be redundant) or unfavorably (when reserve estimates established in
prior periods prove to be deficient).
Liabilities for life and annuity benefits. Life and annuity benefits totaled
$1,148.3 million at June 30, 2012 compared to $1,190.7 million as of
December 31, 2011. The decrease was principally attributable to movements in
foreign exchange rates. We endeavor to match these liabilities with assets of
similar currency and duration in order to limit the net impact to shareholders'
equity of movements in foreign exchange rates. In addition, we paid $50.8
million of benefit payments during the six months ended June 30, 2012.
Senior notes. On September 27, 2010, Alterra Finance, a wholly-owned indirect
subsidiary of Alterra, issued $350.0 million principal amount of 6.25% senior
notes due September 30, 2020 with interest payable on March 30 and September 30
of each year. The 6.25% senior notes are Alterra Finance's senior unsecured
obligations and rank equally in right of payment with all of Alterra Finance's
future unsecured and unsubordinated indebtedness and rank senior to all of
Alterra Finance's future subordinated indebtedness. The 6.25% senior notes are
fully and unconditionally guaranteed by Alterra on a senior unsecured basis. The
guarantee ranks equally with all of Alterra's existing and future unsecured and
unsubordinated indebtedness and ranks senior to all of Alterra's future
subordinated indebtedness. The effective interest rate related to the 6.25%
senior notes, based on the net proceeds received, was 6.37%. The proceeds, net
of all issuance costs, from the sale of the 6.25% senior notes were $346.9
million and were used to repay a $200.0 million revolving bank loan outstanding
under a prior credit facility, which was replaced by our $1,100.0 million Senior
Credit Facility in December 2011, with the remainder designated for general
corporate purposes.
On April 16, 2007, Alterra USA privately issued $100.0 million principal amount
of 7.20% senior notes due April 14, 2017 with interest payable on April 16 and
October 16 of each year. The senior notes are Alterra USA's senior unsecured
obligations and rank equally in right of payment with all existing and future
senior unsecured indebtedness of Alterra USA. The senior notes are fully and
unconditionally guaranteed by Alterra. The principal amount of the senior notes
outstanding as of June 30, 2012 was $90.6 million.
Shareholders' equity. Our shareholders' equity increased to $2,851.7 million as
of June 30, 2012 from $2,809.2 million as of December 31, 2011, an increase of
1.5%, principally due to net income of $158.0 million, partially offset by the
repurchase of $136.9 million of common shares and warrants and the declaration
of dividends of $27.8 million in the six months ended June 30, 2012. In
addition, we recorded an increase in accumulated other comprehensive income of
$35.3 million, principally from an increase in net unrealized gains on
investments.
Liquidity. We generated $165.4 million of cash from operations during the six
months ended June 30, 2012 compared to $148.7 million for the six months ended
June 30, 2011. The principal factors that impact our operating cash flow are
premium collections and payments, and the timing of loss and benefit payments
and recoveries.
Our casualty business generally has a long claim-tail. As a result, we expect
that we will generate significant operating cash flow as we accumulate property
and casualty loss reserves on our balance sheet. Our property business generally
has a short claim-tail. Consequently, we expect volatility in our operating cash
flow levels as losses are incurred. We believe that our property and casualty
loss reserves and life and annuity benefit reserves currently have an average
duration of approximately 4.9 years. We expect increases in the amount of
expected loss payments in future periods with a resulting decrease in operating
cash flow; however, we do not expect loss payments to exceed the premiums
generated. Actual premiums written and collected and losses and loss expenses
paid in any period could vary materially from our expectations and could have a
significant and adverse effect on operating cash flow.
While we tailor our fixed maturities portfolios in an effort to match the
duration of expected loss and benefit payments, increased loss amounts or
settlement of losses and benefits earlier than anticipated can result in greater
cash needs. We maintain a significant working cash balance and have generated
positive cash flow from operations in each of our last eight years of operating
history. We also have the ability to borrow an additional $250.0 million using
our current credit facilities, subject to certain conditions. Our largest credit
facility, a $1,100.0 million four-year secured facility, expires in December
2015. Our cash and cash equivalents balance was $764.0 million as of June 30,
2012. We believe that we currently maintain sufficient liquidity to cover
existing requirements and provide for contingent liquidity. Nonetheless,
significant deviations in expected loss and benefit payments can occur,
potentially requiring us to liquidate a portion of our fixed maturities
portfolios. If we need to liquidate our fixed maturities securities within a
short period of time, the actual realized proceeds may be significantly
different from the fair values estimated as of June 30, 2012. We believe that
our portfolio has sufficient liquidity to mitigate this risk, and we believe
that we can continue to hold any potentially illiquid position until we can
initiate an appropriately priced transaction.
As a holding company, Alterra's principal source of funds is from interest
income on cash balances and cash dividends from its subsidiaries, including
Alterra Bermuda. The payment of dividends by Alterra Bermuda is limited under
Bermuda
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insurance laws. In particular, Alterra Bermuda may not declare or pay any
dividends if it is in breach of its minimum solvency or liquidity levels under
Bermuda law or if the declaration or payment of the dividends would cause it to
fail to meet the minimum solvency or liquidity levels under Bermuda law. As of
June 30, 2012, Alterra Bermuda met all minimum solvency and liquidity
requirements.
In the ordinary course of business, we are required to provide letters of credit
or other regulatory approved security to certain of our clients to meet
contractual and regulatory requirements. As of June 30, 2012, we had two U.S.
dollar denominated letter of credit facilities totaling $1,175.0 million with an
additional $500.0 million available, subject to certain conditions. On that
date, we had $585.7 million in letters of credit outstanding under these
facilities. We also had a British pound sterling, or GBP, denominated letter of
credit facility of GBP 30.0 million ($47.1 million) to support our London branch
of Alterra Europe, of which GBP 16.8 million ($26.3 million) was utilized as of
June 30, 2012. Each of our credit facilities requires that we comply with
certain financial covenants, which may include covenants related to maximum debt
to capital ratio, minimum consolidated tangible net worth, minimum insurer
financial strength rating and restrictions on the payment of dividends. We were
in compliance with all of the financial covenants of each of our credit
facilities as of August 8, 2012.
As of June 30, 2012, we provided $276.4 million in Funds at Lloyds. These
amounts are not available for distribution for the payment of dividends. Our
Funds at Lloyd's commitments are met using cash and fixed maturity securities.
Our corporate members may also be required to maintain funds under the control
of Lloyd's in excess of their capital requirements and such funds also may not
be available for distribution or the payment of dividends.
Capital resources. As of June 30, 2012, total shareholders' equity was $2,851.7
million compared to $2,809.2 million as of December 31, 2011, an increase of
1.5%. On May 21, 2010, we filed a shelf registration statement on Form S-3 (File
No. 333-167035) with the U.S. Securities and Exchange Commission ("SEC") that
permits us to periodically issue debt securities, common shares, preferred
shares, depository shares, warrants, share-purchase contracts and share purchase
units. The shelf registration statement also covers debt securities of Alterra
Finance and trust preferred securities of Alterra Capital Trust I. In September
2010, Alterra Finance issued $350.0 million principal amount of 6.25% senior
notes due September 30, 2020 with interest payable on March 30 and September 30
of each year pursuant to the shelf registration statement. The senior notes are
guaranteed by Alterra. The net proceeds of the offering were used to repay a
$200.0 million revolving bank loan outstanding under a prior credit facility,
with the remainder used for general corporate purposes. In April 2007, Alterra
USA sold $100.0 million aggregate principal amount of 7.20% senior notes due
April 14, 2017, of which $90.6 million principal amount was outstanding as of
June 30, 2012. The senior notes are guaranteed by Alterra.
We believe that we have sufficient capital to meet our foreseeable financial
obligations.
We may repurchase our securities from time to time through the open market,
privately negotiated transactions or Rule 10b5-1 stock trading plans. During the
quarter ended June 30, 2012, we repurchased 3,870,719 common shares for $88.0
million. As of June 30, 2012, the aggregate amount available under our Board
approved share repurchase plan was $123.0 million.
Ratings are an important factor in establishing the competitive position of
reinsurance and insurance companies and are important to our ability to market
our products. We have a financial strength rating for our non-Lloyd's
reinsurance and insurance subsidiaries from each of A.M. Best Company, or A.M.
Best, Fitch Inc., or Fitch, Moody's Investor Services, Inc., or Moody's, and
Standard and Poor's Ratings Services, or S&P. These ratings reflect each rating
agency's opinion of our financial strength, operating performance and ability to
meet obligations. They are not evaluations directed toward the protection of
investors in securities issued by Alterra. The Syndicates share the Lloyd's
market ratings.
As of June 30, 2012, we were rated as follows:
A.M. Best Fitch Moody's S&P
Financial strength rating for non-Lloyd's
reinsurance and insurance subsidiaries A (excellent) (1) A (strong) (1) A3 (2) A (1)
Outlook on financial strength rating Stable (1) Stable (1) Stable (2) Stable (1)
Lloyd's financial strength rating applicable to
the Syndicates A (excellent) A+
(strong) Not applicable A+ (strong)
(1) Applicable to Alterra Bermuda, Alterra Europe, Alterra Re USA, Alterra
America and Alterra E&S.
(2) Applicable to Alterra Bermuda.
On June 5, 2012, we paid a dividend to shareholders of $0.14 per share for an
aggregate amount of $27.8 million. On August 7, 2012, our Board of Directors
declared a dividend of $0.16 per share for an estimated aggregate amount of
$15.6 million payable to shareholders on September 4, 2012. Future cash
dividends are at the discretion of the Board of Directors and will be dependent
upon our results of operations, cash flows, financial position and capital
requirements and upon general business conditions, legal, tax, regulatory and
contractual restrictions on the payment of dividends and other factors the Board
of Directors deems relevant.
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Off-balance sheet arrangements
We do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or variable interest entities, that have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Non-GAAP Financial Measures
In this Quarterly Report on Form 10-Q, we have presented net operating income
and annualized net operating return on average shareholders' equity, which are
"non-GAAP financial measures" as defined in Regulation G. We believe that these
non-GAAP financial measures, which may be defined differently by other
companies, allow for a more complete understanding of the performance of our
business. These measures, however, should not be viewed as a substitute for
those determined in accordance with U.S. GAAP. A reconciliation of the non-GAAP
financial measures to their respective most directly comparable U.S. GAAP
financial measures is as follows:
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 June 30, 2012 June 30, 2011
(Expressed in thousands of U.S. Dollars, except
share and per share amounts)
Net income (loss) $ 78,940 $ 32,635 $ 157,964 $ (14,052 )
Net realized and unrealized (gains)
losses on investments not included
in operating income, net of tax (a) (9,987 ) 4,711 (21,267 ) 27,313
Net foreign exchange losses (14 ) 1,572
(gains), net of tax 7 2,212
Net operating income $ 68,960 $ 39,558 $ 136,683 $ 14,833
Net income (loss) per diluted share $ 0.77 $ 0.30 $
1.54 $ (0.13 )
Net realized and unrealized (gains)
losses on investments not included
in operating income, net of tax (0.10 ) 0.04 (0.21 ) 0.26
Net foreign exchange losses - 0.01
(gains), net of tax - 0.02
Net operating income per diluted $ 1.33 $ 0.14
share $ 0.68 $ 0.37
Weighted average common shares
outstanding - basic 99,563,474 105,604,786 100,283,266 106,385,007
Weighted average common shares
outstanding - diluted 101,957,882 107,111,909
102,556,070 106,385,007
Annualized net income (loss) $ 315,760$ 130,540 $
315,928 $ (28,104 )
Annualized net operating income $ 275,840 $ 158,232 $
273,366 $ 29,666
Average shareholders' equity (b) $ 2,851,499$ 2,758,200 $
2,840,874 $ 2,789,435
Annualized return on average
shareholders' equity 11.1 % 4.7 % 11.1 % (1.0 )%
Annualized net operating return on
average shareholders' equity 9.7 % 5.7 % 9.6 % 1.1 %
Per share totals may not add due to rounding.
(a) Net realized and unrealized (gains) losses on investments not included in
operating income includes realized and unrealized (gains) losses on
trading securities, realized (gains) losses on available for sale
securities, net impairment losses recognized in earnings, earnings from
equity method investments in run-off, and changes in fair value of
investment derivatives, catastrophe bonds and structured deposits.
(b) Average shareholders' equity is computed as the average of the quarterly
average shareholders' equity balances.
