Renaissance Re Profits Plunge
RenaissanceRe Holdings Ltd.’s yesterday [Feb. 8] announced fourth-quarter profit dropped 40 percent amid lower revenue, but the Bermuda-based reinsurer’s core earnings increased.
The reinsurer had seen core earnings decline in recent quarters. Still, Fitch Ratings upgraded the company by a notch last month, noting its “continued strong leading position” in the property-and-casualty reinsurance markets and favorable underwriting results.
Headquartered out of Renaissance House on East Broadway, the company is a global provider of reinsurance and insurance to cover the risk of natural and man-made catastrophes. Founded in Bermuda in 1993, the company is now one of the world´s largest and most successful catastrophe reinsurers and have also established a significant franchise as a specialty reinsurer for a wide range of coverages
In November, the company agreed to sell its US insurance operations to QBE Insurance Group Ltd. (QBE.AU) for an estimated $275 million, narrowing its focus to its much larger reinsurance segment.
Investment income dropped 11%, while net premiums written were $30.2 million versus a negative $5.6 million a year earlier.
Revenue plunged 36% to $187.1 million.
The company reported net income available to RenaissanceRe common shareholders of $122.6 million or $2.23 per diluted common share in the fourth quarter of 2010, compared to $211.8 million or $3.38 per diluted common share, in the fourth quarter of 2009.
Operating income available to RenaissanceRe common shareholders was $189.1 million for the fourth quarter of 2010, or $3.47 per diluted common share, compared to $177.7 million, or $2.82 per diluted common share, in the fourth quarter of 2009.
The company reported an annualized return on average common equity of 14.6% and an annualized operating return on average common equity of 22.5% in the fourth quarter of 2010, compared to 27.1% and 22.7%, respectively, in the fourth quarter of 2009. For the year, the company reported a 21.7% return on average common equity and a 16.5% operating return on average common equity, compared to 30.2% and 27.6%, respectively, for 2009.
Book value per common share increased $2.01, or 3.3%, in the fourth quarter of 2010 to $62.58, compared to a 5.0% increase in the fourth quarter of 2009. For the year, book value per common share increased $10.90, or 21.1%, compared to a 33.4% increase in 2009.
Neill A. Currie, CEO, commented: “I am pleased to report strong earnings for the full year, despite softening market conditions in many lines and a number of significant catastrophic events that took place around the world. We reported $702.6 million of net income for the year, an operating ROE of 16.5% and over 21% growth in book value per common share. Robust underwriting profits, solid investment results and disciplined execution by our team contributed to these results.”
Mr. Currie added: “During the year, we completed a strategic review of our US-based insurance operations which ultimately culminated in our announced sale of these operations. The sale is expected to close in early 2011. This decision reflects our commitment to being nimble and sharpens our focus on being a leading underwriter of low frequency, high-severity risks.”
DISCONTINUED OPERATIONS AND SEGMENTS
Discontinued Operations
On November 18, 2010, the Company entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) with QBE Holdings, Inc. (“QBE”) to sell substantially all of its U.S.-based insurance operations, including its US property and casualty business underwritten through managing general agents, its crop insurance business underwritten through Agro National Inc., its commercial property insurance operations and its claims operations. The company has classified the assets and liabilities associated with this transaction as held for sale. The financial results for these operations have been presented as discontinued operations in the company’s statements of operations for all periods presented. Except as explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all amounts presented in this earnings release and the company’s financial supplement relate to the company’s continuing operations.
Consideration for the transaction is book value at December 31, 2010, for the aforementioned businesses, currently estimated to be $283.4 million, payable in cash at closing and subject to adjustment for certain tax and other items. The transaction is expected to close in early 2011 and is subject to regulatory approvals and customary closing conditions.
Segments
In conjunction with the sale of the company’s US-based insurance operations, the company has changed its reportable segments. The company now has three reportable segments: (1) Reinsurance, which includes catastrophe reinsurance, specialty reinsurance and certain property catastrophe and specialty joint ventures managed by the company’s ventures unit, (2) Lloyd’s, which includes reinsurance and insurance business written through RenaissanceRe Syndicate 1458 (“Syndicate 1458″), and (3) Insurance, which includes the operations of the company’s former Insurance segment that are not being sold pursuant to the Stock Purchase Agreement with QBE. Previously, the company’s Lloyd’s unit was included in the company’s Reinsurance segment and the underwriting results associated with the Company’s discontinued operations were included in the company’s Insurance segment. All prior periods presented have been reclassified to conform to this new presentation.
FOURTH QUARTER 2010 HIGHLIGHTS
Underwriting Results
Gross premiums written for the fourth quarter of 2010 were $31.2 million, a $31.0 million increase from the fourth quarter of 2009, principally reflecting a $28.2 million and an $8.6 million increase in the company’s Reinsurance and Lloyd’s segments, respectively, and partially offset by a $9.4 million decrease in the company’s Insurance segment, as described in more detail below. The company generated $152.2 million of underwriting income and had a combined ratio of 19.8% in the fourth quarter of 2010, compared to $170.7 million of underwriting income and a combined ratio of 13.0% in the fourth quarter of 2009. The strong underwriting results in the fourth quarter of 2010 were primarily driven by a low level of insured catastrophes combined with $72.7 million of favorable development on prior year reserves in the quarter. As discussed in more detail below, the favorable development was principally driven by the catastrophe unit.
Included in the company’s underwriting results for the fourth quarter of 2010, and as detailed in the table below, is an increase in the company’s estimated net claims and claims expenses associated with the New Zealand earthquake which occurred in the third quarter of 2010. The company has increased its estimated net negative impact from this event from $73.6 million at September 30, 2010 to $128.1 million at December 31, 2010, an increase of $54.5 million or 74.0%. The increase was principally driven by an increase in the estimated number of underlying claims associated with the event. In addition, during the fourth quarter of 2010, the company revised its estimates of net claims and claims expenses associated with the Chilean earthquake and European windstorm Xynthia (“Xynthia”), both of which occurred in the first quarter of 2010. As detailed in the table below, the impact of these revised estimates was a reduction in net negative impact of $22.6 million and $15.8 million for the Chilean earthquake and Xynthia, respectively. Net (negative) positive impact includes the sum of estimates of net claims and claim expenses incurred, earned reinstatement premiums assumed and ceded, lost profit commissions, redeemable noncontrolling interest, and for the New Zealand earthquake, equity in net claims and claim expenses of Top Layer Reinsurance Ltd. (“Top Layer Re”).
The company’s estimate of losses from the New Zealand and Chilean earthquakes (the “2010 earthquakes”) are based on initial industry insured loss estimates, market share analysis, the application of the Company’s modeling techniques, reported claims information from cedants, and a review of the Company’s in-force contracts. Given the preliminary nature of the information available, the magnitude and relatively recent occurrence of these events, the expected lengthy duration of the claims development period characteristic of earthquake events, and other factors and uncertainties inherent in loss estimation, meaningful uncertainty remains regarding losses from these events and the Company’s actual ultimate net losses from these events will vary from these estimates, perhaps materially. Changes in these estimates will be recorded in the period in which they occur.
The following is supplemental financial data regarding the net financial statement impact on the company’s consolidated results for the fourth quarter of 2010 due to the New Zealand earthquake, the Chilean earthquake and Xynthia (collectively the “2010 events”):
| Three months ended December 31, 2010 | ||||||||||||||||||
| (in thousands, except ratios) | New Zealand Earthquake |
Chilean Earthquake |
Xynthia | Total | ||||||||||||||
| Net claims and claim expenses incurred | $ | (56,220 | ) | $ | 29,746 | $ | 22,445 | $ | (4,029 | ) | ||||||||
| Net reinstatement premiums earned | (2,992 | ) | (1,492 | ) | (2,411 | ) | (6,895 | ) | ||||||||||
| Lost profit commissions | (3,097 | ) | 1,245 | 801 | (1,051 | ) | ||||||||||||
| Net impact on underwriting result | (62,309 | ) | 29,499 | 20,835 | (11,975 | ) | ||||||||||||
| Equity in losses of Top Layer Re | (11,889 | ) | - | - | (11,889 | ) | ||||||||||||
| Redeemable noncontrolling interest – DaVinciRe | 19,710 | (6,902 | ) | (5,041 | ) | 7,767 | ||||||||||||
| Net (negative) positive impact | $ | (54,488 | ) | $ | 22,597 | $ | 15,794 | $ | (16,097 | ) | ||||||||
| Percentage point impact on consolidated combined ratio | 31.1 | (16.1 | ) | (11.8 | ) | 3.3 | ||||||||||||
| Net (negative) positive impact on Reinsurance segment underwriting result | $ | (58,404 | ) | $ | 29,499 | $ | 20,835 | $ | (8,070 | ) | ||||||||
| Net negative impact on Lloyd’s segment underwriting result | (3,905 | ) | - | - | (3,905 | ) | ||||||||||||
| Net (negative) positive impact on underwriting result | $ | (62,309 | ) | $ | 29,499 | $ | 20,835 | $ | (11,975 | ) | ||||||||
Reinsurance Segment
Gross premiums written for the Company’s Reinsurance segment were $17.9 million in the fourth quarter of 2010, compared to negative $10.2 million in the fourth quarter of 2009, an increase of $28.2 million. The increase is primarily due to a $23.6 million increase in gross premiums written in the company’s catastrophe reinsurance unit, combined with a $4.6 million increase in gross premiums written in the company’s specialty reinsurance unit. The increase in gross premiums written in the company’s catastrophe reinsurance unit is primarily due to the non-recurrence of significant negative premium adjustments in the fourth quarter of 2009, which were driven by estimated decreases in the amount of premium underlying ceding companies had written in 2009 and credit-related issues with certain ceding companies which experienced significant financial difficulty in the fourth quarter of 2009. Gross premiums written in the company’s catastrophe unit were reduced in the fourth quarter of 2010 due to $9.5 million of negative reinstatement premiums as a result of reduced loss estimates on certain large losses, principally the 2010 events, and $4.4 million related to negative premium adjustments. The company’s Reinsurance segment premiums are prone to significant volatility due to the timing of contract inception and also due to the business being characterized by a relatively small number of relatively large transactions.
The Reinsurance segment generated $168.4 million of underwriting income and had a combined ratio of 12.5% in the fourth quarter of 2010, compared to $178.5 million and 7.8%, respectively, in the fourth quarter of 2009. The Reinsurance segment experienced $38.4 million of current accident year net claims and claim expenses in the fourth quarter of 2010, compared to $18.2 million of current accident year losses in the fourth quarter of 2009, with the $20.2 million increase principally due to estimated net claims and claims expenses related to tropical storm Tasha of $15.1 million and $3.0 million in the company’s catastrophe and specialty units, respectively, and higher attritional losses in the company’s specialty unit. In addition, the Reinsurance segment current accident year net claims and claim expenses in the fourth quarter of 2010 includes $52.3 million of net claims and claim expenses related to the New Zealand earthquake, partially offset by decreases in net claims and claim expenses of $29.7 million and $22.4 million related to the Chilean earthquake and Xynthia, respectively. The Reinsurance segment experienced $65.7 million of favorable development on prior year reserves in the fourth quarter of 2010, which includes $49.0 million related to the Company’s catastrophe reinsurance unit, principally attributable to a reduction in ultimate net losses associated with the 2005 Buncefield Oil Depot loss of $25.2 million, the 2005 and 2008 hurricanes of $6.6 million and $5.2 million, respectively, and a number of smaller catastrophe events. The favorable development within the company’s specialty unit of $16.7 million was due to actual reported loss activity coming in better than expected.
Lloyd’s Segment
Gross premiums written for the Company’s Lloyd’s segment in the fourth quarter of 2010 were $8.6 million. The company’s Lloyd’s segment generated an underwriting loss of $5.6 million and a combined ratio of 144.6% in the fourth quarter of 2010. Net claims and claim expenses for the fourth quarter of 2010 include $3.9 million of net claims and claim expenses related to the New Zealand earthquake. Operational expenses of $7.5 million principally include compensation and related operating expenses.
Insurance Segment
Insurance policies and quota-share reinsurance contracts previously written in connection with the company’s Bermuda-based insurance operations not being sold as part of the Stock Purchase Agreement with QBE are included in the company’s continuing operations and are reported in the company’s Insurance segment. Although the company is not actively underwriting new business in the Insurance segment, it may from time to time evaluate potential new business opportunities for its Insurance segment.
Gross premiums written for the company’s Insurance segment decreased $9.4 million to $1.3 million in the fourth quarter of 2010, compared to $10.7 million in the fourth quarter of 2009, primarily as a result of the non-renewal of the previously in-force book of business written in the Insurance segment.
The Insurance segment incurred an underwriting loss of $10.6 million in the fourth quarter of 2010, compared to an underwriting loss of $7.8 million in the fourth quarter of 2009. The underwriting loss in the fourth quarter of 2010 was primarily driven by a decrease in net premiums earned as a result of ceded premiums written being fully earned in the period given the non-renewal of the previously in-force book of business, as noted above. The Insurance segment experienced $7.0 million of favorable development on prior year reserves in the fourth quarter of 2010 compared to $3.8 million of favorable development in the fourth quarter of 2009. The favorable development on prior year reserves in the fourth quarter of 2010 and 2009 was primarily due to actual paid and reported loss activity being more favorable to date than what was originally anticipated when setting the initial reserves.
Investments
Returns on the company’s investment portfolio decreased in the fourth quarter of 2010, compared to the fourth quarter of 2009, primarily due to lower total returns in the company’s fixed maturity investments portfolio and certain of the company’s non-investment grade allocations, which the company includes in other investments, and partially offset by higher returns in its hedge fund and private equity investments during the fourth quarter of 2010, compared to the fourth quarter of 2009. The company’s total investment result, which includes the sum of net investment income, net realized and unrealized gains on fixed maturity investments and net other-than-temporary impairments was a loss of $18.8 million in the fourth quarter of 2010, compared to income of $47.5 million in the fourth quarter of 2009. The average yield on the fixed maturity and short term investment portfolio has increased to 2.1% at December 31, 2010 from 1.7% at September 30, 2010.
Net investment income was $52.5 million in the fourth quarter of 2010, compared to $59.3 million in the fourth quarter of 2009. The $6.8 million decrease in net investment income was principally driven by the lower absolute level of yields on the company’s fixed maturity investments in the fourth quarter of 2010, compared to the fourth quarter of 2009, partially offset by tighter credit spreads, primarily in the company’s investments in senior secured bank loan funds, and by an increase in net investment income from the company’s hedge fund and private equity investments due to higher total returns. The company’s hedge fund, private equity and other investments are accounted for at fair value with the change in fair value recorded in net investment income which included net unrealized gains of $36.5 million in the fourth quarter of 2010, compared to $17.1 million in the fourth quarter of 2009.
Net realized and unrealized losses on fixed maturity investments were $66.1 million in the fourth quarter of 2010, compared to net realized and unrealized gains on fixed maturity investments of $35.5 million in the fourth quarter of 2009, a decrease of $101.6 million. During the fourth quarter of 2009, the company started designating, upon acquisition, certain fixed maturity investments as trading, rather than available for sale, and as a result, $89.1 million of net unrealized losses on these securities are recorded in net realized and unrealized gains on fixed maturity investments in the company’s consolidated statements of operations in the fourth quarter of 2010 rather than in accumulated other comprehensive income in shareholders’ equity, compared to $10.8 million of net unrealized losses in the fourth quarter of 2009.
Other Items
The Company’s equity in losses of other ventures decreased $9.9 million, to a loss of $10.4 million in the fourth quarter of 2010, compared to a loss of $0.5 million in the fourth quarter of 2009, primarily due to the Company’s equity in losses of Top Layer Re of $9.4 million during the fourth quarter of 2010, as a result of increased estimated ultimate net claims and claim expenses related to the New Zealand earthquake recorded by Top Layer Re.
- During the fourth quarter of 2010, the company’s weather and energy risk management operations generated $15.2 million of income, compared to $12.3 million of income in the fourth quarter of 2009, due to favorable trading conditions.
- The company generated $11.1 million in income from discontinued operations which is net of an after-tax loss of $9.5 million associated with the planned sale of substantially all of the Company’s US-based insurance operations pursuant to the Stock Purchase Agreement, after considering transaction expenses. At December 31, 2010, the company’s consolidated balance sheet reflects $872.1 million and $598.5 million of assets and liabilities of discontinued operations held for sale, respectively, substantially all of which will be transferred to QBE upon closing the transaction.
- On December 20, 2010, the company redeemed all of its issued and outstanding 7.30% Series B Preference Shares for $100.0 million plus accrued and unpaid dividends thereon.
- During the fourth quarter of 2010, the company repurchased approximately 782 thousand common shares in open market transactions at an aggregate cost of $49.0 million and at an average share price of $62.74.
FULL YEAR 2010 HIGHLIGHTS
For the year ended December 31, 2010, the company reported net income available to RenaissanceRe common shareholders of $702.6 million, or $12.31 per diluted common share, compared to $838.9 million, or $13.40 per diluted common share, in 2009. Operating income available to RenaissanceRe common shareholders was $536.4 million, or $9.32 per diluted common share, compared to $768.2 million, or $12.25 per diluted common share, in 2009. The company reported a return on average common equity of 21.7% and an operating return on average common equity of 16.5% in 2010, compared to 30.2% and 27.6%, respectively, in 2009.
Book value per common share was $62.58 at December 31, 2010, an increase of $10.90, or 21.1%, in 2010, compared to a 33.4% increase in 2009.
Underwriting Results
Gross premiums written for 2010 were $1,165.3 million, a decrease of $63.6 million, or 5.2%, from 2009. As described in more detail below, the decrease in gross premiums written was driven by decreases in the Company’s Reinsurance and Insurance segments of $87.2 million and $28.2 million, respectively, and partially offset by $66.2 million of gross premiums written in the company’s Lloyd’s segment. The company generated $474.6 million of underwriting income and had a combined ratio of 45.1% in 2010, compared to $695.2 million of underwriting income and a 21.2% combined ratio in 2009. The $220.6 million decrease in underwriting income and 23.9 percentage point increase in the combined ratio was driven by the comparably high level of insured catastrophes during 2010, compared to 2009, specifically the comparative impact of the 2010 earthquakes which resulted in $252.1 million of net underwriting losses, and increased the company’s combined ratio by 32.0 percentage points in 2010.
The net negative impact from the 2010 earthquakes was $211.7 million and includes the sum of estimates of net claims and claim expenses incurred, earned reinstatement premiums assumed and ceded, lost profit commissions, redeemable noncontrolling interest, and for the New Zealand earthquake, equity in net claims and claim expenses of Top Layer Re. The following is supplemental financial data regarding the net financial statement impact on the Company’s consolidated results due to the 2010 earthquakes:
| Year ended December 31, 2010 | ||||||||||||||
| (in thousands, except ratios) | New Zealand Earthquake |
Chilean Earthquake |
Total | |||||||||||
| Net claims and claim expenses incurred | $ | (135,292 | ) | $ | (129,770 | ) | $ | (265,062 | ) | |||||
| Net reinstatement premiums earned | 2,532 | 25,508 | 28,040 | |||||||||||
| Lost profit commissions | (9,730 | ) | (5,372 | ) | (15,102 | ) | ||||||||
| Net impact on underwriting result | (142,490 | ) | (109,634 | ) | (252,124 | ) | ||||||||
| Equity in losses of Top Layer Re | (23,940 | ) | - | (23,940 | ) | |||||||||
| Redeemable noncontrolling interest – DaVinciRe | 38,352 | 26,032 | 64,384 | |||||||||||
| Net negative impact | $ | (128,078 | ) | $ | (83,602 | ) | $ | (211,680 | ) | |||||
| Percentage point impact on consolidated combined ratio | 16.7 | 14.7 | 32.0 | |||||||||||
| Net negative impact on Reinsurance segment underwriting result | $ | (137,283 | ) | $ | (109,634 | ) | $ | (246,917 | ) | |||||
| Net negative impact on Lloyd’s segment underwriting result | (5,207 | ) | - | (5,207 | ) | |||||||||
| Net negative impact on underwriting result | $ | (142,490 | ) | $ | (109,634 | ) | $ | (252,124 | ) | |||||
The Company experienced $302.1 million of favorable development on prior year reserves in 2010, compared to $266.2 million of favorable development in 2009, as discussed in more detail below.
Reinsurance Segment
Gross premiums written for the company’s Reinsurance segment decreased $87.2 million, or 7.2%, to $1,123.6 million in 2010, compared to $1,210.8 million in 2009. Excluding the impact of $28.0 million of reinstatement premiums written in 2010 as a result of the 2010 earthquakes, the company’s managed catastrophe premiums decreased $116.8 million in 2010, or 10.3%, compared to 2009, due to the continued softening of market conditions in catastrophe exposed lines of business in the United States, combined with the non-renewal of several large programs that did not meet the company’s underwriting requirements. The company’s managed specialty premiums increased $49.1 million in 2010, or 42.9%, compared to 2009, principally due to the inception of several new contracts providing financial and credit reinsurance, and the non-renewal and portfolio transfer out of a quota share program in mid-2009 that did not meet the company’s expectations and was included as negative gross premiums written in 2009. The company’s Reinsurance segment premiums are prone to significant volatility due to the timing of contract inception and also due to the business being characterized by a relatively small number of relatively large transactions.
The Reinsurance segment generated $517.0 million of underwriting income and had a combined ratio of 38.4% in 2010, compared to $719.2 million of underwriting income and a 15.4% combined ratio in 2009. The $202.1 million decrease in underwriting income was primarily due to a $238.0 million increase in current accident year net claims and claim expenses due to a comparably high level of insured catastrophes occurring in 2010 compared to 2009, specifically the comparative impact of the 2010 earthquakes noted above, which added $259.9 million in net claims and claim expenses and 32.6 percentage points to the Reinsurance segment’s combined ratio in 2010, and estimated ultimate claims and claims expenses related to tropical storm Tasha of $18.1 million.
The Reinsurance segment experienced $286.0 million of favorable development on prior year reserves in 2010, which includes $157.5 million related to the company’s catastrophe reinsurance unit and $128.6 million related to the company’s specialty reinsurance unit. The favorable development within the company’s catastrophe reinsurance unit was due to reductions of $33.6 million to the estimated ultimate losses of mature, large, mainly international catastrophe events, combined with reductions in net ultimate losses associated with the 2005 Buncefield Oil Depot loss of $27.4 million, the 2005 hurricanes of $25.5 million, the 2008 hurricanes of $10.9 million, European windstorm Klaus of $8.0 million and the 2004 hurricanes of $8.1 million, with the remainder due to a reduction in ultimate losses on a large number of relatively small catastrophes. The favorable development within the company’s specialty unit includes $31.4 million associated with actuarial assumption changes made in the first quarter of 2010, principally in the company’s casualty clash and surety lines of business, and partially offset by an increase in reserves within the company’s workers compensation per risk line of business, principally as a result of revised initial expected loss ratios and loss development factors due to actual experience coming in better than expected; $25.9 million due to a decrease in case reserves and additional case reserves, which are reserves established at the contract level for specific losses or large events; and reported losses coming in better than expected in 2010 on prior accident years events.
Lloyd’s Segment
Gross premiums written for the company’s Lloyd’s segment in 2010 were $66.2 million, and include $34.1 million of specialty premiums, $17.4 million of insurance premiums and $14.7 million of property catastrophe premiums.
The company’s Lloyd’s segment incurred an underwriting loss of $11.1 million and had a combined ratio of 122.1% in 2010. Net claims and claim expenses for 2010 are comprised primarily of incurred but not reported loss activity in the specialty and insurance lines of business and $5.2 million of net claims and claim expenses related to the New Zealand earthquake. Operational expenses of $24.8 million principally include compensation and related operating expenses.
Insurance Segment
Gross premiums written for the company’s Insurance segment decreased $28.2 million to $2.6 million in 2010, compared to $30.7 million in 2009. The decrease in gross premiums written was primarily due to the non-renewal of the remaining in-force book of business previously written in the Insurance segment, combined with the portfolio transfer out of a catastrophe exposed homeowners personal lines property quota share contract during the second quarter 2009, which resulted in less gross premiums written in 2010. Gross premiums written in the Company’s Insurance segment can fluctuate significantly between quarters and between years based on several factors, including, without limitation, the timing of the inception or cessation of quota share reinsurance contracts, including whether or not the company has portfolio transfers in, or portfolio transfers out, of quota share reinsurance contracts of in-force books of business. Although the company is not actively underwriting new business in the Insurance segment, it may from time to time evaluate potential new business opportunities for the Insurance segment.
The Insurance segment incurred an underwriting loss of $31.4 million in 2010, compared to an underwriting loss of $24.0 million in 2009. The $7.4 million increase in underwriting loss was principally due to a $56.6 million decrease in net premiums earned, and partially offset by a $27.1 million decrease in net claims and claim expenses incurred and a $22.1 million decrease in underwriting expenses. The decrease in net premiums earned and underwriting expenses is due to the decrease in net premiums written, noted above, combined with ceded premiums written being fully earned during the year as a result of the non-renewal of the previously in-force book of business, noted above. The Insurance segment experienced $15.9 million of favorable development on prior year reserves in 2010, compared to $16.7 million of favorable development in 2009, primarily due to actual reported loss activity being more favorable to date than what was originally anticipated when setting the initial reserves.
Investments
Returns on the company’s investment portfolio decreased in 2010, compared to 2009, primarily due to lower total returns in the fixed maturity investments portfolio, lower returns in certain of the company’s non-investment grade allocations, which the company includes in other investments, and partially offset by higher returns in the Company’s hedge fund and private equity investments. The company’s total investment result, which includes the sum of net investment income, net realized and unrealized gains on fixed maturity investments and net other-than-temporary impairments was $320.9 million in 2010, compared to $432.1 million in 2009. The average yield on the fixed maturity and short term investment portfolio has declined to 2.1% at December 31, 2010, compared to 2.3% at December 31, 2009, which the company currently expects will result in lower net investment income in future periods based on the company’s current portfolio.
Net investment income was $204.0 million in 2010, compared to $318.2 million in 2009. The $114.2 million decrease in net investment income was principally driven by a $106.1 million decrease from the company’s other investments, primarily due to lower returns for the company’s investments in senior secured bank loan funds due to a more moderate tightening of credit spreads during 2010, compared to 2009, combined with a $52.3 million decrease in net investment income from the company’s fixed maturity investments due to lower yields during 2010, compared to 2009. Partially offsetting the decreases noted above, is net investment income from the company’s hedge fund and private equity investments which increased $46.1 million, to $64.4 million, due to higher total returns, principally from the Company’s private equity investments. The Company’s hedge fund, private equity and other investments are accounted for at fair value with the change in fair value recorded in net investment income which included net unrealized gains of $57.5 million in 2010, compared to $88.5 million in 2009.
Net realized and unrealized gains on fixed maturity investments were $144.4 million in 2010, compared to $93.7 million in 2009, an increase of $50.8 million. During the fourth quarter of 2009, the Company started designating, upon acquisition, certain fixed maturity investments as trading, rather than available for sale, and as a result, $24.8 million of net unrealized gains on these securities are recorded in net realized and unrealized gains on fixed maturity investments in the Company’s consolidated statements of operations in 2010 rather than in accumulated other comprehensive income in shareholders’ equity, compared to net unrealized losses of $10.8 million in 2009.
Other Income
Other income was $41.1 million in 2010, compared to $1.8 million in 2009. The $39.3 million increase in other income is primarily the result of:
- a $15.8 million gain on the sale of the company’s interest in ChannelRe in the third quarter of 2010;
- a $10.1 million positive mark-to-market on the Platinum Underwriters Holdings, Ltd. (“Platinum”) warrants, compared to $5.0 million in 2009, due to an increase in the common share price of Platinum during 2010;
- a reduction in other losses associated with the company’s weather-related and loss mitigation activities of $11.1 million in 2010;
- a $37.8 million improvement in other income associated with the fair value of the assumed and ceded reinsurance contracts accounted for at fair value or as deposits; and partially offset by
- a decrease of $29.0 million in other income from the Company’s weather and energy risk management operations due to overall less favorable trading conditions experienced in 2010, compared to 2009.
Other Items
The company’s equity in other ventures decreased $22.8 million, to a loss of $11.8 million in 2010, compared to earnings of $11.0 million in 2009, primarily due to the company’s equity in losses of Top Layer Re of $12.1 million during 2010, as a result of Top Layer Re experiencing net claims and claim expenses related to the New Zealand earthquake.
The company generated an income tax benefit of $6.1 million in 2010, compared to income tax expense of $10.0 million in 2009, principally due to decreased profitability in the company’s energy and weather risk management operations and higher interest expense associated with the company’s US operations.
The company generated $62.7 million in income from its discontinued operations which is net of an after-tax loss of $9.5 million associated with the planned sale of substantially all of the company’s US-based insurance operations pursuant to the Stock Purchase Agreement, after considering transaction expenses. The company’s US-based operations’ profits in 2010 were driven by $57.0 million of underwriting income which was mainly the result of the Company’s multi-peril crop insurance business.
During 2010, the company repurchased approximately 8.2 million common shares in open market transactions at an aggregate cost of $460.4 million and at an average share price of $56.15.
Subsequent to December 31, 2010 and through the period ending February 7, 2011, the company has repurchased approximately 1.2 million common shares in open market transactions at an aggregate cost of $75.3 million and at an average share price of $64.21.
On January 20, 2011, the company sold its Platinum warrants for an aggregate of $47.9 million and expects to record a gain of $3.0 million in the first quarter of 2011 as a result of the sale. The warrants had provided the Company the right to purchase 2.5 million common shares from Platinum for $27.00 per share.
