To Our Shareholders:
The title of our 2007 Annual Report was “a successful year, a challenging future”. Obviously, it was a bit more challenging than we had expected.
A Review of 2008
Our tests in 2008 revolved around the collapse of the world’s capital markets and the impact of that on our asset portfolio. With over $11 billion of cash and invested assets, we are exposed to investment risk in the credit and equity markets. Despite a horrendous market, we were able to achieve a small positive total return for the year on a local currency basis. This is an excellent result on a relative basis, but we fell short of our return goals on an absolute basis.
On the other hand, we had a year of good profitability in our reinsurance risk classes, generating a 12% operating return on beginning shareholder’s equity, close to our long-term goal of 13%. We achieved that despite enduring the third worst catastrophe year on record and despite the fact that a number of our reinsurance lines had experienced declining prices for three years and several were negatively impacted by the turmoil in the capital markets. Specifically, we reserved for an anticipated increasing loss emergence in our D&O/E&O book and our credit and surety book.
In addition, our balance sheet was stable year over year, which is a significant achievement in a year like 2008. Invested assets and cash were up 1.3%, non-life loss reserves increased 4% to $7.5 billion, and our common shareholders’ equity was down only 3% to $3.7 billion. While we are disappointed in any year that does not result in a 10% growth in book value or economic value per share for our shareholders, we think that it was a credible performance in a difficult year.
We also recognize that the real test of a reinsurer’s success is its performance over the longer term. Since 2002, we have grown our book value per share at an 11% compound rate and our economic value per share at 13%. Looking back at other major loss years within this time frame, the decreasing volatility of our book value also illustrates our success in achieving long-term stability. In 2001, after 9/11, our book value per share declined by 18% from the previous year; in 2005, as a result of the impact of Hurricanes Katrina, Rita and Wilma, it declined by 13%. When comparing those levels of decline with the 6% dip in 2008, it is clear that we have built resilience into our portfolio. Finally, within the same time frame, we increased our shareholder dividend every year to the 2009 rate of $1.88 per share. Next >