Northbridge Financial Corporation: Financial Results for Fourth Quarter and Fiscal Year 2006 and Declaration of 2007 First Quarter Dividend
24 February 2007
(Note: All dollar amounts in this news release are expressed in Canadian dollars)
Northbridge Financial Corporation (TSX: NB) today announced net earnings for the year ended December 31, 2006 of $167.1 million ($3.29 per share), a 15.8% decrease from net earnings of $198.4 million ($3.90 per share) for the year ended December 31, 2005. Underwriting profit for 2006 declined to $23.5 million from $82.9 million for 2005, producing a combined ratio(1) of 98.0% for 2006 compared to 92.9% for 2005. Total investment income was $244.9 million for the year ended December 31, 2006 compared to $201.6 million for the previous year and included net realized gains on the sale of portfolio investments of $130.6 million compared to $122.0 million for 2005.
Net earnings for the fourth quarter of 2006 were $37.1 million ($0.73 per share), a 23.9% increase from net earnings of $29.9 million ($0.59 per share) for the fourth quarter of 2005. Underwriting income for the fourth quarter of 2006 increased to $16.9 million from $6.2 million for the fourth quarter of 2005. Northbridge's combined ratio for the fourth quarter of 2006 was 94.3% compared to 97.8% for the fourth quarter of 2005. Total investment income was $42.4 million for the fourth quarter of 2006 compared to $33.0 million for the fourth quarter of 2005 and included net realized gains on the sale of portfolio investments of $9.4 million, compared to $11.1 million for the fourth quarter of 2005.
Northbridge also announced that its Board of Directors has declared a dividend of $0.165 per share on its outstanding common shares, payable on March 30, 2007 to shareholders of record on March 6, 2007.
The following table presents a summary of consolidated financial results for the fourth quarter and twelve months ended December 31:
--------------------------------------------------------------------------- For the Periods Ended December 31 (in $ millions except per share Fourth Quarter Twelve Months amounts and percentages) 2006 2005 2006 2005 ---------------------------------------------------------------------------
Total revenue 337.7 321.5 1,408.4 1,370.5 Underwriting profit 16.9 6.2 23.5 82.9 Combined ratio(1) 94.3% 97.8% 98.0% 92.9% Net earnings 37.1 29.9 167.1 198.4 Net earnings per share $0.73 $0.59 $3.29 $3.90 Net earnings per diluted share $0.73 $0.59 $3.28 $3.89 ---------------------------------------------------------------------------
(1) The combined ratio is the sum of two components: the loss ratio, which represents claims and loss adjustment expenses incurred, net of reinsurance, expressed as a percentage of net premiums earned, and the expense ratio, which represents expenses including commissions, premium taxes and all general and administrative expenses incurred in operating the business during a period, expressed as a percentage of net premiums earned during that period. A combined ratio below 100% indicates profitable underwriting, while a combined ratio over 100% indicates unprofitable underwriting. The combined ratio does not include consideration of investment income. The underwriting ratios (the loss and expense ratios and the combined ratio) are all non-GAAP measures and do not have standard meanings prescribed by GAAP. They may not be comparable to similar measures used by other companies.
Fourth Quarter Highlights
- Net earnings of $37.1 million ($0.73 per share) compared to $29.9 million ($0.59 per share) for the fourth quarter of 2005.
- Combined ratio of 94.3% compared to 97.8% for the fourth quarter of 2005.
- Underwriting profit of $16.9 million compared to $6.2 million for the fourth quarter of 2005.
- 10.8% decline in net premiums written and 2.4% increase in net premiums earned compared to the fourth quarter of 2005.
Year End Highlights
- Net earnings of $167.1 million ($3.29 per share) compared to $198.4 million ($3.90 per share) in 2005, a decrease of 15.8%.
- Return on average equity of 15.3% compared to 21.0% for 2005.
- Combined ratio of 98.0% compared to 92.9% for 2005.
- Underwriting profit of $23.5 million compared to $82.9 million for 2005.
- 3.4% decline in net premiums written and 0.1% decline in net premiums earned compared to 2005.
- Interest and dividend income of $114.3 million compared to $79.6 million for 2005, and net realized gains on portfolio investments of $130.6 million compared to $122.0 million for 2005.
- Cash flow generated from operations of $214.8 million for 2006 compared to $420.1 million for 2005.
- Cash and short-term investments at year end of $934.0 million compared to $761.8 million at the end of 2005.
- Portfolio investments at carrying value (net of S&P short position) increased by $303.5 million to $2,881.6 million at December 31, 2006 from $2,578.1 million at December 31, 2005, with pre-tax net unrealized gains of $180.1 million at the end of 2006 compared to $207.8 million at the end of 2005.
- Reserve strength, with a conservative approach to setting reserves that has produced favourable reserve development of 2.8% on a cumulative (i.e. weighted average) basis since 1995.
- Continued capital strength, with a weighted average MCT ratio of 250% and consolidated net premiums written to equity ratio of 1.0.
- Shareholders' equity increased to $1,164.0 million, resulting in book value per share of $22.89 at December 31, 2006 compared to $1,026.8 or $20.19 per share at the end of 2005, an increase of 13.4%.
As used in this press release, references to "Northbridge" or the "Company" refer to Northbridge Financial Corporation, references to "Lombard" refer to Lombard Canada Ltd., references to "Markel" refer to Markel Insurance Company of Canada, references to "Commonwealth" refer to Commonwealth Insurance Company, and references to "Federated" refer to Federated Insurance Company of Canada and, in each case, unless the context otherwise requires or as otherwise expressly stated, their respective subsidiaries.
The following discussion should be read in conjunction with Northbridge's unaudited consolidated financial statements as at and for the periods ended December 31, 2006, prepared in accordance with Canadian Generally Accepted Accounting Principles and attached at the end of this release. Northbridge's audited consolidated financial statements for the year ended December 31, 2006 will be published in its 2006 Annual Report, which will be publicly available in connection with its mailing to shareholders, scheduled for the middle of March. The consolidated financial statements for the year ended December 31, 2005 include the results of Federated Life Insurance Company of Canada ("Federated Life") for January and February of that year. All dollar amounts are in Canadian dollars unless otherwise indicated. Certain totals, subtotals and percentages may not reconcile due to rounding.
FOURTH QUARTER RESULTS
Revenues
Revenue reflected in the consolidated financial statements includes net premiums earned, interest and dividend income, and net realized gains on the sale of investments.
Sources of Revenue (in $ millions) -------------------------------------------------------------- For the Quarters Ended December 31 2006 2005 --------------------------------------------------------------
Gross premiums written 435.4 494.8 Net premiums written 285.1 319.8
Net premiums earned 295.3 288.5 Interest and dividends 33.0 21.9 Net realized gains on investments 9.4 11.1 -------------------------------------------------------------- Total revenue 337.7 321.5 --------------------------------------------------------------
Total revenue earned during the fourth quarter of 2006 increased by $16.2 million, or 5.0%, from the fourth quarter of 2005, resulting from an $11.1 million increase in interest and dividend income and a $6.8 million increase in net premiums earned, partially offset by a $1.7 million decrease in net realized gains on the sale of portfolio investments. Interest and dividend income increased $11.1 million for the fourth quarter of 2006 compared to the fourth quarter of 2005, largely as a result of higher yields on cash balances and the increased average size of the investment portfolio. Net premiums earned for the fourth quarter of 2006 were $295.3 million, an increase of 2.4%, compared to the same period one year earlier, primarily due to increased pricing in certain U.S. markets, the steps taken by Federated to increase its net retention of risk and premiums, and reinstatement premiums paid by Commonwealth in the fourth quarter of 2005 which did not recur in 2006; partially offset by the exit of the majority of Commonwealth's Energy & International division in 2006, general competitive pressures across Northbridge's subsidiaries, and decreased contribution from the Facility Association pools.
During the fourth quarter of 2006, gross premiums written were $435.4 million, a decrease of $59.4 million or 12.0% compared to the fourth quarter of 2005. Contributing to this decline was the exit of the majority of Commonwealth's Energy & International division in 2006, competitive pressures experienced by the Company's subsidiaries, as well as decreased contribution from the Facility Association pools. Gross premiums written during the fourth quarter of 2006 declined relative to the fourth quarter of 2005 at Commonwealth (by $47.4 million), Markel (by $14.1 million), and Federated (by $1.3 million), and increased at Lombard (by $3.4 million).
Net premiums written during the fourth quarter of 2006 declined $34.7 million, or 10.8%, to $285.1 million compared to the fourth quarter of 2005. In addition to the factors affecting gross premiums written noted above, the steps taken by Federated to increase its net retention of risk and premiums triggered an adjustment which effectively increased net premiums written at the end of 2005, with no net effect on revenue or income for that period. Partially offsetting these factors was the related increase in risk and premium retention at Federated for the fourth quarter of 2006, as well as decreased reinstatement premiums paid by Commonwealth. Net premiums written during the fourth quarter of 2006 declined relative to the fourth quarter of 2005 at Markel (by $13.6 million), Commonwealth (by $13.2 million), and Federated (by $8.5 million), and increased slightly at Lombard (by $0.6 million).
Net Earnings
For the fourth quarter of 2006, Northbridge's net earnings were $37.1 million, or $0.73 per common share, compared to net earnings of $29.9 million, or $0.59 per common share for the fourth quarter of 2005, an increase of 23.9% . This increase was primarily attributable to a $10.7 million increase in underwriting profit, an $11.1 million increase in interest and dividend income and an $8.1 million decrease in other expenses, partially offset by a $21.0 million increase in the provision for income taxes. Northbridge's combined ratio was 94.3% and its underwriting profit was $16.9 million for the fourth quarter of 2006, improved from a combined ratio of 97.8% and an underwriting profit of $6.2 million for the fourth quarter of 2005. See the "Underwriting Results" section below for further discussion. The increase in interest and dividend income was largely a result of higher yields on cash balances and the increased average size of the investment portfolio. The decline in other expenses was primarily due to lower expense accruals for pension benefits for the fourth quarter of 2006 compared to the fourth quarter of 2005, while the increase in the provision for income taxes was due to a $28.2 million increase in earnings before income taxes, as well as a lower effective tax rate for the fourth quarter of 2005, primarily resulting from favourable tax treatment of certain capital gains realized on its portfolio investments in the fourth quarter of 2005.
Combined ratios and sources of net earnings for the fourth quarters of 2006 and 2005 are set out in the following table. More extensive commentary on combined ratios and operating income on a company-by-company basis is provided under the heading "Underwriting Results" and in the company-specific discussions which follow.
Combined Ratio and Sources of Net Earnings (in $ millions, except percentages) --------------------------------------------------------------------------- For the Quarters Ended December 31 2006 2005 --------------------------------------------------------------------------- Combined ratio 94.3% 97.8% Underwriting profit 16.9 6.2 Interest and dividends 33.0 21.9 --------------------------------------------------------------------------- Operating income 49.9 28.1 Net realized gains on investments 9.4 11.1 Other expenses (2.6) (10.7) --------------------------------------------------------------------------- Earnings before income taxes 56.7 28.5 Provision for (recovery of) income taxes 19.6 (1.4) --------------------------------------------------------------------------- Net earnings 37.1 29.9 ---------------------------------------------------------------------------
Underwriting Results
The Company's underwriting profit increased $10.7 million to $16.9 million for the fourth quarter of 2006 from $6.2 million for the fourth quarter of 2005, and the combined ratio improved to 94.3% for the fourth quarter of 2006, from 97.8% for the fourth quarter of 2005. This improvement was due primarily to a decrease in catastrophe-related losses and corresponding reinstatement premiums paid at Commonwealth, increased profitability at Federated from its increased retention of risk and premiums during 2006 and favourable reserve development.
These factors were partially offset by a $9.5 million loss at Commonwealth from an account within its exited Energy & International business, increased operating expenses at Commonwealth, and a decline in the share in the results of the Facility Association (the residual automobile market insurance pools in which Lombard, Markel and Federated are required by statute to participate), which contributed pre-tax underwriting profit of $5.9 million, including $3.2 million at Lombard, $2.3 million at Markel and $0.4 million at Federated for the fourth quarter of 2006. For the fourth quarter of 2005, the Facility Association contributed pre-tax underwriting profit of $10.4 million, including $5.2 million at Markel, $4.5 million at Lombard and $0.7 million at Federated.
The following table sets out the year-over-year change in net premiums written, underwriting profit (loss) and combined ratios for each of the operating companies for the fourth quarters of 2006 and 2005.
Change in Net Premiums Written and Underwriting Profit (in $ millions, except percentages) --------------------------------------------------------------------------- -------------------------------------------------------------------------- Underwriting For the Quarters Ended Net Premiums Written Profit (Loss) Combined Ratio December 31 2006 2005 % Change 2006 2005 2006 2005 --------------------------------------------------------------------------- Lombard 173.5 172.9 0.3% 13.0 18.2 92.6% 89.4% Markel 48.8 62.4 (21.9%) 3.9 6.6 92.5% 89.0% Commonwealth 37.8 51.0 (25.8%) (7.5) (20.2) 118.2% 157.1% Federated 25.0 33.5 (25.1%) 7.5 1.6 71.4% 92.6% --------------------------------------------------------------------------- Northbridge 285.1 319.8 (10.8%) 16.9 6.2 94.3% 97.8% --------------------------------------------------------------------------- ---------------------------------------------------------------------------
The following tables present the underwriting profit (loss) and combined ratios achieved by each of the operating companies, as well as the investment-related and other non-underwriting elements of the Company's financial results, for the fourth quarters of 2006 and 2005.
Operating Company Underwriting Results and Consolidated Net Earnings (in $ millions, except percentages) --------------------------------------------------------------------------- --------------------------------------------------------------------------- For the Quarter Ended Lombard Markel Commonwealth Federated Total December 31, 2006 --------------------------------------------------------------------------- Combined ratio: Loss ratio 63.4% 70.7% 88.1% 44.0% 66.5% Expense ratio 29.2% 21.8% 30.1% 27.4% 27.8% --------------------------------------------------------------------------- 92.6% 92.5% 118.2% 71.4% 94.3% Gross premiums written 245.4 61.8 96.1 32.1 435.4 Net premiums written 173.5 48.8 37.8 25.0 285.1 Net premiums earned 174.7 52.8 41.6 26.2 295.3 Claims 110.8 37.3 36.6 11.5 196.2 Operating expenses 18.9 6.1 14.9 5.2 45.1 Commissions, net 23.8 3.6 (4.1) 0.9 24.2 Premium taxes 8.2 1.9 1.7 1.1 12.9 --------------------------------------------------------------------------- 161.7 48.9 49.1 18.7 278.4 --------------------------------------------------------------------------- Underwriting profit (loss) 13.0 3.9 (7.5) 7.5 16.9 Interest and dividends 33.0 Net realized gains on investments 9.4 Other expenses (2.6) --------------------------------------------------------------------------- Earnings before income taxes 56.7 Provision for income taxes 19.6 --------------------------------------------------------------------------- Net earnings 37.1 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Total identifiable assets 2,668.0 806.9 1,488.3 416.6 5,379.8 Other 42.2 --------------------------------------------------------------------------- Total assets 5,422.0 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
Operating Company Underwriting Results and Consolidated Net Earnings (in $ millions, except percentages) ---------------------------------------------------------------------------
--------------------------------------------------------------------------- For the Quarter Ended Lombard Markel Commonwealth Federated Total December 31, 2005 --------------------------------------------------------------------------- Combined ratio: Loss ratio 59.6% 63.0% 144.6% 47.9% 69.8% Expense ratio 29.8% 26.0% 12.5% 44.7% 28.0% --------------------------------------------------------------------------- 89.4% 89.0% 157.1% 92.6% 97.8% Gross premiums written 242.0 75.9 143.5 33.4 494.8 Net premiums written 172.9 62.4 51.0 33.5 319.8 Net premiums earned 171.9 59.8 35.3 21.5 288.5 Claims 102.5 37.7 51.1 10.3 201.6 Operating expenses 20.6 9.2 6.2 9.9 45.9 Commissions, net 22.7 4.0 (3.8) (1.4) 21.5 Premium taxes 7.9 2.3 2.0 1.1 13.3 --------------------------------------------------------------------------- 153.7 53.2 55.5 19.9 282.3 --------------------------------------------------------------------------- Underwriting profit (loss) 18.2 6.6 (20.2) 1.6 6.2 Interest and dividends 21.9 Net realized gains on investments 11.1 Other expenses (10.7) --------------------------------------------------------------------------- Earnings before income taxes 28.5 Recovery of income taxes (1.4) --------------------------------------------------------------------------- Net earnings 29.9 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Total identifiable assets 2,439.5 749.4 1,561.5 384.8 5,135.2 Other 27.6 --------------------------------------------------------------------------- Total assets 5,162.8 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
Lombard Insurance
For the fourth quarter of 2006, Lombard reported an underwriting profit of $13.0 million and a combined ratio of 92.6%, compared to an underwriting profit of $18.2 million and a combined ratio of 89.4% for the same period one year earlier. The change in underwriting profit was largely attributable to increased loss severity for the fourth quarter of 2006 and a decline in its share in the results of the Facility Association pools. Gross premiums written were $245.4 million for the fourth quarter of 2006, an increase of 1.4% relative to $242.0 million for the same period in 2005, while net premiums written were $173.5 million for the fourth quarter of 2006, largely unchanged relative to the same period in 2005. Net premiums earned for the fourth quarter of 2006 increased 1.6% to $174.7 million, from $171.9 million for the fourth quarter of 2005. Lombard's relatively unchanged premium volumes are largely a result of premiums from new business initiatives offsetting general competitive pressures across most markets.
For the fourth quarter of 2006, Lombard's business mix, as measured by gross premiums written, was 81.5% commercial lines and 18.5% personal lines, compared to 81.1% and 18.9%, respectively, for the fourth quarter of 2005.
Markel Insurance
Markel recorded an underwriting profit of $3.9 million and a combined ratio of 92.5% for the fourth quarter of 2006, compared to $6.6 million and 89.0% for the fourth quarter of 2005. Gross premiums written declined $14.1 million to $61.8 million for the fourth quarter of 2006, compared to $75.9 million for the fourth quarter of 2005, while net premiums written declined $13.6 million to $48.8 million for the fourth quarter of 2006, compared to $62.4 million for the fourth quarter of 2005.
Net premiums earned for the fourth quarter of 2006 declined $7.0 million, to $52.8 million, compared to $59.8 million for the fourth quarter of 2005. The declines in premiums were primarily attributable to the non-renewal of selected accounts, competitive pressures in the trucking industry, and a decrease in gross premiums written from Markel's share of the Facility Association pools. Underwriting results for the fourth quarter of 2006 were impacted by a higher level of large losses compared to the fourth quarter of 2005, as well as Markel's share in the decreased profits of the Facility Association pools, partially offset by favourable development of reserves.
Commonwealth Insurance
For the fourth quarter of 2006, Commonwealth recorded an underwriting loss of $7.5 million and a combined ratio of 118.2%, compared to an underwriting loss of $20.2 million and a combined ratio of 157.1% for the fourth quarter of 2005. This improvement in underwriting results was largely attributable to a decline in claims and corresponding reinstatement premiums for the fourth quarter of 2006 relative to the fourth quarter of 2005. During the fourth quarter of 2005 Commonwealth's claims were impacted by $24.1 million of net pre-tax losses relating to hurricanes Katrina, Rita and Wilma ("KRW"), and corresponding reinstatement premiums, while the fourth quarter of 2006 included a $9.5 million large loss attributable to an account in its exited Energy & International business. Also contributing to the change in underwriting results were increased operating expenses for the fourth quarter of 2006, due primarily to a $1.3 million provision for uncollectible reinsurance balances compared to a recovery of $1.9 million for the fourth quarter of 2005, as well as increased expenses related to operating systems initiatives.
Gross premiums written were $96.1 million for the fourth quarter of 2006, a decline of $47.4 million, or 33.0%, compared to the fourth quarter of 2005, due primarily to the exit from the majority of its Energy and International division. Net premiums written declined $13.2 million, or 25.8%, to $37.8 million for the fourth quarter of 2006, also largely as a result of the changes to its Energy & International division, partially offset by the reinstatement premiums paid in the fourth quarter of 2005 resulting from KRW, which reduced net premiums written for that period. Net premiums earned were $41.6 million for the fourth quarter of 2006, compared to $35.3 million for the fourth quarter of 2005. The increase in net premiums earned for the fourth quarter of 2006 relative to the fourth quarter of 2005 is largely attributable to price increases achieved in certain of its U.S. property markets following the 2005 hurricane season and earned throughout 2006.
Federated Insurance
Federated recorded an underwriting profit of $7.5 million and a combined ratio of 71.4% for the fourth quarter of 2006, an improvement from an underwriting profit of $1.6 million and a combined ratio of 92.6% for the fourth quarter of 2005. Contributing to the increase in underwriting profit was a decrease in operating expenses, favourable development of reserves, and increased profitability from the non-renewal of a quota share reinsurance agreement, which increased retention of risk and premiums for 2006. Partially offsetting these factors was the increased net commission expense incurred as a result of reduced reinsurance commission received from the increased retention of risk and premiums. Gross premiums written for the fourth quarter of 2006, were $32.1 million, compared to $33.4 million for the fourth quarter of 2005, while net premiums written declined $8.5 million, or 25.1%, to $25.0 million for the fourth quarter of 2006 and net premiums earned increased $4.7 million, or 22.0%, for the fourth quarter of 2006. The decrease in net premiums written was largely due to the adjustment resulting from the steps taken to increase its retention of risk and premiums in the fourth quarter of 2005 which effectively increased net premiums written, with no net effect on revenue or income for that period. Accordingly, Federated's cessions to reinsurers were lower for 2006, thereby increasing its net premiums written in 2006 and contributing to the year-over-year increase in net premiums earned.
Segmented Information
Canadian business accounted for 87.0% of gross premiums written for the fourth quarter of 2006, up from 81.1% for the fourth quarter of 2005, while US and Other premiums accounted for 13.0% of the gross premiums written during the fourth quarter of 2006, down from 18.9% for the fourth quarter of 2005. This shift in business mix is primarily attributable to the exit of the majority of certain business lines at Commonwealth during 2006, partially offset by increased pricing trends within certain of its U.S. commercial property markets and competitive pressures affecting most Canadian markets.
Geographic Mix of Business (in $ millions) --------------------------------------------------------------------------- --------------------------------------------------------------------------- 2006 2005 US & US & For the Quarters Ended Canada Other Total Canada Other Total December 31 --------------------------------------------------------------------------- Gross premiums written 378.6 56.8 435.4 401.3 93.5 494.8 Net premiums written 266.1 19.0 285.1 291.1 28.7 319.8
Net premiums earned 271.0 24.3 295.3 268.2 20.3 288.5 Claims 161.2 35.0 196.2 140.2 61.3 201.5 Operating expenses 38.4 6.7 45.1 42.0 3.8 45.8 Commissions, net 28.0 (3.8) 24.2 22.0 (0.4) 21.6 Premium taxes 12.7 0.2 12.9 13.2 0.2 13.4 --------------------------------------------------------------------------- 240.3 38.1 278.4 217.4 64.9 282.3 --------------------------------------------------------------------------- Underwriting profit (loss) 30.7 (13.8) 16.9 50.8 (44.6) 6.2 Investment income 41.1 1.3 42.4 31.7 1.3 33.0 Other expenses (2.6) - (2.6) (10.7) - (10.7) --------------------------------------------------------------------------- Earnings (loss) before income taxes 69.2 (12.5) 56.7 71.8 (43.3) 28.5 --------------------------------------------------------------------------- Total assets 4,725.2 696.8 5,422.0 4,388.7 774.1 5,162.8 ---------------------------------------------------------------------------
For the fourth quarter of 2006, commercial lines accounted for 89.3% of gross premiums written, down from 90.4% for the fourth quarter of 2005. Personal lines increased to 10.7% of gross premiums written for the fourth quarter of 2006 from 9.6% for the same period a year earlier. The decrease in commercial lines premiums is primarily related to the changes at Commonwealth and the competitive pressures affecting most Canadian markets during 2006.
Gross Premiums Written by Product Line Segments (in $ millions) --------------------------------------------------------------------------- For the Quarters Ended December 31 2006 2005 --------------------------------------------------------------------------- Commercial: Property 154.1 190.1 Automobile 132.7 147.7 General liability 89.9 96.3 Other 12.0 13.1
Personal: Property 13.8 15.7 Automobile 32.9 31.9 --------------------------------------------------------------------------- Total 435.4 494.8 ---------------------------------------------------------------------------
Investment Income
Investment income consists of interest and dividend income, net of investment expenses, plus net realized gains on the sale of portfolio investments, including the change in the market value of the short sale of the Standard and Poor's Depository Receipts ("SPDRs") and certain derivative contracts. During the fourth quarter of 2006, the Company earned $42.4 million in investment income, compared to $33.0 million during the fourth quarter of 2005. Interest and dividend income earned in the fourth quarter of 2006, net of investment expenses, increased to $33.0 million from $21.9 million in the fourth quarter of 2005, largely as a result of higher yields on cash balances and the increased average size of the investment portfolio. This resulted in an annualized pre-tax yield (before expenses) on the average investment portfolio (at carrying value) of 4.9% for the fourth quarter of 2006 and 4.1% for the fourth quarter of 2005. Excluding from average portfolio investments the amounts payable for securities purchased at September 30, 2005 ($152.1 million), the average annualized pre-tax yield was 4.3% for the fourth quarter of 2005. Net realized gains on the sale of portfolio investments were $9.4 million for the fourth quarter of 2006, which included a $13.8 million mark-to-market loss on the short sale of the SPDRs, net of the mark-to-market value of certain derivative contracts, compared to net realized gains of $11.1 million for the fourth quarter of 2005, which included a net $4.1 million mark-to-market SPDR-related loss. Mark-to-market gains or losses on the short sale of the SPDRs are included in gains (losses) on common stocks.
Investment Income (in $ millions) --------------------------------------------------------------------------- For the Quarters Ended December 31 2006 2005 ---------------------------------------------------------------------------
Interest and dividends: Cash and short term investments 15.0 4.6 Bonds 12.9 16.7 Preferred stocks 0.2 1.0 Common stocks 5.6 4.2 Other 1.5 0.2 --------------------------------------------------------------------------- 35.2 26.7 Expenses (2.2) (4.8) --------------------------------------------------------------------------- 33.0 21.9
Net realized gains (losses) on investments: Bonds 22.0 0.2 Preferred stocks - - Common stocks (12.6) 2.1 Other - 8.8 --------------------------------------------------------------------------- 9.4 11.1 --------------------------------------------------------------------------- Net investment income 42.4 33.0 ---------------------------------------------------------------------------
Comparative Quarterly Information
Financial Summary (in $ millions, except percentages and per share amounts)
--------------------------------------------------------------------------- For the Dec. Sept. June Mar. Dec. Sept. June Mar. Quarters 31 30 30 31 31 30 30 31 Ended 2006 2006 2006 2006 2005 2005 2005 2005 ---------------------------------------------------------------------------
Gross premiums written 435.4 410.9 559.3 420.4 494.8 438.7 534.0 408.4 Net premiums written 285.1 258.4 346.1 258.6 319.8 275.5 343.2 250.0 Net premiums earned 295.3 291.5 285.8 290.9 288.5 294.0 297.1 284.9 Under- writing profit (loss) 16.9 18.6 (38.3) 26.3 6.2 17.4 34.7 24.6 Interest and divi- dends 33.0 31.1 25.9 24.2 21.9 16.9 23.6 17.2 Net realized gains on invest- ments 9.4 3.8 73.5 44.0 11.1 30.7 40.2 39.9 Net gain on sale of Federated Life - - - - - - - 4.4 Other expenses (2.6) (4.0) (2.6) (2.0) (10.7) (2.5) (1.9) (2.6) --------------------------------------------------------------------------- Earnings before income taxes 56.7 49.5 58.5 92.5 28.5 62.5 96.6 83.5 Provision for (recovery of) income taxes 19.6 18.6 21.2 30.7 (1.4) 19.2 28.2 26.7 --------------------------------------------------------------------------- Net earnings 37.1 30.9 37.3 61.8 29.9 43.3 68.4 56.8 --------------------------------------------------------------------------- Combined ratio: Loss ratio 66.5% 68.0% 87.1% 65.8% 69.8% 71.0% 64.7% 65.9% Expense ratio 27.8% 25.6% 26.3% 25.2% 28.0% 23.1% 23.6% 25.5% --------------------------------------------------------------------------- 94.3% 93.6% 113.4% 91.0% 97.8% 94.1% 88.3% 91.4% Net earnings per share $0.73 $0.61 $0.73 $1.22 $0.59 $0.85 $1.35 $1.12 Net earnings per diluted share $0.73 $0.61 $0.73 $1.21 $0.59 $0.85 $1.34 $1.11 Book value per share $22.89 $22.22 $21.74 $21.24 $20.19 $19.74 $19.20 $17.93 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
YEAR END RESULTS
Revenue
Revenue reflected in the consolidated financial statements includes net premiums earned, interest and dividend income, net realized gains on the sale of investments and, in 2005, a net pre-tax gain on the sale of Federated Life.
Sources of Revenue (in $ millions) --------------------------------------------------------------------------- --------------------------------------------------------------------------- For the Years Ended December 31 2006 2005 ---------------------------------------------------------------------------
Gross premiums written 1,826.0 1,876.0 Net premiums written 1,148.2 1,188.5
Net premiums earned 1,163.5 1,164.5 Interest and dividends 114.3 79.6 Net realized gains on investments 130.6 122.0 Net gain on sale of Federated Life - 4.4 --------------------------------------------------------------------------- Total revenue 1,408.4 1,370.5 ---------------------------------------------------------------------------
Total revenue earned during 2006 increased by $37.9 million, or 2.8%, over 2005. The increase in revenue is primarily attributable to an increase in interest and dividend income and net realized gains on the sale of portfolio investments, partially offset by the $4.4 million net pre-tax gain on the sale of Federated Life during 2005. Interest and dividend income increased $34.7 million for 2006 over 2005, primarily due to the increased average size of the investment portfolio and higher yields on cash balances during 2006. Net realized gains on the sale of portfolio investments increased by $8.6 million for 2006 over 2005.
Both 2006 and 2005 included significant levels of net realized gains on investments from common stock and bond portfolios, however 2006 was also affected by a $36.3 million mark-to-market loss on the short sale of SPDRs, net of the mark-to-market value of certain derivative contracts, compared to a net $12.6 million mark-to-market SPDR-related loss for 2005. Net premiums earned remained relatively flat at $1,163.5 million for 2006, compared to $1,164.5 million for 2005, impacted by the exit of the majority of Commonwealth's Energy & International division, general competitive pressures across the subsidiaries, decreased contribution from the Facility Association pools, and the sale of Federated Life in the first quarter of 2005, and largely offset by increased pricing in certain U.S. markets, increased retention of risk and premiums at Federated, and contributions from new business initiatives at Lombard in 2006.
During 2006, gross premiums written declined by $50.0 million, or 2.7%, compared to 2005. This decline was largely a result of the exit of the majority of Commonwealth's Energy & International division in 2006, general competitive pressures at the subsidiaries and decreased contribution from the Facility Association pools. The decline was partially offset by price increases attained in certain of the Company's U.S. markets and contributions from new business initiatives at Lombard during 2006. Gross premiums written during 2006 declined relative to 2005 at Markel (by $29.1 million), Commonwealth (by $24.0 million) and Federated (by $9.4 million) and increased at Lombard (by $12.5 million). Net premiums written for 2006 declined by $40.3 million, or 3.4%, from 2005. In addition to the reasons noted above, net premiums written also declined due to the adjustment at the end of 2005, related to the steps taken at Federated to increase its retention of risk and premiums, which effectively increased net premiums written at the end of 2005 with no impact on revenue or income for that period. These factors were partially offset by the related increase in risk and premium retention at Federated for 2006, and decreased reinstatement premiums paid by Commonwealth. Net premiums written for 2006 declined relative to 2005 at Markel (by $32.0 million), and Commonwealth (by $17.5 million) and increased at Lombard (by $8.1 million) and Federated (by $1.1 million).
Net Earnings
For 2006, net earnings were $167.1 million, or $3.29 per share, compared to net earnings of $198.4 million, or $3.90 per common share for 2005, a decrease of 15.8% . The decline in net earnings for 2006 from 2005 was primarily attributable to a $59.4 million decline in underwriting income and a $17.2 million increase in the provision for income taxes, partially offset by a $43.3 million increase in net investment income and a $6.4 million decline in other expenses. Northbridge's combined ratio was 98.0% and underwriting profit was $23.5 million for 2006, compared to a combined ratio of 92.9% and an underwriting profit of $82.9 million for 2005. See the "Underwriting Results" section for further discussion. The increase in the provision for income taxes for 2006 was due to a lower effective tax rate for 2005 resulting from the lower tax treatment on certain capital gains realized on portfolio investments, and was partially offset by a $14.1 million decrease in earnings before income taxes. Net investment income included a $34.7 million increase in interest and dividend income, which largely resulted from the increased average size of the investment portfolio and higher yields on cash balances, while other expenses declined primarily due to lower accruals for pension benefits in 2006 relative to 2005.
Combined ratios and sources of net earnings for 2006 and 2005 are set out in the following table. Combined ratios and operating income are discussed further on a company-by-company basis under the heading "Underwriting Results" and in the company-specific discussions which follow.
Combined Ratio and Sources of Net Earnings (in $ millions except percentages) --------------------------------------------------------------------------- --------------------------------------------------------------------------- For the Years Ended December 31 2006 2005 --------------------------------------------------------------------------- Combined ratio 98.0% 92.9%
Underwriting profit 23.5 82.9 Interest and dividends 114.3 79.6 --------------------------------------------------------------------------- Operating income 137.8 162.5 Net realized gains on investments 130.6 122.0 Net gain on sale of Federated Life - 4.4 Other expenses (11.3) (17.7) --------------------------------------------------------------------------- Earnings before income taxes 257.1 271.2 Provision for income taxes 90.0 72.8 --------------------------------------------------------------------------- Net earnings 167.1 198.4 ---------------------------------------------------------------------------
Underwriting Results
For 2006, underwriting profit declined $59.4 million, to $23.5 million, from $82.9 million for 2005. The decline in underwriting performance was largely due to a net pre-tax total of $103.2 million of new claims and reserve development recorded in 2006 relating to KRW. Also contributing to the decline were several non-catastrophe large losses in Commonwealth's largely exited Energy & International business which totalled $24.8 million and triggered $11.1 million in reinstatement premiums, as well as net commission expenses, which increased $20.8 million year-over-year, largely due to net increases at Lombard and Federated. By comparison, 2005 results included net pre-tax losses from KRW of $81.8 million, net pre-tax losses from August thunderstorms in Ontario of $10.0 million, and reinstatement premiums paid by Commonwealth of $20.3 million (including $12.7 million relating to KRW losses). Excluding the impact of reserve development at the Facility Association and the impact of reserve development relating to KRW at Commonwealth, favourable reserve development for 2006 occurred at each operating company, including $13.3 million at Markel, $10.9 million at Commonwealth, $8.8 million at Federated and $6.1 million at Lombard. The Company's share in the results of the Facility Association contributed a $9.9 million pre-tax underwriting profit for 2006, including $5.2 million at Lombard, $4.1 million at Markel and $0.6 million at Federated, compared to an $18.4 million pre-tax underwriting profit for 2005, including $12.7 million at Lombard, $5.0 million at Markel and $0.7 million at Federated.
The following table sets out the year-over-year change in net premiums written, underwriting profit (loss) and combined ratios for each of the operating companies for the years ended December 31, 2006 and 2005.
Change in Net Premiums Written and Underwriting Profit (in $ millions, except percentages) --------------------------------------------------------------------------- --------------------------------------------------------------------------- For the Years Underwriting Ended Net Premiums Written Profit (Loss) Combined Ratio December 31 2006 2005 % Change 2006 2005 2006 2005 ---------------------------------------------------------------------------
Lombard 699.7 691.6 1.2% 68.0 79.4 90.1% 88.5% Markel 208.5 240.5 (13.3%) 19.2 28.7 91.2% 88.2% Commonwealth 136.5 154.0 (11.4%) (80.5) (33.5) 153.7% 123.3% Federated(1) 103.5 102.4 1.0% 16.8 8.3 84.0% 90.7% --------------------------------------------------------------------------- Northbridge 1,148.2 1,188.5 (3.4%) 23.5 82.9 98.0% 92.9% --------------------------------------------------------------------------- (1) Federated's combined ratio, excluding the results of Federated Life, was 89.9% in 2005.
The following tables present the underwriting profit (loss) and combined ratios achieved by each of the operating companies, as well as the investment-related and other non-underwriting elements of the Company's financial results for the years ended December 31, 2006 and 2005.
Operating Company Underwriting Results and Consolidated Net Earnings (in $ millions, except percentages) --------------------------------------------------------------------------- For the Year Ended December 31, 2006 Lombard Markel Commonwealth Federated Total --------------------------------------------------------------------------- Combined ratio: Loss ratio 60.5% 67.7% 140.3% 56.3% 71.8% Expense ratio 29.6% 23.5% 13.4% 27.7% 26.2% --------------------------------------------------------------------------- 90.1% 91.2% 153.7% 84.0% 98.0%
Gross premiums written 989.4 261.1 443.9 131.6 1,826.0 Net premiums written 699.7 208.5 136.5 103.5 1,148.2
Net premiums earned 689.9 218.4 150.1 105.1 1,163.5 Claims 417.3 147.9 210.4 59.2 834.8 Operating expenses 76.3 29.1 33.2 20.8 159.4 Commissions, net 96.2 13.8 (19.5) 3.9 94.4 Premium taxes 32.1 8.4 6.5 4.4 51.4 ---------------------------------------------------------------------------
621.9 199.2 230.6 88.3 1,140.0 --------------------------------------------------------------------------- Underwriting profit (loss) 68.0 19.2 (80.5) 16.8 23.5 Interest and dividends 114.3 Net realized gains on investments 130.6 Other expenses (11.3) --------------------------------------------------------------------------- Earnings before income taxes 257.1 Provision for income taxes 90.0 --------------------------------------------------------------------------- Net earnings 167.1 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Total identifiable assets 2,668.0 806.9 1,488.3 416.6 5,379.8 Other 42.2 --------------------------------------------------------------------------- Total assets 5,422.0 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
Operating Company Underwriting Results and Consolidated Net Earnings (in $ millions, except percentages) --------------------------------------------------------------------------- --------------------------------------------------------------------------- For the Year Ended December 31, 2005 Lombard Markel Commonwealth Federated Total --------------------------------------------------------------------------- Combined ratio: Loss ratio 61.5% 64.1% 110.5% 58.3% 67.9% Expense ratio 27.0% 24.1% 12.8% 32.4% 25.0% --------------------------------------------------------------------------- 88.5% 88.2% 123.3% 90.7% 92.9% Gross premiums written 976.9 290.2 467.9 141.0 1,876.0 Net premiums written 691.6 240.5 154.0 102.4 1,188.5 Net premiums earned 688.1 244.1 143.2 89.1 1,164.5 Claims 423.2 156.5 158.3 52.0 790.0 Operating expenses 73.2 34.6 28.7 29.3 165.8 Commissions, net 80.2 15.3 (16.9) (5.0) 73.6 Premium taxes 32.1 9.0 6.6 4.5 52.2 --------------------------------------------------------------------------- 608.7 215.4 176.7 80.8 1,081.6 --------------------------------------------------------------------------- Underwriting profit (loss) 79.4 28.7 (33.5) 8.3 82.9 Interest and dividends 79.6 Net realized gains on investments 122.0 Net gain on sale of Federated Life 4.4 Other expenses (17.7) --------------------------------------------------------------------------- Earnings before income taxes 271.2 Provision for income taxes 72.8 --------------------------------------------------------------------------- Net earnings 198.4 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Total identifiable assets 2,439.5 749.4 1,561.5 384.8 5,135.2 Other 27.6 --------------------------------------------------------------------------- Total assets 5,162.8 --------------------------------------------------------------------------- --------------------------------------------------------------------------- (1)Federated's combined ratio, excluding the results of Federated Life, was 89.9% in 2005.
Lombard Insurance
For 2006, Lombard posted a combined ratio of 90.1% and an underwriting profit of $68.0 million, compared to 88.5% and $79.4 million for 2005. The change in underwriting results was largely attributable to the increase in net commissions and operating expenses and a decline in the profitability of its share in the Facility Association pools for 2006, partially offset by decreased claims expense resulting from the absence of weather-related losses which occurred in 2005. Net commission expense increased due to higher commissions relating to its distribution network, as well as lower ceding commissions received related to decreased profit sharing earned under certain reinsurance agreements. Operating expenses increased due to a $3.3 million goodwill writedown related to the outsourcing of Lombard's direct distribution call centre. Gross premiums written for 2006 increased $12.5 million to $989.4 million, while net premiums written increased $8.1 million to $699.7 million, and net premiums earned increased $1.8 million to $689.9 million, for the same period. The increase in premiums written for 2006 compared to 2005 was largely attributable to continued contributions from new business initiatives, partially offset by general competitive pressures across most of its markets.
For 2006, Lombard's business mix, as measured by gross premiums written, was 81.3% commercial lines and 18.7% personal lines, compared to 80.5% and 19.5%, respectively for 2005.
Markel Insurance
Markel's underwriting profit and combined ratio for 2006 were $19.2 million and 91.2%, compared to $28.7 million and 88.2% for 2005. Contributing to the change in underwriting results was a higher level of large losses in 2006 relative to 2005, as well as a decline of its share in the results of the Facility Association pools for 2006, partially offset by favourable development of reserves. Gross premiums written for 2006 declined by $29.1 million to $261.1 million compared to 2005, while net premiums written declined $32.0 million, to $208.5 million, compared to 2005, and net premiums earned declined $25.7 million to $218.4 million for the same period. The declines in premiums were primarily attributable to the non-renewal of selected accounts, competitive pressures in the trucking industry, and a decrease in gross premiums written from Markel's share of the Facility Association pools.
Commonwealth Insurance
Commonwealth reported an underwriting loss of $80.5 million and a combined ratio of 153.7% for 2006, compared to an underwriting loss of $33.5 million and a combined ratio of 123.3% for 2005. This change in underwriting results can be largely attributed to the impact of new claims and net claims development from KRW during 2006, as well as several non-catastrophe large losses in 2006 totalling $24.8 million which were recorded within Commonwealth's largely exited Energy and International business. Also contributing to the decline in underwriting results was a reduced level of favourable development of prior years' reserves (excluding KRW) for 2006 relative to 2005, an increase in operating expenses primarily resulting from increased expenses related to operating systems initiatives and provision for uncollectible reinsurance. Partially offsetting these factors was a $9.2 million decline in reinstatement premiums paid in 2006 relative to 2005.
Gross premiums written were $443.9 million for 2006, a decline of $24.0 million compared to 2005, while net premiums written were $136.5 million for 2006, a decline of $17.5 million compared to 2005. The decline in written premiums is primarily the result of Commonwealth's exit of the majority of its Energy and International division, partially offset by increases in pricing in certain of its U.S. markets. Impacting net premiums written, Commonwealth paid reinstatement premiums of $11.1 million in 2006, triggered by the non-catastrophe large losses discussed earlier, compared to $20.3 million paid in 2005, $12.7 million of which was triggered by KRW losses. Net premiums earned for 2006 increased $6.9 million over 2005, to $150.1 million, largely due to the increased U.S. pricing mentioned earlier, which was earned throughout 2006.
Many changes have been made at Commonwealth throughout 2006, with the goal of reducing volatility and improving long-term underwriting profitability. Commonwealth has withdrawn from the majority of its Energy & International division, the division through which it historically conducted its Marine Energy and Non-Marine Energy businesses. In the first quarter of 2006, it stopped writing Marine Energy insurance policies containing Gulf of Mexico named wind exposures and enhanced its reinsurance protection to named wind exposure in 2006. During the third quarter of 2006, Commonwealth took the further step of withdrawing from the majority of the remaining portions of its Energy & International business lines, including its Marine Energy and Non-Marine Energy segments, although it will continue to be exposed to its exited business lines until all policy contracts expire.
Federated Insurance
On February 28, 2005, the sale of Federated Life for $20 million was completed. The sale generated a net pre-tax gain of $4.4 million, which is included in the first quarter results for 2005. The operating results of Federated Life for the two months prior to the sale date are included in consolidated operating results.
For 2006, Federated recorded an underwriting profit of $16.8 million and a combined ratio of 84.0%, compared to an underwriting profit of $8.3 million and a combined ratio of 90.7% for 2005. The increase in underwriting profit was primarily attributable to a decrease in operating expenses, including reduced expenses relating to the sale of Federated Life, favourable development of reserves, and the non-renewal of a quota share reinsurance agreement, which led to an increase in profitability from the increased retention of risk and premiums, partially offset by a reduction in ceding commissions earned for 2006 due to the related increase in risk and premium retention. Gross premiums written declined to $131.6 million for 2006, from $141.0 million for 2005, largely due to general competitive pressures and the sale of Federated Life. Net premiums written were $103.5 million for 2006 compared to $102.4 million for 2005, while net premiums earned increased to $105.1 million for 2006, from $89.1 million for 2005. The increase in net premiums earned was largely a result of decreased cessions to reinsurers in 2006 stemming from the increased retention of risk and premiums, partially offset by general competitive pressures and the sale of Federated Life. Net premiums written were similarly affected by these factors, but their impact was largely offset by the adjustment relating to the steps taken to increase retention of risk and premiums, which effectively increased net premiums written at the end of 2005 with no net effect on revenue or income for that period.
Segmented Information
For 2006, Canadian business as a percentage of total gross premiums written was 83.8%, the same percentage as 2005, while US and Other represented 16.2% for 2006 and 2005.
Geographic Mix of Business (in $ millions) --------------------------------------------------------------------------- --------------------------------------------------------------------------- 2006 2005 For the Years Ended US & US & December 31 Canada Other Total Canada Other Total --------------------------------------------------------------------------- Gross premiums written 1,530.7 295.3 1,826.0 1,572.7 303.3 1,876.0 Net premiums written 1,077.6 70.6 1,148.2 1,104.3 84.2 1,188.5 Net premiums earned 1,077.6 85.9 1,163.5 1,081.7 82.8 1,164.5 Claims 639.5 195.3 834.8 647.9 142.1 790.0 Operating expenses 139.2 20.2 159.4 147.9 17.9 165.8 Commissions, net 108.6 (14.2) 94.4 81.7 (8.1) 73.6 Premium taxes 50.5 0.9 51.4 51.3 0.9 52.2 --------------------------------------------------------------------------- 937.8 202.2 1,140.0 928.8 152.8 1,081.6 --------------------------------------------------------------------------- Underwriting profit (loss) 139.8 (116.3) 23.5 152.9 (70.0) 82.9 Investment income 239.8 5.1 244.9 193.7 7.9 201.6 Net gain on sale of Federated Life - - - 4.4 - 4.4 Other expenses (11.3) - (11.3) (17.7) - (17.7) --------------------------------------------------------------------------- Earnings (loss) before income taxes 368.3 (111.2) 257.1 333.3 (62.1) 271.2 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Total assets 4,725.2 696.8 5,422.0 4,388.7 774.1 5,162.8 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
For 2006, commercial lines acc
Source: marketwire
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