Northbridge Financial Corporation
TSX : NB

Northbridge Financial Corporation

February 21, 2008 17:46 ET

Northbridge Financial Corporation: Financial Results for Fourth Quarter and Fiscal Year 2007 and Declaration of 2008 First Quarter Dividend

TORONTO, ONTARIO--(Marketwire - Feb. 21, 2008) -

(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, 2007 of $295.0 million ($5.84 per share), a 76.6% increase from net earnings of $167.1 million ($3.29 per share) for the year ended December 31, 2006. Underwriting profit for 2007 increased to $84.3 million from $23.5 million for 2006, producing a combined ratio(1) of 92.3% for 2007 compared to 98.0% for 2006. Total investment income was $331.9 million for the year ended December 31, 2007 compared to $244.9 million for the previous year and included net gains on investments of $203.2 million compared to $130.6 million for 2006.

Net earnings for the fourth quarter of 2007 were $79.5 million ($1.60 per share), a 114.4% increase from net earnings of $37.1 million ($0.73 per share) for the fourth quarter of 2006. Underwriting results for the fourth quarter of 2007 reflected a loss of $2.0 million compared to a profit of $16.9 million for the fourth quarter of 2006. Northbridge's combined ratio for the fourth quarter of 2007 was 100.7% compared to 94.3% for the fourth quarter of 2006. Total investment income was $132.3 million for the fourth quarter of 2007 compared to $42.4 million for the fourth quarter of 2006 and included net gains on investments of $98.5 million, compared to $9.4 million for the fourth quarter of 2006.

Subsequent to the end of 2007, Northbridge had $85.2 million of pre tax net gains on investments relating to its credit default swap portfolio for the period ended February 15, 2008 (including gains on sales and mark-to-market movements since year end). Proceeds on sales of credit default swaps were $106.1 million for the same period. As at February 15, 2008, the fair market value and cost of the company's credit default swap portfolio were $108.6 million and $18.3 million, respectively, compared to $129.5 million and $27.5 million as at December 31, 2007. The credit default swaps are volatile, with the result that their market value and their liquidity may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known upon their disposition.

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 31, 2008 to shareholders of record on March 4, 2008.

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 amounts Fourth Quarter Twelve Months
and percentages 2007 2006 2007 2006
------------------------------------------------------------------------
Total revenue 404.1 337.7 1,430.1 1,408.4
Underwriting profit (loss) (2.0) 16.9 84.3 23.5
Combined ratio(1) 100.7% 94.3% 92.3% 98.0%
Net earnings 79.5 37.1 295.0 167.1
Net earnings per share $1.60 $0.73 $5.84 $3.29
Net earnings per diluted share $1.59 $0.73 $5.82 $3.28
------------------------------------------------------------------------

(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 $79.5 million ($1.60 per share) compared to $37.1 million ($0.73 per share) for the fourth quarter of 2006.

- Underwriting loss of $2.0 million compared to underwriting profit of $16.9 million for the fourth quarter of 2006.

- Combined ratio of 100.7% compared to 94.3% for the fourth quarter of 2006.

- 5.6% decline in net premiums written and 8.0% decline in net premiums earned compared to the fourth quarter of 2006.

- Interest and dividend income of $33.8 million compared to $33.0 million for the fourth quarter of 2006, and net pre-tax gains on investments of $98.5 million compared to $9.4 million for the fourth quarter of 2006.

Year End Highlights

- Net earnings of $295.0 million ($5.84 per share) compared to $167.1 million ($3.29 per share) in 2006, an increase of 76.6%.

- Return on average equity of 22.2% compared to 15.3% for 2006 (excluding after tax unrealized gains or losses on available for sale securities, return on average equity was 23.1% for 2007).

- Underwriting profit of $84.3 million compared to $23.5 million for 2006.

- Combined ratio of 92.3% compared to 98.0% for 2006.

- 6.3% decline in net premiums written and 5.6% decline in net premiums earned compared to 2006.

- Interest and dividend income of $128.7 million compared to $114.3 million for 2006, and net pre-tax gains on investments of $203.2 million compared to $130.6 million for 2006.

- Cash flow generated from operations of $202.6 million for 2007 compared to $214.8 million for 2006.

- Cash and short-term investments at year end of $632.5 million compared to $934.0 million at the end of 2006.

- Investments at carrying value (net of S&P short position) increased by $386.6 million to $3,268.2 million at December 31, 2007 from $2,881.6 million at December 31, 2006, with pre-tax net unrealized gains on available for sale investments of $50.7 million at the end of 2007 compared to $104.0 million at January 1, 2007.

- Reserve strength, with favourable reserve development of 4.6% on a cumulative (i.e. weighted average) basis since 1995.

- Continued capital strength, with a weighted average MCT ratio of 311% and consolidated net premiums written to equity ratio of 0.8.

- Shareholders' equity increased by 22.0% to $1,420.4 million, resulting in book value per share of $28.59 at December 31, 2007 compared to $1,164.0 or $22.89 per share at the end of 2006.

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, 2007, prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and included at the end of this release. Northbridge's audited consolidated financial statements for the year ended December 31, 2007 will be published in its 2007 Annual Report, which is expected to be posted on the Company's website on Friday, March 7, 2008, and mailed to shareholders shortly thereafter. All dollar amounts are in Canadian dollars unless otherwise indicated. Certain totals, subtotals and percentages may not reconcile due to rounding. Certain comparative figures have been reclassified to be consistent with the current year's presentation.

FOURTH QUARTER RESULTS

Revenues

Revenue includes net premiums earned, interest and dividend income and net gains on investments.



Sources of Revenue (in $ millions)
-------------------------------------------------------------
-------------------------------------------------------------
For the Quarters Ended December 31 2007 2006
-------------------------------------------------------------
Gross premiums written 403.0 435.4
Net premiums written 269.3 285.1

Net premiums earned 271.8 295.3
Interest and dividends 33.8 33.0
Net gains on investments 98.5 9.4
-------------------------------------------------------------
Total revenue 404.1 337.7
-------------------------------------------------------------


Total revenue earned during the fourth quarter of 2007 increased by $66.4 million, or 19.7%, from the fourth quarter of 2006, largely resulting from an $89.1 million increase in net gains on investments, partially offset by a $23.5 million decrease in net premiums earned. The year-over-year increase in fourth quarter net gains on investments was primarily due to $75.1 million of net gains in the Company's credit default swap portfolio for the fourth quarter of 2007 and a $25.3 million net improvement in performance on the short sale of Standard & Poor's Depositary Receipts ("SPDRs"). Partially offsetting this increase was a $10.2 million impairment write-down in the Company's common stock portfolio during the fourth quarter of 2007. The decline in net premiums earned was primarily due to competitive pressures, particularly at Commonwealth and Markel, as well as the exit from the majority of Commonwealth's Energy & International ("E&I") business in 2006 (the "E&I exit").

During the fourth quarter of 2007, gross premiums written were $403.0 million, a decrease of $32.4 million or 7.4% compared to the fourth quarter of 2006. Contributing to this decline were competitive pressures, particularly at Commonwealth and Markel, and Commonwealth's E&I exit. Gross premiums written during the fourth quarter of 2007 declined relative to the fourth quarter of 2006 at Commonwealth (by $31.3 million), Markel (by $4.2 million), and Federated (by $0.8 million), and increased at Lombard (by $3.9 million). Net premiums written during the fourth quarter of 2007 declined $15.8 million, or 5.6%, compared to the fourth quarter of 2006 largely due to the reasons noted above. Net premiums written during the fourth quarter of 2007 declined relative to the fourth quarter of 2006 at Commonwealth (by $15.0 million), Markel (by $2.2 million), and Federated (by $0.6 million), and increased at Lombard (by $2.0 million).

Net Earnings

For the fourth quarter of 2007, the Company's net earnings were $79.5 million, or $1.60 per common share, compared to net earnings of $37.1 million, or $0.73 per common share for the fourth quarter of 2006, an increase of $42.4 million or 114.4%. This increase was primarily attributable to an $89.1 million increase in net gains on investments, partially offset by a $27.8 million increase in the provision for income taxes and an $18.9 million decrease in underwriting results. The Company's combined ratio was 100.7% and its underwriting loss was $2.0 million for the fourth quarter of 2007, compared to a combined ratio of 94.3% and an underwriting profit of $16.9 million for the fourth quarter of 2006. See the "-- Underwriting Results" section for further discussion. The increase in net gains on investments was primarily due to $75.1 million of net gains in the Company's credit default swap portfolio for the fourth quarter of 2007 and a $25.3 million net improvement in performance on the short sale of SPDRs. Partially offsetting this increase was a $10.2 million impairment write-down in the Company's common stock portfolio during the fourth quarter of 2007. The increase in the provision for income taxes was due to a $70.2 million increase in earnings before income taxes, as well as a higher effective tax rate for the fourth quarter of 2007, primarily resulting from a reduction in expected future tax rates.

Combined ratios and sources of net earnings for the fourth quarters of 2007 and 2006 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 2007 2006
------------------------------------------------------------------

Combined ratio 100.7% 94.3%

Underwriting profit (loss) (2.0) 16.9
Interest and dividends 33.8 33.0
------------------------------------------------------------------
Operating income 31.8 49.9
Net gains on investments 98.5 9.4
Other expenses (3.4) (2.6)
------------------------------------------------------------------
Earnings before income taxes 126.9 56.7
Provision for income taxes 47.4 19.6
------------------------------------------------------------------
Net earnings 79.5 37.1
------------------------------------------------------------------


Underwriting Results

For the fourth quarter of 2007, the Company's underwriting loss was $2.0 million and its combined ratio was 100.7%, compared to an underwriting profit of $16.9 million and a combined ratio of 94.3% for the fourth quarter of 2006. Each of the operating companies reported a decline in underwriting profit and a deterioration in combined ratio for the fourth quarter of 2007 compared to the fourth quarter of 2006.

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 2007 and 2006.



Change in Net Premiums Written and Underwriting Profit (in $ millions,
except percentages)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
For the Underwriting
Quarters Ended Net Premiums Written Profit (Loss) Combined Ratio
December 31 2007 2006 % Change 2007 2006 2007 2006
--------------------------------------------------------------------------
Lombard 175.5 173.5 1.2% 10.0 13.0 94.2% 92.6%
Markel 46.6 48.8 (4.5%) (2.1) 3.9 104.6% 92.5%
Commonwealth 22.8 37.8 (39.7%) (11.4) (7.5) 146.5% 118.2%
Federated 24.4 25.0 (2.6%) 1.5 7.5 94.1% 71.4%
--------------------------------------------------------------------------
Northbridge 269.3 285.1 (5.6%) (2.0) 16.9 100.7% 94.3%
--------------------------------------------------------------------------


Underwriting profit decreased $18.9 million for the fourth quarter of 2007 compared to the fourth quarter of 2006. This decrease was largely due to unfavourable results in Commonwealth's exited lines of business, including large losses of $3.5 million, increased competitive pressures on pricing in Commonwealth's core business lines, decreased results from the Company's share in the Facility Association (the residual automobile market insurance pools in which Lombard, Markel and Federated are required by statute to participate), and reduced year-over-year benefit from favourable development of prior years' reserves. For the fourth quarter of 2006, large losses of $9.5 million were recorded in Commonwealth's E&I business. The Company's share in the results of the Facility Association contributed pre-tax underwriting loss of $0.7 million for the fourth quarter of 2007, compared to pre-tax underwriting profit of $5.9 million for the fourth quarter of 2006.

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 2007 and 2006.



Operating Company Underwriting Results and Consolidated Net Earnings
(in $ millions, except percentages)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For the Quarter Ended
December 31, 2007 Lombard Markel Commonwealth Federated Total
---------------------------------------------------------------------------
Combined ratio:
Loss ratio 65.2% 79.9% 124.0% 59.5% 72.5%
Expense ratio 29.0% 24.7% 22.5% 34.6% 28.2%
---------------------------------------------------------------------------
94.2% 104.6% 146.5% 94.1% 100.7%

Gross premiums written 249.3 57.6 64.8 31.3 403.0
Net premiums written 175.5 46.6 22.8 24.4 269.3

Net premiums earned 174.3 46.7 24.6 26.2 271.8

Claims 113.7 37.3 30.5 15.6 197.1
Operating expenses 20.0 7.3 10.0 7.1 44.4
Commissions, net 22.6 2.7 (5.7) 0.9 20.5
Premium taxes 8.0 1.5 1.2 1.1 11.8
---------------------------------------------------------------------------
164.3 48.8 36.0 24.7 273.8
---------------------------------------------------------------------------
Underwriting
profit (loss) 10.0 (2.1) (11.4) 1.5 (2.0)
Interest and dividends 33.8
Net gains on investments 98.5
Other expenses (3.4)
---------------------------------------------------------------------------
Earnings before income taxes 126.9
Provision for income 47.4
---------------------------------------------------------------------------
Net earnings 79.5
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total identifiable
assets 2,960.4 819.7 1,208.8 454.6 5,443.5
Other 41.6
---------------------------------------------------------------------------
Total assets 5,485.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------



Operating Company Underwriting Results and Consolidated Net Earnings
(in $ millions, except percentages)
---------------------------------------------------------------------------
For the Quarter Ended Common-
December 31, 2006 Lombard Markel wealth Federated Total
---------------------------------------------------------------------------

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 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
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Lombard Insurance

For the fourth quarter of 2007, Lombard reported an underwriting profit of $10.0 million and a combined ratio of 94.2%, compared to an underwriting profit of $13.0 million and a combined ratio of 92.6% for the same period one year earlier. The change in underwriting profit was largely attributable to a decline in the results of the Facility Association pools. Gross premiums written were $249.3 million for the fourth quarter of 2007, an increase of 1.6% compared to $245.4 million for the same period in 2006, while net premiums written were $175.5 million for the fourth quarter of 2007, an increase of 1.2% compared to $173.5 million for the fourth quarter of 2006. Net premiums earned for the fourth quarter of 2007 were relatively flat at $174.3 million, compared to $174.7 million for the fourth quarter of 2006.

Markel Insurance

Markel recorded an underwriting loss of $2.1 million and a combined ratio of 104.6% for the fourth quarter of 2007, compared to an underwriting profit of $3.9 million and a combined ratio of 92.5% for the fourth quarter of 2006. The change in underwriting results was largely due to a decline in the results of the Facility Association pools and increased severity of claims. Gross premiums written declined $4.2 million to $57.6 million for the fourth quarter of 2007, compared to $61.8 million for the fourth quarter of 2006, while net premiums written declined $2.2 million to $46.6 million for the fourth quarter of 2007, compared to $48.8 million for the fourth quarter of 2006. Net premiums earned for the fourth quarter of 2007 declined $6.1 million, to $46.7 million, compared to $52.8 million for the fourth quarter of 2006. The decline in premiums was primarily attributable to a decrease in new business as a result of competitive pressures.

Commonwealth Insurance

For the fourth quarter of 2007, Commonwealth recorded an underwriting loss of $11.4 million and a combined ratio of 146.5%, compared to an underwriting loss of $7.5 million and a combined ratio of 118.2% for the fourth quarter of 2006. Contributing to this change in underwriting results was the impact of unfavourable performance in its largely exited E&I business, which included $3.5 million in large losses for the fourth quarter, competitive pressures on pricing in its core business lines, and reduced year-over-year benefit from favourable development of reserves relating to prior years' claims. Partially offsetting these factors was a decline in operating expenses relating partly to the impact of foreign exchange fluctuations and a year-over-year reduction in its provision for bad debts, and an increase in commission income primarily due to reinsurance profit sharing arrangements with certain reinsurers. In addition, the fourth quarter of 2006 included $9.5 million of large losses relating to its largely exited E&I business. Gross premiums written were $64.8 million for the fourth quarter of 2007, a decline of $31.3 million compared to the fourth quarter of 2006, due primarily to competitive pressures and the E&I exit. Net premiums written declined $15.0 million to $22.8 million for the fourth quarter of 2007, and net premiums earned declined $17.0 million to $24.6 million for the fourth quarter of 2007, primarily due to the reasons listed above.

Federated Insurance

Federated recorded an underwriting profit of $1.5 million and a combined ratio of 94.1% for the fourth quarter of 2007, compared to an underwriting profit of $7.5 million and a combined ratio of 71.4% for the fourth quarter of 2006. The decline in underwriting profit is largely due to an increased number of large losses and frequency of claims during the fourth quarter of 2007, primarily affecting its commercial auto and commercial property segments, and increased operating expenses. Gross premiums written for the fourth quarter of 2007 were $31.3 million, compared to $32.1 million for the fourth quarter of 2006, while net premiums written were $24.4 million for the fourth quarter of 2007, compared to $25.0 million for the fourth quarter of 2006. Net premiums earned were unchanged at $26.2 million for the fourth quarters of 2007 and 2006.

Segmented Information

Canadian business accounted for 91.5% of gross premiums written for the fourth quarter of 2007, up from 87.0% for the fourth quarter of 2006, while US & Other premiums accounted for 8.5% of the gross premiums written during the fourth quarter of 2007, down from 13.0% for the fourth quarter of 2006. The decrease in US & Other premiums was largely related to competitive pressures in Commonwealth's U.S.-based business, and its exit from the majority of its largely non-Canadian E&I business.



Geographic Mix of Business (in $ millions)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
For the Quarters Ended US & US &
December 31 Canada Other Total Canada Other Total
---------------------------------------------------------------------------

Gross premiums written 368.6 34.4 403.0 378.6 56.8 435.4
Net premiums written 257.9 11.4 269.3 266.1 19.0 285.1
Net premiums earned 259.7 12.1 271.8 271.0 24.3 295.3

Claims 182.2 14.9 197.1 161.2 35.0 196.2
Operating expenses 40.3 4.1 44.4 38.4 6.7 45.1
Commissions, net 24.7 (4.2) 20.5 28.0 (3.8) 24.2
Premium taxes 11.7 0.1 11.8 12.7 0.2 12.9
---------------------------------------------------------------------------
258.9 14.9 273.8 240.3 38.1 278.4
---------------------------------------------------------------------------
Underwriting profit (loss) 0.8 (2.8) (2.0) 30.7 (13.8) 16.9
Investment income 129.9 2.4 132.3 41.1 1.3 42.4
Other expenses (3.4) - (3.4) (2.6) - (2.6)
---------------------------------------------------------------------------
Earnings (loss) before
income taxes 127.3 (0.4) 126.9 69.2 (12.5) 56.7
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets 5,035.5 449.6 5,485.1 4,725.2 696.8 5,422.0
---------------------------------------------------------------------------
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For the fourth quarter of 2007, commercial lines accounted for 88.4% of gross premiums written, down from 89.3% for the fourth quarter of 2006. Personal lines increased to 11.6% of gross premiums written for the fourth quarter of 2007 from 10.7% for the same period one year earlier.



Gross Premiums Written by Product Line Segments (in $ millions)
--------------------------------------------------------------------
For the Quarters Ended December 31 2007 2006
--------------------------------------------------------------------
Commercial:

Property 128.0 154.1
Automobile 128.9 132.7
General liability 86.6 89.9
Other 12.8 12.0

Personal:

Property 14.8 13.8
Automobile 31.9 32.9
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Total 403.0 435.4
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Investment Income

Investment income consists of interest and dividend income, net of investment expenses, and net gains (losses) on investments. Net gains (losses) on investments consist of net realized gains (losses) on the sale of investments, net unrealized gains (losses) on investments held for trading and other investments, and other than temporary declines in the value of investments available for sale. Prior to January 1, 2007, net gains (losses) on investments consisted of net realized gains (losses) on the sale of investments, changes in market value of certain derivative contracts, and other than temporary declines in the value of investments. The impact of changes in foreign exchange on the Company's foreign dollar denominated available for sale investments are included in other comprehensive income, while foreign exchange on the translation of the Company's foreign cash balances and foreign dollar denominated held for trading investments are included in net gains on investments.

During the fourth quarter of 2007, the Company earned $132.3 million in investment income, compared to $42.4 million during the fourth quarter of 2006. Interest and dividend income earned for the fourth quarter of 2007, net of investment expenses, remained relatively flat at $33.8 million compared to $33.0 million for the fourth quarter of 2006. The largely unchanged interest and dividend income resulted from a higher average investment portfolio balance, tempered by a slightly lower yield achieved on the average investment portfolio. The annualized pre-tax yield (before expenses) on the average carrying value of the investment portfolio was 4.5% for the fourth quarter of 2007 and 4.9% for the fourth quarter of 2006. Net gains on investments were $98.5 million for the fourth quarter of 2007, an increase from $9.4 million for the fourth quarter of 2006. The year-over-year increase in fourth quarter net gains on investments was primarily due to $75.3 million of net gains in the Company's credit default swap portfolio for the fourth quarter of 2007 and a $25.3 million improvement in performance on the short sale of SPDRs. Partially offsetting this increase was a $10.2 million impairment write-down in the Company's common stock portfolio during the fourth quarter of 2007.



Investment Income (in $ millions)
--------------------------------------------------------------------------
For the Quarters Ended December 31 2007 2006
--------------------------------------------------------------------------

Interest and dividends:
Cash and short term investments 12.3 15.0
Bonds 19.5 12.9
Preferred stocks 0.2 0.2
Common stocks 5.6 5.6
Other(1) (1.3) 1.5
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36.3 35.2
Expenses (2.5) (2.2)
--------------------------------------------------------------------------
33.8 33.0
Gains (losses) on investments:
Cash and short term investments 5.6 -
Bonds 14.9 21.9
Preferred stocks - -
Common stocks 3.2 1.3
Other(1) 85.0 (13.8)
Provision for losses and writedowns (10.2) -
--------------------------------------------------------------------------
98.5 9.4
--------------------------------------------------------------------------
Net investment income 132.3 42.4
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(1) Includes credit default swaps, equity swaps and call options.



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 2007 2007 2007 2007 2006 2006 2006 2006
---------------------------------------------------------------------------
Gross
premiums
written 403.0 379.5 494.9 376.1 435.4 410.9 559.3 420.4
Net premiums
written 269.3 250.1 318.8 238.2 285.1 258.4 346.1 258.6

Net premiums
earned 271.8 280.8 267.3 278.3 295.3 291.5 285.8 290.9

Underwriting
profit
(loss) (2.0) 32.7 35.5 18.1 16.9 18.6 (38.3) 26.3
Interest and
dividends(1)
33.8 31.2 31.2 32.5 33.0 31.1 25.9 24.2
Net gains on
investments(1)
98.5 16.4 69.8 18.5 9.4 3.8 73.5 44.0
Other
expenses (3.4) (3.2) (3.5) (3.3) (2.6) (4.0) (2.6) (2.0)
---------------------------------------------------------------------------
Earnings
before
income
taxes 126.9 77.1 133.0 65.8 56.7 49.5 58.5 92.5
Provision
for
income
taxes 47.4 23.2 16.3 20.8 19.6 18.6 21.2 30.7
---------------------------------------------------------------------------
Net
earnings 79.5 53.9 116.7 45.0 37.1 30.9 37.3 61.8
---------------------------------------------------------------------------

Combined
ratio:
Loss
ratio 72.5% 60.9% 58.0% 65.0% 66.5% 68.0% 87.1% 65.8%
Expense
ratio 28.2% 27.5% 28.7% 28.5% 27.8% 25.6% 26.3% 25.2%
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100.7% 88.4% 86.7% 93.5% 94.3% 93.6% 113.4% 91.0%
Net
earnings
per
share $1.60 $1.06 $2.29 $0.89 $0.73 $0.61 $0.73 $1.22
Net
earnings
per
diluted
share $1.59 $1.06 $2.29 $0.88 $0.73 $0.61 $0.73 $1.21
Book
value
per
share $28.59 $26.92 $26.70 $25.36 $22.89 $22.22 $21.74 $21.24
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(1) Certain comparative figures have been reclassified to be consistent
with the current period's presentation.



YEAR END RESULTS

Revenue

Revenue includes net premiums earned, interest and dividend income and net
gains on investments.


Sources of Revenue (in $ millions)
------------------------------------------------------------------
For the Years Ended December 31 2007 2006
------------------------------------------------------------------
Gross premiums written 1,653.5 1,826.0
Net premiums written 1,076.4 1,148.2
Net premiums earned 1,098.2 1,163.5
Interest and dividends 128.7 114.3
Net gains on investments 203.2 130.6
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Total revenue 1,430.1 1,408.4
------------------------------------------------------------------
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Total revenue earned during 2007 increased by $21.7 million, or 1.5%, over 2006. The increase in revenue was primarily due to a $72.6 million increase in net gains on investments and a $14.4 million increase in interest and dividend income, partially offset by a $65.3 million decrease in net premiums earned. Net gains on investments increased year-over-year primarily due to $135.6 million of net gains in the Company's credit default swap portfolio, a $100.2 million pre-tax net gain on the sale of the Company's investment in Hub International Limited ("Hub") and a $29.6 million net improvement in performance on the short sale of SPDRs. This increase was partially offset by lower gains recorded in the Company's common stock and bond portfolios for 2007, as detailed in "-Investment Income" below, foreign exchange losses of $21.0 million for 2007 and $22.8 million of impairment write-downs in the Company's common stock portfolio for 2007. The year-over-year increase in interest and dividend income is primarily due to the increased average size of the investment portfolio. Net premiums earned were reduced by Commonwealth's E&I exit and $11.6 million in related reinsurance purchased to cover exposures on remaining in force policies, competitive pressures, primarily at Commonwealth and Markel, and decreased contribution from the Facility Association pools, and were slightly offset by growth in Lombard's specialty lines in the first half of 2007. Net premiums earned in 2006 were impacted by $11.1 million in reinsurance reinstatement premiums at Commonwealth, related to its E&I exit.

During 2007, gross premiums written declined by $172.5 million, or 9.5%, compared to 2006. This decline was largely a result of Commonwealth's E&I exit, competitive pressures, primarily at Commonwealth and Markel, and decreased contribution from the Facility Association pools, and were slightly offset by growth in Lombard's specialty lines in the first half of 2007. Gross premiums written during 2007 declined relative to 2006 at Commonwealth (by $147.3 million), Markel (by $39.1 million) and Federated (by $1.1 million) and increased at Lombard (by $15.0 million). Net premiums written for 2007 declined by $71.8 million, or 6.3%, from 2006, primarily due to the reasons impacting net premiums earned, as noted above. Net premiums written for 2007 declined relative to 2006 at Commonwealth (by $51.3 million), Markel (by $28.8 million) and Federated (by $0.5 million), and increased at Lombard (by $8.8 million).

Net Earnings

For 2007, net earnings were $295.0 million, or $5.84 per share, compared to net earnings of $167.1 million, or $3.29 per share for 2006, an increase of $127.9 million or 76.6%. The increase in net earnings was primarily attributable to a $72.6 million increase in net gains on investments, a $60.8 million increase in underwriting profit, and a $14.4 million increase in interest and dividend income, and was partially offset by a $17.8 million increase in the provision for income taxes. The Company's combined ratio was 92.3% and its underwriting profit was $84.3 million for 2007, compared to a combined ratio of 98.0% and an underwriting profit of $23.5 million for 2006. See the comments below and the "-Underwriting Results" section for further discussion. Net gains on investments increased largely due to $135.6 million of net gains in the Company's credit default swap portfolio, a $100.2 million pre-tax net gain on sale of the Company's Hub investment and a $29.6 million net improvement in performance on the short sale of SPDRs. This was partially offset by reduced gains recorded in the Company's common stock and bond portfolios for 2007, as detailed in "-Investment Income" below, foreign exchange losses of $21.0 million for 2007 and $22.8 million of impairment write-downs in its common stock portfolio for 2007. The increase in interest and dividend income was primarily due to the increased average size of the investment portfolio. The provision for income taxes increased largely due to a $145.7 million increase in earnings before income taxes, though partially offset by a lower effective tax rate in 2007, primarily resulting from the lower tax rate applied to the Hub gain.

The Company's underwriting results and combined ratio for 2007 were affected by foreign exchange movement on translation of claims liabilities denominated in U.S. dollars, reducing its claims expense and combined ratio by $46.8 million and 4.3 percentage points, respectively. Although the ultimate impact of translating U.S. dollar-denominated claims liabilities is mitigated by the translation of corresponding levels of U.S. dollar-denominated investment assets, new accounting standards limit the Company's ability to reflect the extent to which these items offset one another within underwriting income. Instead, such offsets are partially reflected within net income and fully reflected within comprehensive income.

Combined ratios and sources of net earnings for 2007 and 2006 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 2007 2006
-------------------------------------------------------------------
Combined ratio 92.3% 98.0%
Underwriting profit 84.3 23.5
Interest and dividends 128.7 114.3
-------------------------------------------------------------------
Operating income 213.0 137.8
Net gains on investments 203.2 130.6
Other expenses (13.4) (11.3)
-------------------------------------------------------------------
Earnings before income taxes 402.8 257.1
Provision for income taxes 107.8 90.0
-------------------------------------------------------------------
Net earnings 295.0 167.1
-------------------------------------------------------------------


Underwriting Results

For 2007, the Company earned underwriting profit of $84.3 million, compared to underwriting profit of $23.5 million earned for 2006, producing a combined ratio of 92.3% for 2007, compared to 98.0% for 2006. Lombard, Markel and Federated reported a decline in underwriting results and a deterioration of combined ratio year-over-year, while Commonwealth reported improved underwriting results and combined ratio over the same period.

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, 2007 and 2006.



Change in Net Premiums Written and Underwriting Profit (in $ millions,
except percentages)
---------------------------------------------------------------------------
Underwriting
For the Years Ended Net Premiums Written Profit (Loss) Combined Ratio
December 31 2007 2006 % Change 2007 2006 2007 2006
---------------------------------------------------------------------------
Lombard 708.5 699.7 1.3% 43.9 68.0 93.7% 90.1%
Markel 179.7 208.5 (13.8%) 9.2 19.2 95.2% 91.2%
Commonwealth 85.2 136.5 (37.6%) 25.1 (80.5) 77.0% 153.7%
Federated 103.0 103.5 (0.4%) 6.1 16.8 94.1% 84.0%
---------------------------------------------------------------------------
Northbridge 1,076.4 1,148.2 (6.3%) 84.3 23.5 92.3% 98.0%
---------------------------------------------------------------------------


Several factors contributed to the $60.8 million year-over-year improvement in underwriting profit. During 2006, the Company recorded $101.1 million in new claims and development of existing claims related to hurricanes Katrina, Rita and Wilma ("KRW"), as well as large losses of $24.8 million and $11.1 million in corresponding reinsurance reinstatement premiums related to Commonwealth's largely exited E&I business. Also favourably impacting the year-over-year improvement in underwriting results was a $46.8 million reduction in claims expense from foreign exchange movement on translation of claims liabilities denominated in U.S. dollars. These factors were partially offset by increased frequency of claims, primarily in the Company's commercial auto and commercial property segments, the unfavourable impact of the exited portions of Commonwealth's E&I business, including large losses of $12.6 million, the impact of competitive pressures on pricing in Commonwealth's core business lines, deteriorated results from the Facility Association, and slightly increased general operating expenses for 2007. Excluding the impact of reserve development at the Facility Association and the favourable impact of the foreign exchange movement on prior years' claims, favourable reserve development on prior years' claims for 2007 occurred at each operating company, including $17.8 million at Lombard, $8.3 million at Markel, $7.0 million at Federated and $0.2 million at Commonwealth. Excluding the impact of reserve development at the Facility Association and the impact of reserve development relating to KRW at Commonwealth, favourable reserve development on prior years' claims for 2006 also 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 resulted in a $1.2 million pre-tax underwriting loss for 2007 compared to a $9.9 million pre-tax underwriting profit for 2006.

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, 2007 and 2006.



Operating Company Underwriting Results and Consolidated Net Earnings
(in $ millions, except percentages)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For the Year Ended
December 31, 2007 Lombard Markel Commonwealth Federated Total
---------------------------------------------------------------------------
Combined ratio:
Loss ratio 64.4% 68.0% 56.6% 62.9% 64.1%
Expense ratio 29.3% 27.2% 20.4% 31.2% 28.2%
---------------------------------------------------------------------------
93.7% 95.2% 77.0% 94.1% 92.3%
Gross premiums
written 1,004.4 222.0 296.6 130.5 1,653.5
Net premiums written 708.5 179.7 85.2 103.0 1,076.4
Net premiums earned 695.3 189.7 109.4 103.8 1,098.2
Claims 447.7 129.0 61.9 65.3 703.9
Operating expenses 78.5 31.9 35.7 24.4 170.5
Commissions, net 93.2 12.7 (18.8) 3.7 90.8
Premium taxes 32.0 6.9 5.5 4.3 48.7
---------------------------------------------------------------------------
651.4 180.5 84.3 97.7 1,013.9
---------------------------------------------------------------------------
Underwriting profit 43.9 9.2 25.1 6.1 84.3
Interest and dividends 128.7
Net gains on
investments 203.2
Other expenses (13.4)
---------------------------------------------------------------------------
Earnings before
income taxes 402.8
Provision for income
taxes 107.8
---------------------------------------------------------------------------
Net earnings 295.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total identifiable
assets 2,960.4 819.7 1,208.8 454.6 5,443.5
Other 41.6
---------------------------------------------------------------------------
Total assets 5,485.1
---------------------------------------------------------------------------




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 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
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Lombard Insurance

For 2007, Lombard posted a combined ratio of 93.7% and an underwriting profit of $43.9 million, compared to 90.1% and $68.0 million for 2006. The change in underwriting results was largely attributable to increased frequency of claims, primarily in its commercial auto and commercial property lines, and a decline in the profitability of its share of the results in the Facility Association pools. These factors were partially offset by a year-over-year increase in favourable reserve development relating to prior years' claims. Gross premiums written for 2007 increased $15.0 million to $1,004.4 million, while net premiums written increased $8.8 million to $708.5 million, and net premiums earned increased $5.4 million to $695.3 million, for the same period. The increase in premiums was primarily due to growth in Lombard's specialty lines during the first half of 2007.

Markel Insurance

Markel's underwriting profit and combined ratio for 2007 were $9.2 million and 95.2%, respectively, compared to $19.2 million and 91.2% for 2006. Contributing to the change in Markel's underwriting results was increased loss frequency for 2007, as well as deteriorated results from the Facility Association and a reduced year-over-year benefit from favourable development of reserves relating to prior years' claims, partially offset by a $15.5 million reduction in claims expense from foreign exchange movement relating to the translation of claims liabilities denominated in U.S. dollars. Gross premiums written for 2007 declined by $39.1 million to $222.0 million compared to 2006, while net premiums written declined $28.8 million, to $179.7 million, compared to 2006, and net premiums earned declined $28.7 million to $189.7 million for the same period. In addition, there was an $8.9 million reduction in gross premiums written from the Facility Association. Overall, the retention of accounts continues to be strong, however, competitive pressures have heightened in the larger accounts and the attraction of new business has been challenging. The trucking insurance market has been highly volatile in recent periods as a result of very aggressive competition and the economic slowdown in the trucking industry.

Commonwealth Insurance

Commonwealth recorded an underwriting profit of $25.1 million and a combined ratio of 77.0% for 2007, compared to an underwriting loss of $80.5 million and a combined ratio of 153.7% for 2006. Contributing to this year-over-year improvement in underwriting results was the absence of the $101.1 million in new claims and development of existing claims related to KRW for 2006, and the absence of large losses of $24.8 million and $11.1 million in corresponding reinsurance reinstatement premiums related to its largely exited E&I business, which also occurred in 2006. In 2007 there was a $31.3 million reduction in claims expense from foreign exchange movement on translation of claims liabilities denominated in U.S. dollars. These favourable factors were partially offset by the unfavourable impact of the exited portions of its E&I business, including large losses of $12.6 million and the impact of competitive pressures on pricing in its core business lines. Also negatively affecting the year-over-year change in underwriting profit was reduced year-over-year benefit from favourable development of reserves relating to prior years' claims (excluding the impact of KRW in 2006 and the foreign exchange impact in 2007). Gross premiums written were $296.6 million for 2007, a decline of $147.3 million compared to 2006, while net premiums written were $85.2 million for 2007, a decline of $51.3 million compared to 2006. Net premiums earned for 2007 decreased $40.7 million over 2006, to $109.4 million. The decline in premiums is primarily the result of Commonwealth's E&I exit and increased competitive pressures in 2007. Also impacting net premiums written and net premiums earned was $11.6 million in additional reinsurance purchased during 2007, primarily relating to exposures within largely exited business lines, while 2006 included $11.1 million in reinsurance reinstatement premiums paid.

Federated Insurance

For 2007, Federated recorded an underwriting profit of $6.1 million and a combined ratio of 94.1%, compared to an underwriting profit of $16.8 million and a combined ratio of 84.0% for 2006. The change in underwriting performance was primarily impacted by $4.4 million in catastrophe losses stemming from the hail storms in Western Canada during 2007, increased frequency of claims, primarily in its commercial auto and commercial property lines, and a $3.6 million increase in general operating expenses. Gross premiums written were relatively flat at $130.5 million for 2007, compared to $131.6 million for 2006. Net premiums written were $103.0 million for 2007 compared to $103.5 million for 2006, while net premiums earned were $103.8 million for 2007, compared to $105.1 million for 2006.

Segmented Information

For 2007, Canadian business as a percentage of total gross premiums written was 89.4%, compared to 83.8% for 2006, while US & Other represented 10.6% for 2007, compared to 16.2% for 2006. This shift in business mix was primarily attributable to the exit from the majority of Commonwealth's predominantly non-Canadian E&I business.



Geographic Mix of Business (in $ millions)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2007 2006
US & US &
For the Years Canada Other Total Canada Other Total
Ended December 31
---------------------------------------------------------------------------

Gross premiums
written 1,479.0 174.5 1,653.5 1,530.7 295.3 1,826.0
Net premiums
written 1,044.8 31.6 1,076.4 1,077.6 70.6 1,148.2
Net premiums
earned 1,052.2 46.0 1,098.2 1,077.6 85.9 1,163.5

Claims 687.6 16.3 703.9 639.5 195.3 834.8
Operating
expenses 150.6 19.9 170.5 139.2 20.2 159.4
Commissions, net 104.6 (13.8) 90.8 108.6 (14.2) 94.4
Premium taxes 48.1 0.6 48.7 50.5 0.9 51.4
---------------------------------------------------------------------------
990.9 23.0 1,013.9 937.8 202.2 1,140.0
---------------------------------------------------------------------------
Underwriting
profit (loss) 61.3 23.0 84.3 139.8 (116.3) 23.5
Investment income 339.9 (8.0) 331.9 239.8 5.1 244.9
Other expenses (13.4) - (13.4) (11.3) - (11.3)
---------------------------------------------------------------------------
Earnings (loss)
before income taxes 387.8 15.0 402.8 368.3 (111.2) 257.1
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets 5,035.5 449.6 5,485.1 4,725.2 696.8 5,422.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------

For 2007, commercial lines accounted for 88.3% of gross premiums written,
compared to 89.5% for 2006, while personal lines accounted for 11.7% of
gross premiums written for 2007, compared to 10.5% for 2006. The decrease
in commercial lines premiums was largely related to Commonwealth's E&I exit
and competitive pressures, particularly at Commonwealth and Markel.


Gross Premiums Written by Product Line Segments (in $ millions)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For the Years Ended December 31 2007 2006
---------------------------------------------------------------------------

Commercial:
Property 545.9 667.0
Automobile 504.3 545.1
General liability 340.7 368.0
Other 68.4 54.3

Personal:
Property 59.8 61.9
Automobile 134.4 129.7
---------------------------------------------------------------------------
Total 1,653.5 1,826.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Investment Income

During 2007, the Company earned $331.9 million in investment income, compared to $244.9 million during 2006. Interest and dividend income earned in 2007, net of investment expenses, increased to $128.7 million from $114.3 million for 2006, largely due to the increased average size of the investment portfolio. The annualized pre-tax yield (before expenses) on the average carrying value of the investment portfolio was 4.5% for 2007 and 2006. Net gains on investments increased to $203.2 million for 2007 compared to $130.6 million for 2006. Net gains on investments increased year-over-year due to $135.6 million of net gains in the Company's credit default swap portfolio, a $100.2 million pre-tax net gain on sale of the Company's Hub investment, and a $29.6 million net improvement in performance on the short sale of SPDRs. These factors were partially offset by lower gains recorded in the Company's common stock and bond portfolios for 2007, foreign exchange losses of $21.0 million for 2007 and $22.8 million of impairment write-downs in its common stock portfolio for 2007.



Investment Income Summary (in $ millions)
---------------------------------------------------------------------------
For the Years Ended December 31 2007 2006
---------------------------------------------------------------------------

Interest and dividends:
Cash and short term investments 37.9 37.8
Bonds 75.0 63.0
Preferred stocks 0.6 0.7
Common stocks 24.1 20.4
Other(1) 0.7 0.9
---------------------------------------------------------------------------
138.3 122.8
Expenses (9.6) (8.5)
---------------------------------------------------------------------------
128.7 114.3

Gains (losses) on investments:
Cash and short term investments (21.0) -
Bonds (10.5) 57.5
Preferred stocks - 1.7
Common stocks 132.6 111.4
Other(1) 124.9 (36.0)
Provision for losses and writedowns (22.8) (4.0)
---------------------------------------------------------------------------
203.2 130.6
---------------------------------------------------------------------------
Net investment income 331.9 244.9
---------------------------------------------------------------------------
(1) Includes credit default swaps, equity swaps and call options.


BALANCE SHEET ANALYSIS

Investments

At December 31, 2007, investments at carrying value (net of obligations related to securities sold short) totalled $3,268.2 million compared to $2,881.6 million at December 31, 2006. Net pre-tax unrealized gains on available for sale investments at December 31, 2007 were $50.7 million, while net pre-tax unrealized gains on investments at December 31, 2006 were $111.1 million, excluding the investment in Hub. Upon adoption of the new accounting standards on January 1, 2007, the $111.1 million pre-tax unrealized gains on investments at December 31, 2006 were allocated to available for sale and held for trading investments in the amounts of $104.0 million and $7.1 million, respectively.



Summary of Investments (in $ millions)
---------------------------------------------------------------------------
As at December 31 2007 2006
Carrying Total Carrying Total
Type of Investment Value Fair Value Value Fair Value
---------------------------------------------------------------------------

Subsidiary cash and
short term investments 621.4 621.4 904.6 904.6
Marketable securities 216.2 216.2 - -
Bonds
Canadian government 1,555.9 1,555.9 1,302.3 1,316.8
Canadian corporate 116.0 116.0 117.2 118.2
Foreign government 210.1 210.1 161.9 156.7
Foreign corporate 32.0 32.0 60.2 69.7
Preferred stocks
Canadian 12.7 12.7 12.6 13.1
Common stocks
Canadian 535.0 535.0 434.0 514.4
Foreign 96.4 96.4 61.3 71.7
Obligations related
to securities sold short (267.6) (267.6) (301.5) (301.5)
Other invested assets(1)
Canadian 10.6 10.6 3.0 3.0
Foreign 129.5 129.5 18.2 18.2
Investment in Hub - - 107.8 176.8
---------------------------------------------------------------------------
Total 3,268.2 3,268.2 2,881.6 3,061.7
---------------------------------------------------------------------------
(1) Includes credit default swaps, equity swaps and call options.


During 2007, the Company entered into equity swap agreements. The swaps have an equity notional value of approximately $250 million and the Company pays or receives floating interest and other amounts based on the total return of the S&P/TSX 60 Index and the equity notional amount. The estimated fair value of the equity swap agreements is based on quoted market ask prices. The net fair value of the swaps at December 31, 2007 is $4.3 million and is comprised of a $7.6 million asset, which is included in other invested assets, and a $3.3 million liability, which is recorded in obligations related to securities sold short.

At December 31, 2007 the Company has invested $27.5 million (2006 - $15.3 million) in credit default swaps, which are recorded in other invested assets at a fair market value of $129.5 million (2006 -- $10.3 million). The swaps are medium term, U.S. and Euro-denominated credit derivatives purchased from major banks which relate primarily to financial institutions and fluctuate with credit spreads. The estimated fair value of the credit default swaps is based on counterparty broker-dealer quotes.

As a result of the appreciation in the fair value of the credit default swaps, counterparties to these transactions are required to place government securities as collateral, pursuant to the swap agreements. The fair value of this collateral at December 31, 2007 was approximately $103 million (2006 -- nil). Northbridge does not have the right to sell or repledge this collateral as it continues to be the property of the counterparties.

At December 31, 2007, as protection against declines in equity markets, the Company had a short position in SPDRs of approximately US$200 million. The Company has purchased near-dated call option contracts ("Options") to limit the potential loss on the future purchase of the SPDRs. The cost of the Options was US$0.4 million. The Options and the obligation to purchase the SPDRs are carried at fair value in the consolidated financial statements, with fair value based on quoted market ask prices and broker-dealer quotes, respectively. The fair value of the obligation to purchase the SPDRs is $264.3 million and is included in obligations related to securities sold short and the fair value of the Options is included in other invested assets in the consolidated balance sheet.

At December 31, 2007, subsidiary cash and short term investments had decreased to $621.4 million from $904.6 million at December 31, 2006 largely due to the purchase of investments, primarily marketable securities. As at December 31, 2007, 99.9% of Northbridge's bond portfolio was rated investment grade (BBB or higher), compared to 98.7% at December 31, 2006.

Recoverable and Receivable from Reinsurers

Amounts recoverable and receivable from reinsurers, net of provision for uncollectible reinsurance, decreased to $1,258.0 million at December 31, 2007 from $1,454.9 million at the end of 2006, a decrease of 13.5% . This decrease is largely due to the receipt of amounts owing from reinsurers related to KRW claims.

At the end of 2007 the top twenty reinsurers accounted for 92.0% of amounts recoverable and receivable from reinsurers, net of provision for uncollectible reinsurance, compared to 91.5% at the end of 2006. Overall asset quality improved with $1,170.2 million or 93.0% of recoverables and receivables, net of provision for uncollectible reinsurance, from reinsurers rated A- or better by A.M. Best at year end. This compared to $1,289.8 million or 88.6% at year end 2006. Of the $98.3 million in balances recoverable and receivable from reinsurers rated below A- by A.M. Best, $64.1 million is secured and $34.2 million is unsecured.

Northbridge had amounts recoverable and receivable from affiliated reinsurers totalling $593.0 million at December 31, 2007, compared to $675.5 million at December 31, 2006. Of the balances recoverable and receivable from affiliated reinsurers, $553.0 million is recoverable and receivable from affiliated reinsurers rated A- or better by A.M. Best. Of the remaining $40.0 million recoverable and receivable from affiliated reinsurers rated below A-, $39.9 million is secured and $0.1 million is unsecured.

Accounts Receivable and Other

Accounts receivable and other at December 31, 2007 totalled $444.3 million, a decrease of $52.8 million from $497.1 million at December 31, 2006, primarily due to a decline in amounts receivable for securities sold and a decline in premiums receivable.

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at December 31, 2007 totalled $294.7 million, a decrease of $32.6 million from $327.3 million at December 31, 2006, primarily due to a decrease in premium deposits payable to reinsurers.

Unearned Premiums

Unearned premiums decreased to $854.2 million at December 31, 2007 from $918.2 million at December 31, 2006, primarily due to reduced gross premium levels for 2007.

Provision for Claims

Provision for claims was $2,635.2 million at December 31, 2007 compared to $2,710.9 million at December 31, 2006, a decrease of 2.8%, primarily reflecting payments of claims largely related to KRW, a reduction in the claims provision from foreign exchange movement on prior years' claims (see "Year End Results -- Underwriting Results") and the timing of claims paid.

Contractual Obligations

Future contractual obligations under operating leases relate to premises, automobiles and equipment. Future minimum commitments under such leases totalled $74.6 million at December 31, 2007, compared to $87.9 million at December 31, 2006. Future obligations for claims payments, net of reinsurance, were estimated to be $1,696.1 million at December 31, 2007, compared to $1,640.2 million at December 31, 2006.

Capital Structure and Liquidity

Shareholders' equity at December 31, 2007 was $1,420.4 million or $28.59 per share, compared to $1,164.0 million or $22.89 per share at December 31, 2006.

The ratio of net premiums written in 2007 to shareholders' equity was 0.8 at December 31, 2007, down from 1.0 at December 31, 2006 primarily due to strong growth in shareholders' equity and a decline in net premiums written. See "Year End Results -- Revenue" for more information regarding net premiums written. In terms of regulatory measures of capital adequacy, the Company's subsidiaries have a weighted average Minimum Capital Test ratio of 311% at December 31, 2007 compared to 250% at December 31, 2006.

Cash provided by operating activities was $202.6 million for 2007, compared to $214.8 million for 2006. The Company's total cash resources declined to $632.5 million at December 31, 2007 from $934.0 million at December 31, 2006 due to significant purchases of investments.

Northbridge had holding company cash and short term investments and marketable securities of $30.6 million at December 31, 2007 compared to $29.5 million at December 31, 2006.

As previously announced, Northbridge will hold a conference call and webcast at 9:30 am (Toronto time) on Friday, February 22, 2008 to discuss its fourth quarter and year end results for 2007, available on the Company's website at www.norfin.com under "Press Releases". The call, consisting of a presentation by management followed by a question period, will be broadcast live on the internet through the Company's website or may be accessed by telephone at (416) 695-9706 or (866) 542-4270. The webcast and presentation materials will be accessible on the Company's website under "Financial Information" prior to the call. A replay will be available following the call on the same website or via telephone at (416) 695-5800 or (800) 408-3053 (pass-code 3249367) until midnight (Toronto time) on Friday, March 7, 2008.

Northbridge's 2007 Annual Report is scheduled to be posted on the Company's website under "Financial Information" Friday, March 7, 2008, and to be mailed to shareholders shortly thereafter.

Northbridge is the leading commercial property and casualty insurance group in Canada, providing property and casualty insurance products through its subsidiaries primarily in Canada through multiple distribution channels. Northbridge common shares are listed and traded under the symbol NB on the Toronto Stock Exchange. Visit Northbridge's website at www.norfin.com for more information.

This release includes registered and unregistered product names, trade names, trademarks and service marks of Northbridge, Lombard, Markel, Commonwealth, Federated and other companies, each of which is the property of its respective owner.

Forward-Looking Information

Statements in this release about future plans, intentions, results, levels of activity, performance, goals, achievements or other future events constitute forward-looking statements. In some cases forward-looking statements may be identified by the use of words such as "may", "will", "should", "would", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts" or "potential" or the negative or other variations of these words, or other comparable words or phrases. Although Northbridge believes that the expectations reflected in its forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements or other future events. Readers should not place undue reliance on forward-looking statements as they involve known and unknown risks, uncertainties and other factors about Northbridge, the business environment in which it operates, the economy and the insurance industry generally that may cause actual results or events to differ materially from those expressed, implied or anticipated in such forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the following factors which are more fully described in Northbridge's Annual Information Form and other filings with Canadian securities regulators (accessible on SEDAR -- System for Electronic Document Analysis and Retrieval -- at www.sedar.com: the adequacy of claims reserves; unpredictable catastrophic events; ability to alleviate risk through reinsurance coverage; the cyclical nature of the property and casualty insurance industry; competitive market environment; credit risks associated with reinsurers and certain insureds and brokers; ability to achieve investment returns; subsidiaries' ability to maintain their financial strength ratings; changes in the business, economic and political environment; changes in government regulation; periodic negative publicity regarding the insurance industry; litigation and regulatory actions; reliance on independent brokers and third parties to sell certain products; reliance on information technology and telecommunications systems; dependence on operating management; dependence on the financial performance of subsidiaries; uncertainties associated with critical accounting estimates and assumptions; and foreign currency fluctuations. Northbridge is under no obligation and has no intention to update or alter any of its forward-looking statements as a result of new information, future events or otherwise, except as required by law.

In addition, the preparation of Northbridge's financial statements in accordance with Canadian generally accepted accounting principles requires it to make estimates and assumptions about future events which affect certain amounts reported in the financial statements and amounts derived therefrom, including amounts presented in this release. Those critical accounting estimates and assumptions principally relate to the establishment of provisions for claims and expenses, other than temporary impairments of investments, amounts receivable and recoverable from reinsurers and income taxes. As more information becomes known, these estimates and assumptions could change and impact future results. For a more complete discussion of critical accounting estimates and assumptions, please refer to the Company's filings with Canadian securities regulators (accessible on SEDAR at www.sedar.com).



CONSOLIDATED BALANCE SHEETS

(unaudited - in Cdn $ thousands)
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As at December 31 2007 2006
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Assets
Cash and short term investments 11,151 29,457
Marketable securities 19,410 -
Accounts receivable and other 444,270 497,090
Income taxes recoverable - 21,706
Paid losses receivable 76,119 102,859
Recoverable from reinsurers 1,181,852 1,352,075
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1,732,802 2,003,187
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Investments
Subsidiary cash and short term investments 621,389 904,563
Marketable securities (amortized cost $217,849) 216,212 -
Bonds
At fair value (amortized cost $1,941,368) 1,914,047 -
At amortized cost (fair value $1,661,304) - 1,641,590
Preferred stocks
At fair value (cost $12,625) 12,651 -
At cost (fair value $13,125) - 12,625
Common stocks
At fair value (cost $567,607) 631,445 -
At cost (fair value $586,098) - 495,261
Investment in Hub (fair value 2006: $176,811) - 107,762
Other invested assets 140,067 21,238
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Total investments 3,535,811 3,183,039
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Deferred premium acquisition costs 141,322 143,281
Future income taxes 41,301 56,640
Premises and equipment 17,709 15,951
Goodwill 9,501 15,574
Other assets 6,661 4,345
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5,485,107 5,422,017
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Liabilities
Accounts payable and accrued liabilities 294,673 327,331
Obligations related to securities sold short 267,615 301,473
Income taxes payable 12,866 -
Due to affiliates 148 63
Provision for claims 2,635,176 2,710,868
Unearned premiums 854,195 918,239
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4,064,673 4,257,974
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Shareholders' Equity
Capital 555,348 579,046
Retained earnings 842,338 595,814
Accumulated other comprehensive income 22,748 (10,817)
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1,420,434 1,164,043
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5,485,107 5,422,017
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CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited - in Cdn $ thousands, except share data and per share amounts)
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Fourth quarter Twelve months
For the Periods Ended December 31 2007 2006 2007 2006
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Gross premiums written 403,028 435,438 1,653,480 1,825,990
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Net premiums written 269,297 285,129 1,076,356 1,148,177
Revenue
Net premiums earned 271,801 295,342 1,098,210 1,163,529
Interest and dividends 33,806 33,039 128,736 114,276
Net gains on investments 98,522 9,340 203,172 130,611
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404,129 337,721 1,430,118 1,408,416
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Expenses
Claims 197,052 196,285 703,924 834,825
Operating expenses 44,365 45,105 170,457 159,375
Commissions, net 20,515 24,212 90,745 94,447
Premium taxes 11,842 12,857 48,736 51,415
Other 3,416 2,606 13,426 11,301
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277,190 281,065 1,027,288 1,151,363
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Earnings before income taxes 126,939 56,656 402,830 257,053
Provision for income taxes 47,448 19,579 107,776 89,986
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Net earnings 79,491 37,077 295,054 167,067
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Net earnings per share $1.60 $0.73 $5.84 $3.29
Net earnings per diluted share $1.59 $0.73 $5.82 $3.28
Weighted average shares (000) 49,784 50,851 50,552 50,851
Weighted average diluted shares (000) 49,925 50,950 50,658 50,957
Shares outstanding (000) 49,680 50,851 49,680 50,851
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited - in Cdn $ thousands)
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Fourth quarter Twelve months
For the Periods Ended December 31 2007 2006 2007 2006
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Net earnings 79,491 37,077 295,054 167,067
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Other comprehensive income:
Change in unrealized gains or losses
on available for sale investments 15,551 - (38,228) -
Reclassification of net realized (gains)
losses on available for sale
investments to earnings 6,923 - (15,034) -
Change in unrealized foreign currency
translation gains or losses (305) 5,151 (2,523) 2,894
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22,169 5,151 (55,785) 2,894
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Other comprehensive income, income
taxes:
Change in unrealized gains or losses
on available for sale investments (6,065) - 9,855 -
Reclassification of net realized gains
(losses) on available for sale
investments to earnings (2,268) - 6,394 -
(8,333) - 16,249 -
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Other comprehensive income, net of
income taxes:
Change in unrealized gains or losses
on available for sale investments 9,486 - (28,373) -
Reclassification of net realized
(gains) losses on available for
sale investments to earnings 4,655 - (8,640) -
Change in unrealized foreign currency
translation gains or losses (305) 5,151 (2,523) 2,894
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Other comprehensive income (loss) 13,836 5,151 (39,536) 2,894
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Comprehensive income 93,327 42,228 255,518 169,961
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER
COMPREHENSIVE INCOME

(unaudited - in Cdn $ thousands)
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For the Years Ended December 31 2007 2006
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Retained earnings - beginning of period 595,814 462,309
Transition adjustment on adoption of Financial
Instruments standards 4,685 -
Net earnings 295,054 167,067
Common share dividends (33,379) (33,562)
Excess over stated value of shares purchased for
cancellation (19,836) -
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Retained earnings - end of period 842,338 595,814
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Accumulated other comprehensive income -
beginning of period (10,817) -
Reclassification from currency translation account - (13,711)
Transition adjustment on adoption of Financial
Instruments standar 73,101 -
Other comprehensive income (loss) (39,536) 2,894
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Accumulated other comprehensive income - end of period 22,748 (10,817)
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Total retained earnings and accumulated other
comprehensive income 865,086 584,997
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CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited - in Cdn $ thousands)
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Fourth quarter Twelve months
For the Years Ended December 31 2007 2006 2007 2006
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Operating activities
Net earnings 79,491 37,077 295,054 167,067
Amortization 1,737 762 7,126 4,616
Future income taxes (7,414) (18,575) (10,159) 9,393
Net realized (gains) losses on
available for sale investments 6,923 - (15,034) -
Other net gains on investments (105,445) - (188,138) -
Net gains on investments - (9,340) - (130,611)
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(24,708) 9,924 88,849 50,465
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Change in:
Provision for claims (17,034) 40,076 (80,662) 146,919
Unearned premiums (8,767) (21,553) (64,044) (19,735)
Accounts receivable and other (22,469) (23,925) 52,820 (3,345)
Income taxes, net 41,655 27,732 43,054 (15,297)
Deferred premium acquisition
costs 838 931 1,959 (714)
Paid losses receivable (6,069) 3,509 26,740 9,447
Recoverable from reinsurers 39,109 24,716 170,223 89,592
Due to affiliates 147 15 85 (3,781)
Accounts payable and accrued
liabilities 32,319 235 (32,658) (33,424)
Other 3,903 (78) (3,771) (5,296)
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Cash provided by operating
activities 38,924 61,582 202,595 214,831
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Investing activities
Available for sale
investments - purchases (81,229) - (544,350) -
- sales 7,114 - 174,129 -
Marketable securities -
purchases (225,202) - (347,826) -
- sales 54,100 - 106,566 -
Investments classified as held
for trading - purchases (1,488) - (67,108) -
- sales 5,715 - 39,191 -
Investments designated as held
for trading - purchases - - - -
- sales (168) - 20,249 -
Investments equity accounted and
other purchases - - - -
- sales - - 211,335 -
Investments - purchases - (635,764) - (1,151,958)
- sales - 89,836 - 1,149,883
Purchase of premises and
equipment (2,645) (598) (5,357) (3,129)
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Cash used in investing
activities (243,803) (546,526) (413,171) (5,204)
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Financing activities
Common share dividends (8,217) (8,390) (33,379) (33,562)
Share repurchase (11,194) - (40,560) -
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Cash used in financing
activities (19,411) (8,390) (73,939) (33,562)
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Foreign currency translation 6,644 (6,497) (16,965) (3,871)
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Increase (decrease) in cash
resources (217,646) (499,831) (301,480) 172,194
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Cash resources - beginning of
period 850,186 1,433,851 934,020 761,826
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Cash resources - end of period 632,540 934,020 632,540 934,020
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Contact Information

  • Northbridge Financial Corporation
    John Varnell
    Chief Financial Officer
    (416) 350-4300