Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number 1-14536

 

 

PartnerRe Ltd.

(Exact name of Registrant as specified in its charter)

 

 

 

Bermuda   Not Applicable
(State of incorporation)   (I.R.S. Employer Identification No.)

90 Pitts Bay Road, Pembroke, HM08, Bermuda

(Address of principal executive offices) (Zip Code)

(441) 292-0888

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

The number of the Registrant’s common shares (par value $1.00 per share) outstanding, net of treasury shares, as of August 3, 2009 was 58,166,779.

 

 

 


Table of Contents

PartnerRe Ltd.

INDEX TO FORM 10-Q

 

     Page
PART I—FINANCIAL INFORMATION

ITEM 1.

  Financial Statements   
  Report of Independent Registered Public Accounting Firm    1
 

Unaudited Condensed Consolidated Balance Sheets—June 30, 2009 and December 31, 2008

   2
 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income—Three Months and Six Months Ended June 30, 2009 and 2008

   3
 

Unaudited Condensed Consolidated Statements of Shareholders’ Equity—Six Months Ended June 30, 2009 and 2008

   4
 

Unaudited Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2009 and 2008

   5
  Notes to Unaudited Condensed Consolidated Financial Statements    6

ITEM 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    19

ITEM 3.

  Quantitative and Qualitative Disclosures about Market Risk    53

ITEM 4.

  Controls and Procedures    55
PART II—OTHER INFORMATION

ITEM 1.

  Legal Proceedings    56

ITEM 1A.

  Risk Factors    56

ITEM 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    56

ITEM 3.

  Defaults upon Senior Securities    56

ITEM 4.

  Submission of Matters to a Vote of Security Holders    57

ITEM 5.

  Other Information    57

ITEM 6.

  Exhibits    57
  Signatures    59
  Exhibit Index    60


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of PartnerRe Ltd.

We have reviewed the accompanying condensed consolidated balance sheet of PartnerRe Ltd. and subsidiaries (the “Company”) as of June 30, 2009, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2009 and 2008, and of shareholders’ equity and of cash flows for the six-month periods ended June 30, 2009 and 2008. These interim condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of PartnerRe Ltd. and subsidiaries as of December 31, 2008 and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 27, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ Deloitte & Touche
Deloitte & Touche

Hamilton, Bermuda

August 10, 2009

 

1


Table of Contents

PartnerRe Ltd.

Unaudited Condensed Consolidated Balance Sheets

(Expressed in thousands of U.S. dollars, except parenthetical share and per share data)

 

     June 30,
2009
    December 31,
2008
 

Assets

    

Investments:

    

Fixed maturities, trading securities, at fair value (amortized cost: 2009, $10,660,127; 2008, $10,219,126)

   $ 10,756,853      $ 10,181,995   

Short-term investments, trading securities, at fair value (amortized cost: 2009, $63,808; 2008, $116,445)

     63,873        117,091   

Equities, trading securities, at fair value (cost: 2009, $524,272; 2008, $637,198)

     527,280        512,812   

Other invested assets

     105,880        74,493   
                

Total investments

     11,453,886        10,886,391   

Cash and cash equivalents, at fair value, which approximates amortized cost

     616,290        838,280   

Accrued investment income

     184,925        169,103   

Reinsurance balances receivable

     2,051,940        1,719,694   

Reinsurance recoverable on paid and unpaid losses

     156,124        153,594   

Funds held by reinsured companies

     827,457        786,422   

Deferred acquisition costs

     673,685        617,121   

Deposit assets

     330,033        342,132   

Net tax assets

     140,923        215,703   

Goodwill

     429,519        429,519   

Net receivable for securities sold

     37,019        43,007   

Other assets

     72,270        78,354   
                

Total assets

   $ 16,974,071      $ 16,279,320   
                

Liabilities

    

Unpaid losses and loss expenses

   $ 7,396,600      $ 7,510,666   

Policy benefits for life and annuity contracts

     1,546,779        1,432,015   

Unearned premiums

     1,771,401        1,273,787   

Other reinsurance balances payable

     237,397        209,007   

Deposit liabilities

     355,365        362,485   

Net tax liabilities

     239,516        219,679   

Accounts payable, accrued expenses and other

     138,346        164,968   

Current portion of long-term debt

     —          200,000   

Long-term debt

     200,000        200,000   

Debt related to senior notes

     250,000        250,000   

Debt related to capital efficient notes

     70,989        257,605   
                

Total liabilities

     12,206,393        12,080,212   
                

Shareholders’ Equity

    

Common shares (par value $1.00, issued: 2009, 57,950,306; 2008, 57,748,507)

     57,950        57,749   

Series C cumulative preferred shares (par value $1.00, issued and outstanding: 2009 and 2008, 11,600,000; aggregate liquidation preference: 2009 and 2008, $290,000)

     11,600        11,600   

Series D cumulative preferred shares (par value $1.00, issued and outstanding: 2009 and 2008, 9,200,000; aggregate liquidation preference: 2009 and 2008, $230,000)

     9,200        9,200   

Additional paid-in capital

     1,479,431        1,465,688   

Accumulated other comprehensive income:

    

Net unrealized gains on investments (net of tax of: 2009 and 2008, $nil)

     5,072        3,943   

Currency translation adjustment

     42,610        34,888   

Unfunded pension obligation (net of tax of: 2009, $4,561; 2008, $4,668)

     (15,623     (16,023

Retained earnings

     3,275,037        2,729,662   

Common shares held in treasury, at cost (2009 and 2008, 1,295,173)

     (97,599     (97,599
                

Total shareholders’ equity

     4,767,678        4,199,108   
                

Total liabilities and shareholders’ equity

   $ 16,974,071      $ 16,279,320   
                

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

2


Table of Contents

PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

(Expressed in thousands of U.S. dollars, except share and per share data)

 

     For the three
months ended
June 30,
2009
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    For the six
months ended
June 30,
2008
 

Revenues

        

Gross premiums written

   $ 846,149      $ 968,163      $ 2,186,528      $ 2,407,495   
                                

Net premiums written

   $ 844,659      $ 956,269      $ 2,152,717      $ 2,367,833   

Increase in unearned premiums

     (18,530     (730     (460,138     (502,540
                                

Net premiums earned

     826,129        955,539        1,692,579        1,865,293   

Net investment income

     135,593        145,494        268,720        282,504   

Net realized and unrealized investment gains (losses)

     306,536        (296,255     236,417        (271,143

Net realized gain on purchase of capital efficient notes

     —          —          88,427        —     

Other income

     3,361        4,591        7,942        6,228   
                                

Total revenues

     1,271,619        809,369        2,294,085        1,882,882   

Expenses

        

Losses and loss expenses and life policy benefits

     458,898        548,720        977,797        1,138,388   

Acquisition costs

     181,689        228,170        381,657        432,408   

Other operating expenses

     98,468        96,737        182,062        189,017   

Interest expense

     6,335        14,914        15,482        26,810   

Net foreign exchange losses (gains)

     1,202        (1,574     4,550        3,223   
                                

Total expenses

     746,592        886,967        1,561,548        1,789,846   

Income (loss) before taxes and interest in earnings (losses) of equity investments

     525,027        (77,598     732,537        93,036   

Income tax expense (benefit)

     56,954        (53,423     116,765        (10,697

Interest in earnings (losses) of equity investments

     6,196        (1,849     17        (737
                                

Net income (loss)

     474,269        (26,024     615,789        102,996   

Preferred dividends

     8,631        8,631        17,263        17,263   
                                

Net income (loss) available to common shareholders

   $ 465,638      $ (34,655   $ 598,526      $ 85,733   
                                

Comprehensive income (loss), net of tax

        

Net income (loss)

   $ 474,269      $ (26,024   $ 615,789      $ 102,996   

Change in net unrealized gains or losses on investments, net of tax

     (9     6,653        1,129        15,227   

Change in currency translation adjustment

     38,922        4,000        7,722        57,006   

Change in unfunded pension obligation, net of tax

     (786     69        400        (334
                                

Comprehensive income (loss)

   $ 512,396      $ (15,302   $ 625,040      $ 174,895   
                                

Per share data

        

Net income (loss) per common share:

        

Basic net income (loss)

   $ 8.23      $ (0.64   $ 10.58      $ 1.58   

Diluted net income (loss)

   $ 8.10      $ (0.64   $ 10.43      $ 1.54   

Weighted average number of common shares outstanding

     56,609,822        54,276,623        56,560,784        54,262,457   

Weighted average number of common and common share equivalents outstanding

     57,469,013        54,276,623        57,394,927        55,685,583   

Dividends declared per common share

   $ 0.47      $ 0.46      $ 0.94      $ 0.92   

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

     For the six
months ended
June 30, 2009
    For the six
months ended
June 30, 2008
 

Common shares

    

Balance at beginning of period

   $ 57,749      $ 57,380   

Issue of common shares

     201        286   
                

Balance at end of period

     57,950        57,666   

Preferred shares

    

Balance at beginning and end of period

     20,800        20,800   

Additional paid-in capital

    

Balance at beginning of period

     1,465,688        1,441,598   

Issue of common shares

     13,743        19,437   
                

Balance at end of period

     1,479,431        1,461,035   

Accumulated other comprehensive income

    

Balance at beginning of period

     22,808        289,250   

Change in net unrealized gains or losses on investments, net of tax

     1,129        15,227   

Change in currency translation adjustment

     7,722        57,006   

Change in unfunded pension obligation, net of tax

     400        (334

Impact of adopting SFAS 159

     —          (105,961
                

Balance at end of period

     32,059        255,188   

Retained earnings

    

Balance at beginning of period

     2,729,662        2,753,784   

Net income

     615,789        102,996   

Dividends on common shares

     (53,151     (49,893

Dividends on preferred shares

     (17,263     (17,263

Impact of adopting SFAS 159

     —          105,961   
                

Balance at end of period

     3,275,037        2,895,585   

Common shares held in treasury

    

Balance at beginning of period

     (97,599     (241,255

Repurchase of common shares

     —          (39,777
                

Balance at end of period

     (97,599     (281,032
                

Total shareholders’ equity

   $ 4,767,678      $ 4,409,242   
                

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Unaudited Condensed Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

 

     For the six
months ended
June 30, 2009
    For the six
months ended
June 30, 2008
 

Cash Flows from Operating Activities

    

Net income

   $ 615,789      $ 102,996   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of net premium on investments

     10,074        4,650   

Net realized and unrealized investment (gains) losses

     (236,417     271,143   

Net realized gain on purchase of capital efficient notes

     (88,427     —     

Changes in:

    

Reinsurance balances, net

     (286,205     (622,812

Reinsurance recoverable on paid and unpaid losses, net of ceded premiums payable

     17,380        16,134   

Funds held by reinsured companies

     8,537        166,697   

Deferred acquisition costs

     (47,052     (88,713

Net tax liabilities

     93,419        (18,127

Unpaid losses and loss expenses including life policy benefits

     (104,921     215,797   

Unearned premiums

     460,138        502,540   

Other changes in operating assets and liabilities

     (19,341     (34,023

Other, net

     4,552        3,223   
                

Net cash provided by operating activities

     427,526        519,505   

Cash Flows from Investing Activities

    

Sales of fixed maturities

     2,502,800        3,234,844   

Redemptions of fixed maturities

     561,895        430,734   

Purchases of fixed maturities

     (3,447,701     (4,421,994

Sales of short-term investments

     110,600        114,842   

Purchases of short-term investments

     (57,602     (124,230

Sales of equities

     424,522        891,536   

Purchases of equities

     (377,434     (800,242

Other, net

     (6,767     57,535   
                

Net cash used in investing activities

     (289,687     (616,975

Cash Flows from Financing Activities

    

Cash dividends paid to shareholders

     (70,414     (67,156

Repayment of long-term debt

     (200,000     (220,000

Purchase of capital efficient notes

     (94,241     —     

Net issue (repurchase) of common shares and treasury shares

     4,975        (32,760

Contract fees on forward sale agreement

     (2,502     (5,190

Proceeds from issuance of senior notes

     —          250,000   
                

Net cash used in financing activities

     (362,182     (75,106

Effect of foreign exchange rate changes on cash

     2,353        (1,970

Decrease in cash and cash equivalents

     (221,990     (174,546

Cash and cash equivalents—beginning of period

     838,280        654,895   
                

Cash and cash equivalents—end of period

   $ 616,290      $ 480,349   
                

Supplemental cash flow information:

    

Taxes paid

   $ 41,125      $ 17,291   

Interest paid

   $ 18,157      $ 27,408   

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

PartnerRe Ltd.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

PartnerRe Ltd. (the Company) provides reinsurance on a worldwide basis through its principal wholly owned subsidiaries, Partner Reinsurance Company Ltd. (Partner Reinsurance), Partner Reinsurance Company of the U.S. (PartnerRe U.S.) and Partner Reinsurance Europe Limited (PartnerRe Europe). Risks reinsured include, but are not limited to property, casualty, motor, agriculture, aviation/space, catastrophe, credit/surety, engineering, energy, marine, specialty property, specialty casualty, multiline and other lines, life/annuity and health and alternative risk products. The Company’s alternative risk products include weather and credit protection to financial, industrial and service companies on a worldwide basis.

On July 4, 2009, the Company entered into definitive agreements to acquire PARIS RE Holdings Limited (Paris Re) a French-listed, Swiss-based diversified reinsurer and its operating subsidiaries. See Note 10.

2. Significant Accounting Policies

The Company’s Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries, including those that meet the consolidation requirements of variable interest entities. Intercompany accounts and transactions have been eliminated. To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year’s presentation.

The preparation of financial statements in conformity with U.S. GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. While Management believes that the amounts included in the Condensed Consolidated Financial Statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:

 

   

Unpaid losses and loss expenses;

 

   

Policy benefits for life and annuity contracts;

 

   

Gross and net premiums written and net premiums earned;

 

   

Recoverability of deferred acquisition costs;

 

   

Recoverability of deferred tax assets;

 

   

Valuation of goodwill; and

 

   

Valuation of fixed maturity and equity investments that are measured using significant unobservable inputs and valuation of other invested assets, including certain derivative financial instruments.

In the opinion of Management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. As the Company’s reinsurance operations are exposed to low-frequency high-severity risk events, some of which are seasonal, results for certain interim periods may include unusually low loss experience, while results for other interim periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods are not necessarily indicative of results for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The following significant accounting policies were adopted by the Company during the six months ended June 30, 2009.

 

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Table of Contents

SFAS 165

In May 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 165, “Subsequent Events” (SFAS 165). SFAS 165 requires the Company to evaluate subsequent events through the date that the financial statements are issued, establishes the requirements for recognition of a subsequent event in its financial statements and establishes disclosure requirements about events or transactions that occurred after the balance sheet date. The adoption of SFAS 165 as of June 30, 2009 only required new disclosures to be made and did not have an impact on the Company’s consolidated shareholders’ equity or net income.

FSP FAS 107-1 and APB 28-1

In April 2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1), which amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting”, to require disclosures about fair value of financial instruments in interim financial statements. The adoption of FSP FAS 107-1 and APB 28-1 for the three months ended June 30, 2009 only required new disclosures to be made and did not have an impact on the Company’s consolidated shareholders’ equity or net income.

FSP FAS 157-4

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4), which provides additional guidance on fair value measurements under SFAS No. 157, “Fair Value Measurements” (SFAS 157) when the volume and level of activity for an asset or liability have significantly decreased. The adoption of FSP FAS 157-4 for the three months ended June 30, 2009 did not have a material impact on the Company’s consolidated shareholders’ equity or net income.

FSP FAS 157-2

In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” (FSP FAS 157-2), which permits a one-year deferral of the application of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of FSP FAS 157-2 on January 1, 2009 did not have a material impact on the Company’s consolidated shareholders’ equity or net income.

SFAS 160

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (ARB 51) to establish accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of FASB Statement No. 141 (revised 2007), “Business Combinations”. The adoption of SFAS 160 on January 1, 2009 did not have a material impact on the Company’s consolidated shareholders’ equity or net income.

EITF 07-05

In June 2008, the FASB’s Emerging Issues Task Force (EITF) reached a consensus regarding EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF 07-5 outlines a two-step approach to evaluate the instrument’s contingent exercise provisions, if any, and to evaluate the instrument’s settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. The adoption of EITF 07-5 on January 1, 2009 did not have a material impact on the Company’s consolidated shareholders’ equity or net income.

3. New Accounting Pronouncements

SFAS 167

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167). SFAS 167 amends FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51” (FIN 46(R)). SFAS 167 requires an enterprise to perform ongoing reassessments of its variable interest entities, clarifies certain provisions of FIN 46(R) and requires enhanced disclosures of an enterprise’s involvement in variable interest entities. SFAS 167 will be effective for annual and interim periods beginning after November 15, 2009, with early adoption prohibited. The Company is currently evaluating the impact of the adoption of SFAS 167 on its consolidated shareholders’ equity and net income.

SFAS 168

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (SFAS 168). SFAS 168 establishes the “FASB

 

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Accounting Standards Codification” (Codification) as the source of authoritative U.S. GAAP for non-governmental entities. The Codification supersedes all then-existing non-SEC accounting and reporting standards and reorganizes existing U.S. GAAP into authoritative accounting topics and sub-topics. SFAS 168 is effective for annual and interim periods ending after September 15, 2009. Since SFAS 168 will only amend the way the Company refers to U.S. GAAP in its financial statements, its adoption will not affect the Company’s consolidated shareholders’ equity or net income.

4. Fair value

(a) SFAS 157

The SFAS 157 fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement.

The Company must determine the appropriate level in the hierarchy for each financial instrument that it measures at fair value. In determining fair value, the Company uses various valuation approaches, including market, income and cost approaches. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

   

Level 1 inputs—Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

The Company’s financial instruments that it measures at fair value using Level 1 inputs generally include: equities listed on a major exchange and exchange traded derivatives, such as futures and options that are actively traded.

 

   

Level 2 inputs—Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive markets and directly or indirectly observable inputs, other than quoted prices, used in industry accepted models.

The Company’s financial instruments that it measures at fair value using Level 2 inputs generally include: U.S. Treasury bonds; U.S. Government Sponsored Entities; Organization for Economic Co-operation and Development Sovereign Treasury bonds; investment grade and high yield corporate bonds; catastrophe bonds; mortgage-backed securities; asset-backed securities (ABS); foreign exchange forward contracts and over-the-counter derivatives such as foreign currency option contracts, equity put and call options, interest rate swaps and credit default swaps.

 

   

Level 3 inputs—Unobservable inputs.

The Company’s financial instruments that it measures at fair value using Level 3 inputs generally include: unlisted equities including preference shares; unit trusts; private ABS; credit linked notes; loans receivable; total return swaps and weather derivatives.

At June 30, 2009 and December 31 2008, the Company’s financial instruments measured at fair value were categorized between Levels 1, 2 and 3 as follows (in thousands of U.S. dollars):

 

June 30, 2009

   Quoted prices in
active markets for
identical assets
(Level 1)
   Significant other
observable inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
    Total  

Fixed maturities, trading securities

   $ —      $ 10,684,878      $ 71,975      $ 10,756,853   

Short-term investments, trading securities

     —        63,800        73        63,873   

Equities, trading securities

     492,349      217        34,714        527,280   

Other invested assets

     —        (8,338     5,289        (3,049
                               

Total

   $ 492,349    $ 10,740,557      $ 112,051      $ 11,344,957   

December 31, 2008

   Quoted prices in
active markets for
identical assets
(Level 1)
   Significant other
observable inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
    Total  

Fixed maturities, trading securities

   $ —      $ 10,103,857      $ 78,138      $ 10,181,995   

Short-term investments, trading securities

     —        116,954        137        117,091   

Equities, trading securities

     436,627      42,638        33,547        512,812   

Other invested assets

     —        (870     (16,136     (17,006
                               

Total

   $ 436,627    $ 10,262,579      $ 95,686      $ 10,794,892   

 

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At June 30, 2009 and December 31, 2008, the aggregate carrying amounts of items included in Other invested assets that the Company did not measure at fair value were $108.9 million and $91.5 million, respectively, which primarily related to the Company’s investments that are accounted for using the equity method of accounting or investment company accounting.

Substantially all of the accrued investment income in the Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008 related to the Company’s fixed maturities, short-term investments and equities for which the fair value option was elected.

The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the three months ended June 30, 2009 and 2008, respectively (in thousands of U.S. dollars):

 

Three months ended June 30, 2009

   Fixed maturities     Short-term
investments
    Equities     Other invested
assets
    Total  

Balance at beginning of period

   $ 121,578      $ 93      $ 32,985      $ (8,754   $ 145,902   

Realized and unrealized investment gains (losses) included in net income

     19,037        (20     1,729        16,219        36,965   

Net purchases, sales and settlements

     (4,010     —          —          (2,176     (6,186

Net transfers out of Level 3

     (64,630     —          —          —          (64,630
                                        

Balance at end of period

   $ 71,975      $ 73      $ 34,714      $ 5,289      $ 112,051   

Change in unrealized investment gains (losses) relating to assets held at end of period

   $ 18,606      $ (20   $ 1,729      $ 15,575      $ 35,890   
The net transfers out of Level 3 for the three months ended June 30, 2009 of $64.6 million of fixed maturities was related to a single issuer which was classified as a Level 2 asset at December 31, 2008 and June 30, 2009 and valued using a broker quote based on current market activity. However, these fixed maturities were classified as Level 3 assets at March 31, 2009 and valued using an internal model due to a lack of market activity at that time.      

Three months ended June 30, 2008

   Fixed maturities     Short-term
investments
    Equities     Other invested
assets
    Total  

Balance at beginning of period

   $ 11,682      $ —        $ 38,685      $ 89      $ 50,456   

Realized and unrealized investment (losses) gains included in net loss

     (1,738     —          480        12,302        11,044   

Net purchases, sales and settlements

     —          —          —          12,718        12,718   
                                        

Balance at end of period

   $ 9,944      $ —        $ 39,165      $ 25,109      $ 74,218   

Change in unrealized investment (losses) gains relating to assets held at end of period

   $ (1,738   $ —        $ 480      $ 8,468      $ 7,210   

 

The following tables are reconciliations of the beginning and ending balances for all financial instruments measured at fair value using Level 3 inputs for the six months ended June 30, 2009 and 2008, respectively (in thousands of U.S. dollars):

   

Six months ended June 30, 2009

   Fixed maturities     Short-term
investments
    Equities     Other invested
assets
    Total  

Balance at beginning of period

   $ 78,138      $ 137      $ 33,547      $ (16,136   $ 95,686   

Realized and unrealized investment gains (losses) included in net income

     18,741        (64     1,226        23,720        43,623   

Net purchases, sales and settlements

     (5,936     —          (59     (2,295     (8,290

Net transfers out of Level 3

     (18,968     —          —          —          (18,968
                                        

Balance at end of period

   $ 71,975      $ 73      $ 34,714      $ 5,289      $ 112,051   

Change in unrealized investment gains (losses) relating to assets held at end of period

   $ 18,622      $ (64   $ 1,226      $ 22,792      $ 42,576   

 

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Six months ended June 30, 2008

   Fixed maturities     Short-term
investments
   Equities     Other invested
assets
    Total  

Balance at beginning of period

   $ 15,166      $ —      $ 39,606      $ (14,838   $ 39,934   

Realized and unrealized investment (losses) gains included in net income

     (1,764     —        (441     10,411        8,206   

Net purchases, sales and settlements

     —          —        —          29,536        29,536   

Transfers out of Level 3

     (3,458     —        —          —          (3,458
                                       

Balance at end of period

   $ 9,944      $ —      $ 39,165      $ 25,109      $ 74,218   

Change in unrealized investment (losses) gains relating to assets held at end of period

   $ (1,764   $ —      $ (441   $ 586      $ (1,619

Changes in the fair value of the Company’s financial instruments measured at fair value, for which the fair value option was elected, during the three months and six months ended June 30, 2009 and 2008, respectively, were as follows (in thousands of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    For the six
months ended
June 30,
2008
 

Fixed maturities, trading securities

   $ 186,819      $ (303,100   $ 138,448      $ (229,350

Short-term investments, trading securities

     (206     (193     (581     (315

Equities, trading securities

     121,199        14,784        124,689        (74,302
                                

Total

   $ 307,812      $ (288,509   $ 262,556      $ (303,967

All of the above changes in fair value are included in the Condensed Consolidated Statements of Operations under the caption Net realized and unrealized investment gains (losses).

(b) Fair Value of Financial Instrument Liabilities

The methods and assumptions used by the Company in estimating the fair value of each class of financial instrument liabilities recorded in the Condensed Consolidated Balance Sheet for which the Company does not measure these instruments at fair value did not change from December 31, 2008. The carrying values and fair values of the financial instrument liabilities recorded in the Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008 were as follows (in thousands of U.S. dollars):

 

     June 30, 2009    December 31, 2008
     Carrying
Value
   Fair Value    Carrying
Value
   Fair Value

Policy benefits for life and annuity contracts (1)

   $ 1,546,779    $ 1,546,779    $ 1,432,015    $ 1,432,015

Long-term debt

     200,000      198,319      200,000      196,103

Debt related to senior notes (2)

     250,000      241,520      250,000      237,095

Debt related to capital efficient notes (3)

     63,384      30,185      250,000      94,536

Current portion of long-term debt

     —        —        200,000      200,000

 

(1) Policy benefits for life and annuity contracts included short-duration and long-duration contracts.

 

(2) PartnerRe Finance A LLC, the issuer of the Senior Notes, does not meet the consolidation requirements of FIN 46(R). Accordingly, the Company shows the related intercompany debt of $250.0 million at June 30, 2009 and December 31, 2008 in its Condensed Consolidated Balance Sheets.

 

(3) PartnerRe Finance II, the issuer of the capital efficient notes, does not meet the consolidation requirements of FIN 46(R). Accordingly, the Company shows the related intercompany debt of $71.0 million at June 30, 2009 and $257.6 million at December 31, 2008 in its Condensed Consolidated Balance Sheets. The fair value of the capital efficient notes was based on the aggregate principal amount outstanding from PartnerRe Finance II of $63.4 million at June 30, 2009 and $250.0 million at December 31, 2008 (see Note 5).

5. Debt

On March 2, 2009, the Company announced the commencement of a cash tender offer for any and all of the 6.440% Fixed-to-Floating Rate Junior Subordinated Capital Efficient Notes (CENts) due 2066 (see Note 13 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). Under the terms of the tender offer, Partner Re Finance II Inc. (PartnerRe Finance II), an indirect wholly-owned subsidiary of the Company, and the issuer of the CENts, paid holders $500 per $1,000 principal amount of CENts tendered. In addition, holders of the CENts were paid any accrued and unpaid interest on the purchased CENts from the last interest payment date.

 

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On March 13, 2009, PartnerRe Finance II purchased approximately 75% of the issue, or $186.6 million. Contemporaneously, under the terms of a cross receipt agreement, PartnerRe U.S. Holdings paid PartnerRe Finance II consideration of $93.3 million for the extinguishment of $186.6 million of the principal amount of PartnerRe U.S. Holdings’ 6.440% Fixed-to-Floating Rate promissory note due December 1, 2066. All other terms and conditions of the remaining CENts and promissory note remain unchanged. A pre-tax gain of $88.4 million, net of deferred issuance costs and fees was realized on the foregoing transactions. The aggregate principal amount of the CENts and promissory note outstanding at June 30, 2009 was $63.4 million and $71.0 million, respectively.

On January 8, 2009, the Company entered into a second amendment to the loan agreement, dated as of October 25, 2005, among the Company, as borrower, Citibank, N.A., as administrative agent, and Citibank, N.A., as lender, which originally evidenced a three-and-a-half year term loan agreement with Citibank, N.A. Under the terms of the second loan amendment, the Company had a right to prepay the half of the original $400.0 million loan that had a maturity of April 27, 2009. Any such prepayment under the terms of the second loan amendment will be accompanied by payment of accrued and unpaid interest on the prepayment amount. The remaining half of the loan has a maturity of July 12, 2010 and the Company does not have a right to prepay this amount. The loan was otherwise unchanged. On January 14, 2009, the Company repaid the half of the original $400.0 million loan that was due April 27, 2009. See Notes 12 and 22 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

6. Net Income (Loss) per Share

The reconciliation of basic and diluted net income (loss) per share is as follows (in thousands of U.S. dollars or shares, except per share amounts):

 

     For the three
months ended
June 30,
2009
   For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
   For the six
months ended
June 30,
2008

Numerator:

          

Net income (loss)

   $ 474,269    $ (26,024   $ 615,789    $ 102,996

Less: preferred dividends

     8,631      8,631        17,263      17,263
                            

Net income (loss) available to common shareholders

   $ 465,638    $ (34,655   $ 598,526    $ 85,733
                            

Denominator:

          

Weighted average number of common shares outstanding—basic

     56,609.8      54,276.6        56,560.8      54,262.5

Stock options and other (1)

     859.2      —          834.1      1,423.1
                            

Weighted average number of common and common share equivalents outstanding—diluted

     57,469.0      54,276.6        57,394.9      55,685.6
                            

Basic net income (loss) per share

   $ 8.23    $ (0.64   $ 10.58    $ 1.58

Diluted net income (loss) per share (1)

   $ 8.10    $ (0.64   $ 10.43    $ 1.54

 

(1) At June 30, 2009 and 2008, stock options to purchase 969.4 thousand and 377.5 thousand common shares, respectively, were excluded from the calculation of diluted weighted average number of common and common share equivalents outstanding because their exercise prices were greater than the average market price of the common shares.

7. Derivatives

In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), the Company’s derivative instruments are recorded in the Condensed Consolidated Balance Sheets at fair value, with changes in fair value recognized in either net foreign exchange gains and losses or net realized and unrealized investment gains and losses in the Condensed Consolidated Statements of Operations, depending on the nature of the derivative instrument. The Company’s objectives for holding or issuing these derivatives are as follows:

Foreign Exchange Forward Contracts

The Company utilizes foreign exchange forward contracts as part of its overall currency risk management and investment strategies. The Company also utilizes foreign exchange forward contracts to hedge a portion of its net investment exposure resulting from the translation of its foreign subsidiaries and branches whose functional currency is other than the U.S. dollar.

Foreign Currency Option Contracts and Futures Contracts

The Company also utilizes foreign currency option contracts to mitigate foreign currency risk. The Company uses exchange traded treasury note futures contracts and commodity futures to manage portfolio duration or hedge certain investments, respectively.

 

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Credit Default Swaps

The Company purchases protection through credit default swaps to mitigate the risk associated with its underwriting operations, most notably in the credit/surety line and to manage market exposures.

The Company assumes credit risk through credit default swaps to replicate investment positions. The original term of these credit default swaps is generally five years or less and there are no recourse provisions associated with these swaps. While the Company would be required to perform under exposure assumed through credit default swaps in the event of a default on the underlying issuer, no issuer was in default at June 30, 2009. The counterparties on the Company’s assumed credit default swaps are all highly rated financial institutions.

Insurance-Linked Securities

The Company has entered into various weather derivatives, a weather future and a longevity total return swap for which the underlying risks include parametric weather risks for the weather derivatives and future and longevity risk for the longevity total return swap.

Total Return and Interest Rate Swaps

The Company has entered into total return swaps referencing various project and principal finance obligations. The Company has also entered into interest rate swaps to mitigate interest rate risk on certain total return swaps.

The fair values and the related notional values of derivatives included in the Company’s Condensed Consolidated Balance Sheets at June 30, 2009 and December 31, 2008 were as follows (in thousands of U.S. dollars):

 

     June 30, 2009    December 31, 2008
     Fair
Value
    Notional
Value
   Fair
Value
    Notional
Value

Derivatives designated as hedges

         

Foreign exchange forward contracts (net investment hedge)

   $ (31,110   $ 529,779    $ (37,470   $ 443,210

Derivatives not designated as hedges

         

Foreign exchange forward contracts

   $ 17,233      $ 1,892,396    $ 32,522      $ 1,196,830

Foreign currency option contracts

     3,993        93,300      (8,027     123,932

Futures contracts

     14,297        1,580,993      7,991        1,122,524

Credit default swaps (protection purchased)

     3,560        224,141      20,305        295,665

Credit default swaps (assumed risks)

     (16,622     35,714      (16,191     46,130

Insurance-linked securities

     (296     35,432      (5,393     60,000

Total return swaps

     (6,626     223,443      (24,898     239,733

Interest rate swaps

     (9,154     —        (12,355     —  

Other

     (13     —        —          —  
                     

Total derivatives not designated as hedges

   $ 6,372         $ (6,046  
                     

Total derivatives

   $ (24,738      $ (43,516  

The fair value of all derivatives at June 30, 2009 and December 31, 2008 is recorded in other invested assets in the Company’s Condensed Consolidated Balance Sheets.

The effective portion of net investment hedging derivatives, recognized in accumulated other comprehensive income, at June 30, 2009 and December 31, 2008 was a $50.0 million loss and a $37.5 million loss, respectively.

 

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The amount of gain (loss) in the Condensed Consolidated Statement of Operations for derivatives not designated as hedges for the three months and six months ended June 30, 2009 was as follows (in thousands of U.S. dollars):

 

     For the
three months ended
June 30, 2009
    For the
six months ended
June 30, 2009
 

Foreign exchange forward contracts

   $ 22,221      $ 2,035   

Foreign currency option contracts

     3,989        2,184   
                

Total included in net foreign exchange gains and losses

   $ 26,210      $ 4,219   

Futures contracts

   $ 39,434      $ 34,200   

Credit default swaps (protection purchased)

     (8,261     (8,836

Credit default swaps (assumed risks)

     6,347        77   

Insurance-linked securities

     50        571   

Total return swaps

     12,983        19,203   

Interest rate swaps

     1,620        3,202   

Other

     213        230   
                

Total included in net realized and unrealized investment gains and losses

   $ 52,386      $ 48,647   
                

Total derivatives not designated as hedges

   $ 78,596      $ 52,866   

8. Legal Proceedings

Legal proceedings at June 30, 2009 have not changed significantly since December 31, 2008. See Note 16(e) to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

9. Segment Information

The Company monitors the performance of its operations in three segments, Non-life, Life and Corporate & Other as described in Note 19 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The Non-life segment is further divided into four sub-segments: U.S., Global (Non-U.S.) P&C, Global (Non-U.S.) Specialty and Catastrophe.

Because the Company does not manage its assets by segment, net investment income is not allocated to the Non-life segment. However, because of the interest-sensitive nature of some of the Company’s Life products, net investment income is considered in Management’s assessment of the profitability of the Life segment. The following items are not considered in evaluating the results of the Non-life and Life segments: net realized and unrealized investment gains and losses, net realized gain on purchase of CENts, interest expense, net foreign exchange gains and losses and income tax expense or benefit. Segment results are shown net of intercompany transactions.

Management measures results for the Non-life segment on the basis of the loss ratio, acquisition ratio, technical ratio, other operating expense ratio and combined ratio (defined below). Management measures results for the Non-life sub-segments on the basis of the loss ratio, acquisition ratio and technical ratio. Management measures results for the Life segment on the basis of the allocated underwriting result, which includes revenues from net premiums earned, other income or loss and allocated net investment income, and expenses from life policy benefits, acquisition costs and other operating expenses.

 

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The following tables provide a summary of the segment revenues and results for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars, except ratios):

Segment Information

For the three months ended June 30, 2009

 

     U.S.     Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 248      $ 120      $ 232      $ 125      $ 725      $ 116      $ 5      $ 846   

Net premiums written

   $ 249      $ 118      $ 232      $ 125      $ 724      $ 116      $ 5      $ 845   

Decrease (increase) in unearned premiums

     9        43        —          (73     (21     7        (5     (19
                                                                

Net premiums earned

   $ 258      $ 161      $ 232      $ 52      $ 703      $ 123      $ —        $ 826   

Losses and loss expenses and life policy benefits

     (164     (83     (152     22        (377     (85     3        (459

Acquisition costs

     (63     (38     (50     (4     (155     (27     —          (182
                                                                

Technical result

   $ 31      $ 40      $ 30      $ 70      $ 171      $ 11      $ 3      $ 185   

Other income

             1        —          2        3   

Other operating expenses

             (55     (11     (32     (98
                                        

Underwriting result

           $ 117      $ —          n/a      $ 90   

Net investment income

               15        121        136   
                                  

Allocated underwriting result (1)

             $ 15        n/a        n/a   

Net realized and unrealized investment gains

                 307        307   

Interest expense

                 (6     (6

Net foreign exchange losses

                 (2     (2

Income tax expense

                 (57     (57

Interest in earnings of equity investments

                 6        6   
                            

Net income

                 n/a      $ 474   
                            

Loss ratio (2)

     63.7     51.5     65.5     (43.0 )%      53.6      

Acquisition ratio (3)

     24.2        23.7        21.5        7.9        22.0         
                                              

Technical ratio (4)

     87.9     75.2     87.0     (35.1 )%      75.6      

Other operating expense ratio (5)

             7.9         
                      

Combined ratio (6)

             83.5      
                      

 

(1) Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs and other operating expenses.

 

(2) Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.

 

(3) Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.

 

(4) Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.

 

(5) Other operating expense ratio is obtained by dividing other operating expenses by net premiums earned.

 

(6) Combined ratio is defined as the sum of the technical ratio and the other operating expense ratio.

 

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Segment Information

For the three months ended June 30, 2008

 

     U.S.     Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 254      $ 134      $ 291      $ 145      $ 824      $ 138      $ 6      $ 968   

Net premiums written

   $ 246      $ 132      $ 291      $ 145      $ 814      $ 136      $ 6      $ 956   

Decrease (increase) in unearned premiums

     39        54        (19     (80     (6     10        (4     —     
                                                                

Net premiums earned

   $ 285      $ 186      $ 272      $ 65      $ 808      $ 146      $ 2      $ 956   

Losses and loss expenses and life policy benefits

     (227     (87     (144     20        (438     (111     —          (549

Acquisition costs

     (64     (48     (75     (7     (194     (34     —          (228
                                                                

Technical result

   $ (6   $ 51      $ 53      $ 78      $ 176      $ 1      $ 2      $ 179   

Other income

             2        —          3        5   

Other operating expenses

             (63     (12     (22     (97
                                        

Underwriting result

           $ 115      $ (11     n/a      $ 87   

Net investment income

               18        127        145   
                                  

Allocated underwriting result (1)

             $ 7        n/a        n/a   

Net realized and unrealized investment losses

                 (296     (296

Interest expense

                 (15     (15

Net foreign exchange gains

                 2        2   

Income tax benefit

                 53        53   

Interest in losses of equity investments

                 (2     (2
                            

Net loss

                 n/a      $ (26
                            

Loss ratio (2)

     79.6     46.7     52.8     (30.7 )%      54.2      

Acquisition ratio (3)

     22.7        25.6        27.7        10.2        24.0         
                                              

Technical ratio (4)

     102.3     72.3     80.5     (20.5 )%      78.2      

Other operating expense ratio (5)

             7.7         
                      

Combined ratio (6)

             85.9      
                      

 

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Segment Information

For the six months ended June 30, 2009

 

     U.S.     Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 561      $ 419      $ 591      $ 330      $ 1,901      $ 281      $ 5      $ 2,187   

Net premiums written

   $ 561      $ 417      $ 563      $ 330      $ 1,871      $ 277      $ 5      $ 2,153   

Increase in unearned premiums

     (61     (99     (84     (199     (443     (14     (3     (460
                                                                

Net premiums earned

   $ 500      $ 318      $ 479      $ 131      $ 1,428      $ 263      $ 2      $ 1,693   

Losses and loss expenses and life policy benefits

     (326     (158     (309     11        (782     (198     2        (978

Acquisition costs

     (126     (79     (110     (12     (327     (55     —          (382
                                                                

Technical result

   $ 48      $ 81      $ 60      $ 130      $ 319      $ 10      $ 4      $ 333   

Other income

             3        1        4        8   

Other operating expenses

             (109     (21     (52     (182
                                        

Underwriting result

           $ 213      $ (10     n/a      $ 159   

Net investment income

               30        239        269   
                                  

Allocated underwriting result (1)

             $ 20        n/a        n/a   

Net realized and unrealized investment gains

                 236        236   

Net realized gain on purchase of capital efficient notes

                 89        89   

Interest expense

                 (15     (15

Net foreign exchange losses

                 (5     (5

Income tax expense

                 (117     (117

Interest in earnings of equity investments

                 —          —     
                            

Net income

                 n/a      $ 616   
                            

Loss ratio (2)

     65.2     49.6     64.5     (8.6 )%      54.8      

Acquisition ratio (3)

     25.2        24.9        23.0        8.9        22.9         
                                              

Technical ratio (4)

     90.4     74.5     87.5     0.3     77.7      

Other operating expense ratio (5)

             7.6         
                      

Combined ratio (6)

             85.3      
                      

 

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Segment Information

For the six months ended June 30, 2008

 

     U.S.     Global
(Non-U.S.)
P&C
    Global
(Non-U.S.)
Specialty
    Catastrophe     Total
Non-life
Segment
    Life
Segment
    Corporate
and Other
    Total  

Gross premiums written

   $ 586      $ 509      $ 645      $ 343      $ 2,083      $ 313      $ 11      $ 2,407   

Net premiums written

   $ 578      $ 505      $ 624      $ 343      $ 2,050      $ 307      $ 11      $ 2,368   

Increase in unearned premiums

     (27     (118     (134     (201     (480     (16     (7     (503
                                                                

Net premiums earned

   $ 551      $ 387      $ 490      $ 142      $ 1,570      $ 291      $ 4      $ 1,865   

Losses and loss expenses and life policy benefits

     (398     (234     (291     18        (905     (233     —          (1,138

Acquisition costs

     (131     (100     (129     (13     (373     (59     —          (432
                                                                

Technical result

   $ 22      $ 53      $ 70      $ 147      $ 292      $ (1   $ 4      $ 295   

Other income

             3        —          3        6   

Other operating expenses

             (120     (21     (48     (189
                                        

Underwriting result

           $ 175      $ (22     n/a      $ 112   

Net investment income

               33        249        282   
                                  

Allocated underwriting result (1)

             $ 11        n/a        n/a   

Net realized and unrealized investment losses

                 (271     (271

Interest expense

                 (27     (27

Net foreign exchange losses

                 (3     (3

Income tax benefit

                 11        11   

Interest in losses of equity investments

                 (1     (1
                            

Net income

                 n/a      $ 103   
                            

Loss ratio (2)

     72.2     60.6     59.5     (12.9 )%      57.6      

Acquisition ratio (3)

     23.7        25.7        26.3        9.6        23.8         
                                              

Technical ratio (4)

     95.9     86.3     85.8     (3.3 )%      81.4      

Other operating expense ratio (5)

             7.6         
                      

Combined ratio (6)

             89.0      
                      

10. Subsequent Events

The Company has evaluated subsequent events through August 10, 2009, the date the financial statements were issued. The following events occurred subsequent to June 30, 2009 through August 10, 2009.

Acquisition of Paris Re

On July 4, 2009, the Company entered into agreements to effect a multi-step acquisition of all of the outstanding common shares and warrants of PARIS RE Holdings Limited (Paris Re), a French-listed, Swiss-domiciled diversified reinsurer.

As a first step in the acquisition, the Company will cause a wholly-owned subsidiary (the Acquisition Subsidiary) to purchase (the Block Purchase) all of the Paris Re common shares and Paris Re warrants held by six private equity firms and their related investment vehicles pursuant to the terms of a purchase agreement (the Block Purchase Agreement). Under the Block Purchase Agreement, the Company will acquire approximately 57.5% of the outstanding Paris Re common shares. These shares, when added together with the approximately 6.1% of the outstanding Paris Re common shares that the Company purchased from certain other Paris Re shareholders prior to the announcement of the Paris Re acquisition and the additional approximately 19.5% of the outstanding Paris Re common shares that the Company has subsequently committed to acquire simultaneously with the closing of the Block Purchase from certain other Paris Re shareholders, will give the Company an aggregate ownership of approximately 83.1% of the outstanding Paris Re common shares following the closing of the Block Purchase.

 

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Following the closing of the Block Purchase and subject to certain conditions, the Company will cause the Acquisition Subsidiary to commence a voluntary public exchange offer (the Exchange Offer) for all remaining outstanding Paris Re common shares and Paris Re warrants. The Exchange Offer will be commenced pursuant to the terms of a transaction agreement dated July 4, 2009 between the Company and Paris Re (the Transaction Agreement). If, after completion of the Exchange Offer, the Company and its affiliates own at least 90% of the outstanding Paris Re common shares, the Company will effect a compulsory merger (the Merger), in accordance with Swiss law to acquire all remaining outstanding Paris Re common shares. In the Merger, Paris Re will be merged into the Acquisition Subsidiary with the Acquisition Subsidiary surviving the Merger.

In each step of the acquisition, the Company has exchanged or will exchange 0.300 Company common shares for each Paris Re common share and 0.167 Company common shares for each Paris Re warrant. The per share consideration and per warrant consideration are each subject to adjustment if the parties’ tangible book values per share diverge significantly relative to each other prior to the closing of the Block Purchase. In addition, if the Company declares a cash dividend or other cash distribution on the Company’s common shares with a record date on or after the closing of the Block Purchase and prior to the earliest date on which Paris Re shareholders have the right to receive payment for the Paris Re common shares tendered in the Exchange Offer, then the per share consideration will be appropriately adjusted upwards.

Immediately prior to the closing of the Block Purchase, Paris Re intends, subject to obtaining the requisite regulatory approvals, to effect an extraordinary cash distribution by way of a capital reduction to all Paris Re shareholders in the amount of CHF 4.17 per Paris Re common share (the Swiss franc equivalent of $3.85 as of July 7, 2009, the date on which Paris Re fixed the U.S. dollar/Swiss franc currency exchange rate to be used for the extraordinary cash distribution) (the Share Capital Repayment). To the extent that the Share Capital Repayment is not made in full immediately prior to the closing of the Block Purchase, the remaining portion will be paid (i) to the shareholders selling their Paris Re common shares and Paris Re warrants to the Company at or contemporaneously with the Block Purchase in the form of a promissory note issued by the Company at the closing of the Block Purchase and (ii) to all other holders of Paris Re common shares in the form of cash by way of a capital distribution from Paris Re immediately prior to the settlement of the Exchange Offer.

The Paris Re shareholders that have previously sold their Paris Re common shares to the Company prior to the announcement of the transactions will receive a payment of $3.85 for each Paris Re common share sold at the earlier of the closing of the Block Purchase and the termination of the Transaction Agreement (net of dividends paid or payable on the Company’s common shares with respect to the period after such sale and prior to the closing of the Block Purchase). This payment to these selling shareholders will be made irrespective of whether the Block Purchase closes or the Share Capital Repayment or any portion thereof is paid.

The Transaction Agreement contains certain termination rights for both the Company and Paris Re and further provides that the Company may be required to pay Paris Re a termination fee of $75 million upon termination of such agreement either because (i) the Company’s board of directors withdraws, changes or modifies its recommendation with respect to the transactions contemplated by the Block Purchase Agreement and Transaction Agreement in a manner that is adverse to Paris Re or (ii) the Company’s shareholders fail to approve such transactions at the Company’s shareholders’ meeting called for such purpose.

The Block Purchase is expected to close in the fourth quarter of 2009 and the Exchange Offer and the Merger are expected to close in the first quarter of 2010. However, the exact timing of the completion of the transactions cannot be predicted because they are subject to certain shareholder approvals, regulatory approvals and other customary closing conditions.

In conjunction with the purchase of approximately 6.1% of the outstanding Paris Re common shares, in July 2009, the Company issued 1.5 million of its common shares (1.3 million of which were treasury shares) for consideration of $95.5 million in addition to the deferred cash payment described above.

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

The Company is a leading global reinsurer, with a broadly diversified and balanced portfolio of traditional reinsurance risks and capital markets risks. Successful risk management is the foundation of the Company’s value proposition, with diversification of risks at the core of its risk management strategy.

The Company’s ability to succeed in the risk assumption and management business is dependent on its ability to accurately analyze and quantify risk, to understand volatility and how risks aggregate or correlate, and to establish the appropriate capital requirements and absolute limits for the risks assumed. All risks are managed by the Company within an integrated framework of policies and processes that seek to ensure the intelligent and consistent evaluation and valuation of risk, and ultimately to provide an appropriate return to shareholders.

The Company’s economic objective is to manage a portfolio of risks that will generate compound annual diluted book value per share growth of 10 percent and an average operating return on beginning shareholders’ equity of 13 percent over a reinsurance cycle.

See Executive Overview, Key Financial Measures and Other Key Issues of Management in Item 7 of Part II of the Company’s 2008 Annual Report on Form 10-K.

Acquisition of Paris Re

On July 4, 2009, the Company entered into agreements to effect a multi-step acquisition of all of the outstanding common shares and warrants of PARIS RE Holdings Limited (Paris Re), a French-listed, Swiss-domiciled diversified reinsurer.

As a first step in the acquisition, the Company will cause a wholly-owned subsidiary (the Acquisition Subsidiary) to purchase (the Block Purchase) all of the Paris Re common shares and Paris Re warrants held by six private equity firms and their related investment vehicles pursuant to the terms of a purchase agreement (the Block Purchase Agreement). Under the Block Purchase Agreement, the Company will acquire approximately 57.5% of the outstanding Paris Re common shares. These shares, when added together with the approximately 6.1% of the outstanding Paris Re common shares that the Company purchased from certain other Paris Re shareholders prior to the announcement of the Paris Re acquisition and the additional approximately 19.5% of the outstanding Paris Re common shares that the Company has subsequently committed to acquire simultaneously with the closing of the Block Purchase from certain other Paris Re shareholders, will give the Company an aggregate ownership of approximately 83.1% of the outstanding Paris Re common shares following the closing of the Block Purchase.

Following the closing of the Block Purchase and subject to certain conditions, the Company will cause the Acquisition Subsidiary to commence a voluntary public exchange offer (the Exchange Offer) for all remaining outstanding Paris Re common shares and Paris Re warrants. The Exchange Offer will be commenced pursuant to the terms of a transaction agreement dated July 4, 2009 between the Company and Paris Re (the Transaction Agreement). If, after completion of the Exchange Offer, the Company and its affiliates own at least 90% of the outstanding Paris Re common shares, the Company will effect a compulsory merger (the Merger), in accordance with Swiss law to acquire all remaining outstanding Paris Re common shares. In the Merger, Paris Re will be merged into the Acquisition Subsidiary with the Acquisition Subsidiary surviving the Merger.

In each step of the acquisition, the Company has exchanged or will exchange 0.300 Company common shares for each Paris Re common share and 0.167 Company common shares for each Paris Re warrant. The per share consideration and per warrant consideration are each subject to adjustment if the parties’ tangible book values per share diverge significantly relative to each other prior to the closing of the Block Purchase. In addition, if the Company declares a cash dividend or other cash distribution on the Company’s common shares with a record date on or after the closing of the Block Purchase and prior to the earliest date on which Paris Re shareholders have the right to receive payment for the Paris Re common shares tendered in the Exchange Offer, then the per share consideration will be appropriately adjusted upwards.

Immediately prior to the closing of the Block Purchase, Paris Re intends, subject to obtaining the requisite regulatory approvals, to effect an extraordinary cash distribution by way of a capital reduction to all Paris Re shareholders in the amount of CHF 4.17 per Paris Re common share (the Swiss franc equivalent of $3.85 as of July 7, 2009, the date on which Paris Re fixed the U.S. dollar/Swiss franc currency exchange rate to be used for the extraordinary cash distribution) (the Share Capital Repayment). To the extent that the Share Capital Repayment is not made in full immediately prior to the closing of the Block Purchase, the remaining portion will be paid (i) to the shareholders selling their Paris Re common shares and Paris Re warrants to the Company at or contemporaneously with the Block Purchase in the form of a promissory note issued by the Company at the closing of the Block Purchase and (ii) to all other holders of Paris Re common shares in the form of cash by way of a capital distribution from Paris Re immediately prior to the settlement of the Exchange Offer.

 

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The Paris Re shareholders that have previously sold their Paris Re common shares to the Company prior to the announcement of the transactions will receive a payment of $3.85 for each Paris Re common share sold at the earlier of the closing of the Block Purchase and the termination of the Transaction Agreement (net of dividends paid or payable on the Company’s common shares with respect to the period after such sale and prior to the closing of the Block Purchase). This payment to these selling shareholders will be made irrespective of whether the Block Purchase closes or the Share Capital Repayment or any portion thereof is paid.

The Transaction Agreement contains certain termination rights for both the Company and Paris Re and further provides that the Company may be required to pay Paris Re a termination fee of $75 million upon termination of such agreement either because (i) the Company’s board of directors withdraws, changes or modifies its recommendation with respect to the transactions contemplated by the Block Purchase Agreement and Transaction Agreement in a manner that is adverse to Paris Re or (ii) the Company’s shareholders fail to approve such transactions at the Company’s shareholders’ meeting called for such purpose.

The Block Purchase is expected to close in the fourth quarter of 2009 and the Exchange Offer and the Merger are expected to close in the first quarter of 2010. However, the exact timing of the completion of the transactions cannot be predicted because they are subject to certain shareholder approvals, regulatory approvals and other customary closing conditions.

Risk Management

A key challenge in the reinsurance industry is to create economic value through the intelligent assumption of reinsurance and capital markets and investment risk, but also to limit or mitigate those risks that can destroy tangible as well as intangible value. Management believes that every organization faces numerous risks that could threaten the successful achievement of a company’s goals and objectives. These include choice of strategy and markets, economic and business cycles, competition, changes in regulation, data quality and security, fraud, business interruption and management continuity; all factors which can be viewed as either strategic or operational risks that are common to any industry. In addition to these risks, the Company assumes risks and its results are primarily determined by how well the Company understands, prices and manages assumed risk. While many industries and companies start with a return goal and then attempt to shed risks that may derail that goal, the Company starts with a capital-based risk appetite and then looks for risks that meet its return targets within that framework. Management believes that this construct allows the Company to balance the cedants’ need for absolute certainty of claims payment with the shareholders’ need for an adequate return on their capital. See Executive Overview – Other Key Issues of Management – Risk Management in Item 7 of Part II of the Company’s 2008 Annual Report on Form 10-K for a complete description of the Company’s risks, risk management framework and the related risk management strategies and controls.

The Company seeks to maintain a risk appetite moderately above the average of the reinsurance market because Management believes that this position offers the best potential for creating shareholder value at an acceptable risk level. The most profitable products generally present the most volatility and potential downside risk. Management believes that the Company’s actual risk profile is equal to or less than the average of the reinsurance market because of the level of diversification achieved in the portfolio, the strict adherence to risk appetite and limits, and the risk mitigation strategies employed.

The Company manages assumed risk at a strategic level through diversification, risk appetite, and absolute limits. For each key risk, the Board approves a risk appetite that the Company defines as the percentage of economic capital the Company is willing to expose to economic loss with a modeled probability of occurring once every 15 years and once every 75 years. The Company manages its exposure to key risks such that the modeled economic loss at a 1 in 15 year and a 1 in 75 year return period are less than the economic capital the Company is willing to expose to the key risks at those return periods.

The major risks to the Company’s balance sheet are typically due to events that Management refers to as shock losses. The Company defines a shock loss as an event that has the potential to materially damage economic value. The Company defines its economic value as the difference between the net present value of tangible assets and the net present value of liabilities, using appropriate discount rates. For traded assets, the calculated net present values are equivalent to market values.

There are three areas of risk that the Company has currently identified as having the greatest potential for shock losses: catastrophe, reserving for casualty and other long-tail lines, and equity and equity-like investment risk. The Company manages the risk of shock losses by setting risk appetite and limits as described above for each type of shock loss. The Company establishes limits to manage the absolute maximum foreseeable loss from any one event and considers the possibility that several shock losses could occur at one time, for example a major catastrophe event accompanied by a collapse in the equity markets. Management believes that the limits that it has placed on shock losses will allow the Company to continue writing business should such an event occur.

Other risks such as interest rate risk and credit risk have the ability to impact results substantially and may result in volatility of results from quarter to quarter, but Management believes that by themselves, they are unlikely to represent a material downside threat of destruction of the Company’s long-term economic value. See Quantitative and Qualitative Disclosures about Market Risk in Item 3 of Part I of this report for additional disclosure on interest rate risk, credit spread risk, foreign currency risk, counterparty credit risk and equity price risk.

 

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The limits at June 30, 2009 and actual exposures at June 30, 2009 and December 31, 2008 of the Company for its three major risks were as follows:

 

Risk

   Limit at
June 30, 2009
   Utilized at
June 30, 2009
   Utilized at
December 31, 2008

Catastrophe risk – largest zonal limit

   $ 1.6 billion    $ 1.4 billion    $ 1.4 billion

Casualty reserving risk – total earned premiums for casualty and other long-tail lines for the four most recent underwriting periods

     3.8 billion      2.6 billion      2.8 billion

Equity investment risk – value of equity and equity-like securities

     2.4 billion      1.0 billion      920 million

The risk appetite at June 30, 2009 and modeled economic loss at June 30, 2009 and December 31, 2008 for the Company’s three major risks were as follows:

 

Risk

   Risk
Appetite at
June 30, 2009
   Modeled Economic
Loss at
June 30, 2009
   Modeled Economic
Loss at
December 31, 2008

Catastrophe risk – 1 in 75 year annual aggregate loss

   $ 960 million    $ 870 million    $ 810 million

Casualty reserving risk – casualty and other long-tail lines 1 in 15 year prior years’ reserve development

     480 million      330 million      350 million

Equity investment risk – 1 in 75 year decline in value

     720 million      300 million      280 million

Critical Accounting Policies and Estimates

Critical Accounting Policies and Estimates of the Company at June 30, 2009 have not changed materially compared to December 31, 2008. See Critical Accounting Policies and Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of the Company’s 2008 Annual Report on Form 10-K. The following discussion updates specific information related to the Company’s estimates for losses and loss expenses and life policy benefits and fair value measurements.

Losses and Loss Expenses and Life Policy Benefits

Losses and Loss Expenses

Because a significant amount of time can elapse between the assumption of risk, occurrence of a loss event, the reporting of the event to an insurance company (the primary company or the cedant), the subsequent reporting to the reinsurance company (the reinsurer) and the ultimate payment of the claim on the loss event by the reinsurer, the Company’s liability for unpaid losses and loss expenses (loss reserves) is based largely upon estimates. The Company categorizes loss reserves into three types of reserves: reported outstanding loss reserves (case reserves), additional case reserves (ACRs) and incurred but not reported (IBNR) reserves. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. The Company also estimates the future unallocated loss adjustment expenses (ULAE) associated with the loss reserves and these form part of the Company’s loss adjustment expense reserves. The Company’s Non-life loss reserves for each category and sub-segment are reported in the table included later in this section.

The amount of time that elapses before a claim is reported to the cedant and then subsequently reported to the reinsurer is commonly referred to in the industry as the reporting tail. For all lines, the Company’s objective is to estimate ultimate losses and loss expenses. Total loss reserves are then calculated by subtracting losses paid. Similarly, IBNR reserves are calculated by subtraction of case reserves and ACRs from total loss reserves.

The Company analyzes its ultimate losses and loss expenses after consideration of the loss experience of various reserving cells. The Company assigns treaties to reserving cells and allocates losses from the treaty to the reserving cell. The reserving cells are selected in order to ensure that the underlying treaties have homogeneous loss development characteristics (e.g., reporting tail) but are large enough to make estimation of trends credible. The selection of reserving cells is reviewed annually and changes over time as the business of the Company evolves. For each reserving cell, the Company’s estimates of loss reserves are reached after a review of the results of several commonly accepted actuarial projection methodologies. In selecting its best estimate, the Company considers the appropriateness of each methodology to the individual circumstances of the reserving cell and underwriting year for which the projection is made.

 

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See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits in Item 7 of Part II of the Company’s 2008 Annual Report on Form 10-K for additional information on the reserving methodologies employed by the Company, the principal reserving methods used for the reserving lines, the principal parameter assumptions underlying the methods and the main underlying factors upon which the estimates of reserving parameters are predicated.

The Company’s best estimate of total loss reserves is typically in excess of the midpoint of the actuarial reserve estimates. The Company believes that there is potentially significant risk in estimating loss reserves for long-tail lines of business and for immature underwriting years that may not be adequately captured through traditional actuarial projection methodologies. In selecting its best estimate of future liabilities, the Company considers both the results of actuarial point estimates of loss reserves as well as the potential variability of these estimates as captured by a reasonable range of actuarial reserve estimates. Selected reserves are always within the indicated reasonable range of estimates indicated by the Company’s actuaries.

During the three months and six months ended June 30, 2009 and 2008, the Company reviewed its estimate for prior year losses for each sub-segment of the Non-life segment and, in light of developing data, determined to adjust its ultimate loss ratios for prior accident years. The following table summarizes the prior year net favorable reserve development for the Company’s Non-life segment for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
   For the three
months ended
June 30,
2008
   For the six
months ended
June 30,
2009
   For the six
months ended
June 30,
2008

Prior year favorable loss development:

           

Non-life segment

           

U.S.

   $ 56    $ 22    $ 77    $ 38

Global (Non-U.S.) P&C

     35      52      87      110

Global (Non-U.S.) Specialty

     31      32      56      65

Catastrophe

     21      24      23      34
                           

Total Non-life prior year net favorable reserve development

   $ 143    $ 130    $ 243    $ 247

The net favorable reserve development on prior accident years of $143 million and $243 million recorded in the three months and six months ended June 30, 2009, respectively, resulted from a reassessment of the Company’s total Non-life reserves of approximately $126 million and $216 million, respectively, of loss development assumptions used by the Company to estimate future liabilities predominantly due to favorable loss emergence, as losses reported by cedants, including treaties where the risk period expired, were lower than expected. This impact was supplemented by approximately $17 million and $27 million related to change in exposure due to downward premium adjustments in the three months and six months ended June 30, 2009, respectively.

The net favorable reserve development on prior accident years of $130 million and $247 million recorded in the three months and six months ended June 30, 2008, respectively, resulted from a reassessment of approximately $137 million and $223 million, respectively, predominantly due to favorable loss emergence and was partially offset by approximately $7 million related to change in exposure due to upward premium adjustments in the three months ended June 30, 2008 and was supplemented by approximately $24 million related to change in exposure due to downward premium adjustments in the six months ended June 30, 2008.

For a discussion of prior year net favorable reserve development by Non-life sub-segment, see Results by Segment below. See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits in Item 7 of Part II of the Company’s 2008 Annual Report on Form 10-K for additional information by reserving lines.

Case reserves are reported to the Company by its cedants, while ACRs and IBNR reserves are estimated by the Company. The following table shows the gross reserves reported by cedants (case reserves), those estimated by the Company (ACRs and IBNR reserves) and the total net loss reserves recorded as of June 30, 2009 for each Non-life sub-segment (in millions of U.S. dollars):

 

     Case reserves    ACRs    IBNR
reserves
   Total gross
loss reserves
recorded
   Ceded loss
reserves
    Total net
loss reserves
recorded

U.S.

   $ 730    $ 143    $ 1,873    $ 2,746    $ (29   $ 2,717

Global (Non-U.S.) P&C

     1,232      9      992      2,233      (36     2,197

Global (Non-U.S.) Specialty

     1,120      15      1,016      2,151      (61     2,090

Catastrophe

     160      107      —        267      —          267
                                          

Total Non-life

   $ 3,242    $ 274    $ 3,881    $ 7,397    $ (126   $ 7,271

 

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The net loss reserves represent the Company’s best estimate of future losses and loss expense amounts based on information available as of June 30, 2009. Loss reserves are estimates involving actuarial and statistical projections at a given time that reflect the Company’s expectations of the costs of the ultimate settlement and administration of claims. The estimates are continually reviewed and the ultimate liability may be in excess of, or less than, the amounts provided, for which any adjustments will be reflected in the period in which the need for an adjustment is determined.

The Company estimates its net loss reserves using single actuarial point estimates. Ranges around these actuarial point estimates are developed using stochastic simulations and techniques and provide an indication as to the degree of variability of the loss reserves. The Company interprets the ranges produced by these techniques as confidence intervals around the Company’s best estimates for each Non-life sub-segment. However, due to the inherent volatility in the business written by the Company, there can be no guarantee that the final settlement of the loss reserves will fall within these ranges.

The actuarial point estimates recorded by the Company, and the range of estimates around these point estimates at June 30, 2009, were as follows for each Non-life sub-segment (in millions of U.S. dollars):

 

     Recorded Point
Estimate
   High    Low

Net Non-life sub-segment loss reserves:

        

U.S.

   $ 2,717    $ 2,966    $ 2,114

Global (Non-U.S.) P&C

     2,197      2,334      1,920

Global (Non-U.S.) Specialty

     2,090      2,195      1,824

Catastrophe

     267      282      238

It is not appropriate to add together the ranges of each sub-segment in an effort to determine a high and low range around the Company’s total net Non-life recorded loss reserves.

The deteriorating condition of the financial markets during 2008 continued into the first quarter of 2009. However, during the second quarter of 2009, signs of improvement in the financial markets emerged, primarily with increases in worldwide equity markets. During the second quarter the U.S. dollar reversed its course over the prior nine months and weakened against most currencies compared to March 31, 2009, risk-free rates increased and credit spreads narrowed. The fair value of the Company’s investment portfolio benefited from these improved conditions in the financial markets. The Company’s financial position and second quarter results of operations include an increase in the fair value of its investment portfolio, and the related increase in the level of unrealized gains on investments, which following the adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS 159), are recorded in net income.

Based on information currently available and the range of potential estimated ultimate liabilities, the Company believes that the unpaid loss and loss expense reserves for U.S. and Global (Non-U.S.) specialty casualty, Global (Non-U.S.) credit/surety, U.S. surety and other potentially exposed classes of business contemplate a reasonable provision for exposures related to the effect of increased financial stress in the world economies. The Company is unaware of any specific issues that would materially affect its unpaid loss and loss expenses estimates related to this exposure.

Life Policy Benefits

Policy benefits for life and annuity contracts relate to the business in the Company’s Life operations, which predominantly includes reinsurance of longevity, subdivided into standard and non-standard annuities, and mortality business, which includes traditional death and disability covers (with various riders), term assurance and critical illness (TCI) written in the UK and Ireland, and guaranteed minimum death benefit (GMDB) written in Continental Europe.

The Company categorizes life reserves into three types: reported outstanding loss reserves (case reserves), incurred but not reported (IBNR) reserves and reserves for future policy benefits. Such liabilities are established based on methods and underlying assumptions in accordance with U.S. GAAP and applicable actuarial standards. Principal assumptions used in the establishment of reserves for future policy benefits have been determined based upon information reported by ceding companies, supplemented by the Company’s actuarial estimates of mortality, critical illness, persistency and future investment income, with appropriate provision to reflect uncertainty.

For the traditional life portfolio, case reserves, IBNR reserves and reserves for future policy benefits are mainly calculated at the treaty level. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants.

For the products that are covered by the long duration provisions of Financial Accounting Standards Board (FASB) Statement No. 60 “Accounting and Reporting by Insurance Enterprises” (SFAS 60), a reserve adequacy test is performed at least once a year based on

 

23


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the latest best estimate assumptions by line of business, including an experience analysis and a review of likely future experience. If such review produces reserves in excess of those currently held, then the locked-in assumptions will be revised and a loss recognized.

See Critical Accounting Policies and Estimates—Losses and Loss Expenses and Life Policy Benefits – Life Policy Benefits in Item 7 of Part II of the Company’s 2008 Annual Report on Form 10-K for additional information on the reserving methodologies employed by the Company for its longevity and mortality lines.

The Life segment reported net favorable development on prior accident years of $4 million during the three months ended June 30, 2009 and net adverse development of $3 million during the six months ended June 30, 2009, primarily due to certain GMDB treaties where the payout is linked to the performance of the underlying capital markets. For the three months ended June 30, 2008, the Life segment reported net favorable development on prior accident years of less than $1 million and net adverse development on prior accident years of $5 million for the six months ended June 30, 2008, primarily due to certain GMDB treaties. See Results by Segment below.

The Company may be exposed to claims in its life portfolio that may be significantly higher than expected as a result of spikes in mortality due to causes such as a swine flu pandemic. However, the composition of the Company’s mortality and longevity business, as well as retrocessional protection, serve to partially mitigate the impact of such exposures to the Company.

Fair Value Measurements

The Company adopted FASB Statement No. 157, “Fair Value Measurements” (SFAS 157) on January 1, 2008. Fair value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures the fair value of its financial instruments according to a fair value hierarchy that prioritizes the information used to measure fair value into three broad levels based on the reliability of inputs.

Under the SFAS 157 hierarchy, Management uses certain assumptions and judgments to derive the fair value of its investments, particularly for those assets with significant unobservable inputs, commonly referred to as Level 3 assets. The Company’s Level 3 assets totaled $112.1 million and $95.7 million at June 30, 2009 and December 31, 2008, respectively. During the three months ended June 30, 2009, the Company transferred out of Level 3 approximately $65 million of fixed maturities related to a single issuer which was classified as a Level 2 asset at December 31, 2008 and June 30, 2009 and valued using a broker quote based on current market activity. However, these fixed maturities were classified as Level 3 assets at March 31, 2009 and valued using an internal model due to a lack of market activity at that time. For additional information, see Note 4 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

For additional information on the valuation techniques, methods and assumptions that were used by the Company to estimate the fair value of its fixed maturities, short-term investments, equities and other invested assets, see Note 3 to Consolidated Financial Statements included in Item 8 of Part II of the Company’s 2008 Annual Report on Form 10-K. For additional information on the Company’s use of derivative financial instruments, see Note 7 to Condensed Consolidated Financial Statements included in Item 1 of Part I of this report.

Results of Operations—for the Three Months and Six Months Ended June 30, 2009 and 2008

The following discussion of Results of Operations contains forward-looking statements based upon assumptions and expectations concerning the potential effect of future events that are subject to uncertainties. See Item 1A of Part 1 of the Company’s 2008 Annual Report on Form 10-K and Item 1A of Part II of this report for a review of important risk factors. Any of these risk factors could cause actual results to differ materially from those reflected in such forward-looking statements.

The Company’s reporting currency is the U.S. dollar. The Company’s subsidiaries and branches have one of the following functional currencies: U.S. dollar, euro or Canadian dollar. As a significant portion of the Company’s operations is transacted in foreign currencies, fluctuations in foreign exchange rates may affect period-to-period comparisons. To the extent that fluctuations in foreign exchange rates affect comparisons, their impact has been quantified, when possible, and discussed in each of the relevant sections. See Note 2(j) to Consolidated Financial Statements in the Company’s 2008 Annual Report on Form 10-K for a discussion of translation of foreign currencies.

The foreign exchange fluctuations for the principal currencies in which the Company transacts business were as follows:

 

   

the U.S. dollar average exchange rate was stronger against most currencies, except the Japanese yen, in the three months and six months ended June 30, 2009 compared to the same periods in 2008; and

 

   

the U.S. dollar ending exchange rate strengthened against most currencies, except the British pound and the Canadian dollar, at June 30, 2009 compared to December 31, 2008.

 

24


Table of Contents

Overview

The Company measures its performance in several ways. Among the performance measures accepted under U.S. GAAP is diluted net income (loss) per share, a measure that focuses on the return provided to the Company’s common shareholders. Diluted net income (loss) per share is obtained by dividing net income (loss) available to common shareholders by the weighted average number of common and common share equivalents outstanding. Net income (loss) available to common shareholders is defined as net income (loss) less preferred dividends. As the effect of dilutive securities would have been anti-dilutive due to the Company’s reported net loss for the three months ended June 30, 2008, the fully diluted per share figure was calculated using the basic weighted average number of common shares outstanding for that period.

As the Company’s reinsurance operations are exposed to low-frequency, high-severity risk events, some of which are seasonal, results for certain interim periods may include unusually low loss experience, while results for other interim periods may include significant catastrophic losses. Consequently, the Company’s results for interim periods are not necessarily indicative of results for the full year.

The deteriorating condition of the financial markets during 2008 continued into the first quarter of 2009. However, during the second quarter of 2009, signs of improvement in the financial markets emerged, primarily with increases in worldwide equity markets. During the second quarter, the U.S. dollar reversed its course over the prior nine months and weakened against most currencies compared to March 31, 2009, risk-free rates increased and credit spreads narrowed. The fair value of the Company’s investment portfolio benefited from these improved conditions in the financial markets. The Company’s financial position and second quarter results of operations include an increase in the fair value of its investment portfolio, and the related increase in the level of unrealized gains on investments, which following the adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS 159), are recorded in net income.

The impacts of the global financial and economic crisis are wide-ranging and have also affected the Company’s reinsurance operations. Accordingly, the Company has continued to review its loss estimates and has modestly increased its reserves during the three and the six months ended June 30, 2009 in certain lines of business for the 2006, 2007 and 2008 underwriting years, where increased claims are anticipated, given deteriorated economic and credit conditions. The Company’s loss reserves related to the impacted lines of business represent Management’s best estimate of the cost to settle the ultimate liabilities related to these events based on information available at June 30, 2009.

These factors are discussed below in Review of Net Income (Loss) and Financial Condition, Liquidity and Capital Resources. These events and continuing disruptions, uncertainty or volatility in the capital or credit markets may continue to affect our results of operations and financial condition in the future.

Net income (loss), preferred dividends, net income (loss) available to common shareholders and diluted net income (loss) per share for the three months and six months ended June 30, 2009 and 2008 were as follows (in millions of U.S. dollars, except per share data):

 

     For the three
months ended
June 30,
2009
   % Change
2009 over
2008
   For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
   % Change
2009 over
2008
    For the six
months ended
June 30,
2008

Net income (loss)

   $ 474    NM    $ (26   $ 616    498   $ 103

Less: preferred dividends

     9    —        9        17    —          17
                                 

Net income (loss) available to common shareholders

   $ 465    NM    $ (35   $ 599    598      $ 86

Diluted net income (loss) per share

   $ 8.10    NM    $ (0.64   $ 10.43    577      $ 1.54

 

NM: not meaningful

Three-month result

The increase in net income (loss), net income (loss) available to common shareholders and diluted net income (loss) per share for the three months ended June 30, 2009 compared to 2008 resulted primarily from realized and unrealized investment gains and was partially offset by an increase in related income tax expense. These items are discussed in the Review of Net Income (Loss) below.

 

25


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Six-month result

The increase in net income, net income available to common shareholders and diluted net income per share for the six months ended June 30, 2009 compared to 2008 resulted primarily from net realized and unrealized investment gains, net realized gain on purchase of capital efficient notes, an increase in Non-life underwriting result and lower interest expense, and was partially offset by an increase in income tax expense. These items are discussed in the Review of Net Income (Loss) below.

Review of Net Income (Loss)

Management analyzes the Company’s net income (loss) in three parts: underwriting result, investment result and other components of net income (loss). Underwriting result consists of net premiums earned and other income or loss less losses and loss expenses and life policy benefits, acquisition costs and other operating expenses. Net investment income includes interest and dividends, net of investment expenses, generated by the Company’s investment activities, as well as interest income generated on funds held. Net realized and unrealized investment gains and losses include sales of the Company’s fixed income, equity and other invested assets and changes in net unrealized gains and losses. Interest in earnings or losses of equity investments includes the Company’s strategic investments. Other components of net income (loss) consist of net realized gain on purchase of capital efficient notes, technical result and other income, other operating expenses, interest expense, net foreign exchange gains and losses and income tax expense or benefit.

The components of net income (loss) for the three months and six months ended June 30, 2009 and 2008 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    % Change
2009 over
2008
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    % Change
2009 over
2008
    For the six
months ended
June 30,
2008
 

Underwriting result:

            

Non-life

   $ 117      1   $ 115      $ 213      22   $ 175   

Life

     —        NM        (11     (10   (57     (22

Investment result:

            

Net investment income

     136      (7     145        269      (5     282   

Net realized and unrealized investment gains (losses)

     307      NM        (296     236      NM        (271

Interest in earnings (losses) of equity investments

     6      NM        (2     —        NM        (1

Corporate and Other:

            

Net realized gain on purchase of capital efficient notes

     —        —          —          89      NM        —     

Technical result

     3      114        2        4      26        4   

Other income

     2      (33     3        4      9        3   

Other operating expenses

     (32   46        (22     (52   9        (48

Interest expense

     (6   (58     (15     (15   (42     (27

Net foreign exchange (losses) gains

     (2   NM        2        (5   41        (3

Income tax (expense) benefit

     (57   NM        53        (117   NM        11   
                                    

Net income (loss)

   $ 474      NM      $ (26   $ 616      498      $ 103   

 

NM: not meaningful

 

26


Table of Contents

Underwriting result is a key measurement that the Company uses to manage and evaluate its Non-life and Life segments, as it is a primary measure of underlying profitability for the Company’s core reinsurance operations, separate from the investment results. The Company believes that in order to enhance the understanding of its profitability, it is useful for investors to evaluate the components of net income (loss) separately and in the aggregate. Underwriting result should not be considered a substitute for net income (loss) and does not reflect the overall profitability of the business, which is also impacted by investment results and other items.

Three-month result

The underwriting result for the Non-life segment increased by $2 million, from $115 million in the three months ended June 30, 2008 to $117 million in 2009. The increase was principally attributable to:

 

   

an increase of $13 million in net favorable development on prior accident years, from $130 million in the three months ended June 30, 2008 to $143 million in 2009. The components of the net favorable loss development are described in more detail in the discussion of individual sub-segments in Results by Segment below; and

 

   

an increase of approximately $11 million resulting primarily from a lower frequency of mid-sized losses in 2009 and normal fluctuations in profitability between periods and between lines of business as the Company redistributed its premiums to changing market conditions; partially offset by

 

   

a decrease of $22 million in net favorable prior quarter development.

Underwriting result for the Life segment increased by $11 million from a loss of $11 million in the three months ended June 30, 2008 to a breakeven position in the same period of 2009. This increase was due to an improvement in the technical result, which was driven by an increase in profitability of the mortality line, primarily as a result of favorable development in the GMDB line due to improved capital market conditions. See Results by Segment below.

The Company reported net investment income of $136 million in the three months ended June 30, 2009 compared to $145 million in 2008. The 7% decrease in net investment income is primarily attributable to foreign exchange fluctuations, which contributed 7% of the decrease as a result of stronger average U.S. dollar foreign exchange rates in the three months ended June 30, 2009 compared to the same period in 2008. The decrease was also impacted by (a) lower dividends received on equity securities due to a reduction in the level of equity exposures held, (b) the sale of the Company’s bank loan portfolio, which yielded a high interest rate (c) cash outflows from the investment portfolio during the three months ended March 31, 2009 related to the repayment of the Company’s debt and purchase of the Company’s CENts during the first quarter of 2009 and (d) lower reinvestment interest rates in the three months ended June 30, 2009 compared to the same period of 2008. Partially offsetting these declines were increases in net investment income from fixed maturities due to the reinvestment of cash flows from operations and from a reallocation to fixed maturities as the Company reduced its equity exposures during the three months ended June 30, 2009 compared to the same period in 2008, as well as an increase from the purchase of higher yielding investments.

Net realized and unrealized investment gains increased by $603 million, from a loss of $296 million in the three months ended June 30, 2008 to a gain of $307 million in the same period of 2009. This increase in net realized and unrealized investment gains in 2009 was mainly due to the narrowing of credit spreads and increases in worldwide equity markets and was partially offset by increases in risk-free interest rates. Net realized and unrealized investment gains of $307 million in the three months ended June 30, 2009 were primarily due to the change in net unrealized gains on fixed maturities of $187 million, change in net unrealized gains on equities of $121 million, change in net unrealized gains on other invested assets of $38 million, net realized gains on other invested assets of $16 million and net realized gains on fixed maturities and short-term investments of $8 million, which were partially offset by net realized losses on equities of $62 million. See Corporate and Other – Net Realized and Unrealized Investment Gains (Losses) below for more details on the net realized and unrealized investment activity.

Interest in the results of equity investments increased from a loss of $2 million in the three months ended June 30, 2008 to a gain of $6 million in the same period of 2009. See Corporate and Other – Interest in Earnings (Losses) of Equity Investments below for more details.

Other operating expenses included in Corporate and Other increased by $10 million from $22 million in the three months ended June 30, 2008 to $32 million in the same period of 2009. The increase was primarily due to consulting and professional fees incurred related to the acquisition of Paris Re.

Interest expense decreased by $9 million in the three months ended June 30, 2009 compared to the same period in 2008 mainly due to the repayment of $200 million of the Company’s $400 million floating-rate long-term debt and the purchase of approximately 75% of the Company’s CENts during the first quarter of 2009.

Net foreign exchange gains and losses decreased from a gain of $2 million in the three months ended June 30, 2008 to a loss of $2 million in the same period of 2009. The decrease in net foreign exchange during the three months ended June 30, 2009 was primarily due to higher foreign exchange losses on foreign currency exchange hedges on the investment portfolio, partially offset by gains

 

27


Table of Contents

related to currency movements on unhedged equity securities. The Company hedges a significant portion of its currency risk exposure as discussed in Quantitative and Qualitative Disclosures about Market Risk in Item 3 of Part I of this report.

Income tax expense was $57 million for the three months ended June 30, 2009 compared to income tax benefit of $53 million for the prior year period. The increase in the income tax expense was primarily due to higher pre-tax income, partially reduced by the geographic (or tax jurisdiction) distribution of the net realized and unrealized gains on investments, with the Company’s taxable entities generating relatively lower net realized and unrealized gains on investments.

Six-month result

The underwriting result for the Non-life segment increased by $38 million, from $175 million in the six months ended June 30, 2008 to $213 million in 2009. The increase was principally attributable to:

 

   

an increase of approximately $42 million resulting primarily from a lower frequency of mid-sized losses in 2009 and normal fluctuations in profitability between periods and between lines of business as the Company redistributed its premiums to changing market conditions; partially offset by

 

   

a decrease of $4 million in net favorable development on prior accident years, from $247 million in the six months ended June 30, 2008 to $243 million in 2009. The components of the net favorable loss development are described in more detail in the discussion of individual sub-segments in Results by Segment below.

Underwriting result for the Life segment increased by $12 million from a loss of $22 million in the six months ended June 30, 2008 to a loss of $10 million in the same period of 2009. This increase was due to an improvement in the technical result, which was driven by an increase in profitability of the mortality line, primarily as a result of favorable development in the GMDB line due to improved capital market conditions. See Results by Segment below.

The Company reported net investment income of $269 million in the six months ended June 30, 2009 compared to $282 million in 2008. The 5% decrease in net investment income is primarily attributable to foreign exchange fluctuations, which contributed 6% of the decrease as a result of stronger average U.S. dollar foreign exchange rates in the six months ended June 30, 2009 compared to the same period in 2008. The decrease was also impacted by (a) lower dividends received on equity securities due to a reduction in the level of equity exposures held, (b) the sale of the Company’s bank loan portfolio, which yielded a high interest rate, (c) cash outflows from the investment portfolio during the three months ended March 31, 2009 related to the repayment of the Company’s debt and purchase of the Company’s CENts during the first quarter of 2009, and (d) lower reinvestment interest rates in the six months ended June 30, 2009 compared to the same period of 2008. Offsetting these declines were net investment income on operating cash flow added to the investment portfolio and the purchase of higher yielding investments.

Net realized and unrealized investment gains increased by $507 million, from a loss of $271 million in the six months ended June 30, 2008 to a gain of $236 million in the same period of 2009. The increase in net realized and unrealized investment gains in 2009 was mainly due to the narrowing of credit spreads and increases in worldwide equity markets. Net realized and unrealized investment gains of $236 million in the six months ended June 30, 2009 were primarily due to the change in net unrealized gains on fixed maturities and short-term investments of $138 million, change in net unrealized gains on equities of $125 million, net realized gains on other invested assets of $32 million, net realized gains on fixed maturities and short-term investments of $28 million, and change in net unrealized gains on other invested assets of $18 million, which were partially offset by net realized losses on equities of $103 million. See Corporate and Other – Net Realized and Unrealized Investment Gains (Losses) below for more details on the net realized and unrealized investment activity.

Net realized gain on purchase of capital efficient notes (CENts) was $89 million in the six months ended June 30, 2009, as the Company purchased $187 million of the CENts for $93 million, which after deferred issuance costs and fees produced a gain of $89 million.

Other operating expenses included in Corporate and Other increased by $4 million from $48 million in the six months ended June 30, 2008 to $52 million in the same period of 2009. The increase was primarily due to consulting and professional fees incurred related to the acquisition of Paris Re, which were partially offset by lower stock based compensation and the impact of foreign exchange.

Interest expense decreased by $12 million in the six months ended June 30, 2009 compared to the same period in 2008 mainly due to the repayment of $200 million of the Company’s $400 million floating-rate long-term debt and the purchase of approximately 75% of the Company’s CENts in 2009.

Net foreign exchange losses increased from a loss of $3 million in the six months ended June 30, 2008 to a loss of $5 million in the six months ended June 30, 2009. The increase in net foreign exchange losses during the six months ended June 30, 2009 was primarily due to the impact of realized losses on the foreign currency hedges on the investment portfolio partially offset by gains arising from the income statement revaluation. The Company hedges a significant portion of its currency risk exposure as discussed in Quantitative and Qualitative Disclosures about Market Risk in Item 3 of Part I of this report.

 

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Income tax expense was $117 million for the six months ended June 30, 2009, compared to an income tax benefit of $11 million for the same period in 2008. The increase in the income tax expense was primarily due to higher pre-tax income, including tax on the net realized gain on purchase of CENts of $31 million. The increase in the income tax expense was partially reduced by the geographic (or tax jurisdiction) distribution of the net realized and unrealized gains on investments, with the Company’s taxable entities generating relatively lower net realized and unrealized gains on investments. In 2008, the Company incurred a $46 million tax charge related to its European reorganization.

Results by Segment

The Company monitors the performance of its operations in three segments: Non-life, Life and Corporate & Other. The Non-life segment is further divided into four sub-segments, U.S., Global (Non-U.S.) Property and Casualty (Global (Non-U.S.) P&C), Global (Non-U.S.) Specialty, and Catastrophe. See Note 19 to the Consolidated Financial Statements included in the Company’s 2008 Annual Report on Form 10-K for additional information concerning the Company’s segments and sub-segments.

Segment results are shown net of intercompany transactions. Business reported in the Global (Non-U.S.) P&C and Global (Non-U.S.) Specialty sub-segments and the Life segment is, to a significant extent, denominated in foreign currencies and is reported in U.S. dollars at the average foreign exchange rates for each period. The U.S. dollar has fluctuated against the euro and other currencies in the three months and six months ended June 30, 2009 compared to the same period in 2008, and this should be considered when making period-to-period comparisons.

Non-life Segment

U.S.

The U.S. sub-segment includes the U.S. casualty line, which represented approximately 39% and 42% of net premiums written in this sub-segment in the second quarter and first six months of 2009, respectively. This line typically tends to have a higher loss ratio and a lower technical result due to the long-tail nature of the risks involved. Casualty treaties typically provide for investment income on premiums invested over a longer period as losses are typically paid later than for other lines. Investment income, however, is not considered in the calculation of the technical result.

The following table provides the components of the technical result and the corresponding ratios for this sub-segment for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    % Change
2009 over
2008
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    % Change
2009 over
2008
    For the six
months ended
June 30,
2008
 

Gross premiums written

   $ 248      (2 )%    $ 254      $ 561      (4 )%    $ 586   

Net premiums written

     249      1        246        561      (3     578   

Net premiums earned

   $ 258      (9   $ 285      $ 500      (9   $ 551   

Losses and loss expenses

     (164   (27     (227     (326   (18     (398

Acquisition costs

     (63   (3     (64     (126   (4     (131
                                    

Technical result(1)

   $ 31      NM      $ (6   $ 48      110      $ 22   

Loss ratio(2)

     63.7       79.6     65.2       72.2

Acquisition ratio(3)

     24.2          22.7        25.2          23.7   
                                    

Technical ratio(4)

     87.9       102.3     90.4       95.9

 

NM: not meaningful

 

(1) Technical result is defined as net premiums earned less losses and loss expenses and acquisition costs.

 

(2) Loss ratio is obtained by dividing losses and loss expenses by net premiums earned.

 

(3) Acquisition ratio is obtained by dividing acquisition costs by net premiums earned.

 

(4) Technical ratio is defined as the sum of the loss ratio and the acquisition ratio.

Premiums

The U.S. sub-segment represented 29% and 26% of total net premiums written in the three months and six months ended June 30, 2009, respectively.

 

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Three-month result

Gross premiums written decreased by 2% while net premiums written increased by 1% in the three months ended June 30, 2009 compared to the same period in 2008. The decrease in gross premiums written was primarily attributable to the decreases in the agriculture and casualty lines of business, reflecting lower agricultural commodity price levels and resulting downward premium adjustments reported for underwriting years 2008 and 2009 and declining casualty pricing and market conditions. The decreases in gross premiums written were partially offset by increases in the property, structured risk and motor lines of business. The largest increase in gross premiums written was in the property line which benefited from a treaty written on December 31, 2008, and which was subsequently renewed in 2009. Net premiums written increased by 1% during the three months ended June 30, 2009 compared to the same period in 2008 due to the purchase of retrocessional cover in 2008 which was not renewed in 2009. The decrease in net premiums earned of 9% in the three months ended June 30, 2009 compared to the same period in 2008 as compared to the increase in net premiums written of 1% was primarily due to a shift from non-proportional treaties to proportional treaties, which are earned at a slower rate.

Six-month result

Gross and net premiums written and net premiums earned decreased 4%, 3% and 9%, respectively, in the six months ended June 30, 2009 compared to the same period in 2008. These decreases were primarily attributable to the agriculture and casualty lines of business partially offset by increases in the property, motor and structured risk lines of business as described in the three-month result. The decrease in net premiums earned of 9% in the six months ended June 30, 2009 compared to the same period in 2008 was greater than the decrease in net premiums written of 3% primarily due a shift from non-proportional treaties to proportional treaties, which are earned at a slower rate and higher downward net premiums earned adjustments. Notwithstanding the overall declining market conditions and the competition prevailing in certain lines of business and markets of this sub-segment, the Company was able to write business that met its portfolio objectives.

Losses and loss expenses and loss ratio

Three-month result

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2009 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $56 million, or 21.6 points on the loss ratio of this sub-segment, including approximately $13 million related to downward premium adjustments in the agriculture line of business; c) a lower level of mid-sized losses; d) increasing loss trends, predominantly in the casualty line of business; and e) a decrease in the book of business and exposure, as evidenced by the decrease in net premiums earned. The net favorable loss development of $56 million included net favorable development for prior accident years in all lines of business, with the exception of the multiline line of business, which experienced net adverse loss development for prior accident years of $9 million. Loss information provided by cedants in the three months ended June 30, 2009 for prior accident years included no individually significant losses or reductions of losses but a series of attritional losses or reductions. Except for the agriculture line of business, based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratios for all lines of business (increased for multiline), which had the net effect of decreasing (increasing for multiline) prior year loss estimates. For the agriculture line of business, the Company increased its expected ultimate loss ratio which when combined with the impact of the downward premium adjustments described above, had the net effect of decreasing prior year loss estimates.

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2008 reflected a) no large catastrophic losses; b) higher loss estimates for the 2007 and 2008 underwriting years in the specialty casualty line of business reflecting the deteriorated economic and financial market conditions; c) a higher level of mid-sized losses mainly in the agriculture, property and structured risk lines of business; d) net favorable loss development on prior accident years of $22 million, or 7.9 points on the loss ratio of this sub-segment; and e) an increase in the book of business and exposure. The net favorable loss development of $22 million included net favorable development for prior accident years in all lines of business, with the exception of the motor line, which experienced net adverse loss development for prior accident years of $3 million.

The decrease of $63 million in losses and loss expenses for the three months ended June 30, 2009 compared to the same period of 2008 included:

 

   

an increase of $34 million in net favorable prior year development, which included approximately $13 million related to downward premium adjustments reported in the agriculture line of business; and

 

   

a decrease in losses and loss expenses of approximately $32 million resulting from a combination of a lower level of mid-sized losses and a decrease in the book of business and exposure, partially offset by increasing loss trends predominantly in the casualty line of business, and normal fluctuations in profitability between periods; partially offset by

 

   

an increase of $3 million in net adverse prior quarter development.

 

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Table of Contents

Six-month result

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2009 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $77 million, or 15.4 points on the loss ratio of this sub-segment, including approximately $13 million related to downward premium adjustments in the agriculture line of business; c) a lower level of mid-sized losses; d) increasing loss trends, predominantly in the casualty line of business; and e) a decrease in the book of business and exposure. The net favorable loss development of $77 million included net favorable development for prior accident years in all lines of business, with the exception of the multiline and motor lines of business, which experienced combined adverse loss development for prior accident years of $10 million. Loss information provided by cedants in the six months ended June 30, 2009 for prior accident years included no individually significant losses or reductions of losses but a series of attritional losses or reductions. Except for the agriculture line of business, based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratios for all lines of business (increased for multiline and motor), which had the net effect of decreasing (increasing for multiline and motor) prior year loss estimates. For the agriculture line of business, the Company increased its expected ultimate loss ratio which when combined with the impact of the downward premium adjustments described above, had the net effect of decreasing prior year loss estimates.

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2008 reflected a) no large catastrophic losses; b) higher loss estimates for the 2007 and 2008 underwriting years in the specialty casualty line of business reflecting the deteriorated economic and financial market conditions; c) a higher level of mid-sized losses mainly in the agriculture, property and structured risk lines of business; d) net favorable loss development on prior accident years of $38 million, or 6.9 points on the loss ratio of this sub-segment; and e) an increase in the book of business and exposure. The net favorable loss development of $38 million included net favorable development for prior accident years in all lines of business, with the exception of the motor line, which experienced net adverse loss development for prior accident years of $4 million.

The decrease of $72 million in losses and loss expenses for the six months ended June 30, 2009 compared to the same period of 2008 included:

 

   

an increase of $39 million in net favorable prior year development, which included approximately $13 million related to downward premium adjustments reported in the agriculture line of business; and

 

   

a decrease in losses and loss expenses of approximately $33 million resulting from a combination of a lower level of mid-sized losses and a decrease in the book of business and exposure, which was partially offset by increasing loss trends, mainly in the casualty line of business, and normal fluctuations in profitability between periods.

Acquisition costs and acquisition ratio

Three-month result and six-month result

Acquisition costs decreased in the three months and six months ended June 30, 2009 compared to the same periods in 2008 as a result of lower net premiums earned. The acquisition ratio for the three months and six months ended June 30, 2009 increased compared to the same period in 2008 mainly as a result of a shift towards proportional property and casualty business which carries a higher acquisition cost ratio, and was partially offset by a reduction in profit commissions in the agriculture line of business.

Technical result and technical ratio

Three-month result

The increase of $37 million in the technical result and the corresponding decrease in technical ratio in the three months ended June 30, 2009 compared to the same period of 2008 was primarily attributable to an increase in net favorable prior year development of $34 million, and a lower level of mid-sized losses and was partially offset by lower net premiums earned, increasing loss trends, mainly in the casualty line of business, and normal fluctuations in profitability between periods.

Six-month result

The increase of $26 million in the technical result and the corresponding decrease in technical ratio in the six months ended June 30, 2009 compared to the same period of 2008 was primarily attributable to an increase in net favorable prior year development of $39 million, and a lower level of mid-sized losses and was partially offset by lower net premiums earned, increasing loss trends, mainly in the casualty line of business, and normal fluctuations in profitability between periods.

Global (Non-U.S.) P&C

The Global (Non-U.S.) P&C sub-segment is composed of short-tail business, in the form of property and proportional motor business, that represented approximately 92% and 82% of net premiums written for this sub-segment in the three months and six months ended June 30, 2009 and 2008, respectively, and long-tail business, in the form of casualty and non-proportional motor business, that represented the balance of this sub-segment.

 

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The following table provides the components of the technical result and the corresponding ratios for this sub-segment for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    % Change
2009 over
2008
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    % Change
2009 over
2008
    For the six
months ended
June 30,
2008
 

Gross premiums written

   $ 120      (11 )%    $ 134      $ 419      (18 )%    $ 509   

Net premiums written

     118      (11     132        417      (17     505   

Net premiums earned

   $ 161      (14   $ 186      $ 318      (18   $ 387   

Losses and loss expenses

     (83   (5     (87     (158   (33     (234

Acquisition costs

     (38   (20     (48     (79   (21     (100
                                    

Technical result

   $ 40      (23   $ 51      $ 81      52      $ 53   

Loss ratio

     51.5       46.7     49.6       60.6

Acquisition ratio

     23.7          25.6        24.9          25.7   
                                    

Technical ratio

     75.2       72.3     74.5       86.3

Premiums

The Global (Non-U.S.) P&C sub-segment represented 14% and 20% of total net premiums written in the three months and six months ended June 30, 2009, respectively.

Three-month result

The decrease of 11% in gross and net premiums written and 14% in net premiums earned was primarily due to the stronger U.S. dollar in the three months ended June 30, 2009 compared to the same period in 2008, as premiums denominated in currencies that have depreciated against the U.S. dollar were converted into U.S. dollars at lower average exchange rates. Foreign exchange fluctuations decreased gross and net premiums written by 17% and net premiums earned by 16%. The decrease in gross and net premiums written in the three months ended June 30, 2009 compared to the same period of 2008 resulted from the motor and casualty lines of business and was partially offset by an increase in the property line. The decrease in net premiums earned of 14% in the three months ended June 30, 2009 compared to the same period in 2008 resulted from all lines of business in this sub-segment and was greater than the decrease in net premiums written primarily due to net premiums written in the property line relating to proportional business, which is earned at a slower rate than it is written.

Six-month result

The decrease in gross and net premiums written and net premiums earned of 18%, 17% and 18%, respectively, was primarily due to the stronger U.S. dollar in the six months ended June 30, 2009 compared to the same period in 2008. Foreign exchange fluctuations decreased gross and net premiums written and net premiums earned by 14%. The decrease in gross and net premiums written in the six months ended June 30, 2009 compared to the same period of 2008 resulted from all lines of business in this sub-segment, while the decrease in net premiums earned resulted from the property and casualty lines and was marginally offset by an increase in the motor line, as a result of an increase in proportional motor business written during 2008, which was earned in 2009. The decreases in gross and net premiums written and net premiums earned were also attributable to treaty cancellations during renewal, declines in pricing, increased competition and increased risk retention by cedants, partially offset by the impact of lower downward premium adjustments reported by cedants in the six months ended June 30, 2009 compared to the same period of 2008. Notwithstanding the declines in pricing, increased competition and increased risk retentions by cedants prevailing in certain lines of business and markets of this sub-segment, the Company was able to write business that met its portfolio objectives.

Losses and loss expenses and loss ratio

Three-month result

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2009 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $35 million, or 22.0 points on the loss ratio; c) net adverse loss development on the prior quarter of $2 million or 1.5 points on the loss ratio; d) a higher level of mid-sized losses; and e) a decrease in the book of business and exposure. The net favorable loss development of $35 million included net favorable development in all lines of business, particularly casualty and motor, and was primarily due to favorable loss emergence, as losses reported by cedants during the three months ended June 30, 2009 for prior accident years were lower than the Company expected. Loss information provided by cedants in the three months ended June 30, 2009 for prior accident years included no individually significant losses or reductions of losses but a series of attritional losses or reductions. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratios for all lines, which had the net effect of decreasing prior year loss estimates.

 

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Table of Contents

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2008 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $52 million, or 27.9 points on the loss ratio; c) net favorable loss development on the prior quarter of $5 million, or 2.7 points on the loss ratio; and d) an increase in the book of business and exposure. The net favorable loss development of $52 million included net favorable development in all lines of business, but was most pronounced in the property line.

The decrease of $4 million in losses and loss expenses for the three months ended June 30, 2009 compared to the same period in 2008 included:

 

   

a decrease in losses and loss expenses of approximately $28 million resulting from a decrease in the book of business (including the impact of foreign exchange) partially offset by a higher level of mid-sized losses and normal fluctuations in profitability between periods; partially offset by

 

   

a decrease of $17 million in net favorable prior year development; and

 

   

a decrease of $7 million in net favorable prior quarter development.

Six-month result

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2009 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $87 million, or 27.4 points on the loss ratio; c) a lower level of mid-sized losses; and d) a decrease in the book of business and exposure. The net favorable loss development of $87 million included net favorable development in all lines of business, and was primarily due to favorable loss emergence, as losses reported by cedants during the six months ended June 30, 2009 for prior accident years were lower than the Company expected. Loss information provided by cedants in the six months ended June 30, 2009 for prior accident years included no individually significant losses or reductions of losses but a series of attritional losses or reductions. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratios for all lines, which had the net effect of decreasing prior year loss estimates.

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2008 reflected a) no large catastrophic losses; b) a higher level of mid-sized losses mainly in the property line of business; c) net favorable loss development on prior accident years of $110 million, or 28.3 points on the loss ratio; and d) an increase in the book of business and exposure. The net favorable loss development of $110 million included net favorable development in all lines of business.

The decrease of $76 million in losses and loss expenses for the six months ended June 30, 2009 compared to the same period in 2008 included:

 

   

a decrease in losses and loss expenses of approximately $99 million resulting from a combination of a decrease in the book of business (including the impact of foreign exchange), a lower level of mid-sized losses, improved loss trends and normal fluctuations in profitability between periods; partially offset by

 

   

a decrease of $23 million in net favorable prior year development.

Acquisition costs and acquisition ratio

Three-month and six-month result

Acquisition costs decreased in the three months and six months ended June 30, 2009 compared to 2008 as a result of lower net premiums earned. The acquisition ratio decreased due to lower profit commission adjustments reported by cedants in the three months and six months ended June 30, 2009 compared to 2008.

Technical result and technical ratio

Three-month result

The decrease of $11 million in technical result and corresponding increase in technical ratio for the three months ended June 30, 2009 compared to the same period in 2008 was primarily explained by a decrease of $17 million in net favorable prior year development, and a change of $7 million in adverse prior quarter development, and was partially offset by improved loss trends and normal fluctuations in profitability between periods.

Six-month result

The increase of $28 million in technical result and corresponding decrease in technical ratio for the six months ended June 30, 2009 compared to the same period in 2008 was primarily explained by an increase of $51 million resulting from a lower level of mid-sized losses, improved loss trends and normal fluctuations in profitability between periods, and was partially offset by a decrease of $23 million in net favorable prior year development.

 

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Table of Contents

Global (Non-U.S.) Specialty

The Global (Non-U.S.) Specialty sub-segment is primarily composed of lines of business that are considered to be either short or medium-tail. The short-tail lines consist of agriculture, energy and specialty property and accounted for 21% and 26% of the net premiums written in this sub-segment in the three months and six months ended June 30, 2009, respectively. Aviation/space, credit/surety, engineering and marine are considered by the Company to have a medium-tail and represented 66% and 59% of the net premiums written, while specialty casualty is considered to be long-tail and represented 13% and 15% of the net premiums written in this sub-segment in the three months and six months ended June 30, 2009, respectively.

The following table provides the components of the technical result and the corresponding ratios for this sub-segment for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    % Change
2009 over
2008
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    % Change
2009 over
2008
    For the six
months ended
June 30,
2008
 

Gross premiums written

   $ 232      (20 )%    $ 291      $ 591      (8 )%    $ 645   

Net premiums written

     232      (20     291        563      (10     624   

Net premiums earned

   $ 232      (15   $ 272      $ 479      (2   $ 490   

Losses and loss expenses

     (152   6        (144     (309   6        (291

Acquisition costs

     (50   (34     (75     (110   (15     (129
                                    

Technical result

   $ 30      (43   $ 53      $ 60      (14   $ 70   

Loss ratio

     65.5       52.8     64.5       59.5

Acquisition ratio

     21.5          27.7        23.0          26.3   
                                    

Technical ratio

     87.0       80.5     87.5       85.8

Premiums

The Global (Non-U.S.) Specialty sub-segment represented 28% and 26% of total net premiums written in the three months and six months ended June 30, 2009, respectively.

Three-month result

Gross and net premiums written decreased by 20% and net premiums earned decreased by 15% during the three months ended June 30, 2009 compared to the same period in 2008. The decrease in gross and net premiums written and net premiums earned was primarily due to the stronger U.S. dollar in the three months ended June 30, 2009 compared to the same period in 2008. Foreign exchange fluctuations contributed 10% to the decrease in gross and net premiums written and in net premiums earned. The decrease in gross and net premiums written was primarily driven by decreases in the credit/surety and engineering lines of business, which are due to a reduction in exposure given the deterioration in credit and economic conditions, and a reduction in demand driven by declining market conditions and modest downward premium adjustments during the three months ended June 30, 2009 compared to positive premium adjustments in the same period in 2008. The decreases in gross and net premiums written were partially offset by increases in the marine, specialty property and agriculture lines of business as a result of improved pricing. The decrease in net premiums earned of 15% in the three months ended June 30, 2009 compared to the same period in 2008 was lower than the decrease in the gross and net premiums written of 20% as a result of the written premium adjustments described above.

Six-month result

Gross and net premiums written decreased by 8% and 10%, respectively, and net premiums earned decreased by 2% during the six months ended June 30, 2009 compared to the same period in 2008. The decrease in gross and net premiums written and net premiums earned was primarily due to the stronger U.S. dollar in the six months ended June 30, 2009 compared to the same period in 2008. Foreign exchange fluctuations contributed 9% to the decrease in gross and net premiums written and net premiums earned. The decrease in gross and net premiums written was primarily driven by decreases in the credit/surety and engineering lines of business due to the same factors described in the three-month result. The decreases in the gross and net premiums written were partially offset by increases in the marine, energy and agriculture lines of business as a result of improved pricing. The decrease in net premiums earned of 2% in the six months ended June 30, 2009 compared to the same period in 2008 was lower than the decrease in net premiums written of 10% due to an increase in business written in 2008, which was earned in 2009. Notwithstanding the increased competition, declines in pricing and increased risk retentions by cedants prevailing in certain lines of business and markets of this sub-segment, the Company was able to write business that met its portfolio objectives.

 

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Table of Contents

Losses and loss expenses and loss ratio

Three-month result

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2009 reflected a) no large catastrophic losses; b) a higher level of mid-sized losses; c) net favorable loss development on prior accident years of $31 million, or 13.3 points on the loss ratio; d) net adverse loss development on the prior quarter of $7 million, or 2.9 points on the loss ratio; and e) a decrease in the book of business and exposure, as evidenced by the decrease in net premiums earned. The net favorable development of $31 million reported in the three months ended June 30, 2009 included net favorable loss development for prior accident years in all lines of business. Loss information provided by cedants in the three months ended June 30, 2009 for prior accident years was lower than the Company expected and included no individually significant losses or reductions but a series of attritional losses or reductions. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratios for all lines of business, which had the net effect of decreasing prior year loss estimates.

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2008 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $32 million, or 11.7 points on the loss ratio; and c) net favorable loss development on the prior quarter of $9 million, or 3.5 points on the loss ratio. The net favorable development of $32 million reported in the three months ended June 30, 2008 included net favorable loss development for prior accident years in all lines of business with the exception of the engineering and energy lines of business, which included net adverse loss development for prior accident years of $3 million.

The increase of $8 million in losses and loss expenses for the three months ended June 30, 2009 compared to the same period in 2008 included:

 

   

a decrease of $16 million and $1 million in net favorable prior quarter and prior year development, respectively; partially offset by

 

   

a decrease in losses and loss expenses of approximately $9 million resulting from the decrease in the book of business and exposure and normal fluctuations in profitability between periods, partially offset by a higher level of mid-sized losses.

Six-month result

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2009 reflected a) no large catastrophic losses; b) a higher level of mid-sized losses; c) net favorable loss development on prior accident years of $56 million, or 11.6 points on the loss ratio; and d) a decrease in the book of business and exposure, as evidenced by the decrease in net premiums earned. The net favorable development of $56 million reported in the six months ended June 30, 2009 included net favorable loss development for prior accident years in all lines of business with the exception of marine, which included adverse loss development for prior accident years of $5 million. Loss information provided by cedants in the six months ended June 30, 2009 for prior accident years was lower than the Company expected (higher for marine) and included no individually significant losses or reductions but a series of attritional losses or reductions. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratios for all lines of business (increased for the marine line), which had the net effect of decreasing (increasing for the marine line) prior year loss estimates.

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2008 reflected a) no large catastrophic losses; b) a higher level of mid-sized losses; and c) net favorable loss development on prior accident years of $65 million, or 13.2 points on the loss ratio. The net favorable development of $65 million reported in the six months ended June 30, 2008 included net favorable loss development for prior accident years in all lines of business with the exception of the energy line, which included net adverse loss development for prior accident years of $11 million.

The increase of $18 million in losses and loss expenses for the six months ended June 30, 2009 compared to the same period in 2008 included:

 

   

a decrease of $9 million in net favorable prior year development; and

 

   

an increase in losses and loss expenses of approximately $9 million resulting from a combination of a higher level of mid-sized losses, partially offset by the decrease in the book of business and exposure and normal fluctuations in profitability between periods.

Acquisition costs and acquisition ratio

Three-month and six-month result

The decrease in acquisition costs in the three months and six months ended June 30, 2009 compared to the same periods in 2008 is primarily due to the decrease in the sub-segment’s book of business and exposure, as evidenced by the decrease in net premiums earned. The acquisition ratio in the three months and six months ended June 30, 2009 decreased compared to the same periods in 2008 due to a reduction in acquisition costs following the premium deficiency recorded in the fourth quarter of 2008 in the credit/surety line of business and lower profit commission adjustments reported by the cedants in the three months and six months ended June 30, 2009 compared to 2008.

 

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Table of Contents

Technical result and technical ratio

Three-month result

The decrease of $23 million in the technical result and corresponding increase in the technical ratio for the three months ended June 30, 2009 compared to the same period in 2008 was explained by a decrease of $17 million in net favorable prior quarter and prior year development and a higher level of mid-sized losses, partially offset by lower acquisition costs and normal fluctuations in profitability between periods.

Six-month result

The decrease of $10 million in the technical result and corresponding increase in the technical ratio for the six months ended June 30, 2009 compared to the same period in 2008 was explained by a decrease of $9 million in net favorable prior year development and a higher level of mid-sized losses and was partially offset by lower acquisition costs and normal fluctuations in profitability between periods.

Catastrophe

The Catastrophe sub-segment writes business predominantly on a non-proportional basis and is exposed to volatility resulting from catastrophic losses. Thus, profitability in any one quarter or year is not necessarily predictive of future profitability.

The following table provides the components of the technical result and the corresponding ratios for this sub-segment for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    % Change
2009 over
2008
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    % Change
2009 over
2008
    For the six
months ended
June 30,
2008
 

Gross premiums written

   $ 125      (14 )%    $ 145      $ 330      (4 )%    $ 343   

Net premiums written

     125      (14     145        330      (4     343   

Net premiums earned

   $ 52      (20   $ 65      $ 131      (8   $ 142   

Losses and loss expenses

     22      12        20        11      (39     18   

Acquisition costs

     (4   (38     (7     (12   (14     (13
                                    

Technical result

   $ 70      (10   $ 78      $ 130      (11   $ 147   

Loss ratio

     (43.0 )%        (30.7 )%      (8.6 )%        (12.9 )% 

Acquisition ratio

     7.9          10.2        8.9          9.6   
                                    

Technical ratio

     (35.1 )%        (20.5 )%      0.3       (3.3 )% 

Premiums

The Catastrophe sub-segment represented 15% of total net premiums written in the three months and six months ended June 30, 2009, respectively.

Three-month result

Gross and net premiums written decreased by 14% and net premiums earned decreased by 20% in the three months ended June 30, 2009 compared to the same period of 2008. The decreases in gross and net premiums written and net premiums earned were primarily due to policy cancellations during renewal, timing differences between periods related to recording of the premiums compared to the same period of 2008 and downward reinstatement premium adjustments related to a reduction in loss estimates for Hurricane Ike. The stronger U.S. dollar in the three months ended June 30, 2009 compared to the same period in 2008 also contributed to the decrease in gross and net premiums written and net premiums earned as premiums denominated in currencies that have depreciated against the U.S. dollar were converted into U.S. dollars at lower average exchange rates. Foreign exchange fluctuations decreased gross and net premiums written by 2% and net premiums earned by 9%.

Six-month result

Gross and net premiums written decreased by 4% and net premiums earned decreased by 8% in the six months ended June 30, 2009 compared to the same period of 2008. The decreases in gross and net premiums written and net premiums earned were primarily due to the stronger U.S. dollar in the six months ended June 30, 2009 compared to the same period in 2008. Foreign exchange fluctuations decreased gross and net premiums written by 5% and net premiums earned by 6%. The decreases in gross and net premiums written were partially offset by increases in pricing and strengthening of terms and conditions in certain markets.

 

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Losses and loss expenses and loss ratio

Three-month result

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2009 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $21 million, or 40.4 points on the loss ratio; c) net favorable loss development on the prior quarter of $6 million or 11.5 points on the loss ratio; d) a low level of mid-sized loss activity and e) a decrease in the book of business and exposure. The net favorable development of $21 million was primarily due to favorable loss emergence, as losses reported by cedants in the three months ended June 30, 2009 for prior accident years were lower than the Company expected. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratio, which had the effect of decreasing the prior year loss estimates.

The losses and loss expenses and loss ratio reported in the three months ended June 30, 2008 reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $24 million, or 37.7 points on the loss ratio; and c) net favorable loss development on the prior quarter of $2 million, or 2.6 points on the loss ratio.

The decrease of $2 million in losses and loss expenses for the three months ended June 30, 2009 compared to the same period in 2008 included:

 

   

an increase of $4 million in net favorable prior quarter development; and

 

   

a decrease in losses and loss expenses of approximately $1 million resulting from normal fluctuations in profitability between periods; partially offset by

 

   

a decrease of $3 million in net favorable prior year development.

Six-month result

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2009 reflected a) no large catastrophic losses; b) a decrease in the book of business and exposure; c) net favorable loss development on prior accident years of $23 million, or 17.3 points on the loss ratio; and d) a low level of mid-sized loss activity. The net favorable development of $23 million was primarily due to favorable loss emergence, as losses reported by cedants in the six months ended June 30, 2009 for prior accident years were lower than the Company expected. Based on the Company’s assessment of this loss information, the Company decreased its expected ultimate loss ratio, which had the effect of decreasing the prior year loss estimates.

The losses and loss expenses and loss ratio reported in the six months ended June 30, 2008 for this sub-segment reflected a) no large catastrophic losses; b) net favorable loss development on prior accident years of $34 million, or 24.6 points on the loss ratio; and c) a low level of mid-sized loss activity.

The increase of $7 million in losses and loss expenses for the six months ended June 30, 2009 compared to the same period in 2008 included:

 

   

a decrease of $11 million in net favorable prior year development; partially offset by

 

   

a decrease in losses and loss expenses of approximately $4 million resulting from normal fluctuations in profitability between periods.

Acquisition costs and acquisition ratio

Three-month and six-month result

The decrease in acquisition costs in the three months and six months ended June 30, 2009 compared to 2008 is primarily due to the decrease in the sub-segment’s book of business and exposure, as evidenced by the decrease in net premiums earned. The decrease in the acquisition ratio in the three months and six months ended June 30, 2009 compared to the same period in 2008 was primarily due to profit commissions received from certain cedants in 2009.

Technical result and technical ratio

Three-month result

The decrease of $8 million in the technical result and decrease in the technical ratio in the three months ended June 30, 2009 compared to the same period in 2008 was primarily explained by a decrease in net premiums earned in the three months ended June 30, 2009 compared to the same period in 2008 offset by a decrease in losses and acquisition costs.

Six-month result

The decrease of $17 million in the technical result and corresponding increase in the technical ratio in the six months ended June 30, 2009 compared to the same period in 2008 was primarily explained by a decrease of $11 million in net favorable prior year development and a decrease in net premiums earned in the six months ended June 30, 2009 compared to the same period in 2008.

 

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Table of Contents

Life Segment

The following table provides the components of the allocated underwriting result for this segment for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    % Change
2009 over
2008
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    % Change
2009 over
2008
    For the six
months ended
June 30,
2008
 

Gross premiums written

   $ 116      (16 )%    $ 138      $ 281      (10 )%    $ 313   

Net premiums written

     116      (15     136        277      (10     307   

Net premiums earned

   $ 123      (16   $ 146      $ 263      (10   $ 291   

Life policy benefits

     (85   (23     (111     (198   (15     (233

Acquisition costs

     (27   (21     (34     (55   (8     (59
                                    

Technical result

   $ 11      NM      $ 1      $ 10      NM      $ (1

Other income

     —        NM        —          1      268        —     

Other operating expenses

     (11   (11     (12     (21   (1     (21

Net investment income

     15      (19     18        30      (10     33   
                                    

Allocated underwriting result(1)

   $ 15      128      $ 7      $ 20      81      $ 11   

 

NM: not meaningful

 

(1) Allocated underwriting result is defined as net premiums earned, other income or loss and allocated net investment income less life policy benefits, acquisition costs and other operating expenses.

Premiums

The Life segment represented 14% and 13% of total net premiums written in the three months and six months ended June 30, 2009, respectively.

Three-month result

Gross and net premiums written and net premiums earned decreased by 16%, 15% and 16%, respectively, in the three months ended June 30, 2009 compared to the same period in 2008. The decrease in gross and net premiums written and net premiums earned was primarily driven by the impact of foreign exchange. Foreign exchange fluctuations decreased gross and net premiums written and net premiums earned by 18% as a result of the stronger U.S. dollar in the three months ended June 30, 2009 compared to the same period in 2008. Gross and net premiums written and net premiums earned also decreased as a result of downward premium adjustments reported by a cedant on a term and critical illness treaty in the mortality line, and were partially offset by growth in the longevity line, resulting from growth in the business written by the Company’s cedants on existing treaties.

Six-month result

Gross and net premiums written and net premiums earned all decreased by 10% in the six months ended June 30, 2009 compared to the same period in 2008. The decrease in gross and net premiums written and net premiums earned was primarily driven by the impact of foreign exchange. Foreign exchange fluctuations decreased gross and net premiums written and net premiums earned by 16% as a result of the stronger U.S. dollar in the six months ended June 30, 2009 compared to the same period in 2008. The decrease in gross and net premiums written and net premiums earned was also attributable to downward premium adjustments reported by a cedant on a term and critical illness treaty in the mortality line, and was offset by growth in all other lines of business.

Life policy benefits

Three-month result

Life policy benefits decreased by $26 million in the three months ended June 30, 2009 compared to the same period in 2008. The decrease was primarily attributable to the impact of foreign exchange fluctuations, which decreased life policy benefits by 18% (consistent with the decrease in net premiums earned) during the three months ended June 30, 2009 compared to the same period in 2008, as well as an increase of $4 million in net favorable prior year development. The net favorable development of $4 million in the three months ended June 30, 2009 included favorable development resulting from the GMDB business of $8 million, where the payout is linked to the performance of underlying capital market assets in France, and was partially offset by adverse development of $4 million from the longevity line and from short-term products within the mortality line. The net favorable development of less than $1 million in the three months ended June 30, 2008 resulted primarily from short-term products and was partially offset by adverse development from the GMDB and term and critical illness business.

 

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Table of Contents

Six-month result

Life policy benefits decreased by $35 million in the six months ended June 30, 2009 compared to the same period in 2008. The decrease was primarily attributable to the impact of foreign exchange fluctuations, which decreased life policy benefits by 17% (consistent with the decrease in net premiums earned) during the six months ended June 30, 2009 compared to the same period in 2008, adjustments reported by a cedant on a term and critical illness treaty in the mortality line and a decrease of $2 million in net adverse prior year development, and was partially offset by the increase in the book of business (excluding the impact of foreign exchange). The net adverse development of $3 million in the six months ended June 30, 2009 included adverse development resulting from the GMDB business of $2 million. The net adverse development of $5 million in the six months ended June 30, 2008 was primarily from the GMDB business and was partially offset by net favorable development from the mortality line.

Acquisition costs

Three-month and six-month result

The decrease in acquisition costs in the three months ended June 30, 2009 compared to the same period in 2008 was primarily attributable to lower earned premiums and downward profit commission adjustments reported by cedants. The decrease in acquisition costs in the six months ended June 30, 2009 compared to the same period in 2008 was primarily due to lower earned premiums and was partially offset by profit commissions reported by a cedant in 2009.

Net investment income

Three-month and six-month result

Net investment income decreased by $3 million for the three months and six months ended June 30, 2009, respectively, compared to the same periods in 2008 primarily as a result of lower investment income reported by a cedant due to declining interest rates and the impact of foreign exchange fluctuations.

Allocated underwriting result

Three-month and six-month result

The increase of $8 million and $9 million, respectively, in allocated underwriting result in the three and six months ended June 30, 2009 compared to the same periods in 2008 was primarily explained by the increase in the technical result, partially offset by lower net investment income. The increase in technical result was driven by a decrease in adverse development from the GMDB business in the three months and six months ended June 30, 2009.

Premium Distribution by Line of Business

The distribution of net premiums written by line of business for the three months and six months ended June 30, 2009 and 2008 was as follows:

 

     For the three
months ended
June 30,
2009
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    For the six
months ended
June 30,
2008
 

Non-life

        

Property and casualty

        

Casualty

   13   14   13   15

Property

   16      11      18      17   

Motor

   4      4      6      6   

Multiline and other

   3      2      3      2   

Specialty

        

Agriculture

   8      10      6      7   

Aviation/Space

   5      5      3      3   

Catastrophe

   15      15      15      14   

Credit/Surety

   5      7      5      6   

Engineering

   5      6      4      5   

Energy

   2      3      3      2   

Marine

   5      3      4      3   

Specialty casualty

   3      4      4      4   

Specialty property

   2      2      3      3   

Life

   14      14      13      13   
                        

Total

   100   100   100   100

 

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Table of Contents

There were some modest shifts in the distribution of net premiums written by line between the 2009 and 2008 periods, which reflected the Company’s response to existing market conditions. The distribution of net premiums written may also be affected by the timing of renewals of treaties, a shift in treaty structure and premium adjustments by cedants. In addition, foreign exchange fluctuations affected the comparison for all lines.

 

   

Casualty: the decrease in net premiums written was primarily due to increasingly competitive market conditions and non-renewals as pricing did not adequately reflect increasing loss trends.

 

   

Property: the increase was the result of a proportional treaty written on December 31, 2008 and subsequently renewed in 2009, in the U.S. sub-segment, which was partially offset by policy cancellations during renewal, driven by pricing declines, increased competition and increased cedant retentions in Global (Non-U.S.) P&C sub-segment.

 

   

Agriculture: the decrease in net premiums written in the agriculture line was mainly the result of lower agricultural commodity price levels and downward premium adjustments.

 

   

Credit/surety: the decrease in net premiums written was driven by a reduction in exposure in this line of business due to the deterioration in economic and credit market conditions.

Premium Distribution by Treaty Type

The Company typically writes business on either a proportional or non-proportional basis. On proportional business, the Company shares proportionally in both the premiums and losses of the cedant. On non-proportional business, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio. In both proportional and non-proportional business, the Company typically reinsures a large group of primary insurance contracts written by the ceding company. In addition, the Company writes a small percentage of its business on a facultative basis. Facultative arrangements are generally specific to an individual risk and can be written on either a proportional or non-proportional basis. Generally, the Company has more influence over pricing, as well as terms and conditions, in non-proportional and facultative arrangements.

The distribution of gross premiums written by treaty type for the three months and six months ended June 30, 2009 and 2008 was as follows:

 

     For the three
months ended
June 30,
2009
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    For the six
months ended
June 30,
2008
 

Non-life Segment

        

Proportional

   53   56   49   50

Non-Proportional

   28      27      35      34   

Facultative

   5      3      3      3   

Life Segment

        

Proportional

   14      14      11      11   

Non-Proportional

   —        —        2      2   
                        

Total

   100   100   100   100

The distribution of gross premiums written by treaty type is affected by changes in the allocation of capacity among lines of business, the timing of receipt by the Company of cedant accounts and premium adjustments by cedants. In addition, foreign exchange fluctuations affected the comparison for all treaty types.

The decrease in the percentage of proportional gross premiums written in the Non-life segment in the three months ended June 30, 2009 compared to the same period in 2008 resulted primarily from decreases in the agriculture line of business in the U.S. sub-segment and the credit/surety and engineering lines of business in the Global (Non-U.S.) Specialty sub-segment. The increase in the percentage of facultative gross premiums written in the Non-life segment in three months ended June 30, 2009 compared to the same period in 2008 resulted from a shift from proportional treaties written in the engineering line of business to facultative treaties, as cedants restructured their treaties.

 

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Table of Contents

Premium Distribution by Geographic Region

The geographic distribution of gross premiums written for the three months and six months ended June 30, 2009 and 2008 was as follows:

 

     For the three
months ended
June 30,
2009
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    For the six
months ended
June 30,
2008
 

North America

   48   47   42   40

Europe

   32      39      42      47   

Asia, Australia and New Zealand

   11      7      8      6   

Latin America, Caribbean and Africa

   9      7      8      7   
                        

Total

   100   100   100   100

The distribution of gross premiums written in Europe was affected by foreign exchange fluctuations, which decreased non-U.S. premiums as premiums denominated in currencies that have depreciated against the U.S. dollar were converted into U.S. dollars at lower average exchange rates. The increase in gross premiums written in Asia, Australia and New Zealand is primarily due to an increase in the property line of business in the Global (Non-U.S.) P&C sub-segment. Gross premiums written in other geographic regions in the three months and six months ended June 30, 2009 were relatively higher than 2008 as a result of the decrease in Europe.

Premium Distribution by Production Source

The Company generates its gross premiums written both through brokers and through direct relationships with cedants. The percentage of gross premiums written by production source for the three months and six months ended June 30, 2009 and 2008 was as follows:

 

     For the three
months ended
June 30,
2009
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    For the six
months ended
June 30,
2008
 

Broker

   76   75   72   72

Direct

   24      25      28      28   
                        

Total

   100   100   100   100

The distribution of gross premiums written by production source was comparable between both periods.

Corporate and Other

Corporate and Other is comprised of the Company’s capital markets and investment related activities, including principal finance transactions, insurance-linked securities and strategic investments, and its corporate activities, including other operating expenses.

Net Investment Income

The table below provides net investment income by asset source for the three months and six months ended June 30, 2009 and 2008 (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    % Change
2009 over
2008
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    % Change
2009 over
2008
    For the six
months ended
June 30,
2008
 

Fixed maturities

   $ 132      2   $ 129      $ 261      5   $ 248   

Short-term investments, cash and cash equivalents

     1      (73     4        3      (71     11   

Equities

     4      (51     7        7      (57     15   

Funds held and other

     8      (26     11        15      (22     20   

Investment expenses

     (9   49        (6     (17   43        (12
                                    

Net investment income

   $ 136      (7   $ 145      $ 269      (5   $ 282   

Because of the interest-sensitive nature of some of the Company’s Life products, net investment income is considered in Management’s assessment of the profitability of the Life segment (see Life segment above). The following discussion includes net investment income from all investment activities, including the net investment income allocated to the Life segment.

 

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Table of Contents

Three-month result

Net investment income decreased in the three months ended June 30, 2009 compared to the same period in 2008 for the following reasons:

 

   

the strengthening of the U.S. dollar, on average, in the three months ended June 30, 2009 compared to the same period in 2008 contributed 7% to the decrease in net investment income;

 

   

a decrease in net investment income from short-term investments and cash and cash equivalents due to lower yields during the three months ended June 30, 2009 compared to the same period in 2008;

 

   

a decrease in net investment income from equities due to a reduction in the level of equity exposures held during the three months ended June 30, 2009 compared to the same period in 2008;

 

   

a decrease in net investment income on funds held balances, primarily due to the impact of the strengthening U.S. dollar as well as lower investment income reported by a cedant due to declining interest rates; and

 

   

increased investment expenses; partially offset by

 

   

an increase in net investment income from fixed maturities due to the reinvestment of cash flows from operations and from a reallocation to fixed maturities as the Company reduced its equity exposures during the three months ended June 30, 2009 compared to the same period in 2008, as well as an increase from the purchase of higher yielding investments. This increase was tempered by cash flows used for the repayment of $200 million of debt and the purchase of 75% of the outstanding CENts during the first quarter of 2009.

Six-month result

Net investment income decreased in the six months ended June 30, 2009 compared to the same period in 2008 for the following reasons:

 

   

the strengthening of the U.S. dollar, on average, in the six months ended June 30, 2009 compared to the same period in 2008 contributed 6% to the decrease in net investment income; partially offset by

 

   

the net impact of the factors listed under the thee month result above.

Net Realized and Unrealized Investment Gains (Losses)

The Company’s portfolio managers have dual investment objectives of optimizing current investment income and achieving capital appreciation. To meet these objectives, it is often desirable to buy and sell securities to take advantage of changing market conditions and to reposition the investment portfolios. Accordingly, recognition of realized gains and losses is considered by the Company to be a normal consequence of its ongoing investment management activities. In addition, the Company has elected SFAS 159 for substantially all of its investments. Thus, it records changes in fair value of these securities as unrealized investment gains or losses in its Condensed Consolidated Statements of Operations. Realized and unrealized investment gains and losses are generally a function of multiple factors, with the most significant being prevailing interest rates and equity and credit market conditions.

As discussed in Overview above, the global economy and financial markets showed signs of improvement during the three months ended June 30, 2009, and had a significant impact on the Company’s investment portfolio and the related level of realized and unrealized gains (losses) on investments.

The components of net realized and unrealized investment gains (losses) for the three months and six months ended June 30, 2009 and 2008 were as follows (in millions of U.S. dollars):

 

     For the three
months ended
June 30,
2009
    For the three
months ended
June 30,
2008
    For the six
months ended
June 30,
2009
    For the six
months ended
June 30,
2008
 

Net realized investment gains on fixed maturities and short-term investments

   $ 8      $ 18      $ 28      $ 63   

Net realized investment losses on equities

     (62     (21     (103     (47

Net realized gains (losses) on other invested assets

     16        (16     32        7   

Change in net unrealized gains on other invested assets

     38        14        17        12   

Change in net unrealized investment gains (losses) on fixed maturities and short-term investments subject to the fair value option under SFAS 159

     187        (303     138        (229

Change in net unrealized investment gains (losses) on equities subject to the fair value option under SFAS 159

     121        15        125        (74

Net other realized and unrealized investment losses

     (1     (3     (1     (3
                                

Net realized and unrealized investment gains (losses)

   $ 307      $ (296   $ 236      $ (271

 

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Table of Contents

Three-month result

Net realized and unrealized investment gains (losses) increased by $603 million, from a $296 million loss in the three months ended June 30, 2008 to a $307 million gain in the same period of 2009. The increase in net realized and unrealized investment gains (losses) was primarily due to the narrowing of credit spreads and improvements in worldwide equity markets, and was partially offset by an increase in risk-free interest rates. Net realized and unrealized investment gains (losses) of $307 million in the three months ended June 30, 2009 were primarily due to the changes in net unrealized investment gains on fixed maturities and short-term investments, equities and other invested assets of $346 million and net realized investment gains on other invested assets and fixed maturities and short-term investments of $24 million, and were partially offset by net realized losses on equities of $62 million.

Net realized gains on other invested assets of $16 million in the three months ended June 30, 2009 primarily relate to gains on credit default swaps and treasury futures. The net unrealized gains on other invested assets of $38 million primarily relate to unrealized gains on treasury futures and total return swaps, which were partially offset by unrealized losses on credit default swaps. Net realized losses and the change in unrealized gains on other invested assets of $2 million in the three months ended June 30, 2008 primarily relate to losses on treasury futures and losses on two principal finance transactions.

Six-month result

Net realized and unrealized investment gains increased by $507 million, from a $271 million loss in the six months ended June 30, 2008 to a $236 million gain in the same period of 2009. The increase in net realized and unrealized investment gains (losses) was primarily due to the narrowing of credit spreads and improvements in worldwide equity markets, and was partially offset by an increase in risk-free interest rates. Net realized and unrealized investment gains of $236 million in the six months ended June 30, 2009 were primarily due to the change in net unrealized investment gains on fixed maturities and short-term investments, equities and other invested assets of $280 million and net realized investment gains on other invested assets and fixed maturities and short-term investments of $60 million, and were partially offset by net realized losses on equities of $103 million.

Net realized gains on other invested assets of $32 million in the six months ended June 30, 2009 primarily relate to gains on treasury and equity futures and credit default swaps. The net unrealized gains on other invested assets of $17 million primarily relate to unrealized gains on total return and interest rate swaps and treasury futures, which were partially offset by unrealized losses on credit default swaps. Net realized and unrealized gains on other invested assets of $19 million in the six months ended June 30, 2008 primarily relate to gains on treasury futures and were partially offset by losses on principal finance transactions.

Interest in Earnings (Losses) of Equity Investments