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 limits for the risks assumed. All risks,
whether they are reinsurance related risks or capital market risks, are managed
by the Company within an integrated framework of policies and processes to
ensure the intelligent and consistent evaluation and valuation of risk, and to
ultimately provide an appropriate return to shareholders. The Company's updated
Risk Management framework is discussed below.
The Company's economic objective is to manage a portfolio of risks that will
generate growth in compound annual diluted book value per share and share
equivalents outstanding over a reinsurance cycle. Management assesses this
economic objective over the reinsurance cycle, rather than any particular
quarterly or annual period, given the Company's profitability is significantly
affected by the level of large catastrophic losses that it incurs each period.
The Company uses a number of metrics to monitor its performance in meeting its
economic objective, which are discussed further below under Key Financial
Measures.
Overview of the Results of Operations for the Three Months and Six Months Ended
June 30, 2012
The Company measures its performance in several ways. Among the performance
measures accepted under U.S. GAAP is diluted net income or loss per share, a
measure that focuses on the return provided to the Company's common
shareholders. Diluted net income or loss per share is obtained by dividing net
income or loss available to common shareholders by the weighted average number
of common shares and common share equivalents outstanding. Net income or loss
available to common shareholders is defined as net income or loss less preferred
dividends. See the discussion of the non-GAAP performance measures that the
Company uses (operating earnings or loss and Operating ROE) and the
reconciliation of those non-GAAP performance measures to the most directly
comparable GAAP measures in Key Financial Measures below.
As the Company's reinsurance operations are exposed to low frequency and high
severity risk events, some of which are seasonal, results for certain periods
may include unusually low loss experience, while results for other periods may
include significant catastrophic losses. Consequently, the Company's results for
interim periods may be volatile from period to period and are not necessarily
indicative of results for the full year.
The results for the three months and six months ended June 30, 2012 and 2011
demonstrate this volatility. The three months ended June 30, 2012 included no
significant catastrophic losses, while during the three months ended June 30,
2011 the Company incurred losses of $122 million, net of retrocession,
reinstatement premiums and profit commission adjustments, related to the
tornadoes that caused severe destruction to large areas of southern, mid-western
and northeastern United States in April and May 2011 (U.S. tornadoes) and an
aggregate contract covering losses in Australia and New Zealand.
Similarly, the six months ended June 30, 2012 included no significant
catastrophic losses, while during the six months ended June 30, 2011 the Company
incurred losses of $1,259 million related to the combined impact of the Japan
earthquake and resulting tsunami (Japan Earthquake), the New Zealand earthquake
that occurred in February 2011 (New Zealand Earthquake), aggregate contracts
covering losses in Australia and New Zealand, U.S. tornadoes and the floods in
Queensland, Australia (Australian Floods) (collectively, 2011 catastrophic
events).
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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, 2012 and 2011 were as follows (in millions of U.S.
dollars, except per share data):
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 2012 % Change June 30, 2011 June 30, 2012 % Change June 30, 2011
Net income (loss) $ 176 42 % $ 124 $ 536 NM % $ (683 )
Less: preferred dividends 15 78 9 31 78 17
Net income (loss) available to
common shareholders $ 161 39 $ 115 $ 505 NM $ (700 )
Diluted net income (loss) per
share $ 2.50 48 $ 1.69 $ 7.76 NM $ (10.32 )
NM: not meaningful
Three-month result
The increase in net income of $52 million for the three months ended June 30,
2012 compared to the same period of 2011 resulted primarily from:
• an increase in the Non-life underwriting result of $99 million, which was
mainly driven by the absence of large catastrophic losses in the three
months ended June 30, 2012 compared to losses of $178 million related to
the 2011 catastrophic events. This increase in the Non-life underwriting
result was partially offset by a decrease in net favorable loss
development on prior accident years and a lower level of net premiums
earned in the Catastrophe sub-segment which, absent catastrophe losses,
directly affects the underwriting result; partially offset by
• a decrease in pre-tax net realized and unrealized investment gains of $40
million as a result of continued volatility in the capital markets which
were impacted by wider credit spreads and modest declines in equity
markets; and
• a decrease in the Life underwriting result of $7 million, driven by modest
increases in claims activity on certain long-term mortality business.
The increase in net income available to common shareholders and diluted net
income per share for the three months ended June 30, 2012 compared to the same
period of 2011 was primarily due to the above factors, partially offset by an
increase in preferred dividends following the issuance of preferred shares
during the three months ended June 30, 2011. For diluted net income per share
specifically, the increase was also due to a modest decrease in the diluted
number of common shares.
Six-month result
The increase in net income of $1,219 million for the six months ended June 30,
2012 compared to the same period of 2011 resulted primarily from:
• an increase in the Non-life underwriting result of $1,046 million, which
was primarily driven by the absence of large catastrophic losses in the
six months ended June 30, 2012 compared to losses of $1,204 million
related to the 2011 catastrophic events in the same period of 2011. This
increase in the Non-life underwriting result was partially offset by a
decrease in net favorable loss development on prior accident years, a
lower level of net premiums earned in the Catastrophe sub-segment as
described above and the impact of lower losses recoverable from
retrocessional programs in the Global (Non-U.S.) Specialty sub-segment;
and
• an increase in pre-tax net realized and unrealized investment gains of$265 million as a result of continued volatility in the capital markets
which was driven by narrowing credit spreads and decreases in risk-free
interest rates; partially offset by
• an increase in income tax expense of $93 million, resulting from a higher pre-tax net income.
The increase in net income available to common shareholders and diluted net
income per share for the six months ended June 30, 2012 compared to the same
period of 2011 was primarily due to the above factors, partially offset by an
increase in preferred dividends following the issuance of preferred shares
during the three months ended June 30, 2011. For diluted net income per share
specifically, the increase was also due to a modest decrease in the diluted
number of common shares.
These factors affecting the year over year comparison of the Company's results
are discussed below in Review of Net Income (Loss), Results by Segment and
Financial Condition, Liquidity and Capital Resources, and may continue to affect
our results of operations and financial condition in the future.
Currently, the United States is experiencing one of its worst droughts in 50
years, which is threatening crop production of corn, wheat and soybeans. The
Company is continuing to monitor its exposure to the drought conditions on a
state by state basis. The Company is currently assessing its future incurred
losses related to the ongoing drought, but information as of August 2, 2012 is
uncertain and not sufficient to arrive at a reasonable estimate.
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Key Financial Measures
In addition to the Unaudited Condensed Consolidated Balance Sheets and Unaudited
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss),
Management uses certain key measures to evaluate its financial performance and
the overall growth in value generated for the Company's common shareholders. The
four key measures that Management uses, together with definitions of their
calculations, are as follows at June 30, 2012 and December 31, 2011 and for the
three months and six months ended June 30, 2012 and 2011:
