ALLEGHANY CORP /DE
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2009 | ||
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission file number
1-9371
ALLEGHANY CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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51-0283071 | |
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification Number) |
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7 Times Square Tower,
New York, New York |
10036
(Zip Code) |
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(Address of principal executive
offices)
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Registrant’s telephone number, including area code:
212-752-1356
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
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Title of Each Class
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on Which Registered
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Common Stock, $1.00 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Not applicable
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(Section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files.
Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company.
Yes
o
No
þ
As of June 30, 2009, the aggregate market value (based upon
the closing price of these shares on the New York Stock
Exchange) of the shares of Common Stock of Alleghany Corporation
held by non-affiliates was $1,944,982,718.
As of February 20, 2010, 8,860,073 shares of Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting
of Stockholders of Alleghany Corporation to be held on
April 23, 2010 are incorporated into Part III of this
Form 10-K
Report.
ALLEGHANY
CORPORATION
Form 10-K
Report
for the
year ended December 31, 2009
Table of
Contents
Description
13
Table of Contents
PART I
References in this Annual Report on
Form 10-K
for the year-ended December 31, 2009, or the
“Form 10-K
Report,” to the “Company,” “Alleghany,”
“we,” “us” and “our” refer to
Alleghany Corporation and its consolidated subsidiaries, unless
the context otherwise requires. In addition, unless the context
otherwise requires, references to
| • | “AIHL” are to our insurance holding company subsidiary Alleghany Insurance Holdings LLC, | |
| • | “RSUI” are to our subsidiary RSUI Group, Inc. and its subsidiaries, | |
| • | “CATA” are to our subsidiary Capitol Transamerica Corporation and its subsidiaries, and also includes the operations and results of Platte River Insurance Company, or “Platte River,” unless the context otherwise requires, | |
| • | “EDC” are to our subsidiary Employers Direct Corporation and its subsidiaries, | |
| • | “AIHL Re” are to our subsidiary AIHL Re LLC, and | |
| • | “Alleghany Properties” are to our subsidiary Alleghany Properties Holdings LLC and its subsidiaries. |
Items 1
and 2. Business and Properties.
Business
Overview
We are a Delaware-incorporated company engaged, through AIHL and
its subsidiaries RSUI, CATA and EDC, in the property and
casualty and surety insurance business. AIHL acquired EDC on
July 18, 2007 for a purchase price of approximately
$198.1 million, including approximately $5.6 million
of incurred acquisition costs. CATA has been a subsidiary of
AIHL since January 2002, and RSUI has been a subsidiary of AIHL
since July 2003. In June 2006, AIHL Re was established as a
captive reinsurance subsidiary of AIHL, and AIHL Re has, in the
past, provided reinsurance to our insurance operating units and
affiliates.
We also own and manage properties in Sacramento, California
through our subsidiary Alleghany Properties, and we also own an
approximately 38 percent ownership stake in ORX
Exploration, Inc., or “ORX,” a regional oil and gas
exploration and production company. In addition, we own an
approximately 33 percent stake in Homesite Group
Incorporated, or “Homesite,” a national, full-service,
mono-line provider of homeowners insurance. We acquired our
stake in ORX on July 18, 2008 through a purchase of
participating preferred stock for cash consideration of
$50.0 million. We acquired our shares of Homesite common
stock on December 29, 2006 for a purchase price of
approximately $120.0 million.
We owned approximately 55 percent of Darwin Professional
Underwriters, Inc., or “Darwin,” a specialty property
and casualty insurer until October 20, 2008, when it was
merged with a subsidiary of Allied World Assurance Company
Holdings, Ltd, or “AWAC.” We were engaged in the
industrial minerals business through World Minerals, Inc. and
its subsidiaries, or “World Minerals,” until
July 14, 2005, when we sold that business to Imerys USA,
Inc. As a result of our disposition of Darwin and World
Minerals, these businesses have been classified as discontinued
operations in this
Form 10-K
Report, and we no longer have any foreign operations.
In 2009, we studied a number of potential acquisitions. We
intend to continue to expand our operations through internal
growth at our subsidiaries, as well as through possible
operating company acquisitions and investments.
At December 31, 2009, we had 768 employees, with 754
at our subsidiaries and 14 at the parent level. Our principal
executive offices are located in leased office space of
approximately 14,200 square feet at 7 Times Square
Tower, New York, New York 10036, and our telephone number is
(212) 752-1356.
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, or the “Exchange Act,” are
available, free of charge, on our website at www.alleghany.com,
as soon as reasonably practicable after we electronically file
or furnish this material to the U.S. Securities and
Exchange Commission, or the “SEC.” Our Financial
Personnel Code of Ethics, Code of Business Conduct and Ethics,
Corporate Governance Guidelines and the charters for our Audit,
Compensation and Nominating and
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Table of Contents
Governance Committees are also available on our website. In
addition, interested parties may obtain, free of charge, copies
of any of the above reports or documents upon request to the
Secretary of Alleghany.
We refer you to Items 7 and 8 of this
Form 10-K
Report for further information about our business in 2009. Our
consolidated financial statements are set forth in Item 8
of this
Form 10-K
Report and include our accounts and the accounts of our
subsidiaries for all periods presented.
Property
and Casualty and Surety Insurance Businesses
General
Description of Business
AIHL is our holding company for our property and casualty and
surety insurance operations. Property and casualty operations
are conducted through RSUI, headquartered in Atlanta, Georgia;
CATA, headquartered in Middleton, Wisconsin; and EDC,
headquartered in Agoura Hills, California. Surety operations are
conducted through CATA. AIHL Re, our Vermont-domiciled captive
reinsurance company, has, in the past, provided reinsurance to
our insurance operating units and affiliates. Unless we state
otherwise, references to AIHL include the operations of RSUI,
CATA, EDC and AIHL Re. We also own an approximately
33 percent stake in Homesite, a national, full-service,
mono-line provider of homeowners insurance.
In general, property insurance protects an insured against
financial loss arising out of loss of property or its use caused
by an insured peril. Casualty insurance protects the insured
against financial loss arising out of the insured’s
obligation to others for loss or damage to property or persons,
including, with respect to workers’ compensation insurance,
persons who are employees. In 2009, property insurance accounted
for approximately 44.0 percent and casualty insurance
accounted for approximately 52.3 percent of AIHL’s
gross premiums written. Surety bonds, both commercial and
contract, are three-party agreements in which the issuer of the
bond (the surety) joins with a second party (the principal) in
guaranteeing to a third party (the obligee) the fulfillment of
some obligation on the part of the principal to the obligee. In
2009, surety bonds accounted for approximately 3.7 percent
of AIHL’s gross premiums written.
RSUI
General.
RSUI, which includes the operations of its
operating subsidiaries RSUI Indemnity Company, or
“RIC,” Landmark American Insurance Company, or
“Landmark,” and Covington Specialty Insurance Company,
or “Covington,” underwrites specialty insurance
coverages in the property, umbrella/excess, general liability,
directors and officers, or “D&O,” liability and
professional liability lines of business. RSUI writes business
on an admitted basis primarily through RIC in the 50 states
and the District of Columbia where RIC is licensed and subject
to form and rate regulations. RSUI writes business on an
approved, non-admitted basis primarily through Landmark, which,
as a non-admitted company, is not subject to state form and rate
regulations and thus has more flexibility in its rates and
coverages for specialized or
hard-to-place
risks. As of December 31, 2009, Landmark was approved to
write business on a non-admitted basis in 49 states and on
an admitted basis in Oklahoma. Covington, a New Hampshire
domiciled insurer, was formed in September 2007 to, among other
things, support non-admitted business written primarily by
RSUI’s binding authority department, which writes small,
specialized coverages pursuant to underwriting authority
arrangements with managing general agents.
Pursuant to quota share arrangements effective as of
January 1, 2009, Landmark and Covington cede
90 percent of all their respective premiums and losses,
gross of third party reinsurance, to RIC. As of
December 31, 2009, the statutory surplus of RIC was
approximately $1.1 billion, the statutory surplus of
Landmark was approximately $152.0 million, and the
statutory surplus of Covington was approximately
$26.2 million. RIC is rated A (Excellent) by A.M. Best
Company, Inc., or “A.M. Best,” an independent
organization that analyzes the insurance industry. Landmark is
rated A (Excellent) on a reinsured basis by A.M. Best, and
Covington is rated A (Excellent) on a group basis by
A.M. Best. RSUI leases approximately 133,000 square
feet of office space in Atlanta, Georgia for its headquarters
and approximately 34,000 square feet of office space in
Sherman Oaks, California.
Distribution.
At December 31, 2009, RSUI conducted
its insurance business through approximately 162 independent
wholesale insurance brokers located throughout the United States
and 32 managing general agents.
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RSUI’s wholesale brokers are appointed on an individual
basis based on management’s appraisal of expertise and
experience, and only specific locations of a wholesale
broker’s operations may be appointed to distribute
RSUI’s products. Producer agreements which stipulate
premium collection, payment terms and commission arrangements
are in place with each wholesale broker. No wholesale broker
holds underwriting, claims or reinsurance authority. RSUI has
entered into underwriting authority arrangements with 24
managing general agents for small, specialized coverages.
RSUI’s top five producing wholesale brokers accounted for
approximately 58 percent of gross premiums written by RSUI
in 2009. RSUI’s top two producing wholesale brokers,
Swett & Crawford Group and AmWINS Group, Inc.
accounted for, in the aggregate, approximately 31 percent
of AIHL’s gross premiums written in 2009.
Underwriting.
RSUI’s underwriting philosophy is
based on handling only product lines in which its underwriters
have underwriting expertise. RSUI generally focuses on higher
severity, lower frequency specialty risks that can be
effectively “desk underwritten” without the need for
inspection or engineering reviews. RSUI tracks underwriting
results for each of its underwriters and believes that the
underwriting systems and applications it has in place facilitate
efficient underwriting and high productivity levels.
Underwriting authority is delegated on a “top-down”
basis ultimately to individual underwriters based on experience
and expertise. This authority is in writing and addresses
maximum limits, excluded classes and coverages and premium size
referral. Referral to a product line manager is required for
risks exceeding an underwriter’s authority.
CATA
General.
CATA, primarily through its wholly-owned
subsidiaries Capitol Indemnity Corporation, or “Capitol
Indemnity,” and Capitol Specialty Insurance Corporation, or
“CSIC,” operates in 50 states and the District of
Columbia. Capitol Indemnity conducts its property and casualty
insurance business on an admitted basis, with a geographic
concentration in the Midwestern and Plains states. Capitol
Indemnity also writes surety products such as commercial surety
bonds and contract surety bonds on a national basis. Commercial
surety bonds include all surety bonds other than contract surety
bonds and cover obligations typically required by law or
regulation, such as license and permit coverage. Capitol
Indemnity offers contract surety bonds in the non-construction
segment of the market which secure performance under supply,
service and maintenance contracts, and developer subdivision
bonds. CSIC conducts substantially all of its business on an
approved, non-admitted basis on a national basis and writes
primarily specialty lines of property and casualty insurance.
Platte River is licensed in 50 states and the District of
Columbia and operates in conjunction with Capitol Indemnity
primarily by providing surety products and offering pricing
flexibility in those jurisdictions where both Capitol Indemnity
and Platte River are licensed. The property and casualty
business of CATA accounted for approximately 73.0 percent
of its gross premiums written in 2009, while the surety business
accounted for the remainder.
As of December 31, 2009, the statutory surplus of Capitol
Indemnity was approximately $182.2 million, including the
statutory surplus of CSIC of $32.1 million. As of
December 31, 2009, the statutory surplus of Platte River
was approximately $36.7 million. Capitol Indemnity, CSIC
and Platte River are rated A (Excellent) on a reinsured basis by
A.M. Best. CATA leases approximately 55,000 square
feet of office space in Middleton, Wisconsin for its and Platte
River’s headquarters.
Distribution.
CATA conducts its insurance business
through independent and general insurance agents located
throughout the United States, with a concentration in the
Midwestern and Plains states. At December 31, 2009, CATA
had approximately 254 independent agents and 65 general agents
licensed to write property and casualty and surety coverages,
approximately 240 agents specializing in professional liability
and approximately 284 independent agents licensed only to write
surety coverages. The general agents write very little surety
business and have full quoting and binding authority within the
parameters of their agency contracts with respect to the
property and casualty business that they write. Certain
independent agents have binding authority for specific business
owner policy products, including property and liability
coverages and non- contract surety products. No agent of CATA
had writings in excess of 10 percent of AIHL’s gross
premiums written in 2009.
Underwriting.
Elements of CATA’s underwriting
process include prudent risk selection, appropriate pricing and
coverage customization. All accounts are reviewed on an
individual basis to determine underwriting acceptability. CATA
is a subscriber to the Insurance Service Organization, or
“ISO,” and the Surety and Fidelity Association of
America, or “SFAA,” insurance reference resources
recognized by the insurance
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industry. Underwriting procedures, rates and contractual
coverage obligations are based on procedures and data developed
by the ISO for property and casualty lines and by the SFAA for
surety lines. Underwriting acceptability is determined by type
of business, claims experience, length of time in business and
business experience, age and condition of premises occupied, and
financial stability. Information is obtained from, among other
sources, agent applications, financial reports and
on-site
loss
control surveys. If an account does not meet pre-determined
acceptability parameters, coverage is declined. If an in-force
policy becomes unprofitable due to extraordinary claims activity
or inadequate premium levels, a non-renewal notice is issued in
accordance with individual state statutes and rules.
Employers
Direct Corporation
General.
EDC was granted its Certificate of Authority by
the California Department of Insurance and began writing
workers’ compensation insurance on January 1, 2003
through its wholly-owned subsidiary Employers Direct Insurance
Company, or “EDIC.” EDIC is currently licensed in
California and seven additional states. Workers’
compensation insurance provides coverage for the statutorily
prescribed benefits that employers are obligated to provide for
their employees who are injured in the course of employment. EDC
leases approximately 66,000 square feet of office space in
Agoura Hills, California.
In June 2009, EDC determined that it was unable to write
business at rates it deemed adequate due to the current state of
the California workers’ compensation market. As a result,
EDC ceased soliciting new or renewal business on a direct basis
commencing August 1, 2009 and took corresponding expense
reduction steps, including staff reductions, in light of such
determination. As a result of EDC’s determination to cease
writing business on a direct basis and certain other factors, on
June 30, 2009, A.M. Best downgraded its rating of EDIC
from A- (Excellent), with a negative outlook, to B++ (Good),
with a stable outlook. During the 2009 third quarter, EDC sold
the renewal rights of its directly placed workers’
compensation insurance policies and certain other assets and
rights to an independent insurance brokerage.
As of December 31, 2009, the statutory surplus of EDIC was
approximately $106.9 million.
AIHL Re
LLC
AIHL Re was formed in June 2006 as a captive reinsurance
subsidiary of AIHL to provide catastrophe reinsurance coverage
for RSUI. AIHL Re and RSUI entered into a reinsurance agreement,
effective July 1, 2006, whereby AIHL Re, in exchange for
market-based premiums, took that portion of RSUI’s
catastrophe reinsurance program not covered by third-party
reinsurers. This reinsurance coverage expired on April 30,
2007, and AIHL Re has not participated in RSUI’s
catastrophe reinsurance programs since that date. AIHL Re and
Homesite entered into a reinsurance agreement, effective
April 1, 2007, whereby AIHL Re, in exchange for annual
premium of approximately $2.0 million, provided
$20.0 million of
excess-of-loss
reinsurance coverage to Homesite under its catastrophe
reinsurance program which is concentrated in the Northeast
region of the United States. This reinsurance coverage expired
on March 31, 2008, and AIHL Re has not participated in
Homesite’s catastrophe reinsurance programs since that date.
AIHL Re had no employees at December 31, 2009.
Changes
in Historical Net Loss and Loss Adjustment Expense
Reserves
The following table shows changes in historical net loss and
loss adjustment expense, or “LAE,” reserves for AIHL
for each year since 2002. The first line of the upper portion of
the table shows the net reserves at December 31 of each of the
indicated years, representing the estimated amounts of net
outstanding losses and LAE for claims arising during that year
and in all prior years that are unpaid, including losses that
have been incurred but not yet reported, or “IBNR,” to
AIHL’s insurance operating units. The upper (paid) portion
of the table shows the cumulative net amounts paid as of
December 31 of successive years with respect to the net reserve
liability for each year. The lower portion of the table shows
the re-estimated amount of the previously recorded net reserves
for each year based on experience as of the end of each
succeeding year. The estimate changes as more information
becomes known about claims for individual years. In evaluating
the information in the table, it should be noted that a reserve
amount reported in any period includes the effect of any
subsequent change in such reserve amount. For example, if
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a loss was first reserved in 2002 at $100,000 and was determined
in 2003 to be $150,000, the $50,000 deficiency would be included
in the Cumulative (Deficiency) Redundancy row shown below for
each of the years 2002 through 2009.
Conditions and trends that have affected the development of the
net reserve liability in the past may not necessarily occur in
the future. Accordingly, it is not appropriate to extrapolate
future redundancies or deficiencies based on this table.
Changes
in Historical Net Reserves for Losses and LAE
| Years Ended December 31 | ||||||||||||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
|
Net liability as of the end of year
|
$ | 113.3 | $ | 276.0 | $ | 639.0 | $ | 952.9 | $ | 1,127.5 | $ | 1,412.9 | $ | 1,570.3 | $ | 1,573.3 | ||||||||||||||||
|
Cumulative amount of net liability paid as of:
|
||||||||||||||||||||||||||||||||
|
One year later
|
47.4 | 72.6 | 239.4 | 172.7 | 243.3 | 296.1 | 355.6 | |||||||||||||||||||||||||
|
Two years later
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80.6 | 116.8 | 310.8 | 356.1 | 421.7 | 515.0 | ||||||||||||||||||||||||||
|
Three years later
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100.1 | 149.6 | 365.2 | 493.2 | 529.6 | |||||||||||||||||||||||||||
|
Four years later
|
110.1 | 173.7 | 413.6 | 572.2 | ||||||||||||||||||||||||||||
|
Five years later
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115.8 | 191.7 | 446.9 | |||||||||||||||||||||||||||||
|
Six years later
|
121.7 | 208.0 | ||||||||||||||||||||||||||||||
|
Seven years later
|
124.0 | |||||||||||||||||||||||||||||||
|
Net liability re-estimated as of:
|
||||||||||||||||||||||||||||||||
|
One year later
|
134.0 | 268.7 | 631.8 | 943.2 | 1,115.4 | 1,370.0 | 1,552.4 | |||||||||||||||||||||||||
|
Two years later
|
147.7 | 264.6 | 620.1 | 941.2 | 1,047.9 | 1,341.9 | ||||||||||||||||||||||||||
|
Three years later
|
149.0 | 268.1 | 593.3 | 899.7 | 1,012.5 | |||||||||||||||||||||||||||
|
Four years later
|
150.7 | 263.8 | 584.1 | 873.0 | ||||||||||||||||||||||||||||
|
Five years later
|
153.5 | 262.0 | 566.7 | |||||||||||||||||||||||||||||
|
Six years later
|
151.7 | 256.1 | ||||||||||||||||||||||||||||||
|
Seven years later
|
148.4 | |||||||||||||||||||||||||||||||
|
Cumulative (Deficiency) Redundancy
|
$ | (35.1 | ) | $ | 19.9 | $ | 72.3 | $ | 79.9 | $ | 115.0 | $ | 71.0 | $ | 17.9 | |||||||||||||||||
|
Gross Liability-End of Year
|
$ | 258.1 | $ | 438.0 | $ | 1,246.4 | $ | 2,571.9 | $ | 2,228.9 | $ | 2,379.7 | $ | 2,578.6 | $ | 2,521.0 | ||||||||||||||||
|
Less: Reinsurance Recoverable
|
144.8 | 162.0 | 607.4 | 1,619.0 | 1,101.4 | 966.8 | 1,008.3 | 947.7 | ||||||||||||||||||||||||
|
Net Liability-End of Year
|
$ | 113.3 | $ | 276.0 | $ | 639.0 | $ | 952.9 | $ | 1,127.5 | $ | 1,412.9 | $ | 1,570.3 | $ | 1,573.3 | ||||||||||||||||
|
Gross Re-estimated Liability-Latest
|
$ | 285.6 | $ | 430.2 | $ | 1,156.8 | $ | 2,372.8 | $ | 1,979.5 | $ | 2,223.2 | $ | 2,500.0 | $ | 2,521.0 | ||||||||||||||||
|
Re-estimated Recoverable-Latest
|
137.2 | 174.1 | 590.1 | 1,499.8 | 966.9 | 881.3 | 947.6 | 947.7 | ||||||||||||||||||||||||
|
Net Re-estimated Liability-Latest
|
$ | 148.4 | $ | 256.1 | $ | 566.7 | $ | 873.0 | $ | 1,012.6 | $ | 1,341.9 | $ | 1,552.4 | $ | 1,573.3 | ||||||||||||||||
|
Gross Cumulative (Deficiency) Redundancy
|
$ | (27.5 | ) | $ | 7.8 | $ | 89.6 | $ | 199.1 | $ | 249.5 | $ | 156.5 | $ | 78.6 | $ | – | |||||||||||||||
The net cumulative redundancies since 2003 primarily reflect
casualty net reserve releases by RSUI and casualty and surety
net reserve releases by CATA, partially offset by
catastrophe-related net reserve increases by RSUI in 2006 and
2007, as well as reserve increases at EDC in 2008 and 2009.
Prior year reserve adjustments are discussed on pages 38
and 39 and pages 50 through 52 of this
Form 10-K
Report.
The reconciliation between the aggregate net loss and LAE
reserves of AIHL reported in the annual statements filed with
state insurance departments prepared in accordance with
statutory accounting practices, or “SAP,” and those
reported in AIHL’s consolidated financial statements
prepared in accordance with generally accepted
18
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accounting principles in the United States of America, or
“GAAP,” for the last three years is shown below (in
millions):
Reconciliation
of Reserves for Losses and LAE from SAP Basis to
GAAP Basis
| 2009 | 2008 | 2007 | ||||||||||
|
Statutory reserves
|
$ | 1,574.9 | $ | 1,573.1 | $ | 1,417.4 | ||||||
|
Reinsurance recoverables*
|
947.7 | 1,008.3 | 966.8 | |||||||||
|
Purchase accounting adjustment
|
(1.6 | ) | (2.8 | ) | (4.5 | ) | ||||||
|
GAAP reserves
|
$ | 2,521.0 | $ | 2,578.6 | $ | 2,379.7 | ||||||
| * | Reinsurance recoverables in this table include only ceded loss reserves. Amounts reflected under the caption “Reinsurance recoverables” on our consolidated balance sheets set forth in Item 8 of this Form 10-K Report also include paid loss recoverables. |
The reconciliation of beginning and ending aggregate reserves
for unpaid losses and LAE of AIHL for the last three years is
shown below (in millions):
Reconciliation
of Reserves for Losses and LAE
| 2009 | 2008 | 2007 | ||||||||||
|
Reserves as of January 1
|
$ | 2,578.6 | $ | 2,379.7 | $ | 2,228.9 | ||||||
|
Reserves acquired
|
— | — | 165.0 | |||||||||
|
Less: reinsurance recoverables
|
1,008.3 | 966.8 | 1,101.4 | |||||||||
|
Net reserves
|
1,570.3 | 1,412.9 | 1,292.5 | |||||||||
|
Incurred loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
460.0 | 612.8 | 480.1 | |||||||||
|
Prior years
|
(17.9 | ) | (42.8 | ) | (31.1 | ) | ||||||
|
Total incurred loss, net of reinsurance
|
442.1 | 570.0 | 449.0 | |||||||||
|
Paid loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
83.5 | 116.4 | 71.7 | |||||||||
|
Prior years
|
355.6 | 296.2 | 256.9 | |||||||||
|
Total paid loss, net of reinsurance
|
439.1 | 412.6 | 328.6 | |||||||||
|
Reserves, net of reinsurance recoverables, as of December 31
|
1,573.3 | 1,570.3 | 1,412.9 | |||||||||
|
Reinsurance recoverables as of December 31*
|
947.7 | 1,008.3 | 966.8 | |||||||||
|
Reserves, gross of reinsurance recoverables, as of December 31
|
$ | 2,521.0 | $ | 2,578.6 | $ | 2,379.7 | ||||||
| * | Reinsurance recoverables in this table include only ceded loss reserves. Amounts reflected under the caption “Reinsurance recoverables” on our consolidated balance sheets set forth in Item 8 of this Form 10-K Report also include paid loss recoverables. |
Asbestos
and Environmental Impairment Reserves
AIHL’s reserves for losses and LAE include amounts for
various liability coverages related to asbestos and
environmental impairment claims that arose from reinsurance of
certain general liability and commercial multiple peril
coverages assumed by Capitol Indemnity between 1969 and 1976.
Capitol Indemnity exited this business in 1976. As of
December 31, 2009, reserves of CATA totaled approximately
$15.1 million for asbestos liabilities and approximately
$3.8 million for environmental liabilities, resulting in
aggregate asbestos and environmental reserves of
$18.9 million. As of December 31, 2008, reserves for
asbestos liabilities totaled approximately $14.9 million
and
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reserves for environmental liabilities totaled
$5.5 million, resulting in aggregate asbestos and
environmental reserves of $20.4 million. At
December 31, 2009, the reserves for asbestos liabilities
were approximately 18 times the average paid claims for the
prior three year period, compared with 11 times at
December 31, 2008. The reserves for environmental
impairment liabilities were approximately five times the average
paid claims for the prior three year period, compared with
twelve times at December 31, 2008. The significant changes
in these metrics from December 31, 2008 to
December 31, 2009 primarily reflect fluctuations in the
amount and timing in recent years of commutations, which affect
paid losses and loss exposure. Additional information regarding
the policies that CATA uses to set reserves for these asbestos
and environmental impairment claims is set forth on
pages 39 and 40 of this
Form 10-K
Report.
The reconciliation of the beginning and ending aggregate
reserves for unpaid losses and LAE related to asbestos and
environmental impairment claims of AIHL for the years 2007
through 2009 is shown below (in millions):
Reconciliation
of Asbestos-Related Claims Reserves for Losses and LAE
| 2009 | 2008 | 2007 | ||||||||||
|
Reserves as of January 1
|
$ | 14.9 | $ | 16.7 | $ | 17.4 | ||||||
|
Losses and LAE incurred
|
0.5 | (0.3 | ) | 0.1 | ||||||||
|
Paid losses*
|
(0.3 | ) | (1.5 | ) | (0.8 | ) | ||||||
|
Reserves as of December 31
|
$ | 15.1 | $ | 14.9 | $ | 16.7 | ||||||
|
Type of reserves
|
||||||||||||
|
Case
|
$ | 1.9 | $ | 2.5 | $ | 3.7 | ||||||
|
IBNR
|
13.2 | 12.4 | 13.0 | |||||||||
|
Total
|
$ | 15.1 | $ | 14.9 | $ | 16.7 | ||||||
| * | Paid losses include commutations and legal settlements as well as regular paid losses. |
Reconciliation
of Environmental Impairment Claims Reserves for Losses and
LAE
| 2009 | 2008 | 2007 | ||||||||||
|
Reserves as of January 1
|
$ | 5.5 | $ | 6.2 | $ | 6.4 | ||||||
|
Losses and LAE incurred
|
(0.4 | ) | 0.3 | (0.1 | ) | |||||||
|
Paid losses*
|
(1.3 | ) | (1.0 | ) | (0.1 | ) | ||||||
|
Reserves as of December 31
|
$ | 3.8 | $ | 5.5 | $ | 6.2 | ||||||
|
Type of reserves
|
||||||||||||
|
Case
|
$ | 0.5 | $ | 0.9 | $ | 1.4 | ||||||
|
IBNR
|
3.3 | 4.6 | 4.8 | |||||||||
|
Total
|
$ | 3.8 | $ | 5.5 | $ | 6.2 | ||||||
| * | Paid losses include commutations and legal settlements as well as regular paid losses. |
Catastrophe
Risk Management
AIHL’s insurance operating units, particularly RSUI, expose
AIHL to losses on claims arising out of natural or human-made
catastrophes, including hurricanes, other windstorms,
earthquakes and floods, as well as terrorist activities. The
incidence and severity of catastrophes in any short period of
time are inherently unpredictable. The extent of gross losses
from a catastrophe is a function of both the total amount of
insured exposure in the area affected by the event and the
severity of the event. Most catastrophes are restricted to small
geographic areas;
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however, hurricanes, other windstorms, earthquakes and floods
may produce significant damage when those areas are heavily
populated. The geographic distribution of AIHL’s insurance
operating units subjects them to catastrophe exposure in the
United States from hurricanes in the Gulf coast regions,
Florida, the Mid-Atlantic, and the Northeast, from other
windstorms in the Midwest and Southern regions, and earthquakes
in California, the Pacific Northwest region and along the New
Madrid fault line in the Midwest region.
AIHL’s insurance operating units use underwriting controls
and systems, including third-party catastrophe modeling
software, to help evaluate potential losses. The operating units
use modeled loss scenarios to set risk retention levels and help
structure their reinsurance programs in an effort to ensure that
the aggregate amount of catastrophe exposures conform to
established risk tolerances and fit within the existing exposure
portfolio. RSUI also relies on reinsurance to limit its exposure
to catastrophes, which is discussed in more detail under
“
Reinsurance”
below. Additional information
regarding the risks faced by AIHL’s insurance operating
units, particularly RSUI, with respect to managing their
catastrophe exposure risk can be found on pages 27 and 28
of this
Form 10-K
Report.
With respect to terrorism, to the extent that reinsurers have
excluded coverage for terrorist acts or have priced this
coverage at rates that are not practical, our insurance
operating units do not have reinsurance protection and are
exposed to potential losses as a result of any terrorist acts.
To the extent an act of terrorism is certified by the
U.S. Secretary of Treasury, we may be covered under the
Terrorism Act as described below under
“
Reinsurance
.” Information regarding our
insurance operating units’ coverage for terrorism and the
impact of the Terrorism Act on our insurance operating units can
be found on pages 22 and 23 of this
Form 10-K
Report.
Reinsurance
AIHL’s insurance operating units reinsure a significant
portion of the risks they underwrite in order to mitigate their
exposure to losses, manage capacity, and protect capital
resources. In general, the insurance operating units obtain
reinsurance on a treaty and facultative basis. Treaty
reinsurance is based on a contract between a primary insurer or
“cedent” and a reinsurer and covers certain classes of
risk specified in the treaty. Under most treaties, the cedent is
obligated to offer, and the reinsurer is obligated to accept, a
specified portion of a class of risk underwritten by the cedent.
Alternatively, facultative reinsurance is the reinsurance of
individual risks, whereby a reinsurer separately rates and
underwrites each risk and is free to accept or reject each risk
offered by the cedent. Facultative reinsurance is normally
purchased for risks not otherwise covered or covered only in
part by reinsurance treaties, and for unusual or large risks.
Treaty and facultative reinsurance can be written on a quota
share, surplus share, or excess of loss basis. Under a quota
share reinsurance treaty, the cedent and reinsurer share the
premiums as well as the losses and expenses of any single risk,
or an entire group of risks. Under a surplus share reinsurance
treaty, the cedent may transfer, and the reinsurer is required
to accept, the part of every risk that exceeds a predetermined
amount (commonly referred to as the cedent’s
“retention”), with the reinsurer sharing premiums and
losses in the same proportion as it shares in the total policy
limits of the risk written by the cedent. Under an excess of
loss reinsurance treaty, a reinsurer, in exchange for a premium,
agrees to reimburse the cedent for all or part of any losses in
excess of the cedent’s retention, generally up to a
predetermined limit, at which point the risk of loss is assumed
by another reinsurer or reverts to the cedent.
In 2009, RSUI ceded 40 percent of its gross premiums
written to reinsurers. Although the net amount of loss exposure
retained by RSUI varies by line of business, in general, as of
December 31, 2009, RSUI retained a maximum net exposure for
any single property risk of $10.0 million and any single
casualty risk of $9.75 million, with the exception of
losses arising from acts of foreign terrorism.
RSUI reinsures its property lines of business through a program
consisting of surplus share treaties, facultative placements,
per risk, and catastrophe excess of loss treaties. Under its
surplus share treaties, which generally provide coverage on a
risk attaching basis (the treaties cover policies which become
effective during the treaty coverage period) from January 1 to
December 31, RSUI is indemnified on a
pro rata
basis
against covered property losses. The amount indemnified is based
on the proportionate share of risk ceded after consideration of
a stipulated dollar amount of “line” for RSUI to
retain in relation to the entire limit written. RSUI ceded
approximately 29 percent of its property gross premiums
written in 2009 under these surplus share treaties. Under
RSUI’s
2009-2010
per risk reinsurance program, which generally provides coverage
on an annual basis for losses occurring
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from May 1 to the following April 30, RSUI is reinsured for
$90.0 million in excess of a $10.0 million net
retention per risk after the application of the surplus share
treaties and facultative reinsurance.
RSUI’s catastrophe reinsurance program (which covers
catastrophe risks including, among others, windstorms and
earthquakes) and per risk reinsurance program run on an annual
basis from May 1 to the following April 30. The
2009-2010
program provides coverage in two layers for $400.0 million
of losses in excess of a $100.0 million net retention after
application of the surplus share treaties, facultative
reinsurance, and per risk covers. The first layer provides
coverage for $100.0 million of losses, before a
33.15 percent co-participation by RSUI, in excess of the
$100.0 million net retention, and the second layer provides
coverage for $300.0 million of losses, before a
5 percent co-participation by RSUI, in excess of
$200.0 million. In addition, RSUI’s property per risk
reinsurance program for the
2009-2010
period provides RSUI with coverage for $90.0 million of
losses in excess of a $10.0 million net retention per risk
after application of the surplus share treaties and reinsurance.
RSUI reinsures its other lines of business through quota share
treaties, except for professional liability and binding
authority lines where RSUI retains all of such business.
RSUI’s quota share reinsurance treaty for umbrella/excess
lines for the period June 1, 2009 to May 31, 2010
provides coverage for policies with limits up to
$30.0 million, with RSUI ceding 35 percent of the
premium and loss for policies with limits up to
$15.0 million and ceding 67.5 percent of the premium
and loss for policies with limits in excess of
$15.0 million up to $30.0 million. RSUI’s quote
share primary casualty lines treaty for the period
April 15, 2009 to April 14, 2010 provides coverage for
policies with limits up to $2.0 million, with RSUI ceding
25 percent of the premium. RSUI’s D&O liability
line quota share reinsurance treaty for the period July 1,
2009 to June 30, 2010 provides coverage for policies with
limits up to $20.0 million, with RSUI ceding
35 percent of the premium and loss for all policies with
limits up to $10.0 million and ceding 60 percent of
the premium and loss for policies with limits in excess of
$10.0 million up to $20.0 million.
With respect to potential losses at RSUI arising from acts of
terrorism, the Terrorism Risk Insurance Act of 2002, as extended
and amended by the Terrorism Risk Insurance Extension Act of
2005 and the Terrorism Risk Insurance Program Reauthorization
Act of 2007, which we collectively refer to as the
“Terrorism Act,” established a program under which the
Federal Government will reimburse insurers for losses arising
from certain acts of terrorism. The Terrorism Act is
administered by the U.S. Secretary of the Treasury and is
effective through December 31, 2014, at which time it will
automatically expire. The intent of the Terrorism Act is to
provide federal assistance to the insurance industry in order to
meet the needs of commercial insurance policyholders with
potential exposure for losses due to acts of terrorism. The
Terrorism Act applies to U.S. risks only, whether it be
foreign or domestic terrorism on U.S. soil or on certain
U.S. interests abroad. In return for requiring insurers
writing certain lines of property and casualty insurance to
offer coverage against certain acts of terrorism, the law
requires the Federal Government to indemnify such insurers for
85 percent of insured losses during a program year
resulting from covered acts of terrorism above certain
premium-based deductibles. AIHL’s deductible under the
Terrorism Act in 2010 will be 20 percent of its direct
premiums earned in 2009, or approximately $255.8 million.
In addition, federal compensation will only be paid under the
Terrorism Act if the aggregate industry insured losses resulting
from the covered act of terrorism exceed $100.0 million for
insured losses occurring in 2010 but no payment shall be made
for any portion of aggregate industry insured losses that exceed
$100.0 billion in 2010.
AIHL’s terrorism exposure is substantially attributable to
RSUI and, as described below, EDC. In general, RSUI’s
casualty reinsurance programs provide coverage for domestic and
foreign acts of terrorism, while RSUI’s property
reinsurance programs provide coverage only for domestic acts of
terrorism. The cost of property reinsurance in the marketplace
has increased significantly in recent years, and reinsurance
capacity for terrorism exposures is limited and expensive. As a
result, RSUI would be liable for these exposures on a net basis,
subject to the Terrorism Act coverage, for property policies
containing foreign terrorism coverage. Approximately
4.8 percent of all policies and approximately
16.3 percent of all property policies, written by RSUI in
2009 contained coverage for domestic and foreign acts of
terrorism. RSUI uses various underwriting strategies to mitigate
its exposure to terrorism losses.
CATA uses reinsurance to protect against severity losses. In
2009, CATA reinsured with various reinsurers individual property
and casualty and contract surety risks in excess of
$1.5 million. As of December 1, 2009, the commercial
surety line was reinsured for individual losses above
$1.5 million. In addition, CATA purchases
22
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facultative reinsurance coverage for risks in excess of
$6.0 million on property and casualty and
$15.0 million on commercial surety.
EDC uses reinsurance to protect against catastrophe losses. As
of December 31, 2009, EDC retained the first
$1.0 million of loss per occurrence and purchased
reinsurance with various reinsurers for $19.0 million above
that level. Any loss above $20.0 million would be the sole
responsibility of EDC. EDC uses various catastrophe models to
assist it in determining the amount of reinsurance to purchase.
All of EDC’s current reinsurance includes foreign and
domestic terrorism coverage, although nuclear, chemical,
biological and radiological events are excluded. Under the
Terrorism Act, EDC cannot exclude any form of terrorism from its
workers’ compensation policies.
At December 31, 2009, AIHL had total reinsurance
recoverables of $976.2 million, consisting of
$947.7 million of ceded outstanding losses and LAE and
$28.5 million of recoverables on paid losses. The
reinsurance purchased by AIHL’s insurance operating units
does not relieve them from their obligations to their
policyholders, and therefore, the financial strength of their
reinsurers is important. Approximately 93.1 percent of
AIHL’s reinsurance recoverables balance at
December 31, 2009 was due from reinsurers having an
A.M. Best financial strength rating of A (Excellent) or
higher. AIHL had no allowance for uncollectible reinsurance as
of December 31, 2009. Additional information regarding the
risks faced by AIHL’s insurance operating units with
respect to their use of reinsurance can be found on page 28 of
this
Form 10-K
Report.
AIHL’s Reinsurance Security Committee, which includes
certain of our officers and the chief financial officers of each
of AIHL’s operating units, meets to track, analyze and
manage the use of reinsurance by AIHL’s insurance operating
units. The Reinsurance Security Committee considers the limits
on the maximum amount of unsecured reinsurance recoverables that
should be outstanding from any particular reinsurer, the lines
of business that should be ceded to a particular reinsurer and,
where applicable, the types of collateral that should be posted
by reinsurers. Information related to concentration of
reinsurance recoverables can be found in Note 5(a) to the
Notes to the Consolidated Financial Statements set forth in
Item 8 of this Form
10-K
Report.
Investments
The investment portfolios of RSUI, CATA, and EDC are managed
under the direction of AIHL. For a discussion of AIHL investment
results, please see pages 48 and 49 and pages 55
through 59 of this
Form 10-K
Report.
Competition
The property and casualty businesses of RSUI, as well as the
surety and non-admitted specialty businesses of CATA, compete on
a national basis. CATA’s admitted property and casualty
businesses compete on a regional basis with a primary focus on
the Midwestern and Plains states. EDC competes primarily in
California. Our insurance operating units compete with a large
number of other companies in their selected lines of business.
They compete, and will continue to compete, with major
U.S. and
non-U.S. insurers,
other regional companies, mutual companies, specialty insurance
companies, underwriting agencies, state funds, and diversified
financial services companies. Many competitors have considerably
greater financial resources and greater experience in the
insurance industry and offer a broader line of insurance
products than do AIHL’s insurance operating units. Except
for regulatory considerations, there are virtually no barriers
to entry into the insurance industry. Competition may be
domestic or foreign, and competitors are not necessarily
required to be licensed by various state insurance departments.
Competition in the businesses of our insurance operating units
is based on many factors, including the perceived financial
strength of the company, premium charges, other terms and
conditions offered, services provided, commissions paid to
producers, ratings assigned by independent rating agencies,
speed of claims payment, and reputation and experience in the
lines to be written.
Historically, insurers have experienced significant fluctuations
in operating results due to competition, frequency or severity
of catastrophic and other loss events, levels of capacity,
general economic and social conditions, and other factors. The
supply of insurance is related to prevailing prices in relation
to emerging loss experience, the level of insured losses and the
level of industry capital which, in turn, may fluctuate in
response to changes in rates of return on investments being
earned in the insurance industry. As a result, the insurance
business historically has been a cyclical business characterized
by periods of intense price competition due to excessive
23
Table of Contents
underwriting capacity as well as periods when shortages of
capacity permitted favorable price levels. A discussion of the
risks faced by our insurance operating units due to competition
within, and the cyclicality of, the insurance business can be
found on pages 26 and 27 of this
Form 10-K
Report.
Regulation
AIHL is subject to the insurance holding company laws of several
states. In addition, dividends and distributions by an insurance
subsidiary are subject to approval by the insurance regulators
of the domiciliary state of a subsidiary. Other significant
transactions between an insurance subsidiary and its holding
company or other subsidiaries of the holding company may require
approval by insurance regulators in the domiciliary state of
each of the insurance subsidiaries participating in these
transactions. AIHL’s insurance operating units are subject
to regulation in their domiciliary states as well as in the
other states in which they do business. This regulation pertains
to matters such as approving policy forms and various premium
rates, licensing agents, granting and revoking licenses to
transact business, and regulating trade practices. In addition,
some of AIHL’s insurance operating units are in states
requiring prior approval by regulators before proposed rates for
property or casualty or surety insurance policies may be
implemented. Insurance regulatory authorities perform periodic
examinations of an insurer’s market conduct and other
affairs.
Insurance companies are required to report their financial
condition and results of operations in accordance with statutory
accounting principles prescribed or permitted by state insurance
regulators in conjunction with the National Association of
Insurance Commissioners, or “NAIC.” State insurance
regulators also prescribe the form and content of statutory
financial statements, perform periodic financial examinations of
insurers, set minimum reserve and loss ratio requirements,
establish standards for permissible types and amounts of
investments, and require minimum capital and surplus levels.
These statutory capital and surplus requirements include
risk-based capital, or “RBC,” rules promulgated by the
NAIC. These RBC standards are intended to assess the level of
risk inherent in an insurance company’s business and
consider items such as asset risk, credit risk, underwriting
risk and other business risks relevant to its operations. In
accordance with RBC formulas, a company’s RBC requirements
are calculated and compared with its total adjusted capital to
determine whether regulatory intervention is warranted. At
December 31, 2009, the total adjusted capital of each of
AIHL’s insurance subsidiaries exceeded the minimum levels
required under RBC rules, and each had excess capacity to write
additional premiums in relation to these requirements.
The NAIC annually calculates certain statutory financial ratios
for most insurance companies in the United States. These
calculations are known as the Insurance Regulatory Information
System, or “IRIS,” ratios. There presently are
thirteen IRIS ratios, with each ratio having an established
“usual range” of results. The IRIS ratios assist state
insurance departments in executing their statutory mandate to
oversee the financial condition of insurance companies. A ratio
falling outside the usual range is not considered a failing
result; rather, unusual values are viewed as part of the
regulatory early monitoring system. Furthermore, in some years,
it may not be unusual for financially sound companies to have
several ratios with results outside the usual ranges. The NAIC
reports the ratios to state insurance departments who may then
contact a company if four or more of its ratios fall outside the
NAIC’s usual ranges. Based upon calculations as of
December 31, 2009, EDIC had six of its ratios falling
outside the NAIC’s usual ranges, with three falling outside
the usual ranges due to EDIC’s underwriting loss in 2009,
one falling outside the usual range due to adverse reserve
development, one falling outside the usual range due to a
decline in gross premiums written by EDIC in 2009, and one
falling outside the usual range due to a decline in investment
yields.
Certain of AIHL’s insurance operating units are required
under the guaranty fund laws of most states in which they
transact business to pay assessments up to prescribed limits to
fund policyholder losses or liabilities of insolvent insurance
companies. AIHL’s insurance operating units also are
required to participate in various involuntary pools,
principally involving workers’ compensation and windstorms.
In most states, the involuntary pool participation of
AIHL’s insurance operating units is in proportion to their
voluntary writings of related lines of business in such states.
In addition to the regulatory requirements described above, a
number of legislative and regulatory initiatives under
consideration may significantly affect the insurance business in
a variety of ways. These measures include,
24
Table of Contents
among other things, tort reform, consumer privacy requirements,
and proposals for the establishment of state or federal
catastrophe funds. It is also possible that the structure of
insurance regulation may be impacted by the broader financial
regulation reform that Congress continues to pursue at the
federal level in the wake of the recent financial crisis.
Employees
AIHL’s insurance operating units employed 748 persons
as of December 31, 2009, 353 of whom were at RSUI and its
subsidiaries, 235 of whom were at CATA and its subsidiaries, and
160 of whom were at EDC and its subsidiaries. AIHL’s
investment management subsidiary, Alleghany Capital Partners
LLC, employed 3 people at December 31, 2009.
Corporate
Activities
Real
Estate Business
Headquartered in Sacramento, California, Alleghany Properties
owns and manages properties in Sacramento, California. These
properties include primarily improved and unimproved commercial
land, as well as residential lots. The majority of these
properties are located in the City of Sacramento in the planned
community of North Natomas. A considerable amount of development
activity has occurred in the North Natomas area since 1998,
including the construction of more than 13,500 single family
homes, 4,000 apartment units, 1.1 million square feet of
office buildings and 2.3 million square feet of retail
space. Participating in this growth, Alleghany Properties sold
over 387 acres of residential land, and 92 acres of
commercial property through December 31, 2008, when
development activity within North Natomas was temporarily
halted. The temporary halt in development activity was a result
of new Federal Emergency Management Agency flood insurance maps
for the area which revoked the area’s previously certified
100-year
flood protection. This action will limit development activity
until late 2011 when it is anticipated that sufficient progress
on the levee improvements will have occurred to restore
100-year
flood protection. At December 31, 2009, Alleghany
Properties owned approximately 320 acres of property in
various land use categories ranging from multi-family
residential to commercial. Alleghany Properties had three
employees at December 31, 2009.
Parent
Company Operations
At the parent level, we seek out attractive investment
opportunities, including strategic investments in operating
companies, delegate responsibilities to competent and motivated
managers at the operating business level, define risk
parameters, set management goals for our operating businesses,
ensure that operating business managers are provided with
incentives to meet these goals, and monitor their progress.
Strategic investments currently include an approximately
33 percent stake in Homesite and an approximately
38 percent stake in ORX.
At December 31, 2009, we had 14 employees at the
parent level.
Item 1A. Risk
Factors.
We face risks from our property and casualty and surety
insurance businesses and our investments in debt and equity
securities. Discussed below are significant risks that our
business faces. If any of the events or circumstances described
as risks below actually occurs, our business, results of
operations or financial condition could be materially and
adversely affected. Our businesses may also be adversely
affected by risks and uncertainties not currently known to us or
that we currently consider immaterial.
Risk
Factors Relating to our Operating Units
The reserves for losses and LAE of our insurance operating
units are estimates and may not be adequate, which would require
our insurance operating units to establish additional
reserves.
Gross reserves for losses and LAE reported on our
balance sheet as of December 31, 2009 were approximately
$2.5 billion. These loss and LAE reserves reflect our best
estimates of the cost of settling all claims and related
expenses with respect to insured events that have occurred.
Reserves do not represent an exact calculation of liability, but
rather an estimate of what
25
Table of Contents
management expects the ultimate settlement and claims
administration will cost for claims that have occurred, whether
known or unknown. These reserve estimates, which generally
involve actuarial projections, are based on management’s
assessment of facts and circumstances currently known and
assumptions about anticipated loss emergence patterns, including
expected future trends in claims severity and frequency,
inflation, judicial theories of liability, reinsurance coverage,
legislative changes, and other factors.
The inherent uncertainties of estimating reserves are greater
for certain types of liabilities, where long periods of time
elapse before a definitive determination of liability is made
and settlement is reached. Our liabilities for losses and LAE
can generally be categorized into two distinct groups,
short-tail business and long-tail business. Short-tail business
refers to lines of business, such as property, for which losses
are usually known and paid shortly after the loss actually
occurs. Long-tail business describes lines of business for which
specific losses may not be known and reported for some period
and losses take much longer to emerge. Given the time frame over
which long-tail exposures are ultimately settled, there is
greater uncertainty and volatility in these lines than in
short-tail lines of business. Our long-tail coverages consist of
most casualty lines including professional liability, D&O
liability, general liability, umbrella/excess and certain
workers’ compensation exposures. Some factors that
contribute to the uncertainty and volatility of long-tail
casualty programs, and thus require a significant degree of
judgment in the reserving process, include the inherent
uncertainty as to the length of reporting and payment
development patterns, the possibility of judicial
interpretations or legislative changes that might impact future
loss experience relative to prior loss experience, and the
potential lack of comparability of the underlying data used in
performing loss reserve analyses.
In periods with increased economic volatility, such as under the
current financial market conditions, it becomes more difficult
to accurately predict claim costs. It is especially difficult to
estimate the impact of inflation on loss reserves given the
current economic environment and related regulatory and
government actions. Reserve estimates are continually refined in
an ongoing process as experience develops and further claims are
reported and settled. Adjustments to reserves are reflected in
the results of the periods in which the adjustments are made.
Because setting reserves is inherently uncertain, we cannot
assure you that our current reserves will prove adequate in
light of subsequent events. Should our insurance operating units
need to increase their reserves, our pre-tax income for the
period would decrease by a corresponding amount. Although
current reserves reflect our best estimate of the costs of
settling claims, we cannot assure you that our reserve estimates
will not need to be increased in the future.
Significant competitive pressures may prevent our insurance
operating units from retaining existing business or writing new
business at adequate rates.
Our insurance operating units
compete with a large number of other companies in their selected
lines of business. They compete, and will continue to compete,
with major U.S. and
non-U.S. insurers,
other regional companies, mutual companies, specialty insurance
companies, underwriting agencies, state funds, and diversified
financial services companies. Many competitors have considerably
greater financial resources and greater experience in the
insurance industry and offer a broader line of insurance
products than do AIHL’s insurance operating units. Except
for regulatory considerations, there are virtually no barriers
to entry into the insurance industry. Competition may be
domestic or foreign, and competitors are not necessarily
required to be licensed by various state insurance departments.
Competition in the businesses of our insurance operating units
is based on many factors, including the perceived financial
strength of the company, premium charges, other terms and
conditions offered, services provided, commissions paid to
producers, ratings assigned by independent rating agencies,
speed of claims payment, and reputation and experience in the
lines to be written. Such competition could cause the supply
and/or
demand for insurance to change, which could affect the ability
of our insurance operating units to price their products at
adequate rates. If our insurance operating units are unable to
retain existing business or write new business at adequate
rates, our results of operations could be materially and
adversely affected.
In the past few years, our insurance operating units have faced
increasing competition as a result of an increased flow of
capital into the insurance industry, with both new entrants and
existing insurers seeking to gain market share. This has
resulted in decreased premium rates and less favorable contract
terms and conditions. In particular, RSUI and CATA’s
specialty lines of business increasingly encounter competition
from admitted companies seeking to increase market share. We
expect to continue to face strong competition in these and the
other lines of business of our insurance operating units, and
our insurance operating units may continue to experience
decreases in premium rates
and/or
premium volume and less favorable contract terms and conditions.
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Table of Contents
Our results may fluctuate as a result of many factors,
including cyclical changes in the insurance industry.
Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical
periods of price competition and excess underwriting capacity,
followed by periods of high premium rates and shortages of
underwriting capacity. Although an individual insurance
company’s financial performance is dependent on its own
specific business characteristics, the profitability of most
property and casualty insurance companies tends to follow this
cyclical market pattern. Further, this cyclical market pattern
can be more pronounced in the excess and surplus market, in
which RSUI primarily competes, than in the admitted insurance
market. When premium rates are high and there is a shortage of
capacity in the admitted insurance market, the same factors are
present in the excess and surplus market, and growth in the
excess and surplus market can be significantly more rapid than
growth in the standard insurance market. Similarly, when there
is price competition and excess underwriting capacity in the
admitted insurance market, many customers that were previously
driven into the excess and surplus market may return to the
admitted insurance market, exacerbating the effects of price
competition. Since cyclicality is due in large part to the
actions of our insurance operating units’ competitors and
general economic factors, we cannot predict the timing or
duration of changes in the market cycle. These cyclical patterns
cause our revenues and net earnings to fluctuate.
Because our insurance operating units are property and
casualty insurers, we face losses from natural and human-made
catastrophes.
Property and casualty insurers are subject to
claims arising out of catastrophes that may have a significant
effect on their results of operations, liquidity and financial
condition. Catastrophe losses, or the absence thereof, have had
a significant impact on our results. For example, pre-tax
catastrophe losses, net of reinsurance, at RSUI were minimal in
2009, compared with $97.9 million in 2008 (primarily
reflecting 2008 third quarter hurricane net catastrophe losses
for Hurricanes Ike, Gustav and Dolly) and $47.1 million in
2007. Several states, or underwriting organizations of which our
insurance operating units are required to be members, may
increase their mandatory assessments as a result of catastrophes
and other events, and we may not be able to fully recoup these
increased costs.
Natural or human-made catastrophes can be caused by various
events, including hurricanes, other windstorms, earthquakes and
floods, as well as terrorist activities. The incidence and
severity of catastrophes in any short period of time are
inherently unpredictable. The extent of gross losses from a
catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of
the event. Most catastrophes are restricted to small geographic
areas; however, hurricanes, other windstorms, earthquakes and
floods may produce significant damage when those areas are
heavily populated. The geographic distribution of AIHL’s
insurance operating units subjects them to catastrophe exposure
in the United States from hurricanes in the Gulf coast regions,
Florida, the Mid-Atlantic, and the Northeast, from other
windstorms in the Midwest and Southern regions, and earthquakes
in California, the Pacific Northwest region and along the New
Madrid fault line in the Midwest region. Catastrophes can cause
losses in a variety of our property and casualty lines, and most
of our past catastrophe-related claims have resulted from severe
hurricanes. It is therefore possible that a catastrophic event
or multiple catastrophic events could produce significant losses
and have a material adverse effect on our financial condition
and results of operations.
In addition, longer-term natural catastrophe trends may be
changing due to climate change, a phenomenon that has been
associated with extreme weather events linked to rising
temperatures, and includes effects on global weather patterns,
greenhouse gases, sea, land and air temperatures, sea levels,
rain and snow. Climate change, to the extent it produces rising
temperatures and changes in weather patterns, could impact the
frequency or severity of weather events such as hurricanes. To
the extent climate change increases the frequency and severity
of such weather events, our insurance operating units,
particularly RSUI, may face increased claims, particularly with
respect to properties located in coastal areas. Our insurance
operating units take certain measures to mitigate against the
frequency and severity of such events by giving consideration to
these risks in their underwriting and pricing decisions and
through the purchase of reinsurance. To the extent broad
environmental factors, exacerbated by climate change or
otherwise, lead to increases in insured losses, particularly if
those losses exceed the expectations, including reinsurance
coverage, of our insurance operating units, our financial
condition and results of operations could be materially,
adversely affected.
With respect to terrorism, to the extent that reinsurers have
excluded coverage for certain terrorist acts or have priced this
coverage at rates that are not practical, our insurance
operating units, particularly RSUI, would not have
27
Table of Contents
reinsurance protection and would be exposed to potential losses
as a result of any terrorist acts. To the extent an act of
terrorism is certified by the U.S. Secretary of Treasury,
we may be covered under the Terrorism Act. Information regarding
the Terrorism Act and its impact on our insurance operating
units can be found on pages 22 and 23 of this
Form 10-K
Report.
We cannot guarantee that the reinsurers used by our insurance
operating units will pay in a timely fashion, if at all, and, as
a result, we could experience losses even if reinsured.
Our
insurance operating units purchase reinsurance by transferring,
or ceding, part of the risk that they have underwritten to a
reinsurance company in exchange for part of the premium received
by our insurance operating units in connection with that risk.
Although reinsurance makes the reinsurer liable to our insurance
operating units to the extent the risk is transferred or ceded
to the reinsurer, it does not relieve our insurance operating
units of their liability to their policyholders. Reinsurers may
not pay the reinsurance recoverables that they owe to our
insurance operating units or they may not pay these recoverables
on a timely basis. This risk may increase significantly if these
reinsurers experience financial difficulties as a result of
catastrophes and other events. Underwriting results and
investment returns of some of the reinsurers used by our
insurance operating units may affect their future ability to pay
claims. Accordingly, we bear credit risk with respect to our
insurance operating units’ reinsurers, and if they fail to
pay, our financial results would be adversely affected. As of
December 31, 2009, the amount due from reinsurers reported
on our balance sheet was $1.0 billion, with approximately
$0.8 billion attributable to RSUI’s reinsurers.
If market conditions cause reinsurance to be more costly or
unavailable, our insurance operating units may be required to
bear increased risks or reduce the level of their underwriting
commitments.
As part of our overall risk and capacity
management strategy, our insurance operating units purchase
reinsurance for certain amounts of risk underwritten by them,
especially catastrophe risks. The reinsurance programs purchased
by our insurance operating units are generally subject to annual
renewal. Market conditions beyond their control determine the
availability and cost of the reinsurance protection they
purchase, which may affect the level of their business written
and thus their profitability. If our insurance operating units
are unable to renew their expiring facilities or to obtain new
reinsurance facilities, either their net exposures would
increase, which could increase the volatility of their results
or, if they are unwilling to bear an increase in net exposures,
they would have to reduce the level of their underwriting
commitments, especially catastrophe-exposed risks, which may
reduce their revenues and net earnings. Generally, under
reinsurance contracts, an insured, to the extent it exhausts its
original coverage under a reinsurance contract during a single
coverage period (typically a single twelve-month period), can
pay a reinsurance reinstatement premium to restore coverage
during such coverage period. If our insurance operating units
exhaust their original and reinstated coverage under their
third-party catastrophic reinsurance contracts during a single
coverage period, they will not have any reinsurance coverage
available for losses incurred as a result of additional
catastrophic events during that coverage period.
RSUI attempts to manage its exposure to catastrophe risk
partially through the use of catastrophe modeling software. The
failure of this software to accurately gauge the
catastrophe-exposed risks RSUI writes could have a material
adverse effect on our financial condition and results of
operations.
As part of its approach to managing catastrophe
risk, RSUI has historically used a number of tools, including
third-party catastrophe modeling software, to help evaluate
potential losses. RSUI has used modeled loss scenarios to set
its level of risk retention and help structure its reinsurance
programs. Modeled loss estimates, however, have not always
accurately predicted RSUI’s ultimate losses with respect to
hurricane activity. Accordingly, in an effort to better manage
its accumulations of risk such that its loss exposure conforms
to its established risk tolerances and fits within its
reinsurance programs, RSUI periodically reviews its catastrophe
exposure management approach, which may result in the
implementation of new monitoring tools and a revision of its
underwriting guidelines and procedures. However, these efforts
may not be successful in sufficiently mitigating risk exposures
and losses resulting from future catastrophes.
Our insurance operating units are rated by A.M. Best and
a decline in these ratings could affect the standing of our
insurance operating units in the insurance industry and cause
their premium volume and earnings to decrease.
Ratings have
become an increasingly important factor in establishing the
competitive position of insurance companies. Some of our
insurance operating unit companies are rated by A.M. Best,
an independent organization that analyzes the insurance
industry. A.M. Best’s ratings reflect its opinion of
an insurance company’s financial strength, operating
performance, strategic position, and ability to meet its
28
Table of Contents
obligations to policyholders. These ratings are subject to
periodic review, and we cannot assure you that any of our
insurance operating unit companies will be able to retain those
ratings. In this regard, as a result of EDC’s determination
in June 2009 to cease writing business on a direct basis and
certain other factors, A.M. Best downgraded its rating of
EDIC from A- (Excellent), with a negative outlook, to B++
(Good), with a stable outlook on June 30, 2009. If the
ratings of our insurance operating unit companies are reduced,
or in the case of EDIC, further reduced, from their current
levels by A.M. Best, their competitive positions in the
insurance industry could suffer and it would be more difficult
for them to market their products. A significant downgrade could
result in a substantial loss of business as policyholders move
to other companies with higher claims-paying and financial
strength ratings.
The businesses of our insurance operating units are heavily
regulated, and changes in regulation may reduce their
profitability and limit their growth.
Our insurance
operating units are subject to extensive regulation and
supervision in the jurisdictions in which they conduct business.
This regulation is generally designed to protect the interests
of policyholders, and not necessarily the interests of insurers,
their stockholders, or other investors. The regulation relates
to authorization for lines of business, capital and surplus
requirements, investment limitations, underwriting limitations,
transactions with affiliates, dividend limitations, changes in
control, premium rates, and a variety of other financial and
nonfinancial components of an insurance company’s business.
Virtually all states in which our insurance operating units
conduct their business require them, together with other
insurers licensed to do business in that state, to bear a
portion of the loss suffered by some insureds as the result of
impaired or insolvent insurance companies. In addition, in
various states, our insurance operating units must participate
in mandatory arrangements to provide various types of insurance
coverage to individuals or other entities that otherwise are
unable to purchase that coverage from private insurers. A few
states require our insurance operating units to purchase
reinsurance from a mandatory reinsurance fund. Such reinsurance
funds can create a credit risk for insurers if not adequately
funded by the state and, in some cases, the existence of a
reinsurance fund could affect the prices charged for the
policies issued by our insurance operating units. The effect of
these and similar arrangements could reduce the profitability of
our insurance operating units in any given period or limit the
ability of our insurance operating units to grow their business.
In recent years, the state insurance regulatory framework has
come under increased scrutiny, and some state legislatures have
considered or enacted laws that may alter or increase state
authority to regulate insurance companies and insurance holding
companies. Further, the NAIC and state insurance regulators are
continually reexamining existing laws and regulations,
specifically focusing on modifications to statutory accounting
principles, interpretations of existing laws and the development
of new laws and regulations. It is also possible that the
structure of insurance regulation may be impacted by the broader
financial regulatory reform that Congress continues to pursue in
the wake of the recent financial crisis. Any proposed or future
state or federal legislation or NAIC initiatives, if adopted,
may be more restrictive on the ability of our insurance
operating units to conduct business than current regulatory
requirements or may result in higher costs.
Risk
Factors Relating to our Investments and Assets
A substantial amount of our assets is invested in debt
securities and is subject to market fluctuations.
A
substantial portion of our investment portfolio consists of debt
securities. As of December 31, 2009, our investment in debt
securities was approximately $3.3 billion, or
74.5 percent of our total investment portfolio. The fair
market value of these assets and the investment income from
these assets fluctuate depending on general economic and market
conditions. A rise in interest rates would increase the net
unrealized loss position of our investment portfolio, offset by
our ability to earn higher rates of return on funds reinvested.
Conversely, a decline in interest rates would decrease the net
unrealized loss position of our investment portfolio, offset by
lower rates of return on funds reinvested. In addition, some
debt securities, such as mortgage-backed and other asset-backed
securities, carry prepayment risk, or the risk that principal
will be returned more rapidly or slowly than expected, as a
result of interest rate fluctuations. Based upon the composition
and duration of our investment portfolio at December 31,
2009, a 100 basis point increase in interest rates would
result in a decrease in the fair value of our debt security
investments of approximately $116.7 million.
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Table of Contents
Defaults, downgrades or other events impairing the value of
our debt securities portfolio may reduce our earnings.
We
are subject to the risk that the issuers, or guarantors, of debt
securities we own may default on principal and interest payments
they owe us. The occurrence of a major economic downturn, such
as the current downturn in the economy, acts of corporate
malfeasance, widening risk spreads, or other events that
adversely affect the issuers or guarantors of these debt
securities could cause the value of our debt securities
portfolio and our net earnings to decline and the default rate
of the debt securities in our investment portfolio to increase.
In addition, with economic uncertainty, the credit quality of
issuers or guarantors could be adversely affected and a ratings
downgrade of the issuers or guarantors of the debt securities we
own could also cause the value of our debt securities portfolio
and our net earnings to decrease. For example, rating agency
downgrades of mono-line insurance companies during 2008
contributed to a decline in the carrying value and liquidity of
our municipal bond investment portfolio. Any event reducing the
value of these securities other than on a temporary basis could
have a material adverse effect on our business, results of
operations, and financial condition. We continually monitor the
difference between cost and the estimated fair value of our
investments in debt securities. If a decline in the value of a
particular debt security is deemed to be temporary, we record
the decline as an unrealized loss in stockholders’ equity.
If the decline is deemed to be other than temporary, we write it
down to the carrying value of the investment and record an
other-than-temporary
impairment loss on our statement of earnings, which may be
material to our operating results.
Investment returns are currently, and will likely continue to
remain, under pressure due to the significant volatility and
disruption experienced in the financial markets and the current
and continuing economic uncertainty. As a result, our exposure
to the risks described above could have a material adverse
effect on our results of operations.
We invest some of our assets in equity securities, which are
subject to fluctuations in market value.
We invest a portion
of our investment portfolio in equity securities which are
subject to fluctuations in market value. As of December 31,
2009, our investments in equity securities had a fair market
value of approximately $624.5 million, which represented
14.1 percent of our investment portfolio. We hold our
equity securities as available for sale, and any changes in the
fair value of these securities, net of tax, would be reflected
in our accumulated other comprehensive income as a component of
stockholders’ equity. If a decline in the value of a
particular equity security is deemed to be temporary, we record
the decline as an unrealized loss in stockholders’ equity.
If the decline is deemed to be other than temporary, we write it
down to the carrying value of the investment and record an
other-than-temporary
impairment loss on our statement of earnings, which may be
material to our operating results, regardless of whether we
continue to hold the equity security. A severe
and/or
prolonged downturn in equity markets could give rise to
significant impairment charges.
In 2009, we recorded $74.1 million of
other-than-temporary
impairment losses on equity securities, which were primarily
based on the severity of the declines in fair value of such
securities relative to their cost as of the balance sheet date.
Such severe declines are primarily related to a significant
deterioration of U.S. equity market conditions during the
latter part of 2008 and the first quarter of 2009, which abated
somewhat during the remainder of 2009. If U.S. equity
market conditions deteriorate in 2010, we may be required to
record additional
other-than-temporary
impairment losses, which could have a material and adverse
impact on our results of operations.
As of December 31, 2009, our energy sector equity holdings
had an aggregate fair market value of $399.2 million, which
represented 63.9 percent of our equity portfolio. This
investment concentration may lead to higher levels of short-term
price volatility and variability in the level of unrealized
investment gains or losses.
If our business does not perform well, we may be required to
recognize an impairment of our goodwill or other long-lived
assets or to establish a valuation allowance against the
deferred income tax asset, which could adversely affect our
results of operations or financial condition.
Goodwill
represents the excess of the amount we paid to acquire
subsidiaries and other businesses over the fair value of their
net assets at the date of acquisition. We test goodwill at least
annually for impairment. Impairment testing is performed based
upon estimates of the fair value of the operating unit to which
the goodwill relates. The fair value of the operating unit is
impacted by the performance of the business. The performance of
our businesses may be adversely impacted by
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Table of Contents
prolonged market declines. If it is determined that the goodwill
has been impaired, we must write down the goodwill by the amount
of the impairment, with a corresponding charge to net earnings.
Such write-downs could have a material adverse effect on our
results of operations or financial position. For example, in
connection with impairment testing of goodwill and other
intangible assets as of December 31, 2008, we determined
that the $48.7 million of goodwill associated with our
acquisition of EDC was impaired. As a result, as of
December 31, 2008, we recorded a non-cash charge of
$48.7 million, representing the entire EDC goodwill balance
at such date. EDC also recorded a pre-tax, non-cash impairment
charge of $11.2 million in the 2009 second quarter,
representing the entire carrying value of EDC’s trade names
(originally determined to have indefinite useful lives), renewal
rights, distribution rights, and database development, net of
accumulated amortization. Further or continued deterioration of
financial market conditions could result in a decrease in the
expected future earnings of our operating units, which could
lead to an impairment of some or all of the goodwill associated
with them in future periods.
Deferred income tax represents the tax effect of the differences
between the book and tax basis of assets and liabilities.
Deferred tax assets are assessed periodically by management to
determine if they are recoverable. Factors in management’s
determination include the performance of the business including
the ability to generate capital gains. If it is more likely than
not that the deferred income tax asset will not be realized
based on available information then a valuation allowance must
be established with a corresponding charge to net earnings. Such
charges could have a material adverse effect on our results of
operations or financial position. Additional deterioration of
financial market conditions could also result in the impairment
of long-lived assets and the establishment of a valuation
allowance on our deferred income tax assets.
Item 1B. Unresolved
Staff Comments.
There are no unresolved written comments that were received from
the SEC staff 180 days or more before the end of our fiscal
year relating to our periodic or current reports under the
Exchange Act.
Item 3. Legal
Proceedings.
Our subsidiaries are parties to pending litigation and claims in
connection with the ordinary course of their businesses. Each
subsidiary makes provision on its books, in accordance with
GAAP, for estimated losses to be incurred in connection with
such litigation and claims, including legal costs. In the
opinion of management, this provision is adequate under GAAP as
of December 31, 2009.
Item 4. Submission
of Matters to a Vote of Security Holders.
We did not submit any matter to a vote of security holders
during the quarter ended December 31, 2009.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market
Information, Holders and Dividends
As of December 31, 2009, there were 1,020 holders of record
of our common stock. The following table indicates quarterly
high and low prices of our common stock on the New York Stock
Exchange in 2009 and 2008. Our ticker symbol is Y.
| 2009 | 2008 | |||||||||||||||
|
Quarter Ended
|
High | Low | High | Low | ||||||||||||
|
March 31
|
$ | 301.47 | $ | 234.83 | $ | 396.00 | $ | 317.23 | ||||||||
|
June 30
|
277.50 | 221.74 | 372.39 | 324.32 | ||||||||||||
|
September 30
|
288.73 | 250.58 | 411.76 | 279.41 | ||||||||||||
|
December 31
|
276.52 | 247.01 | 362.75 | 177.74 | ||||||||||||
In 2009 and 2008, our Board of Directors declared, as our
dividend on our common stock for each such year, a stock
dividend consisting of one share of our common stock for every
fifty shares outstanding.
Purchases
of Equity Securities by Us
The following table summarizes our common stock repurchases for
the quarter ended December 31, 2009:
|
Approximate Dollar
|
||||||||||||||||
|
Total Number of
|
Value of Shares
|
|||||||||||||||
|
Shares Purchased as
|
that May Yet Be
|
|||||||||||||||
|
Part of Publicly
|
Purchased Under the
|
|||||||||||||||
|
Total Number of
|
Average Price
|
Announced Plans
|
Plans
|
|||||||||||||
|
Period
|
Shares Purchased | Paid per Share | or Programs(1) | or Programs | ||||||||||||
|
October 1 to October 31
|
55,774 | $ | 259.11 | 55,774 | ||||||||||||
|
November 1 to November 30
|
749 | $ | 264.90 | 749 | ||||||||||||
|
December 1 to December 31
|
29,629 | $ | 269.66 | 29,269 | ||||||||||||
|
Total
|
86,152 | $ | 262.76 | 85,792 | $ | 81,718,365 | ||||||||||
| (1) | All shares represent shares repurchased pursuant to an authorization of the Board of Directors, announced in February 2008, to repurchase shares of our common stock, at such times and at prices as management may determine advisable, up to an aggregate of $300.0 million. |
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Table of Contents
PERFORMANCE
GRAPH
The following graph compares for the years 2005 through 2009 the
cumulative total stockholder return on our common stock, the
cumulative total return on the Standard & Poor’s
500 Stock Index (the “S&P 500”), and the
cumulative total return on the Standard & Poor’s
500 Property and Casualty Insurance Index (the “P&C
Index”). The graph shows the value at the end of each such
year of $100 invested as of January 1, 2005 in our common
stock, the S&P 500 and the P&C Index.
| Company/Index | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||
|
n
Alleghany
|
101.55 | 132.62 | 149.55 | 107.01 | 106.83 | ||||||||||||||||||||
|
=
S&P 500
|
104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||||
|
5
P&C Index
|
115.11 | 129.93 | 111.79 | 78.91 | 88.65 | ||||||||||||||||||||
This performance graph is based on the following assumptions:
(i) cash dividends are reinvested on the ex-dividend date
in respect of such dividend; and (ii) the two-percent stock
dividends we have paid in each of the years 2005 through 2009
are included in the cumulative total stockholder return on our
common stock.
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Table of Contents
| Item 6. | Selected Financial Data. |
Alleghany
Corporation and Subsidiaries*
| Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (in millions, except for per share and share amounts) | ||||||||||||||||||||
|
Operating Data
|
||||||||||||||||||||
|
Revenues from continuing operations
|
$ | 1,184.4 | $ | 989.1 | $ | 1,228.6 | $ | 1,060.3 | $ | 1,062.7 | ||||||||||
|
Earnings from continuing operations
|
$ | 271.0 | $ | 40.6 | $ | 287.6 | $ | 240.9 | $ | 43.9 | ||||||||||
|
Earnings from discontinued operations
|
— | 107.4 | 11.5 | 7.0 | 8.4 | |||||||||||||||
|
Net earnings
|
$ | 271.0 | $ | 148.0 | $ | 299.1 | $ | 247.9 | $ | 52.3 | ||||||||||
|
Basic earnings per share of common stock**
|
||||||||||||||||||||
|
Continuing operations
|
$ | 30.43 | $ | 2.75 | $ | 31.89 | $ | 27.40 | $ | 5.15 | ||||||||||
|
Discontinued operations
|
— | 12.67 | 1.36 | 0.83 | 0.98 | |||||||||||||||
|
Net earnings
|
$ | 30.43 | $ | 15.42 | $ | 33.25 | $ | 28.23 | $ | 6.13 | ||||||||||
|
Average number of shares of common stock**
|
8,704,268 | 8,479,863 | 8,476,152 | 8,465,844 | 8,536,073 | |||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||
|
Total assets
|
$ | 6,192.8 | $ | 6,181.8 | $ | 6,942.1 | $ | 6,178.7 | $ | 5,822.3 | ||||||||||
|
Debt
|
$ | – | $ | – | $ | – | $ | 80.0 | $ | 80.0 | ||||||||||
|
Common stockholders’ equity
|
$ | 2,717.5 | $ | 2,347.3 | $ | 2,484.8 | $ | 2,146.4 | $ | 1,894.4 | ||||||||||
|
Common stockholders’ equity per share of common stock**
|
$ | 306.71 | $ | 278.17 | $ | 292.73 | $ | 254.12 | $ | 221.40 | ||||||||||
| * | We sold World Minerals on July 14, 2005. World Minerals has been classified as discontinued operations for the year ended 2005. On July 18, 2007, AIHL acquired EDC. We sold Darwin on October 20, 2008. Darwin has been classified as discontinued operations for the four years ended 2008 and discontinued operations, net of minority interest expense, includes the gain on disposition in 2008. | |
| ** | Amounts have been adjusted for subsequent common stock dividends. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Quantitative
and Qualitative Disclosures About Market Risk” contain
disclosures which are forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be
identified by the use of words such as “may,”
“will,” “expect,” “project,”
“estimate,” “anticipate,” “plan,”
“believe,” “potential,” “should,”
“continue” or the negative versions of those words or
other comparable words. These forward-looking statements are
based upon our current plans or expectations and are subject to
a number of uncertainties and risks that could significantly
affect current plans, anticipated actions and our future
financial condition and results. These statements are not
guarantees of future performance, and we have no specific
intention to update these statements. The uncertainties and
risks include, but are not limited to,
| • | significant weather-related or other natural or human-made catastrophes and disasters; | |
| • | the cyclical nature of the property and casualty insurance industry; | |
| • | changes in market prices of our equity investments and changes in value of our debt portfolio; | |
| • | adverse loss development for events insured by our insurance operating units in either the current year or prior year; | |
| • | the long-tail and potentially volatile nature of certain casualty lines of business written by our insurance operating units; | |
| • | the cost and availability of reinsurance; | |
| • | exposure to terrorist acts; | |
| • | the willingness and ability of our insurance operating units’ reinsurers to pay reinsurance recoverables owed to our insurance operating units; | |
| • | changes in the ratings assigned to our insurance operating units; | |
| • | claims development and the process of estimating reserves; | |
| • | legal and regulatory changes; | |
| • | the uncertain nature of damage theories and loss amounts; and | |
| • | increases in the levels of risk retention by our insurance operating units. |
Additional risks and uncertainties include general economic and
political conditions, including the effects of a prolonged
U.S. or global economic downturn or recession; changes in
costs; variations in political, economic or other factors; risks
relating to conducting operations in a competitive environment;
effects of acquisition and disposition activities, inflation
rates, or recessionary or expansive trends; changes in interest
rates; extended labor disruptions, civil unrest, or other
external factors over which we have no control; and changes in
our plans, strategies, objectives, expectations, or intentions,
which may happen at any time at our discretion. As a
consequence, current plans, anticipated actions, and future
financial condition and results may differ from those expressed
in any forward-looking statements made by us or on our behalf.
Critical
Accounting Estimates
Losses
and LAE
Overview.
Each of our insurance operating
units establishes reserves on its balance sheet for unpaid
losses and LAE related to its property and casualty insurance
and surety contracts. As of any balance sheet date, historically
there have been claims that have not yet been reported, and some
claims may not be reported for many years after the date a loss
occurs. As a result of this historical pattern, the liability
for unpaid losses and LAE includes significant estimates for
IBNR. Additionally, reported claims are in various stages of the
settlement process. Each claim is settled individually based
upon its merits, and certain claims may take years to settle,
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especially if legal action is involved. As a result, the
liabilities for unpaid losses and LAE include significant
judgments, assumptions and estimates made by management relating
to the actual ultimate losses that will arise from the claims.
Due to the inherent uncertainties in the process of establishing
these liabilities, the actual ultimate loss from a claim is
likely to differ, perhaps materially, from the liability
initially recorded and could be material to the results of our
operations. The accounting policies that our insurance operating
units use in connection with the establishment of these
liabilities include critical accounting estimates.
As noted above, as of any balance sheet date, not all claims
that have occurred have been reported to our insurance operating
units, and if reported may not have been settled. The time
period between the occurrence of a loss and the time it is
settled by the insurer is referred to as the “claim
tail.” Property claims usually have a fairly short claim
tail and, absent claim litigation, are reported and settled
within no more than a few years of the date they occur. For
short-tail lines, loss reserves consist primarily of reserves
for reported claims. The process of recording quarterly and
annual liabilities for unpaid losses and LAE for short-tail
lines is primarily focused on maintaining an appropriate reserve
level for reported claims and IBNR, rather than determining an
expected loss ratio for the current business. Specifically, we
assess the reserve adequacy of IBNR in light of such factors as
the current levels of reserves for reported claims and
expectations with respect to reporting lags, historical data,
legal developments, and economic conditions, including the
effects of inflation. At December 31, 2009, the amount of
IBNR for short-tail claims represented approximately
1.1 percent, or $28.6 million, of our total gross loss
and LAE liabilities of $2.5 billion. In conformity with
GAAP, our insurance operating units are not permitted to
establish IBNR reserves for catastrophe losses that have not
occurred. Therefore, losses related to a significant
catastrophe, or accumulation of catastrophes, in any reporting
period could have a material, negative impact on our results
during that period.
Our insurance operating units provide coverage on both a
claims-made and occurrence basis. Claims-made policies generally
require that claims occur and be reported during the coverage
period of the policy. Occurrence policies allow claims which
occur during a policy’s coverage period to be reported
after the coverage period, and as a result, these claims can
have a very long claim tail, occasionally extending for decades.
Casualty claims can have a very long claim tail, in certain
situations extending for many years. In addition, casualty
claims are more susceptible to litigation and the legal
environment and can be significantly affected by changing
contract interpretations, all of which contribute to extending
the claim tail. For long-tail casualty lines of business,
estimation of ultimate liabilities for unpaid losses and LAE is
a more complex process and depends on a number of factors,
including the line and volume of the business involved. For
these reasons, AIHL’s insurance operating units will
generally use actuarial projections in setting reserves for all
casualty lines of business.
Although we are unable at this time to determine whether
additional reserves, which could have a material impact upon our
financial condition, results of operations, and cash flows, may
be necessary in the future, we believe that the reserves for
unpaid losses and LAE established by our insurance operating
units are adequate as of December 31, 2009.
Methodologies and Assumptions.
Our insurance operating
units use a variety of techniques that employ significant
judgments and assumptions to establish the liabilities for
unpaid losses and LAE recorded at the balance sheet date. These
techniques include detailed statistical analyses of past claim
reporting, settlement activity, claim frequency, internal loss
experience, changes in pricing or coverages, and severity data
when sufficient information exists to lend statistical
credibility to the analyses. More subjective techniques are used
when statistical data is insufficient or unavailable. These
liabilities also reflect implicit or explicit assumptions
regarding the potential effects of future inflation, judicial
decisions, changes in laws and recent trends in such factors, as
well as a number of actuarial assumptions that vary across our
insurance operating units and across lines of business. This
data is analyzed by line of business, coverage, and accident
year, as appropriate.
Our loss reserve review processes use actuarial methods that
vary by insurance operating unit and line of business and
produce point estimates for each class of business. The
actuarial methods used by our insurance operating units include
the following methods:
| • | Reported Loss Development Method: a reported loss development pattern is calculated based on historical data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year to ultimate levels; |
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| • | Paid Development Method: a paid loss development pattern is calculated based on historical development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year to ultimate levels; | |
| • | Expected Loss Ratio Method: expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and | |
| • | Bornhuetter-Ferguson Method: the results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method. |
The primary assumptions used by our insurance operating units
include the following:
| • | Expected loss ratios represent management’s expectation of losses, in relation to earned premium, at the time business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends, and known changes in the type of risks underwritten. | |
| • | Rate of loss cost inflation (or deflation) represents management’s expectation of the inflation associated with the costs we may incur in the future to settle claims. Expected loss cost inflation is particularly important for claims with a substantial medical component, such as workers’ compensation. | |
| • | Reported and paid loss emergence patterns represent management’s expectation of how losses will be reported and ultimately paid in the future based on the historical emergence patterns of reported and paid losses and are derived from past experience of our insurance operating units, modified for current trends. These emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. |
Each of the above actuarial assumptions may also incorporate
data from the insurance industry as a whole, or peer companies
writing substantially similar insurance coverages, in the
absence of sufficiently credible internally-derived historical
information. Data from external sources may be used to set
expectations, as well as assumptions regarding loss frequency or
severity relative to an exposure unit or claim, among other
actuarial parameters. Assumptions regarding the application or
composition of peer group or industry reserving parameters
require substantial judgment. The use of data from external
sources was most significant for EDC as of December 31,
2009.
Sensitivity.
Loss frequency and severity are measures of
loss activity that are considered in determining the key
assumptions described above. Loss frequency is a measure of the
number of claims per unit of insured exposure, and loss severity
is a measure of the average size of claims. Factors affecting
loss frequency include the effectiveness of loss controls and
safety programs and changes in economic conditions or weather
patterns. Factors affecting loss severity include changes in
policy limits, retentions, rate of inflation, and judicial
interpretations. Another factor affecting estimates of loss
frequency and severity is the loss reporting lag, which is the
period of time between the occurrence of a loss and the date the
loss is reported to our insurance operating units. The length of
the loss reporting lag affects our ability to accurately predict
loss frequency (loss frequencies are more predictable for lines
with short reporting lags), as well as the amount of reserves
needed for IBNR. If the actual level of loss frequency and
severity is higher or lower than expected, the ultimate losses
will be different than management’s estimates. A small
percentage change in an estimate can result in a material effect
on our reported earnings. The following table reflects the
impact of changes, which could be favorable or unfavorable, in
frequency and severity on our loss estimates for claims
occurring in 2009 (dollars in millions):
| Frequency | ||||||||||||
|
Severity
|
1.0% | 5.0% | 10.0% | |||||||||
|
1.0%
|
$ | 8.7 | $ | 26.3 | $ | 48.3 | ||||||
|
5.0%
|
$ | 26.3 | $ | 44.6 | $ | 67.4 | ||||||
|
10.0%
|
$ | 48.3 | $ | 67.4 | $ | 91.3 | ||||||
Our net reserves for losses and LAE of $1.6 billion as of
December 31, 2009 relate to multiple accident years.
Therefore, the impact of changes in frequency or severity for
more than one accident year could be higher or lower
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than the amounts reflected above. We believe the above analysis
provides a reasonable benchmark for sensitivity as we believe it
is within historical variation for our reserves. Currently, none
of the scenarios is believed to be more likely than the other.
Prior Year Development.
Our insurance operating units
continually evaluate the potential for changes, both positive
and negative, in their estimates of their loss and LAE
liabilities and use the results of these evaluations to adjust
both recorded liabilities and underwriting criteria. With
respect to liabilities for unpaid losses and LAE established in
prior years, these liabilities are periodically analyzed and
their expected ultimate cost adjusted, where necessary, to
reflect positive or negative development in loss experience and
new information, including, for certain catastrophic events,
revised industry estimates of the magnitude of a catastrophe.
Adjustments to previously recorded liabilities for unpaid losses
and LAE, both positive and negative, are reflected in our
financial results in the periods in which these adjustments are
made and are referred to as prior year reserve development. Each
of RSUI, CATA, and EDC adjusted its prior year loss and LAE
reserve estimate during 2009 and 2008 based on current
information that differed from previous assumptions made at the
time such loss and LAE reserves were previously estimated. These
reserve increases/(decreases) to prior year net reserves are
summarized as follows (in millions):
| 2009 | 2008 | |||||||
|
RSUI:
|
||||||||
|
Net casualty reserve releases
|
$ | (38.4 | ) | $ | (43.7 | ) | ||
|
Reserve release for third quarter 2008 hurricanes
|
(9.9 | ) | — | |||||
|
Non-catastrophe property case reserve re-estimation
|
11.5 | (6.2 | ) | |||||
|
All other, net
|
1.6 | (4.8 | ) | |||||
| $ | (35.2 | ) | $ | (54.7 | ) | |||
|
CATA:
|
||||||||
|
Net insurance reserve releases
|
$ | (10.7 | ) | $ | (11.8 | ) | ||
|
EDC:
|
||||||||
|
Net workers’ compensation increase
|
$ | 26.5 | $ | 25.4 | ||||
|
All other, net
|
1.5 | (1.7 | ) | |||||
| $ | 28.0 | $ | 23.7 | |||||
|
Total incurred related to prior years
|
$ | (17.9 | ) | $ | (42.8 | ) | ||
The more significant prior year adjustments affecting 2009 and
2008 are summarized as follows:
| • | For RSUI, loss and LAE for 2009 reflect a net $38.4 million release of prior accident year casualty loss reserves, compared with a net $43.7 million release of prior accident year casualty loss reserves during 2008. Both amounts relate primarily to D&O liability, professional liability, and general liability lines of business for the 2003 through 2007 accident years and reflect favorable loss emergence, compared with loss emergence patterns assumed in earlier periods for such lines of business. Specifically, cumulative losses for such lines of business, which include both loss payments and case reserves, in respect of prior accident years were expected to be higher through December 31, 2009 than the actual cumulative losses through that date. This amount of lower cumulative losses, expressed as a percentage of carried loss and LAE reserves at the beginning of the year, was 2.9 percent. Such reduction did not impact the assumptions used in estimating RSUI’s loss and LAE liabilities for business earned in 2009. For RSUI, loss and LAE for 2009 also reflect a net $9.9 million release of prior accident year loss reserves related to 2008 third quarter Hurricanes Ike, Gustav, and Dolly. | |
| • | For CATA, loss and LAE for 2009 reflect a net $10.7 million release of prior accident year loss reserves, compared with a net $11.8 million release of prior accident year loss reserves during 2008. Both amounts relate primarily to favorable loss emergence in the casualty and surety lines of business, compared with loss emergence patterns assumed in earlier periods for such lines of business. Specifically, cumulative losses for such lines of business, which include both loss payments and case reserves, in respect of prior accident years |
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| were expected to be higher through December 31, 2009 than the actual cumulative losses through that date. This amount of lower cumulative losses, expressed as a percentage of carried loss and LAE reserves at the beginning of the year, was 2.6 percent. Such reduction did not impact the assumptions used in estimating CATA’s loss and LAE liabilities for business earned in 2009. |
| • | For EDC, workers’ compensation loss and LAE for 2009 reflect a $26.5 million increase of prior accident year workers’ compensation loss reserves, compared with a $25.4 million increase of prior accident year workers’ compensation loss reserves during 2008. Both such reserve increases primarily reflect a significant acceleration in claims emergence and higher than anticipated increases in industry-wide severity. In addition, the $26.5 million increase in 2009 also reflects the estimated impact of judicial decisions by the Workers’ Compensation Appeals Board, or “WCAB.” Such WCAB decisions related to permanent disability determinations that have materially weakened prior workers’ compensation reforms instrumental in reducing medical and disability costs in earlier years. These decisions are in the process of being appealed to the California appellate courts but will continue in effect during the appeals process. With respect to the $26.5 million increase for prior accident years, $17.7 million primarily reflected higher than expected paid losses and $8.8 million reflected the estimated impact of the WCAB decisions. Cumulative paid losses in respect of prior accident years were expected to be lower through June 30, 2009 (the date of the reserve increase) than the actual cumulative paid losses through that date. This amount of higher cumulative paid losses, expressed as a percentage of carried loss and LAE reserves at the beginning of the year, was 1.5 percent. Such increases impacted the assumptions used in estimating EDC’s loss and LAE liabilities for business earned in 2009 and 2008, causing an increase of current accident year reserves of $8.0 million and $10.5 million, respectively. Of the $8.0 million, $6.2 million primarily reflected higher than expected paid losses and the remainder reflected the estimated impact of the WCAB decisions. Although EDC believes its reserves, including the provision for the WCAB decisions, were adequate as of December 31, 2009, the WCAB decisions could materially adversely affect the number and amount of EDC’s permanent disability payments, including those on its open claims, and the related loss and LAE reserves. |
Asbestos & Environmental.
Our reserve for
unpaid losses and LAE includes $18.9 million and
$18.8 million of gross and net reserves, respectively, at
December 31, 2009, for various liability coverages related
to asbestos and environmental impairment claims that arose from
reinsurance of certain general liability and commercial multiple
peril coverages assumed by Capitol Indemnity between 1969 and
1976. Capitol Indemnity exited this business in 1976. Reserves
for asbestos and environmental impairment claims cannot be
estimated with traditional loss reserving techniques because of
uncertainties that are greater than those associated with other
types of claims. Factors contributing to these uncertainties
include a lack of historical data, the significant periods of
time that often elapse between the occurrence of an insured loss
and the reporting of that loss to the ceding company and the
reinsurer, uncertainty as to the number and identity of insureds
with potential exposure to these risks, unresolved legal issues
regarding policy coverage, and the extent and timing of any such
contractual liability. Loss reserve estimates for these
environmental impairment and asbestos exposures include case
reserves, which also reflect reserves for legal and other LAE
and IBNR reserves. IBNR reserves are determined based upon
CATA’s historic general liability exposure base and policy
language, previous environmental impairment loss experience, and
the assessment of current trends of environmental law,
environmental cleanup costs, asbestos liability law, and
judicial settlements of asbestos liabilities.
For both asbestos and environmental impairment reinsurance
claims, CATA establishes case reserves by receiving case reserve
amounts from its ceding companies and verifies these amounts
against reinsurance contract terms, analyzing from the first
dollar of loss incurred by the primary insurer. In establishing
the liability for asbestos and environmental impairment claims,
CATA considers facts currently known and the current state of
the law and coverage litigation. Additionally, ceding companies
often report potential losses on a precautionary basis to
protect their rights under the reinsurance arrangement, which
generally calls for prompt notice to the reinsurer. Ceding
companies, at the time they report potential losses, advise CATA
of the ceding companies’ current estimate of the extent of
the loss. CATA’s claims department reviews each of the
precautionary claims notices and, based upon current
information, assesses the likelihood of loss to CATA. This
assessment is one of the factors used in determining the
adequacy of the recorded asbestos and environmental impairment
reserves. Although we are unable at this time to determine
whether additional reserves, which could have a material impact
upon our results of
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operations, may be necessary in the future, we believe that
CATA’s asbestos and environmental impairment reserves are
adequate as of December 31, 2009. Additional information
regarding asbestos and environmental impairment claims can be
found on pages 19 and 20 of this
Form 10-K
Report.
Reinsurance.
Receivables recorded with respect to claims
ceded by our insurance operating units to reinsurers under
reinsurance contracts are predicated in large part on the
estimates for unpaid losses and, therefore, are also subject to
a significant degree of uncertainty. In addition to the factors
cited above, reinsurance receivables may prove uncollectible if
the reinsurer is unable to perform under the contract.
Reinsurance contracts purchased by our insurance operating units
do not relieve them of their obligations to their own
policyholders. Additional information regarding the use of, and
risks related to, the use of reinsurance by our insurance
operating units can be found on page 28 of this
Form 10-K
Report.
Investments
Impairment
We hold our equity and debt securities as available for sale,
and as such, these securities are recorded at fair value. We
continually monitor the difference between cost and the
estimated fair value of our investments, which involves
uncertainty as to whether declines in value are temporary in
nature. If a decline in the value of a particular investment is
deemed temporary, we record the decline as an unrealized loss in
stockholders’ equity. If the decline is deemed to be other
than temporary, we write it down to the carrying value of the
investment and record an
other-than-temporary
impairment loss on our statement of earnings, regardless of
whether we continue to hold the applicable security. In
addition, under GAAP, any portion of such decline that relates
to debt securities that is believed to arise from factors other
than credit is recorded as a component of other comprehensive
income.
Management’s assessment of a decline in value includes,
among other things,
| • | the duration of time and the relative magnitude to which fair value of the investment has been below cost; | |
| • | the financial condition and near-term prospects of the issuer of the investment; | |
| • | extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer of the investment; and | |
| • | our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. |
A debt security is deemed impaired if it is probable that we
will not be able to collect all amounts due under the
security’s contractual terms. An equity security is deemed
impaired if, among other things, its decline in estimated fair
value has existed for twelve months or more or if its decline in
estimated fair value from its cost is greater than
50 percent, absent compelling evidence to the contrary.
Further, for securities expected to be sold, an
other-than-temporary
impairment loss is recognized if we do not expect the fair value
of a security to recover its cost prior to the expected date of
sale. If that judgment changes in the future, we may ultimately
record a realized loss after having originally concluded that
the decline in value was temporary. Risks and uncertainties are
inherent in the methodology we use to assess
other-than-temporary
declines in value. Risks and uncertainties could include, but
are not limited to, incorrect assumptions about financial
condition, liquidity or future prospects, inadequacy of any
underlying collateral, and unfavorable changes in economic or
social conditions, interest rates or credit ratings.
See Note 3 to the Consolidated Financial Statements set
forth in Item 8 of this
Form 10-K
Report for additional information on our investments and
investment impairments.
Goodwill
and Other Intangible Assets
Our consolidated balance sheet as of December 31, 2009
includes goodwill and other intangible assets, net of
amortization, of approximately $145.7 million. This amount
has been recorded as a result of business acquisitions. Other
intangible assets that are not deemed to have an indefinite
useful life are amortized over their estimated useful lives.
Goodwill and other intangible assets deemed to have an
indefinite useful life are tested annually in the fourth quarter
of every calendar year for impairment and at such other times
upon the occurrence of certain events. We also evaluate goodwill
and other intangible assets whenever events and changes in
circumstances suggest that the carrying amount may not be
recoverable. A significant amount of judgment is required in
performing goodwill and
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other intangible asset impairment tests. These tests include
estimating the fair value of our operating units and other
intangible assets. With respect to goodwill, as required by
GAAP, we compare the estimated fair value of our operating units
with their respective carrying amounts including goodwill. Under
GAAP, fair value refers to the amount for which the entire
operating unit may be bought or sold. Our methods for estimating
operating unit values include asset and liability fair values
and other valuation techniques, such as discounted cash flows
and multiples of earnings or revenues. All of these methods
involve significant estimates and assumptions.
In connection with impairment testing of our goodwill and other
intangible assets in the fourth quarter of 2008, we determined
that the $48.7 million of goodwill associated with our
acquisition of EDC was impaired in its entirety. As a result, at
December 31, 2008, we recorded a non-cash charge of
$48.7 million, which is classified as a net realized
capital loss in our consolidated statement of earnings for the
year ended December 31, 2008 and represents the entire EDC
goodwill balance at such date. Our estimation of EDC’s fair
value was based primarily on observing the stock market-based
valuations of other publicly-traded insurance carriers. The
factors that contributed to our determination that the EDC
goodwill was impaired included unfavorable conditions in the
U.S. economy and California workers’ compensation
insurance market, combined with EDC’s poor results during
2008. There was no resulting impact to our tax balances as a
result of this charge.
In addition, we also recorded a pre-tax, non-cash impairment
charge of $11.2 million in 2009, which is classified as a
net realized capital loss on our consolidated statement of
earnings for the year ended December 31, 2009. The
$11.2 million pre-tax, non-cash impairment charge
represents the entire carrying value of EDC’s trade names,
originally determined to have indefinite useful lives, renewal
rights, distribution rights, and database development, net of
accumulated amortization. The impairment charge was due
primarily to EDC’s determination in June 2009 that it was
unable to write business at rates it deemed adequate due to the
current state of the California workers’ compensation
market. As a result, EDC ceased soliciting new or renewal
business on a direct basis commencing August 1, 2009 and
took corresponding expense reduction steps, including staff
reductions, in light of such determination. In addition,
immaterial accruals were established related to terminated
employee severance payments and other charges.
See Note 4 to the Consolidated Financial Statements set
forth in Item 8 of this
Form 10-K
Report for additional information on our goodwill and other
intangible assets.
Deferred
Taxes
We file a consolidated federal income tax return with our
subsidiaries. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amount of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. At December 31, 2009, a net deferred
tax asset of $124.3 million was recorded, which included a
valuation allowance of $14.6 million for certain deferred
state tax assets which we believe may not be realized. A
valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be
realized. This determination is based upon a review of
anticipated future earnings as well as all available evidence,
both positive and negative.
See Note 8 to the Consolidated Financial Statements set
forth in Item 8 of this
Form 10-K
Report for additional information on our deferred taxes.
In addition to the policies described above which contain
critical accounting estimates, our other accounting policies are
described in Note 1 to the Consolidated Financial
Statements set forth in Item 8 of this
Form 10-K
Report. The accounting policies described in Note 1 require
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities but do
not meet the level of materiality required for a determination
that the accounting policy includes critical accounting
estimates. On an ongoing basis, we evaluate our estimates,
including those related to the value of long-lived assets,
deferred acquisition costs, incentive compensation, pension
benefits, and contingencies and litigation. Our estimates are
based on historical experience and on various other assumptions
that are believed to be
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reasonable under the circumstances. Our actual results may
differ from these estimates under different assumptions or
conditions.
Consolidated
Results of Operations
Overview
We are engaged, through AIHL and its subsidiaries, primarily in
the property and casualty and surety insurance business. We also
own and manage properties in the Sacramento, California region
through our subsidiary Alleghany Properties and seek out
strategic investments and conduct other activities at the parent
level. Strategic investments currently include an approximately
33 percent stake in Homesite, a national, full-service,
mono-line provider of homeowners insurance and an approximately
38 percent stake in ORX, a regional gas and oil exploration
and production company. Our primary sources of revenues and
earnings are our insurance operations and investments.
The profitability of our insurance operating units, and as a
result, our profitability, is primarily impacted by the adequacy
of premium rates, level of catastrophe losses, investment
returns, intensity of competition, and the cost of reinsurance.
The ultimate adequacy of premium rates is not known with
certainty at the time property and casualty insurance policies
are issued because premiums are determined before claims are
reported. The adequacy of premium rates is affected mainly by
the severity and frequency of claims, which are influenced by
many factors, including natural disasters, regulatory measures
and court decisions that define and expand the extent of
coverage, and the effects of economic inflation on the amount of
compensation due for injuries or losses.
Catastrophe losses, or the absence thereof, can have a
significant impact on our results. For example, RSUI’s
pre-tax catastrophe losses, net of reinsurance, were minimal in
2009, compared with $97.9 million in 2008 (primarily
reflecting net losses from 2008 third quarter Hurricanes Ike,
Gustav and Dolly) and catastrophe losses of $47.1 million
in 2007. The incidence and severity of catastrophes in any short
period of time are inherently unpredictable. Catastrophes can
cause losses in a variety of our property and casualty lines of
business, and most of our past catastrophe-related claims have
resulted from severe hurricanes. Longer-term natural catastrophe
trends may be changing due to climate change, a phenomenon that
has been associated with extreme weather events linked to rising
temperatures, and includes effects on global weather patterns,
greenhouse gases, sea, land and air temperatures, sea levels,
rain and snow. Climate change, to the extent it produces rising
temperatures and changes in weather patterns, could impact the
frequency or severity of weather events such as hurricanes. To
the extent climate change increases the frequency and severity
of such weather events, our insurance operating units,
particularly RSUI, may face increased claims, particularly with
respect to properties located in coastal areas. Our insurance
operating units take certain measures to mitigate against the
frequency and severity of such events by giving consideration to
these risks in their underwriting and pricing decisions and
through the purchase of reinsurance.
At December 31, 2009, we had consolidated total investments
of approximately $4.4 billion, of which approximately
$3.3 billion was invested in debt securities and
approximately $624.5 million was invested in equity
securities. Net realized capital gains,
other-than-temporary
impairment losses and net investment income related to such
investment assets are subject to market conditions and
management investment decisions and as a result can have a
significant impact on our profitability. In 2009, net realized
capital gains were $320.4 million, compared with
$151.8 million in 2008, and
other-than-temporary
impairment losses were $85.9 million in 2009, compared with
$244.0 million in 2008.
The profitability of our insurance operating units is also
impacted by competition generally and price competition in
particular. Historically, the financial performance of the
property and casualty insurance industry has tended to fluctuate
in cyclical periods of price competition and excess underwriting
capacity followed by periods of high premium rates and shortages
of underwriting capacity. Although an individual insurance
company’s financial performance is dependent on its own
specific business characteristics, the profitability of most
property and casualty insurance companies tends to follow this
cyclical market pattern. In the past few years, our insurance
operating units have faced increasing competition as a result of
an increased flow of capital into the insurance industry, with
both new entrants and existing insurers seeking to gain market
share. This has resulted in decreased premium rates and less
favorable contract terms and conditions. In particular, RSUI and
CATA’s specialty lines of business increasingly encounter
competition from admitted companies seeking to increase market
share. We expect
42
Table of Contents
to continue to face strong competition in these and the other
lines of business of our insurance operating units, and our
insurance operating units may continue to experience decreases
in premium rates
and/or
premium volume and less favorable contract terms and conditions.
As part of their overall risk and capacity management strategy,
our insurance operating units purchase reinsurance for certain
amounts of risk underwritten by them, especially catastrophe
risks. The reinsurance programs purchased by our insurance
operating units are generally subject to annual renewal. Market
conditions beyond the control of our insurance operating units
determine the availability and cost of the reinsurance
protection they purchase, which may affect the level of business
written and thus their profitability.
The following table summarizes our consolidated revenues, costs
and expenses and earnings.
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Revenues
|
||||||||||||
|
Net premiums earned
|
$ | 845.0 | $ | 948.7 | $ | 974.3 | ||||||
|
Net investment income
|
101.9 | 130.2 | 146.1 | |||||||||
|
Net realized capital gains
|
320.4 | 151.8 | 100.5 | |||||||||
|
Other than temporary impairment losses
|
(85.9 | ) | (244.0 | ) | (7.7 | ) | ||||||
|
Other income
|
3.0 | 2.4 | 15.4 | |||||||||
|
Total revenues
|
$ | 1,184.4 | $ | 989.1 | $ | 1,228.6 | ||||||
|
Costs and expenses
|
||||||||||||
|
Loss and loss adjustment expenses
|
$ | 442.1 | $ | 570.0 | $ | 449.0 | ||||||
|
Commissions, brokerage and other underwriting expenses
|
273.7 | 286.6 | 257.2 | |||||||||
|
Other operating expenses
|
45.6 | 34.9 | 55.6 | |||||||||
|
Corporate administration
|
26.9 | 35.9 | 33.0 | |||||||||
|
Interest expense
|
0.7 | 0.7 | 1.5 | |||||||||
|
Total costs and expenses
|
$ | 789.0 | $ | 928.1 | $ | 796.3 | ||||||
|
Earnings from continuing operations, before income taxes
|
$ | 395.4 | $ | 61.0 | $ | 432.3 | ||||||
|
Income taxes
|
124.4 | 20.4 | 144.7 | |||||||||
|
Earnings from continuing operations
|
$ | 271.0 | $ | 40.6 | $ | 287.6 | ||||||
|
Earnings from discontinued operations, net of tax*
|
— | 107.4 | 11.5 | |||||||||
|
Net earnings
|
$ | 271.0 | $ | 148.0 | $ | 299.1 | ||||||
|
Revenues:
|
||||||||||||
|
AIHL
|
$ | 996.9 | $ | 813.6 | $ | 1,137.8 | ||||||
|
Corporate activities**
|
187.5 | 175.5 | 90.8 | |||||||||
|
Earnings (loss) from continuing operations, before income taxes:
|
||||||||||||
|
AIHL
|
$ | 237.6 | $ | (75.1 | ) | $ | 378.8 | |||||
|
Corporate activities**
|
157.8 | 136.1 | 53.5 | |||||||||
| * | Discontinued operations consist of the operations of Darwin, net of minority interest expense and the gain on disposition in 2008. Additional information regarding the results of discontinued operations can be found in Note 2 to the Notes to the Consolidated Financial Statements set forth in Item 8 of this 10-K Report. | |
| ** | Corporate activities consist of Alleghany Properties, our investments in Homesite and ORX and corporate activities at the parent level. |
Our earnings from continuing operations before income taxes in
2009 increased substantially from 2008, primarily reflecting
higher net realized capital gains, lower
other-than-temporary
impairment losses and a decrease in loss and LAE, partially
offset by lower net premiums earned. The increase in net
realized capital gains was due
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Table of Contents
primarily to larger gains on the sales of equity securities,
including our holdings of Burlington Northern Santa Fe
Corporation, or “Burlington Northern,” as well as
certain holdings within our energy portfolio. In addition,
2009 net realized capital gains include a non-cash charge
of $11.2 million related to an impairment of assets
associated with our acquisition of EDC, compared with
$48.7 million of such non-cash charges in 2008. The
decrease in
other-than-temporary
impairment losses was due in part to comparatively improved
equity market conditions in 2009 compared with 2008. The
decrease in loss and LAE primarily reflects minimal catastrophe
losses at RSUI in 2009, compared with approximately
$97.9 million of net catastrophe losses at RSUI in 2008
related in large part to Hurricanes Ike, Gustav and Dolly. The
significant decrease in net premiums earned primarily reflects
the impact of continuing competition at our insurance operating
units.
Our earnings from continuing operations before income taxes in
2008 decreased substantially from 2007, primarily reflecting a
substantial increase in
other-than-temporary
impairment losses and loss and LAE in 2008. In 2008, our
substantial
other-than-temporary
impairment losses were primarily related to a significant
deterioration of U.S. equity market conditions during the
latter part of 2008. The substantial increase in loss and LAE
primarily reflects the inclusion of a full year of EDC’s
results in 2008, including a $35.9 million reserve increase
in 2008 for current and prior accident years, as well as net
catastrophe losses at RSUI of $97.9 million in 2008,
partially offset by an aggregate $43.7 million of prior
accident year loss reserve releases by RSUI.
The effective tax rate on earnings from continuing operations
before income taxes was 31.5 percent in 2009,
33.6 percent in 2008, and 33.5 percent in 2007. The
lower effective tax rate in 2009 primarily reflects the absence
of certain permanent tax differences, partially offset by the
lower impact of tax-exempt income on our increased earnings in
the 2009 period over the 2008 period. The effective tax rate in
2008, and to a lesser extent 2007, reflects certain permanent
tax differences that had the effect of increasing the effective
tax rates for those years. For 2008, such permanent tax
differences related to a $48.7 million non-deductible
goodwill impairment charge incurred. For 2007, a net tax
adjustment of $5.2 million was incurred, resulting
primarily from the reduction of estimated deferred tax assets
related to unused foreign tax credits.
Our earnings from discontinued operations consist of the
operations of Darwin prior to its disposition in October 2008,
net of minority interest expense, and include an after-tax gain
upon disposition of approximately $92.1 million in the 2008
fourth quarter, including approximately $9.5 million of
gain deferred at the time of Darwin’s initial public
offering in May 2006. See Note 2 to the Consolidated
Financial Statements set forth in Item 8 to this
Form 10-K
Report for additional information on discontinued operations.
44
Table of Contents
AIHL
Operating Results
AIHL
Operating Unit Pre-Tax Results
| RSUI | AIHL Re | CATA | EDC(1) | AIHL | ||||||||||||||||
| (in millions, except ratios) | ||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Gross premiums written
|
$ | 1,033.4 | $ | – | $ | 174.6 | $ | 51.1 | $ | 1,259.1 | ||||||||||
|
Net premiums written
|
621.1 | – | 165.3 | 44.4 | 830.8 | |||||||||||||||
|
Net premiums earned (2)
|
$ | 633.4 | $ | – | $ | 166.7 | $ | 44.9 | $ | 845.0 | ||||||||||
|
Loss and loss adjustment expenses
|
274.3 | – | 81.6 | 86.2 | 442.1 | |||||||||||||||
|
Commission, brokerage and other underwriting expenses (3)
|
169.3 | – | 75.0 | 29.4 | 273.7 | |||||||||||||||
|
Underwriting profit (loss) (4)
|
$ | 189.8 | $ | – | $ | 10.1 | $ | (70.7 | ) | $ | 129.2 | |||||||||
|
Net investment income (2)
|
116.7 | |||||||||||||||||||
|
Net realized capital gains (2)
|
119.8 | |||||||||||||||||||
|
Other than temporary impairment losses (2)
|
(85.9 | ) | ||||||||||||||||||
|
Other income (2)
|
1.3 | |||||||||||||||||||
|
Other expenses (3)
|
43.5 | |||||||||||||||||||
|
Earnings from continuing operations, before income taxes
|
$ | 237.6 | ||||||||||||||||||
|
Loss ratio (5)
|
43.3 | % | – | 48.9 | % | 192.2 | % | 52.3 | % | |||||||||||
|
Expense ratio (6)
|
26.7 | % | – | 45.0 | % | 65.4 | % | 32.4 | % | |||||||||||
|
Combined ratio (7)
|
70.0 | % | – | 93.9 | % | 257.6 | % | 84.7 | % | |||||||||||
|
2008
|
||||||||||||||||||||
|
Gross premiums written
|
$ | 1,055.4 | $ | 0.4 | $ | 207.9 | $ | 77.0 | $ | 1,340.7 | ||||||||||
|
Net premiums written
|
650.9 | 0.1 | 177.4 | 69.8 | 898.2 | |||||||||||||||
|
Net premiums earned (2)
|
$ | 689.6 | $ | 0.2 | $ | 186.9 | $ | 72.0 | $ | 948.7 | ||||||||||
|
Loss and loss adjustment expenses
|
376.3 | – | 90.9 | 102.8 | 570.0 | |||||||||||||||
|
Commission, brokerage and other underwriting expenses (3)
|
175.7 | – | 80.8 | 30.1 | 286.6 | |||||||||||||||
|
Underwriting profit (loss) (4)
|
$ | 137.6 | $ | 0.2 | $ | 15.2 | $ | (60.9 | ) | $ | 92.1 | |||||||||
|
Net investment income (2)
|
112.6 | |||||||||||||||||||
|
Net realized capital losses (2)
|
(4.4 | ) | ||||||||||||||||||
|
Other than temporary impairment losses (2)
|
(244.0 | ) | ||||||||||||||||||
|
Other income (2)
|
0.7 | |||||||||||||||||||
|
Other expenses (3)
|
32.1 | |||||||||||||||||||
|
Losses from continuing operations, before income taxes
|
$ | (75.1 | ) | |||||||||||||||||
|
Loss ratio (5)
|
54.6 | % | – | 48.6 | % | 142.8 | % | 60.1 | % | |||||||||||
|
Expense ratio (6)
|
25.5 | % | 22.8 | % | 43.2 | % | 41.8 | % | 30.2 | % | ||||||||||
|
Combined ratio (7)
|
80.1 | % | 22.8 | % | 91.8 | % | 184.6 | % | 90.3 | % | ||||||||||
|
2007
|
||||||||||||||||||||
|
Gross premiums written
|
$ | 1,206.6 | $ | 1.1 | $ | 250.1 | $ | 49.0 | $ | 1,506.8 | ||||||||||
|
Net premiums written
|
716.1 | 2.2 | 199.1 | 45.1 | 962.5 | |||||||||||||||
|
Net premiums earned (2)
|
$ | 707.5 | $ | 24.5 | $ | 198.0 | $ | 44.3 | $ | 974.3 | ||||||||||
|
Loss and loss adjustment expenses
|
324.3 | – | 95.8 | 28.9 | 449.0 | |||||||||||||||
|
Commission, brokerage and other underwriting expenses (3)
|
163.3 | 0.1 | 82.8 | 11.0 | 257.2 | |||||||||||||||
|
Underwriting profit (4)
|
$ | 219.9 | $ | 24.4 | $ | 19.4 | $ | 4.4 | $ | 268.1 | ||||||||||
|
Net investment income (2)
|
126.5 | |||||||||||||||||||
|
Net realized capital gains (2)
|
44.2 | |||||||||||||||||||
|
Other than temporary impairment losses (2)
|
(7.7 | ) | ||||||||||||||||||
|
Other income (2)
|
0.5 | |||||||||||||||||||
|
Other expenses (3)
|
52.8 | |||||||||||||||||||
|
Earnings from continuing operations, before income taxes
|
$ | 378.8 | ||||||||||||||||||
|
Loss ratio (5)
|
45.8 | % | – | 48.4 | % | 65.1 | % | 46.1 | % | |||||||||||
|
Expense ratio (6)
|
23.1 | % | 0.7 | % | 41.8 | % | 24.8 | % | 26.4 | % | ||||||||||
|
Combined ratio (7)
|
68.9 | % | 0.7 | % | 90.2 | % | 89.9 | % | 72.5 | % | ||||||||||
| (1) | Includes the results of EDC, net of purchase accounting adjustments, commencing July 18, 2007. (See Note 4(a) to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K Report). | |
| (2) | Represent components of total revenues. |
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Table of Contents
| (3) | Commission, brokerage and other underwriting expenses represent commission and brokerage expenses and that portion of salaries, administration and other operating expenses attributable primarily to underwriting activities, whereas the remainder constitutes other expenses. | |
| (4) | Represents net premiums earned less loss and LAE and commission, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income and other income or net realized capital gains and other-than-temporary impairment losses. Underwriting profit does not replace net earnings determined in accordance with GAAP as a measure of profitability; rather, we believe that underwriting profit, which does not include net investment income and other income or net realized capital gains and other-than-temporary impairment losses, enhances the understanding of AIHL’s insurance operating units’ operating results by highlighting net earnings attributable to their underwriting performance. With the addition of net investment income, net realized capital gains, other-than-temporary impairment losses, other income and other expenses, reported pre-tax net earnings (a GAAP measure) may show a profit despite an underlying underwriting loss. Where underwriting losses persist over extended periods, an insurance company’s ability to continue as an ongoing concern may be at risk. Therefore, we view underwriting profit as an important measure in the overall evaluation of performance. | |
| (5) | Loss and LAE divided by net premiums earned, all as determined in accordance with GAAP. | |
| (6) | Commission, brokerage and other underwriting expenses divided by net premiums earned, all as determined in accordance with GAAP. | |
| (7) | The sum of the loss ratio and expense ratio, all as determined in accordance with GAAP, representing the percentage of each premium dollar an insurance company has to spend on losses (including LAE) and commission, brokerage and other underwriting expenses. |
Discussion of individual AIHL operating unit results follows,
and AIHL investment results are discussed below under “AIHL
Investment Results.”
RSUI
The modest decrease in gross premiums written by RSUI in 2009
from 2008 primarily reflects the impact of continuing and
increasing competition, particularly in RSUI’s general
liability and umbrella/excess lines of business, partially
offset by growth in RSUI’s binding authority business.
RSUI’s net premiums earned decreased in 2009 from 2008
primarily due to the decline in gross premiums written and an
increase in ceded premiums written associated with RSUI’s
property line of business.
The decrease in gross premiums written by RSUI in 2008 from 2007
primarily reflects continuing and increasing price competition,
particularly in RSUI’s general liability and property lines
of business. RSUI’s net premiums earned decreased in 2008
from 2007 due to a decrease in the property line of business,
partially offset by a modest increase in the casualty lines of
business. The decrease in property premiums earned is due to
substantially lower premium writings, partially offset by
reduced reinsurance limits being purchased and reduced rates
paid for catastrophe and per risk reinsurance coverage renewed
at May 1, 2008. The modest increase in casualty premiums
earned primarily reflects the growth of RSUI’s binding
authority line of business and the non-renewal at April 1,
2007 of a professional liability quota share reinsurance treaty,
partially offset by substantially lower premium writings in the
general liability line of business.
The decrease in loss and LAE in 2009 from 2008 primarily
reflects lower catastrophe losses, the impact of lower net
premiums earned, and lower net releases of prior accident year
loss reserves. Net catastrophe losses were minimal in 2009,
compared with approximately $97.9 million of net
catastrophe losses at RSUI in 2008, primarily related to 2008
third quarter Hurricanes Ike, Gustav and Dolly. Loss and LAE for
2009 also reflect a net $48.3 million release of prior
accident year loss reserves, compared with a net
$43.7 million release of prior accident year loss reserves
during the corresponding 2008 period. Of the $48.3 million,
$38.4 million relates primarily to D&O liability,
professional liability, and general liability lines of business
for the 2003 through 2007 accident years and reflects favorable
loss emergence, compared with loss emergence patterns assumed in
earlier periods for such lines of business. The remaining
$9.9 million of the 2009 net reserve release relates
to a release of prior accident year reserves for 2008 Hurricanes
Ike, Gustav and Dolly.
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Table of Contents
The increase in loss and LAE in 2008 from 2007 primarily
reflects 2008 net catastrophe losses of $97.9 million,
partially offset by a net $43.7 million of prior accident
year loss reserve releases, compared with minimal net
catastrophe losses (excluding an increase in Hurricane Katrina
reserves) and a net $8.5 million increase of prior accident
year loss reserves (including an increase in Hurricane Katrina
reserves) during 2007.
The decrease in commissions, brokerage and other underwriting
expenses in 2009 compared with 2008 primarily reflects the net
effect of lower premium volume in the more recent period. The
increase in commissions, brokerage and other underwriting
expenses in 2008 from 2007 primarily reflects lower ceding
commissions primarily resulting from the non-renewal of
RSUI’s professional liability quota share reinsurance
treaty which expired in April 2007, as well as lower ceding
commissions on RSUI’s reinsurance arrangements for other
casualty lines of business due to a reduction in premiums
written in such lines.
The decrease in loss and LAE, partially offset by a decrease in
net premiums earned, was the primary cause for the increase in
RSUI’s underwriting profit in 2009 from 2008. The increase
in loss and LAE described above was the primary cause for the
decrease in RSUI’s underwriting profit in 2008 from 2007.
Additional information regarding RSUI’s use of reinsurance
and risks related to reinsurance recoverables can be found on
pages 21 through 23 and page 28 of this
Form 10-K
Report. Additional information regarding RSUI’s prior year
reserve adjustments and releases can be found on pages 38
and 39 of this
Form 10-K
Report.
In general, rates at RSUI in 2009 compared with 2008, as well as
in 2008 compared with 2007, reflect overall industry trends of
downward pricing as a result of increased competition.
CATA
CATA’s gross premiums written and net premiums earned in
2009 decreased from 2008, primarily reflecting continuing price
competition in CATA’s property and casualty (including in
excess and surplus markets) and commercial surety lines of
business, partially offset by gross premiums written and net
premiums earned in CATA’s recently established specialty
markets division. CATA’s gross premiums written and net
premiums earned in 2008 decreased from 2007 for similar reasons.
The decrease in loss and LAE in 2009 from 2008 primarily
reflects the impact of lower net premiums earned in 2009,
partially offset by a lower amount of prior year reserve
releases. During 2009, CATA had net prior year reserve releases
of $10.7 million, primarily reflecting favorable loss
emergence in casualty and surety lines of business, compared
with loss emergence patterns assumed in earlier periods for such
lines of business. Loss and LAE decreased in 2008 from 2007,
primarily reflecting the impact of lower net premiums earned in
2008 compared with 2007, partially offset by a lower amount of
prior year reserve releases of $11.8 million in 2008,
compared with $14.4 million in 2007. The 2008 and 2007
prior year reserve releases primarily reflect favorable loss
emergence in the casualty and surety lines of business, compared
with loss emergence patterns assumed in earlier periods for such
lines of business.
The decrease in net premiums earned, partially offset by the
decrease in loss and LAE described above, was the primary cause
for the decrease in CATA’s underwriting profit in 2009 from
2008 and in 2008 from 2007.
Additional information regarding CATA’s prior year reserve
releases can be found on pages 38 and 39 of this
Form 10-K
Report.
EDC
EDC reported an underwriting loss of $70.7 million for
2009, primarily reflecting a substantial decrease in net
premiums earned from 2008 as a result of EDC’s
determination to cease soliciting new and renewal business on a
direct basis in June 2009 and a $34.5 million reserve
increase recorded in the 2009 second quarter. In addition, EDC
also recorded a pre-tax, non-cash impairment charge of
$11.2 million in the 2009 second quarter, which is
classified as a net realized capital loss in our consolidated
statement of earnings. The $11.2 million pre-tax, non-cash
impairment charge as of June 30, 2009 represents the entire
carrying value of EDC’s trade names (originally determined
to have indefinite useful lives), renewal rights, distribution
rights and database development, net of
47
Table of Contents
accumulated amortization. In addition, immaterial accruals were
established related to terminated employee severance payments
and other charges.
EDC’s decision to cease soliciting new and renewal business
on a direct basis was due to its determination that it was
unable to write business at rates it deemed adequate due to the
current state of the California workers’ compensation
market. EDC ceased soliciting new or renewal business on a
direct basis commencing August 1, 2009 and took
corresponding expense reduction steps, including staff
reductions, in light of such determination. As a result of
EDC’s determination to cease writing business on a direct
basis and certain other factors, on June 30, 2009,
A.M. Best downgraded its rating of EDIC from A-
(Excellent), with a negative outlook, to B++ (Good), with a
stable outlook. During the 2009 third quarter, EDC sold the
renewal rights of its directly placed workers’ compensation
insurance policies and certain other assets and rights to an
independent insurance brokerage.
EDC’s net premiums earned in 2008 decreased from 2007,
primarily reflecting increased competition, decreased rates,
reduction of exposure as measured by insured payroll, and
declining renewal retention rates. Loss and LAE in 2009, 2008
and 2007 reflect the exposure of EDC’s underlying book of
business. In addition, loss and LAE in 2009 and 2008 reflect the
trend of increasing loss costs, as well as reserve increases. A
reserve increase of $34.5 million was recorded in the 2009
second quarter, consisting of $26.5 million related to
prior accident years and $8.0 million related to the 2009
accident year. A reserve increase of $35.9 million was
recorded in 2008, consisting of $25.4 million related to
prior accident years and $10.5 million related to the 2008
accident year. Both reserve increases primarily reflected higher
than expected paid losses and, with respect to the 2009
increases, the estimated impact of judicial decisions by the
WCAB.
In connection with impairment testing of goodwill and other
intangible assets as of December 31, 2008, we determined
that the $48.7 million of goodwill associated with our
acquisition of EDC was impaired. As a result, as of
December 31, 2008, we recorded a non-cash charge of
$48.7 million, which is classified as a net realized
capital loss in our consolidated statement of earnings for the
year ended December 31, 2008 and represents the entire EDC
goodwill balance at such date. The estimation of EDC’s fair
value was based primarily on observing the stock market-based
valuations of other publicly-traded insurance carriers. The
factors that contributed to our determination that the EDC
goodwill was impaired include the recent unfavorable conditions
in the U.S. economy and California workers’
compensation insurance market, combined with EDC’s poor
results during 2008. There was no resulting impact to our tax
balances as a result of this charge.
Additional information regarding EDC’s reserve increases
can be found on pages 38 and 39 of this
Form 10-K
Report.
AIHL
Investment Results
Following is information relating to AIHL’s investment
results.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Net investment income
|
$ | 116.7 | $ | 112.6 | $ | 126.5 | ||||||
|
Net realized capital gains
|
$ | 132.1 | * | $ | 44.3 | * | $ | 44.2 | ||||
|
Other than temporary impairment losses
|
$ | (85.9 | ) | $ | (244.0 | ) | $ | (7.7 | ) | |||
| * | Excludes non-cash impairment charges in 2009 and 2008 related to the intangible assets associated with our acquisition of EDC which were classified as a net realized capital loss in our consolidated statements of earnings (see Note 4(a) to the Notes to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K Report). |
Net Investment Income.
The increase in
AIHL’s net investment income in 2009 from 2008 is due
principally to poor results from partnership investments in 2008
and positive underwriting cash flow at RSUI in 2009, partially
offset by lower average investment yields during 2009. The
decrease in AIHL’s net investment income in 2008 from 2007
is due principally to lower average investment yields in 2008
and poor results from partnership investments in 2008, partially
offset by the net positive effect from the acquisition of EDC,
as invested assets acquired were greater than our purchase
price, and positive underwriting cash flow at RSUI.
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Table of Contents
Approximate yields of AIHL’s debt securities for 2009, 2008
and 2007 are as follows (in millions, except for percentages):
|
Pre-Tax
|
After-Tax
|
|||||||||||||||||||
|
Net
|
Net
|
After-
|
||||||||||||||||||
|
Average
|
Investment
|
Investment
|
Effective
|
Tax
|
||||||||||||||||
|
Year
|
Investments (1) | Income (2) | Income (3) | Yield(4) | Yield(5) | |||||||||||||||
|
2009
|
$ | 2,858.4 | $ | 104.7 | $ | 83.9 | 3.7 | % | 2.9 | % | ||||||||||
|
2008
|
$ | 2,564.5 | $ | 112.0 | $ | 86.3 | 4.4 | % | 3.4 | % | ||||||||||
|
2007
|
$ | 2,293.0 | $ | 119.1 | $ | 90.8 | 5.2 | % | 4.0 | % | ||||||||||
| (1) | Average of amortized cost of debt securities portfolio at beginning and end of period. | |
| (2) | After investment expenses, excluding net realized gains and other-than-temporary impairment losses. | |
| (3) | Pre-tax net investment income less income taxes. | |
| (4) | Pre-tax net investment income for the period divided by average investments for the same period. | |
| (5) | After-tax net investment income for the period divided by average investments for the same period. |
Net Realized Capital Gains.
Net realized
capital gains in 2009, 2008 and 2007 relate primarily to sales
of equity securities in the energy sector, some of which had
their cost basis reduced in earlier periods for the recognition
of unrealized losses through
other-than-temporary
impairment losses, particularly in 2009.
Other-Than-Temporary
Impairment
Losses.
Other-than-temporary
impairment losses reflect impairment charges related to
unrealized losses that were deemed to be other than temporary
and, as such, are required to be charged against earnings. Of
the $85.9 million in 2009, $57.6 million related to
equity holdings in the energy sector, $16.5 million related
to equity holdings in various other sectors, and
$11.8 million related to debt security holdings (all of
which were deemed to be credit-related). Of the
$244.0 million in 2008, $144.8 million related to
equity holdings in the energy sector, $96.0 million related
to equity holdings in various other sectors, and
$3.2 million related to debt security holdings (all of
which were deemed to be credit-related). The determination that
unrealized losses on such securities were other than temporary
in 2009 and 2008 was primarily based on the severity of the
declines in fair value of such securities relative to cost as of
the balance sheet date. Such severe declines are primarily
related to a significant deterioration of U.S. equity
market conditions during the latter part of 2008 and the first
quarter of 2009, which abated somewhat in the remainder of 2009.
After adjusting the cost basis of securities for the recognition
of
other-than-temporary
impairment losses, no equity security was in a continuous
unrealized loss position for twelve months or more as of
December 31, 2009. See Note 3 to the Notes to the
Consolidated Financial Statements set forth in Item 8 of
this
Form 10-K
Report for further details concerning gross unrealized
investment losses for debt and equity securities at
December 31, 2009.
Corporate
Activities Operating Results
The following table summarizes corporate activities’
results for 2009, 2008 and 2007 (in millions):
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net investment income
|
$ | (14.8 | ) | $ | 17.6 | $ | 19.6 | |||||
|
Net realized capital gains
|
200.6 | 156.2 | 56.2 | |||||||||
|
Other than temporary impairment losses
|
– | – | – | |||||||||
|
Other income
|
1.7 | 1.7 | 15.0 | |||||||||
|
Total revenues
|
$ | 187.5 | $ | 175.5 | $ | 90.8 | ||||||
|
Corporate administration and other expenses
|
29.1 | 38.7 | 35.9 | |||||||||
|
Interest expense
|
0.6 | 0.7 | 1.4 | |||||||||
|
Earnings from continuing operations, before income taxes
|
$ | 157.8 | $ | 136.1 | $ | 53.5 | ||||||
49
Table of Contents
Corporate activities’ earnings from continuing operations
before income taxes increased in 2009 from 2008, primarily
reflecting an increase in net realized capital gains, partially
offset by a decrease in net investment income. Net realized
capital gains for both the 2009 and 2008 periods resulted
primarily from parent-level sales of shares of Burlington
Northern common stock. Net investment income in 2009 primarily
reflects $21.9 million of losses, net of purchase
accounting adjustments, related to our investment in ORX and
$1.1 million of losses, net of purchase accounting
adjustments, related to our investment in Homesite. The ORX
losses were due primarily to asset impairment charges incurred
as of December 31, 2008, but finalized in the 2009 third
quarter, arising from relatively low energy prices as of
December 31, 2008. Homesite losses primarily reflect the
impact of increased homeowners insurance claims from severe
weather and ongoing purchase accounting adjustments in 2009
compared with 2008.
Earnings from continuing operations before income taxes in 2007
primarily reflect net realized capital gains resulting in large
part from parent-level sales of shares of Burlington Northern
common stock and the positive impact on other income from gains
on sales by Alleghany Properties of real property of
$14.7 million.
Reserve
Review Process
AIHL’s insurance operating units periodically analyze, at
least quarterly, liabilities for unpaid losses and LAE
established in prior years and adjust their expected ultimate
cost, where necessary, to reflect positive or negative
development in loss experience and new information, including,
for certain catastrophic events, revised industry estimates of
the magnitude of a catastrophe. Adjustments to previously
recorded liabilities for unpaid losses and LAE, both positive
and negative, are reflected in our financial results in the
periods in which these adjustments are made and are referred to
as prior year reserve development. The following table presents
the reserves established in connection with the losses and LAE
of AIHL’s insurance operating units on a gross and net
basis by line of business. These reserve amounts represent the
accumulation of estimates of ultimate losses (including for
IBNR) and LAE.
|
Workers’
|
||||||||||||||||||||||||||||
| Property | Casualty(1) | CMP(2) | Surety | Comp(3) | All Other(4) | Total | ||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||||||
|
Gross loss and LAE reserves
|
$ | 249.1 | $ | 1,902.4 | $ | 63.6 | $ | 18.0 | $ | 245.9 | $ | 42.0 | $ | 2,521.0 | ||||||||||||||
|
Reinsurance recoverables on unpaid losses
|
(104.5 | ) | (799.5 | ) | (0.2 | ) | (0.1 | ) | (20.2 | ) | (23.2 | ) | (947.7 | ) | ||||||||||||||
|
Net loss and LAE reserves
|
$ | 144.6 | $ | 1,102.9 | $ | 63.4 | $ | 17.9 | $ | 225.7 | $ | 18.8 | $ | 1,573.3 | ||||||||||||||
|
2008
|
||||||||||||||||||||||||||||
|
Gross loss and LAE reserves
|
$ | 365.9 | $ | 1,836.6 | $ | 75.8 | $ | 21.5 | $ | 227.4 | $ | 51.4 | $ | 2,578.6 | ||||||||||||||
|
Reinsurance recoverables on unpaid losses
|
(153.5 | ) | (811.6 | ) | (0.3 | ) | (0.2 | ) | (12.2 | ) | (30.5 | ) | (1,008.3 | ) | ||||||||||||||
|
Net loss and LAE reserves
|
$ | 212.4 | $ | 1,025.0 | $ | 75.5 | $ | 21.3 | $ | 215.2 | $ | 20.9 | $ | 1,570.3 | ||||||||||||||
|
2007
|
||||||||||||||||||||||||||||
|
Gross loss and LAE reserves
|
$ | 332.1 | $ | 1,683.2 | $ | 85.0 | $ | 20.6 | $ | 187.4 | $ | 71.4 | $ | 2,379.7 | ||||||||||||||
|
Reinsurance recoverables on unpaid losses
|
(126.4 | ) | (783.8 | ) | (1.1 | ) | (0.3 | ) | (8.8 | ) | (46.4 | ) | (966.8 | ) | ||||||||||||||
|
Net loss and LAE reserves
|
$ | 205.7 | $ | 899.4 | $ | 83.9 | $ | 20.3 | $ | 178.6 | $ | 25.0 | $ | 1,412.9 | ||||||||||||||
| (1) | Primarily consists of umbrella/excess, D&O liability, professional liability, and general liability. | |
| (2) | Commercial multiple peril. | |
| (3) | Workers’ compensation amounts include EDC, net of purchase accounting adjustments (see Note 4(a) to the Notes to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K Report). Such adjustments |
50
Table of Contents
| include a minor reduction of gross and net loss and LAE for acquisition date discounting, as required under purchase accounting. Workers’ compensation amounts also include minor balances from CATA. | ||
| (4) | Primarily consists of loss and LAE reserves for terminated lines of business and loss reserves acquired in connection with prior acquisitions for which the sellers provided loss reserve guarantees. The loss and LAE reserves are ceded 100 percent to the sellers. Additional information regarding the loss reserve guarantees can be found in Note 5(b) to the Notes to the Consolidated Financial Statements set forth in Item 8 of this 10-K Report. |
Changes
in Loss and LAE Reserves between December 31, 2009 and
December 31, 2008
Gross Reserves.
Gross loss and LAE reserves at
December 31, 2009 decreased slightly from December 31,
2008, due to reserve decreases in property and certain other
lines of business, largely offset by increases in casualty and,
to a lesser extent, workers’ compensation lines of
business. The decrease in property gross loss and LAE reserves
is mainly due to loss payments made by RSUI on hurricane related
losses incurred in prior years. The increase in casualty gross
loss and LAE reserves primarily reflects anticipated loss
reserves on current accident year gross premiums earned and
limited gross paid loss activity for the current and prior
accident years at RSUI, partially offset by RSUI’s release
of prior accident year reserves for D&O liability,
professional liability, and general liability lines of business.
The increase in workers’ compensation gross loss and LAE
reserves primarily reflects an increase by EDC of current and
prior accident year reserves during 2009, partially offset by
the impact of EDC’s decision to cease soliciting new or
renewal business on a direct basis commencing August 1,
2009.
Net Reserves.
Net loss and LAE reserves at
December 31, 2009 were essentially unchanged from
December 31, 2008, due to reserve decreases in property and
certain other lines of business, offset by increases in casualty
and, to a lesser extent, workers’ compensation lines of
business. The decrease in property net loss and LAE reserves is
mainly due to loss payments made by RSUI on hurricane related
losses incurred in prior years, substantially offset by
corresponding decreases in reinsurance recoverables on unpaid
losses. The increase in casualty gross loss and LAE reserves
primarily reflects anticipated loss reserves on current accident
year net premiums earned and limited net paid loss activity for
the current and prior accident years at RSUI, partially offset
by RSUI’s release of prior accident year reserves for
D&O liability, professional liability, and general
liability lines of business. The increase in workers’
compensation net loss and LAE reserves primarily reflects an
increase by EDC of current and prior accident year reserves
during 2009, partially offset by the impact of EDC’s
decision to cease soliciting new or renewal business on a direct
basis commencing August 1, 2009.
Changes
in Loss and LAE Reserves between December 31, 2008 and
December 31, 2007
Gross Reserves.
The increase in gross loss and
LAE reserves at December 31, 2008 from December 31,
2007 primarily reflects increases in casualty and to a lesser
extent, workers’ compensation and property gross loss and
LAE reserves, partially offset by modest decreases in other
gross loss and LAE reserves. The increase in casualty gross loss
and LAE reserves primarily reflects anticipated loss reserves on
current accident year gross premiums earned and limited gross
paid loss activity for the current and prior accident years at
RSUI. Such increases for RSUI were partially offset by net
releases of prior accident year reserves. The increase in
workers’ compensation gross loss and LAE reserves primarily
relates to increases to both current and prior accident year
reserves by EDC. The increase in property gross loss and LAE
reserves primarily reflects significant catastrophe losses
incurred by RSUI during 2008 from Hurricanes Ike, Gustav and
Dolly. The decrease in other reserves is due primarily to a
reduction in loss and LAE reserves acquired in connection with
prior acquisitions which are ceded 100 percent to the
sellers.
Net Reserves.
The increase in net loss and LAE
reserves at December 31, 2008 from December 31, 2007
primarily reflects increases in casualty and, to a lesser
extent, workers’ compensation net loss and LAE reserves.
The increase in casualty net loss and LAE reserves primarily
reflects anticipated loss reserves on current accident year
premiums earned and limited net paid loss activity for the
current and prior accident years at RSUI. Such increases for
RSUI were partially offset by net releases of prior accident
year reserves. The increase in workers’ compensation net
loss and LAE reserves is primarily due to increases by EDC to
both its current and prior accident year reserves.
51
Table of Contents
Additional information regarding RSUI’s net prior year
reserve releases and EDC’s current and prior year reserve
increases in 2009 and 2008 can be found on pages 38 and 39
of this
Form 10-K
Report.
Reinsurance
Recoverables
At December 31, 2009, AIHL had total reinsurance
recoverables of $976.2 million, consisting of
$947.7 million of ceded outstanding losses and LAE and
$28.5 million of recoverables on paid losses. RSUI’s
reinsurance recoverables totaled approximately
$815.9 million of AIHL’s $976.2 million.
Approximately 93.1 percent of AIHL’s reinsurance
recoverables balance at December 31, 2009 was due from
reinsurers having an A.M. Best financial strength rating of
A (Excellent) or higher. AIHL’s Reinsurance Security
Committee, which includes certain of our officers and the chief
financial officer of each of AIHL’s operating units and
which manages the use of reinsurance by such operating units,
have determined that reinsurers with a rating of A (Excellent)
or higher have an ability to meet their ongoing obligations at a
level that is acceptable to us. In February 2009, A.M. Best
downgraded the financial strength rating for Swiss Reinsurance
Company, or “Swiss Re,” our largest reinsurer, from A+
(Superior) to A (Excellent). As a financial strength rating of A
(Excellent) is within the parameters determined to be acceptable
by the Reinsurance Security Committee, the downgrade of Swiss
Re’s financial strength rating did not require the taking
of any action with respect to Swiss Re by the Reinsurance
Security Committee and did not have any adverse effect on our
financial position and results of operations in 2009.
Information regarding concentration of AIHL’s reinsurance
recoverables at December 31, 2009 is as follows (dollars in
millions):
|
Reinsurer(1)
|
Rating(2) | Dollar Amount | Percentage | |||||||||
|
Swiss Re
|
A (Excellent | ) | $ | 174.3 | 17.9 | % | ||||||
|
The Chubb Corporation
|
A++ (Superior | ) | 105.8 | 10.8 | % | |||||||
|
Platinum Underwriters Holdings, Ltd.
|
A (Excellent | ) | 97.1 | 9.9 | % | |||||||
|
All other reinsurers
|
599.0 | 61.4 | % | |||||||||
|
Total
|
$ | 976.2 | 100.0 | % | ||||||||
| (1) | Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed reinsurer. | |
| (2) | Represents the A.M. Best rating for the applicable reinsurance subsidiary or subsidiaries from which the reinsurance recoverable is due. |
At December 31, 2009, AIHL also had fully collateralized
reinsurance recoverables of $120.3 million due from Darwin,
now a subsidiary of AWAC. The A.M. Best financial strength
rating of Darwin was A (Excellent) at December 31, 2009.
AIHL had no allowance for uncollectible reinsurance as of
December 31, 2009.
Financial
Condition
Parent
Level
General.
In general, we follow a policy of maintaining a
relatively liquid financial condition at the parent company in
the form of cash, marketable securities, available credit lines,
and minimal amounts of debt. This policy has permitted us to
expand our operations through internal growth at our
subsidiaries and through acquisitions of, or substantial
investments in, operating companies. At December 31, 2009,
we held approximately $287.4 million of marketable
securities and cash at the parent company and
$537.8 million of marketable securities and cash at AIHL,
which totaled $825.2 million of marketable securities and
cash. We believe that we have and will have adequate internally
generated funds and cash resources to provide for the currently
foreseeable needs of our business, and we had no material
commitments for capital expenditures at December 31, 2009.
Stockholders’ equity increased to approximately
$2.7 billion as of December 31, 2009, compared with
approximately $2.6 billion as of December 31, 2008,
representing an increase of 2.7 percent. The increase in
stockholders’ equity reflects net earnings in 2009 and a
net increase in net unrealized appreciation in our investment
portfolio during 2009, partially offset by the repurchase of
shares of our 5.75% Mandatory Convertible Preferred Stock, or
the “Preferred Stock,” and to a lesser extent, our
common stock.
52
Table of Contents
On June 23, 2006, we completed an offering of
1,132,000 shares of Preferred Stock at a public offering
price of $264.60 per share, resulting in net proceeds of
$290.4 million. On June 15, 2009, all outstanding
shares of Preferred Stock were mandatorily converted into shares
of our common stock. Each outstanding share of Preferred Stock
was automatically converted into 1.0139 shares of our
common stock based on the arithmetic average of the daily
volume-weighted average price per share of our common stock for
each of the 20 consecutive trading days ending on June 10,
2009, or $260.9733 per share. We issued approximately
698,009 shares of our common stock for the
688,621 shares of Preferred Stock that were outstanding at
the date of the mandatory conversion.
$80.0 million of floating rate notes due 2007 of Alleghany
Funding Corporation, or “Alleghany Funding,” a
wholly-owned subsidiary of Alleghany, which were secured by a
$91.5 million installment note receivable, matured in
January 2007. In conjunction with the issuance of the notes,
Alleghany Funding entered into a related interest rate swap
agreement with a notional amount of $86.2 million for the
purpose of matching interest expense with interest income. The
interest rate swap also matured in January 2007, without gain or
loss to us.
Dividends.
We have declared stock dividends in lieu of
cash dividends every year since 1987 except 1998 when Chicago
Title Corporation was spun off to our stockholders. These
stock dividends have helped to conserve our financial strength
and, in particular, the liquid assets available to finance
internal growth and operating company acquisitions and
investments. On April 23, 2010, as our dividend on our
common stock for 2010, we will pay to stockholders of record on
April 1, 2010 a dividend of one share of our common stock
for every 50 shares outstanding.
Credit Agreement.
Until October 23, 2009, we were
party to a three-year unsecured credit agreement, or the
“Credit Agreement” with a bank syndicate, which
provided commitments for revolving credit loans in an aggregate
principal amount of up to $200.0 million. The Credit
Agreement expired on October 23, 2009 with no amounts
outstanding thereunder. There were no borrowings under the
Credit Agreement in 2009. Given our strong cash position, the
expiration of the Credit Agreement did not have a material
adverse affect on our financial condition or results of
operations.
Capital Contributions.
From time to time, we make capital
contributions to our subsidiaries when third-party financing may
not be attractive or available. In 2007, we made a capital
contribution of $50.0 million to AIHL to provide additional
capital support to EDC in connection with AIHL’s
acquisition of EDC. We expect that we will continue to make
capital contributions to our subsidiaries from time to time in
the future for similar or other purposes.
Common Stock and Preferred Stock Purchases.
In February
2008, we announced that our Board of Directors had authorized
the repurchase of shares of our common stock, at such times and
at prices as management may determine advisable, up to an
aggregate of $300.0 million. In November 2008, the
authorization to repurchase our common stock was expanded to
include repurchases of Preferred Stock. During 2009, we
repurchased an aggregate of 295,463 shares of our common
stock in the open market for approximately $75.9 million,
at an average price per share of $256.73. Prior to the mandatory
conversion date of June 15, 2009, we repurchased an
aggregate of 442,998 shares of Preferred Stock in the open
market for approximately $117.4 million, at an average
price per share of $264.92. During 2008, we repurchased an
aggregate of 78,817 shares of our common stock in the open
market for approximately $25.1 million, at an average price
per share of $318.05 (not adjusted for the subsequent stock
dividend). In 2007, we did not purchase any shares of our common
stock. As of December 31, 2009, we had
8,860,354 shares of our common stock outstanding, adjusted
to reflect the common stock dividend declared in February 2009
and paid in April 2009.
Dividends from Subsidiaries.
At December 31, 2009,
approximately $759.1 million of the equity of all of our
subsidiaries was available for dividends or advances to us at
the parent level. AIHL’s insurance operating units are
subject to various regulatory restrictions that limit the
maximum amount of dividends available to be paid by them without
prior approval of insurance regulatory authorities. Of the
aggregate total equity of our insurance operating units at
December 31, 2009 of $1.7 billion, a maximum of
$155.1 million was available for dividends without prior
approval of the applicable insurance regulatory authorities.
These limitations have not affected our ability to meet our
obligations. In 2009, RSUI paid AIHL a cash dividend of
$150.0 million and CATA paid AIHL a cash dividend of
$15.0 million. In 2008, CATA paid AIHL a cash dividend of
$3.0 million, AIHL Re paid AIHL a dividend of
$21.4 million, and Alleghany Properties paid us a cash
dividend of $3.0 million. RSUI did not pay a dividend in
53
Table of Contents
2008. In 2007, RSUI paid AIHL a cash dividend of
$75.0 million, CATA paid AIHL a cash dividend of
$12.0 million, AIHL Re paid AIHL a dividend of
$70.0 million, and Alleghany Properties paid us a cash
dividend of $12.0 million.
Contractual Obligations.
We have certain obligations to
make future payments under contracts and credit-related
financial instruments and commitments. At December 31,
2009, certain long-term aggregate contractual obligations and
credit-related financial commitments were as follows (in
millions):
|
More than
|
More than
|
|||||||||||||||||||
|
1 Year
|
3 Years
|
|||||||||||||||||||
|
Within
|
but Within
|
but Within
|
More than
|
|||||||||||||||||
|
Contractual Obligations
|
Total | 1 Year | 3 Years | 5 Years | 5 Years | |||||||||||||||
|
Operating lease obligations
|
$ | 88.5 | $ | 9.4 | $ | 19.0 | $ | 19.5 | $ | 40.6 | ||||||||||
|
Investments
|
2.6 | 2.6 | – | – | – | |||||||||||||||
|
Other long-term liabilities reflected on our consolidated
balance sheet under GAAP*
|
116.1 | 20.3 | 25.7 | 50.1 | 20.0 | |||||||||||||||
|
Losses and LAE
|
2,521.0 | 634.1 | 876.9 | 480.3 | 529.7 | |||||||||||||||
|
Total
|
$ | 2,728.2 | $ | 666.4 | $ | 921.6 | $ | 549.9 | $ | 590.3 | ||||||||||
| * | Other long-term liabilities primarily reflect employee pension obligations, certain retired executive pension obligations, and obligations under certain incentive compensation plans. |
Our insurance operating units have obligations to make certain
payments for losses and LAE pursuant to insurance policies they
issue. These future payments are reflected as reserves on our
consolidated financial statements. With respect to losses and
LAE, there is typically no minimum contractual commitment
associated with insurance contracts, and the timing and ultimate
amount of actual claims related to these reserves is uncertain.
Additional information regarding reserves for losses and LAE,
including information regarding the timing of payments of these
expenses, can be found on pages 17 through 20,
pages 25 and 26, pages 35 through 40 and pages 50
through 52 of this
Form 10-K
Report.
Material Off-Balance Sheet Arrangements.
We did not have
any off-balance sheet arrangements outstanding at
December 31, 2009, 2008 or 2007, nor did we enter into any
off-balance sheet arrangements during 2009, 2008 or 2007.
Subsidiaries
Financial strength is also a high priority of our subsidiaries,
whose assets stand behind their financial commitments to their
customers and vendors. We believe that our subsidiaries have and
will have adequate internally generated funds, cash resources,
and unused credit facilities to provide for the currently
foreseeable needs of their businesses. Our subsidiaries have no
material commitments for capital expenditures.
AIHL.
The obligations and cash outflow of AIHL’s
insurance operating units include claim settlements,
administrative expenses, and purchases of investments. In
addition to premium collections, cash inflow is obtained from
interest and dividend income and maturities and sales of
investments. Because cash inflow from premiums is received in
advance of cash outflow required to settle claims, AIHL’s
insurance operating units accumulate funds which they invest
pending the need for liquidity. As an insurance company’s
cash needs can be unpredictable due to the uncertainty of the
claims settlement process, AIHL’s portfolio, which includes
those of its insurance operating units, is composed primarily of
debt securities and short-term investments to ensure the
availability of funds and maintain a sufficient amount of liquid
securities. As of December 31, 2009, investments and cash
represented 69.2 percent of the assets of AIHL and its
insurance operating units.
At December 31, 2009, AIHL had total unpaid losses and LAE
of approximately $2.5 billion and total reinsurance
recoverables of approximately $976.2 million, consisting of
$947.7 million of ceded outstanding losses and LAE and
$28.5 million of recoverables on paid losses. As of
December 31, 2009, AIHL’s investment securities
portfolio had a fair market value of approximately
$3.9 billion and consisted primarily of high quality debt
54
Table of Contents
securities. Additional information regarding AIHL’s
investment portfolio and the credit quality of AIHL’s debt
securities portfolio can be found on pages 55 through 59 of
this
Form 10-K
Report.
On July 18, 2007, AIHL acquired the outstanding shares of
common stock of EDC for $198.1 million. AIHL made a capital
contribution of $50.0 million to EDC in connection with the
acquisition.
Alleghany Properties.
As of December 31, 2009,
Alleghany Properties held properties having a total book value
of $19.8 million, compared with $19.5 million as of
December 31, 2008 and $20.1 million as of
December 31, 2007. These properties and loans had a total
book value of approximately $90.1 million as of
October 31, 1994, the date Alleghany Properties purchased
the assets. The capital needs of Alleghany Properties consist
primarily of various development costs relating to its owned
properties and corporate administration. Adequate funds to
provide for the currently foreseeable needs of its business are
expected to be generated by sales and, if needed, capital
contributions by us.
Consolidated
Investment Holdings
Investment Strategy.
Our investment strategy seeks to
preserve principal and maintain liquidity while trying to
maximize our risk-adjusted, after-tax rate of return. Investment
decisions are guided mainly by the nature and timing of expected
liability payouts, management’s forecast of cash flows and
the possibility of unexpected cash demands, for example, to
satisfy claims due to catastrophic losses. Our consolidated
investment portfolio currently consists mainly of highly rated
and liquid debt securities and equity securities listed on
national securities exchanges. The overall debt securities
portfolio credit quality is measured using the lower of either
Standard & Poor’s or Moody’s rating. In this
regard, the weighted average rating at December 31, 2009
was AA+, with 63.2 percent of our consolidated debt
securities portfolio invested in securities with the highest
rating (Aaa / AAA), 23.0 percent invested in
securities with the second highest rating (Aa/AA), and only
1.0 percent had either no rating or a rating below
investment grade (below Baa3 / BBB-). Our debt
securities portfolio has been designed to enable management to
react to investment opportunities created by changing interest
rates, prepayments, tax and credit considerations or other
factors, or to circumstances that could result in a mismatch
between the desired duration of portfolio assets and the
duration of liabilities, and, as such, is classified as
available for sale.
We produced positive cash flow in the three-year period ending
December 31, 2009. Our positive cash flow from continuing
operations reduces the need to liquidate portions of our debt
securities portfolio to pay for current claims of our insurance
operating units. This positive cash flow also permits us, as
attractive investment opportunities arise, to make investments
in debt securities that have a longer duration than our
liabilities. When attractive investment opportunities do not
arise, we may maintain higher proportions of shorter duration
debt securities to preserve our capital resources. Effective
duration measures a portfolio’s sensitivity to change in
interest rates; a change within a range of plus or minus
1 percent in interest rates would be expected to result in
an inverse change of approximately 3.5 percent in the fair
market value of our portfolio. In this regard, as of
December 31, 2009, our portfolio had an effective duration
of approximately 3.5 years, with approximately
$1.4 billion, or 41.1 percent, of our debt securities
portfolio in securities with maturities of five years or less
and approximately $262.9 million of short-term investments.
See Note 3 to the Notes to the Consolidated Financial
Statements set forth in Item 8 of this
Form 10-K
Report for further details concerning the contractual maturities
of our consolidated investment portfolio. We may modestly
increase the proportion of our debt securities portfolio held in
securities with maturities of more than five years should the
yields of these securities provide, in our judgment, sufficient
compensation for their increased risk. We do not believe that
this strategy would reduce our ability, as necessary, to meet
ongoing claim payments or to respond to significant catastrophe
losses.
In the event paid losses accelerate beyond the ability of our
insurance operating units to fund these paid losses from current
cash balances, current operating cash flow, coupon receipts and
security maturities, we would need to liquidate a portion of our
investment portfolio, make capital contributions to our
insurance operating units,
and/or
arrange for financing. Strains on liquidity could result from:
| • | the occurrence of several significant catastrophic events in a relatively short period of time; | |
| • | the sale of investments into a depressed marketplace to fund these paid losses; |
55
Table of Contents
| • | the uncollectibility of reinsurance recoverables on these paid losses; | |
| • | the significant decrease in the value of collateral supporting reinsurance recoverables; or | |
| • | a significant reduction in our net premium collections. |
We may, from time to time, make significant investments in the
common stock of a public company, subject to limitations imposed
by applicable regulations. Although the vast majority of our
investment holdings are denominated in U.S. dollars,
investments may be made in other currency denominations
depending upon investment opportunities in those currencies, or
as may be required by regulation or law.
Fair Value.
The estimated carrying values and fair values
of our consolidated financial instruments as of
December 31, 2009 and December 31, 2008 were as
follows (in millions):
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Value | Value | Value | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Investments (excluding equity method investments)*
|
$ | 4,211.6 | $ | 4,211.6 | $ | 4,057.7 | $ | 4,057.7 | ||||||||
| * | For purposes of this table, investments include available-for-sale securities as well as investments in partnerships carried at fair value that are included in other invested assets. Investments exclude our investments in Homesite, ORX and partnerships that are accounted for under the equity method which are included in other invested assets. The fair value of short-term investments approximates amortized cost. The fair value of all other categories of investments is discussed below. |
GAAP defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Fair value measurements are not adjusted for transaction costs.
In addition, GAAP establishes a three-tiered hierarchy for
inputs used in management’s determination of fair value of
financial instruments that emphasizes the use of observable
inputs over the use of unobservable inputs by requiring that the
observable inputs be used when available. Observable inputs are
market participant assumptions based on market data obtained
from sources independent of the reporting entity. Unobservable
inputs are the reporting entity’s own assumptions about
market participant assumptions based on the best information
available under the circumstances. In assessing the
appropriateness of using observable inputs in making our fair
value determinations, we consider whether the market for a
particular security is “active” or not based on all
the relevant facts and circumstances. For example, we may
consider a market to be inactive if there are relatively few
recent transactions or if there is a significant decrease in
market volume. Furthermore, we consider whether observable
transactions are “orderly” or not. We do not consider
a transaction to be orderly if there is evidence of a forced
liquidation or other distressed condition, and as such, little
or no weight is given to that transaction as an indicator of
fair value.
The hierarchy is broken down into three levels based on the
reliability of inputs as follows:
| • | “Level 1” — Valuations are based on unadjusted quoted prices in active markets for identical, unrestricted assets. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these assets does not involve any meaningful degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Our Level 1 assets generally include publicly traded common stocks and debt securities issued directly by the U.S. Government, where our valuations are based on quoted market prices. | |
| • | “Level 2” — Valuations are based on quoted market prices where such markets are not deemed to be sufficiently “active.” In such circumstances, additional valuation metrics will be used which involve direct or indirect observable market inputs. Our Level 2 assets generally include preferred stocks and debt securities other than debt issued directly by the U.S. Government. Substantially all of the determinations of value in this category are based on a single quote from third-party dealers and pricing services. As we generally do not make any adjustments thereto, such quote typically constitutes the sole input in our determination of the fair value of these types of securities. In developing a quote, such third parties will use the terms of the |
56
Table of Contents
| security and market-based inputs. Terms of the security include coupon, maturity date, and any special provisions that may, for example, enable the investor, at its election, to redeem the security prior to its scheduled maturity date. Market-based inputs include the level of interest rates applicable to comparable securities in the market place and current credit rating(s) of the security. Such quotes are generally non-binding. |
| • | “Level 3” — Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Valuation under Level 3 generally involves a significant degree of judgment on our part. Our Level 3 assets are primarily limited to partnership investments. Net asset value quotes from the third-party general partner of the entity in which such investment is held, which will often be based on unobservable market inputs, constitute the primary input in our determination of the fair value of such assets. |
We validate the reasonableness of our fair value determinations
for Level 2 securities by testing the methodology of the
relevant third-party dealer or pricing service that provides the
quotes upon which the fair value determinations are made. We
test the methodology by comparing such quotes with prices from
executed market trades when such trades occur. We discuss with
the relevant third-party dealer or pricing service any
identified material discrepancy between the quote derived from
its methodology and the executed market trade in order to
resolve the discrepancy. We use the quote from the third-party
dealer or pricing service unless we determine that the
methodology used to produce such quote is not in compliance with
GAAP. In addition to such procedures, we also compare the
aggregate amount of the fair value for such Level 2
securities with the aggregate fair value provided by a
third-party financial institution. Furthermore, we review the
reasonableness of its classification of securities within the
three-tiered hierarchy to ensure that the classification is
consistent with GAAP.
The estimated carrying values of our investments as of
December 31, 2009 and December 31, 2008 allocated
among the three levels set forth above were as follows (in
millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock
|
$ | 624.5 | $ | — | $ | — | $ | 624.5 | ||||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
638.4 | — | — | 638.4 | ||||||||||||
|
Mortgage and asset-backed securities*
|
— | 958.8 | — | 958.8 | ||||||||||||
|
States, municipalities, political subdivisions bonds
|
— | 1,234.0 | — | 1,234.0 | ||||||||||||
|
Foreign bonds
|
— | 144.3 | — | 144.3 | ||||||||||||
|
Corporate bonds and other
|
— | 313.5 | — | 313.5 | ||||||||||||
| 638.4 | 2,650.6 | — | 3,289.0 | |||||||||||||
|
Short-term investments
|
75.2 | 187.7 | — | 262.9 | ||||||||||||
|
Other invested assets**
|
— | — | 35.2 | 35.2 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,338.1 | $ | 2,838.3 | $ | 35.2 | $ | 4,211.6 | ||||||||
57
Table of Contents
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
As of December 31, 2008
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock
|
$ | 619.8 | $ | — | $ | — | $ | 619.8 | ||||||||
|
Preferred stock
|
— | 9.7 | — | 9.7 | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
266.3 | 20.3 | — | 286.6 | ||||||||||||
|
Mortgage and asset-backed securities*
|
— | 653.8 | 0.7 | 654.5 | ||||||||||||
|
States, municipalities, political subdivisions bonds
|
— | 1,434.1 | — | 1,434.1 | ||||||||||||
|
Foreign bonds
|
— | 177.3 | — | 177.3 | ||||||||||||
|
Corporate bonds and other
|
— | 207.5 | — | 207.5 | ||||||||||||
| 266.3 | 2,493.0 | 0.7 | 2,760.0 | |||||||||||||
|
Short-term investments
|
175.9 | 460.3 | — | 636.2 | ||||||||||||
|
Other invested assets**
|
— | — | 32.0 | 32.0 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,062.0 | $ | 2,963.0 | $ | 32.7 | $ | 4,057.7 | ||||||||
| * | Consists primarily of residential mortgage-backed securities. | |
| ** | The carrying value of partnership investments of $35.2 million increased by $3.2 million from the December 31, 2008 carrying value of $32.0 million, due primarily to an increase in estimated fair value during the period. |
Mortgage- and Asset-Backed Securities.
At
December 31, 2009, our mortgage- and asset-backed
securities portfolio, which primarily includes residential
mortgage-backed securities, or “RMBS,” and constitutes
$958.8 million of our debt securities portfolio, was backed
by the following types of underlying collateral (in millions):
|
Type of Underlying Collateral
|
Fair Value | Average Rating | ||||
|
RMBS: guaranteed by FNMA or FHLMC (1)
|
$ | 89.2 | Aaa / AAA | |||
|
RMBS: guaranteed by GNMA (2)
|
520.3 | Aaa / AAA | ||||
|
RMBS: Alt A (3)
|
20.5 | A1 / A+ | ||||
|
RMBS:
Sub-prime
(3)
|
2.9 | Aaa/AAA | ||||
|
RMBS: Prime (3) and other non-RMBS (4)
|
325.9 | Aaa/AAA | ||||
|
Total
|
$ | 958.8 | Aaa / AAA | |||
| (1) | “FNMA” refers to the Federal National Mortgage Association, and “FHLMC” refers to the Federal Home Loan Mortgage Corporation. | |
| (2) | “GNMA” refers to the Government National Mortgage Association. | |
| (3) | As defined by Standard & Poor’s. | |
| (4) | In addition to RMBS Prime, includes commercial mortgage-backed securities and other asset-backed securities. |
All of our mortgage- and asset-backed securities are current as
to principal and interest. Additional information regarding
AIHL’s holdings of securities backed by
sub-prime
and Alt-A collateral at December 31, 2009 is as follows (in
millions):
|
Gross
|
Gross
|
Weighted
|
||||||||||
|
Type of Underlying
|
Unrealized
|
Unrealized
|
Average
|
|||||||||
|
Collateral
|
Gains | Losses | Life | |||||||||
|
Alt-A
|
$ | 0.1 | $ | 1.3 | 4.5 years | |||||||
|
Sub-prime
|
$ | – | $ | 0.5 | 4.2 years | |||||||
58
Table of Contents
Financial Guaranty Insurance and Municipal
Bonds.
Approximately 22.4 percent (or
approximately $736.6 million) of debt securities,
predominantly municipal bonds, contained in our debt securities
portfolio is insured by financial guaranty insurance companies.
The purpose of this insurance is to increase the credit quality
of the debt securities and their credit ratings discussed above.
If the obligations of these financial guarantors ceased to be
valuable, either through a credit rating downgrade or default,
these debt securities would likely receive lower credit ratings
by the rating agencies that would reflect the creditworthiness
of the various obligors as if the debt securities were
uninsured. The primary financial guaranty insurance companies
currently providing insurance coverage to our debt security
portfolio include Ambac Financial Inc., MBIA Inc., Assured
Guaranty Inc. and Financial Guaranty Insurance Company.
The following table summarizes the credit quality of our
portfolio as rated, and as rated if the debt securities were
uninsured, as of December 31, 2009:
|
% of Debt Securities
|
||||||||
| Portfolio | ||||||||
| As rated | As rated if uninsured | |||||||
|
Aaa /AAA
|
63.2 | % | 63.4 | % | ||||
|
Aa / AA
|
23.0 | % | 20.7 | % | ||||
|
A / A
|
10.3 | % | 12.4 | % | ||||
|
Baa / BBB
|
2.5 | % | 2.4 | % | ||||
|
Below Baa / BBB
|
1.0 | % | 1.0 | % | ||||
|
Not rated
|
– | % | 0.1 | % | ||||
| 100.0 | % | 100.0 | % | |||||
The following table details the top five state exposures of our
municipal bond portfolio (in millions):
|
General
|
Special
|
Total
|
||||||||||
| Obligation | Revenue | Fair Value | ||||||||||
|
Texas
|
$ | 72.8 | $ | 16.1 | $ | 88.9 | ||||||
|
Massachusetts
|
8.8 | 58.4 | 67.2 | |||||||||
|
Illinois
|
43.5 | 17.1 | 60.6 | |||||||||
|
New York
|
4.3 | 51.6 | 55.9 | |||||||||
|
Washington
|
44.2 | 11.0 | 55.2 | |||||||||
|
All other
|
353.1 | 317.3 | 670.4 | |||||||||
| $ | 526.7 | $ | 471.5 | $ | 998.2 | |||||||
|
Advance refunded / escrowed to maturity bonds
|
235.8 | |||||||||||
|
Total municipal bond portfolio
|
$ | 1,234.0 | ||||||||||
Recent
Accounting Standards
Recently
Adopted
In June 2009, Financial Accounting Standards Board or
“FASB,” Statement No. 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162” or “SFAS 168,” was issued.
SFAS 168 establishes the FASB Accounting Standards
Codification, or “FASB ASC,” as the single source of
authoritative accounting principles in the preparation of
financial statements in conformity with GAAP. SFAS 168,
which is referenced within the FASB ASC in Topic
105-10,
or
“FASB ASC
105-10,”
is effective for interim and annual periods ending after
September 15, 2009. We have adopted SFAS 168 in the
2009 third quarter, and the implementation did not have any
impact on our results of operations and financial condition. All
of our public filings will now include references, wherever
appropriate, to the FASB ASC as the sole source of authoritative
literature.
In December 2007, FASB Statements No. 141 (revised 2007),
“Business Combinations” or “SFAS 141R”
[FASB ASC
805-10],
and
No. 160, “Noncontrolling Interests in Consolidated
Financial Statements” or “SFAS 160”
59
Table of Contents
[FASB ASC
810-10],
were issued. SFAS 141R replaces FASB Statement
No. 141, “Business Combinations.” SFAS 141R
requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition date
fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose
additional information regarding the nature and financial effect
of the business combination. SFAS 160 requires all entities
to report noncontrolling (minority) interests in subsidiaries in
the same way — as equity in the consolidated financial
statements. SFAS 160 also requires disclosure, on the face
of the consolidated statement of income, of the amounts of
consolidated net earnings attributable to the parent and to the
noncontrolling interest. We have adopted SFAS 141R and
SFAS 160 for all business combinations initiated after
December 31, 2008, and the implementation did not have a
material impact on our results of operations and financial
condition.
In September 2006, FASB Statement No. 157, “Fair Value
Measurements” or “SFAS 157” [FASB ASC
820-10],
was
issued. SFAS 157 provides guidance for using fair value to
measure assets and liabilities. SFAS 157 does not expand
the use of fair value to any new circumstances. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. We have adopted the provisions of
SFAS 157 as of January 1, 2008, and the implementation
did not have a material impact on our results of operations and
financial condition.
In October 2008, FASB Staff Position
No. 157-3
or “FSP
FAS 157-3”
[FASB ASC
820-10]
was
issued. FSP
FAS 157-3
clarifies the application of SFAS 157 in an inactive
market. If a market becomes inactive, then the fair value
determination for securities in that market may be based on
inputs that are unobservable in the market, rather than being
based on either unadjusted quoted prices or observable market
inputs. FSP
FAS 157-3
is effective upon issuance, including periods for which
financial statements have not been issued. We have adopted the
provisions of FSP
FAS 157-3
as of September 30, 2008, and the implementation did not
have a material impact on our results of operations and
financial condition.
In April 2009, FASB Staff Position
No. 157-4
or “FSP
FAS 157-4”
[FASB ASC
820-10-65]
was issued. FSP
FAS 157-4
provides guidelines for making fair value measurements more
consistent with the principles presented in SFAS 157
regarding the determination of when a market is not considered
to be active and when a transaction is not considered to be
distressed. The determination of whether a market is not
considered to be active is based on an evaluation of a number of
factors. If such factors indicate that a market is not active,
it must then be determined whether a quoted price from that
market is associated with a distressed transaction based on the
facts and circumstances. FSP
FAS 157-4
also provides for additional financial statement disclosure. FSP
FAS 157-4
is effective for periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. We have adopted the provisions of FSP
FAS 157-4
in the second quarter of 2009, and the implementation did not
have a material impact on our results of operations and
financial condition.
In April 2009, FASB Staff Position
No. 115-2
and
124-2
or
“FSP
FAS 115-2
and
124-2”
[FASB ASC
320-10-65],
was issued. FSP
FAS 115-2
and
124-2
provides additional guidance in accounting for and presenting
impairment losses on debt securities. If a decline in fair value
below the amortized cost exists at the balance sheet date for a
debt security, and the entity intends to sell the security or it
is more likely than not that the entity will sell the debt
security before recovery of its cost basis, an
other-than-temporary
impairment exists. Furthermore, the amount of the impairment
related to the credit losses must be recognized in earnings,
whereas the amount of the impairment related to other factors
must be recognized in other comprehensive income. FSP
FAS 115-2
and
124-2
also provides for additional financial statement disclosure. FSP
FAS 115-2
and
124-2
is
effective for periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. We have adopted the provisions of FSP
FAS 115-2
and
124-2
in
the second quarter of 2009, and the implementation did not have
a material impact on our results of operations and financial
condition. As part of our implementation, we have determined
that current and prior period
other-than-temporary
impairment losses on debt securities were credit-related.
In April 2009, FASB Staff Position
No. 107-1
and APB28-1 or “FSP
FAS 107-1
and APB28-1” [FASB ASC
825-10-65],
was issued. FSP
FAS 107-1
and APB28-1 amend existing fair value disclosure requirements
for financial instruments by requiring that such disclosures be
made in interim financial statements. FSP
FAS 107-1
and APB28-1 is effective for periods ending after June 15,
2009, with early adoption permitted for periods ending after
60
Table of Contents
March 15, 2009. We have adopted the provisions of FSP
FAS 107-1
and APB28-1 in the second quarter of 2009, and the
implementation did not have a material impact on our results of
operations and financial condition.
In May 2009, FASB Statements No. 165, “Subsequent
Events” or “SFAS 165” [FASB ASC
855-10],
was
issued. SFAS 165 establishes general standards related to
events that occur after the balance sheet date but before
financial statements are issued. SFAS 165 describes the
circumstances where events or transactions occurring after the
balance sheet date should be recognized in the financial
statements and provides for additional financial statement
disclosure. SFAS 165 is effective for interim and annual
periods ending after June 15, 2009. We have adopted
SFAS 165 in the 2009 second quarter, and the implementation
did not have a material impact on our results of operations and
financial condition. We have evaluated subsequent events through
February 24, 2010.
In September 2009, FASB Accounting Standards Update
No. 2009-12
or “ASU2009-12” [FASB ASC 820], was issued. ASU2009-12
allows investors to use net asset value as a practical expedient
to estimate fair value of investments in investment companies
(and like entities) that do not have readily determinable fair
values. ASU2009-12 does not apply to investments accounted for
on the equity method. ASU2009-12 is effective for interim and
annual periods ending after December 15, 2009, with early
application permitted. We have adopted ASU2009-12 in the fourth
quarter of 2009, and the implementation did not have any impact
on our results of operations and financial condition. Our
partnership investments accounted for as
available-for-sale
are subject to ASU2009-12. Net asset value quotes from the
third-party general partner of the entity in which such
investment is held, which will often be based on unobservable
market inputs, constitute the primary input in our determination
of the fair value. The fair value of our
available-for-sale
partnership investments was $35.2 million at
December 31, 2009 and $32.0 million at
December 31, 2008.
Future
Application of Accounting Standards
In June 2009, FASB Statements No. 166, “Accounting for
Transfers of Financial Assets” or
“SFAS 166,” and No. 167, “Amendments to
FASB Interpretation No. 46(R)” or
“SFAS 167,” were issued [FASB ASC
860-10
and
810-10].
SFAS 166 and SFAS 167 change the way entities account
for securitizations and special-purpose entities. SFAS 166
is a revision to Statement No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,” and, among other things, will eliminate
the concept of a “qualifying special-purpose entity,”
change the requirements for derecognizing financial assets, and
require additional disclosure about transfers of financial
assets, including securitization transactions and an
entity’s continuing exposure to the risks related to
transferred financial assets. SFAS 167 is a revision to
FASB Interpretation No. 46(R), “Consolidation of
Variable Interest Entities,” and will change how a company
determines when an entity that is insufficiently capitalized or
is not controlled through voting rights (or similar rights)
should be consolidated. The determination of whether a company
is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s
ability to direct the activities of the entity that most
significantly impact the entity’s economic performance.
SFAS 166 and SFAS 167 are generally effective for
periods beginning in 2010. We will adopt SFAS 166 and
SFAS 167 in the 2010 first quarter, and we do not believe
the implementation will have a material impact on our results of
operations and financial condition. We did not have any
off-balance sheet arrangements outstanding at December 31,
2009 or December 31, 2008, including those that may involve
the types of entities contemplated in SFAS 166 and
SFAS 167.
In January 2010, FASB Accounting Standards Update
No. 2010-06
or “ASU2010-06” [FASB ASC 820], was issued. ASU2010-06
provides for additional financial statement disclosure on fair
value measurements, including how fair values are measured.
ASU2010-06 is effective for interim and annual periods ending
after December 15, 2009. We will adopt ASU2010-06 in the
first quarter of 2010, and we do not believe the implementation
will have a material impact on our results of operations and
financial condition.
61
Table of Contents
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Market risk is the risk of loss from adverse changes in market
prices and rates, such as interest rates, foreign currency
exchange rates, and commodity prices. The primary market risk
related to our non-trading financial instruments is the risk of
loss associated with adverse changes in interest rates. We
invest in equity securities which are subject to fluctuations in
market value. We also purchase debt securities with fixed
maturities that expose us to risk related to adverse changes in
interest rates. We hold our equity securities and debt
securities as available for sale. Any changes in the fair value
in these securities, net of tax, would be reflected in our
accumulated other comprehensive income as a component of
stockholders’ equity. However, if a decline in fair value
relative to cost is believed to be other than temporary, a loss
is generally recorded on our statement of earnings.
Equity Securities
The table below summarizes our equity price risk and shows the
effect of a hypothetical increase or decrease in market prices
as of December 31, 2009 and 2008 on the estimated fair
value of our consolidated equity portfolio. The selected
hypothetical changes do not indicate what could be the potential
best or worst case scenarios (dollars in millions):
|
Estimated Fair Value
|
Hypothetical Percentage
|
|||||||||||||
|
Estimated
|
Hypothetical
|
after Hypothetical
|
Increase (Decrease) in
|
|||||||||||
|
As of December 31,
|
Fair Value | Price Change | Change in Prices | Stockholders’ Equity | ||||||||||
|
2009
|
$ | 624.5 | 20% Increase | $ | 749.4 | 2.9 | % | |||||||
| 20% decrease | $ | 499.6 | (2.9 | )% | ||||||||||
|
2008
|
$ | 629.5 | 20% Increase | $ | 755.4 | 2.9 | % | |||||||
| 20% decrease | $ | 503.6 | (2.9 | )% | ||||||||||
Debt Securities
The primary market risk for our and our subsidiaries’ debt
is interest rate risk at the time of refinancing. We monitor the
interest rate environment to evaluate refinancing opportunities.
We currently do not use derivatives to manage market and
interest rate risks. One interest rate swap that we had matured
in January 2007 at no gain or loss to us. The tables below
present sensitivity analyses of our consolidated debt securities
as of December 31, 2009 and 2008 that are sensitive to
changes in interest rates. Sensitivity analysis is defined as
the measurement of potential change in future earnings, fair
values, or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates
over a selected time. In the sensitivity analysis model below,
we use a +/- 300 basis point range of change in interest
rates to measure the hypothetical change in fair value of the
financial instruments included in the analysis. The change in
fair value is determined by calculating hypothetical
December 31, 2009 and 2008 ending prices based on yields
adjusted to reflect a +/- 300 basis point range of change
in interest rates, comparing these hypothetical ending prices to
actual ending prices, and multiplying the difference by the par
outstanding.
At
December 31, 2009
(dollars
in millions)
| Interest rate shifts | -300 | -200 | -100 | 0 | 100 | 200 | 300 | ||||||||||||||||||||||||||||
|
Debt securities, fair value
|
$3,605.7 | $3,499.8 | $3,398.2 | $3,289.0 | $3,172.3 | $3,057.1 | $2,947.6 | ||||||||||||||||||||||||||||
|
Estimated change in fair value
|
$316.7 | $210.8 | $109.2 | – | $(116.7 | ) | $(231.9 | ) | $(341.4 | ) | |||||||||||||||||||||||||
At
December 31, 2008
(dollars
in millions)
| Interest rate shifts | -300 | -200 | -100 | 0 | 100 | 200 | 300 | ||||||||||||||||||||||||||||
|
Debt securities, fair value
|
$3,036.6 | $2,954.3 | $2,861.0 | $2,760.0 | $2,659.6 | $2,561.8 | $2,466.9 | ||||||||||||||||||||||||||||
|
Estimated change in fair value
|
$276.6 | $194.3 | $101.0 | – | $(100.4 | ) | $(198.2 | ) | $(293.1 | ) | |||||||||||||||||||||||||
These sensitivity analyses provide only a limited,
point-in-time
view of the market risk of the financial instruments discussed
above. The actual impact of changes in equity prices and market
interest rates on the financial
62
Table of Contents
instruments may differ significantly from those shown in the
above sensitivity analyses. The sensitivity analyses are further
limited because they do not consider any actions we could take
in response to actual
and/or
anticipated changes in equity prices and in interest rates.
Partnership Investments.
In addition to debt
and equity securities, we invest in several partnerships which
are subject to fluctuations in market value. Partnership
investments are included in other invested assets and are
accounted for as either
available-for-sale
or an equity method investment. The carrying value of
available-for-sale
partnership investments was $35.2 million at
December 31, 2009 and $32.0 million at
December 31, 2008. The carrying value of equity method
partnership investments was $47.7 million at
December 31, 2009 and $45.3 million at
December 31, 2008.
63
Table of Contents
Item 8. Financial
Statements and Supplementary Data.
Index to
Consolidated Financial Statements
Alleghany
Corporation and
Subsidiaries
|
Description
|
Page | |||
| 65 | ||||
| 66 | ||||
| 67 | ||||
| 68 | ||||
| 69 | ||||
| 109 | ||||
64
Table of Contents
ALLEGHANY
CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Consolidated Balance Sheets
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
(in thousands, except
|
||||||||
| share amounts) | ||||||||
|
Assets
|
||||||||
|
Investments
|
||||||||
|
Available-for-sale
securities at fair value:
|
||||||||
|
Equity securities (cost: 2009 – $530,945;
2008 – $463,207)
|
$ | 624,546 | $ | 629,518 | ||||
|
Debt securities (amortized cost: 2009 – $3,235,595;
2008 – $2,781,829)
|
3,289,013 | 2,760,019 | ||||||
|
Short-term investments
|
262,903 | 636,197 | ||||||
| 4,176,462 | 4,025,734 | |||||||
|
Other invested assets
|
238,227 | 250,407 | ||||||
|
Total investments
|
4,414,689 | 4,276,141 | ||||||
|
Cash
|
32,526 | 18,125 | ||||||
|
Premium balances receivable
|
145,992 | 154,022 | ||||||
|
Reinsurance recoverables
|
976,172 | 1,056,438 | ||||||
|
Ceded unearned premium reserves
|
160,713 | 185,402 | ||||||
|
Deferred acquisition costs
|
71,098 | 71,753 | ||||||
|
Property and equipment at cost, net of accumulated depreciation
and amortization
|
20,097 | 23,310 | ||||||
|
Goodwill and other intangibles, net of amortization
|
145,667 | 151,223 | ||||||
|
Current taxes receivable
|
— | 14,338 | ||||||
|
Net deferred tax assets
|
124,266 | 130,293 | ||||||
|
Other assets
|
101,550 | 100,783 | ||||||
| $ | 6,192,770 | $ | 6,181,828 | |||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Losses and loss adjustment expenses
|
$ | 2,520,979 | $ | 2,578,590 | ||||
|
Unearned premiums
|
573,906 | 614,067 | ||||||
|
Reinsurance payable
|
51,795 | 53,541 | ||||||
|
Current taxes payable
|
3,827 | — | ||||||
|
Other liabilities
|
324,742 | 288,941 | ||||||
|
Total liabilities
|
3,475,249 | 3,535,139 | ||||||
|
Preferred stock
|
||||||||
|
(shares authorized: 2009 – none; 2008 –
1,132,000; shares issued and outstanding: 2009 – none;
2008 – 1,131,619)
|
— | 299,429 | ||||||
|
Common stock
|
||||||||
|
(shares authorized: 2009 and 2008 – 22,000,000; issued
and outstanding 2009 – 9,118,367; 2008 –
8,516,270)
|
9,118 | 8,349 | ||||||
|
Contributed capital
|
921,225 | 742,863 | ||||||
|
Accumulated other comprehensive income
|
94,045 | 87,249 | ||||||
|
Treasury stock, at cost (2009 – 258,013 shares;
2008 – 76,513 shares)
|
(66,325 | ) | (24,290 | ) | ||||
|
Retained earnings
|
1,759,458 | 1,533,089 | ||||||
|
Total stockholders’ equity
|
2,717,521 | 2,646,689 | ||||||
| $ | 6,192,770 | $ | 6,181,828 | |||||
See accompanying Notes to Consolidated Financial Statements.
65
Table of Contents
ALLEGHANY
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings and Comprehensive Income
Consolidated Statements of Earnings and Comprehensive Income
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
|
Revenues
|
||||||||||||
|
Net premiums earned
|
$ | 845,015 | $ | 948,652 | $ | 974,321 | ||||||
|
Net investment income
|
101,949 | 130,184 | 146,082 | |||||||||
|
Net realized capital gains
|
320,389 | 151,713 | 100,425 | |||||||||
|
Other than temporary impairment losses
|
(85,916 | ) | (243,881 | ) | (7,659 | ) | ||||||
|
Other income
|
2,955 | 2,432 | 15,427 | |||||||||
|
Total revenues
|
1,184,392 | 989,100 | 1,228,596 | |||||||||
|
Costs and expenses
|
||||||||||||
|
Loss and loss adjustment expenses
|
442,104 | 570,019 | 449,052 | |||||||||
|
Commissions, brokerage and other underwriting expenses
|
273,722 | 286,573 | 257,198 | |||||||||
|
Other operating expenses
|
45,615 | 34,861 | 55,604 | |||||||||
|
Corporate administration
|
26,938 | 35,895 | 32,987 | |||||||||
|
Interest expense
|
633 | 700 | 1,476 | |||||||||
|
Total costs and expenses
|
789,012 | 928,048 | 796,317 | |||||||||
|
Earnings from continuing operations, before income taxes
|
395,380 | 61,052 | 432,279 | |||||||||
|
Income taxes
|
124,381 | 20,485 | 144,737 | |||||||||
|
Earnings from continuing operations
|
270,999 | 40,567 | 287,542 | |||||||||
|
Discontinued operations
|
||||||||||||
|
Operations (including a gain on disposal of $141,688 in 2008)
|
— | 164,193 | 24,976 | |||||||||
|
Income taxes (including tax on the gain on disposal of $49,591
in 2008)
|
— | 56,789 | 13,448 | |||||||||
|
Earnings from discontinued operations, net of tax
|
— | 107,404 | 11,528 | |||||||||
|
Net earnings
|
$ | 270,999 | $ | 147,971 | $ | 299,070 | ||||||
|
Changes in other comprehensive income
|
||||||||||||
|
Change in unrealized (losses) gains, net of deferred taxes of
$90,590, $(145,368), and $60,778 for 2009, 2008 and 2007,
respectively
|
$ | 168,239 | $ | (269,969 | ) | $ | 112,874 | |||||
|
Less: reclassification for net realized capital gains and other
than temporary impairment losses, net of taxes of $86,386,
$(15,198) and $32,458 for 2009, 2008 and 2007, respectively
|
(160,432 | ) | 28,225 | (60,280 | ) | |||||||
|
Other
|
(1,011 | ) | 361 | 167 | ||||||||
|
Comprehensive income
|
$ | 277,795 | $ | (93,412 | ) | $ | 351,831 | |||||
|
Net earnings
|
$ | 270,999 | $ | 147,971 | $ | 299,070 | ||||||
|
Preferred dividends
|
6,158 | 17,218 | 17,223 | |||||||||
|
Net earnings available to common stockholders
|
$ | 264,841 | $ | 130,753 | $ | 281,847 | ||||||
|
Basic earnings per share of common stock: *
|
||||||||||||
|
Continuing operations
|
$ | 30.43 | $ | 2.75 | $ | 31.89 | ||||||
|
Discontinued operations
|
— | 12.67 | 1.36 | |||||||||
|
Basic earning per share
|
$ | 30.43 | $ | 15.42 | $ | 33.25 | ||||||
|
Diluted earnings per share of common stock: *
|
||||||||||||
|
Continuing operations
|
$ | 29.66 | $ | 2.75 | $ | 30.25 | ||||||
|
Discontinued operations
|
— | 12.67 | 1.20 | |||||||||
|
Diluted earnings per share
|
$ | 29.66 | $ | 15.42 | $ | 31.45 | ||||||
| * | Amounts reflect subsequent common stock dividends. |
See accompanying Notes to Consolidated Financial Statements.
66
Table of Contents
ALLEGHANY
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Changes in Stockholders’ Equity
| Three Years Ended December 31, 2009 | ||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||
|
Other
|
Total
|
|||||||||||||||||||||||||||
|
Preferred
|
Common
|
Contributed
|
Comprehensive
|
Treasury
|
Retained
|
Stockholders’
|
||||||||||||||||||||||
| Stock | Stock | Capital | Income | Stock | Earnings | Equity | ||||||||||||||||||||||
| (in thousands, except share amounts) | ||||||||||||||||||||||||||||
|
Balance at December 31, 2006
|
||||||||||||||||||||||||||||
|
(8,446,465* shares of common stock issued; none in treasury)
|
$ | 299,527 | $ | 7,959 | $ | 627,215 | $ | 275,871 | $ | — | $ | 1,235,392 | $ | 2,445,964 | ||||||||||||||
|
Add (deduct):
|
||||||||||||||||||||||||||||
|
Net earnings
|
— | — | — | — | — | 299,070 | 299,070 | |||||||||||||||||||||
|
Other comprehensive loss, net of tax:
|
||||||||||||||||||||||||||||
|
Retirement plans
|
— | — | — | 167 | — | — | 167 | |||||||||||||||||||||
|
Change in unrealized appreciation of investments, net
|
— | — | — | 52,594 | — | — | 52,594 | |||||||||||||||||||||
|
Comprehensive income
|
— | — | — | 52,761 | — | 299,070 | 351,831 | |||||||||||||||||||||
|
Dividends paid
|
— | 159 | 58,315 | — | — | (75,840 | ) | (17,366 | ) | |||||||||||||||||||
|
Stock based compensation
|
— | — | 1,144 | — | — | — | 1,144 | |||||||||||||||||||||
|
Other, net
|
(47 | ) | 41 | 2,761 | — | — | (1 | ) | 2,754 | |||||||||||||||||||
|
Balance at December 31, 2007
|
||||||||||||||||||||||||||||
|
(8,488,795* shares of common stock issued; none in treasury)
|
299,480 | 8,159 | 689,435 | 328,632 | — | 1,458,621 | 2,784,327 | |||||||||||||||||||||
|
Add (deduct):
|
||||||||||||||||||||||||||||
|
Net earnings
|
— | — | — | — | — | 147,971 | 147,971 | |||||||||||||||||||||
|
Other comprehensive loss, net of tax:
|
||||||||||||||||||||||||||||
|
Retirement plans
|
— | — | — | 361 | — | — | 361 | |||||||||||||||||||||
|
Change in unrealized appreciation of investments, net
|
— | — | — | (241,744 | ) | — | — | (241,744 | ) | |||||||||||||||||||
|
Comprehensive income
|
— | — | — | (241,383 | ) | — | 147,971 | (93,412 | ) | |||||||||||||||||||
|
Dividends paid
|
— | 163 | 55,988 | — | — | (73,501 | ) | (17,350 | ) | |||||||||||||||||||
|
Stock based compensation
|
— | — | 2,941 | — | — | — | 2,941 | |||||||||||||||||||||
|
Treasury stock purchase
|
— | — | — | — | (24,290 | ) | — | (24,290 | ) | |||||||||||||||||||
|
Adjust gain on sale of subsidiary stock
|
— | — | (9,473 | ) | — | — | — | (9,473 | ) | |||||||||||||||||||
|
Other, net
|
(51 | ) | 27 | 3,972 | — | — | (2 | ) | 3,946 | |||||||||||||||||||
|
Balance at December 31, 2008
|
||||||||||||||||||||||||||||
|
(8,516,270* shares of common stock issued; 76,513 in treasury)
|
299,429 | 8,349 | 742,863 | 87,249 | (24,290 | ) | 1,533,089 | 2,646,689 | ||||||||||||||||||||
|
Add (deduct):
|
||||||||||||||||||||||||||||
|
Net earnings
|
— | — | — | — | — | 270,999 | 270,999 | |||||||||||||||||||||
|
Other comprehensive loss, net of tax:
|
||||||||||||||||||||||||||||
|
Retirement plans
|
— | — | — | (1,011 | ) | — | — | (1,011 | ) | |||||||||||||||||||
|
Change in unrealized appreciation of investments, net
|
— | — | — | 7,807 | — | — | 7,807 | |||||||||||||||||||||
|
Comprehensive income
|
— | — | — | 6,796 | — | 270,999 | 277,795 | |||||||||||||||||||||
|
Dividends paid
|
— | 72 | 11,246 | — | 26,629 | (44,630 | ) | (6,683 | ) | |||||||||||||||||||
|
Stock based compensation
|
— | — | 1,186 | — | — | — | 1,186 | |||||||||||||||||||||
|
Treasury stock purchase
|
— | — | — | — | (75,856 | ) | — | (75,856 | ) | |||||||||||||||||||
|
Preferred stock repurchase
|
(117,218 | ) | — | — | — | — | — | (117,218 | ) | |||||||||||||||||||
|
Conversion of preferred stock
|
(182,211 | ) | 698 | 181,513 | — | — | — | — | ||||||||||||||||||||
|
Other, net
|
— | (1 | ) | (15,583 | ) | — | 7,192 | — | (8,392 | ) | ||||||||||||||||||
|
Balance at December 31, 2009
(9,118,367 shares
of common stock issued; 258,013 in treasury)
|
$ | — | $ | 9,118 | $ | 921,225 | $ | 94,045 | $ | (66,325 | ) | $ | 1,759,458 | $ | 2,717,521 | |||||||||||||
| * | Amounts reflect subsequent common stock dividends. |
See accompanying Notes to Consolidated Financial Statements.
67
Table of Contents
ALLEGHANY
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net earnings
|
$ | 270,999 | $ | 147,971 | $ | 299,070 | ||||||
|
Earnings from discontinued operations, net
|
— | 107,404 | 11,528 | |||||||||
|
Earnings from continuing operations
|
270,999 | 40,567 | 287,542 | |||||||||
|
Adjustments to reconcile earnings from continuing operations to
net cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
32,358 | 25,674 | 16,275 | |||||||||
|
Net realized capital (gains) losses
|
(320,389 | ) | (151,713 | ) | (100,425 | ) | ||||||
|
Other than temporary impairment losses
|
85,916 | 243,881 | 7,659 | |||||||||
|
(Increase) decrease in other assets
|
1,255 | (37,117 | ) | (2,515 | ) | |||||||
|
(Increase) decrease in reinsurance receivable, net of
reinsurance payable
|
78,520 | (41,604 | ) | 116,257 | ||||||||
|
(Increase) decrease in premium balances receivable
|
8,030 | 17,671 | 27,318 | |||||||||
|
(Increase) decrease in ceded unearned premium reserves
|
24,689 | 35,801 | 90,098 | |||||||||
|
(Increase) decrease in deferred acquisition costs
|
655 | 3,870 | (8,286 | ) | ||||||||
|
Increase (decrease) in other liabilities and current taxes
|
59,164 | (24,928 | ) | 46,224 | ||||||||
|
Increase (decrease) in unearned premiums
|
(40,161 | ) | (86,955 | ) | (102,873 | ) | ||||||
|
Increase (decrease) in losses and loss adjustment expenses
|
(57,611 | ) | 198,889 | (25,469 | ) | |||||||
|
Net adjustments
|
(127,574 | ) | 183,469 | 64,263 | ||||||||
|
Net cash provided by operating activities from continuing
operations
|
143,425 | 224,036 | 351,805 | |||||||||
|
Net cash provided by operating activities from discontinued
operations
|
— | 106,510 | 127,355 | |||||||||
|
Net cash provided by operating activities
|
143,425 | 330,546 | 479,160 | |||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchase of investments
|
(2,332,932 | ) | (1,564,024 | ) | (1,336,433 | ) | ||||||
|
Sales of investments
|
1,725,742 | 1,149,434 | 824,305 | |||||||||
|
Maturities of investments
|
311,868 | 325,970 | 284,666 | |||||||||
|
Purchases of property and equipment
|
(5,539 | ) | (9,760 | ) | (4,884 | ) | ||||||
|
Net change in short-term investments
|
373,442 | (320,111 | ) | 79,974 | ||||||||
|
Other, net
|
(913 | ) | 3,700 | 4,640 | ||||||||
|
Acquisition of majority- and minority-owned companies, net of
cash acquired
|
— | (50,816 | ) | (186,743 | ) | |||||||
|
Net cash provided by investing activities from continuing
operations
|
71,668 | (465,607 | ) | (334,475 | ) | |||||||
|
Net cash provided by investing activities from discontinued
operations
|
— | 151,607 | (152,076 | ) | ||||||||
|
Net cash (used in) provided by investing activities
|
71,668 | (314,000 | ) | (486,551 | ) | |||||||
|
Cash flows from financing activities
|
||||||||||||
|
Treasury stock acquisitions
|
(75,856 | ) | (25,068 | ) | — | |||||||
|
Convertible preferred stock acquisition
|
(117,358 | ) | — | — | ||||||||
|
Principal payments on long-term debt
|
— | — | (80,000 | ) | ||||||||
|
Proceeds from repayment of note receivable
|
— | — | 91,536 | |||||||||
|
Convertible preferred stock dividends paid
|
(7,456 | ) | (17,350 | ) | (17,367 | ) | ||||||
|
Tax benefit on stock based compensation
|
312 | 2,330 | 1,063 | |||||||||
|
Other, net
|
(334 | ) | 2,133 | 3,626 | ||||||||
|
Net cash provided by (used in) financing activities from
continuing operations
|
(200,692 | ) | (37,955 | ) | (1,142 | ) | ||||||
|
Net cash provided by (used in) financing activities from
discontinued operations
|
— | (5,000 | ) | 5,316 | ||||||||
|
Net cash provided by (used in) financing activities
|
(200,692 | ) | (42,955 | ) | 4,174 | |||||||
|
Cash flows of discontinued operations
|
||||||||||||
|
Operating activities
|
— | (106,510 | ) | (127,355 | ) | |||||||
|
Investing activities
|
— | 88,398 | 152,076 | |||||||||
|
Financing activities
|
— | 5,000 | (5,316 | ) | ||||||||
|
Net cash provided by (used in) discontinued operations
|
— | (13,112 | ) | 19,405 | ||||||||
|
Net cash provided by (used in) continuing operations
|
14,401 | (39,521 | ) | 16,188 | ||||||||
|
Cash at beginning of period
|
18,125 | 57,646 | 41,458 | |||||||||
|
Cash at end of period
|
$ | 32,526 | $ | 18,125 | $ | 57,646 | ||||||
|
Supplemental disclosures of cash flow information
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | — | $ | 200 | $ | 505 | ||||||
|
Income taxes paid (refunds received)
|
$ | 105,478 | $ | 179,984 | $ | 191,680 | ||||||
See accompanying Notes to Consolidated Financial Statements.
68
Table of Contents
ALLEGHANY
CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
| 1. | Summary of Significant Accounting Principles |
| (a) | Principles of Financial Statement Presentation |
Alleghany Corporation, a Delaware corporation, which together
with its subsidiaries is referred to as “Alleghany”
unless the context otherwise requires, is engaged in the
property and casualty and surety insurance business through its
wholly-owned subsidiary Alleghany Insurance Holdings LLC
(“AIHL”). AIHL’s insurance business is conducted
through its wholly-owned subsidiaries RSUI Group, Inc.
(“RSUI”), Capitol Transamerica Corporation, Platte
River Insurance Company (collectively “CATA”) and
Employers Direct Corporation (“EDC”). AIHL Re LLC
(“AIHL Re”), a captive reinsurance subsidiary of AIHL,
has in the past provided reinsurance to Alleghany operating
units and affiliates. In addition, Alleghany owns approximately
33 percent of the outstanding shares of common stock of
Homesite Group Incorporated (“Homesite”), a national,
full-service, mono-line provider of homeowners insurance and
approximately 38 percent of ORX Exploration, Inc.
(“ORX”), a regional oil and gas exploration and
production company. These investments are reflected in
Alleghany’s financial statements in other invested assets.
Alleghany also owns and manages properties in the Sacramento,
California region through its subsidiary Alleghany Properties
Holdings LLC (“Alleghany Properties”) and makes
strategic investments in operating companies and conducts other
activities at the parent level. Alleghany also owned
approximately 55 percent of Darwin Professional
Underwriters, Inc. (“Darwin”) until its disposition on
October 20, 2008. Accordingly, the operations of Darwin
have been reclassified as discontinued operations for all
periods presented. See Note 2.
The accompanying consolidated financial statements include the
results of Alleghany and its wholly-owned and majority-owned
subsidiaries, and have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“GAAP”). All significant inter-company
balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
reported results to the extent that those estimates and
assumptions prove to be inaccurate.
| (b) | Investments |
Investments consist of equity securities, debt securities,
short-term investments, and other invested assets. Alleghany
classifies its equity securities, debt securities, and
short-term investments as available for sale. Debt securities
consist of securities with an initial fixed maturity of more
than one year. Short-term investments include commercial paper,
certificates of deposit, money market instruments, and any fixed
maturity with an initial maturity of one year or less.
At December 31, 2009 and 2008,
available-for-sale
securities are recorded at fair value. Unrealized gains and
losses during the year, net of the related tax effect applicable
to
available-for-sale
securities, are excluded from earnings and reflected in
comprehensive income and the cumulative effect is reported as a
separate component of stockholders’ equity until realized.
If the decline in fair value is deemed to be other than
temporary, it is written down to the carrying value of the
investment and recorded as an
other-than-temporary
impairment loss on the statement of earnings. In addition, any
portion of such decline that relates to debt securities that is
believed to arise from factors other than credit is to be
recorded as a component of other comprehensive income.
Net realized gains and losses on investments are determined in
accordance with the specific identification method.
Other invested assets include strategic equity investments in
operating companies which are accounted for under the equity
method and partnership investments which are accounted for as
either
available-for-sale
or as an equity method investment.
69
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
Premiums and discounts arising from the purchase of certain debt
securities are treated as a yield adjustment over the estimated
useful life of the securities, adjusted for anticipated
prepayments using the retrospective interest method. Under this
method, the effective yield on a security is estimated. Such
estimates are based on the prepayment terms of the security,
past actual cash flows and assumptions as to future expected
cash flow. The future cash flow assumptions consider various
prepayment assumptions based on historical experience, as well
as current market conditions. Periodically, the effective yield
is re-estimated to reflect actual prepayments and updated future
cash flow assumptions. Upon a re-estimation, the security’s
book value is restated at the most recently calculated effective
yield, assuming that yield had been in effect since the security
was purchased. This treatment results in an increase or decrease
to net investment income (amortization of premium or discount)
at the new measurement date.
See Notes 3, 14 and 16(b) for further information regarding
investments.
| (c) | Derivative Financial Instruments |
Alleghany entered into an interest rate swap in 1997 for
purposes of matching interest expense with interest income. The
interest rate swap was accounted for as a hedge of the
obligation. Interest expense was recorded using the revised
interest rate. The interest rate swap matured in January 2007,
at no gain or loss to Alleghany.
| (d) | Cash |
For purposes of the consolidated statements of cash flows and
consolidated balance sheets, cash includes all deposit balances
with a bank that are available for immediate withdrawal, whether
interest-bearing or non-interest bearing.
| (e) | Premiums and Unearned Premiums |
Premiums are recognized as revenue on a pro-rata basis over the
term of an insurance policy. This recognition method is based on
the short term (twelve months or less) nature of the lines of
business written by AIHL’s insurance operating units, which
consist of property and casualty and surety lines. Unearned
premiums represent the portion of premiums written which are
applicable to the unexpired terms of insurance policies in force.
Premium balances receivable are reported net of an allowance for
estimated uncollectible premium amounts. Ceded premiums are
charged to income over the applicable terms of the various
reinsurance contracts with third-party reinsurers. See
Note 5.
| (f) | Reinsurance Recoverables |
AIHL’s insurance operating units reinsure a significant
portion of the risks they underwrite in order to mitigate their
exposure to losses, manage capacity, and protect capital
resources. Reinsuring loss exposures does not relieve
AIHL’s insurance operating units from their obligations to
policyholders. AIHL’s insurance operating units remain
liable to their policyholders for the portion reinsured to the
extent that any reinsurer does not meet the obligations assumed
under the reinsurance agreements. To minimize their exposure to
losses from a reinsurer’s inability to pay, AIHL’s
insurance operating units evaluate the financial condition of
their reinsurers upon placement of the reinsurance and
periodically thereafter.
Reinsurance recoverables (including amounts related to claims
incurred but not reported (“IBNR”) and prepaid
reinsurance premiums) are reported as assets. Amounts
recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured business.
Ceded premiums are charged to income over the applicable terms
of the various reinsurance contracts with third-party reinsurers.
Reinsurance contracts that do not result in a reasonable
possibility that the reinsurer may realize a significant loss
from the insurance risk assumed and that do not provide for the
transfer of significant insurance risk generally
70
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
do not meet the conditions for reinsurance accounting and are
accounted for as deposits. Alleghany currently does not have any
reinsurance contracts that qualify for deposit accounting. See
Note 5.
| (g) | Deferred Acquisition Costs |
Acquisition costs related to unearned premiums that vary with,
and are directly related to, the production of such premiums
(principally commissions, premium taxes, compensation and
certain other underwriting expenses) are deferred. Deferred
acquisition costs are amortized to expense as the related
premiums are earned. See Note 16(d).
Deferred acquisition costs are periodically reviewed to
determine their recoverability from future income, including
investment income, and if any such costs are determined to be
not recoverable they are charged to expense. During 2008, EDC
wrote-off its deferred acquisition cost asset of
$2.1 million, primarily reflecting a significant
acceleration in claims emergence and higher than anticipated
increases in industry-wide severity.
| (h) | Property and Equipment |
Property and equipment is recorded at cost, net of accumulated
depreciation and amortization. Depreciation of buildings and
equipment is principally calculated using the straight-line
method over the estimated useful life of the respective assets.
Estimated useful lives for such assets range from 3 to
20 years. Amortization of leasehold improvements is
principally calculated using the straight-line method over the
estimated useful life of the leasehold improvement or the life
of the lease, whichever is less. Rental expense on operating
leases is recorded on a straight-line basis over the term of the
lease, regardless of the timing of actual lease payments. See
Note 16(c).
| (i) | Goodwill and Other Intangible Assets |
Goodwill and other intangible assets, net of amortization, is
recorded as a result of business acquisitions. Other intangible
assets that are not deemed to have an indefinite useful life are
amortized over their estimated useful lives. Goodwill and other
intangible assets deemed to have an indefinite useful life are
tested annually in the fourth quarter of every year for
impairment. Goodwill and other intangible assets are also tested
whenever events and changes in circumstances suggest that the
carrying amount may not be recoverable. A significant amount of
judgment is required in performing goodwill and other intangible
assets impairment tests. These tests include estimating the fair
value of Alleghany’s operating units and other intangible
assets. With respect to goodwill, as required by GAAP, a
comparison is made between the estimated fair values of
Alleghany’s operating units with their respective carrying
amounts including goodwill. Under GAAP, fair value refers to the
amount for which the entire operating unit may be bought or
sold. The methods for estimating operating unit values include
asset and liability fair values and other valuation techniques,
such as discounted cash flows and multiples of earnings or
revenues. All of these methods involve significant estimates and
assumptions. If the carrying value exceeds estimated fair value,
there is an indication of potential impairment, and a second
step is performed to measure the amount of impairment. The
second step involves calculating an implied fair value of
goodwill by measuring the excess of the estimated fair value of
Alleghany’s operating units over the aggregate estimated
fair values of the individual assets less liabilities. If the
carrying value of goodwill exceeds the implied fair value of
goodwill, an impairment charge is recorded for the excess.
Subsequent reversal of any goodwill impairment charge is not
permitted.
In connection with impairment testing of goodwill and other
intangible assets as of December 31, 2008, Alleghany
determined that the $48.7 million of goodwill associated
with Alleghany’s acquisition of EDC was impaired in its
entirety. As a result, at December 31, 2008, Alleghany
recorded a non-cash charge of $48.7 million, which is
classified as a net realized capital loss in Alleghany’s
consolidated statement of earnings and represents the entire EDC
goodwill balance at such date. EDC also recorded a pre-tax,
non-cash impairment charge of $11.2 million in the 2009
second quarter, representing the entire carrying value of
EDC’s trade names (originally determined to have indefinite
useful lives), renewal rights, distribution rights and database
71
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
development, net of accumulated amortization. See Note 4
for further information on this impairment as well as
information on goodwill and other intangible assets.
| (j) | Income Taxes |
Alleghany files a consolidated federal income tax return with
its subsidiaries. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. See Note 8.
| (k) | Loss Reserves |
The reserves for losses and loss adjustment expenses represent
management’s best estimate of the ultimate cost of all
reported and unreported losses incurred through the balance
sheet date and include, but are not limited to: (i) the
accumulation of individual estimates for claims reported on
direct business prior to the close of an accounting period;
(ii) estimates received from reinsurers with respect to
reported claims which have been reinsured; (iii) estimates
for IBNR based on past experience modified for current trends
and industry data; and (iv) estimates of expenses for
investigating and settling claims based on past experience. The
reserves recorded are based on estimates resulting from the
review process, and differences between estimates and ultimate
payments are reflected as an expense in the statement of
earnings in the period in which the estimates are revised. See
Note 6.
| (l) | Revenue Recognition for Land Sales |
Revenue and profits from land sales are recognized using the
full accrual method when title has passed to the buyer, the
collectibility of the sales price is reasonably assured, the
required minimum cash down payment has been received, and
Alleghany has no continuing involvement with the property.
Alleghany records land sales under the full accrual method as
all requirements have been met.
| (m) | Earnings Per Share of Common Stock |
Basic earnings per share of common stock are based on the
average number of shares of common stock, par value $1.00 per
share, of Alleghany (“Common Stock”) outstanding
during the years ended December 31, 2009, 2008 and 2007,
respectively, retroactively adjusted for stock dividends.
Diluted earnings per share of Common Stock are based on those
shares used to calculate basic earnings per share of Common
Stock. Diluted earnings per share of Common Stock also include
the dilutive effect of stock-based compensation awards,
retroactively adjusted for stock dividends. See Note 12.
| (n) | Stock-Based Compensation Plans |
GAAP requires that the cost resulting from all stock-based
compensation transactions be recognized in the financial
statements, establishes fair value as the measurement objective
in accounting for stock-based compensation arrangements and
requires the application of the fair value based measurement
method in accounting for stock-based compensation transactions
with employees. Effective January 1, 2003, Alleghany
adopted the “fair value based method of accounting”
under GAAP, using the prospective transition method for awards
granted after January 1, 2003. GAAP treats non-employee
directors as employees for accounting purposes.
With respect to stock option grants, the fair value of each
option award is estimated on the date of grant using the
Black-Scholes option pricing model that uses the assumptions
noted in the following table. Expected volatilities are based on
historical volatility of the Common Stock. Alleghany uses
historical data to estimate option exercise and employee
termination within the valuation model. The expected term of
options granted is derived from the
72
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
output of the option valuation model and represents the period
of time that options granted are expected to be outstanding. The
risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect
at the time of the grant.
| 2009 | 2008 | 2007 | ||||||||||
|
Expected volatility
|
23 | % | 19 | % | 18 | % | ||||||
|
Expected dividends
|
— | — | — | |||||||||
|
Expected term (in years)
|
9 | 10 | 8-10 | |||||||||
|
Risk-free rate
|
3.2 | % | 3.8 | % | 5.2 | % | ||||||
See Note 10 for further information on stock option grants
as well as information on all other types of stock-based
compensation awards.
| (o) | Reclassification |
Certain prior year amounts have been reclassified to conform to
the 2009 presentation.
| (p) | Recent Accounting Standards |
Recently
Adopted
In June 2009, Financial Accounting Standards Board
(“FASB”) Statement No. 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162” (“SFAS 168”), was issued.
SFAS 168 establishes the FASB Accounting Standards
Codification (“FASB ASC”) as the single source of
authoritative accounting principles in the preparation of
financial statements in conformity with GAAP. SFAS 168,
which is referenced within the FASB ASC in Topic
105-10,
or
“FASB ASC
105-10,”
is effective for interim and annual periods ending after
September 15, 2009. Alleghany adopted SFAS 168 in the
2009 third quarter, and the implementation did not have any
impact on its results of operations and financial condition. All
public filings of Alleghany will now include references,
wherever appropriate, to the FASB ASC as the sole source of
authoritative literature.
In December 2007, FASB Statements No. 141 (revised 2007),
“Business Combinations” (“SFAS 141R”)
[FASB ASC
805-10],
and
No. 160, “Noncontrolling Interests in Consolidated
Financial Statements” (“SFAS 160”) [FASB ASC
810-10],
were issued. SFAS 141R replaces FASB Statement
No. 141, “Business Combinations.” SFAS 141R
requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition date
fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose
additional information regarding the nature and financial effect
of the business combination. SFAS 160 requires all entities
to report noncontrolling (minority) interests in subsidiaries in
the same way — as equity in the consolidated financial
statements. SFAS 160 also requires disclosure, on the face
of the consolidated statement of income, of the amounts of
consolidated net earnings attributable to the parent and to the
noncontrolling interest. Alleghany adopted SFAS 141R and
SFAS 160 for all business combinations initiated after
December 31, 2008, and the implementation did not have a
material impact on its results of operations and financial
condition.
In September 2006, FASB Statement No. 157, “Fair Value
Measurements” (“SFAS 157”) [FASB ASC
820-10],
was
issued. SFAS 157 provides guidance for using fair value to
measure assets and liabilities. SFAS 157 does not expand
the use of fair value to any new circumstances. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. Alleghany adopted the provisions of
SFAS 157 as of January 1, 2008, and the implementation
did not have a material impact on its results of operations and
financial condition. See Note 14.
In October 2008, FASB Staff Position
No. 157-3
(“FSP
FAS 157-3”)[FASB
ASC
820-10]
was issued. FSP
FAS 157-3
clarifies the application of SFAS 157 in an inactive
market. If a market becomes inactive, then the fair
73
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
value determination for securities in that market may be based
on inputs that are unobservable in the market, rather than being
based on either unadjusted quoted prices or observable market
inputs. FSP
FAS 157-3
is effective upon issuance, including periods for which
financial statements have not been issued. Alleghany adopted the
provisions of FSP
FAS 157-3
as of September 30, 2008, and the implementation did not
have a material impact on its results of operations and
financial condition. See Note 14.
In April 2009, FASB Staff Position
No. 157-4
(“FSP
FAS 157-4”)
[FASB ASC
820-10-65]
was issued. FSP
FAS 157-4
provides guidelines for making fair value measurements more
consistent with the principles presented in SFAS 157
regarding the determination of when a market is not considered
to be active and when a transaction is not considered to be
distressed. The determination of whether a market is not
considered to be active is based on an evaluation of a number of
factors. If such factors indicate that a market is not active,
it must then be determined whether a quoted price from that
market is associated with a distressed transaction based on the
facts and circumstances. FSP
FAS 157-4
also provides for additional financial statement disclosure. FSP
FAS 157-4
is effective for periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. Alleghany adopted the provisions of FSP
FAS 157-4
in the second quarter of 2009, and the implementation did not
have a material impact on its results of operations and
financial condition. See Note 14.
In April 2009, FASB Staff Position
No. 115-2
and
124-2
(“FSP
FAS 115-2
and
124-2”)
[FASB ASC
320-10-65],
was issued. FSP
FAS 115-2
and
124-2
provides additional guidance in accounting for and presenting
impairment losses on debt securities. If a decline in fair value
below the amortized cost exists at the balance sheet date for a
debt security, and the entity intends to sell the security or it
is more likely than not that the entity will sell the debt
security before recovery of its cost basis, an
other-than-temporary
impairment exists. Furthermore, the amount of the impairment
related to the credit losses must be recognized in earnings,
whereas the amount of the impairment related to other factors
must be recognized in other comprehensive income. FSP
FAS 115-2
and
124-2
also provides for additional financial statement disclosure. FSP
FAS 115-2
and
124-2
is
effective for periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. Alleghany adopted the provisions of FSP
FAS 115-2
and
124-2
in
the second quarter of 2009, and the implementation did not have
a material impact on its results of operations and financial
condition. As part of its implementation, Alleghany has
determined that current and prior period
other-than-temporary
impairment losses on debt securities were credit-related. See
Note 14.
In April 2009, FASB Staff Position
No. 107-1
and APB28-1 (“FSP
FAS 107-1
and APB28-1”) [FASB ASC
825-10-65],
was issued. FSP
FAS 107-1
and APB28-1 amend existing fair value disclosure requirements
for financial instruments by requiring that such disclosures be
made in interim financial statements. FSP
FAS 107-1
and APB28-1 is effective for periods ending after June 15,
2009, with early adoption permitted for periods ending after
March 15, 2009. Alleghany adopted the provisions of FSP
FAS 107-1
and APB28-1 in the second quarter of 2009, and the
implementation did not have a material impact on its results of
operations and financial condition. See Note 14.
In May 2009, FASB Statements No. 165, “Subsequent
Events” (“SFAS 165”) [FASB ASC
855-10],
was
issued. SFAS 165 establishes general standards related to
events that occur after the balance sheet date but before
financial statements are issued. SFAS 165 describes the
circumstances where events or transactions occurring after the
balance sheet date should be recognized in the financial
statements and provides for additional financial statement
disclosure. SFAS 165 is effective for interim and annual
periods ending after June 15, 2009. Alleghany adopted
SFAS 165 in the 2009 second quarter, and the implementation
did not have a material impact on its results of operations and
financial condition. Alleghany has evaluated subsequent events
through February 24, 2010.
In September 2009, FASB Accounting Standards Update
No. 2009-12
(“ASU2009-12”) [FASB ASC 820], was issued. ASU2009-12
allows investors to use net asset value as a practical expedient
to estimate fair value of investments in investment companies
(and like entities) that do not have readily determinable fair
values. ASU2009-12 does not apply to investments accounted for
on the equity method. ASU2009-12 is effective for interim and
annual periods ending after December 15, 2009, with early
application permitted. Alleghany has
74
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
adopted ASU2009-12 in the fourth quarter of 2009, and the
implementation did not have any impact on its results of
operations and financial condition. Alleghany’s partnership
investments accounted for as
available-for-sale
are subject to ASU2009-12. Net asset value quotes from the
third-party general partner of the entity in which such
investment is held, which will often be based on unobservable
market inputs, constitute the primary input in Alleghany’s
determination of the fair value. The fair value of
Alleghany’s
available-for-sale
partnership investments was $35.2 million at
December 31, 2009 and $32.0 million at
December 31, 2008.
Future
Application of Accounting Standards
In June 2009, FASB Statements No. 166, “Accounting for
Transfers of Financial Assets” (“SFAS 166”)
and No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”) were issued
[FASB ASC 860-10 and 810-10]. SFAS 166 and SFAS 167
change the way entities account for securitizations and
special-purpose entities. SFAS 166 is a revision to
Statement No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities,
”
and, among other things, will
eliminate the concept of a “qualifying special-purpose
entity,” change the requirements for derecognizing
financial assets, and require additional disclosure about
transfers of financial assets, including securitization
transactions and an entity’s continuing exposure to the
risks related to transferred financial assets. SFAS 167 is
a revision to FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities,” and
will change how a company determines when an entity that is
insufficiently capitalized or is not controlled through voting
rights (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an
entity is based on, among other things, an entity’s purpose
and design and a company’s ability to direct the activities
of the entity that most significantly impact the entity’s
economic performance. SFAS 166 and SFAS 167 are
generally effective for periods beginning in 2010. Alleghany
will adopt SFAS 166 and SFAS 167 in the 2010 first
quarter, and Alleghany does not believe the implementation will
have a material impact on its results of operations and
financial condition. Alleghany did not have any off-balance
sheet arrangements outstanding at December 31, 2009 or
December 31, 2008, including those that may involve the
types of entities contemplated in SFAS 166 and
SFAS 167.
In January 2010, FASB Accounting Standards Update
No. 2010-06
(“ASU2010-06”) [FASB ASC 820], was issued. ASU2010-06
provides for additional financial statement disclosure on fair
value measurements, including how fair values are measured.
ASU2010-06 is effective for interim and annual periods ending
after December 15, 2009. Alleghany will adopt ASU2010-06 in
the first quarter of 2010, and Alleghany does not believe the
implementation will have a material impact on its results of
operations and financial condition.
| (q) | Statutory Accounting Practices |
Alleghany’s insurance operating units, domiciled
principally in the States of California, New Hampshire,
Delaware, Wisconsin and Nebraska, prepare statutory financial
statements in accordance with the accounting practices
prescribed or permitted by the insurance departments of the
states of domicile. Prescribed statutory accounting practices
are those practices that are incorporated directly or by
reference in state laws, regulations and general administrative
rules applicable to all insurance enterprises domiciled in a
particular state. Permitted statutory accounting practices
include practices not prescribed by the domiciliary state, but
allowed by the domiciliary state regulatory authority. The
impact of any permitted accounting practices on statutory
surplus of Alleghany is not material. See Note 9(c).
| 2. | Discontinued Operations |
On October 20, 2008, Darwin, of which AIHL owned
approximately 55 percent, merged with Allied World
Assurance Company Holdings, Ltd. (“AWAC”) whereby AWAC
acquired all of the issued and outstanding shares of Darwin
common stock for cash consideration of $32.00 per share (the
“Transaction”). At that time, Alleghany received
aggregate proceeds of approximately $300 million in cash
for AIHL’s 9,371,096 shares of Darwin common stock.
Alleghany recorded an after-tax gain from the Transaction of
approximately $92.1 million in the
75
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 2. | Discontinued Operations, continued |
2008 fourth quarter, including approximately $9.5 million
of gain deferred at the time of Darwin’s initial public
offering in May 2006.
Alleghany has classified the operations of Darwin as
“discontinued operations” in its consolidated
financial statements for all periods presented.
Historical information related to the results of operations of
the discontinued operations of Darwin, as included in
Alleghany’s consolidated financial statements, is set forth
in the following table (in millions):
|
January 1, 2008
|
||||||||
|
Through
|
||||||||
|
October 19,
|
Year Ended
|
|||||||
| 2008 | December 31, 2007 | |||||||
|
Revenues
|
||||||||
|
Net premiums earned
|
$ | 170.9 | $ | 180.9 | ||||
|
Investment and all other income
|
20.7 | 22.6 | ||||||
| 191.6 | 203.5 | |||||||
|
Costs and expenses
|
||||||||
|
Loss and loss adjustment expenses
|
67.6 | 101.3 | ||||||
|
Commissions, brokerage and other underwriting expenses
|
65.2 | 50.9 | ||||||
|
All other operating expenses
|
17.9 | 5.9 | ||||||
| 150.7 | 158.1 | |||||||
|
Earnings before income taxes and minority interest
|
40.9 | 45.4 | ||||||
|
Income taxes
|
11.0 | 13.2 | ||||||
|
Earnings before minority interest
|
29.9 | 32.2 | ||||||
|
Minority interest*
|
14.6 | 20.7 | ||||||
|
Net earnings
|
$ | 15.3 | $ | 11.5 | ||||
| * | Represents the portion of Darwin’s earnings that is attributable to common stockholders other than Alleghany, as well as parent capital gains taxes incurred. These expense accruals were made at the AIHL level. |
Earnings before income taxes and minority interest during the
2008 period include a $32.5 million release of prior
accident year loss reserves ($21.1 million after tax and
before minority interest), reflecting favorable loss emergence.
Net earnings during the 2008 period exclude the gain recorded
associated with the Transaction of approximately
$92.1 million in the 2008 fourth quarter, including
approximately $9.5 million of gain deferred at the time of
Darwin’s initial public offering in May 2006.
76
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments |
Available-for-sale
securities at December 31, 2009 and 2008 are summarized as
follows (in millions):
|
Amortized
|
Gross
|
Gross
|
||||||||||||||
|
Cost
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| or Cost | Gains | Losses | Value | |||||||||||||
|
2009
|
||||||||||||||||
|
Consolidated
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock
|
$ | 530.9 | $ | 99.4 | $ | (5.8 | ) | $ | 624.5 | |||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
634.8 | 5.1 | (1.5 | ) | 638.4 | |||||||||||
|
Mortgage and asset-backed securities*
|
955.8 | 16.5 | (13.5 | ) | 958.8 | |||||||||||
|
States, municipalities, political subdivisions
|
1,202.2 | 35.0 | (3.2 | ) | 1,234.0 | |||||||||||
|
Foreign bonds
|
137.8 | 6.5 | — | 144.3 | ||||||||||||
|
Corporate bonds and other
|
305.0 | 8.9 | (0.4 | ) | 313.5 | |||||||||||
| 3,235.6 | 72.0 | (18.6 | ) | 3,289.0 | ||||||||||||
|
Short-term investments
|
262.9 | — | — | 262.9 | ||||||||||||
| $ | 4,029.4 | $ | 171.4 | $ | (24.4 | ) | $ | 4,176.4 | ||||||||
|
Industry Segment
|
||||||||||||||||
|
AIHL insurance group
|
$ | 3,744.7 | $ | 167.0 | $ | (23.3 | ) | $ | 3,888.4 | |||||||
|
Corporate activities
|
284.7 | 4.4 | (1.1 | ) | 288.0 | |||||||||||
| $ | 4,029.4 | $ | 171.4 | $ | (24.4 | ) | $ | 4,176.4 | ||||||||
77
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
|
Amortized
|
Gross
|
Gross
|
||||||||||||||
|
Cost
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| or Cost | Gains | Losses | Value | |||||||||||||
|
2008
|
||||||||||||||||
|
Consolidated
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock
|
$ | 453.5 | $ | 215.0 | $ | (48.7 | ) | $ | 619.8 | |||||||
|
Preferred stock
|
9.7 | — | — | 9.7 | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
274.7 | 11.9 | — | 286.6 | ||||||||||||
|
Mortgage and asset-backed securities*
|
707.7 | 10.1 | (63.3 | ) | 654.5 | |||||||||||
|
States, municipalities, political subdivisions
|
1,421.8 | 23.4 | (11.1 | ) | 1,434.1 | |||||||||||
|
Foreign bonds
|
172.5 | 6.6 | (1.8 | ) | 177.3 | |||||||||||
|
Corporate bonds and other
|
205.1 | 4.1 | (1.7 | ) | 207.5 | |||||||||||
| 2,781.8 | 56.1 | (77.9 | ) | 2,760.0 | ||||||||||||
|
Short-term investments
|
636.2 | — | — | 636.2 | ||||||||||||
| $ | 3,881.2 | $ | 271.1 | $ | (126.6 | ) | $ | 4,025.7 | ||||||||
|
Industry Segment
|
||||||||||||||||
|
AIHL insurance group
|
$ | 3,624.0 | $ | 79.2 | $ | (125.9 | ) | $ | 3,577.3 | |||||||
|
Corporate activities
|
257.2 | 191.9 | (0.7 | ) | 448.4 | |||||||||||
| 3,881.2 | $ | 271.1 | $ | (126.6 | ) | $ | 4,025.7 | |||||||||
| * | Consists primarily of residential mortgage-backed securities. |
The amortized cost and estimated fair value of debt securities
at December 31, 2009 by contractual maturity are shown
below (in millions). Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
|
Amortized
|
Fair
|
|||||||
| Cost | Value | |||||||
|
Short-term investments due in one year or less
|
$ | 262.9 | $ | 262.9 | ||||
|
Mortgage and asset-backed securities
|
955.8 | 958.8 | ||||||
|
Debt securities
|
||||||||
|
One year or less
|
285.7 | 288.8 | ||||||
|
Over one through five years
|
1,039.7 | 1,062.6 | ||||||
|
Over five through ten years
|
448.8 | 464.1 | ||||||
|
Over ten years
|
505.6 | 514.7 | ||||||
|
Equity securities
|
530.9 | 624.5 | ||||||
| $ | 4,029.4 | $ | 4,176.4 | |||||
The proceeds from sales of
available-for-sale
securities were $1.7 billion, $1.1 billion, and
$0.8 billion, in 2009, 2008 and 2007, respectively. The
amounts of gross realized gains and gross realized losses of
available-for-sale
securities were, respectively, $338.5 million and
$5.8 million in 2009, $259.9 million and
$59.4 million in 2008 and $103.1 million and
$2.6 million in 2007. The gross loss amounts exclude
78
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
other-than-temporary
impairment losses, as discussed below, and goodwill and related
impairment losses. See Note 4(a).
Alleghany holds its equity and debt securities as available for
sale, and as such, these securities are recorded at fair value.
Alleghany continually monitors the difference between cost and
the estimated fair value of its investments, which involves
uncertainty as to whether declines in value are temporary in
nature. If Alleghany believes a decline in the value of a
particular investment is temporary, Alleghany records the
decline as an unrealized loss in stockholders’ equity. If
the decline is deemed to be other than temporary, Alleghany
writes it down to the carrying value of the investment and
records an
other-than-temporary
impairment loss on its statement of earnings. In addition, under
GAAP, any portion of such decline that relates to debt
securities that is believed to arise from factors other than
credit is to be recorded as a component of other comprehensive
income.
Management’s assessment of a decline in value includes,
among other things: (i) the duration of time and the
relative magnitude to which fair value of the investment has
been below cost; (ii) the financial condition and near-term
prospects of the issuer of the investment;
(iii) extraordinary events, including negative news
releases and rating agency downgrades, with respect to the
issuer of the investment; (iv) Alleghany’s ability and
intent to hold an equity security for a period of time
sufficient to allow for any anticipated recovery; and
(v) whether it is more likely than not that Alleghany will
sell a debt security before recovery of its amortized cost
basis. A debt security is deemed impaired if it is probable that
Alleghany will not be able to collect all amounts due under the
security’s contractual terms. An equity security is deemed
impaired if, among other things, its decline in estimated fair
value has existed for twelve months or more or if its decline in
estimated fair value from its cost is greater than
50 percent, absent compelling evidence to the contrary.
Further, for securities expected to be sold, an
other-than-temporary
impairment loss is recognized if Alleghany does not expect the
fair value of a security to recover its cost prior to the
expected date of sale. If that judgment changes in the future,
Alleghany may ultimately record a realized loss after having
originally concluded that the decline in value was temporary.
Risks and uncertainties are inherent in the methodology
Alleghany uses to assess other-than-temporary declines in value.
Risks and uncertainties could include, but are not limited to,
incorrect assumptions about financial condition, liquidity or
future prospects, inadequacy of any underlying collateral, and
unfavorable changes in economic or social conditions, interest
rates or credit ratings.
Other-than-temporary
impairment losses in 2009 reflect $85.9 million of
unrealized losses that were deemed to be other than temporary
and, as such, are required to be charged against earnings. Of
the $85.9 million, $57.6 million related to equity
holdings in the energy sector, $16.5 million related to
equity holdings in various other sectors, and $11.8 million
related to debt security holdings (all of which were deemed to
be credit-related). The determination that unrealized losses on
such securities were other than temporary was primarily based on
the severity of the declines in fair value of such securities
relative to their cost as of the balance sheet date. Such severe
declines are primarily related to a significant deterioration of
U.S. equity market conditions during the latter part of
2008 and the first quarter of 2009, which abated somewhat in the
remainder of 2009.
Other-than-temporary
impairment losses in 2008 reflect $244.0 million related to
unrealized losses that were deemed to be other than temporary
and, as such, are required to be charged against earnings. Of
the $244.0 million of
other-than-temporary
impairment losses, $144.8 million related to equity
holdings in the energy sector, $96.0 million related to
equity holdings in various other sectors, and $3.2 million
related to debt security holdings (all of which were deemed to
be credit-related). Such severe declines are primarily related
to a significant deterioration of U.S. equity market
conditions during the latter part of 2008.
Other-than-temporary
impairment losses in 2007 reflect $7.7 million related to
unrealized losses that were deemed to be other than temporary
and, as such, are required to be charged against earnings.
79
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
After adjusting the cost basis of securities for the recognition
of unrealized losses through
other-than-temporary
impairment losses, the gross unrealized investment losses and
related fair value for debt securities and equity securities at
December 31, 2009 and December 31, 2008 were as
follows (in millions):
|
Gross
|
||||||||
|
Fair
|
Unrealized
|
|||||||
| Value | Losses | |||||||
|
2009
|
||||||||
|
Debt securities
|
||||||||
|
U.S. Government obligations
|
||||||||
|
Less than 12 months
|
$ | 225.5 | $ | 1.5 | ||||
|
More than 12 months
|
— | — | ||||||
|
Mortgage & asset-backed securities
|
||||||||
|
Less than 12 months
|
18.6 | 0.7 | ||||||
|
More than 12 months
|
149.2 | 12.8 | ||||||
|
States, municipalities & political subdivisions
bonds
|
||||||||
|
Less than 12 months
|
98.1 | 2.5 | ||||||
|
More than 12 months
|
16.1 | 0.7 | ||||||
|
Foreign bonds
|
||||||||
|
Less than 12 months
|
1.0 | — | ||||||
|
More than 12 months
|
— | — | ||||||
|
Corporate bonds and other
|
||||||||
|
Less than 12 months
|
50.7 | 0.4 | ||||||
|
More than 12 months
|
1.8 | — | ||||||
|
Total debt securities
|
||||||||
|
Less than 12 months
|
393.9 | 5.1 | ||||||
|
More than 12 months
|
167.1 | 13.5 | ||||||
|
Equity securities — Common Stock
|
||||||||
|
Less than 12 months
|
105.0 | 5.8 | ||||||
|
More than 12 months
|
— | — | ||||||
|
Equity securities — Preferred Stock
|
||||||||
|
Less than 12 months
|
— | — | ||||||
|
More than 12 months
|
— | — | ||||||
|
Total temporarily impaired securities
|
||||||||
|
Less than 12 months
|
498.9 | 10.9 | ||||||
|
More than 12 months
|
167.1 | 13.5 | ||||||
|
Total
|
$ | 666.0 | $ | 24.4 | ||||
80
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
|
Gross
|
||||||||
|
Fair
|
Unrealized
|
|||||||
| Value | Losses | |||||||
|
2008
|
||||||||
|
Debt securities
|
||||||||
|
U.S. Government obligations
|
||||||||
|
Less than 12 months
|
$ | — | $ | — | ||||
|
More than 12 months
|
— | — | ||||||
|
Mortgage & asset-backed securities
|
||||||||
|
Less than 12 months
|
311.9 | 46.1 | ||||||
|
More than 12 months
|
57.0 | 17.2 | ||||||
|
States, municipalities & political subdivisions
bonds
|
||||||||
|
Less than 12 months
|
380.1 | 8.6 | ||||||
|
More than 12 months
|
20.9 | 2.5 | ||||||
|
Foreign bonds
|
||||||||
|
Less than 12 months
|
54.9 | 1.8 | ||||||
|
More than 12 months
|
— | — | ||||||
|
Corporate bonds and other
|
||||||||
|
Less than 12 months
|
39.8 | 1.1 | ||||||
|
More than 12 months
|
11.4 | 0.6 | ||||||
|
Total debt securities
|
||||||||
|
Less than 12 months
|
786.7 | 57.6 | ||||||
|
More than 12 months
|
89.3 | 20.3 | ||||||
|
Equity securities — Common Stock
|
||||||||
|
Less than 12 months
|
151.5 | 48.7 | ||||||
|
More than 12 months
|
— | — | ||||||
|
Equity securities — Preferred Stock
|
||||||||
|
Less than 12 months
|
— | — | ||||||
|
More than 12 months
|
— | — | ||||||
|
Total temporarily impaired securities
|
||||||||
|
Less than 12 months
|
938.2 | 106.3 | ||||||
|
More than 12 months
|
89.3 | 20.3 | ||||||
|
Total
|
$ | 1,027.5 | $ | 126.6 | ||||
As of December 31, 2009, Alleghany held a total of 137 debt
and equity investments that were in an unrealized loss position,
of which 51 investments, all related to debt securities, were in
an unrealized loss position continuously for 12 months or
more. Of the equity investments that were in an unrealized loss
position, all relate to common stocks. Of the debt investments
that were in an unrealized loss position, most relate to
mortgage and asset-backed securities, states, municipalities and
political subdivisions bonds and U.S. government
obligations. At December 31, 2009, virtually all of
Alleghany’s debt securities were rated investment grade.
At December 31, 2009, non-income producing invested assets
were insignificant.
81
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
At December 31, 2009 and 2008, investments carried at fair
value totaling $286.2 million and $294.4 million,
respectively, were on deposit with various states or
governmental agencies to comply with state insurance regulations.
Net investment income was as follows (in millions):
| 2009 | 2008 | 2007 | ||||||||||
|
Interest income
|
$ | 113.7 | $ | 122.2 | $ | 135.1 | ||||||
|
Dividend income
|
15.2 | 20.1 | 17.5 | |||||||||
|
Investment expenses
|
(7.2 | ) | (4.7 | ) | (6.3 | ) | ||||||
|
Equity in (losses) earnings of Homesite, net of purchase
accounting adjustments
|
(1.1 | ) | 0.3 | 4.0 | ||||||||
|
Other investment (loss) income
|
(18.7 | )* | (7.7 | ) | (4.2 | ) | ||||||
| $ | 101.9 | $ | 130.2 | $ | 146.1 | |||||||
| * | Reflects $21.9 million of losses related to Alleghany’s investment in ORX, net of purchase accounting adjustments, due primarily to the asset impairment charges incurred as of December 31, 2008, but finalized and recorded in 2009, arising from relatively low energy prices as of December 31, 2008. |
| 4. | Acquisitions |
| (a) | EDC |
On July 18, 2007 (the “Acquisition Date”), AIHL
completed its acquisition of EDC for a purchase price of
approximately $198.1 million, including approximately
$5.6 million of incurred acquisition costs. EDC is included
as an insurance operating unit within AIHL for segment reporting
purposes.
The acquisition has been accounted for by the purchase method of
accounting in accordance with GAAP, and therefore, the assets
acquired and liabilities assumed have been recorded at their
estimated fair values at the Acquisition Date. Any excess of the
purchase price over the estimated fair values of the assets
acquired, including identifiable intangible assets, and
liabilities assumed is recorded as goodwill. Acquired
identifiable intangible assets include trade names and licenses,
which were determined to have indefinite useful lives. Acquired
identifiable assets also include renewal rights, distribution
rights, and database development. The estimated fair value of
assets acquired, including identifiable intangible assets, and
liabilities assumed at the Acquisition Date was as follows (in
millions):
|
Available-for-sale
securities
|
$ | 257.5 | ||
|
Goodwill
|
48.7 | * | ||
|
Other intangible assets
|
13.9 | ** | ||
|
All other assets
|
81.1 | |||
|
Total assets assumed
|
$ | 401.2 | ||
|
Liabilities assumed (primarily losses and loss adjustment
expenses)
|
203.1 | |||
|
Net assets acquired
|
$ | 198.1 | ||
| * | In connection with impairment testing of goodwill and other intangible assets as of December 31, 2008, Alleghany determined that the $48.7 million of goodwill associated with Alleghany’s acquisition of EDC was impaired. As a result, as of December 31, 2008, Alleghany recorded a non-cash charge of $48.7 million, which is classified as a net realized capital loss in the consolidated statement of earnings and represents the entire EDC goodwill balance at such date. The estimation of EDC’s fair value was based primarily on observing the stock |
82
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 4. | Acquisitions, continued |
| market-based valuations of other publicly-traded insurance carriers. The factors that contributed to Alleghany’s determination that the EDC goodwill was impaired include the recent unfavorable conditions in the U.S. economy and California workers’ compensation insurance market, combined with EDC’s poor results during 2008. There was no resulting impact to Alleghany’s tax balances as a result of this charge. | ||
| ** | In June 2009, EDC determined that it was unable to write business at rates it deemed adequate due to the current state of the California workers’ compensation market. As a result, EDC ceased soliciting new or renewal business on a direct basis commencing August 1, 2009 and took corresponding expense reduction steps, including staff reductions, in light of such determination. As a result of EDC’s determination to cease writing business on a direct basis and certain other factors, on June 30, 2009, EDC recorded a pre-tax, non-cash impairment charge of $11.2 million in the 2009 second quarter, which is classified as a net realized capital loss in Alleghany’s consolidated statement of earnings. The $11.2 million charge represents the entire carrying value of EDC’s trade names (originally determined to have indefinite useful lives), renewal rights, distribution rights, and database development, net of accumulated amortization. In addition, immaterial accruals were established related to terminated employee severance payments and other charges. During the 2009 third quarter, EDC sold the renewal rights of its directly placed workers’ compensation insurance policies and certain other assets and rights to an independent insurance brokerage. |
| (b) | Homesite |
On December 29, 2006, Alleghany invested
$120.0 million in Homesite, a national, full-service,
mono-line provider of homeowners insurance. As consideration for
its $120.0 million investment, Alleghany received
85,714 shares of the common stock of Homesite, representing
approximately 33 percent of the Homesite common stock after
giving effect to the investment. As part of its investment,
Alleghany incurred $0.7 million of transaction costs.
Homesite is reported as a component of other invested assets.
Alleghany’s interest in Homesite is included in corporate
activities for segment reporting purposes and is accounted for
under the equity method of accounting.
| (c) | ORX |
On July 18, 2008, Alleghany, through its subsidiary
Alleghany Capital Corporation, acquired a minority voting
interest in ORX, a regional oil and gas exploration and
production company, through a purchase of preferred stock for
$50.0 million. The $50.0 million cost includes
$16.1 million of goodwill. The goodwill is not deductible
for tax purposes. This investment is reflected in
Alleghany’s financial statements in other invested assets.
Alleghany’s interest in ORX is included in corporate
activities for segment reporting purposes and is accounted for
under the equity method of accounting.
Losses related to Alleghany’s investment in ORX, net of
purchase accounting adjustments, were $21.9 million in 2009
and were due primarily to asset impairment charges incurred as
of December 31, 2008, but finalized in the 2009 third
quarter, arising from relatively low energy prices as of
December 31, 2008.
83
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 4. | Acquisitions, continued |
| (d) | Goodwill and Intangible Assets |
The amount of goodwill and intangible assets, net of
amortization expense, separately reported on Alleghany’s
consolidated balance sheets at December 31, 2009 and 2008
is as follows (in millions):
| 2009 | 2008 | |||||||
|
AIHL insurance group — Goodwill
|
$ | 48.1 | $ | 45.1 | ||||
|
AIHL insurance group — Intangible assets
|
||||||||
|
Agency relationships
|
$ | 16.8 | $ | 11.5 | ||||
|
State insurance licenses
|
25.8 | 26.1 | ||||||
|
Trade name
|
35.5 | 39.2 | ||||||
|
Brokerage and reinsurance relationships
|
19.2 | 21.4 | ||||||
|
Renewal and distribution rights
|
0.3 | 3.3 | ||||||
|
Other
|
— | 4.6 | ||||||
| $ | 97.6 | $ | 106.1 | |||||
The economic useful lives of intangible assets are as follows:
agency relationships — 15 years; state insurance
licenses — indefinite; trade names —
indefinite; broker and reinsurance relationships —
15 years; and renewal and distribution rights —
between 5 and 10 years. Accumulated amortization expense as
of December 31, 2009 and 2008 is $47.6 million and
$46.0 million, respectively.
| 5. | Reinsurance |
| (a) | AIHL Reinsurance Recoverable |
In the ordinary course of business, AIHL’s insurance
operating units purchase reinsurance in order to mitigate their
exposure to losses, manage capacity, and protect capital
resources. If the assuming reinsurers are unable or unwilling to
meet the obligations assumed under the applicable reinsurance
agreements, AIHL’s insurance operating units would remain
liable to their policyholders for such reinsurance portion not
paid by their reinsurers.
Reinsurance recoverables at December 31, 2009 and 2008
consist of the following (in millions):
| 2009 | 2008 | |||||||
|
Reinsurance recoverables on paid losses
|
$ | 28.5 | $ | 48.1 | ||||
|
Ceded outstanding losses and loss adjustment expenses
|
947.7 | 1,008.3 | ||||||
|
Reinsurance recoverables
|
$ | 976.2 | $ | 1,056.4 | ||||
Approximately 93.1 percent of AIHL’s reinsurance
recoverables balance at December 31, 2009 was due from
reinsurers having an A.M. Best financial strength rating of
A (Excellent) or higher. Information regarding concentration of
AIHL’s reinsurance recoverables at December 31, 2009
is as follows (dollars in millions):
|
Reinsurer(1)
|
Rating(2) | Dollar Amount | Percentage | |||||||||
|
Swiss Reinsurance Company
|
A (Excellent | ) | $ | 174.3 | 17.9 | % | ||||||
|
The Chubb Corporation
|
A++ (Superior | ) | 105.8 | 10.8 | % | |||||||
|
Platinum Underwriters Holdings, Ltd.
|
A (Excellent | ) | 97.1 | 9.9 | % | |||||||
|
All other reinsurers
|
599.0 | 61.4 | % | |||||||||
|
Total
|
$ | 976.2 | 100.0 | % | ||||||||
84
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 5. | Reinsurance, continued |
| (1) | Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed reinsurer. | |
| (2) | Represents the A.M. Best rating for the applicable reinsurance subsidiary or subsidiaries from which the reinsurance recoverable is due. |
At December 31, 2009, AIHL also had fully collateralized
reinsurance recoverables of $120.3 million due from Darwin,
now a subsidiary of AWAC. The A.M. Best financial strength
rating of Darwin was A (Excellent) at December 31, 2009.
AIHL had no allowance for uncollectible reinsurance as of
December 31, 2009.
| (b) | Prior Year Acquisitions |
In connection with the acquisition by Alleghany of Platte River
in 2002 and the acquisition by RSUI Indemnity Company
(“RIC”), a wholly-owned subsidiary of RSUI, of
Landmark American Insurance Company (“Landmark”) in
2003 (discussed in more detail below), the sellers contractually
retained all of the loss and loss adjustment expense
liabilities. These contractual provisions constituted loss
reserve guarantees as contemplated under GAAP.
On January 3, 2002, Alleghany acquired Platte River from
Swiss Reinsurance America Corporation (“Swiss Re
America”) pursuant to a Stock Purchase Agreement dated as
of December 5, 2001, and transferred Platte River to AIHL
pursuant to a Contribution Agreement dated January 3, 2002.
The Stock Purchase Agreement provides that Swiss Re America
shall indemnify and hold harmless Alleghany, AIHL and Platte
River and their respective directors, officers and employees
from and against any and all liabilities arising out of binders,
policies, and contracts of insurance issued by Platte River to
the date of closing under the Stock Purchase Agreement. AIHL
recorded a reinsurance recoverable and a corresponding loss
reserve liability in the amount of $181.3 million at the
time it acquired Platte River. Such reinsurance recoverable and
loss reserve liability may change as losses are reported. Such
amounts were $17.9 million, $19.6 million and
$28.7 million for Platte River at December 31, 2009,
2008 and 2007, respectively.
On September 2, 2003, RIC acquired Landmark from Guaranty
National Insurance Company (“Guaranty National”)
pursuant to a Stock Purchase Agreement dated as of June 6,
2003. In contemplation of the sale of Landmark to RIC, Landmark
and Royal Indemnity Company, an affiliate of Guaranty National
(“Royal Indemnity”), entered into a 100 percent
Quota Share Reinsurance Agreement and an Assumption of
Liabilities Agreement, each dated as of September 2, 2003.
Pursuant to these two agreements, Royal Indemnity assumed all of
Landmark’s liabilities of any nature arising out of or
relating to all policies, binders, and contracts of insurance
issued in Landmark’s name prior to the closing under the
Stock Purchase Agreement, and all other liabilities of Landmark.
The reinsurance recoverable and loss reserve liability recorded
was $5.4 million, $10.8 million and $17.7 million
at December 31, 2009, 2008 and 2007, respectively.
85
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 5. | Reinsurance, continued |
| (c) | AIHL Premium Activity |
The following table indicates property and casualty premiums
written and earned for the years ended December 31, 2009,
2008 and 2007 (in millions):
| Written | Earned | |||||||
|
2009
|
||||||||
|
Premiums direct
|
$ | 1,238.8 | $ | 1,278.9 | ||||
|
Premiums assumed
|
$ | 20.3 | $ | 19.1 | ||||
|
Premiums ceded
|
$ | 428.3 | $ | 453.0 | ||||
|
2008
|
||||||||
|
Premiums direct
|
$ | 1,324.2 | $ | 1,409.7 | ||||
|
Premiums assumed
|
$ | 16.5 | $ | 17.2 | ||||
|
Premiums ceded
|
$ | 442.5 | $ | 478.2 | ||||
|
2007
|
||||||||
|
Premiums direct
|
$ | 1,488.9 | $ | 1,580.1 | ||||
|
Premiums assumed
|
$ | 17.9 | $ | 19.3 | ||||
|
Premiums ceded
|
$ | 544.3 | $ | 625.1 | ||||
In general, AIHL’s insurance operating units obtain
reinsurance on a treaty and facultative basis.
Ceded loss recoveries for AIHL included in Alleghany’s
consolidated statements of earnings were approximately
$197.1 million, $236.9 million and $214.6 million
at December 31, 2009, 2008 and 2007, respectively.
| (d) | RSUI |
RSUI reinsures its property lines of business through a program
consisting of surplus share treaties, facultative placements,
per risk, and catastrophe excess of loss treaties. Under its
surplus share treaties, which generally provide coverage on a
risk attaching basis (the treaties cover policies which become
effective during the treaty coverage period) from January 1 to
December 31, RSUI is indemnified on a
pro rata
basis
against covered property losses. The amount indemnified is based
on the proportionate share of risk ceded after consideration of
a stipulated dollar amount of “line” for RSUI to
retain in relation to the entire limit written. RSUI ceded
approximately 29 percent of its property gross premiums
written in 2009 under these surplus share treaties. Under
RSUI’s
2009-2010
per risk reinsurance program, which generally provides coverage
on an annual basis for losses occurring from May 1 to the
following April 30, RSUI is reinsured for
$90.0 million in excess of a $10.0 million net
retention per risk after the application of the surplus share
treaties and facultative reinsurance.
RSUI’s catastrophe reinsurance program (which covers
catastrophe risks including, among others, windstorms and
earthquakes) and per risk reinsurance program run on an annual
basis from May 1 to the following April 30. The
2009-2010
program provides coverage in two layers for $400.0 million
of losses in excess of a $100.0 million net retention after
application of the surplus share treaties, facultative
reinsurance and per risk covers. The first layer provides
coverage for $100.0 million of losses, before a
33.15 percent co-participation by RSUI, in excess of the
$100.0 million net retention, and the second layer provides
coverage for $300.0 million of losses, before a
5 percent co-participation by RSUI, in excess of
$200.0 million. In addition, RSUI’s property per risk
reinsurance program for the
2009-2010
period provides RSUI with coverage for $90.0 million of
losses in excess of a $10.0 million net retention per risk
after application of the surplus share treaties and reinsurance.
RSUI reinsures its other lines of business through quota share
treaties, except for professional liability and binding
authority lines where RSUI retains all of such business.
RSUI’s quota share reinsurance treaty for umbrella/excess
for the period June 1, 2009 to May 31, 2010 provides
coverage for policies with limits up to $30.0 million,
86
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 5. | Reinsurance, continued |
with RSUI ceding 35 percent of the premium and loss for
policies with limits up to $15.0 million and ceding
67.5 percent of the premium and loss for policies with
limits in excess of $15.0 million up to $30.0 million.
RSUI’s quote share primary casualty lines treaty for the
period April 15, 2009 to April 14, 2010 provides
coverage for policies with limits up to $2.0 million, with
RSUI ceding 25 percent of the premium. RSUI’s D&O
liability line quota share reinsurance treaty for the period
July 1, 2009 to June 30, 2010 provides coverage for
policies with limits up to $20.0 million, with RSUI ceding
35 percent of the premium and loss for all policies with
limits up to $10.0 million and ceding 60 percent of
the premium and loss for policies with limits in excess of
$10.0 million up to $20.0 million.
| (e) | CATA |
CATA uses reinsurance to protect against severity losses. In
2009, CATA reinsured individual property and casualty and
contract surety risks in excess of $1.5 million with
various reinsurers. As of December 1, 2009, the commercial
surety line was reinsured for individual losses above
$1.5 million. In addition, CATA purchases facultative
reinsurance coverage for risks in excess of $6.0 million on
property and casualty and $15.0 million on commercial
surety.
| (f) | EDC |
EDC uses reinsurance to protect against catastrophe losses. As
of December 31, 2009, EDC retained the first $1.0 million of
loss per occurrence and purchased reinsurance with various
reinsurers for $19.0 million above that level. Any loss above
$20.0 million would be the sole responsibility of EDC.
| 6. | Liability for Losses and Loss Adjustment Expenses |
Activity in liability for losses and loss adjustment expenses in
2009, 2008 and 2007 is summarized as follows (in millions):
| 2009 | 2008 | 2007 | ||||||||||
|
Reserves as of January 1
|
$ | 2,578.6 | $ | 2,379.7 | $ | 2,228.9 | ||||||
|
Reserves acquired
|
— | — | 165.0 | |||||||||
|
Less: reinsurance recoverables
|
1,008.3 | 966.8 | 1,101.4 | |||||||||
|
Net reserves
|
1,570.3 | 1,412.9 | 1,292.5 | |||||||||
|
Incurred loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
460.0 | 612.8 | 480.1 | |||||||||
|
Prior years
|
(17.9 | ) | (42.8 | ) | (31.1 | ) | ||||||
|
Total incurred loss, net of reinsurance
|
442.1 | 570.0 | 449.0 | |||||||||
|
Paid loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
83.5 | 116.4 | 71.7 | |||||||||
|
Prior years
|
355.6 | 296.2 | 256.9 | |||||||||
|
Total paid loss, net of reinsurance
|
439.1 | 412.6 | 328.6 | |||||||||
|
Reserves, net of reinsurance recoverables, as of December 31
|
1,573.3 | 1,570.3 | 1,412.9 | |||||||||
|
Reinsurance recoverables, as of December 31*
|
947.7 | 1,008.3 | 966.8 | |||||||||
|
Reserves, gross of reinsurance recoverables, as of December 31
|
$ | 2,521.0 | $ | 2,578.6 | $ | 2,379.7 | ||||||
| * | Reinsurance recoverables in this table include only ceded loss reserves. Amounts reflected under the caption “Reinsurance recoverables” on Alleghany’s consolidated balance sheets also include paid loss recoverables. |
Gross loss and loss adjustment expense reserves at
December 31, 2009 decreased $57.6 million from
December 31, 2008, due to reserve decreases in property of
$116.8 million and certain other lines of business totaling
$25.1 million, largely offset by increases in casualty and,
to a lesser extent, workers’ compensation lines of
87
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 6. | Liability for Losses and Loss Adjustment Expenses, continued |
business of $65.8 million and $18.5 million,
respectively. The decrease in property gross loss and loss
adjustment reserves is mainly due to loss payments made by RSUI
on hurricane related losses incurred in prior years. The
increase in casualty gross loss and loss adjustment expense
reserves primarily reflects anticipated loss reserves on current
accident year gross premiums earned and limited gross paid loss
activity for the current and prior accident years at RSUI,
partially offset by RSUI’s release of prior accident year
reserves for D&O liability, professional liability and
general liability lines of business. The increase in
workers’ compensation gross loss and loss adjustment
expense reserves primarily reflects an increase by EDC of
current and prior accident year reserves during 2009, partially
offset by the impact of EDC’s decision to cease soliciting
new or renewal business on a direct basis commencing
August 1, 2009.
Gross loss and loss adjustment expense reserves increased by
$198.9 million during 2008, from $2,379.7 million at
December 31, 2007 to $2,578.6 million at
December 31, 2008. Of this increase, $153.4 million
was due to casualty lines of business, $40.0 million was
due to workers’ compensation line of business and
$33.8 million was due to property lines of business. These
increases were partially offset by a modest decrease in other
reserves. The increase in casualty gross loss and loss
adjustment expense reserves primarily reflects anticipated loss
reserves on current accident year gross premiums earned and
limited gross paid loss activity for the current and prior
accident years at RSUI. Such increases for RSUI were partially
offset by net releases of prior accident year reserves. The
increase in workers’ compensation gross loss and loss
adjustment expense reserves primarily relates to increases to
both current and prior accident year reserves by EDC. The
increase in property gross loss and loss adjustment expense
reserves primarily reflects three significant catastrophe losses
incurred by RSUI during the third quarter of 2008 (Hurricanes
Ike, Gustav, and Dolly). The decrease in other reserves is due
primarily to a reduction in loss and loss adjustment expense
reserves acquired in connection with prior acquisitions which
are ceded 100 percent to the sellers.
The above reserve changes included
increases / (decreases) to prior year net reserves,
which are summarized as follows (in millions):
| 2009 | 2008 | |||||||
|
RSUI:
|
||||||||
|
Net casualty reserve releases
|
$ | (38.4 | ) | $ | (43.7 | ) | ||
|
Reserve release for third quarter 2008 hurricanes
|
(9.9 | ) | — | |||||
|
Non-catastrophe property case reserve re-estimation
|
11.5 | (6.2 | ) | |||||
|
All other, net
|
1.6 | (4.8 | ) | |||||
| $ | (35.2 | ) | $ | (54.7 | ) | |||
|
CATA:
|
||||||||
|
Net insurance reserve releases
|
$ | (10.7 | ) | $ | (11.8 | ) | ||
|
EDC:
|
||||||||
|
Net workers’ compensation increase
|
$ | 26.5 | $ | 25.4 | ||||
|
All other, net
|
1.5 | (1.7 | ) | |||||
| $ | 28.0 | $ | 23.7 | |||||
|
Total incurred related to prior years
|
$ | (17.9 | ) | $ | (42.8 | ) | ||
The more significant prior year adjustments affecting 2009 and
2008 are summarized as follows:
| • | For RSUI, loss and loss adjustment expenses for 2009 reflect a net $38.4 million release of prior accident year casualty loss reserves, compared with a net $43.7 million release of prior accident year casualty loss reserves during 2008. Both amounts relate primarily to D&O liability, professional liability, and general |
88
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 6. | Liability for Losses and Loss Adjustment Expenses, continued |
| liability lines of business for the 2003 through 2007 accident years and reflects favorable loss emergence, compared with loss emergence patterns assumed in earlier periods for such lines of business. Specifically, cumulative losses for such lines of business, which include both loss payments and case reserves, in respect of prior accident years were expected to be higher through December 31, 2009 than the actual cumulative losses through that date. This amount of lower cumulative losses, expressed as a percentage of carried loss and loss adjustment expense reserves at the beginning of the year, was 2.9 percent. Such reduction did not impact the assumptions used in estimating RSUI’s loss and loss adjustment expense liabilities for business earned in 2009. For RSUI, loss and loss adjustment expenses for 2009 also reflect a net $9.9 million release of prior accident year loss reserves related to 2008 third quarter Hurricanes Ike, Gustav and Dolly. |
| • | For CATA, loss and loss adjustment expenses for 2009 reflect a net $10.7 million release of prior accident year loss reserves, compared with a net $11.8 million release of prior accident year loss reserves during 2008. Both amounts relate primarily to favorable loss emergence in the casualty and surety lines of business, compared with loss emergence patterns assumed in earlier periods for such lines of business. Specifically, cumulative losses for such lines of business, which include both loss payments and case reserves, in respect of prior accident years were expected to be higher through December 31, 2009 than the actual cumulative losses through that date. This amount of lower cumulative losses, expressed as a percentage of carried loss and loss adjustment expense reserves at the beginning of the year, was 2.6 percent. Such reduction did not impact the assumptions used in estimating CATA’s loss and loss adjustment expense liabilities for business earned in 2009. | |
| • | For EDC, workers’ compensation loss and loss adjustment expenses for 2009 reflect a $26.5 million increase of prior accident year workers’ compensation loss reserves, compared with a $25.4 million increase of prior accident year workers’ compensation loss reserves during 2008. Both such reserve increases primarily reflect a significant acceleration in claims emergence and higher than anticipated increases in industry-wide severity. In addition, the $26.5 million increase in 2009 also reflects the estimated impact of the judicial decisions by the Workers’ Compensation Appeals Board, or “WCAB.” Such WCAB decisions related to permanent disability determinations that have materially weakened prior workers’ compensation reforms instrumental in reducing medical and disability costs in earlier years. These decisions are in the process of being appealed to the California appellate courts but will continue in effect during the appeals process. With respect to the $26.5 million increase for prior accident years, $17.7 million primarily reflected higher than expected paid losses and $8.8 million reflected the estimated impact of the WCAB decisions. Cumulative paid losses in respect of prior accident years were expected to be lower through June 30, 2009 (the date of the reserve increase) than the actual cumulative paid losses through that date. This amount of higher cumulative paid losses, expressed as a percentage of carried loss and loss adjustment expense reserves at the beginning of the year, was 1.5 percent. Such increases impacted the assumptions used in estimating EDC’s loss and loss adjustment expense liabilities for business earned in 2009 and 2008, causing an increase of current accident year reserves of $8.0 million and $10.5 million, respectively. Of the $8.0 million, $6.2 million primarily reflected higher than expected paid losses and the remainder reflected the estimated impact of the WCAB decisions |
| 7. | Credit Agreement |
Until October 23, 2009, Alleghany was party to a three-year
unsecured credit agreement (“Credit Agreement”) with a
bank syndicate, which provided commitments for revolving credit
loans in an aggregate principal amount of up to
$200.0 million. The Credit Agreement expired on
October 23, 2009 with no amounts outstanding thereunder.
There were no borrowings under the Credit Agreement in 2009.
89
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 8. | Income Taxes |
Income tax expense (benefit) from continuing operations consists
of the following (in millions):
|
State and
|
||||||||||||
| Federal | Foreign | Total | ||||||||||
|
2009
|
||||||||||||
|
Current
|
$ | 123.3 | $ | 2.4 | $ | 125.7 | ||||||
|
Deferred
|
(1.1 | ) | (0.2 | ) | (1.3 | ) | ||||||
| $ | 122.2 | $ | 2.2 | $ | 124.4 | |||||||
|
2008
|
||||||||||||
|
Current
|
$ | 84.3 | $ | 1.7 | $ | 86.0 | ||||||
|
Deferred
|
(63.5 | ) | (2.0 | ) | (65.5 | ) | ||||||
| $ | 20.8 | $ | (0.3 | ) | $ | 20.5 | ||||||
|
2007
|
||||||||||||
|
Current
|
$ | 166.9 | $ | 3.6 | $ | 170.5 | ||||||
|
Deferred
|
(24.5 | ) | (1.2 | ) | (25.7 | ) | ||||||
| $ | 142.4 | $ | 2.4 | $ | 144.8 | |||||||
The difference between the federal income tax rate and the
effective income tax rate on continuing operations is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Change in estimates and other
true-ups
|
— | (0.7 | ) | 1.2 | ||||||||
|
Income subject to dividends-received deduction
|
(0.8 | ) | (6.8 | ) | (0.8 | ) | ||||||
|
Tax-exempt interest
|
(3.5 | ) | (22.2 | ) | (2.5 | ) | ||||||
|
State taxes, net of federal tax benefit
|
0.4 | — | 0.4 | |||||||||
|
Goodwill impairment
|
— | 27.9 | — | |||||||||
|
Other, net
|
0.4 | 0.4 | 0.2 | |||||||||
| 31.5 | % | 33.6 | % | 33.5 | % | |||||||
The lower effective tax rate in 2009 primarily reflects the
absence of certain permanent tax differences, partially offset
by the lower impact of tax-exempt income on Alleghany’s
increased earnings in the 2009 period over the 2008 period. The
effective tax rate in 2008, and to a lesser extent 2007, reflect
certain permanent tax differences that had the effect of
increasing the effective tax rates for those years. For 2008,
such permanent tax differences relate to a $48.7 million
non-deductible goodwill impairment charge incurred. For 2007, a
net tax adjustment of $5.2 million was incurred, resulting
primarily from the reduction of estimated deferred tax assets
related to unused foreign tax credits.
90
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 8. | Income Taxes, continued |
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2009 and 2008 are as follows
(in millions):
| 2009 | 2008 | |||||||
|
Deferred tax assets
|
||||||||
|
Foreign tax credit carry forward
|
$ | — | $ | 1.1 | ||||
|
State net operating loss carry forward
|
15.3 | 15.0 | ||||||
|
Reserves for impaired assets
|
3.1 | 2.3 | ||||||
|
Expenses deducted for tax purposes when paid
|
1.4 | 1.8 | ||||||
|
Other than temporary impairment
|
48.4 | 69.5 | ||||||
|
Property and casualty loss reserves
|
67.6 | 66.5 | ||||||
|
Unearned premium reserves
|
29.3 | 31.5 | ||||||
|
Performance shares
|
1.7 | 1.9 | ||||||
|
Unrealized loss on investments
|
— | 20.6 | ||||||
|
Compensation accruals
|
48.9 | 43.7 | ||||||
|
Other
|
16.6 | 4.5 | ||||||
|
Deferred tax assets
|
$ | 232.3 | $ | 258.4 | ||||
|
Valuation allowance
|
$ | (14.6 | ) | $ | (14.5 | ) | ||
|
Total net deferred tax assets
|
$ | 217.7 | $ | 243.9 | ||||
|
Deferred tax liabilities
|
||||||||
|
Unrealized gain on investments
|
$ | 54.1 | $ | 68.7 | ||||
|
Tax over book depreciation
|
1.4 | 1.4 | ||||||
|
Deferred gains
|
3.8 | 2.1 | ||||||
|
Burlington Northern redemption
|
— | 4.2 | ||||||
|
Deferred acquisition costs
|
25.7 | 25.9 | ||||||
|
Purchase accounting adjustments
|
5.5 | 10.8 | ||||||
|
Other
|
2.9 | 0.5 | ||||||
|
Total deferred tax liabilities
|
$ | 93.4 | $ | 113.6 | ||||
|
Net deferred tax assets
|
$ | 124.3 | $ | 130.3 | ||||
A valuation allowance is provided against deferred tax assets
when, in the opinion of Alleghany management, it is more likely
than not that some portion of the deferred tax asset will not be
realized. Accordingly, a valuation allowance is maintained for
certain state tax items. Alleghany has recognized
$15.3 million of deferred tax assets for state net
operating and capital loss carryovers. A valuation allowance of
$14.6 million has been established against these deferred
tax assets since Alleghany does not currently anticipate
generating sufficient income in the various states to absorb
these loss carryovers.
Alleghany’s income tax returns are not currently under
examination by the Internal Revenue Service. Alleghany’s
2008, 2007 and 2006 income tax returns remain open to
examination.
As of December 31, 2009, Alleghany believes there were no
material uncertain tax positions that would require disclosure
under GAAP.
91
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 9. | Stockholders’ Equity |
| (a) | Mandatory Convertible Preferred Stock |
On June 23, 2006, Alleghany completed an offering of
1,132,000 shares of its 5.75% mandatory convertible
preferred stock (the “Preferred Stock”) at a public
offering price of $264.60 per share, resulting in net proceeds
of $290.4 million.
In November 2008, the Alleghany Board of Directors authorized
the repurchase of shares of Preferred Stock. Prior to the
mandatory conversion date of June 15, 2009, Alleghany
repurchased an aggregate of 442,998 shares of Preferred
Stock in the open market for approximately $117.4 million,
at an average price per share of $264.92.
On June 15, 2009, all outstanding shares of Preferred Stock
were mandatorily converted into shares of Common Stock. Each
outstanding share of Preferred Stock was automatically converted
into 1.0139 shares of Common Stock based on the arithmetic
average of the daily volume-weighted average price per share of
Common Stock for each of the 20 consecutive trading days ending
on June 10, 2009, or $260.9733 per share. Alleghany issued
approximately 698,009 shares of Common Stock for the
688,621 shares of Preferred Stock that were outstanding at
the date of the mandatory conversion.
| (b) | Treasury Stock |
In February 2008, Alleghany announced that its Board of
Directors had authorized the purchase of shares of Common Stock,
at such times and at prices as management may determine
advisable, up to an aggregate of $300.0 million. During
2009, Alleghany purchased an aggregate of 295,463 shares of
Common Stock in the open market for approximately
$75.9 million, at an average price per share of $256.73.
During 2008, Alleghany purchased an aggregate of
78,817 shares of Common Stock in the open market for
approximately $25.1 million, at an average price per share
of $318.05. As of December 31, 2009, Alleghany held
258,013 shares of treasury stock.
| (c) | Regulatory Matters |
At December 31, 2009, approximately $759.1 million of
the equity of all of Alleghany’s subsidiaries was available
for dividends or advances to Alleghany at the parent level. At
that date, approximately $1.6 billion of Alleghany’s
total equity of $2.7 billion was unavailable for dividends
or advances to Alleghany from its subsidiaries. AIHL’s
insurance operating units are subject to various regulatory
restrictions that limit the maximum amount of dividends
available to be paid by them without prior approval of insurance
regulatory authorities. Of the aggregate total equity of
Alleghany’s insurance operating units at December 31,
2009 of $1.7 billion, a maximum of $155.1 million was
available for dividends without prior approval of the applicable
insurance regulatory authorities.
Statutory net income of Alleghany’s insurance operating
units was $227.7 million and $(42.4) million for the
years ended December 31, 2009 and 2008, respectively.
Combined statutory capital and surplus of Alleghany’s
insurance operating units was $1.4 billion and
$1.3 billion at December 31, 2009 and 2008,
respectively.
| 10. | Stock-Based Compensation Plans |
| (a) | General |
As of December 31, 2009, Alleghany had stock-based payment
plans for parent-level employees and directors. As described in
more detail below, parent-level, stock-based payments to current
employees do not include stock options but consist only of
restricted stock awards, including units, and performance share
awards. Parent-level, stock-based payments to non-employee
directors consist of annual awards of stock options and
restricted stock, including restricted stock units. In addition,
as of December 31, 2009, RSUI had its own stock-based
payment plan, which is described below.
Amounts recognized as compensation expense in the consolidated
statements of earnings and comprehensive income with respect to
stock-based awards under plans for parent-level employees and
directors were $6.9 million,
92
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 10. | Stock-Based Compensation Plans, continued |
$9.1 million and $11.7 million in 2009, 2008 and 2007,
respectively. The amount of related income tax benefit
recognized as income in the consolidated statements of earnings
and comprehensive income with respect to these plans was
$2.4 million, $3.2 million and $4.1 million in
2009, 2008 and 2007, respectively. In 2009, 2008 and 2007,
$3.8 million, $6.8 million and $18.5 million of
Common Stock, at fair market value, respectively, and
$2.1 million, $3.9 million and $13.2 million of
cash, respectively, was paid by Alleghany under plans for
parent-level employees and directors. As noted above, as of
December 31, 2009 and December 31, 2008, all
outstanding awards were accounted for under the fair-value-based
method of accounting.
Alleghany does not have an established policy or practice of
repurchasing shares of Common Stock in the open market for the
purpose of delivering Common Stock upon the exercise of stock
options. Alleghany issues authorized but not outstanding shares
of Common Stock to settle option exercises in those instances
where the number of shares it has repurchased are not sufficient
to settle an option exercise.
| (b) | Director Stock Option and Restricted Stock Plans |
Alleghany provided, through its Amended and Restated
Directors’ Stock Option Plan (under which options were
granted through May 1999) and its 2000 Directors’
Stock Option Plan (which expired on December 31, 2004), for
the automatic grant of non-qualified options to purchase
1,000 shares of Common Stock in each year after 1987 to
each non-employee director. Alleghany’s
2005 Directors’ Stock Plan (the “2005 Plan”)
provided for the automatic grant of nonqualified options to
purchase 500 shares of Common Stock, as well as an
automatic grant of 250 shares of restricted Common Stock or
under certain circumstances, restricted stock units, to each
non-employee director on an annual basis. In 2009 and 2008,
Alleghany awarded a total of 2,250 restricted shares and units
and 2,295 restricted shares and units, respectively, which vest
over a one year period.
A summary of option activity under the above plans as of
December 31, 2009 and changes during the year then ended is
presented below:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
Aggregate
|
||||||||||||||
|
Average
|
Remaining
|
Intrinsic
|
||||||||||||||
|
Shares
|
Exercise
|
Contractual
|
Value
|
|||||||||||||
|
Options
|
(000) | Price | Term (years) | ($ millions) | ||||||||||||
|
Outstanding at January 1, 2009
|
64 | $ | 204 | |||||||||||||
|
Granted
|
4 | 225 | ||||||||||||||
|
Exercised
|
(11 | ) | 152 | |||||||||||||
|
Forfeited or expired
|
— | — | ||||||||||||||
|
Outstanding at December 31, 2009
|
57 | $ | 216 | 4.2 | $ | 3.9 | ||||||||||
|
Exercisable at December 31, 2009
|
48 | $ | 203 | 3.3 | $ | 3.7 | ||||||||||
The weighted-average grant-date fair value of options granted
during the years 2009, 2008 and 2007, was $102, $134 and $134,
respectively. The total intrinsic value of options exercised
during the years ended December 31, 2009, 2008 and 2007,
was $1.1 million, $2.1 million and $2.2 million,
respectively.
93
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 10. | Stock-Based Compensation Plans, continued |
A summary of the status of Alleghany’s non-vested shares as
of December 31, 2009, and changes during the year ended
December 31, 2009, is presented below:
|
Weighted-Average
|
||||||||
|
Shares
|
Grant-Date
|
|||||||
|
Non-vested Shares
|
(000) | Fair Value | ||||||
|
Non-vested at January 1, 2009
|
9 | $ | 129 | |||||
|
Granted
|
4 | 102 | ||||||
|
Vested
|
(4 | ) | 105 | |||||
|
Forfeited
|
— | — | ||||||
|
Non-vested at December 31, 2009
|
9 | $ | 118 | |||||
As of December 31, 2009, there was $0.7 million of
total unrecognized compensation cost related to non-vested
stock-based compensation arrangements granted under the 2005
Plan. That cost is expected to be recognized over a
weighted-average period of approximately one year. The total
fair value of shares vested during the years ended
December 31, 2009, 2008 and 2007, was $1.2 million,
$1.2 million and $1.5 million, respectively.
| (c) | Alleghany 2002 and 2007 Long-Term Incentive Plans |
Alleghany provided incentive compensation to management
employees through its 2002 Long-Term Incentive Plan (the
“2002 LTIP”) until December 31, 2006 when the
2002 LTIP expired. In December 2006, Alleghany adopted the 2007
Long-Term Incentive Plan (the “2007 LTIP”) which was
approved by Alleghany stockholders in April 2007. The provisions
of the 2002 LTIP and 2007 LTIP are substantially similar. Awards
under the 2002 LTIP and 2007 LTIP may include, but are not
limited to, cash
and/or
shares of Common Stock, rights to receive cash
and/or
shares of Common Stock, and options to purchase shares of Common
Stock including options intended to qualify as incentive stock
options under the Internal Revenue Code and options not intended
to so qualify. Under the 2002 LTIP and 2007 LTIP, the following
types of awards are outstanding:
(i) Performance Share Awards
—
Participants are entitled, at the end of a four-year award
period, to a maximum amount equal to the value of one and
one-half shares of Common Stock for each performance share
issued to them based on market value on the payment date.
Payouts are made provided defined levels of performance are
achieved. Prior to 2009, awards were generally made in cash to
the extent of minimum statutory withholding requirements in
respect of an award, with the balance in Common Stock. Expense
was recognized over the performance period on a
pro rata
basis. In 2009, Alleghany modified its payout policy to
allow participants to elect the percentage of performance shares
to be paid in cash, subject to certain limitations. As a result,
the accounting for all awards was changed pursuant to GAAP,
whereby the fair value of each award outstanding is recorded,
with changes therefrom recorded as an expense. The fair value is
calculated based primarily on: the value of Common Stock as of
the balance sheet date; the degree to which performance targets
specified in the 2002 and 2007 LTIP has been achieved; and the
time elapsed with respect to each award period. The resulting
change in accounting reduced Alleghany’s net earnings by
approximately $3.0 million after-tax.
(ii) Restricted Share Awards
— Alleghany
has awarded to certain management employees restricted shares of
Common Stock. These awards entitle the participants to a
specified maximum amount equal to the value of one share of
Common Stock for each restricted share issued to them based on
the market value on the payment date. In most instances, payouts
are made provided defined levels of performance are achieved. As
of December 31, 2009, 56,605 restricted shares were
outstanding, 1,142 were granted in 2009, none were granted in
2008, 287 were granted in 2007, 32,653 were granted in 2004 and
22,523 were granted in 2003. The expense is recognized ratably
over the performance period, which can be extended under certain
circumstances. The 2004 awards are expected to vest over ten
years.
94
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 10. | Stock-Based Compensation Plans, continued |
| (d) | RSUI Restricted Share Plan |
RSUI has a Restricted Stock Unit Plan (the “RSUI
Plan”) for the purpose of providing equity-like incentives
to key employees of RSUI. Under the RSUI Plan, restricted stock
units (“units”) are issued. Additional units, defined
as the “Deferred Equity Pool,” were issued in 2009,
2008 and 2007 and may be created in the future if certain
financial performance measures are met. Units may only be
settled in cash. The fair value of each unit is calculated,
pursuant to GAAP, as stockholder’s equity of RSUI, adjusted
for certain capital transactions and accumulated compensation
expense recognized under the RSUI Plan, divided by the sum of
RSUI common stock outstanding and the original units available
under the RSUI Plan. The units vest on the fourth anniversary of
the date of grant and contain certain restrictions, relating to,
among other things, forfeiture in the event of termination of
employment and transferability. In 2009, 2008 and 2007, RSUI
recorded $36.9 million, $21.7 million and
$43.9 million, respectively, in compensation expense
related to the RSUI Plan. During the same periods, a deferred
tax benefit of $12.9 million, $7.6 million and
$15.4 million, respectively, related to the compensation
expense was recorded.
| 11. | Employee Benefit Plans |
| (a) | Alleghany Employee Defined Benefit Pension Plans |
Alleghany has an unfunded, noncontributory defined benefit
pension plan for executives and a smaller, funded,
noncontributory defined benefit pension plan for employees.
The executive plan currently provides for designated employees
(including all of Alleghany’s current executive officers)
retirement benefits in the form of an annuity for the joint
lives of the participant and his or her spouse or,
alternatively, actuarially equivalent forms of benefits,
including a lump sum. Under the executive plan, a participant
must have completed five years of service with Alleghany before
he or she is vested in, and thus has a right to receive, any
retirement benefits following his or her termination of
employment. The annual retirement benefit under the executive
plan, if paid in the form of a joint and survivor life annuity
to a participant who retires on reaching age 65 with 15 or
more years of service, is equal to 67 percent of the
participant’s highest average annual base salary and
related annual incentive award over a consecutive three-year
period during the last ten years or, if shorter, the full
calendar years of employment. The plan does not take other
payments or benefits, such as payouts of long-term incentives,
into account in computing retirement benefits. During 2004, the
plan was amended and changed from a funded to an unfunded plan
resulting in the distribution of all accrued benefits to vested
participants.
With respect to the funded employee plan, Alleghany’s
policy is to contribute annually the amount necessary to satisfy
the Internal Revenue Service’s funding requirements.
Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be
earned in the future.
95
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 11. | Employee Benefit Plans, continued |
The following tables set forth the defined benefit plans’
funded status at December 31, 2009 and 2008 and total cost
for the years ended December 31, 2009, 2008 and 2007 (in
millions, except percentages):
| 2009 | 2008 | |||||||
|
OBLIGATIONS AND FUNDING STATUS:
|
||||||||
|
Change in benefit obligation
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 20.3 | $ | 17.3 | ||||
|
Service cost
|
2.9 | 2.9 | ||||||
|
Interest cost
|
1.1 | 0.9 | ||||||
|
Amendments
|
— | — | ||||||
|
Curtailment loss
|
— | — | ||||||
|
Actuarial loss
|
1.3 | 0.5 | ||||||
|
Benefits paid
|
(2.3 | ) | (1.3 | ) | ||||
|
Projected benefit obligation at end of year
|
$ | 23.3 | $ | 20.3 | ||||
|
Change in plan assets
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | 2.6 | $ | 2.3 | ||||
|
Actual return on plan assets, net of expenses
|
(0.2 | ) | 0.4 | |||||
|
Company contributions
|
2.2 | 1.2 | ||||||
|
Benefits paid
|
(2.3 | ) | (1.3 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | 2.3 | $ | 2.6 | ||||
|
Funded status
|
$ | (21.0 | ) | $ | (17.7 | ) | ||
|
Amounts recognized in statement of financial position
consist of:
|
||||||||
|
Prepaid benefit cost
|
0.7 | 0.8 | ||||||
|
Accrued benefit liability
|
(16.2 | ) | (14.4 | ) | ||||
|
Accumulated other comprehensive income
|
(5.5 | ) | (4.1 | ) | ||||
|
Net amount recognized
|
$ | (21.0 | ) | $ | (17.7 | ) | ||
|
Weighted average asset allocations
|
||||||||
|
Debt securities
|
100 | % | 100 | % | ||||
| 2009 | 2008 | 2007 | ||||||||||
|
COST AND OTHER COMPREHENSIVE INCOME:
|
||||||||||||
|
Net pension cost included the following expense (income)
components:
|
||||||||||||
|
Service cost — benefits earned during the year
|
$ | 2.9 | $ | 2.9 | $ | 2.3 | ||||||
|
Interest cost on benefit obligation
|
1.1 | 0.9 | 0.8 | |||||||||
|
Expected return on plan assets
|
(0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
|
Net amortization and deferral
|
0.2 | 0.2 | 0.2 | |||||||||
|
Net periodic pension cost
|
4.1 | 3.9 | 3.2 | |||||||||
|
Curtailment loss
|
— | — | — | |||||||||
|
Settlement charge
|
— | 0.2 | — | |||||||||
|
Total cost
|
$ | 4.1 | $ | 4.1 | $ | 3.2 | ||||||
|
Change in other comprehensive income (pension-related)
|
1.4 | (0.1 | ) | — | ||||||||
|
Net periodic pension cost and other comprehensive income
|
$ | 5.5 | $ | 4.0 | $ | 3.2 | ||||||
96
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 11. | Employee Benefit Plans, continued |
| 2009 | 2008 | 2007 | ||||||||||
|
ASSUMPTIONS:
|
||||||||||||
|
Assumptions used in computing the net periodic pension
cost of the plans is as follows
|
||||||||||||
|
Rates for increases in compensation levels
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Weighted average discount rates
|
6.00 | % | 6.00 | % | 5.75 | % | ||||||
|
Expected long-term rates of return
|
5.00 | % | 5.00 | % | 4.00 | % | ||||||
|
Assumptions used in computing the funded status of the
plans is as follows
|
||||||||||||
|
Rates for increases in compensation levels
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Weighted average discount rates
|
6.00 | % | 6.00 | % | 6.00 | % | ||||||
Discount rates for 2009 were predicated primarily on the
Citigroup Pension Discount Curve and Liability Index, rounded to
the nearest 25 basis points. Discount rates for 2008 and
2007 were predicated primarily on the Moody’s Investor
Service Aa long-term corporate bond index, rounded to the
nearest 25 basis points. Alleghany’s investment policy
with respect to its defined benefit plans is to provide
long-term growth combined with a steady income stream. The
target allocation is 100 percent in debt securities. The
debt securities are highly liquid and highly rated. The overall
long-term,
rate-of-return-on-assets
assumptions are based on historical investment returns.
Contributions of less than $0.1 million are expected to be
made to Alleghany’s funded employee plan during 2010. The
following benefit payments, which reflect expected future
service, as appropriate, are expected to be made (in millions):
|
2010
|
$ | 0.1 | ||
|
2011
|
0.3 | |||
|
2012
|
0.3 | |||
|
2013
|
0.3 | |||
|
2014
|
0.3 | |||
|
2015-2019
|
1.9 |
The measurement date used to determine pension benefit plans is
December 31, 2009.
| (b) | Other Employee Retirement Plans |
Alleghany has two unfunded retiree health plans, one for
executives and one for employees. To be eligible for benefits,
participants must be age 55 or older. In addition,
non-executive employees must have completed at least
10 years of service. Under both plans, participants must
pay a portion of the premiums charged by the medical insurance
provider. All benefits cease upon retiree death. RSUI also has
an unfunded retiree health plan for its employees. As of
December 31, 2009 and December 31, 2008, the liability
for all of these plans was $3.1 million and
$4.3 million, respectively, representing the entire
accumulated post-retirement benefit obligation as of that date.
Assumptions used on the accounting for these plans are
comparable to those cited above for the Alleghany pension plans.
Future benefit payments associated with these plans are not
expected to be material to Alleghany.
Alleghany provides supplemental retirement benefits through
deferred compensation programs and profit sharing plans for
certain of its officers and employees. In addition,
Alleghany’s subsidiaries sponsor both qualified, defined
contribution retirement plans for substantially all employees,
including executives, and non-qualified plans only for
executives, both of which provide for voluntary salary reduction
contributions by employees and matching contributions by each
respective subsidiary, subject to specified limitations.
Alleghany has endorsement split-dollar life insurance policies
for its officers that are effective during employment as well as
retirement. Premiums are paid by Alleghany, and death benefits
are split between
97
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 11. | Employee Benefit Plans, continued |
Alleghany and the beneficiaries of the officers. Death benefits
for current employees that inure to the beneficiaries are
generally equal to four times the annual salary at the time of
an officer’s death. After retirement, death benefits that
inure to the beneficiaries are generally equal to the annual
ending salary of the officer at the date of retirement.
| 12. | Earnings Per Share of Common Stock |
The following is a reconciliation of the income and share data
used in the basic and diluted earnings per share computations
for the years ended December 31 (in millions, except share
amounts):
| 2009 | 2008 | 2007 | ||||||||||
|
Net earnings
|
$ | 271.0 | $ | 148.0 | $ | 299.1 | ||||||
|
Preferred dividends
|
6.2 | 17.2 | 17.2 | |||||||||
|
Income available to common stockholders for basic earnings per
share
|
264.8 | 130.8 | 281.9 | |||||||||
|
Preferred dividends
|
6.2 | — | 17.2 | |||||||||
|
Effect of other dilutive securities
|
0.4 | — | 0.3 | |||||||||
|
Income available to common stockholders for diluted earnings per
share
|
$ | 271.4 | $ | 130.8 | $ | 299.4 | ||||||
|
Weighted average shares outstanding applicable to basic earnings
per share
|
8,704,268 | 8,479,863 | 8,476,152 | |||||||||
|
Preferred stock
|
430,121 | — | 1,017,929 | |||||||||
|
Effect of other dilutive securities
|
14,476 | — | 23,819 | |||||||||
|
Adjusted weighted average shares outstanding applicable to
diluted earnings per share
|
9,148,865 | 8,479,863 | 9,517,900 | |||||||||
Contingently issuable shares of 47,417, 1,170,298 and 60,216
were potentially available during 2009, 2008 and 2007,
respectively, but were not included in the computations of
diluted earnings per share because the impact was anti-dilutive
to the earnings per share calculation.
| 13. | Commitments and Contingencies |
| (a) | Leases |
Alleghany leases certain facilities, furniture and equipment
under long-term lease agreements. In addition, certain land,
office space and equipment are leased under noncancelable
operating leases that expire at various dates through 2020. Rent
expense was $10.7 million, $10.3 million and
$8.7 million in 2009, 2008 and 2007, respectively.
The aggregate minimum payments under operating leases with
initial or remaining terms of more than one year as of
December 31, 2009 were as follows (in millions):
|
Aggregate
|
||||
|
Minimum
|
||||
|
Lease
|
||||
|
Year
|
Payments | |||
|
2010
|
$ | 9.4 | ||
|
2011
|
9.4 | |||
|
2012
|
9.6 | |||
|
2013
|
9.7 | |||
|
2014
|
9.7 | |||
|
2015 and thereafter
|
40.6 | |||
98
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 13. | Commitments and Contingencies, continued |
| (b) | Litigation |
Alleghany’s subsidiaries are parties to pending litigation
and claims in connection with the ordinary course of their
businesses. Each such subsidiary makes provisions for estimated
losses to be incurred in such litigation and claims, including
legal costs. In the opinion of management, such provisions are
adequate.
| (c) | Asbestos and Environmental Impairment Exposure |
AIHL’s reserve for unpaid losses and loss adjustment
expenses includes $18.9 million of gross reserves and
$18.8 million of net reserves at December 31, 2009,
and $20.4 million of gross reserves and $20.3 million
of net reserves at December 31, 2008, for various liability
coverages related to asbestos and environmental impairment
claims that arose from reinsurance assumed by a subsidiary of
CATA between 1969 and 1976. This subsidiary exited this business
in 1976. Reserves for asbestos and environmental impairment
claims cannot be estimated with traditional loss reserving
techniques because of uncertainties that are greater than those
associated with other types of claims. Factors contributing to
those uncertainties include a lack of historical data, the
significant periods of time that often elapse between the
occurrence of an insured loss and the reporting of that loss to
the ceding company and the reinsurer, uncertainty as to the
number and identity of insured parties with potential exposure
to such risks, unresolved legal issues regarding policy
coverage, and the extent and timing of any such contractual
liability. Loss reserve estimates for such environmental
impairment and asbestos exposures include case reserves, which
also reflect reserves for legal and other loss adjustment
expenses and IBNR reserves. IBNR reserves are determined based
upon historic general liability exposure base and policy
language, previous environmental loss experience and the
assessment of current trends of environmental law, environmental
cleanup costs, asbestos liability law, and judicial settlements
of asbestos liabilities.
For both asbestos and environmental impairment reinsurance
claims, CATA establishes case reserves by receiving case reserve
amounts from its ceding companies, and verifies these amounts
against reinsurance contract terms, analyzing from the first
dollar of loss incurred by the primary insurer. In establishing
the liability for claims for asbestos related liability and for
environmental impairment claims, management considers facts
currently known and the current state of the law and coverage
litigation. Additionally, ceding companies often report
potential losses on a precautionary basis to protect their
rights under their reinsurance arrangements, which generally
calls for prompt notice to the reinsurer. Ceding companies, at
the time they report such potential losses, advise CATA of the
ceding companies’ current estimate of the extent of such
loss. CATA’s claims department reviews each of the
precautionary claims notices and, based upon current
information, assesses the likelihood of loss to CATA. Such
assessment is one of the factors used in determining the
adequacy of the recorded asbestos and environmental impairment
reserves.
| (d) | Indemnification Obligations |
On July 14, 2005, Alleghany completed the sale of its
world-wide industrial minerals business, World Minerals, Inc.
(“World Minerals”), to Imerys USA, Inc. (the
“Purchaser”), a wholly-owned subsidiary of Imerys,
S.A., pursuant to a Stock Purchase Agreement, dated as of
May 19, 2005, by and among the Purchaser, Imerys, S.A. and
Alleghany (the “Stock Purchase Agreement”). Pursuant
to the Stock Purchase Agreement, Alleghany undertook certain
indemnification obligations, including a general indemnification
for breaches of representations and warranties set forth in the
Stock Purchase Agreement (the “Contract
Indemnification”) and a special indemnification (the
“Products Liability Indemnification”) related to
products liability claims arising from events that occurred
during pre-closing periods, including the period of Alleghany
ownership (the “Alleghany Period”).
The Products Liability Indemnification is divided into two
parts, the first relating to products liability claims arising
in respect of events occurring during the period prior to
Alleghany’s acquisition of the World Minerals business from
Johns Manville Corporation, Inc. (f/k/a Manville Sales
Corporation) (“Manville”) in July 1991 (the
“Manville Period”), and the second relating to
products liability claims arising in respect of events occurring
during
99
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 13. | Commitments and Contingencies, continued |
the period of Alleghany ownership (the “Alleghany
Period”). Under the terms of the Stock Purchase Agreement,
Alleghany will provide indemnification at a rate of
100 percent for the first $100.0 million of losses
arising from products liability claims relating to the Manville
Period and at a rate of 50 percent for the next
$100.0 million of such losses, so that Alleghany’s
maximum indemnification obligation in respect of products
liability claims relating to the Manville Period is
$150.0 million. This indemnification obligation in respect
of Manville Period products liability claims will expire on
July 31, 2016. The Stock Purchase Agreement states that it
is the intention of the parties that, with regard to losses
incurred in respect of products liability claims relating to the
Manville Period, recovery should first be sought from Manville,
and that Alleghany’s indemnification obligation in respect
of products liability claims relating to the Manville Period is
intended to indemnify the Purchaser for such losses which are
not recovered from Manville within a reasonable period of time
after recovery is sought from Manville. In connection with World
Minerals’ acquisition of the assets of the industrial
minerals business of Manville in 1991, Manville agreed to
indemnify World Minerals for certain product liability claims,
in respect of products of the industrial minerals business
manufactured during the Manville Period, asserted against World
Minerals through July 31, 2006. In June 2006, Manville
agreed to extend its indemnification for such claims asserted
against World Minerals through July 31, 2009.
Notwithstanding the expiration of the Manville indemnity in July
2009, World Minerals did not, as part of its 1991 acquisition of
the assets of Manville’s industrial minerals business
assets, assume liability for product liability claims to the
extent that such claims relate, in whole or in part, to the
Manville Period, and Manville should continue to be responsible
for such claims.
With respect to the Contract Indemnification, substantially all
of the representations and warranties to which the Contract
Indemnification applies survived until July 14, 2007, with
the exception of certain representations and warranties such as
those related to environmental, real estate and tax matters,
which survive for longer periods and generally, except for tax
and certain other matters, apply only to aggregate losses in
excess of $2.5 million, up to a maximum of approximately
$123.0 million. The Stock Purchase Agreement provides that
Alleghany has no responsibility for products liability claims
arising in respect of events occurring after the closing, and
that any products liability claims involving both pre-closing
and post-closing periods will be apportioned on an equitable
basis.
Based on Alleghany’s historical experience and other
analyses, in July 2005, Alleghany established a
$0.6 million reserve in connection with the Products
Liability Indemnification for the Alleghany Period. Such reserve
was approximately $0.3 million and approximately
$0.4 million at December 31, 2009 and
December 31, 2008, respectively.
| (e) | Equity Holdings Concentration |
At December 31, 2009 and 2008, Alleghany had a
concentration of market risk in its
available-for-sale
equity securities portfolio with respect to certain energy
sector businesses, of $399.2 million and
$290.8 million, respectively.
Until November 2009, Alleghany had a concentration of market
risk in its
available-for-sale
equity securities portfolio of Burlington Northern Santa Fe
Corporation (“Burlington Northern”), a railroad
holding company. At December 31, 2008, Alleghany’s
Burlington Northern common stock holdings had a fair market
value of $227.1 million. During 2009, Alleghany sold all of
its remaining shares of its Burlington Northern stock holdings,
resulting in a pre-tax gain of $198.5 million. During 2008,
Alleghany sold approximately 2.0 million shares of its
Burlington Northern stock holdings, resulting in a pre-tax gain
of $152.3 million.
100
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 14. | Fair Value of Financial Instruments |
The estimated carrying values and fair values of
Alleghany’s financial instruments as of December 31,
2009 and 2008 are as follows (in millions):
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Investments (excluding equity method investments)*
|
$ | 4,211.6 | $ | 4,211.6 | $ | 4,057.7 | $ | 4,057.7 | ||||||||
| * | For purposes of this table, investments include available-for-sale securities as well as investments in partnerships carried at fair value that are included in other invested assets. Investments exclude Alleghany’s investments in Homesite, ORX and partnerships that are accounted for under the equity method, which are included in other invested assets. The fair value of short-term investments approximates amortized cost. The fair value of all other categories of investments is discussed below. |
GAAP defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Fair value measurements are not adjusted for transaction costs.
In addition, GAAP has a three-tiered hierarchy for inputs used
in management’s determination of fair value of financial
instruments that emphasizes the use of observable inputs over
the use of unobservable inputs by requiring that the observable
inputs be used when available. Observable inputs are market
participant assumptions based on market data obtained from
sources independent of the reporting entity. Unobservable inputs
are the reporting entity’s own assumptions about market
participant assumptions based on the best information available
under the circumstances. In assessing the appropriateness of
using observable inputs in making its fair value determinations,
Alleghany considers whether the market for a particular security
is “active” or not based on all the relevant facts and
circumstances. For example, Alleghany may consider a market to
be inactive if there are relatively few recent transactions or
if there is a significant decrease in market volume.
Furthermore, Alleghany considers whether observable transactions
are “orderly” or not. Alleghany does not consider a
transaction to be orderly if there is evidence of a forced
liquidation or other distressed condition, and as such, little
or no weight is given to that transaction as an indicator of
fair value.
The hierarchy is broken down into three levels based on the
reliability of inputs as follows:
| • | “Level 1” — Valuations are based on unadjusted quoted prices in active markets for identical, unrestricted assets. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these assets does not involve any meaningful degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Alleghany’s Level 1 assets generally include publicly traded common stocks and debt securities issued directly by the U.S. Government, where Alleghany’s valuations are based on quoted market prices. | |
| • | “Level 2” — Valuations are based on quoted market prices where such markets are not deemed to be sufficiently “active.” In such circumstances, additional valuation metrics will be used which involve direct or indirect observable market inputs. Alleghany’s Level 2 assets generally include preferred stocks and debt securities other than debt issued directly by the U.S. Government. Substantially all of the determinations of value in this category are based on a single quote from third-party dealers and pricing services. As Alleghany generally does not make any adjustments thereto, such quote typically constitutes the sole input in Alleghany’s determination of the fair value of these types of securities. In developing a quote, such third parties will use the terms of the security and market-based inputs. Terms of the security include coupon, maturity date, and any special provisions that may, for example, enable the investor, at its election, to redeem the security prior to its scheduled maturity date. Market-based inputs include the level of interest rates applicable to comparable securities in the market place and current credit rating(s) of the security. Such quotes are generally non-binding. |
101
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 14. | Fair Value of Financial Instruments, continued |
| • | “Level 3” — Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Valuation under Level 3 generally involves a significant degree of judgment on the part of Alleghany. Alleghany’s Level 3 assets are primarily limited to partnership investments. Net asset value quotes from the third-party general partner of the entity in which such investment is held, which will often be based on unobservable market inputs, constitute the primary input in Alleghany’s determination of the fair value of such assets. |
Alleghany validates the reasonableness of its fair value
determinations for Level 2 securities by testing the
methodology of the relevant third-party dealer or pricing
service that provides the quotes upon which the fair value
determinations are made. Alleghany tests the methodology by
comparing such quotes with prices from executed market trades
when such trades occur. Alleghany discusses with the relevant
third-party dealer or pricing service any identified material
discrepancy between the quote derived from its methodology and
the executed market trade in order to resolve the discrepancy.
Alleghany uses the quote from the third-party dealer or pricing
service unless Alleghany determines that the methodology used to
produce such quote is not in compliance with GAAP. In addition
to such procedures, Alleghany also compares the aggregate amount
of the fair value for such Level 2 securities with the
aggregate fair value provided by a third-party financial
institution. Furthermore, Alleghany reviews the reasonableness
of its classification of securities within the three-tiered
hierarchy to ensure that the classification is consistent with
GAAP.
102
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 14. | Fair Value of Financial Instruments, continued |
The estimated carrying values of Alleghany’s investments as
of December 31, 2009 and December 31, 2008 allocated
among the three levels set forth above were as follows (in
millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock
|
$ | 624.5 | $ | — | $ | — | $ | 624.5 | ||||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
638.4 | — | — | 638.4 | ||||||||||||
|
Mortgage and asset-backed securities*
|
— | 958.8 | — | 958.8 | ||||||||||||
|
States, municipalities, political subdivisions bonds
|
— | 1,234.0 | — | 1,234.0 | ||||||||||||
|
Foreign bonds
|
— | 144.3 | — | 144.3 | ||||||||||||
|
Corporate bonds and other
|
— | 313.5 | — | 313.5 | ||||||||||||
| 638.4 | 2,650.6 | — | 3,289.0 | |||||||||||||
|
Short-term investments
|
75.2 | 187.7 | — | 262.9 | ||||||||||||
|
Other invested assets**
|
— | — | 35.2 | 35.2 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,338.1 | $ | 2,838.3 | $ | 35.2 | $ | 4,211.6 | ||||||||
|
As of December 31, 2008
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock
|
$ | 619.8 | $ | — | $ | — | $ | 619.8 | ||||||||
|
Preferred stock
|
— | 9.7 | — | 9.7 | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
266.3 | 20.3 | — | 286.6 | ||||||||||||
|
Mortgage and asset-backed securities*
|
— | 653.8 | 0.7 | 654.5 | ||||||||||||
|
States, municipalities, political subdivisions bonds
|
— | 1,434.1 | — | 1,434.1 | ||||||||||||
|
Foreign bonds
|
— | 177.3 | — | 177.3 | ||||||||||||
|
Corporate bonds and other
|
— | 207.5 | — | 207.5 | ||||||||||||
| 266.3 | 2,493.0 | 0.7 | 2,760.0 | |||||||||||||
|
Short-term investments
|
175.9 | 460.3 | — | 636.2 | ||||||||||||
|
Other invested assets**
|
— | — | 32.0 | 32.0 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,062.0 | $ | 2,963.0 | $ | 32.7 | $ | 4,057.7 | ||||||||
| * | Consists primarily of residential mortgage-backed securities. | |
| ** | The carrying value of partnership investments of $35.2 million increased by $3.2 million from the December 31, 2008 carrying value of $32.0 million, due primarily to an increase in estimated fair value during the period. |
| 15. | Segments of Business |
Information related to Alleghany’s reportable segment is
shown in the table below. Property and casualty and surety
insurance operations are conducted by AIHL through its insurance
operating units RSUI, CATA and EDC. In addition, AIHL Re is a
wholly-owned subsidiary of AIHL that has in the past provided
reinsurance to Alleghany’s insurance operating units and
affiliates.
103
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 15. | Segments of Business, continued |
Alleghany’s reportable segment is reported in a manner
consistent with the way management evaluates the businesses. As
such, insurance underwriting activities are evaluated separately
from investment activities. Net realized capital gains and
other-than-temporary
impairment losses are not considered relevant in evaluating
investment performance on an annual basis. Segment accounting
policies are described in Note 1.
The primary components of “corporate activities” are
Alleghany Properties, Alleghany’s investments in Homesite
and ORX and strategic investments and other activities at the
parent level.
| 2009 | 2008 | 2007(1) | ||||||||||
| (in millions) | ||||||||||||
|
Revenues:
|
||||||||||||
|
AIHL insurance group:
|
||||||||||||
|
Net premiums earned
|
||||||||||||
|
RSUI
|
$ | 633.4 | $ | 689.6 | $ | 707.5 | ||||||
|
CATA
|
166.7 | 186.9 | 198.0 | |||||||||
|
EDC
|
44.9 | 72.0 | 44.3 | |||||||||
|
AIHL Re
|
— | 0.2 | 24.5 | |||||||||
| 845.0 | 948.7 | 974.3 | ||||||||||
|
Net investment income
|
116.7 | 112.6 | 126.5 | |||||||||
|
Net realized capital gains (losses)
|
119.8 | (4.4 | ) | 44.2 | ||||||||
|
Other than temporary impairment losses (2)
|
(85.9 | ) | (244.0 | ) | (7.7 | ) | ||||||
|
Other income
|
1.3 | 0.7 | 0.5 | |||||||||
|
Total insurance group
|
996.9 | 813.6 | 1,137.8 | |||||||||
|
Corporate activities:
|
||||||||||||
|
Net investment income (3)
|
(14.8 | ) | 17.6 | 19.6 | ||||||||
|
Net realized capital gains (4)
|
200.6 | 156.2 | 56.2 | |||||||||
|
Other than temporary impairment losses
|
— | — | — | |||||||||
|
Other income (5)
|
1.7 | 1.7 | 15.0 | |||||||||
|
Total
|
$ | 1,184.4 | $ | 989.1 | $ | 1,228.6 | ||||||
104
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 15. | Segments of Business, continued |
| 2009 | 2008 | 2007(1) | ||||||||||
| (in millions) | ||||||||||||
|
Earnings from continuing operations before income
taxes:
|
||||||||||||
|
AIHL insurance group:
|
||||||||||||
|
Underwriting profit (loss) (6)
|
||||||||||||
|
RSUI
|
$ | 189.8 | $ | 137.6 | $ | 219.9 | ||||||
|
CATA
|
10.1 | 15.2 | 19.4 | |||||||||
|
EDC
|
(70.7 | ) | (60.9 | ) | 4.4 | |||||||
|
AIHL Re
|
— | 0.2 | 24.4 | |||||||||
| 129.2 | 92.1 | 268.1 | ||||||||||
|
Net investment income
|
116.7 | 112.6 | 126.5 | |||||||||
|
Net realized capital gains
|
119.8 | (4.4 | ) | 44.2 | ||||||||
|
Other than temporary impairment losses (2)
|
(85.9 | ) | (244.0 | ) | (7.7 | ) | ||||||
|
Other income, less other expenses
|
(42.2 | ) | (31.4 | ) | (52.3 | ) | ||||||
|
Total insurance group
|
237.6 | (75.1 | ) | 378.8 | ||||||||
|
Corporate activities:
|
||||||||||||
|
Net investment income (3)
|
(14.8 | ) | 17.6 | 19.6 | ||||||||
|
Net realized capital gains (4)
|
200.6 | 156.2 | 56.2 | |||||||||
|
Other than temporary impairment losses
|
— | — | — | |||||||||
|
Other income (5)
|
1.7 | 1.7 | 15.0 | |||||||||
|
Corporate administration and other expenses
|
29.1 | 38.7 | 35.9 | |||||||||
|
Interest expense
|
0.6 | 0.7 | 1.4 | |||||||||
|
Total
|
$ | 395.4 | $ | 61.0 | $ | 432.3 | ||||||
| (1) | Includes the results of EDC, net of purchase accounting adjustments, commencing July 18, 2007. See Note 4(a). | |
| (2) | Reflects impairment charges for unrealized losses related to AIHL’s investment portfolio that were deemed to be other than temporary. See Note 3. | |
| (3) | Includes $(1.1) million, $0.3 million and $4.0 million of Alleghany’s equity in (losses) earnings of Homesite, net of purchase accounting adjustments, for 2009, 2008 and 2007, respectively. Also includes $(21.9) million and $1.5 million of Alleghany’s equity in (losses) earnings of ORX, net of purchase accounting adjustments, for 2009 and 2008, respectively. See Note 4(b) and 4(c). | |
| (4) | Primarily reflects net realized capital gains from the sale of shares of Burlington Northern common stock. | |
| (5) | Primarily reflects sales activity of Alleghany Properties. | |
| (6) | Represents net premiums earned less loss and loss adjustment expenses and commission, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income, other income, net realized capital gains or other-than-temporary impairment losses. Commission, brokerage and other underwriting expenses represent commission and brokerage expenses and that portion of salaries, administration and other operating expenses attributable primarily to underwriting activities, whereas the remainder constitutes other expenses. |
105
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 15. | Segments of Business, continued |
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Identifiable assets at December 31
|
||||||||||||
|
AIHL insurance group
|
$ | 5,659.2 | $ | 5,554.2 | $ | 6,166.7 | ||||||
|
Corporate activities
|
533.6 | 627.6 | 775.4 | |||||||||
|
Total
|
$ | 6,192.8 | $ | 6,181.8 | $ | 6,942.1 | ||||||
|
Capital expenditures
|
||||||||||||
|
AIHL insurance group
|
$ | 5.5 | $ | 9.8 | $ | 4.7 | ||||||
|
Corporate activities
|
— | — | 0.2 | |||||||||
|
Total
|
$ | 5.5 | $ | 9.8 | $ | 4.9 | ||||||
|
Depreciation and amortization
|
||||||||||||
|
AIHL insurance group
|
$ | 30.5 | $ | 25.0 | $ | 15.3 | ||||||
|
Corporate activities
|
1.9 | 0.7 | 1.0 | |||||||||
|
Total
|
$ | 32.4 | $ | 25.7 | $ | 16.3 | ||||||
| 16. | Other Information |
| (a) | Other Assets |
Other assets shown in Alleghany’s consolidated balance
sheets include the following amounts at December 31, 2009
and 2008 (in millions):
| 2009 | 2008 | |||||||
|
Real estate properties
|
$ | 19.8 | $ | 19.5 | ||||
|
Interest and dividends receivable
|
38.1 | 41.1 | ||||||
|
Other
|
43.7 | 40.2 | ||||||
| $ | 101.6 | $ | 100.8 | |||||
| (b) | Other Invested Assets |
Other invested assets shown in Alleghany’s consolidated
balance sheets include the following amounts at
December 31, 2009 and 2008 (in millions):
| 2009 | 2008 | |||||||
|
Investment in Homesite (see Note 4(b))
|
$ | 125.7 | $ | 121.6 | ||||
|
Investment in ORX (see Note 4(c))
|
29.6 | 51.5 | ||||||
|
Partnerships accounted for on an available for sale basis
|
35.2 | 32.0 | ||||||
|
Partnerships accounted for as an equity method investment
|
47.7 | 45.3 | ||||||
| $ | 238.2 | $ | 250.4 | |||||
106
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 16. | Other Information, continued |
| (c) | Property and equipment |
Property and equipment, net of accumulated depreciation and
amortization, at December 31, 2009 and 2008, are as follows
(in millions):
| 2009 | 2008 | |||||||
|
Furniture and equipment
|
$ | 46.4 | $ | 41.2 | ||||
|
Leasehold improvements
|
5.9 | 5.7 | ||||||
|
Other
|
0.3 | 0.3 | ||||||
| 52.6 | 47.2 | |||||||
|
Less: accumulated depreciation and amortization
|
(32.5 | ) | (23.9 | ) | ||||
| $ | 20.1 | $ | 23.3 | |||||
| (d) | Deferred Acquisition Costs |
Activity in deferred acquisition cost assets as shown in
Alleghany’s consolidated balance sheets in 2009 and 2008 is
summarized as follows (in millions):
| 2009 | 2008 | |||||||
|
Balance at January 1
|
$ | 71.8 | $ | 75.6 | ||||
|
Current year’s costs deferred
|
146.9 | 153.5 | ||||||
|
Less: amortization to expense for the year
|
(147.6 | ) | (155.2 | ) | ||||
|
Less: asset impairment (related to EDC)
|
— | (2.1 | ) | |||||
|
Balance at December 31
|
$ | 71.1 | $ | 71.8 | ||||
| (e) | Other Liabilities |
Other liabilities shown in Alleghany’s consolidated balance
sheets include the following amounts at December 31, 2009
and 2008 (in millions):
| 2009 | 2008 | |||||||
|
Accounts payable
|
$ | 4.3 | $ | 7.3 | ||||
|
Incentive plans
|
143.6 | 129.2 | ||||||
|
Accrued salaries and wages
|
10.0 | 8.2 | ||||||
|
Deferred compensation
|
8.1 | 7.2 | ||||||
|
Accrued expenses
|
7.7 | 11.2 | ||||||
|
Taxes other than income
|
2.5 | 3.5 | ||||||
|
Deferred revenue
|
11.8 | 11.8 | ||||||
|
Payable to brokers
|
3.0 | 4.8 | ||||||
|
Pension and postretirement benefits
|
32.5 | 23.1 | ||||||
|
Funds held for surety bonds
|
76.6 | 65.3 | ||||||
|
Other
|
24.6 | 17.3 | ||||||
| $ | 324.7 | $ | 288.9 | |||||
107
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 17. | Quarterly Results of Operations (unaudited) |
Selected quarterly financial data for 2009 and 2008 are
presented below (in millions, except per share amounts):
| Quarters Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
|
2009
|
||||||||||||||||
|
Revenues
|
$ | 239.9 | $ | 299.4 | $ | 288.3 | $ | 356.7 | ||||||||
|
Earnings from:
|
||||||||||||||||
|
Continuing operations
|
$ | 44.6 | $ | 46.0 | $ | 49.5 | $ | 130.9 | ||||||||
|
Discontinued operations
|
— | — | — | — | ||||||||||||
|
Net earnings
|
$ | 44.6 | $ | 46.0 | $ | 49.5 | $ | 130.9 | ||||||||
|
Basic earnings per share of common stock: *
|
||||||||||||||||
|
Continuing operations
|
$ | 4.82 | $ | 5.11 | $ | 5.50 | $ | 14.72 | ||||||||
|
Discontinued operations
|
— | — | — | — | ||||||||||||
|
Total
|
$ | 4.82 | $ | 5.11 | $ | 5.50 | $ | 14.72 | ||||||||
|
2008
|
||||||||||||||||
|
Revenues
|
$ | 355.5 | $ | 253.4 | $ | 263.3 | $ | 116.9 | ||||||||
|
Earnings from:
|
||||||||||||||||
|
Continuing operations
|
$ | 90.6 | $ | 13.0 | $ | (8.8 | ) | $ | (54.1 | ) | ||||||
|
Discontinued operations
|
5.3 | 4.8 | 4.6 | 92.6 | ||||||||||||
|
Net earnings
|
$ | 95.9 | $ | 17.8 | $ | (4.2 | ) | $ | 38.5 | |||||||
|
Basic earnings per share of common stock: *
|
||||||||||||||||
|
Continuing operations
|
$ | 10.15 | $ | 1.02 | $ | (1.55 | ) | $ | (6.86 | ) | ||||||
|
Discontinued operations
|
0.63 | 0.57 | 0.55 | 10.92 | ||||||||||||
|
Total
|
$ | 10.78 | $ | 1.59 | $ | (1.00 | ) | $ | 4.06 | |||||||
| * | Adjusted to reflect subsequent stock dividends. |
Earnings per share by quarter may not equal the amount for the
full year due to the timing of treasury stock purchases and
rounding.
108
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alleghany Corporation:
We have audited the accompanying consolidated balance sheets of
Alleghany Corporation and subsidiaries as of December 31,
2009 and 2008, and the related consolidated statements of
earnings and comprehensive income, changes in stockholders’
equity, and cash flows for each of the years in the three-year
period ended December 31, 2009. These consolidated
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Alleghany Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Alleghany Corporation’s internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 24, 2010
expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ KPMG LLP
New York, New York
February 24, 2010
109
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alleghany Corporation:
We have audited Alleghany Corporation’s internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Alleghany Corporation’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
including the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal controls based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Alleghany Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Alleghany Corporation and
subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of earnings and comprehensive
income, changes in stockholders’ equity, and cash flows for
each of the years in the three-year period ended
December 31, 2009, and our report dated February 24,
2010 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
New York, New York
February 24, 2010
110
Table of Contents
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. | Controls and Procedures. |
Disclosure
Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive
officer, or “CEO,” and our chief financial officer, or
“CFO,” of the effectiveness of the design and
operation of our disclosure controls and procedures as of the
end of the period covered by this
Form 10-K
Report pursuant to
Rule 13a-15(e)
or
15d-15(e)
promulgated under the Exchange Act. Based on that evaluation,
our management, including our CEO and CFO, concluded that our
disclosure controls and procedures were effective as of that
date to provide reasonable assurance that information required
to be disclosed by us in reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and timely
reported as specified in the SEC’s rules and forms. We note
that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and
we cannot assure you that any design will succeed in achieving
its stated goals under all potential future conditions,
regardless of how remote.
Management’s
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Our internal control system was designed
to provide reasonable assurance to our management and Board of
Directors regarding the preparation and fair presentation of
financial statements for external purposes.
We carried out an evaluation, under the supervision and with the
participation of our management, including our CEO and CFO, of
the effectiveness of our internal control over financial
reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on that evaluation, our
management, including our CEO and CFO, concluded that, as of
December 31, 2009, our internal control over financial
reporting was effective. Our independent registered public
accounting firm that audited the consolidated financial
statements included in this
Form 10-K
Report, KPMG LLP, has issued an attestation report on the
effectiveness of our internal control over financial reporting
which appears in Item 8 on page 110 of this
Form 10-K
Report. We note that all internal control systems, no matter how
well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and
presentation.
Changes
in Internal Control Over Financial Reporting
There were no changes in internal control over financial
reporting during the quarter ended December 31, 2009 that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
111
Table of Contents
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this Item 10 is included under
the captions “Alleghany Corporate Governance —
Board of Directors,” “Alleghany Corporate
Governance — Committees of the Board of
Directors,” “Alleghany Corporate
Governance — Codes of Ethics,” “Securities
Ownership of Directors and Executive Officers —
Section 16(a) Beneficial Ownership Reporting
Compliance,” “Proposals Requiring Your
Vote — Proposal 1. Election of Directors,”
and “Executive Officers” in our Proxy Statement, filed
or to be filed in connection with our Annual Meeting of
Stockholders to be held on April 23, 2010, or our
“2010 Proxy Statement,” which information is
incorporated herein by reference.
In September 2003, our Board of Directors adopted a Financial
Personnel Code of Ethics applicable to our CEO, CFO, chief
accounting officer, controller and vice president for tax
matters that complies with the requirements of Item 406 of
Regulation S-K
under the Exchange Act. The Financial Personnel Code of Ethics
supplements our Code of Business Conduct and Ethics, adopted by
our Board of Directors in September 2003, which is applicable to
all of our employees and directors. A copy of the Financial
Personnel Code of Ethics was filed as an Exhibit to our Annual
Report on
Form 10-K
for the year ended December 31, 2003. The Financial
Personnel Code of Ethics and the Code of Business Conduct and
Ethics are available on our website at www.alleghany.com or may
be obtained, free of charge, upon request to the Secretary of
Alleghany.
| Item 11. | Executive Compensation. |
The information required by this Item 11 is included under
the captions “Proposals Requiring Your
Vote — Proposal 1. Election of
Directors — Compensation of Directors,”
“Compensation Committee Report,” “Compensation
Discussion and Analysis,” “Payments upon Termination
of Employment,” and “Executive Compensation,” in
our 2010 Proxy Statement, which information is incorporated
herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this Item 12 is included under
the captions “Principal Stockholders,”
“Securities Ownership of Directors and Executive
Officers,” and “Equity Compensation Plan
Information” in our 2010 Proxy Statement, which information
is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this Item 13 is included under
the captions “Alleghany Corporate Governance —
Director Independence” and “Alleghany Corporate
Governance — Related Party Transactions” in our
2010 Proxy Statement, which information is incorporated herein
by reference.
| Item 14. | Principal Accountant Fees and Services. |
The information required by this Item 14 is included under
the caption “Proposals Requiring Your Vote —
Proposal 4. — Ratification of Selection of
Independent Registered Public Accounting Firm for the year
2010” in our 2010 Proxy Statement, which information is
incorporated herein by reference.
112
Table of Contents
PART IV
| Item 15. | Exhibits and Financial Statement Schedules. |
(a) 1. Financial Statements.
Our consolidated financial statements, together with the report
thereon of KPMG LLP, our independent registered public
accounting firm, are set forth on pages 64 through 110 of
this
Form 10-K
Report.
2. Financial Statement Schedules.
The Index to Financial Statements Schedules and the schedules
relating to our consolidated financial statements, together with
the report thereon of KPMG LLP, our independent registered
public accounting firm, are set forth on pages 116 through
126 this
Form 10-K
Report.
3. Exhibits.
See the Index to Exhibits beginning on page 127 of this
Form 10-K
Report for a description of the exhibits filed as part of this
Form 10-K
Report.
113
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLEGHANY CORPORATION
(Registrant)
(Registrant)
|
Date: February 25, 2010
|
By
/s/
Weston
M. Hicks
Weston
M. Hicks
President |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
Date: February 25, 2010
|
By
/s/
Rex
D. Adams
Rex
D. Adams
Director |
|
|
Date: February 25, 2010
|
By
/s/
Jerry
G. Borrelli
Jerry
G. Borrelli
Vice President (principal accounting officer) |
|
|
Date: February 25, 2010
|
By
/s/
Karen
Brenner
Karen
Brenner
Director |
|
|
Date: February 25, 2010
|
By
/s/
John
J. Burns, Jr.
John
J. Burns, Jr.
Chairman of the Board and Director |
|
|
Date: February 25, 2010
|
By
/s/
Dan
R. Carmichael
Dan
R. Carmichael
Director |
|
|
Date: February 25, 2010
|
By
/s/
Roger
B. Gorham
Roger
B. Gorham
Senior Vice President (principal financial officer) |
114
Table of Contents
|
Date: February 25, 2010
|
By
/s/
Weston
M. Hicks
Weston
M. Hicks
President and Director (principal executive officer) |
|
|
Date: February 25, 2010
|
By
/s/
Thomas
S. Johnson
Thomas
S. Johnson
Director |
|
|
Date: February 25, 2010
|
By
/s/
Allan
P. Kirby, Jr.
Allan
P. Kirby, Jr.
Director |
|
|
Date: February 25, 2010
|
By
/s/
Jefferson
W. Kirby
Jefferson
W. Kirby
Director |
|
|
Date: February 25, 2010
|
By
/s/
William
K. Lavin
William
K. Lavin
Director |
|
|
Date: February 25, 2010
|
By
/s/
Phillip
M. Martineau
Phillip
M. Martineau
Director |
|
|
Date: February 25, 2010
|
By
/s/
James
F. Will
James
F. Will
Director |
|
|
Date: February 25, 2010
|
By
/s/
Raymond
L.M. Wong
Raymond
L.M. Wong
Director |
115
Table of Contents
Alleghany
Corporation and Subsidiaries
|
Description
|
Page | |||
| 117 | ||||
| 118 | ||||
| 119 | ||||
| 123 | ||||
| 124 | ||||
| 125 | ||||
| 126 | ||||
116
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alleghany Corporation:
Under date of February 24, 2010, we reported on the
consolidated balance sheets of Alleghany Corporation and
subsidiaries (the “Company”) as of December 31,
2009 and 2008, and the related consolidated statements of
earnings and comprehensive income, changes in stockholders’
equity, and cash flows for each of the years in the three-year
period ended December 31, 2009, which are included in this
Annual Report on
Form 10-K
for the year ended December 31, 2009. In connection with
our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement
schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
February 24, 2010
117
Table of Contents
Schedule I –
Summary of Investments – Other Than Investments
in Related Parties
ALLEGHANY CORPORATION AND SUBSIDIARIES
December 31, 2009
ALLEGHANY CORPORATION AND SUBSIDIARIES
December 31, 2009
|
Amount at
|
||||||||||||
|
which shown
|
||||||||||||
|
in the
|
||||||||||||
|
Fair
|
Balance
|
|||||||||||
|
Type of Investment
|
Cost | Value | Sheet | |||||||||
| (in thousands) | ||||||||||||
|
Fixed maturities:
|
||||||||||||
|
Bonds:
|
||||||||||||
|
United States Government and government agencies and authorities
|
$ | 634,822 | $ | 638,448 | $ | 638,448 | ||||||
|
States, municipalities & political subdivisions
|
1,202,200 | 1,233,939 | 1,233,939 | |||||||||
|
Foreign governments
|
— | — | — | |||||||||
|
Mortgage and asset-backed securities
|
955,757 | 958,781 | 958,781 | |||||||||
|
All other bonds
|
442,816 | 457,845 | 457,845 | |||||||||
|
Fixed maturities
|
3,235,595 | 3,289,013 | 3,289,013 | |||||||||
|
Equity securities:
|
||||||||||||
|
Common stocks:
|
||||||||||||
|
Public utilities
|
— | — | — | |||||||||
|
Banks, trust, and insurance companies
|
55,102 | 60,780 | 60,780 | |||||||||
|
Industrial, miscellaneous, and all other
|
475,806 | 563,652 | 563,652 | |||||||||
|
Nonredeemable preferred stocks
|
37 | 114 | 114 | |||||||||
|
Equity securities
|
530,945 | 624,546 | 624,546 | |||||||||
|
Other invested assets
|
238,227 | 238,227 | 238,227 | |||||||||
|
Short-term investments
|
262,903 | 262,903 | 262,903 | |||||||||
|
Total investments
|
$ | 4,267,670 | $ | 4,414,689 | $ | 4,414,689 | ||||||
118
Table of Contents
Schedule II –
Condensed Balance Sheets
ALLEGHANY CORPORATION
December 31, 2009 and 2008
ALLEGHANY CORPORATION
December 31, 2009 and 2008
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
|
Assets
|
||||||||
|
Equity securities (cost: 2009 $14,995; 2008 $38,062)
|
$ | 18,368 | $ | 227,130 | ||||
|
Debt securities (amortized cost: 2009 $221,213; 2008 $79,232)
|
221,438 | 81,364 | ||||||
|
Short-term investments
|
45,744 | 136,740 | ||||||
|
Cash
|
1,831 | 77 | ||||||
|
Property and equipment — at cost, net of accumulated
depreciation
|
1,095 | 1,312 | ||||||
|
Other assets
|
17,759 | 18,982 | ||||||
|
Current taxes receivable
|
2,469 | — | ||||||
|
Net deferred tax receivable
|
26,055 | — | ||||||
|
Investment in subsidiaries
|
2,441,924 | 2,274,417 | ||||||
| $ | 2,776,683 | $ | 2,740,022 | |||||
|
Liabilities and stockholders’ equity
|
||||||||
|
Other liabilities
|
59,162 | 43,863 | ||||||
|
Current taxes payable
|
— | 4,889 | ||||||
|
Net deferred tax liabilities
|
— | 44,581 | ||||||
|
Total liabilities
|
59,162 | 93,333 | ||||||
|
Stockholders’ equity
|
2,717,521 | 2,646,689 | ||||||
| $ | 2,776,683 | $ | 2,740,022 | |||||
See accompanying Notes to Condensed Financial Statements.
119
Table of Contents
Schedule II –
Condensed Statements of Earnings
ALLEGHANY CORPORATION
Years ended December 31,
ALLEGHANY CORPORATION
Years ended December 31,
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Net investment income
|
$ | 8,341 | $ | 15,806 | $ | 14,545 | ||||||
|
Net realized capital gains
|
200,626 | 156,191 | 56,207 | |||||||||
|
Other than temporary impairment losses
|
— | — | — | |||||||||
|
Other income
|
— | 318 | 203 | |||||||||
|
Total revenues
|
208,967 | 172,315 | 70,955 | |||||||||
|
Costs and Expenses:
|
||||||||||||
|
Interest expense
|
633 | 700 | 1,006 | |||||||||
|
Corporate administration
|
27,022 | 37,216 | 35,534 | |||||||||
|
Total costs and expenses
|
27,655 | 37,916 | 36,540 | |||||||||
|
Operating profit (losses)
|
181,312 | 134,399 | 34,415 | |||||||||
|
Equity in earnings of consolidated subsidiaries
|
214,068 | (73,347 | ) | 397,864 | ||||||||
|
Earnings from continuing operations, before income taxes
|
395,380 | 61,052 | 432,279 | |||||||||
|
Income taxes
|
124,381 | 20,485 | 144,737 | |||||||||
|
Earnings from continuing operations
|
270,999 | 40,567 | 287,542 | |||||||||
|
Earnings from discontinued operations (including gain on
disposal of $141,688 in 2008)
|
— | 164,193 | 24,976 | |||||||||
|
Income taxes (including tax on gain on disposal of $49,591 in
2008)
|
— | 56,789 | 13,448 | |||||||||
|
Earnings from discontinued operations, net of tax
|
— | 107,404 | 11,528 | |||||||||
|
Net earnings
|
$ | 270,999 | $ | 147,971 | $ | 299,070 | ||||||
See accompanying Notes to Condensed Financial Statements.
120
Table of Contents
Schedule II –
Condensed Statements of Cash Flows
ALLEGHANY CORPORATION
Years ended December 31,
ALLEGHANY CORPORATION
Years ended December 31,
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net earnings
|
$ | 270,999 | $ | 147,971 | $ | 299,070 | ||||||
|
Adjustments to reconcile earnings to cash provided by (used in)
operations:
|
||||||||||||
|
Equity in undistributed net (earnings) losses of consolidated
subsidiaries
|
(158,401 | ) | 47,890 | (269,549 | ) | |||||||
|
Depreciation and amortization
|
1,873 | 716 | 980 | |||||||||
|
Net (gain) loss on investment transactions
|
(200,626 | ) | (156,191 | ) | (56,207 | ) | ||||||
|
Decrease (increase) in other assets
|
8,135 | 1,614 | (1,074 | ) | ||||||||
|
Increase (decrease) in other liabilities and taxes payable
|
(7,334 | ) | 50,470 | (20,712 | ) | |||||||
|
Earnings of discontinued operations and sale of subsidiary
|
— | (107,404 | ) | (11,528 | ) | |||||||
|
Net adjustments
|
(356,353 | ) | (162,905 | ) | (358,090 | ) | ||||||
|
Net cash provided by (used) in operations
|
(85,354 | ) | (14,934 | ) | (59,020 | ) | ||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Purchase of investments
|
(286,330 | ) | (75,357 | ) | (69,080 | ) | ||||||
|
Sales of investments
|
364,967 | 259,745 | 159,555 | |||||||||
|
Maturities of investments
|
1,623 | 31,707 | 1,354 | |||||||||
|
Purchases of property and equipment
|
(34 | ) | 940 | (148 | ) | |||||||
|
Net change in short-term investments
|
90,996 | (118,408 | ) | 45,065 | ||||||||
|
Other, net
|
— | — | 504 | |||||||||
|
Net cash provided by (used in) investing activities
|
171,222 | 98,627 | 137,250 | |||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Principal payments on long-term debt
|
— | — | (19,123 | ) | ||||||||
|
Treasury stock acquisitions
|
(75,856 | ) | (25,068 | ) | — | |||||||
|
Convertible preferred stock acquisitions
|
(117,358 | ) | — | — | ||||||||
|
Convertible preferred stock dividends paid
|
(7,456 | ) | (17,350 | ) | (17,367 | ) | ||||||
|
Tax benefit on stock based compensation
|
312 | 2,330 | 1,063 | |||||||||
|
Capital contributions to consolidated subsidiaries
|
(36,200 | ) | (50,005 | ) | (90,179 | ) | ||||||
|
Distributions from consolidated subsidiaries
|
151,040 | 3,050 | 43,635 | |||||||||
|
Other, net
|
1,404 | 2,133 | 3,627 | |||||||||
|
Net cash provided by (used in) financing activities
|
(84,114 | ) | (84,910 | ) | (78,344 | ) | ||||||
|
Net decrease in cash
|
1,754 | (1,217 | ) | (114 | ) | |||||||
|
Cash at beginning of year
|
77 | 1,294 | 1,408 | |||||||||
|
Cash at end of year
|
$ | 1,831 | $ | 77 | $ | 1,294 | ||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
— | — | — | |||||||||
|
Income taxes
|
$ | 105,161 | $ | 154,911 | $ | 170,359 | ||||||
See accompanying Notes to Condensed Financial Statements.
121
Table of Contents
SCHEDULE II –
Notes to Condensed Financial Statements
ALLEGHANY CORPORATION
(in thousands)
ALLEGHANY CORPORATION
(in thousands)
1. Investment in Consolidated Subsidiaries. Reference is
made to Note 1 of the Notes to the Consolidated Financial
Statements set forth in Item 8 of this
Form 10-K
Report.
2. Income Taxes. Reference is made to Note 8 of the
Notes to the Consolidated Financial Statements set forth in
Item 8 of this
Form 10-K
Report.
3. Commitments and Contingencies. Reference is made to
Note 13 of the Notes to the Consolidated Financial
Statements set forth in Item 8 of this
Form 10-K
Report.
4. Stockholders’ Equity. Reference is made to
Note 9 of the Notes to the Consolidated Financial
Statements set forth in Item 8 of this
Form 10-K
Report with respect to stockholders’ equity and surplus
available for dividend payments to Alleghany from its
subsidiaries.
122
Table of Contents
Schedule III –
Supplementary Insurance Information
ALLEGHANY CORPORATION AND SUBSIDIARIES
ALLEGHANY CORPORATION AND SUBSIDIARIES
| At December 31, | For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||
|
Future
|
||||||||||||||||||||||||||||||||||||||||||
|
Policy
|
Other
|
Benefits,
|
||||||||||||||||||||||||||||||||||||||||
|
Benefits,
|
Policy
|
Claims,
|
Amortization
|
|||||||||||||||||||||||||||||||||||||||
|
Deferred
|
Losses,
|
Claims
|
Losses
|
of Deferred
|
||||||||||||||||||||||||||||||||||||||
|
Policy
|
Claims
|
and
|
Net
|
and
|
Policy
|
Other
|
||||||||||||||||||||||||||||||||||||
|
Acquisition
|
and Loss
|
Unearned
|
Benefits
|
Premium
|
Investment
|
Settlement
|
Acquisition
|
Operating
|
Premiums
|
|||||||||||||||||||||||||||||||||
|
Year
|
Line of Business | Costs | Expenses | Premiums | Payable | Revenue | Income | Expenses | Costs | Expenses | Written | |||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||
|
2009
|
Property
and Casualty Insurance |
$ | 71,098 | $ | 2,520,979 | $ | 573,906 | $ | — | $ | 845,015 | $ | 116,719 | $ | 442,104 | $ | 147,635 | $ | 126,087 | $ | 830,829 | |||||||||||||||||||||
|
2008
|
Property
and Casualty Insurance |
$ | 71,753 | $ | 2,578,590 | $ | 614,067 | $ | — | $ | 948,652 | $ | 112,596 | $ | 570,019 | $ | 155,151 | $ | 131,422 | $ | 898,221 | |||||||||||||||||||||
|
2007
|
Property
and Casualty Insurance |
$ | 75,623 | $ | 2,379,701 | $ | 699,409 | $ | — | $ | 974,321 | $ | 126,470 | $ | 449,052 | $ | 146,058 | $ | 111,140 | $ | 962,451 | |||||||||||||||||||||
123
Table of Contents
Schedule IV –
Reinsurance
ALLEGHANY CORPORATION AND SUBSIDIARIES
Three years ended December 31, 2009
ALLEGHANY CORPORATION AND SUBSIDIARIES
Three years ended December 31, 2009
|
Percentage
|
||||||||||||||||||||||||
|
Ceded to
|
Assumed
|
of Amount
|
||||||||||||||||||||||
|
Gross
|
Other
|
From Other
|
Net
|
Assumed
|
||||||||||||||||||||
|
Year
|
Line of Business | Amount | Companies | Companies | Amount | to Net | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
2009
|
Property and casualty | $ | 1,278,910 | $ | 452,999 | $ | 19,104 | $ | 845,015 | 2.3 | % | |||||||||||||
|
2008
|
Property and casualty | $ | 1,409,736 | $ | 478,268 | $ | 17,184 | $ | 948,652 | 1.8 | % | |||||||||||||
|
2007
|
Property and casualty | $ | 1,580,071 | $ | 625,099 | $ | 19,349 | $ | 974,321 | 2.0 | % | |||||||||||||
124
Table of Contents
Schedule V –
Valuation and Qualifying Accounts
ALLEGHANY CORPORATION AND SUBSIDIARIES
ALLEGHANY CORPORATION AND SUBSIDIARIES
|
Charged to
|
Charged to
|
|||||||||||||||||||||
|
Balance at
|
Costs and
|
Other
|
Deductions-
|
Balance at
|
||||||||||||||||||
|
Year
|
Description | January 1, | Expenses | Accounts-Describe | Describe | December 31, | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||||
|
2009
|
Allowance for uncollectible
reinsurance recoverables |
$ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
|
Allowance for uncollectible
premiums receivable |
$ | 3,412 | $ | 918 | $ | — | $ | 3,356 | $ | 974 | ||||||||||||
|
2008
|
Allowance for uncollectible
reinsurance recoverables |
$ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
|
Allowance for uncollectible
premiums receivable |
$ | 1,232 | $ | 3,486 | $ | — | $ | 1,306 | $ | 3,412 | ||||||||||||
|
2007
|
Allowance for uncollectible
reinsurance recoverables |
$ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
|
Allowance for uncollectible
premiums receivable |
$ | 986 | $ | 517 | $ | — | $ | 271 | $ | 1,232 | ||||||||||||
125
Table of Contents
SCHEDULE VI –
Supplemental Information Concerning Insurance Operations
ALLEGHANY CORPORATION AND SUBSIDIARIES
ALLEGHANY CORPORATION AND SUBSIDIARIES
| At December 31, | For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
|
Discount,
|
Claims
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
if Any,
|
and Claim
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Reserves
|
Deducted
|
Adjustment
|
||||||||||||||||||||||||||||||||||||||||||||||
|
for
|
in Reserves
|
Expenses
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Unpaid
|
for Unpaid
|
Incurred
|
Amortization
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Deferred
|
Claims
|
Claims
|
Related to |
of Deferred
|
Paid Claims
|
|||||||||||||||||||||||||||||||||||||||||||
|
Policy
|
and Claim
|
and Claim
|
Net
|
(1)
|
(2)
|
Policy
|
and Claim
|
|||||||||||||||||||||||||||||||||||||||||
|
Acquisition
|
Adjustment
|
Adjustment
|
Unearned
|
Earned
|
Investment
|
Current
|
Prior
|
Acquisition
|
Adjustment
|
Premiums
|
||||||||||||||||||||||||||||||||||||||
|
Year
|
Line of Business | Costs | Expenses | Expenses | Premiums | Premiums | Income | Year | Year | Costs | Expenses | Written | ||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
2009
|
Property and Casualty | $ | 71,098 | $ | 2,520,979 | $ | — | $ | 573,906 | $ | 845,015 | $ | 116,719 | $ | 459,943 | $ | (17,839 | ) | $ | 147,635 | $ | 439,086 | $ | 830,829 | ||||||||||||||||||||||||
|
2008
|
Property and Casualty | $ | 71,753 | $ | 2,578,590 | $ | — | $ | 614,067 | $ | 948,652 | $ | 112,596 | $ | 612,836 | $ | (42,817 | ) | $ | 155,151 | $ | 412,651 | $ | 898,221 | ||||||||||||||||||||||||
|
2007
|
Property and Casualty | $ | 75,623 | $ | 2,379,701 | $ | — | $ | 699,409 | $ | 974,321 | $ | 126,470 | $ | 480,137 | $ | (31,085 | ) | $ | 146,058 | $ | 328,759 | $ | 962,451 | ||||||||||||||||||||||||
126
Table of Contents
INDEX TO
EXHIBITS
|
Exhibit
|
||||
|
Number
|
Description
|
|||
| 3 | .01 | Restated Certificate of Incorporation of Alleghany, as amended by Amendment accepted and received for filing by the Secretary of State of the State of Delaware on June 23, 1988, filed as Exhibit 3.1 to Alleghany’s Registration Statement on Form S-3 (No. 333-134996) filed on June 14, 2006, is incorporated herein by reference. | ||
| 3 | .02 | By-laws of Alleghany, as amended December 19, 2006, filed as Exhibit 3.2 to Alleghany’s Current Report on Form 8-K filed on December 22, 2006, is incorporated herein by reference. | ||
| 3 | .03 | Certificate of Elimination of 5.75% Mandatory Convertible Preferred Stock of Alleghany, filed as Exhibit 3.1 to Alleghany’s Current Report on Form 8-K filed on July 21, 2009, is incorporated herein by reference. | ||
| 4 | .01 | Specimen certificates representing shares of common stock, par value $1.00 per share, of Alleghany, filed as Exhibit 4.1 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, is incorporated herein by reference. | ||
| * 10 | .01 | Alleghany 2005 Management Incentive Plan, filed as Exhibit 10.4 to Alleghany’s Current Report on Form 8-K filed on October 22, 2007, is incorporated herein by reference. | ||
| * 10 | .02 | Alleghany Officers and Highly Compensated Employees Deferred Compensation Plan, as amended and restated as of January 1, 2008, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on December 18, 2008, is incorporated herein by reference. | ||
| *10 | .03 | Alleghany 2002 Long-Term Incentive Plan, adopted and effective April 26, 2002, as amended, filed as Exhibit 10.2 to Alleghany’s Current Report on Form 8-K filed on December 18, 2008, is incorporated herein by reference. | ||
| *10 | .04 | Alleghany 2007 Long-Term Incentive Plan, adopted and effective April 27, 2007, as amended, filed as Exhibit 10.3 to Alleghany’s Current Report on Form 8-K filed on December 18, 2008, is incorporated herein by reference. | ||
| *10 | .05 | Alleghany Retirement Plan, amended and restated effective December 31, 2007, filed as Exhibit 10.05 to Alleghany’s Annual Report on Form 10-K for the year ended December 31, 2008, is incorporated herein by reference. | ||
| *10 | .06 | Alleghany Retirement COLA Plan dated and effective as of January 1, 1992, as adopted on March 17, 1992, filed as Exhibit 10.1 to Alleghany’s Registration Statement on Form S-3 (No. 333-134996) filed on June 14, 2006, is incorporated herein by reference. | ||
| *10 | .07 | Description of Alleghany Group Long Term Disability Plan effective as of July 1, 1995, filed as Exhibit 10.10 to Alleghany’s Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. | ||
| *10 | .08 | Alleghany 2000 Directors’ Stock Option Plan effective April 28, 2000, filed as Exhibit A to Alleghany’s Proxy Statement, filed in connection with its Annual Meeting of Stockholders held on April 28, 2000, is incorporated herein by reference. | ||
| * 10 | .09 | Alleghany Non-Employee Directors’ Retirement Plan, as amended, effective December 19, 2006, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on December 22, 2006, is incorporated herein by reference. | ||
| *10 | .10(a) | Alleghany 2005 Directors’ Stock Plan, as amended as of December 31, 2008, filed as Exhibit 10.12(a) to Alleghany’s Annual Report on Form 10-K for the year ended December 31, 2008, is incorporated herein by reference. | ||
| *10 | .10(b) | Form of Option Agreement under the Alleghany 2005 Directors’ Stock Plan, as amended as of December 16, 2008, filed as Exhibit 10.12(a) to Alleghany’s Annual Report on Form 10-K for the year ended December 31, 2008, is incorporated herein by reference. | ||
| * | Compensatory plan or arrangement. |
127
Table of Contents
|
Exhibit
|
||||
|
Number
|
Description
|
|||
| *10 | .10(c) | Amended and Restated Stock Unit Supplement to the Alleghany 2005 Directors’ Stock Plan, as amended as of December 16, 2008, filed as Exhibit 10.12(c) to Alleghany’s Annual Report on Form 10-K for the year ended December 31, 2008, is incorporated herein by reference. | ||
| *10 | .11(a) | Employment Agreement, dated October 7, 2002, between Alleghany and Weston M. Hicks, filed as Exhibit 10.1 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, is incorporated herein by reference. | ||
| * 10 | .11(b) | Restricted Stock Unit Matching Grant Agreement, dated October 7, 2002, between Alleghany and Weston M. Hicks, filed as Exhibit 10.3 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, is incorporated herein by reference. | ||
| *10 | .11(c) | Restricted Stock Award Agreement, dated December 31, 2004, between Alleghany and Weston M. Hicks, filed as Exhibit 10.11(d) to Alleghany’s Annual Report on Form 10-K for the year ended December 31, 2004, is incorporated herein by reference. | ||
| *10 | .11(d) | Letter Agreement, dated April 15, 2008, between Alleghany and Weston M. Hicks, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on April 21, 2008, is incorporated herein by reference. | ||
| *10 | .12 | Restricted Stock Award Agreement, dated as of December 21, 2004 between Alleghany and Roger B. Gorham, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on April 21, 2005, is incorporated herein by reference. | ||
| 10 | .13(a) | Asset Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville Sales Corporation (the “Celite Asset Purchase Agreement”), filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on June 20, 2006, is incorporated herein by reference. | ||
| 10 | .13(b) | List of Contents of Exhibits and Schedules to the Celite Asset Purchase Agreement, filed as Exhibit 10.2 to Alleghany’s Current Report on Form 8-K filed on June 20, 2006, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .13(c) | Amendment No. 1 dated as of July 31, 1991 to the Celite Asset Purchase Agreement, filed as Exhibit 10.3 to Alleghany’s Current Report on Form 8-K filed on June 20, 2006, is incorporated herein by reference. | ||
| 10 | .13(d) | Amendment No. 2 dated as of May 11, 2006 to the Celite Asset Purchase Agreement, filed as Exhibit 10.4 to Alleghany’s Current Report on Form 8-K filed on June 20, 2006, is incorporated herein by reference. | ||
| 10 | .14(a) | Acquisition Agreement, dated as of June 6, 2003, by and between Royal Group, Inc. and AIHL (the “Resurgens Specialty Acquisition Agreement”), filed as Exhibit 10.1 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .14(b) | List of Contents of Exhibits and Schedules to the Resurgens Specialty Acquisition Agreement, filed as Exhibit 10.2 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .15(a) | Quota Share Reinsurance Agreement, dated as of July 1, 2003, by and between Royal Indemnity Company and RIC (the “Royal Indemnity Company Quota Share Reinsurance Agreement”), filed as Exhibit 10.4 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| * | Compensatory plan or arrangement. |
128
Table of Contents
|
Exhibit
|
||||
|
Number
|
Description
|
|||
| 10 | .15(b) | List of Contents of Exhibits and Schedules to the Royal Indemnity Company Quota Share Reinsurance Agreement, filed as Exhibit 10.5 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .16(a) | Quota Share Reinsurance Agreement, dated as of July 1, 2003, by and between Royal Surplus Lines Insurance Company and RIC (the “Royal Surplus Lines Insurance Company Quota Share Reinsurance Agreement”), filed as Exhibit 10.6 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .16(b) | List of Contents of Exhibits and Schedules to the Royal Surplus Lines Insurance Company Quota Share Reinsurance Agreement, filed as Exhibit 10.7 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .17(a) | Quota Share Reinsurance Agreement, dated as of July 1, 2003, by and between Landmark and RIC (the “Landmark Quota Share Reinsurance Agreement”), filed as Exhibit 10.8 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .17(b) | List of Contents of Exhibits and Schedules to the Landmark Quota Share Reinsurance Agreement, filed as Exhibit 10.9 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .18(a) | Administrative Services Agreement, dated as of July 1, 2003, by and among Royal Indemnity Company, Resurgens Specialty and RIC (the “Royal Indemnity Company Administrative Services Agreement”), filed as Exhibit 10.10 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .18(b) | List of Contents of Exhibits and Schedules to the Royal Indemnity Company Administrative Services Agreement, filed as Exhibit 10.11 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .19(a) | Administrative Services Agreement, dated as of July 1, 2003, by and among Royal Surplus Lines Insurance Company, Resurgens Specialty and RIC (the “Royal Surplus Lines Insurance Company Administrative Services Agreement”), filed as Exhibit 10.12 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .19(b) | List of Contents of Exhibits and Schedules to the Royal Surplus Lines Insurance Company Administrative Services Agreement, filed as Exhibit 10.13 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .20(a) | Administrative Services Agreement, dated as of July 1, 2003, by and among Royal Insurance Company of America, Resurgens Specialty and RIC (the “Royal Insurance Company of America Administrative Services Agreement”), filed as Exhibit 10.14 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .20(b) | List of Contents of Exhibits and Schedules to the Royal Insurance Company of America Administrative Services Agreement, filed as Exhibit 10.15 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
129
Table of Contents
|
Exhibit
|
||||
|
Number
|
Description
|
|||
| 10 | .21(a) | Administrative Services Agreement, dated as of July 1, 2003, by and among Landmark, Resurgens Specialty and RIC (the “Landmark Administrative Services Agreement”), filed as Exhibit 10.16 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .21(b) | List of Contents of Exhibits and Schedules to the Landmark Administrative Services Agreement, filed as Exhibit 10.17 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .22 | Administrative Services Intellectual Property License Agreement, dated as of July 1, 2003, by and between Royal Indemnity Company and Resurgens Specialty (entered into pursuant to the Royal Indemnity Company Administrative Services Agreement), filed as Exhibit 10.21 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .23 | Administrative Services Intellectual Property License Agreement, dated as of July 1, 2003, by and between Royal Indemnity Company and Resurgens Specialty (entered into pursuant to the Royal Surplus Lines Insurance Company Administrative Services Agreement), filed as Exhibit 10.22 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .24 | Administrative Services Intellectual Property License Agreement, dated as of July 1, 2003, by and between Royal Indemnity Company and Resurgens Specialty (entered into pursuant to the Royal Insurance Company of America Administrative Services Agreement), filed as Exhibit 10.23 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .25 | Administrative Services Intellectual Property License Agreement, dated as of July 1, 2003, by and between Royal Indemnity Company and Resurgens Specialty (entered into pursuant to the Landmark Administrative Services Agreement), filed as Exhibit 10.24 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .26(a) | Stock Purchase Agreement, dated as of June 6, 2003, by and between AIHL and Guaranty National Insurance Company (the “Landmark Stock Purchase Agreement”), filed as Exhibit 10.42 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .26(b) | List of Contents of Exhibits and Schedules to the Landmark Stock Purchase Agreement, filed as Exhibit 10.43 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .27(a) | Stock Purchase Agreement, dated as of June 12, 2003, by and between Swiss Re America Holding Corporation and RSUI (the “RIC Stock Purchase Agreement”), filed as Exhibit 10.44 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. | ||
| 10 | .27(b) | List of Contents of Exhibits and Schedules to the RIC Stock Purchase Agreement, filed as Exhibit 10.45 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .28(a) | RIC (Landmark) Quota Share Reinsurance Agreement, dated as of September 2, 2003, by and between Landmark and Royal Indemnity Company (the “Royal Indemnity Company (Landmark) Quota Share Reinsurance Agreement”), filed as Exhibit 10.2 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. | ||
130
Table of Contents
|
Exhibit
|
||||
|
Number
|
Description
|
|||
| 10 | .28(b) | List of Contents of Exhibits and Schedules to the Royal Indemnity Company (Landmark) Quota Share Reinsurance Agreement, filed as Exhibit 10.3 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .29(a) | RIC (Landmark) Administrative Services Agreement, dated as of September 2, 2003, by and between Royal Indemnity Company and Landmark (the “Royal Indemnity Company (Landmark) Administrative Services Agreement”), filed as Exhibit 10.4 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. | ||
| 10 | .29(b) | List of Contents of Exhibits and Schedules to the Royal Indemnity Company (Landmark) Administrative Services Agreement, filed as Exhibit 10.5 to Alleghany’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .30(a) | Stock Purchase Agreement, dated as of May 19, 2005, by and among Imerys USA, Inc., Imerys, S.A. and Alleghany (the “Imerys Stock Purchase Agreement”), filed as Exhibit 10.1(a) to Alleghany’s Current Report on Form 8-K filed on May 23, 2005, is incorporated herein by reference. | ||
| 10 | .30(b) | List of Contents of Exhibits and Schedules to the Imerys Stock Purchase Agreement, filed as Exhibit 10.1(b) to Alleghany’s Current Report on Form 8-K filed on May 23, 2005, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request. | ||
| 10 | .31 | Agreement and Plan of Merger, dated as of June 27, 2008, by and among Darwin, AWAC and Allied World Merger Company, filed as Exhibit 2.1 to Alleghany’s Current Report on Form 8-K filed on June 30, 2008, is incorporated herein by reference. | ||
| 10 | .32 | Voting Agreement, dated as of June 27, 2008, by and between AIHL and AWAC, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on June 30, 2008, is incorporated herein by reference. | ||
| 21 | List of subsidiaries of Alleghany. | |||
| 23 | Consent of KPMG LLP, independent registered public accounting firm, to the incorporation by reference of its reports relating to the financial statements, the related schedules of Alleghany and subsidiaries and its attestation report. | |||
| 31 | .1 | Certification of the Chief Executive Officer of Alleghany pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2 | Certification of the Chief Financial Officer of Alleghany pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1 | Certification of the Chief Executive Officer of Alleghany pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Annual Report on Form 10-K. | ||
| 32 | .2 | Certification of the Chief Financial Officer of Alleghany pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Annual Report on Form 10-K. | ||
131
TABLE OF CONTENTS
Part IprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 3. Legal ProceedingsprintItem 4. Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint