ALLEGHANY CORP /DE
10-Qs and 10-Ks
PROXIES
Table of Contents
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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, 2010 | ||
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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
(State or other jurisdiction of incorporation or organization) |
51-0283071
(I.R.S. Employer Identification Number) |
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7 Times Square Tower,
New York, New York (Address of principal executive offices) |
10036
(Zip Code) |
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 | 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
þ
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, 2010, 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 $2,158,211,388.
As of February 18, 2011, 8,747,177 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 29, 2011 are incorporated into Part III of this
Form 10-K
Report.
ALLEGHANY
CORPORATION
Form 10-K
Report
for the
year ended December 31, 2010
Table of
Contents
Description
14
Table of Contents
PART I
References in this Annual Report on
Form 10-K
for the year ended December 31, 2010, 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, | |
| • | “PCC” refers to our subsidiary Pacific Compensation Corporation (formerly known as Employers Direct Corporation), | |
| • | “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 PCC, in the property and
casualty and surety insurance business. 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. In March 2007, Alleghany Capital
Partners LLC, or “Alleghany Capital Partners,” was
established to manage our equity investments, including those
held by our insurance operating units. AIHL acquired PCC on
July 18, 2007 for a purchase price of $198.1 million,
including $5.6 million of incurred acquisition costs. We
also own and manage properties in Sacramento, California through
our subsidiary Alleghany Properties.
We own an approximately 38 percent ownership stake in ORX
Exploration, Inc., or “ORX,” a regional oil and gas
exploration and production company, and 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.” As a result of our
disposition of Darwin, that business has been reclassified as
discontinued operations in this
Form 10-K
Report.
In 2010, 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, 2010, we had 745 employees, with 732
at our subsidiaries and 13 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 2010. 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 PCC,
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, PCC 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 2010, property insurance accounted
for approximately 45.6 percent, and casualty insurance
accounted for approximately 49.8 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
2010, surety bonds accounted for approximately 4.6 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. The market for
specialty insurance coverages differs significantly from the
market for standard insurance coverages. The specialty market
provides coverage for
hard-to-place
risks that generally do not fit the underwriting criteria of the
standard market which provides coverage for largely uniform and
relatively predictable exposures and which is highly regulated
with respect to rates and forms.
RSUI writes specialty business in the admitted specialty market
primarily through RIC in the 50 states and the District of
Columbia where RIC is licensed and subject to state form and
rate regulations. Most of the risks in the admitted specialty
market are unique and
hard-to-place
in the standard market, but must remain with an admitted
insurance company for regulatory
and/or
marketing reasons. As an admitted carrier, RIC is subject to
more state regulation than a non-admitted carrier, particularly
with regard to rate and form filing requirements, restrictions
on the ability to exit lines of business, premium tax payments
and membership in various state associations, such as state
guaranty funds and assigned risk plans.
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. This typically results in coverages that are more
restrictive and expensive than coverages written by a standard
insurance company. As of December 31, 2010, Landmark was
approved to write business on a non-admitted basis in
49 states and is a domestic surplus lines company in
Oklahoma.
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Table of Contents
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, 2010, the statutory surplus of RIC was
approximately $1.24 billion, the statutory surplus of
Landmark was $180.2 million, and the statutory surplus of
Covington was $26.5 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, 2010, RSUI conducted
its insurance business through approximately 162 independent
wholesale insurance brokers located throughout the United States
and 31 managing general agents. 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 31 managing general agents for small,
specialized coverages. RSUI’s top five producing wholesale
brokers accounted for approximately 61 percent of gross
premiums written by RSUI in 2010. RSUI’s top two producing
wholesale brokers, Swett & Crawford Group and AmWINS
Group, Inc. accounted for, in the aggregate, approximately
35 percent of AIHL’s gross premiums written in 2010.
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 the 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
70.2 percent of its gross premiums written in 2010
(including approximately 5.0 percent of professional
liability), and the surety business accounted for the remainder.
As of December 31, 2010, the statutory surplus of Capitol
Indemnity was $187.2 million, including the statutory
surplus of CSIC of $36.0 million. As of December 31,
2010, the statutory surplus of Platte River was
$40.7 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.
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Table of Contents
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, 2010, CATA
had approximately 402 independent agents and 60 general agents
licensed to write property and casualty and surety coverages,
approximately 92 agents specializing in professional liability
and approximately 319 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 2010.
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 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.
PCC
General.
Effective April 12, 2010, as part of a
strategic repositioning effort, PCC changed its name from
Employers Direct Corporation and changed the name of its
wholly-owned insurance subsidiary from Employers Direct
Insurance Company to Pacific Compensation Insurance Company, or
“PCIC,” and took steps to emerge as a writer, through
PCIC, of workers’ compensation insurance distributed
through independent insurance brokers. PCIC 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. PCC leases approximately 66,000 square feet of
office space in Agoura Hills, California.
In June 2009, PCC determined that it was unable to write
business at rates it deemed adequate due to the state of the
California workers’ compensation market. As a result, PCC
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 PCC’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 PCIC
from A- (Excellent), with a negative outlook, to B++ (Good),
with a stable outlook. During the 2009 third quarter, PCC 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, 2010, the statutory surplus of PCIC was
$133.4 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 $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
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expired on March 31, 2008, and AIHL Re has not participated
in Homesite’s catastrophe reinsurance programs since that
date.
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 loss 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 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 2010.
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 Loss and LAE
| Years Ended December 31 | ||||||||||||||||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||||||||||
| (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 | $ | 1,481,3 | ||||||||||||||||||
|
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 | 388.7 | ||||||||||||||||||||||||||||
|
Two years later
|
80.6 | 116.8 | 310.8 | 356.1 | 421.7 | 515.0 | 659.5 | |||||||||||||||||||||||||||||
|
Three years later
|
100.1 | 149.6 | 365.2 | 493.2 | 529.6 | 708.5 | ||||||||||||||||||||||||||||||
|
Four years later
|
110.1 | 173.7 | 413.6 | 572.2 | 648.6 | |||||||||||||||||||||||||||||||
|
Five years later
|
115.8 | 191.7 | 446.9 | 664.7 | ||||||||||||||||||||||||||||||||
|
Six years later
|
121.7 | 208.0 | 465.4 | |||||||||||||||||||||||||||||||||
|
Seven years later
|
124.0 | 220.0 | ||||||||||||||||||||||||||||||||||
|
Eight years later
|
125.5 | |||||||||||||||||||||||||||||||||||
|
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 | 1,539.6 | ||||||||||||||||||||||||||||
|
Two years later
|
147.7 | 264.6 | 620.1 | 941.2 | 1,047.9 | 1,341.9 | 1,526.5 | |||||||||||||||||||||||||||||
|
Three years later
|
149.0 | 268.1 | 593.3 | 899.7 | 1,012.5 | 1,306.7 | ||||||||||||||||||||||||||||||
|
Four years later
|
150.7 | 263.8 | 584.1 | 873.0 | 976.7 | |||||||||||||||||||||||||||||||
|
Five years later
|
153.5 | 262.0 | 566.7 | 858.8 | ||||||||||||||||||||||||||||||||
|
Six years later
|
151.7 | 256.1 | 554.0 | |||||||||||||||||||||||||||||||||
|
Seven years later
|
148.4 | 252.8 | ||||||||||||||||||||||||||||||||||
|
Eight years later
|
143.6 | |||||||||||||||||||||||||||||||||||
|
Cumulative (Deficiency) Redundancy
|
$ | (30.3 | ) | $ | 23.2 | $ | 85.0 | $ | 94.1 | $ | 150.8 | $ | 106.2 | $ | 43.8 | $ | 33.7 | |||||||||||||||||||
|
Gross Liability-End of Year
|
$ | 258.0 | $ | 438.0 | $ | 1,246.4 | $ | 2,571.9 | $ | 2,228.9 | $ | 2,379.7 | $ | 2,578.6 | $ | 2,521.0 | $ | 2,328.7 | ||||||||||||||||||
|
Less: Reinsurance Recoverable
|
144.8 | 162.0 | 607.4 | 1,619.0 | 1,101.4 | 966.8 | 1,008.3 | 947.7 | 847.4 | |||||||||||||||||||||||||||
|
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 | $ | 1,481.3 | ||||||||||||||||||
|
Gross Re-estimated Liability-Latest
|
$ | 278.9 | $ | 429.6 | $ | 1,123.1 | $ | 2,318.5 | $ | 1,890.0 | $ | 2,121.2 | $ | 2,401.4 | $ | 2,402.4 | $ | 2,328.7 | ||||||||||||||||||
|
Re-estimated Recoverable-Latest
|
135.3 | 176.8 | 569.1 | 1,459.7 | 913.3 | 814.5 | 874.9 | 862.8 | 847.4 | |||||||||||||||||||||||||||
|
Net Re-estimated Liability-Latest
|
$ | 143.6 | $ | 252.8 | $ | 554.0 | $ | 858.8 | $ | 976.7 | $ | 1,306.7 | $ | 1,526.5 | $ | 1,539.6 | $ | 1,481.3 | ||||||||||||||||||
|
Gross Cumulative (Deficiency) Redundancy
|
$ | (20.9 | ) | $ | 8.4 | $ | 123.2 | $ | 253.4 | $ | 338.9 | $ | 258.5 | $ | 177.2 | $ | 118.6 | $ | — | |||||||||||||||||
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The net cumulative redundancies since 2003 primarily reflect
casualty net reserve releases by RSUI and, to a lesser extent,
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 PCC in 2008, 2009
and 2010. Prior year reserve adjustments are discussed on
pages 43 and 44 and pages 57 and 58 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 accounting
principles in the United States of America, or “GAAP,”
for the last three years is shown below (in millions):
Reconciliation
of Reserves for Loss and LAE from SAP Basis to
GAAP Basis
| 2010 | 2009 | 2008 | ||||||||||
|
Statutory reserves
|
$ | 1,482.3 | $ | 1,574.9 | $ | 1,573.1 | ||||||
|
Reinsurance recoverables*
|
847.4 | 947.7 | 1,008.3 | |||||||||
|
Purchase accounting adjustment
|
(1.0 | ) | (1.6 | ) | (2.8 | ) | ||||||
|
GAAP reserves
|
$ | 2,328.7 | $ | 2,521.0 | $ | 2,578.6 | ||||||
| * | 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 loss and LAE of AIHL for the last three years is
shown below (in millions):
Reconciliation
of Reserves for Loss and LAE
| 2010 | 2009 | 2008 | ||||||||||
|
Reserves as of January 1
|
$ | 2,521.0 | $ | 2,578.6 | $ | 2,379.7 | ||||||
|
Less: reinsurance recoverables
|
947.7 | 1,008.3 | 966.8 | |||||||||
|
Net reserves
|
1,573.3 | 1,570.3 | 1,412.9 | |||||||||
|
Incurred loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
411.6 | 460.0 | 612.8 | |||||||||
|
Prior years
|
(33.7 | ) | (17.9 | ) | (42.8 | ) | ||||||
|
Total incurred loss, net of reinsurance
|
377.9 | 442.1 | 570.0 | |||||||||
|
Paid loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
81.2 | 83.5 | 116.4 | |||||||||
|
Prior years
|
388.7 | 355.6 | 296.2 | |||||||||
|
Total paid loss, net of reinsurance
|
469.9 | 439.1 | 412.6 | |||||||||
|
Reserves, net of reinsurance recoverables, as of December 31
|
1,481.3 | 1,573.3 | 1,570.3 | |||||||||
|
Reinsurance recoverables as of December 31*
|
847.4 | 947.7 | 1,008.3 | |||||||||
|
Reserves, gross of reinsurance recoverables, as of December 31
|
$ | 2,328.7 | $ | 2,521.0 | $ | 2,578.6 | ||||||
| * | 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. |
20
Table of Contents
Asbestos
and Environmental Impairment Reserves
AIHL’s reserves for loss and LAE include amounts for
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, 2010, reserves of CATA totaled
$11.3 million for asbestos liabilities and
$2.8 million for environmental liabilities, resulting in
aggregate asbestos and environmental reserves of
$14.1 million. As of December 31, 2009, reserves for
asbestos liabilities totaled $15.1 million and reserves for
environmental liabilities totaled $3.8 million, resulting
in aggregate asbestos and environmental reserves of
$18.9 million. The decrease in liabilities during 2010 is
due primarily to the fact that CATA released $3.5 million
of such reserves at June 30, 2010 based on a reserve study
that was completed in the 2010 second quarter.
At December 31, 2010, the reserves for asbestos liabilities
were approximately 13 times the average paid claims for the
prior three year period, compared with 18 times at
December 31, 2009. The reserves for environmental
impairment liabilities were approximately three times the
average paid claims for the prior three year period, compared
with five times at December 31, 2009. The significant
changes in these metrics from December 31, 2009 to
December 31, 2010 primarily reflect fluctuations in the
amount and timing of commutations in recent years, which affect
paid losses and loss exposure, as well as the impact of the
above-noted reserve release. Additional information regarding
the policies that CATA uses to set reserves for these asbestos
and environmental impairment claims is set forth on
pages 44 and 45 of this
Form 10-K
Report.
The reconciliation of the beginning and ending aggregate
reserves for unpaid loss and LAE related to asbestos and
environmental impairment claims of AIHL for the years 2008
through 2010 is shown below (in millions):
Reconciliation
of Asbestos-Related Claims Reserves for Loss and LAE
| 2010 | 2009 | 2008 | ||||||||||
|
Reserves as of January 1
|
$ | 15.1 | $ | 14.9 | $ | 16.7 | ||||||
|
Loss and LAE incurred
|
(3.0 | ) | 0.5 | (0.3 | ) | |||||||
|
Paid losses*
|
(0.8 | ) | (0.3 | ) | (1.5 | ) | ||||||
|
Reserves as of December 31
|
$ | 11.3 | $ | 15.1 | $ | 14.9 | ||||||
|
Type of reserves
|
||||||||||||
|
Case
|
$ | 1.7 | $ | 1.9 | $ | 2.5 | ||||||
|
IBNR
|
9.6 | 13.2 | 12.4 | |||||||||
|
Total
|
$ | 11.3 | $ | 15.1 | $ | 14.9 | ||||||
| * | Paid losses include commutations and legal settlements as well as regular paid losses. |
Reconciliation
of Environmental Impairment Claims Reserves for Loss and
LAE
| 2010 | 2009 | 2008 | ||||||||||
|
Reserves as of January 1
|
$ | 3.8 | $ | 5.5 | $ | 6.2 | ||||||
|
Loss and LAE incurred
|
(0.5 | ) | (0.4 | ) | 0.3 | |||||||
|
Paid losses*
|
(0.5 | ) | (1.3 | ) | (1.0 | ) | ||||||
|
Reserves as of December 31
|
$ | 2.8 | $ | 3.8 | $ | 5.5 | ||||||
|
Type of reserves
|
||||||||||||
|
Case
|
$ | 0.4 | $ | 0.5 | $ | 0.9 | ||||||
|
IBNR
|
2.4 | 3.3 | 4.6 | |||||||||
|
Total
|
$ | 2.8 | $ | 3.8 | $ | 5.5 | ||||||
| * | Paid losses include commutations and legal settlements as well as regular paid losses. |
21
Table of Contents
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; 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 31 and 32
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 the 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 23 and
24 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. 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.
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 2010, RSUI ceded 38.9 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, 2010, RSUI retained a maximum net exposure for
any single property risk of $19 million and any single
casualty risk of $9.75 million, with the exception of
losses arising from acts of foreign terrorism.
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Table of Contents
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 28 percent of its property gross premiums
written in 2010 under these surplus share treaties. Under
RSUI’s
2010-2011
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 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
2010-2011
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 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.
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, 2010 to May 31, 2011
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
D&O liability line quota share reinsurance treaty for the
period July 1, 2010 to June 30, 2011 provides coverage
for policies with limits up to $20.0 million, with RSUI
ceding 35 percent of the premium and loss for 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 to provide
federal assistance to the insurance industry in order to meet
the needs of commercial insurance policyholders for coverages
against losses due to 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 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 to
commercial insurance policyholders against certain acts of
terrorism, the law requires the U.S. federal government to
reimburse such insurers for 85 percent of insured losses
during a program year resulting from such acts of terrorism
above certain premium-based deductibles. AIHL’s deductible
under the Terrorism Act in 2011 will be 20 percent of its
direct premiums earned in 2010, or $216.1 million. In
addition, federal reimbursement 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 2011 but no payment shall be made
for any portion of aggregate industry insured losses that exceed
$100.0 billion in 2011.
AIHL’s terrorism exposure is substantially attributable to
RSUI. Approximately 4.1 percent of all policies and
approximately 16.5 percent of property policies written by
RSUI in 2010 contained coverage for domestic and foreign acts of
terrorism. RSUI uses various underwriting strategies to mitigate
its exposure to terrorism losses. In addition, its casualty
reinsurance programs provide coverage for domestic and foreign
acts of terrorism. The cost of property reinsurance for acts of
terrorism has increased significantly in recent years and
capacity is limited. RSUI’s property reinsurance programs
provide coverage only for domestic acts of terrorism; as a
result, RSUI remains liable for losses under property policies
that provide coverage for foreign acts of terrorism, subject to
Terrorism Act reimbursement.
23
Table of Contents
CATA uses reinsurance to protect against severity losses. In
2010, CATA reinsured with various reinsurers individual property
and casualty and contract surety risks in excess of
$1.5 million. As of December 1, 2010, the commercial
surety line was reinsured for individual losses above
$1.5 million. In addition, CATA purchases facultative
reinsurance coverage for property and casualty risks in excess
of $6.0 million and for commercial surety risks in excess
of $15.0 million.
As of April 1, 2010, PCC ceased purchasing reinsurance as a
result of its withdrawal from writing direct business. Prior to
April 1, 2010, PCC used reinsurance to protect against
catastrophic losses.
At December 31, 2010, AIHL had total reinsurance
recoverables of $873.3 million, consisting of
$847.4 million of ceded outstanding loss and LAE and
$25.9 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 89.9 percent of
AIHL’s reinsurance recoverables balance at
December 31, 2010 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, 2010. Additional information regarding the
risks faced by AIHL’s insurance operating units with
respect to their use of reinsurance can be found on page 31
and 32 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(b) 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 PCC are managed
under the direction of Alleghany, with Alleghany Capital
Partners primarily responsible for managing RSUI, CATA and PCC
equity portfolios. For a discussion of AIHL investment results,
please see pages 55 and 56 and pages 63 through 67 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. PCC competes primarily in
California. Our insurance operating units compete with a large
number of other companies in their selected lines of business,
including 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 the 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
24
Table of Contents
historically has been a cyclical business characterized by
periods of intense price competition due to excessive
underwriting capacity as well as periods when shortages of
capacity permitted favorable price levels.
During periods of excessive underwriting capacity, in an attempt
to use their capital, many insurance companies seek to write
additional premiums without appropriate regard for ultimate
profitability, and standard insurance companies are more willing
to write specialty coverages. The opposite is typically true
during periods when a shortage of capacity exists. 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 standard market
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.
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 page 30 of this
Form 10-K
Report.
Regulation
U.S. Insurance Regulation.
The insurance companies
within AIHL’s insurance operating units conduct business in
the United States and have no foreign operations. They are
regulated in all U.S. jurisdictions in which they conduct
business. The extent of this regulation varies, but state
insurance laws and regulations generally govern the financial
condition of insurers, including standards of solvency, types
and concentrations of permissible investments, establishment and
maintenance of reserves, credit for reinsurance and requirements
of capital adequacy and the business conduct of insurers,
including marketing and sales practices and claims handling. In
addition, state insurance laws and regulations usually require
the licensing of insurers and agents, and the approval of policy
forms, related materials and the rates for certain lines of
insurance. The insurance laws applicable to us or our insurance
companies are described below.
Insurance Holding Company Regulation.
As an insurance
holding company, we and our insurance companies are subject to
regulation under the insurance holding company laws enacted in
those states where our insurance companies are domiciled or
where they conduct business. Although the insurance holding
company laws and regulations vary from jurisdiction to
jurisdiction, such laws generally require an insurance holding
company and its insurer subsidiaries (other than captive
insurers) to register with their respective state insurance
regulatory authorities and to file with those authorities
certain reports, including information concerning their capital
structure, ownership, financial condition, certain intercompany
transactions, including dividends and distributions and general
business operations. The insurance holding company laws of some
states, including with respect to the payment of dividends and
distributions, may be more restrictive than the insurance
holding company laws of other states.
Under the insurance holding company laws and regulations to
which we and our insurance companies are subject, our insurance
companies may not pay an “extraordinary” dividend or
distribution, or pay a dividend except out of earned surplus,
without the approval of state insurance regulatory authorities.
In general, an “extraordinary” dividend or
distribution is defined as a dividend or distribution that,
together with other dividends and distributions made within the
preceding 12 months, exceeds the greater (or, in some
jurisdictions, the lesser) of 10 percent of the
insurer’s statutory surplus as of the immediately prior
year end, and the statutory net income during the prior calendar
year.
In addition, insurance holding company laws and regulations to
which we and our insurance companies are subject generally
require prior notification and approval or non-disapproval by
the applicable insurance regulatory authority of certain other
significant transactions, including sales, loans, reinsurance
agreements and service agreements between an insurer subsidiary
and its holding company or other subsidiaries of the holding
company.
The insurance holding company laws and regulations of the states
in which our insurance companies are domiciled also require
that, before a person can acquire direct or indirect control of
an insurer domiciled in the state,
25
Table of Contents
prior written approval must be obtained from the state insurance
regulatory authorities. The state insurance regulatory
authorities are required to consider various factors, including
the financial strength of the acquirer, the integrity and
management experience of the acquirer’s board of directors
and executive officers, the acquirer’s plans for the future
operations of the insurer and any possible anti-competitive
results that may arise from the proposed acquisition of control.
Pursuant to applicable laws and regulations, “control”
over an insurer is presumed to exist if any person, directly or
indirectly, owns, controls, holds the power to vote or holds
proxies representing, 10 percent or more of the voting
securities of that insurer. Indirect ownership includes
ownership of the shares of our common stock. Thus, the insurance
regulatory authorities of the states in which our insurance
companies are domiciled are likely to apply these restrictions
on acquisition of control to any proposed acquisition of
10 percent or more of our common stock.
Some states require a person seeking to acquire control of an
insurer licensed but not domiciled in that state to make a
filing prior to completing an acquisition if the acquirer and
its affiliates, on the one hand, and the target insurer and its
affiliates, on the other hand, have specified market shares in
the same lines of insurance in that state. While these
provisions may not require acquisition approval, they can lead
to the imposition of conditions on an acquisition that could
delay or prevent its consummation.
The acquisition of control laws described above may discourage
potential acquisition proposals and may delay, deter or prevent
a change in control of us, including through transactions, and
in particular unsolicited transactions, that some or all of our
stockholders might consider to be desirable.
Model Insurance Holding Company System Regulatory Act and
Regulation.
In December 2010, the National Association of
Insurance Commissioners, or “NAIC,” adopted amendments
to the Model Insurance Holding Company System Regulatory Act and
Regulation, or the “Amended Model Act and Regulation.”
The Amended Model Act and Regulation introduce the concept of
“enterprise” risk within an insurance holding company
system. If and when adopted by a particular state, the Amended
Model Act and Regulation would impose more extensive
informational requirements on the insurance holding company and
other affiliates of a licensed insurer with the purpose of
protecting such insurer from enterprise risk, including
requiring an annual enterprise risk report by the insurance
holding company that identifies the material risks within the
insurance holding company system that could pose enterprise risk
to the licensed insurer. The Amended Model Act and Regulation
must be adopted by the individual states, and specifically the
states in which our insurance companies are domiciled, for the
new requirements to apply. It is not clear if and when such
states will adopt these changes; however, it is anticipated that
the NAIC will seek to make the amendments part of its
accreditation standards for state solvency regulation, which
would motivate states to adopt the amendments promptly.
Rates and Policy Forms.
Our insurance companies’
policy forms and various premium rates and rates for property or
casualty or surety insurance policies are subject to regulation
in every state in which they conduct business. In many states,
rates and policy forms must be filed with the applicable
insurance regulatory authority prior to their use, and in some
states, rates and forms must be approved by the applicable
insurance regulatory authority prior to use.
Financial and Market Conduct Examinations.
The insurance
laws and regulations to which our insurance companies are
subject govern their marketplace activities, affecting the form
and content of disclosure to consumers, product illustrations,
advertising, product replacement, sales and underwriting
practices and complaint and claims handling. These provisions
are generally enforced through periodic market conduct
examinations. Such insurance laws and regulations also govern
the licensing of insurance companies and agents and regulate
trade practices.
The California Department of Insurance, or the “CDI,”
is responsible for periodic financial and market conduct
examinations of California-domiciled insurance companies. In
September 2010, the CDI issued a financial examination report of
PCIC for the period from July 1, 2004 through
December 31, 2008. As part of its work for such financial
examination report, the CDI produced an actuarial report, or the
“Actuarial Report,” for the years ended
December 31, 2009 and 2008. The Actuarial Report included
an estimate of loss and LAE reserves on a statutory basis of
accounting that was higher than that recorded by PCIC at such
dates. We believe that PCIC’s reserves for unpaid loss and
LAE are adequate, and the CDI did not require PCIC to currently
or retroactively increase its carried reserves to the estimates
included in the Actuarial Report. AIHL did, however, contribute
26
Table of Contents
$40.0 million of capital to PCC on September 27, 2010.
These funds were used by PCIC to increase its workers’
compensation deposit, which California workers’
compensation regulations require PCIC to maintain, to a level
consistent with the estimated loss and LAE reserves included in
the Actuarial Report. To the extent that PCIC’s actual loss
experience is less than the CDI’s final estimate of
PCIC’s loss and LAE reserves, over time such additional
workers’ compensation deposit funds will be released back
to PCIC.
Periodic Financial Reporting and Risk-Based Capital.
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 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, 2010, 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, 2010, PCIC had four of its ratios falling
outside the NAIC’s usual ranges, with one falling outside
the usual range due to PCIC’s underwriting loss in 2010,
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 PCIC in 2010 and one
falling outside the usual range due to a decline in investment
yields.
Guarantee Associations and Similar Arrangements.
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 certain 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.
Statutory Accounting Principles.
State insurance
regulatory authorities have developed SAP as a basis of
accounting used to monitor and regulate the solvency of
insurers. SAP is primarily concerned with measuring an
insurer’s surplus to policyholders. Accordingly, SAP
focuses on valuing assets and liabilities of an insurer at
financial reporting dates in accordance with applicable
insurance laws and regulations in the state in which such
insurer is domiciled. SAP determines, among other things, the
amount of statutory surplus and statutory net income of our
insurance companies and thus determines, in part, the amount of
funds they have available to pay as dividends.
GAAP is concerned with a company’s solvency, but it is also
concerned with other financial measurements, such as income and
cash flows. Accordingly, GAAP gives more consideration to
appropriate matching of revenue and expenses and accounting for
management’s stewardship of assets than does SAP. Due to
differences in methodology between SAP and GAAP, the values for
assets, liabilities and equity reflected in financial statements
prepared in accordance with GAAP are materially different from
those reflected in financial statements prepared under SAP.
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The NAIC has been debating and will continue to debate the
future of the current SAP framework in response to the possible
adoption of a new International Financial Reporting Standard, or
“IFRS,” by the International Accounting Standards
Board as a U.S. accounting standard for public companies
and/or
the
convergence of IFRS and GAAP accounting, with a range of
potential outcomes including but not limited to replacement of
SAP with GAAP. We will continue to monitor these developments
and the impact they may have on our insurance operating units.
Legislative and Regulatory Initiatives.
As discussed in
more detail under “
Reinsurance
” above, the
Terrorism Act established a federal assistance program to help
the commercial property and casualty insurance industry cover
claims arising from terrorism-related losses and regulates the
terms of insurance relating to the terrorism coverage provided
by AIHL’s insurance operating units.
In response to the recent financial crisis, the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010, or the
“Dodd-Frank Act,” was enacted in July 2010. The
Dodd-Frank Act made extensive changes to the laws regulating
financial services firms and requires various federal agencies
to adopt a broad range of new implementing rules and
regulations. In addition to introducing sweeping reform of the
U.S. financial services industry, the Dodd-Frank Act adopts
certain changes to U.S. insurance regulation in general,
and to non-admitted insurance and reinsurance in particular. The
Dodd-Frank Act incorporates the Non-Admitted and Reinsurance
Reform Act, or the “NRRA,” which will become effective
on July 21, 2011. Among other things, the NRRA would
establish national uniform standards on how states may regulate
and tax surplus lines insurance (and also sets national
standards concerning the regulation of reinsurance). In
particular, the NRRA gives regulators in the state where an
insurer is domiciled exclusive authority to regulate and tax
surplus lines insurance transactions, and regulators in a ceding
insurer’s state of domicile are given the sole
responsibility for regulating the balance sheet credit that the
ceding insurer may take for reinsurance recoverables. At the
present time, it is unclear what effect the NRRA changes
specific to non-admitted insurance and reinsurance will have on
AIHL’s insurance operating units, and there is still
significant uncertainty as to how these and other provisions of
the Dodd-Frank Act will be implemented in practice.
The Dodd-Frank Act also creates the Federal Insurance Office
within the Department of Treasury, which is designed to promote
national coordination within the insurance sector and which
would have the authority, in part, to monitor all aspects of the
insurance industry, including identifying issues or gaps in the
regulation of insurers that could contribute to a systemic
crisis in the insurance industry or the U.S. financial system.
Federal agencies have been given significant discretion in
drafting the rules and regulations that will implement the
Dodd-Frank Act. In addition, the Dodd-Frank Act mandated
multiple studies and reports for the U.S. Congress, which
could in some cases result in additional legislative or
regulatory action. We cannot predict the requirements of the
regulations ultimately adopted under the Dodd-Frank Act or any
related additional legislation, the additional costs resulting
from compliance with such regulations or legislation, or any
changes to our operations that may be necessary to comply with
the Dodd-Frank Act.
In addition, a number of legislative and regulatory initiatives
under consideration may significantly affect the insurance
business in a variety of ways. These measures include, among
other things, tort reform, consumer privacy requirements and
proposals for the establishment of state or federal catastrophe
funds.
Employees
AIHL’s insurance operating units employed 725 persons
at December 31, 2010, 357 of whom were at RSUI and its
subsidiaries, 224 of whom were at CATA and its subsidiaries, and
144 of whom were at PCC and its subsidiaries. AIHL Re had no
employees at December 31, 2010.
Corporate
Activities
Alleghany
Properties
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,
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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 2012 when it is anticipated that sufficient progress
on the levee improvements will have occurred to restore the
100-year
flood protection. At December 31, 2010, Alleghany
Properties owned approximately 320 acres of property in
various land use categories ranging from multi-family
residential to commercial. In 2010, Alleghany Properties
leveraged its local real estate expertise and made a small
investment in low income housing tax credits. Alleghany
Properties had three employees at December 31, 2010.
Alleghany
Capital Partners
Primarily through our indirect, wholly-owned subsidiary,
Alleghany Capital Partners, we manage our public equity
investments, including those held by our insurance operating
units, as well as conduct equity investment and non-insurance
acquisition research. Alleghany Capital Partners employed
4 people at December 31, 2010.
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, 2010, we had
13 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 loss 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 loss and LAE reported on our
balance sheet as of December 31, 2010 were approximately
$2.3 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 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 loss 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
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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, 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 the 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 standard market 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.
Our results may fluctuate as a result of many factors,
including cyclical changes in the insurance industry.
Historically, the 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
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 standard insurance market. When
premium rates are high and there is a shortage of capacity in
the standard 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 standard
insurance market, many customers that were previously driven
into the excess and surplus market may return to the standard
insurance market, exacerbating the effects of price competition.
Since cyclicality is due in
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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, RSUI’s
pre-tax catastrophe losses, net of reinsurance, were
$31.0 million in 2010, $6.7 million in 2009 and
$97.9 million in 2008 (primarily reflecting 2008 third
quarter hurricane net catastrophe losses for Hurricanes Ike,
Gustav and Dolly). 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 and
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 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 the 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 23 and 24 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.
As
part of their overall risk and capacity management strategy, 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
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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, 2010, the amount
due from reinsurers reported on our balance sheet was
$0.9 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 on future
policies 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. The exhaustion
of such reinsurance coverage could have a material adverse
effect on the profitability of our insurance operating units in
any given period and on our results of operations.
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
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 PCC’s determination
in June 2009 to cease writing business on a direct basis and
certain other factors, A.M. Best downgraded its rating of
PCIC 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 PCIC, 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.
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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. On the federal level, the
Dodd-Frank Act, enacted in July 2010, mandated significant
changes to the regulation of U.S. insurance, as discussed
above. We cannot predict the requirements of the regulations
ultimately adopted under the Dodd-Frank Act or the impact such
regulation will have on our business. These regulations, and 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.
Laws and regulations of the jurisdictions in which we conduct
business could delay, deter or prevent an attempt to acquire
control of us that stockholders might consider to be desirable,
and may restrict a stockholder’s ability to purchase more
than 10 percent of our common stock.
Generally, the
insurance holding company laws require that, before a person can
acquire control of an insurance company, prior written approval
must be obtained from the insurance regulatory authorities in
the state in which that insurance company is domiciled. Pursuant
to applicable laws and regulations, “control” over an
insurer is presumed to exist if any person, directly or
indirectly, owns, controls, holds the power to vote, or holds
proxies representing, 10 percent or more of the voting
securities of that insurer. Indirect ownership includes
ownership of the shares of our common stock. Thus, the insurance
regulatory authorities of the states in which our insurance
operating units are domiciled are likely to apply these
restrictions on acquisition of control to any proposed
acquisition of 10 percent or more of our common stock.
Some states require a person seeking to acquire control of an
insurer licensed but not domiciled in that state to make a
filing prior to completing an acquisition if the acquirer and
its affiliates, on the one hand, and the target insurer and its
affiliates, on the other hand, have specified market shares in
the same lines of insurance in that state. While these
provisions may not require acquisition approval, they can lead
to the imposition of conditions on an acquisition that could
delay or prevent its consummation.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change in control of us through
transactions, and in particular unsolicited transactions, that
some or all of our stockholders might consider to be desirable.
Legislative and judicial changes may have an effect on
workers’ compensation claims in California.
Benefit
rights under workers’ compensation laws in California
continue to be subject to judicial decisions and legislative
changes that may increase amounts payable by all workers’
compensation insurers, including PCC.
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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, 2010, our investment in debt
securities was approximately $2.8 billion, or
58.9 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 decrease the net
unrealized gain position of our investment portfolio and
potentially produce a net unrealized loss position, offset by
our ability to earn higher rates of return on funds reinvested.
Conversely, a decline in interest rates would increase the net
unrealized gain position of our investment portfolio, offset by
lower rates of return on funds reinvested. Based upon the
composition and duration of our investment portfolio at
December 31, 2010, a 100 basis point increase in
interest rates would result in an approximate
$122.9 million decrease in the fair value of our debt
security investments. 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.
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 of debt securities we
own may default on principal and interest payments they owe us.
The occurrence of a major economic downturn, acts of corporate
malfeasance, widening risk spreads or other events that
adversely affect the issuers 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 could be
adversely affected and a ratings downgrade of the issuers of the
debt securities we own could also cause the value of our debt
securities portfolio and our net earnings to decrease. 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.
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,
2010, our investments in equity securities had a fair market
value of approximately $1.5 billion, which represented
31.2 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 2010, we recorded $11.1 million of
other-than-temporary
impairment losses on equity securities, primarily based on the
severity and duration of the declines in fair value of such
securities relative to their cost as of the balance sheet date.
In 2009 and 2008, we recorded $74.1 million and
$240.8 million, respectively, 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.
The severe declines in 2009 and 2008 were 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 2011, 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, 2010, our energy sector equity security
holdings had an aggregate fair market value of
$1.0 billion, which represented 67.0 percent of our
equity portfolio. Of the $1.0 billion, $585.0 million
represented
34
Table of Contents
our ownership of common stock of Exxon Mobil Corporation. 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 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 PCC was impaired. As a result, as of December 31, 2008,
we recorded a non-cash charge of $48.7 million,
representing the entire PCC goodwill balance at such date. PCC
also recorded a pre-tax, non-cash impairment charge of
$11.2 million in the 2009 second quarter, representing the
entire carrying value of PCC’s trade names (originally
determined to have indefinite useful lives), renewal rights,
distribution rights and database development, net of accumulated
amortization. A decrease in the expected future earnings of RSUI
and CATA could lead to an impairment of some or all of the
goodwill associated with such operating units 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. Deterioration of financial
market conditions could result in the impairment of long-lived
assets and the establishment of a valuation allowance on our
deferred income tax assets.
Risks
Relating to our Senior Notes
Our failure to comply with restrictive covenants contained in
the indenture governing the Senior Notes or any other
indebtedness, including indebtedness under our revolving credit
facility and any future indebtedness, could trigger prepayment
obligations, which could adversely affect our business,
financial condition and results of operations.
On
September 9, 2010, we entered into a three-year credit
agreement with a bank which provides for a two tranche revolving
credit facility, or the “Credit Agreement,” in an
aggregate principal amount of up to $100.0 million. On
September 20, 2010, we issued $300.0 million of the
5.625% Senior Notes due September 15, 2020, or the
“Senior Notes.” The indenture governing the Senior
Notes contains covenants that impose restrictions on us with
respect to, among other things, the incurrence of liens on the
capital stock of certain of our subsidiaries. The indenture
governing the Senior Notes requires us to file with the trustee
copies of our annual, quarterly and current reports which we are
required to file with the SEC, and the Credit Agreement requires
us to comply with certain covenants. Our failure to comply with
such covenants could result in an event of default under the
indenture, under the Credit Agreement or under any other debt
agreement we may enter into in the future, which could, if not
cured or waived, result in us being required to repay the Senior
Notes, the indebtedness under the Credit Agreement or any other
future indebtedness. As a result, our business, financial
condition and results of operations could be adversely affected.
To service our debt, we will require a significant amount of
cash, which may not be available to us.
Our ability to make
payments on, or repay or refinance, our debt, including the
Senior Notes, will depend largely upon the future performance
and use of our Corporate activities investment portfolio, and
our future operating performance, including the operating
performance of our subsidiaries. Our future performance, to a
certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are
beyond our control. In addition, our ability to borrow funds in
the future will depend on the satisfaction of the
35
Table of Contents
covenants in the indenture governing the Senior Notes, in the
Credit Agreement and in other debt agreements we may enter into
in the future. Under the Credit Agreement, we also need to
maintain certain financial ratios. We cannot assure you that our
business, including the operating performance of our
subsidiaries, will generate sufficient cash flow from operations
or that future borrowings will be available to us under the
Credit Agreement or from other sources in an amount sufficient
to enable us to pay our debt, including the Senior Notes, or to
fund our other liquidity needs.
| 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, 2010.
| Item 4. | [Removed and Reserved.] |
36
Table of Contents
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, 2010, there were 981 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 2010 and 2009. Our ticker symbol is Y.
| 2010 | 2009 | |||||||||||||||
| Quarter Ended | High | Low | High | Low | ||||||||||||
|
March 31
|
$ | 302.85 | $ | 251.12 | $ | 295.56 | $ | 230.23 | ||||||||
|
June 30
|
307.83 | 277.79 | 272.06 | 217.39 | ||||||||||||
|
September 30
|
311.00 | 287.43 | 283.07 | 245.67 | ||||||||||||
|
December 31
|
311.00 | 292.00 | 271.10 | 242.17 | ||||||||||||
In 2010 and 2009, 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, 2010:
|
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
|
200 | $ | 292.02 | |||||||||||||
|
November 1 to November 30
|
25,788 | $ | 301.17 | |||||||||||||
|
December 1 to December 31
|
28,946 | $ | 302.51 | |||||||||||||
|
Total
|
54,934 | $ | 301.84 | 54,934 | $ | 293,856,700 | ||||||||||
| (1) | All shares represent shares repurchased pursuant to authorization of the Board of Directors. In February 2008, our Board of Directors authorized the repurchase of shares of our common stock, at such times and at prices as management determined advisable, up to an aggregate of $300.0 million. This program was fully utilized by December 2010. In July 2010, in anticipation of such full utilization, our Board of Directors authorized the repurchase of additional shares of our common stock, at such times and at prices as management may determine advisable, up to an aggregate of $300.0 million, upon such full utilization. |
37
Table of Contents
PERFORMANCE
GRAPH
The following graph compares for the years 2006 through 2010 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, 2006 in our common
stock, the S&P 500 and the P&C Index.
| Company/Index | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||
|
n
Alleghany
|
130.59 | 147.27 | 105.37 | 105.19 | 119.10 | ||||||||||||||||||||
|
=
S&P 500
|
115.79 | 122.16 | 76.96 | 97.33 | 111.99 | ||||||||||||||||||||
|
5
P&C Index
|
112.87 | 97.11 | 68.55 | 77.01 | 83.90 | ||||||||||||||||||||
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 2006 through 2010
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, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (in millions, except for per share and share amounts) | ||||||||||||||||||||
|
Operating Data
|
||||||||||||||||||||
|
Revenues from continuing operations
|
$ | 985.4 | $ | 1,184.4 | $ | 989.1 | $ | 1,228.6 | $ | 1,060.3 | ||||||||||
|
Earnings from continuing operations
|
$ | 198.5 | $ | 271.0 | $ | 40.6 | $ | 287.6 | $ | 240.9 | ||||||||||
|
Earnings from discontinued operations
|
— | — | 107.4 | 11.5 | 7.0 | |||||||||||||||
|
Net earnings
|
$ | 198.5 | $ | 271.0 | $ | 148.0 | $ | 299.1 | $ | 247.9 | ||||||||||
|
Basic earnings per share of common stock**
|
||||||||||||||||||||
|
Continuing operations
|
$ | 22.29 | $ | 29.83 | $ | 2.70 | $ | 31.27 | $ | 26.86 | ||||||||||
|
Discontinued operations
|
— | — | 12.42 | 1.33 | 0.82 | |||||||||||||||
|
Net earnings
|
$ | 22.29 | $ | 29.83 | $ | 15.12 | $ | 32.60 | $ | 27.68 | ||||||||||
|
Average number of shares of common stock**
|
8,903,466 | 8,878,353 | 8,649,460 | 8,645,675 | 8,635,161 | |||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Balance Sheet
|
||||||||||||||||||||
|
Total assets
|
$ | 6,431.7 | $ | 6,192.8 | $ | 6,181.8 | $ | 6,942.1 | $ | 6,178.7 | ||||||||||
|
Debt
|
$ | 298.9 | $ | – | $ | – | $ | – | $ | 80.0 | ||||||||||
|
Common stockholders’ equity
|
$ | 2,908.9 | $ | 2,717.5 | $ | 2,347.3 | $ | 2,484.8 | $ | 2,146.4 | ||||||||||
|
Common stockholders’ equity per share of common stock**
|
$ | 331.81 | $ | 300.69 | $ | 272.72 | $ | 286.99 | $ | 249.14 | ||||||||||
| * | On July 18, 2007, AIHL acquired PCC. We sold Darwin on October 20, 2008. Darwin has been reclassified as discontinued operations for the three 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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Table of Contents
| 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
Loss and
LAE
Overview.
Each of our insurance operating
units establishes reserves on its balance sheet for unpaid loss
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 loss 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,
especially if legal action is
40
Table of Contents
involved. As a result, the liabilities for unpaid loss 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 loss 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, 2010, the amount of
IBNR for short-tail claims represented approximately
1.3 percent, or $29.6 million, of our total gross loss
and LAE liabilities of $2.3 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 loss 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 loss and LAE established by our insurance operating units
are adequate as of December 31, 2010.
Methodologies and Assumptions.
Our insurance
operating units use a variety of techniques that employ
significant judgments and assumptions to establish the
liabilities for unpaid loss 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 loss development 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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Table of Contents
| • | 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 PCC as of December 31,
2010.
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 2010 (dollars in millions):
| Frequency | ||||||||||||
| Severity | 1.0% | 5.0% | 10.0% | |||||||||
|
1.0%
|
$ | 7.9 | $ | 23.7 | $ | 43.5 | ||||||
|
5.0%
|
$ | 23.7 | $ | 40.2 | $ | 60.8 | ||||||
|
10.0%
|
$ | 43.5 | $ | 60.8 | $ | 82.4 | ||||||
Our net reserves for loss and LAE of $1.5 billion as of
December 31, 2010 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 loss 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 loss
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 PCC adjusted its prior year loss and LAE
reserve estimate during 2010 and 2009 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):
| 2010 | 2009 | |||||||
|
RSUI:
|
||||||||
|
Net casualty reserve releases
|
$ | (33.9 | ) | $ | (38.4 | ) | ||
|
Property and other, net
|
(9.3 | ) | 3.2 | |||||
| $ | (43.2 | ) | $ | (35.2 | ) | |||
|
CATA:
|
||||||||
|
Net insurance reserve releases
|
$ | (0.4 | ) | $ | (10.7 | ) | ||
|
Reinsurance assumed reserve release
|
(3.5 | ) | — | |||||
| $ | (3.9 | ) | $ | (10.7 | ) | |||
|
PCC:
|
||||||||
|
Net workers’ compensation increase
|
$ | 12.5 | $ | 26.5 | ||||
|
All other, net
|
0.9 | 1.5 | ||||||
| $ | 13.4 | $ | 28.0 | |||||
|
Total incurred related to prior years
|
$ | (33.7 | ) | $ | (17.9 | ) | ||
The more significant prior year adjustments affecting 2010 and
2009 are summarized as follows:
| • | For RSUI, loss and LAE for 2010 reflect a net $33.9 million release of prior accident year casualty loss reserves, compared with a net $38.4 million release of prior accident year casualty loss reserves during 2009. The $33.9 million net release consisted of a $41.4 million reserve release, partially offset by a $7.5 million reserve increase. The $41.4 million reserve release relates primarily to the general liability and professional liability lines of business primarily 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 the balance sheet date than the actual cumulative losses through that date. The amount of lower cumulative losses, expressed as a percentage of carried loss and LAE reserves at the beginning of the year, was 3.8 percent. Such reduction did not impact the assumptions used in estimating RSUI’s loss and LAE liabilities for its general liability and professional liability lines of business earned in 2010. The $7.5 million reserve increase in loss reserves related to an increase in estimated ultimate 2007 accident year losses for the D&O liability line of business, reflecting, in part, unfavorable loss emergence on certain sub-prime mortgage industry claims. Such increase did not impact the assumptions used in estimating RSUI’s loss and LAE liabilities for its D&O liability line of business earned in 2010. The net $38.4 million release of prior accident year casualty loss reserves during 2009 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. |
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| • | For RSUI, loss and LAE for 2010 and 2009 also include a net $9.3 million release of prior accident year loss reserves and a net $3.2 million increase in prior accident year loss reserves, respectively, primarily related to a re-estimation of case and IBNR reserves in the property line of business. For 2010, the net $9.3 million reserve release primarily reflects significant net reserve releases in non-catastrophe property reserves, partially offset by a $16.3 million reserve increase related to prior year catastrophes. Of the $16.3 million, $5.3 million was recorded in the 2010 second quarter and related to the third quarter 2008 hurricanes, and $11.0 million was recorded throughout 2010 and related to the third quarter 2005 hurricanes. For 2009, the net $3.2 million reserve increase primarily reflects net reserve increases in the non-catastrophe property reserves, partially offset by a net $9.9 million release of reserves recorded in the 2009 fourth quarter related to the third quarter 2008 hurricanes. | |
| • | For CATA, loss and LAE for 2010 reflect a net $0.4 million release of prior accident year loss reserves (related primarily to the surety lines of business), compared with a net $10.7 million release of prior accident year loss reserves during 2009 (related primarily to the casualty and surety lines of business). These amounts relate primarily to favorable loss emergence compared with loss emergence patterns assumed in earlier periods. 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 the balance sheet date than the actual cumulative losses through that date. The net $0.4 million release of prior accident year loss reserves did not impact the assumptions used in estimating CATA’s loss and LAE liabilities for business earned in 2010. | |
| • | For CATA, loss and LAE for 2010 also reflect a $3.5 million reserve release reflecting favorable loss emergence for asbestos and environmental impairment claims that arose from reinsurance assumed by a subsidiary of CATA between 1969 and 1976, based on a reserve study that was completed in the 2010 second quarter. | |
| • | For PCC, loss and LAE for 2010 reflect a $12.5 million increase of prior accident year workers’ compensation net loss reserves, compared with a $26.5 million reserve increase of prior accident year workers’ compensation loss reserves during 2009. The $12.5 million increase relates primarily to a decrease in ceded loss and LAE based on a fourth quarter 2010 review of reinsurance coverage estimates, and to a lesser extent, an increase in unallocated LAE reserves. Such increase did not impact the assumptions used in estimating PCC’s loss and LAE liabilities for business earned in 2010. The review of reinsurance coverage estimates also resulted in a $5.0 million, decrease in ceded premiums earned which increased net premiums earned. The $26.5 million increase in 2009 primarily reflects 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 the “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. Such increases impacted the assumptions used in estimating PCC’s loss and LAE liabilities for business earned in 2009, causing an increase of current accident year reserves of $8.0 million in 2009. 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. |
Asbestos and Environmental Impairment Reserves.
Our
reserve for unpaid loss and LAE includes $14.1 million and
$14.0 million of gross and net reserves, respectively, at
December 31, 2010, for 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. 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
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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 asbestos and environmental
impairment 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, asbestos liability
law, judicial settlements of asbestos liabilities, previous
environmental impairment loss experience, the assessment of
current trends of environmental law and environmental cleanup
costs.
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 applicable 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 operations, may be necessary in the future,
we believe that CATA’s asbestos and environmental
impairment reserves are adequate as of December 31, 2010.
Additional information regarding asbestos and environmental
impairment claims can be found on page 21 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 pages 22 through 24 and
pages 31 and 32 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; | |
| • | our ability and intent to hold an equity security for a period of time sufficient to allow for any anticipated recovery; and | |
| • | whether it is more likely than not that we will sell a debt security before recovery of its amortized cost basis. |
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
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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, 2010
includes goodwill and other intangible assets, net of
amortization, of $142.3 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 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.
We 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 PCC’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 PCC’s determination in June 2009 that it was
unable to write business at rates it deemed adequate due to the
state of the California workers’ compensation market. As a
result, PCC 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.
In connection with impairment testing of our goodwill and other
intangible assets in the fourth quarter of 2008, we also
determined that the $48.7 million of goodwill associated
with our acquisition of PCC 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 PCC
goodwill balance at such date. Our estimation of PCC’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 PCC
goodwill was impaired included unfavorable conditions in the
U.S. economy and California workers’ compensation
insurance market, combined with PCC’s poor results during
2008. There was no resulting impact to our tax balances as a
result of this charge.
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
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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, 2010, a net
deferred tax asset of $77.1 million was recorded, which
included a valuation allowance of $15.0 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 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. Primarily through our wholly-owned subsidiary, Alleghany
Capital Partners, we manage our public equity investments,
including those held by our insurance operating units, as well
as conduct equity investment and non-insurance acquisition
research. 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 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. 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.
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
$31.0 million for 2010, $6.7 million for 2009 and
$97.9 million for 2008 (primarily reflecting net losses
from 2008 third quarter Hurricanes Ike, Gustav and Dolly). 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,
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
47
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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, 2010, we had consolidated total investments
of approximately $4.8 billion, of which approximately
$2.8 billion was invested in debt securities and
approximately $1.5 billion 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 results. Net realized capital gains
were $97.4 million in 2010, compared with
$320.4 million in 2009, and
other-than-temporary
impairment losses were $12.3 million in 2010, compared with
$85.9 million in 2009.
The profitability of our insurance operating units is also
impacted by competition generally and price competition in
particular. Historically, the 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 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 standard market 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.
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.
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The following table summarizes our consolidated revenues, costs
and expenses and earnings.
| 2010 | 2009 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Revenues
|
||||||||||||
|
Net premiums earned
|
$ | 768.1 | $ | 845.0 | $ | 948.7 | ||||||
|
Net investment income
|
125.0 | 101.9 | 130.2 | |||||||||
|
Net realized capital gains
|
97.4 | 320.4 | 151.8 | |||||||||
|
Other than temporary impairment losses
|
(12.3 | ) | (85.9 | ) | (244.0 | ) | ||||||
|
Other income
|
7.2 | 3.0 | 2.4 | |||||||||
|
Total revenues
|
$ | 985.4 | $ | 1,184.4 | $ | 989.1 | ||||||
|
Costs and expenses
|
||||||||||||
|
Loss and loss adjustment expenses
|
$ | 377.9 | $ | 442.1 | $ | 570.0 | ||||||
|
Commissions, brokerage and other underwriting expenses
|
259.3 | 273.7 | 286.6 | |||||||||
|
Other operating expenses
|
37.2 | 45.6 | 34.9 | |||||||||
|
Corporate administration
|
28.9 | 26.9 | 35.9 | |||||||||
|
Interest expense
|
4.7 | 0.7 | 0.7 | |||||||||
|
Total costs and expenses
|
$ | 708.0 | $ | 789.0 | $ | 928.1 | ||||||
|
Earnings from continuing operations, before income taxes
|
$ | 277.4 | $ | 395.4 | $ | 61.0 | ||||||
|
Income taxes
|
78.9 | 124.4 | 20.4 | |||||||||
|
Earnings from continuing operations
|
$ | 198.5 | $ | 271.0 | $ | 40.6 | ||||||
|
Earnings from discontinued operations, net of tax*
|
— | — | 107.4 | |||||||||
|
Net earnings
|
$ | 198.5 | $ | 271.0 | $ | 148.0 | ||||||
|
Revenues:
|
||||||||||||
|
AIHL
|
$ | 978.2 | $ | 996.9 | $ | 813.6 | ||||||
|
Corporate activities**
|
7.2 | 187.5 | 175.5 | |||||||||
|
Earnings (loss) from continuing operations, before income taxes:
|
||||||||||||
|
AIHL
|
$ | 306.6 | $ | 237.6 | $ | (75.1 | ) | |||||
|
Corporate activities**
|
(29.2 | ) | 157.8 | 136.1 | ||||||||
| * | 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
2010 decreased from 2009, primarily reflecting lower net
realized capital gains and, to a lesser extent, a decline in net
premiums earned, partially offset by lower
other-than-temporary
impairment losses and loss and LAE. The decrease in net realized
capital gains primarily reflects the absence of sales of common
stock of Burlington Northern Santa Fe Corporation, or
“Burlington Northern,” in 2010, which were significant
in 2009. The decrease in net premiums earned and loss and LAE in
2010 compared with 2009 reflects the impact of continuing
competition at RSUI, as well as PCC’s determination in June
2009 to cease soliciting new and renewal business on a direct
basis commencing August 1, 2009. The decrease in
other-than-temporary
impairment losses was due to improvements in U.S. equity
market conditions since the 2009 first quarter when we incurred
substantial losses primarily related to a significant
deterioration of U.S. equity and, to a lesser extent,
residential housing market conditions.
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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 primarily to larger gains on the
sales of equity securities, including our holdings of 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 PCC,
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 $6.7 million of
catastrophe losses at RSUI in 2009, compared with
$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.
The effective income tax rate on earnings from continuing
operations before income taxes was 28.4 percent in 2010,
31.5 percent in 2009 and 33.6 percent in 2008. The
lower effective income tax rate in 2010 compared with 2009
primarily reflects the recognition of a permanent tax benefit in
the 2010 first quarter. This permanent tax benefit relates to a
finalization of our unused foreign tax credits arising from our
prior ownership of World Minerals, Inc. which we sold on
July 14, 2005. The lower effective income tax rate in 2010
compared with 2009 also reflects increased tax benefits
associated with dividends and tax-exempt income. The higher
effective income tax rate in 2008 compared with 2009 reflects
certain permanent tax differences that had the effect of
increasing the effective income tax rate for that year. For
2008, such permanent tax differences related to a
$48.7 million non-deductible goodwill impairment charge
incurred.
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 $92.1 million in the 2008 fourth
quarter, including $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.
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AIHL
Operating Results
AIHL
Operating Unit Pre-Tax Results
| RSUI | AIHL Re | CATA | PCC | AIHL | ||||||||||||||||
| (in millions, except ratios) | ||||||||||||||||||||
|
2010
|
||||||||||||||||||||
|
Gross premiums written
|
$ | 933.6 | $ | – | $ | 168.9 | $ | 1.5 | $ | 1,104.0 | ||||||||||
|
Net premiums written
|
570.7 | – | 159.0 | 6.5 | 736.2 | |||||||||||||||
|
Net premiums earned (1)
|
$ | 593.6 | $ | – | $ | 164.3 | $ | 10.2 | $ | 768.1 | ||||||||||
|
Loss and loss adjustment expenses
|
271.0 | – | 89.4 | 17.5 | 377.9 | |||||||||||||||
|
Commission, brokerage and other underwriting expenses (2)
|
162.7 | – | 73.4 | 23.2 | 259.3 | |||||||||||||||
|
Underwriting profit (loss) (3)
|
$ | 159.9 | $ | – | $ | 1.5 | $ | (30.5 | ) | $ | 130.9 | |||||||||
|
Net investment income (1)
|
128.9 | |||||||||||||||||||
|
Net realized capital gains (1)
|
92.9 | |||||||||||||||||||
|
Other than temporary impairment losses (1)
|
(12.3 | ) | ||||||||||||||||||
|
Other income (1)
|
0.6 | |||||||||||||||||||
|
Other expenses (2)
|
34.4 | |||||||||||||||||||
|
Earnings from continuing operations, before income taxes
|
$ | 306.6 | ||||||||||||||||||
|
Loss ratio (4)
|
45.7 | % | – | 54.4 | % | 170.9 | % | 49.2 | % | |||||||||||
|
Expense ratio (5)
|
27.4 | % | – | 44.7 | % | 226.7 | % | 33.8 | % | |||||||||||
|
Combined ratio (6)
|
73.1 | % | – | 99.1 | % | 397.6 | % | 83.0 | % | |||||||||||
|
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 (1)
|
$ | 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 (2)
|
169.3 | – | 75.0 | 29.4 | 273.7 | |||||||||||||||
|
Underwriting profit (loss) (3)
|
$ | 189.8 | $ | – | $ | 10.1 | $ | (70.7 | ) | $ | 129.2 | |||||||||
|
Net investment income (1)
|
116.7 | |||||||||||||||||||
|
Net realized capital gains (1)
|
119.8 | |||||||||||||||||||
|
Other than temporary impairment losses (1)
|
(85.9 | ) | ||||||||||||||||||
|
Other income (1)
|
1.3 | |||||||||||||||||||
|
Other expenses (2)
|
43.5 | |||||||||||||||||||
|
Earnings from continuing operations, before income taxes
|
$ | 237.6 | ||||||||||||||||||
|
Loss ratio (4)
|
43.3 | % | – | 48.9 | % | 192.2 | % | 52.3 | % | |||||||||||
|
Expense ratio (5)
|
26.7 | % | – | 45.0 | % | 65.4 | % | 32.4 | % | |||||||||||
|
Combined ratio (6)
|
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 (1)
|
$ | 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 (2)
|
175.7 | – | 80.8 | 30.1 | 286.6 | |||||||||||||||
|
Underwriting profit (loss) (3)
|
$ | 137.6 | $ | 0.2 | $ | 15.2 | $ | (60.9 | ) | $ | 92.1 | |||||||||
|
Net investment income (1)
|
112.6 | |||||||||||||||||||
|
Net realized capital losses (1)
|
(4.4 | ) | ||||||||||||||||||
|
Other than temporary impairment losses (1)
|
(244.0 | ) | ||||||||||||||||||
|
Other income (1)
|
0.7 | |||||||||||||||||||
|
Other expenses (2)
|
32.1 | |||||||||||||||||||
|
Losses from continuing operations, before income taxes
|
$ | (75.1 | ) | |||||||||||||||||
|
Loss ratio (4)
|
54.6 | % | – | 48.6 | % | 142.8 | % | 60.1 | % | |||||||||||
|
Expense ratio (5)
|
25.5 | % | 22.8 | % | 43.2 | % | 41.8 | % | 30.2 | % | ||||||||||
|
Combined ratio (6)
|
80.1 | % | 22.8 | % | 91.8 | % | 184.6 | % | 90.3 | % | ||||||||||
| (1) | Represent components of total revenues. | |
| (2) | 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. |
51
Table of Contents
| (3) | Represents net premiums earned less loss and LAE and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income, net realized capital gains, other-than-temporary impairment losses, other income or other expenses. 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, net realized capital gains, other-than-temporary impairment losses, other income or other expenses, 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. | |
| (4) | Loss and LAE divided by net premiums earned, all as determined in accordance with GAAP. | |
| (5) | Commission, brokerage and other underwriting expenses divided by net premiums earned, all as determined in accordance with GAAP. | |
| (6) | 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 loss and 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 decrease in gross premiums written by RSUI in 2010 from 2009
primarily reflects the impact of reduced exposures of
RSUI’s customers and continuing and increasing competition,
particularly in RSUI’s property, umbrella/excess and
general liability lines of business, partially offset by growth
in RSUI’s binding authority business. RSUI’s net
premiums earned decreased in 2010 from 2009 primarily due to the
decline in gross premiums written, partially offset by a
decrease in ceded premiums written associated primarily with
RSUI’s property line of business.
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 loss and LAE in 2010 from 2009 primarily
reflects the impact of lower net premiums earned and lower
non-catastrophe property losses incurred, partially offset by
$31.0 million of catastrophe losses in 2010, compared with
$6.7 million of catastrophe losses in 2009. The decrease in
loss and LAE in 2010 from 2009 also reflects modestly lower net
releases of prior accident year loss reserves in the 2010 period
(as further described below).
Loss and LAE in 2010 reflect a net $33.9 million release of
prior accident year casualty loss reserves, compared with a net
$38.4 million release of prior accident year casualty loss
reserves during 2009. The $33.9 million net release
consisted of a $41.4 million reserve release, partially
offset by a $7.5 million reserve increase. The
$41.4 million release relates primarily to the general
liability and professional liability lines of business primarily
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
$7.5 million increase in loss reserves related to an
increase in estimated ultimate 2007 accident year losses for the
D&O liability line of business, reflecting, in part,
unfavorable loss emergence on certain
sub-prime
mortgage industry claims. The net $38.4 million release of
prior accident year casualty loss reserves during 2009 relates
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.
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Table of Contents
Loss and LAE in 2010 also reflects increases in prior accident
year property loss reserves of $5.3 million related to 2008
third quarter hurricanes and $11.0 million related to 2005
third quarter hurricanes. Loss and LAE in 2009 also reflects a
net $9.9 million release of prior accident year property
loss reserves related to 2008 third quarter hurricanes.
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 $6.7 million in
2009, compared with $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
reflects a net $48.3 million release of prior accident year
casualty loss reserves, compared with a net $43.7 million
release of prior accident year loss reserves during the
corresponding 2008 period. The $48.3 million release
consists of $38.4 million related to casualty reserves and
$9.9 million related to third quarter 2008 catastrophes,
both of which are described above.
The decrease in commissions, brokerage and other underwriting
expenses in 2010 compared with 2009, as well as 2009 compared
with 2008, primarily reflects the net effect of lower premium
volumes described above, which caused premium taxes, commissions
and related acquisition costs to decline.
The decrease in RSUI’s underwriting profit in 2010 from
2009 primarily reflects a decrease in net premiums earned,
partially offset by the decrease in loss and LAE. The increase
in RSUI’s underwriting profit in 2009 from 2008 primarily
reflects a decrease in loss and LAE, partially offset by the
decrease in net premiums earned.
Additional information regarding RSUI’s use of reinsurance
and risks related to reinsurance recoverables can be found on
pages 22 through 24 and pages 31 and 32 of this
Form 10-K
Report. Additional information regarding RSUI’s prior year
reserve adjustments and releases can be found on pages 43
and 44 of this
Form 10-K
Report.
In general, rates at RSUI in 2010 compared with 2009, as well as
in 2009 compared with 2008, reflect overall industry trends of
downward pricing as a result of increased competition.
CATA
CATA’s net premiums earned decreased slightly in 2010 from
2009, primarily reflecting continuing price competition in
CATA’s property and casualty (including in excess and
surplus markets) lines of business, partially offset by higher
gross premiums written and net premiums earned in CATA’s
commercial surety and miscellaneous errors and omissions
liability lines of business. 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 and commercial surety lines of business, partially
offset by gross premiums written and net premiums earned in
certain specialty classes of business.
The increase in loss and LAE in 2010 from 2009 primarily
reflects a lower amount of prior year reserve releases in 2010
compared with 2009, and, to a lesser extent, higher property and
workers’ compensation claims. During 2010, CATA had a net
prior year reserve release of $3.9 million, compared with a
net prior year reserve release of $10.7 million in 2009. Of
the $3.9 million reserve release, $3.5 million
reflects favorable loss emergence for asbestos and environmental
impairment claims based on a reserve study that was completed in
the 2010 second quarter. The remaining $0.4 million of the
$3.9 million reserve release primarily relates to a net
prior year reserve release in 2010 in the surety lines of
business, reflecting favorable loss emergence compared with loss
emergence patterns assumed in earlier periods for such lines of
business. The $10.7 million reserve release in 2009
primarily reflects favorable emergence in the casualty and
surety lines of business.
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 a net prior year reserve release
of $10.7 million (as discussed above), compared with a net
prior year reserve release of $11.8 million in 2008.
The increase in loss and LAE described above was the primary
cause for the decrease in CATA’s underwriting profit in
2010 from 2009. 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.
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Table of Contents
Additional information regarding CATA’s prior year reserve
releases can be found on pages 43 and 44 of this
Form 10-K
Report.
PCC
In June 2009, PCC decided to cease soliciting new and renewal
business on a direct basis commencing August 1, 2009 due to
its determination that it was unable to write business at rates
it deemed adequate due to the state of the California
workers’ compensation market. On June 30, 2009,
A.M. Best downgraded its rating of PCIC from A-
(Excellent), with a negative outlook, to B++ (Good), with a
stable outlook. Commencing August 1, 2009, PCC ceased
soliciting new or renewal business on a direct basis and took
corresponding expense reduction steps, including staff
reductions, in light of such determination. Effective
April 12, 2010, as part of a strategic repositioning
effort, PCC changed its name from Employers Direct Corporation,
changed the name of PCIC from Employers Direct Insurance
Company, and took steps to emerge as a brokerage carrier at such
time as it determines rates are adequate.
PCC reported an underwriting loss of $30.5 million in 2010,
primarily reflecting a substantial decrease in net premiums
earned from 2009 for the reasons described above. PCC’s
underwriting loss of $30.5 million for 2010 also reflects a
$12.5 million increase of prior accident year workers’
compensation net loss reserves, related primarily to a decrease
in ceded loss and LAE based on a fourth quarter 2010 review of
reinsurance coverage estimates, and to a lesser extent, an
increase in unallocated LAE reserves. The review of reinsurance
coverage estimates also resulted in a $5.0 million
decrease in ceded premiums earned which increased net premiums
earned.
PCC reported an underwriting loss of $70.7 million for
2009, primarily reflecting a substantial decrease in net
premiums earned from 2008 for the reasons described above, and a
$34.5 million reserve increase in the 2009 second quarter.
Of the $34.5 million reserve increase, $26.5 million
related to prior accident years and $8.0 million related to
the 2009 accident year. In addition, PCC also recorded a pre-tax
non-cash impairment charge of $11.2 million in the 2009
second quarter, which was classified as a net realized capital
loss in its consolidated statement of earnings.
PCC reported an underwriting loss of $60.9 million for
2008, primarily reflecting a reserve increase of
$35.9 million and a decrease in net premiums earned. In
addition, 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 PCC 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 PCC
goodwill balance at such date. The estimation of PCC’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 PCC
goodwill was impaired included the recent unfavorable conditions
in the U.S. economy and California workers’
compensation insurance market, combined with PCC’s poor
results during 2008. There was no resulting impact to our tax
balances as a result of this charge.
The California Department of Insurance, or the “CDI,”
is responsible for periodic financial and market conduct
examinations of California-domiciled insurance companies. In
September 2010, the CDI issued a financial examination report of
PCIC for the period from July 1, 2004 through
December 31, 2008. As part of its work for such financial
examination report, the CDI produced an actuarial report, or the
“Actuarial Report,” for the years ended
December 31, 2009 and 2008. The Actuarial Report included
an estimate of loss and LAE reserves on a statutory basis of
accounting that was higher than that recorded by PCIC at such
dates. We believe that PCIC’s reserves for unpaid loss and
LAE are adequate, and the CDI did not require PCIC to currently
or retroactively increase its carried reserves to the estimates
included in the Actuarial Report. AIHL did, however, contribute
$40.0 million of capital to PCC on September 27, 2010,
and these funds were used by PCIC to increase its workers’
compensation deposit, which is required to be maintained by PCIC
under California workers’ compensation regulations, to a
level consistent with the estimated loss and LAE reserves
included in the Actuarial Report. To the extent that PCIC’s
actual loss experience is less than the CDI’s final
estimate of PCIC’s loss and LAE reserves, over time such
additional workers’ compensation deposit funds will be
released back to PCIC.
Additional information regarding PCC’s reserve increases
can be found on pages 43 and 44 of this
Form 10-K
Report.
54
Table of Contents
AIHL
Investment Results
Following is information relating to AIHL’s investment
results.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Net investment income
|
$ | 128.9 | $ | 116.7 | $ | 112.6 | ||||||
|
Net realized capital gains
|
$ | 92.9 | $ | 132.1 | * | $ | 44.3 | * | ||||
|
Other than temporary impairment losses
|
$ | (12.3 | ) | $ | (85.9 | ) | $ | (244.0 | ) | |||
| * | Excludes non-cash impairment charges in 2009 and 2008 related to the intangible assets associated with our acquisition of PCC 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 2010 from 2009 is due
principally to higher dividend income due to a higher allocation
of AIHL’s investment portfolio to equity securities during
2010 compared with 2009. 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.
Approximate yields of AIHL’s debt securities for 2010, 2009
and 2008 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) | |||||||||||||||
|
2010
|
$ | 2,887.3 | $ | 102.1 | $ | 80.2 | 3.5 | % | 2.8 | % | ||||||||||
|
2009
|
$ | 2,858.4 | $ | 104.7 | $ | 83.9 | 3.7 | % | 2.9 | % | ||||||||||
|
2008
|
$ | 2,564.5 | $ | 112.0 | $ | 86.3 | 4.4 | % | 3.4 | % | ||||||||||
| (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 2010, 2009 and 2008 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 $12.3 million of
other-than-temporary
impairment losses in 2010, $11.1 million related to equity
security holdings (primarily in the energy sector) and
$1.2 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
was primarily based on the severity and duration of the declines
in fair value of such securities relative to their cost as of
the balance sheet date.
Of the $85.9 million of
other-than-temporary
impairment losses in 2009, $57.6 million related to equity
security holdings in the energy sector, $16.5 million
related to equity security 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 of
other-than-temporary
impairment losses in 2008, $144.8 million related to equity
security 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
55
Table of Contents
securities relative to cost as of the balance sheet date. Such
severe declines were 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, the gross unrealized investment losses for
debt and equity securities as of December 31, 2010 were
deemed to be temporary, based on, among other things:
| • | the duration of time and the relative magnitude to which fair values of these investments has been below cost was not indicative of an other-than-temporary impairment loss (for example, no equity security was in a continuous unrealized loss position for twelve months or more as of December 31, 2010); | |
| • | the absence of compelling evidence that would cause us to call into question the financial condition or near-term prospects of 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. |
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, 2010.
Corporate
Activities Operating Results
The following table summarizes corporate activities’
results for 2010, 2009 and 2008 (in millions):
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net investment income
|
$ | (3.9 | ) | $ | (14.8 | ) | $ | 17.6 | ||||
|
Net realized capital gains
|
4.5 | 200.6 | 156.2 | |||||||||
|
Other than temporary impairment losses
|
– | – | – | |||||||||
|
Other income
|
6.6 | 1.7 | 1.7 | |||||||||
|
Total revenues
|
$ | 7.2 | $ | 187.5 | $ | 175.5 | ||||||
|
Corporate administration and other expenses
|
31.4 | 29.1 | 38.7 | |||||||||
|
Interest expense
|
5.0 | 0.6 | 0.7 | |||||||||
|
(Losses) earnings from continuing operations, before income taxes
|
$ | (29.2 | ) | $ | 157.8 | $ | 136.1 | |||||
Corporate activities reported a loss from continuing operations
before income taxes in 2010 compared with earnings from
continuing operations before income taxes in 2009, primarily
reflecting lower net realized capital gains which were not
sufficient to offset corporate administration, interest and
other expenses. The lower net realized capital gains primarily
reflects the absence of sales of common stock of Burlington
Northern in 2010, which were significant in 2009.
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 sales of Burlington Northern common stock. Net
investment income in 2009 primarily reflects losses related to
our investment in ORX, as discussed below.
Net investment income includes ($2.0) million,
($21.9) million and $1.5 million of our equity in
(losses) earnings of ORX for 2010, 2009 and 2008, respectively.
The 2009 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. Net investment income also includes
($3.2) million, ($1.1) million and $0.3 million
of our equity in (losses) earnings of Homesite for 2010, 2009
and 2008, respectively. Homesite losses in 2010 and 2009
primarily reflect the impact of increased homeowners insurance
claims from severe weather and ongoing purchase accounting
adjustments.
56
Table of Contents
Interest expense in 2010 includes interest on our
$300.0 million of Senior Notes, which were issued on
September 20, 2010 (see Note 7 to the Notes to the
Consolidated Financial Statements set forth in Item 8 of
this
Form 10-K
Report for further details).
Reserve
Review Process
AIHL’s insurance operating units periodically analyze, at
least quarterly, liabilities for unpaid loss 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 loss 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 loss 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 loss (including for IBNR) and LAE.
|
Workers’
|
||||||||||||||||||||||||||||
| Property | Casualty(1) | CMP(2) | Surety | Comp(3) | All Other(4) | Total | ||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||||
|
2010
|
||||||||||||||||||||||||||||
|
Gross loss and LAE reserves
|
$ | 150.1 | $ | 1,883.6 | $ | 58.9 | $ | 17.1 | $ | 186.7 | $ | 32.3 | $ | 2,328.7 | ||||||||||||||
|
Reinsurance recoverables on unpaid losses
|
(52.0 | ) | (765.2 | ) | (1.0 | ) | (0.1 | ) | (10.9 | ) | (18.2 | ) | (847.4 | ) | ||||||||||||||
|
Net loss and LAE reserves
|
$ | 98.1 | $ | 1,118.4 | $ | 57.9 | $ | 17.0 | $ | 175.8 | $ | 14.1 | $ | 1,481.3 | ||||||||||||||
|
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 | ||||||||||||||
| (1) | Primarily consists of umbrella/excess, D&O liability, professional liability, and general liability. | |
| (2) | Commercial multiple peril. | |
| (3) | Workers’ compensation amounts include PCC, 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 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(c) 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, 2010 and
December 31, 2009
Gross Reserves.
Gross loss and LAE reserves at
December 31, 2010 decreased from December 31, 2009 due
primarily to reserve decreases in property and 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
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prior years. The decrease in workers’ compensation gross
loss and LAE reserves primarily reflects the impact of
PCC’s decision in June 2009 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, 2010 decreased from December 31, 2009 due
primarily to reserve decreases in the workers’ compensation
and property lines of business, partially offset by a modest
reserve increase in the casualty line of business. The decrease
in workers’ compensation net loss and LAE reserves
primarily reflects the impact of PCC’s decision in June
2009 to cease soliciting new or renewal business on a direct
basis commencing August 1, 2009. This decrease was
partially offset by a $12.5 million increase of prior
accident year workers’ compensation net loss reserves
recorded by PCC related primarily to a decrease in ceded loss
and LAE based on a fourth quarter 2010 review of reinsurance
coverage estimates, and to a lesser extent, an increase in
unallocated LAE reserves. 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, net of
corresponding decreases in reinsurance recoverables on unpaid
losses. The increase in the casualty line of business relates
primarily to modest increases at CATA due to growth in certain
specialty classes and its miscellaneous errors and omissions
liability line of business.
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 PCC of current and
prior accident year reserves during 2009, partially offset by
the impact of PCC’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 PCC of current and prior accident year reserves
during 2009, partially offset by the impact of PCC’s
decision to cease soliciting new or renewal business on a direct
basis commencing August 1, 2009.
Additional information regarding RSUI’s net prior year
reserve releases and PCC’s current and prior year reserve
increases can be found on pages 43 and 44 of this
Form 10-K
Report.
Reinsurance
Recoverables
At December 31, 2010, AIHL had total reinsurance
recoverables of $873.3 million, consisting of
$847.4 million of ceded outstanding loss and LAE and
$25.9 million of recoverables on paid losses. RSUI’s
reinsurance recoverables totaled $752.6 million of
AIHL’s $873.3 million. 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 89.9 percent of AIHL’s reinsurance
recoverables balance at December 31, 2010 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
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Table of Contents
units, has 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.
Information regarding concentration of AIHL’s reinsurance
recoverables at December 31, 2010 is as follows (dollars in
millions):
| Reinsurer(1) | Rating(2) | Dollar Amount | Percentage | |||||||||
|
Swiss Re
|
A (Excellent | ) | $ | 160.1 | 18.3 | % | ||||||
|
Platinum Underwriters Holdings, Ltd.
|
A (Excellent | ) | 95.9 | 11.0 | % | |||||||
|
The Chubb Corporation
|
A++ (Superior | ) | 91.6 | 10.5 | % | |||||||
|
All other reinsurers
|
525.7 | 60.2 | % | |||||||||
|
Total
|
$ | 873.3 | 100.0 | % | ||||||||
| (1) | Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed company. | |
| (2) | Represents the A.M. Best rating for the applicable reinsurance subsidiary or subsidiaries from which the reinsurance recoverable is due. |
At December 31, 2010, AIHL also had fully collateralized
reinsurance recoverables of $92.7 million due from Darwin,
now a subsidiary of AWAC. The A.M. Best financial strength
rating of Darwin was A (Excellent) at December 31, 2010.
AIHL had no allowance for uncollectible reinsurance as of
December 31, 2010.
Financial
Condition
Parent
Level
General.
In general, we follow a policy of
maintaining a relatively liquid financial condition at the
parent company. 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, 2010, we held
marketable securities and cash of $634.4 million at the
parent company and $581.6 million at AIHL, which totaled
$1,216.0 million. We believe that we have and will have
adequate internally generated funds, cash resources and unused
credit facilities to provide for the currently foreseeable needs
of our business, and we had no material commitments for capital
expenditures at December 31, 2010.
Stockholders’ equity increased to approximately
$2.9 billion as of December 31, 2010, compared with
approximately $2.7 billion as of December 31, 2009,
representing an increase of 7.0 percent. The increase in
stockholders’ equity primarily reflects net earnings in
2010, and a net increase in net unrealized appreciation in our
investment portfolio during 2010, partially offset by the
repurchase of our common stock pursuant to our repurchase
program described below.
Debt.
On September 20, 2010, we issued
$300.0 million of Senior Notes. The Senior Notes are
unsecured and unsubordinated general obligations of Alleghany as
the parent company. Interest is payable semi-annually on March
15 and September 15 of each year. The terms of the Senior Notes
permit redemption prior to their maturity. The indenture under
which the Senior Notes were issued contains covenants that
impose conditions on our ability to create liens on the capital
stock of AIHL or RSUI or to engage in sales of the capital stock
of AIHL or RSUI. The Senior Notes were issued at a discount of
approximately 99.63 percent, resulting in proceeds before
underwriting discount, commissions and other expenses of
$298.9 million, and an effective yield of approximately
5.67 percent. Approximately $2.8 million of
underwriting discount, commissions and other expenses was
recorded as deferred charges, which are amortized over the life
of the Senior Notes. We currently intend to use the net proceeds
from the sale of the Senior Notes for general corporate
purposes, including, but not limited to, acquisitions, additions
to working capital, capital expenditures, investments,
contributions of capital to our subsidiaries, repayment of
Senior Notes, and repurchases and redemptions of our securities.
Credit Agreement.
On September 9, 2010, we
entered into the Credit Agreement, and a related security
agreement, or the “Security Agreement,” with a bank
syndicate. The Credit Agreement provides for a two tranche
revolving credit facility in an aggregate principal amount of up
to $100.0 million, or the “Commitments,”
consisting
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Table of Contents
of (i) a secured credit facility, or
“Tranche A,” subject to a borrowing base as set
forth in the Credit Agreement, in an aggregate principal amount
of up to $50.0 million and (ii) an unsecured credit
facility, or “Tranche B,” in an aggregate
principal amount of up to $50.0 million. The Commitments
under the Credit Agreement are scheduled to terminate on
September 9, 2013, or the “Maturity Date,” unless
earlier terminated. Borrowings under the Credit Agreement will
be available for working capital and general corporate purposes.
Alternate Base Rate Borrowings under the Credit Agreement will
bear interest at (x) the greatest of (a) the
administrative agent’s prime rate, (b) the federal
funds rate plus 0.5 percent or (c) an adjusted London
Interbank Overnight, or “LIBO,” rate for a one month
interest period on such day plus 1 percent, plus (y) a
specified margin (currently 0 basis points for
Tranche A and 125 basis points for Tranche B).
Eurodollar Borrowings under the Credit Agreement will bear
interest at the Adjusted LIBO Rate for the interest period in
effect plus a specified margin (currently 75 basis points
for Tranche A and 225 basis points for
Tranche B). The Credit Agreement requires that all loans be
repaid in full no later than the Maturity Date. The Credit
Agreement also requires us to pay a Commitment Fee each quarter
in a range of between one fifth and one-half of one percent per
annum, based upon our Moody’s Rating and S&P Rating,
on the daily unused amount of the Commitments of the relevant
Tranche.
The Credit Agreement contains representations, warranties and
covenants customary for bank loan facilities of this nature. In
this regard, the Credit Agreement requires us to, among other
things, (i) maintain a consolidated net worth of not less
than the sum of (x) approximately $2.0 billion plus
(y) 50 percent of our cumulative consolidated net
income earned in each fiscal quarter (if positive) commencing on
September 30, 2010 and (ii) maintain a ratio of
consolidated total indebtedness to consolidated capital as of
the end of each fiscal quarter of not greater than 0.25 to 1.0.
Additionally, the Credit Agreement contains various negative
covenants with which we must comply, including, but not limited
to, limitations respecting the creation of liens on any property
or asset; the incurrence of indebtedness; mergers,
consolidations, liquidations and dissolutions; change of
business; sales of assets; transactions with affiliates; and
other provisions customary in similar types of agreements. In
addition, at any time when a default has occurred and is
continuing or would result therefrom, the Credit Agreement
proscribes our ability to declare or pay, or permit certain of
our subsidiaries to declare or pay, any dividend on, or make any
payment on account of, or set apart assets for a sinking or
other analogous fund for, the purchase, redemption, defeasance,
retirement or acquisition of, any of our stock or any such
subsidiaries.
Under the Credit Agreement, an Event of Default is defined as
(i) a failure to pay any principal or interest on any of
the loans or any fee or any other amount payable under the
Credit Agreement or any other loan document within designated
time periods; (ii) a breach of any representation or
warranty made in the Credit Agreement or any other loan
document; (iii) a failure to comply with certain specified
covenants, conditions or agreements in the Credit Agreement;
(iv) a failure to comply with any other conditions,
covenants or agreements in the Credit Agreement or any other
loan document within thirty days after knowledge or written
notice of such failure; (v) a failure by us or any
subsidiary to pay any indebtedness, other than loans under the
Credit Agreement, or any obligation in respect of our or any
subsidiary’s hedging agreements in an aggregate amount
exceeding $25.0 million, or “Material
Indebtedness,” when due or payable; (vi) any event or
condition occurs that results in the acceleration of the
maturity of Material Indebtedness or which enables or permits
the holder of such Material Indebtedness to cause the
acceleration of such indebtedness, except for secured
indebtedness that becomes due as a result of the voluntary sale
or transfer of the property or assets securing such
indebtedness; (vii) the occurrence of certain involuntary
or voluntary bankruptcy, insolvency or reorganization events
relating to us or any of our material subsidiaries;
(viii) the rendering of certain money judgments against us
or any of our subsidiaries in an aggregate amount in excess of
$25.0 million; (ix) a failure by us or certain
affiliates to pay any material amounts to the Pension Benefit
Guaranty Corporation or to an employee pension benefit plan or
the institution of an enforcement proceeding under ERISA (as
defined in the Credit Agreement), the occurrence of certain
ERISA events which would reasonably be expected to have a
material adverse effect, or the occurrence of certain material
events under ERISA covered plans; (x) the failure of any
lien created by any of the security documents to constitute an
enforceable first priority perfected lien on all of the
collateral encumbered thereby; or (xi) the occurrence of
certain events constituting a Change of Control relating to us.
If an Event of Default occurs, then, to the extent permitted in
the Credit Agreement, the Lenders may, as applicable, terminate
the Commitments, accelerate the repayment of any outstanding
loans and exercise all rights and remedies available to such
Lenders under the Credit Agreement, the Security Agreement and
related documents
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Table of Contents
and applicable law, including, without limitation, exercising
rights and remedies with respect to the collateral for the
benefit of the Tranche A Lenders. In the case of an Event
of Default that exists due to the occurrence of certain
involuntary or voluntary bankruptcy, insolvency or
reorganization events relating to us, the Commitments will
automatically terminate and the repayment of any outstanding
loans shall be automatically accelerated.
The Security Agreement secures all of our obligations relating
to the Tranche A Loans under the Credit Agreement, and
grants to a collateral agent for the Lenders, or
“Collateral Agent,” a continuing first priority lien
on and security interest in, and assigns to the Collateral Agent
(for the ratable benefit of the Lenders) as collateral security,
all of our right, title and interest in and to: (i) all
cash, securities, shares of stock, investment property,
financial assets, equity interests, instruments and general
intangibles which are from time to time held in or credited to a
certain account, or the “Account,” maintained with the
Collateral Agent, (ii) the Account itself, and
(iii) all rights to which we now or hereafter become
entitled by reason of our interest in any of the previously
described collateral, and all security entitlements related to
the Account and the financial assets credited to the Account,
and the additions to, accessions to, substitutions of, products
or proceeds of any or all of the foregoing.
There were no borrowings under the Credit Agreement during 2010.
Preferred Stock.
On June 23, 2006, we completed
an offering of 1,132,000 shares of 5.75% Mandatory
Convertible Preferred Stock, or the “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
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. All of the foregoing per
share data has not been adjusted for subsequent Alleghany common
stock dividends.
Capital Contributions.
From time to time, we make
capital contributions to our subsidiaries when third-party
financing may not be attractive or available. In 2010, we made a
capital contribution of $40.0 million to provide capital
support to PCIC in connection with an increase in its
workers’ compensation deposit, which is required to be
maintained by PCIC under California workers’ compensation
regulations. In 2007, we made a capital contribution of
$50.0 million to provide additional capital support to PCC
in connection with AIHL’s acquisition of PCC. 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 Repurchases.
In
February 2008, our Board of Directors authorized the repurchase
of shares of our common stock, at such times and at prices as
management determined 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. As of December 31, 2010, this program
had been fully utilized. In July 2010, in anticipation of such
full utilization, our Board of Directors authorized the
repurchase of additional shares of our common stock, at such
times and at prices as management may determine advisable, up to
an aggregate of $300.0 million, upon such full utilization.
During 2010, we repurchased an aggregate of 285,056 shares
of our common stock in the open market for $83.1 million,
at an average price per share of $291.64. During 2009, we
repurchased an aggregate of 295,463 shares of our common
stock in the open market for $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
$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 $25.1 million,
at an average price per share of $318.05. All of the foregoing
per share and average price data has not been adjusted for
subsequent Alleghany common stock dividends.
As of December 31, 2010 and December 31, 2009, we had
8,766,554 and 9,037,561 shares of our common stock
outstanding, respectively.
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
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financial strength and, in particular, the liquid assets
available to finance internal growth and operating company
acquisitions and investments. On April 29, 2011, as our
dividend on our common stock for 2011, we will pay to
stockholders of record on April 1, 2011 a dividend of one
share of our common stock for every 50 shares outstanding.
Dividends from Subsidiaries.
At December 31,
2010, approximately $709.1 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, 2010 of $1.8 billion, a maximum of
$41.5 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 2010, RSUI paid AIHL a cash dividend of
$100.0 million and CATA paid AIHL a cash dividend of
$25.0 million. 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
2008.
Contractual Obligations.
We have certain obligations
to make future payments under contracts and credit-related
financial instruments and commitments. At December 31,
2010, 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
|
$ | 70.3 | $ | 8.9 | $ | 18.0 | $ | 16.7 | $ | 26.7 | ||||||||||
|
Investments
|
30.0 | 8.7 | 11.3 | 10.0 | — | |||||||||||||||
|
Senior Notes
|
298.9 | — | — | — | 298.9 | |||||||||||||||
|
Loss and LAE
|
2,328.7 | 535.3 | 787.7 | 429.1 | 576.6 | |||||||||||||||
|
Other long-term liabilities reflected on our consolidated
balance sheet under GAAP*
|
136.5 | 15.9 | 71.9 | 21.6 | 27.1 | |||||||||||||||
|
Total
|
$ | 2,864.4 | $ | 568.8 | $ | 888.9 | $ | 477.4 | $ | 929.3 | ||||||||||
| * | 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 loss and LAE pursuant to insurance policies they
issue. These future payments are reflected as reserves on our
consolidated financial statements. With respect to loss 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 loss and LAE, including
information regarding the timing of payments of these expenses,
can be found on pages 19 through 21, pages 29 and 30,
pages 40 through 45 and pages 57 and 58 of this
Form 10-K
Report.
Material Off-Balance Sheet Arrangements.
We did not
have any off-balance sheet arrangements outstanding at
December 31, 2010, 2009 or 2008, nor did we enter into any
off-balance sheet arrangements during 2010, 2009 or 2008.
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.
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Table of Contents
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, 2010, investments and cash
represented 73.3 percent of the assets of AIHL and its
insurance operating units.
At December 31, 2010, AIHL had total unpaid loss and LAE of
approximately $2.3 billion and total reinsurance
recoverables of $873.3 million, consisting of
$847.4 million of ceded outstanding loss and LAE and
$25.9 million of recoverables on paid losses. As of
December 31, 2010, AIHL’s investment securities
portfolio had a fair market value of approximately
$4.0 billion and consisted primarily of high quality debt
securities. Additional information regarding AIHL’s
investment portfolio and the credit quality of AIHL’s debt
securities portfolio can be found on pages 63 through 67 of
this
Form 10-K
Report.
Alleghany Properties.
As of December 31, 2010,
Alleghany Properties held properties having a total book value
of $19.9 million, compared with $19.8 million as of
December 31, 2009 and $19.5 million as of
December 31, 2008. These properties and loans had a total
book value of $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, 2010
was AA+, with 50.9 percent of our consolidated debt
securities portfolio invested in securities with the highest
rating (Aaa / AAA), 29.7 percent invested in
securities with the second highest rating (Aa/AA) and only
1.1 percent had either no rating or a rating below
investment grade (below Baa3 / BBB-). Although many of
our debt securities, which consist predominantly of municipal
bonds, are insured by financial guaranty insurance companies,
the impact of such insurance is not significant to the foregoing
debt securities ratings.
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 debt
securities 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, 2010. 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 4 percent in the fair
market value of our debt securities portfolio. In this regard,
as of December 31, 2010, our debt securities portfolio had
an effective duration of approximately 4.3 years, with
approximately $1.8 billion, or 63.8 percent, of our
debt securities portfolio in securities with maturities of five
years or less and $264.8 million of short-term investments.
See Note 3 to the Notes to the Consolidated Financial
63
Table of Contents
Statements set forth in Item 8 of this
Form 10-K
Report for further details concerning the contractual maturities
of our consolidated debt securities 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; | |
| • | 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.
Overview.
On a consolidated basis, our invested asset
portfolio was approximately $4.8 billion as of
December 31, 2010, an increase of 8.8 percent from
December 31, 2009. The increase reflects the investment of
the proceeds from the issuance of Senior Notes discussed above
and positive cash flow from underwriting activities at RSUI,
partially offset by negative cash flow at PCC and our repurchase
of common stock pursuant to our repurchase program. Negative
cash flow at PCC was a result of PCC’s determination in
June 2009 to cease soliciting new and renewal business on a
direct basis commencing August 1, 2009.
Fair Value.
The estimated carrying values and fair values
of our consolidated financial instruments as of
December 31, 2010 and December 31, 2009 were as
follows (in millions):
| December 31, 2010 | December 31, 2009 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Value | Value | Value | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Investments (excluding equity method investments)*
|
$ | 4,622.7 | $ | 4,622.7 | $ | 4,211.6 | $ | 4,211.6 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Senior Notes
|
$ | 298.9 | $ | 291.8 | $ | — | $ | — | ||||||||
| * | This table includes available-for-sale investments (securities as well as partnership investments carried at fair value that are included in other invested assets). This table excludes investments accounted for using the equity method (Homesite, ORX and other investments) and certain loans receivable that are carried at cost, all of 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
64
Table of Contents
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. Our Level 2 liabilities include the Senior Notes. 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 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 investments are 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 investment 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 our classification of securities within the
three-tiered hierarchy to ensure that the classification is
consistent with GAAP.
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Table of Contents
The estimated fair values of our financial instruments as of
December 31, 2010 and December 31, 2009 allocated
among the three levels set forth above were as follows (in
millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
As of December 31, 2010
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock(1)
|
$ | 1,500.7 | $ | — | $ | — | $ | 1,500.7 | ||||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
307.3 | 30.5 | — | 337.8 | ||||||||||||
|
Mortgage and asset-backed securities(2)
|
— | 866.5 | — | 866.5 | ||||||||||||
|
States, municipalities and political subdivision bonds
|
— | 1,068.5 | — | 1,068.5 | ||||||||||||
|
Foreign bonds
|
— | 114.2 | — | 114.2 | ||||||||||||
|
Corporate bonds and other
|
— | 445.4 | — | 445.4 | ||||||||||||
| 307.3 | 2,525.1 | — | 2.832.4 | |||||||||||||
|
Short-term investments
|
86.4 | 178.4 | — | 264.8 | ||||||||||||
|
Other invested assets(3)
|
— | — | 24.8 | 24.8 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,894.4 | $ | 2,703.5 | $ | 24.8 | $ | 4,622.7 | ||||||||
|
Senior Notes
|
$ | — | $ | 291.8 | $ | — | $ | 291.8 | ||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock(1)
|
$ | 624.5 | $ | — | $ | — | $ | 624.5 | ||||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
638.4 | — | — | 638.4 | ||||||||||||
|
Mortgage and asset-backed securities(2)
|
— | 958.8 | — | 958.8 | ||||||||||||
|
States, municipalities and political subdivision 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(3)
|
— | — | 35.2 | 35.2 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,338.1 | $ | 2,838.3 | $ | 35.2 | $ | 4,211.6 | ||||||||
| (1) | Of the $1,500.7 million of fair value at December 31, 2010, $1,004.8 million related to certain energy sector businesses. Of the $624.5 million of fair value at December 31, 2009, $399.2 million related to certain energy sector businesses. | |
| (2) | Of the $866.5 million of fair value at December 31, 2010, $499.9 million related to residential mortgage-backed securities, or “RMBS,” $173.4 million related to commercial mortgage-backed securities, or “CMBS” and $193.2 million related to other asset-backed securities. Of the $958.8 million of fair value at December 31, 2009, $685.7 million related to RMBS, $75.5 million related to CMBS and $197.6 million related to other asset-backed securities. | |
| (3) | Level 3 securities consist of partnership investments. The carrying value of partnership investments of $24.8 million decreased by $10.4 million from the December 31, 2009 carrying value of $35.2 million, |
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Table of Contents
| due primarily to sales of $13.9 million (which generated a realized capital gain of $5.1 million), partially offset by an increase in estimated fair value during the period of $3.5 million. Level 3 securities, consisting of mortgage- and asset-backed securities totaling $1.6 million, were acquired during the 2010 third quarter and sold during the 2010 fourth quarter. |
Mortgage- and Asset-Backed Securities.
At
December 31, 2010, our mortgage- and asset-backed
securities portfolio consisted of the following and 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)
|
$ | 57.6 | Aaa /AAA | |||
|
RMBS: guaranteed by GNMA (2)
|
361.3 | Aaa /AAA | ||||
|
RMBS: Alt A
|
12.4 | Aa3 /AA+ | ||||
|
RMBS:
Sub-prime
|
2.7 | Aaa/AAA | ||||
|
All other
|
432.5 | Aaa/AAA | ||||
|
Total
|
$ | 866.5 | 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. |
All of our mortgage- and asset-backed securities are current as
to principal and interest. Additional information regarding our
holdings of securities backed by
sub-prime
and Alt-A collateral at December 31, 2010 is as follows (in
millions):
|
Gross
|
Gross
|
Weighted
|
||||||||||
|
Type of Underlying
|
Unrealized
|
Unrealized
|
Average
|
|||||||||
| Collateral | Gains | Losses | Life | |||||||||
|
Alt-A
|
$ | 0.4 | $ | (0.2 | ) | 5.1 years | ||||||
|
Sub-prime
|
$ | – | $ | – | 4.3 years | |||||||
Municipal Bonds.
The following table details
the top five state exposures of our municipal bond portfolio (in
millions):
|
General
|
Special
|
Total
|
||||||||||
| Obligation | Revenue | Fair Value | ||||||||||
|
Texas
|
$ | 69.0 | $ | 29.6 | $ | 98.6 | ||||||
|
Washington
|
50.2 | 14.8 | 65.0 | |||||||||
|
Massachusetts
|
4.5 | 57.3 | 61.8 | |||||||||
|
New York
|
4.3 | 53.0 | 57.3 | |||||||||
|
Illinois
|
35.4 | 15.8 | 51.2 | |||||||||
|
All other
|
232.6 | 413.3 | 645.9 | |||||||||
| $ | 396.0 | $ | 583.8 | $ | 979.8 | |||||||
|
Advance refunded / escrowed to maturity bonds
|
88.7 | |||||||||||
|
Total municipal bond portfolio
|
$ | 1,068.5 | ||||||||||
Recent
Accounting Standards
Recently
Adopted
In June 2009, the Financial Accounting Standards Board, or
“FASB,” issued guidance that establishes the FASB
Accounting Standards Codification, or the “ASC,” as
the single source of authoritative accounting principles in the
preparation of financial statements in conformity with GAAP. The
ASC was effective for interim and annual
67
Table of Contents
periods ending after September 15, 2009. We adopted the ASC
in the 2009 third quarter, and the implementation did not have
any impact on our results of operations and financial condition.
In June 2009, FASB issued guidance that changes the way entities
account for securitizations and special-purpose entities. This
guidance eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosure about transfers of financial assets, including
securitization transactions and an entity’s continuing
exposure to the risks related to transferred financial assets.
This guidance also changes 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. This guidance is
generally effective for interim and annual periods beginning in
2010. We adopted this guidance in the 2010 first quarter, and
the implementation did not have any impact on our results of
operations and financial condition. We did not have any
off-balance sheet arrangements outstanding at December 31,
2010 or December 31, 2009, including those that may involve
the types of entities contemplated in this guidance.
In September 2009, FASB issued guidance that allows investors to
use net asset value as a practical expedient to estimate the
fair value of investments in investment companies (and like
entities) that do not have readily determinable fair values.
This guidance does not apply to investments accounted for using
the equity method. This guidance was effective for interim and
annual periods ending after December 15, 2009, with early
application permitted. We adopted this guidance 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 that are accounted for as
available-for-sale
are subject to this guidance. Net asset value quotes from the
third-party general partner of the entity in which such
investments are held, which will often be based on unobservable
market inputs, constitute the primary input in our determination
of the fair value of such investments. The fair value of our
available-for-sale
partnership investments was $24.8 million at
December 31, 2010 and $35.2 million at
December 31, 2009.
In January 2010, FASB issued guidance that provides for
additional financial statement disclosure regarding fair value
measurements, including how fair values are measured. This
guidance was effective for interim and annual periods ending
after December 15, 2009. We adopted this guidance in the
2010 first quarter, and the implementation did not have any
impact on our results of operations and financial condition.
Future
Application of Accounting Standards
In July 2010, FASB issued guidance that provides for additional
financial statement disclosure regarding financing receivables,
including the credit quality and allowance for credit losses
associated with such assets. This guidance is generally
effective for interim and annual periods beginning after
December 15, 2010, with certain disclosures effective for
interim and annual periods ending on or after December 31,
2010. We will fully adopt this guidance in the 2011 first
quarter, and we do not currently believe that the implementation
will have any impact on our results of operations and financial
condition.
In October 2010, FASB issued new guidance that provides
additional clarification for costs associated with acquiring or
renewing insurance contracts. The new guidance states that only
incremental, direct costs associated with the successful
acquisition of a new or renewal insurance contract may be
capitalized as deferred acquisition costs. Furthermore, such
costs: (i) must be essential to the contract transaction;
(ii) would not have been incurred had the contract
transaction not occurred; and (iii) must be related
directly to the acquisition activities involving underwriting,
policy issuance and processing, medical and inspection, and
sales force contract selling. Advertising costs should be
included in deferred acquisition costs only if the
capitalization criteria in separate “direct-response”
advertising guidance within GAAP are met. All other
acquisition-related costs and other expenses should be charged
to expense as incurred. This guidance is effective for interim
and annual periods beginning after December 15, 2011, with
early adoption permitted (but only at the beginning of an
entity’s annual reporting period). We will adopt this
guidance in the 2012 first quarter, and we do not currently
believe that the implementation will have a material impact on
our results of operations and financial condition.
68
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 recorded as a
component of other comprehensive income. 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,
2010 and 2009 on the estimated fair value of our consolidated
equity securities 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 | ||||||||||
|
2010
|
$ | 1,500.7 | 20% Increase | $ | 1,800.8 | 6.7 | % | |||||||
| 20% Decrease | $ | 1,200.6 | (6.7 | )% | ||||||||||
|
2009
|
$ | 624.5 | 20% Increase | $ | 749.4 | 2.9 | % | |||||||
| 20% Decrease | $ | 499.6 | (2.9 | )% | ||||||||||
Debt Securities and Senior Notes.
The primary
market risk for our and our subsidiaries’ debt securities
is interest rate risk at the time of refinancing. We monitor the
interest rate environment to evaluate refinancing opportunities.
We generally do not use derivatives to manage market and
interest rate risks. The tables below present sensitivity
analyses at December 31, 2010 and 2009 of our
(i) consolidated debt securities and (ii) Senior
Notes, 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, 2010
and 2009 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, 2010
(dollars
in millions)
| Interest rate shifts | -300 | -200 | -100 | 0 | 100 | 200 | 300 | ||||||||||||||||||||||||||||
|
Assets:
|
|||||||||||||||||||||||||||||||||||
|
Debt securities, fair value
|
$3,186.2 | $3,066.4 | $2,951.1 | $2,832.4 | $2,709.5 | $2,591.4 | $2,480.9 | ||||||||||||||||||||||||||||
|
Estimated change in fair value
|
$353.8 | $234.0 | $118.7 | – | $(122.9 | ) | $(241.0 | ) | $(351.5 | ) | |||||||||||||||||||||||||
|
Liabilities:
|
|||||||||||||||||||||||||||||||||||
|
Senior Notes, fair value
|
$365.9 | $338.9 | $314.2 | $291.8 | $271.2 | $252.5 | $235.2 | ||||||||||||||||||||||||||||
|
Estimated change in fair value
|
$74.1 | $47.1 | $22.4 | – | $(20.6 | ) | $(39.3 | ) | $(56.6 | ) | |||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||||||
| * | The Senior Notes were issued on September 20, 2010 and thus were not outstanding at December 31, 2009. |
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 market prices and
market interest rates may
69
Table of Contents
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 market prices and in market
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 as an equity method investment. The carrying value of
available-for-sale
partnership investments was $24.8 million at
December 31, 2010 and $35.2 million at
December 31, 2009. The carrying value of equity method
partnership investments was $47.7 million at
December 31, 2009 (such partnerships were dissolved during
the third quarter of 2010, and thus were not outstanding at
December 31, 2010).
70
Table of Contents
| Item 8. | Financial Statements and Supplementary Data. |
Index to
Consolidated Financial Statements
Alleghany
Corporation and Subsidiaries
| Description | Page | |||
| 72 | ||||
| 73 | ||||
| 74 | ||||
| 75 | ||||
| 76 | ||||
| 115 | ||||
71
Table of Contents
ALLEGHANY
CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Consolidated Balance Sheets
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
(in thousands, except
|
||||||||
| share amounts) | ||||||||
|
Assets
|
||||||||
|
Investments
|
||||||||
|
Available-for-sale
securities at fair value:
|
||||||||
|
Equity securities (cost: 2010 – $1,310,009;
2009 – $530,945)
|
$ | 1,500,686 | $ | 624,546 | ||||
|
Debt securities (amortized cost: 2010 – $2,778,117;
2009 – $3,235,595)
|
2,832,411 | 3,289,013 | ||||||
|
Short-term investments
|
264,811 | 262,903 | ||||||
| 4,597,908 | 4,176,462 | |||||||
|
Other invested assets
|
207,294 | 238,227 | ||||||
|
Total investments
|
4,805,202 | 4,414,689 | ||||||
|
Cash
|
76,741 | 32,526 | ||||||
|
Premium balances receivable
|
128,075 | 145,992 | ||||||
|
Reinsurance recoverables
|
873,295 | 976,172 | ||||||
|
Ceded unearned premium reserves
|
144,065 | 160,713 | ||||||
|
Deferred acquisition costs
|
67,692 | 71,098 | ||||||
|
Property and equipment at cost, net of accumulated depreciation
and amortization
|
19,504 | 20,097 | ||||||
|
Goodwill and other intangibles, net of amortization
|
142,312 | 145,667 | ||||||
|
Net deferred tax assets
|
77,147 | 124,266 | ||||||
|
Other assets
|
97,666 | 101,550 | ||||||
| $ | 6,431,699 | $ | 6,192,770 | |||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Loss and loss adjustment expenses
|
$ | 2,328,742 | $ | 2,520,979 | ||||
|
Unearned premiums
|
523,927 | 573,906 | ||||||
|
Senior Notes
|
298,923 | — | ||||||
|
Reinsurance payable
|
41,500 | 51,795 | ||||||
|
Current taxes payable
|
3,220 | 3,827 | ||||||
|
Other liabilities
|
326,519 | 324,742 | ||||||
|
Total liabilities
|
3,522,831 | 3,475,249 | ||||||
|
Common stock
|
||||||||
|
(shares authorized: 2010 and 2009 – 22,000,000; issued
and outstanding 2010 – 9,118,086; 2009 –
9,300,734)
|
9,118 | 9,118 | ||||||
|
Contributed capital
|
928,816 | 921,225 | ||||||
|
Accumulated other comprehensive income
|
170,262 | 94,045 | ||||||
|
Treasury stock, at cost (2010 – 351,532 shares;
2009 – 258,013 shares)
|
(99,686 | ) | (66,325 | ) | ||||
|
Retained earnings
|
1,900,358 | 1,759,458 | ||||||
|
Total stockholders’ equity
|
2,908,868 | 2,717,521 | ||||||
| $ | 6,431,699 | $ | 6,192,770 | |||||
See accompanying Notes to Consolidated Financial Statements.
72
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
|
Revenues
|
||||||||||||
|
Net premiums earned
|
$ | 768,134 | $ | 845,015 | $ | 948,652 | ||||||
|
Net investment income
|
125,012 | 101,949 | 130,184 | |||||||||
|
Net realized capital gains
|
97,374 | 320,389 | 151,713 | |||||||||
|
Other than temporary impairment losses
|
(12,356 | ) | (85,916 | ) | (243,881 | ) | ||||||
|
Other income
|
7,188 | 2,955 | 2,432 | |||||||||
|
Total revenues
|
985,352 | 1,184,392 | 989,100 | |||||||||
|
Costs and expenses
|
||||||||||||
|
Loss and loss adjustment expenses
|
377,937 | 442,104 | 570,019 | |||||||||
|
Commissions, brokerage and other underwriting expenses
|
259,335 | 273,722 | 286,573 | |||||||||
|
Other operating expenses
|
37,157 | 45,615 | 34,861 | |||||||||
|
Corporate administration
|
28,854 | 26,938 | 35,895 | |||||||||
|
Interest expense
|
4,698 | 633 | 700 | |||||||||
|
Total costs and expenses
|
707,981 | 789,012 | 928,048 | |||||||||
|
Earnings from continuing operations, before income taxes
|
277,371 | 395,380 | 61,052 | |||||||||
|
Income taxes
|
78,869 | 124,381 | 20,485 | |||||||||
|
Earnings from continuing operations
|
198,502 | 270,999 | 40,567 | |||||||||
|
Discontinued operations
|
||||||||||||
|
Operations (including a gain on disposal of $141,688 in 2008)
|
— | — | 164,193 | |||||||||
|
Income taxes (including tax on the gain on disposal of $49,591
in 2008)
|
— | — | 56,789 | |||||||||
|
Earnings from discontinued operations, net of tax
|
— | — | 107,404 | |||||||||
|
Net earnings
|
$ | 198,502 | $ | 270,999 | $ | 147,971 | ||||||
|
Other comprehensive income
|
||||||||||||
|
Change in unrealized (losses) gains, net of deferred taxes of
$66,873, $90,590 and $(145,368) for 2010, 2009 and 2008,
respectively
|
$ | 124,192 | $ | 168,239 | $ | (269,969 | ) | |||||
|
Less: reclassification for net realized capital gains and other
than temporary impairment losses, net of taxes of $29,756,
$86,386 and $(15,198) for 2010, 2009 and 2008, respectively
|
(55,262 | ) | (160,432 | ) | 28,225 | |||||||
|
Other
|
7,287 | (1,011 | ) | 361 | ||||||||
|
Comprehensive income
|
$ | 274,719 | $ | 277,795 | $ | (93,412 | ) | |||||
|
Net earnings
|
$ | 198,502 | $ | 270,999 | $ | 147,971 | ||||||
|
Preferred dividends
|
— | 6,158 | 17,218 | |||||||||
|
Net earnings available to common stockholders
|
$ | 198,502 | $ | 264,841 | $ | 130,753 | ||||||
|
Basic earnings per share of common stock: *
|
||||||||||||
|
Continuing operations
|
$ | 22.29 | $ | 29.83 | $ | 2.70 | ||||||
|
Discontinued operations
|
— | — | 12.42 | |||||||||
|
Basic earning per share
|
$ | 22.29 | $ | 29.83 | $ | 15.12 | ||||||
|
Diluted earnings per share of common stock: *
|
||||||||||||
|
Continuing operations
|
$ | 22.29 | $ | 29.08 | $ | 2.70 | ||||||
|
Discontinued operations
|
— | — | 12.42 | |||||||||
|
Diluted earnings per share
|
$ | 22.29 | $ | 29.08 | $ | 15.12 | ||||||
| * | Amounts reflect subsequent common stock dividends. |
See accompanying Notes to Consolidated Financial Statements.
73
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, 2010 | ||||||||||||||||||||||||||||
|
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, 2007
|
||||||||||||||||||||||||||||
|
(8,658,571* 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
|
||||||||||||||||||||||||||||
|
(8,686,595* 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
|
||||||||||||||||||||||||||||
|
(9,300,734* shares of common stock issued; 258,013 in treasury)
|
— | 9,118 | 921,225 | 94,045 | (66,325 | ) | 1,759,458 | 2,717,521 | ||||||||||||||||||||
|
Add (deduct):
|
||||||||||||||||||||||||||||
|
Net earnings
|
— | — | — | — | — | 198,502 | 198,502 | |||||||||||||||||||||
|
Other comprehensive loss, net of tax:
|
||||||||||||||||||||||||||||
|
Retirement plans
|
— | — | — | 7,287 | — | — | 7,287 | |||||||||||||||||||||
|
Change in unrealized appreciation of investments, net
|
— | — | — | 68,930 | — | — | 68,930 | |||||||||||||||||||||
|
Comprehensive income
|
— | — | — | 76,217 | — | 198,502 | 274,719 | |||||||||||||||||||||
|
Dividends paid
|
— | 7,051 | — | 45,461 | (53,060 | ) | (548 | ) | ||||||||||||||||||||
|
Stock based compensation
|
— | — | 340 | — | — | — | 340 | |||||||||||||||||||||
|
Treasury stock purchase
|
— | — | — | — | (83,135 | ) | — | (83,135 | ) | |||||||||||||||||||
|
Other, net
|
— | 200 | — | 4,313 | (4,542 | ) | (29 | ) | ||||||||||||||||||||
|
Balance at December 31, 2010
(9,118,086 shares
of common stock issued; 351,532 in treasury)
|
$ | — | $ | 9,118 | $ | 928,816 | $ | 170,262 | $ | (99,686 | ) | $ | 1,900,358 | $ | 2,908,868 | |||||||||||||
| * | Amounts reflect subsequent common stock dividends. |
See accompanying Notes to Consolidated Financial Statements.
74
Table of Contents
ALLEGHANY
CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net earnings
|
$ | 198,502 | $ | 270,999 | $ | 147,971 | ||||||
|
Earnings from discontinued operations, net
|
— | — | 107,404 | |||||||||
|
Earnings from continuing operations
|
198,502 | 270,999 | 40,567 | |||||||||
|
Adjustments to reconcile earnings from continuing operations to
net cash provided by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
33,816 | 32,358 | 25,674 | |||||||||
|
Net realized capital (gains) losses
|
(97,374 | ) | (320,389 | ) | (151,713 | ) | ||||||
|
Other than temporary impairment losses
|
12,356 | 85,916 | 243,881 | |||||||||
|
(Increase) decrease in other assets
|
6,899 | 1,255 | (37,117 | ) | ||||||||
|
(Increase) decrease in reinsurance receivable, net of
reinsurance payable
|
92,582 | 78,520 | (41,604 | ) | ||||||||
|
(Increase) decrease in premium balances receivable
|
17,917 | 8,030 | 17,671 | |||||||||
|
(Increase) decrease in ceded unearned premium reserves
|
16,648 | 24,689 | 35,801 | |||||||||
|
(Increase) decrease in deferred acquisition costs
|
3,406 | 655 | 3,870 | |||||||||
|
Increase (decrease) in other liabilities and current taxes
|
18,332 | 59,164 | (24,928 | ) | ||||||||
|
Increase (decrease) in unearned premiums
|
(49,979 | ) | (40,161 | ) | (86,955 | ) | ||||||
|
Increase (decrease) in loss and loss adjustment expenses
|
(192,237 | ) | (57,611 | ) | 198,889 | |||||||
|
Net adjustments
|
(137,634 | ) | (127,574 | ) | 183,469 | |||||||
|
Net cash provided by operating activities from continuing
operations
|
60,868 | 143,425 | 224,036 | |||||||||
|
Net cash provided by operating activities from discontinued
operations
|
— | — | 106,510 | |||||||||
|
Net cash provided by operating activities
|
60,868 | 143,425 | 330,546 | |||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchase of investments
|
(2,222,296 | ) | (2,332,932 | ) | (1,564,024 | ) | ||||||
|
Sales of investments
|
1,530,027 | 1,725,742 | 1,149,434 | |||||||||
|
Maturities of investments
|
435,164 | 311,868 | 325,970 | |||||||||
|
Purchases of property and equipment
|
(6,607 | ) | (5,539 | ) | (9,760 | ) | ||||||
|
Net change in short-term investments
|
(1,845 | ) | 373,442 | (320,111 | ) | |||||||
|
Acquisition of equity method investments
|
(20,000 | ) | — | (50,816 | ) | |||||||
|
Other, net
|
55,036 | (913 | ) | 3,700 | ||||||||
|
Net cash (used in) provided by investing activities from
continuing operations
|
(230,521 | ) | 71,668 | (465,607 | ) | |||||||
|
Net cash provided by investing activities from discontinued
operations
|
— | — | 151,607 | |||||||||
|
Net cash (used in) provided by investing activities
|
(230,521 | ) | 71,668 | (314,000 | ) | |||||||
|
Cash flows from financing activities
|
||||||||||||
|
Proceeds from issuance of Senior Notes
|
298,893 | — | — | |||||||||
|
Debt issue costs paid
|
(2,736 | ) | — | — | ||||||||
|
Treasury stock acquisitions
|
(83,135 | ) | (75,856 | ) | (25,068 | ) | ||||||
|
Convertible preferred stock acquisition
|
(117,358 | ) | — | |||||||||
|
Convertible preferred stock dividends paid
|
— | (7,456 | ) | (17,350 | ) | |||||||
|
Tax benefit on stock based compensation
|
513 | 312 | 2,330 | |||||||||
|
Other, net
|
333 | (334 | ) | 2,133 | ||||||||
|
Net cash provided by (used in) financing activities from
continuing operations
|
213,868 | (200,692 | ) | (37,955 | ) | |||||||
|
Net cash provided by (used in) financing activities from
discontinued operations
|
— | — | (5,000 | ) | ||||||||
|
Net cash provided by (used in) financing activities
|
213,868 | (200,692 | ) | (42,955 | ) | |||||||
|
Cash flows of discontinued operations
|
||||||||||||
|
Operating activities
|
— | — | (106,510 | ) | ||||||||
|
Investing activities
|
— | — | 88,398 | |||||||||
|
Financing activities
|
— | — | 5,000 | |||||||||
|
Net cash provided by (used in) discontinued operations
|
— | — | (13,112 | ) | ||||||||
|
Net cash provided by (used in) continuing operations
|
44,215 | 14,401 | (39,521 | ) | ||||||||
|
Cash at beginning of period
|
32,526 | 18,125 | 57,646 | |||||||||
|
Cash at end of period
|
$ | 76,741 | $ | 32,526 | $ | 18,125 | ||||||
|
Supplemental disclosures of cash flow information
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest
|
$ | — | $ | — | $ | 200 | ||||||
|
Income taxes paid (refunds received)
|
$ | 70,315 | $ | 105,478 | $ | 179,984 | ||||||
See accompanying Notes to Consolidated Financial Statements.
75
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 and Platte
River Insurance Company (collectively “CATA”), and
Pacific Compensation Corporation, formerly known as Employers
Direct Corporation. Effective April 12, 2010, as part of a
strategic repositioning effort, Employers Direct Corporation
changed its name to Pacific Compensation Corporation
(“PCC”), and the name of its insurance subsidiary from
Employers Direct Insurance Company to Pacific Compensation
Insurance Company (“PCIC”). AIHL Re LLC (“AIHL
Re”), a captive reinsurance subsidiary of AIHL, has in the
past provided reinsurance to Alleghany operating units and
affiliates. Alleghany’s equity investments, including those
held by AIHL’s insurance operating units, are managed
primarily by Alleghany Capital Partners LLC, an indirect,
wholly-owned subsidiary of Alleghany. Alleghany also owns and
manages properties in the Sacramento, California region through
its subsidiary Alleghany Properties Holdings LLC
(“Alleghany Properties”). 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 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 business of Darwin has
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 debt security with an
initial maturity of one year or less.
At December 31, 2010 and 2009,
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.
76
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
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; partnership investments, which are accounted for as
either
available-for-sale
or as an equity method investment; and loans receivable, which
are carried at unpaid principal balance.
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) | 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.
| (d) | 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. Ceded premiums are charged to income over the applicable
terms of the various reinsurance contracts with third-party
reinsurers.
Premium balances receivable are reported net of an allowance for
estimated uncollectible premium amounts. The allowance is based
upon AIHL’s insurance operating units ongoing review of
amounts outstanding, length of collection periods, the
creditworthiness of the insured and other relevant factors.
Amounts deemed to be uncollectible are written off against the
allowance. See Note 5.
| (e) | 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. In addition to considering the
financial condition of their reinsurers, Alleghany and
AIHL’s insurance operating units evaluate the
collectibility of their reinsurance recoverables (and where
appropriate, establish an allowance for estimated uncollectible
reinsurance recoverables), based upon a number of factors. Such
factors include the amounts outstanding, length of collection
periods, disputes, any collateral or letters of credit held by
AIHL’s insurance operating units and other relevant
factors. Amounts deemed to be uncollectible are written off
against the allowance for estimated uncollectible reinsurance
recoverables. As of
77
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
December 31, 2010 and December 31, 2009, Alleghany did
not record an allowance for estimated uncollectible reinsurance
recoverables.
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 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.
| (f) | 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, PCC
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.
| (g) | 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).
| (h) | 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.
78
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
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 PCC 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 PCC
goodwill balance at such date. PCC also recorded a pre-tax,
non-cash impairment charge of $11.2 million in the 2009
second quarter, representing the entire carrying value of
PCC’s trade names (originally determined to have indefinite
useful lives), renewal rights, distribution rights and database
development, net of accumulated amortization. See Note 4
for further information on this impairment as well as
information on goodwill and other intangible assets.
| (i) | 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.
| (j) | Loss Reserves |
The reserves for loss and loss adjustment expenses
(“LAE”) 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.
| (k) | 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.
| (l) | 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, 2010, 2009 and 2008,
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.
79
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
| (m) | 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 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.
| 2010 | 2009 | 2008 | ||||||||||
|
Expected volatility
|
23 | % | 23 | % | 19 | % | ||||||
|
Expected dividends
|
— | — | — | |||||||||
|
Expected term (in years)
|
9 | 9 | 10 | |||||||||
|
Risk-free rate
|
3.8 | % | 3.2 | % | 3.8 | % | ||||||
See Note 10 for further information on stock option grants
as well as information on all other types of stock-based
compensation awards.
| (n) | Reclassification |
Certain prior year amounts have been reclassified to conform to
the 2010 presentation.
| (o) | Recent Accounting Standards |
Recently
Adopted
In June 2009, the Financial Accounting Standards Board
(“FASB”) issued guidance that establishes the FASB
Accounting Standards Codification (the “ASC”) as the
single source of authoritative accounting principles in the
preparation of financial statements in conformity with GAAP. The
ASC was effective for interim and annual periods ending after
September 15, 2009. Alleghany adopted the ASC in the 2009
third quarter, and the implementation did not have any impact on
its results of operations and financial condition.
In June 2009, FASB issued guidance that changes the way entities
account for securitizations and special-purpose entities. This
guidance eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional
disclosure about transfers of financial assets, including
securitization transactions and an entity’s continuing
exposure to the risks related to transferred financial assets.
This guidance also changes 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. This guidance was
generally effective for interim and annual periods beginning in
2010. Alleghany adopted this guidance in the 2010 first quarter,
and the implementation did not have any impact on its results of
operations and financial condition. Alleghany did not have any
off-balance sheet arrangements outstanding at December 31,
2010 or December 31, 2009, including those that may involve
the types of entities contemplated in this guidance.
80
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 1. | Summary of Significant Accounting Principles, continued |
In September 2009, FASB issued guidance that allows investors to
use net asset value as a practical expedient to estimate the
fair value of investments in investment companies (and like
entities) that do not have readily determinable fair values.
This guidance does not apply to investments accounted for using
the equity method. This guidance was effective for interim and
annual periods ending after December 15, 2009, with early
application permitted. Alleghany adopted this guidance 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 that are accounted for
as
available-for-sale
are subject to this guidance. Net asset value quotes from the
third-party general partner of the entity in which such
investments are held, which will often be based on unobservable
market inputs, constitute the primary input in Alleghany’s
determination of the fair value of such investments. The fair
value of Alleghany’s
available-for-sale
partnership investments was $24.8 million at
December 31, 2010 and $35.2 million at
December 31, 2009.
In January 2010, FASB issued guidance that provides for
additional financial statement disclosure regarding fair value
measurements, including how fair values are measured. This
guidance was effective for interim and annual periods ending
after December 15, 2009. Alleghany adopted this guidance in
the 2010 first quarter, and the implementation did not have any
impact on its results of operations and financial condition.
Future
Application of Accounting Standards
In July 2010, FASB issued guidance that provides for additional
financial statement disclosure regarding financing receivables,
including the credit quality and allowance for credit losses
associated with such assets. This guidance is generally
effective for interim and annual periods beginning after
December 15, 2010, with certain disclosures effective for
interim and annual periods ending on or after December 31,
2010. Alleghany will fully adopt this guidance in the 2011 first
quarter, and Alleghany does not currently believe that the
implementation will have any impact on its results of operations
and financial condition.
In October 2010, FASB issued new guidance that provides
additional clarification for costs associated with acquiring or
renewing insurance contracts. The new guidance states that only
incremental, direct costs associated with the successful
acquisition of a new or renewal insurance contract may be
capitalized as deferred acquisition costs. Furthermore, such
costs: (i) must be essential to the contract transaction;
(ii) would not have been incurred had the contract
transaction not occurred; and (iii) must be related
directly to the acquisition activities involving underwriting,
policy issuance and processing, medical and inspection, and
sales force contract selling. Advertising costs should be
included in deferred acquisition costs only if the
capitalization criteria in separate “direct-response”
advertising guidance within GAAP are met. All other
acquisition-related costs and other expenses should be charged
to expense as incurred. This guidance is effective for interim
and annual periods beginning after December 15, 2011, with
early adoption permitted (but only at the beginning of an
entity’s annual reporting period). Alleghany will adopt
this guidance in the 2012 first quarter, and Alleghany does not
currently believe that the implementation will have a material
impact on its results of operations and financial condition.
| (p) | Statutory Accounting Practices |
Alleghany’s insurance operating units, domiciled
principally in the States of California, New Hampshire,
Delaware, Wisconsin, Oklahoma 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).
81
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 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
$92.1 million in the 2008 fourth quarter, including
$9.5 million of gain deferred at the time of Darwin’s
initial public offering in May 2006.
Alleghany has reclassified the business 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,
|
||||
| 2008 | ||||
|
Revenues
|
||||
|
Net premiums earned
|
$ | 170.9 | ||
|
Investment and all other income
|
20.7 | |||
| 191.6 | ||||
|
Costs and expenses
|
||||
|
Loss and loss adjustment expenses
|
67.6 | |||
|
Commissions, brokerage and other underwriting expenses
|
65.2 | |||
|
All other operating expenses
|
17.9 | |||
| 150.7 | ||||
|
Earnings before income taxes and minority interest
|
40.9 | |||
|
Income taxes
|
11.0 | |||
|
Earnings before minority interest
|
29.9 | |||
|
Minority interest*
|
14.6 | |||
|
Net earnings
|
$ | 15.3 | ||
| * | Represents the portion of Darwin’s earnings 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 in
connection with the Transaction of $92.1 million in the
2008 fourth quarter, including $9.5 million of gain
deferred at the time of Darwin’s initial public offering in
May 2006.
82
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments |
Available-for-sale
securities at December 31, 2010 and 2009 are summarized as
follows (in millions):
|
Amortized
|
Gross
|
Gross
|
||||||||||||||
|
Cost
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| or Cost | Gains | Losses | Value | |||||||||||||
|
2010
|
||||||||||||||||
|
Consolidated
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock(1)
|
$ | 1,310.0 | $ | 196.3 | $ | (5.6 | ) | $ | 1,500.7 | |||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
334.4 | 4.6 | (1.2 | ) | 337.8 | |||||||||||
|
Mortgage and asset-backed securities(2)
|
841.0 | 31.8 | (6.3 | ) | 866.5 | |||||||||||
|
States, municipalities and political subdivision bonds
|
1,058.1 | 25.4 | (15.0 | ) | 1,068.5 | |||||||||||
|
Foreign bonds
|
112.7 | 2.4 | (0.9 | ) | 114.2 | |||||||||||
|
Corporate bonds and other
|
431.9 | 14.9 | (1.4 | ) | 445.4 | |||||||||||
| 2,778.1 | 79.1 | (24.8 | ) | 2,832.4 | ||||||||||||
|
Short-term investments
|
264.8 | — | — | 264.8 | ||||||||||||
| $ | 4,352.9 | $ | 275.4 | $ | (30.4 | ) | $ | 4,597.9 | ||||||||
|
Industry Segment
|
||||||||||||||||
|
AIHL insurance group
|
$ | 3,760.3 | $ | 232.7 | $ | (30.4 | ) | $ | 3,962.6 | |||||||
|
Corporate activities
|
592.6 | 42.7 | — | 635.3 | ||||||||||||
| $ | 4,352.9 | $ | 275.4 | $ | (30.4 | ) | $ | 4,597.9 | ||||||||
83
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
|
Amortized
|
Gross
|
Gross
|
||||||||||||||
|
Cost
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| or Cost | Gains | Losses | Value | |||||||||||||
|
2009
|
||||||||||||||||
|
Consolidated
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock(1)
|
$ | 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(2)
|
955.8 | 16.5 | (13.5 | ) | 958.8 | |||||||||||
|
States, municipalities and political subdivision bonds
|
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 | ||||||||
| (1) | Of the $1,500.7 million of fair value at December 31, 2010, $1,004.8 million related to certain energy sector businesses. Of the $624.5 million of fair value at December 31, 2009, $399.2 million related to certain energy sector businesses. | |
| (2) | Of the $866.5 million of fair value at December 31, 2010, $499.9 million related to residential mortgage-backed securities, or “RMBS,” $173.4 million related to commercial mortgage-backed securities, or “CMBS” and $193.2 million related to other asset-backed securities. Of the $958.8 million of fair value at December 31, 2009, $685.7 million related to RMBS, $75.5 million related to CMBS and $197.6 million related to other asset-backed securities. |
84
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
The amortized cost and estimated fair value of debt securities
at December 31, 2010 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
|
$ | 264.8 | $ | 264.8 | ||||
|
Mortgage and asset-backed securities
|
841.0 | 866.5 | ||||||
|
Debt securities
|
||||||||
|
One year or less
|
185.1 | 187.1 | ||||||
|
Over one through five years
|
730.7 | 752.2 | ||||||
|
Over five through ten years
|
537.9 | 551.2 | ||||||
|
Over ten years
|
483.4 | 475.4 | ||||||
|
Equity securities
|
1,310.0 | 1,500.7 | ||||||
| $ | 4,352.9 | $ | 4,597.9 | |||||
The proceeds from sales of
available-for-sale
securities were $1.5 billion, $1.7 billion and
$1.1 billion, in 2010, 2009 and 2008, respectively. The
amounts of gross realized gains and gross realized losses of
available-for-sale
securities were, respectively, $105.0 million and
$7.6 million in 2010, $338.5 million and
$5.8 million in 2009, and $259.9 million and
$59.4 million in 2008. The gross loss amounts exclude
other-than-temporary
impairment losses, as discussed below, and goodwill and related
impairment losses. See Note 4(a). Gross gains relate
primarily to the sales of equity securities.
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, regardless of
whether Alleghany continues 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: (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,
85
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
inadequacy of any underlying collateral, and unfavorable changes
in economic or social conditions, interest rates or credit
ratings.
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 $12.3 million in 2010, $11.1 million related to
equity security holdings (primarily in the energy sector) and
$1.2 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
was primarily based on the severity and duration of the declines
in fair value of such securities relative to their cost as of
the balance sheet date.
Of the $85.9 million of
other-than-temporary
impairment losses in 2009, $57.6 million related to equity
security holdings in the energy sector, $16.5 million
related to equity security 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 of
other-than-temporary
impairment losses in 2008, $144.8 million related to equity
security holdings in the energy sector, $96.0 million
related to equity security 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 were 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, the gross unrealized investment losses for
debt and equity securities as of December 31, 2010 were
deemed to be temporary, based on, among other things:
| • | the duration of time and the relative magnitude to which fair values of these investments has been below cost was not indicative of an other-than-temporary impairment loss (for example, no equity security was in a continuous unrealized loss position for twelve months or more as of December 31, 2010); | |
| • | the absence of compelling evidence that would cause Alleghany to call into question the financial condition or near-term prospects of the issuer of the investment; and | |
| • | Alleghany’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. |
86
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
Such gross unrealized investment losses and related fair value
for debt securities and equity securities at December 31,
2010, as well as for December 31, 2009, were as follows (in
millions):
| 2010 | 2009 | |||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||
| Value | Losses | Value | Losses | |||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
||||||||||||||||
|
Less than 12 months
|
$ | 49.7 | $ | 1.2 | $ | 225.5 | $ | 1.5 | ||||||||
|
More than 12 months
|
— | — | — | — | ||||||||||||
|
Mortgage & asset-backed securities
|
||||||||||||||||
|
Less than 12 months
|
170.8 | 2.8 | 18.6 | 0.7 | ||||||||||||
|
More than 12 months
|
39.5 | 3.5 | 149.2 | 12.8 | ||||||||||||
|
States, municipalities and political subdivision bonds
|
||||||||||||||||
|
Less than 12 months
|
349.1 | 14.4 | 98.1 | 2.5 | ||||||||||||
|
More than 12 months
|
7.7 | 0.6 | 16.1 | 0.7 | ||||||||||||
|
Foreign bonds
|
||||||||||||||||
|
Less than 12 months
|
45.2 | 0.9 | 1.0 | — | ||||||||||||
|
More than 12 months
|
— | — | — | — | ||||||||||||
|
Corporate bonds and other
|
||||||||||||||||
|
Less than 12 months
|
63.1 | 1.4 | 50.7 | 0.4 | ||||||||||||
|
More than 12 months
|
— | — | 1.8 | — | ||||||||||||
|
Total debt securities
|
||||||||||||||||
|
Less than 12 months
|
677.9 | 20.7 | 393.9 | 5.1 | ||||||||||||
|
More than 12 months
|
47.2 | 4.1 | 167.1 | 13.5 | ||||||||||||
|
Equity securities — Common Stock
|
||||||||||||||||
|
Less than 12 months
|
139.5 | 5.6 | 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
|
817.4 | 26.3 | 498.9 | 10.9 | ||||||||||||
|
More than 12 months
|
47.2 | 4.1 | 167.1 | 13.5 | ||||||||||||
|
Total
|
$ | 864.6 | $ | 30.4 | $ | 666.0 | $ | 24.4 | ||||||||
As of December 31, 2010, Alleghany held a total of 218 debt
and equity securities that were in an unrealized loss position,
of which 17 securities, all debt securities, were in an
unrealized loss position continuously for 12 months or
more. Of the debt securities that were in an unrealized loss
position, all were mortgage- and asset-backed securities, and
states, municipalities and political subdivision bonds. At
December 31, 2010, substantially all of Alleghany’s
debt securities were rated investment grade.
At December 31, 2010, non-income producing invested assets
were insignificant.
87
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 3. | Investments, continued |
At December 31, 2010 and 2009, investments carried at fair
value totaling $322.1 million and $286.2 million,
respectively, were on deposit with various states or
governmental agencies to comply with state insurance
regulations. The $322.1 million amount at December 31,
2010 includes $40.0 million that was contributed by AIHL to
PCC on September 27, 2010, and these funds were used by
PCIC to increase its workers’ compensation deposit.
Net investment income was as follows (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Interest income
|
$ | 108.6 | $ | 113.7 | $ | 122.2 | ||||||
|
Dividend income
|
23.2 | 15.2 | 20.1 | |||||||||
|
Investment expenses
|
(5.5 | ) | (7.2 | ) | (4.7 | ) | ||||||
|
Equity in (losses) earnings of Homesite
|
(3.2 | ) | (1.1 | ) | 0.3 | |||||||
|
Equity in (losses) earnings of ORX
|
(2.0 | ) | (21.9 | )* | 1.5 | |||||||
|
Other investment (loss) income
|
3.9 | 3.2 | (9.2 | ) | ||||||||
| $ | 125.0 | $ | 101.9 | $ | 130.2 | |||||||
| * | Includes significant 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) | PCC |
On July 18, 2007 (the “Acquisition Date”), AIHL
completed its acquisition of PCC for a purchase price of
$198.1 million, including $5.6 million of incurred
acquisition costs. PCC 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 was recorded as goodwill. Acquired
identifiable intangible assets include trade names and licenses,
which were determined to have indefinite useful lives. Acquired
identifiable assets also included renewal rights, distribution
rights, and database development.
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 PCC 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 PCC
goodwill balance at such date. PCC also recorded a pre-tax,
non-cash impairment charge of $11.2 million in the 2009
second quarter, representing the entire carrying value of
PCC’s trade names (originally determined to have indefinite
useful lives), renewal rights, distribution rights and database
development, net of accumulated amortization.
| (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.
88
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 4. | Acquisitions, continued |
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 acquired a minority voting
interest in ORX, a regional oil and gas exploration and
production company, through a purchase of $50.0 million of
preferred stock, which currently represents an approximately
38 percent ownership of ORX.
ORX is reported as a component of 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.
| (d) | Goodwill and Intangible Assets |
The amount of goodwill and intangible assets, net of accumulated
amortization expense, reported on Alleghany’s consolidated
balance sheets at December 31, 2010 and 2009 is as follows
(in millions):
| 2010 | 2009 | |||||||
|
AIHL insurance group — Goodwill
|
$ | 48.1 | $ | 48.1 | ||||
|
AIHL insurance group — Intangible assets:
|
||||||||
|
Agency relationships
|
$ | 15.7 | $ | 16.8 | ||||
|
State insurance licenses
|
25.8 | 25.8 | ||||||
|
Trade name
|
35.5 | 35.5 | ||||||
|
Brokerage and reinsurance relationships
|
16.9 | 19.2 | ||||||
|
Renewal and distribution rights
|
0.3 | 0.3 | ||||||
| $ | 94.2 | $ | 97.6 | |||||
|
Goodwill and other intangibles, net of amortization
|
$ | 142.3 | $ | 145.7 | ||||
The economic useful lives of intangible assets are as follows:
agency relationships — 15 years; state insurance
licenses — indefinite; trade names —
indefinite; brokerage and reinsurance relationships —
15 years and renewal and distribution rights —
between 5 and 10 years. Accumulated amortization expense as
of December 31, 2010 was $51.0 million, consisting of
$6.0 million for agency relationships, $16.9 million
for brokerage and reinsurance relationships, $24.0 million
for renewal and distribution rights, and $4.1 million of
other intangible assets. Accumulated amortization expense as of
December 31, 2009 was $47.6 million, consisting of
$5.0 million for agency relationships, $14.6 million
for brokerage and reinsurance relationships, $23.9 million
for renewal and distribution rights and $4.1 million of
other intangible assets.
| 5. | Reinsurance |
| (a) | AIHL Reinsurance Programs |
General.
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. 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.
RSUI.
In 2010, RSUI ceded 38.9 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, 2010, RSUI
retained a maximum net exposure for any single property risk of
$19 million and any single casualty risk of
$9.75 million, with the exception of losses arising from
acts of foreign terrorism.
89
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 5. | Reinsurance, continued |
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 28 percent of its property gross premiums
written in 2010 under these surplus share treaties. Under
RSUI’s
2010-2011
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
2010-2011
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 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.
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, 2010 to May 31, 2011
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
directors and officers (“D&O”) liability line
quota share reinsurance treaty for the period July 1, 2010
to June 30, 2011 provides coverage for policies with limits
up to $20.0 million, with RSUI ceding 35 percent of
the premium and loss for 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.
CATA.
CATA uses reinsurance to protect against
severity losses. In 2010, CATA reinsured individual property and
casualty and contract surety risks in excess of
$1.5 million with various reinsurers. As of
December 1, 2010, 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.
PCC.
As of April 1, 2010, PCC ceased
purchasing reinsurance as a result of its withdrawal from
writing direct business. Prior to that date, PCC used
reinsurance to protect against catastrophe losses.
| (b) | AIHL Reinsurance Recoverables |
Reinsurance recoverables at December 31, 2010 and 2009
consist of the following (in millions):
| 2010 | 2009 | |||||||
|
Reinsurance recoverables on paid losses
|
$ | 25.9 | $ | 28.5 | ||||
|
Ceded outstanding loss and loss adjustment expenses
|
847.4 | 947.7 | ||||||
|
Total reinsurance recoverables
|
$ | 873.3 | $ | 976.2 | ||||
90
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 5. | Reinsurance, continued |
Approximately 89.9 percent of AIHL’s reinsurance
recoverables balance at December 31, 2010 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, 2010
is as follows (dollars in millions):
| Reinsurer(1) | Rating(2) | Dollar Amount | Percentage | |||||||||
|
Swiss Re
|
A (Excellent | ) | $ | 160.1 | 18.3 | % | ||||||
|
Platinum Underwriters Holdings, Ltd.
|
A (Excellent | ) | 95.9 | 11.0 | % | |||||||
|
The Chubb Corporation
|
A++ (Superior | ) | 91.6 | 10.5 | % | |||||||
|
All other reinsurers
|
525.7 | 60.2 | % | |||||||||
|
Total
|
$ | 873.3 | 100.0 | % | ||||||||
| (1) | Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed company. | |
| (2) | Represents the A.M. Best rating for the applicable reinsurance subsidiary or subsidiaries from which the reinsurance recoverable is due. |
At December 31, 2010, AIHL also had fully collateralized
reinsurance recoverables of $92.7 million due from Darwin,
now a subsidiary of AWAC. The A.M. Best financial strength
rating of Darwin was A (Excellent) at December 31, 2010.
AIHL had no allowance for uncollectible reinsurance as of
December 31, 2010.
Ceded loss recoveries for AIHL included in Alleghany’s
consolidated statements of earnings were $119.4 million,
$197.1 million and $236.9 million at December 31,
2010, 2009 and 2008, respectively.
| (c) | Prior Year Acquisitions |
Overview.
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 LAE
liabilities. These contractual provisions constituted loss
reserve guarantees as contemplated under GAAP.
Platte River.
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 $15.7 million, $17.9 million and
$19.6 million for Platte River at December 31, 2010,
2009 and 2008, respectively.
Landmark.
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 $2.4 million,
$5.4 million and $10.8 million at December 31,
2010, 2009 and 2008, respectively.
91
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 5. | Reinsurance, continued |
| (d) | AIHL Premium Activity |
The following table indicates property and casualty premiums
written and earned for the years ended December 31, 2010,
2009 and 2008 (in millions):
| Written | Earned | |||||||
|
2010
|
||||||||
|
Premiums direct
|
$ | 1,080.5 | $ | 1,131.7 | ||||
|
Premiums assumed
|
$ | 23.5 | $ | 21.0 | ||||
|
Premiums ceded
|
$ | 367.8 | $ | 384.6 | ||||
|
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 | ||||
In general, AIHL’s insurance operating units obtain
reinsurance on a treaty and facultative basis.
| 6. | Liability for Loss and Loss Adjustment Expenses |
Activity in liability for loss and LAE in 2010, 2009 and 2008 is
summarized as follows (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Reserves as of January 1
|
$ | 2,521.0 | $ | 2,578.6 | $ | 2,379.7 | ||||||
|
Less: reinsurance recoverables
|
947.7 | 1,008.3 | 966.8 | |||||||||
|
Net reserves
|
1,573.3 | 1,570.3 | 1,412.9 | |||||||||
|
Incurred loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
411.6 | 460.0 | 612.8 | |||||||||
|
Prior years
|
(33.7 | ) | (17.9 | ) | (42.8 | ) | ||||||
|
Total incurred loss, net of reinsurance
|
377.9 | 442.1 | 570.0 | |||||||||
|
Paid loss, net of reinsurance, related to:
|
||||||||||||
|
Current year
|
81.2 | 83.5 | 116.4 | |||||||||
|
Prior years
|
388.7 | 355.6 | 296.2 | |||||||||
|
Total paid loss, net of reinsurance
|
469.9 | 439.1 | 412.6 | |||||||||
|
Reserves, net of reinsurance recoverables, as of December 31
|
1,481.3 | 1,573.3 | 1,570.3 | |||||||||
|
Reinsurance recoverables as of December 31*
|
847.4 | 947.7 | 1,008.3 | |||||||||
|
Reserves, gross of reinsurance recoverables, as of December 31
|
$ | 2,328.7 | $ | 2,521.0 | $ | 2,578.6 | ||||||
| * | Reinsurance recoverables in this table include only ceded loss reserves. |
Gross loss and LAE reserves at December 31, 2010 decreased
$192.3 million from December 31, 2009 due primarily to
reserve decreases in property lines of business of
$99.0 million and reserve decreases in workers’
compensation lines of business of $59.2 million. The
decrease in property gross loss and LAE reserves is mainly due
92
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 6. | Liability for Loss and Loss Adjustment Expenses, continued |
to loss payments made by RSUI on hurricane related losses
incurred in prior years. The decrease in workers’
compensation gross loss and LAE reserves primarily reflects the
impact of PCC’s decision in June 2009 to cease soliciting
new or renewal business on a direct basis commencing
August 1, 2009.
Gross loss and LAE reserves at December 31, 2009 decreased
$57.6 million from December 31, 2008, due to reserve
decreases in property lines of business of $116.8 million
and reserve decreases in certain other lines of business of
$25.1 million, largely offset by reserve increases in
casualty and, to a lesser extent, workers’ compensation
lines of business of $65.8 million and $18.5 million,
respectively. The decrease in property gross loss and LAE 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 PCC of current and
prior accident year reserves during 2009, partially offset by
the impact of PCC’s decision to cease soliciting new or
renewal business on a direct basis commencing August 1,
2009.
The above reserve changes included increases (decreases) to
prior year net reserves, which are summarized as follows (in
millions):
| 2010 | 2009 | |||||||
|
RSUI:
|
||||||||
|
Net casualty reserve releases
|
$ | (33.9 | ) | $ | (38.4 | ) | ||
|
Property and other, net
|
(9.3 | ) | 3.2 | |||||
| $ | (43.2 | ) | $ | (35.2 | ) | |||
|
CATA:
|
||||||||
|
Net insurance reserve releases
|
$ | (0.4 | ) | $ | (10.7 | ) | ||
|
Reinsurance assumed reserve release
|
(3.5 | ) | — | |||||
| $ | (3.9 | ) | $ | (10.7 | ) | |||
|
PCC:
|
||||||||
|
Net workers’ compensation increase
|
$ | 12.5 | $ | 26.5 | ||||
|
All other, net
|
0.9 | 1.5 | ||||||
| $ | 13.4 | $ | 28.0 | |||||
|
Total incurred related to prior years
|
$ | (33.7 | ) | $ | (17.9 | ) | ||
The more significant prior year adjustments affecting 2010 and
2009 are summarized as follows:
| • | For RSUI, loss and LAE for 2010 reflect a net $33.9 million release of prior accident year casualty loss reserves, compared with a net $38.4 million release of prior accident year casualty loss reserves during 2009. The $33.9 million net release consisted of a $41.4 million reserve release, partially offset by a $7.5 million reserve increase. The $41.4 million reserve release relates primarily to the general liability and professional liability lines of business primarily 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 the balance sheet date than the actual cumulative losses through that date. The amount of lower cumulative losses, expressed as a percentage of carried loss and LAE reserves at the beginning of the year, was 3.8 percent. Such reduction did not impact the assumptions used in estimating RSUI’s loss and LAE liabilities for its general liability and professional liability lines of business earned in 2010. The $7.5 million reserve increase in loss reserves related to an increase in estimated ultimate 2007 accident year losses for the D&O liability |
93
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 6. | Liability for Loss and Loss Adjustment Expenses, continued |
line of business, reflecting, in part, unfavorable loss
emergence on certain
sub-prime
mortgage industry claims. Such increase did not impact the
assumptions used in estimating RSUI’s loss and LAE
liabilities for its D&O liability line of business earned
in 2010. The net $38.4 million release of prior accident
year casualty loss reserves during 2009 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.
| • | For RSUI, loss and LAE for 2010 and 2009 also include a net $9.3 million release of prior accident year loss reserves and a net $3.2 million increase in prior accident year loss reserves, respectively, primarily related to re-estimation of case and IBNR reserves in the property line of business. For 2010, the net $9.3 million reserve release primarily reflects significant net reserve releases in non-catastrophe property reserves, partially offset by a $16.3 million reserve increase related to prior year catastrophes. Of the $16.3 million, $5.3 million was recorded in the 2010 second quarter and related to the third quarter 2008 hurricanes, and $11.0 million was recorded throughout 2010 and related to the third quarter 2005 hurricanes. For 2009, the net $3.2 million reserve increase primarily reflects net reserve increases in the non-catastrophe property reserves, partially offset by a net $9.9 million release of reserves recorded in the 2009 fourth quarter related to the third quarter 2008 hurricanes. | |
| • | For CATA, loss and LAE for 2010 reflect a net $0.4 million release of prior accident year loss reserves (related primarily to the surety lines of business), compared with a net $10.7 million release of prior accident year loss reserves during 2009 (related primarily to the casualty and surety lines of business). These amounts relate primarily to favorable loss emergence compared with loss emergence patterns assumed in earlier periods. 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 the balance sheet date than the actual cumulative losses through that date. The net $0.4 million release of prior accident year loss reserves did not impact the assumptions used in estimating CATA’s loss and LAE liabilities for business earned in 2010. | |
| • | For CATA, loss and LAE for 2010 also reflect a $3.5 million reserve release reflecting favorable loss emergence for various asbestos and environmental impairment claims that arose from reinsurance assumed by a subsidiary of CATA between 1969 and 1976, based on a reserve study that was completed in the 2010 second quarter. | |
| • | For PCC, loss and LAE for 2010 reflect a $12.5 million increase of prior accident year workers’ compensation net loss reserves, compared with a $26.5 million reserve increase of prior accident year workers’ compensation loss reserves during 2009. The $12.5 million increase relates primarily to a decrease in ceded loss and LAE based on a fourth quarter 2010 review of reinsurance coverage estimates, and to a lesser extent, an increase in unallocated LAE reserves. Such increase did not impact the assumptions used in estimating PCC’s loss and LAE liabilities for business earned in 2010. The review of reinsurance coverage estimates also resulted in a $5.0 million decrease in ceded premiums earned, which increased net premiums earned. The $26.5 million increase in 2009 primarily reflects 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 the “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. Such increases impacted the assumptions used in estimating PCC’s loss and LAE liabilities for business earned in 2009, causing an increase of current accident year |
94
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 6. | Liability for Loss and Loss Adjustment Expenses, continued |
| reserves of $8.0 million in 2009. 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. | Senior Notes and Credit Agreement |
| (a) | Senior Notes |
On September 20, 2010, Alleghany issued $300.0 million
of 5.625% Senior Notes due on September 15, 2020
(“Senior Notes”). The Senior Notes are unsecured and
unsubordinated general obligations of Alleghany. Interest is
payable semi-annually on March 15 and September 15 of each year.
The terms of the Senior Notes permit redemption prior to their
maturity. The indenture under which the Senior Notes were issued
contains covenants that impose conditions on Alleghany’s
ability to create liens on the capital stock of AIHL or RSUI or
to engage in sales of the capital stock of AIHL or RSUI. The
Senior Notes were issued at a discount of approximately
99.63 percent, resulting in proceeds before underwriting
discount, commissions and other expenses of $298.9 million,
and an effective yield of approximately 5.67 percent.
Approximately $2.8 million of underwriting discount,
commissions and other expenses were recorded as deferred
charges, which are amortized over the life of the Senior Notes.
Alleghany currently intends to use the net proceeds from the
sale of the Senior Notes for general corporate purposes,
including, but not limited to, acquisitions, additions to
working capital, capital expenditures, investments,
contributions of capital to its subsidiaries, repayment of
Senior Notes, and repurchases and redemptions of its securities.
| (b) | Credit Agreement |
On September 9, 2010, Alleghany entered into a three-year
credit agreement (the “Credit Agreement”) with a bank
syndicate, providing commitments (the “Commitments”)
for a two tranche revolving credit facility in an aggregate
principal amount of up to $100.0 million, consisting of
(i) a secured credit facility (“Tranche A”),
subject to a borrowing base as set forth in the Credit
Agreement, in an aggregate principal amount of up to
$50.0 million and (ii) an unsecured credit facility
(“Tranche B”) in an aggregate principal amount of
up to $50.0 million. The Commitments under the Credit
Agreement are scheduled to terminate on September 9, 2013
(the “Maturity Date”), unless earlier terminated.
Borrowings under the Credit Agreement will be available for
working capital and general corporate purposes. Alternate Base
Rate Borrowings under the Credit Agreement will bear interest at
(x) the greatest of (a) the administrative
agent’s prime rate, (b) the federal funds rate plus
0.5 percent or (c) an adjusted London Interbank
Overnight (“LIBO”) rate for a one month interest
period on such day plus 1 percent, plus (y) a
specified margin (currently 0 basis points for
Tranche A and 125 basis points for Tranche B).
Eurodollar Borrowings under the Credit Agreement will bear
interest at an adjusted LIBO Rate for the interest period in
effect plus a specified margin (currently 75 basis points
for Tranche A and 225 basis points for
Tranche B). The Credit Agreement requires that all loans be
repaid in full no later than the Maturity Date. The Credit
Agreement also requires Alleghany to pay a commitment fee each
quarter in a range of between one fifth and one-half of one
percent per annum, in each case based upon Alleghany’s
credit ratings, on the daily unused amount of the Commitments of
the relevant Tranche.
The Credit Agreement contains representations, warranties and
covenants customary for bank loan facilities of this nature. In
this regard, the Credit Agreement requires Alleghany to, among
other things, (i) maintain a consolidated net worth of not
less than the sum of (x) approximately $2.0 billion
plus (y) 50 percent of Alleghany’s accumulated,
consolidated net earnings earned in each fiscal quarter (if
positive) commencing September 30, 2010 and
(ii) maintain a ratio of total indebtedness to total
capital as of the end of each fiscal quarter of not greater than
0.25 to 1.0. Additionally, the Credit Agreement contains various
negative covenants with which Alleghany must comply, including,
but not limited to, limitations respecting the creation of liens
on any property or asset; the incurrence of indebtedness;
mergers, consolidations, liquidations and dissolutions; change
of business; sales of assets; transactions with affiliates; and
other provisions customary in similar types of agreements. There
were no borrowings under the Credit Agreement during 2010.
95
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 | ||||||||||
|
2010
|
||||||||||||
|
Current
|
$ | 63.9 | $ | 2.6 | $ | 66.5 | ||||||
|
Deferred
|
11.3 | 1.1 | 12.4 | |||||||||
| $ | 75.2 | $ | 3.7 | $ | 78.9 | |||||||
|
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 | ||||||
The difference between the federal income tax rate and the
effective income tax rate on continuing operations is as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Foreign tax credit and other adjustments
|
(1.7 | ) | — | (0.7 | ) | |||||||
|
Income subject to dividends-received deduction
|
(1.8 | ) | (0.8 | ) | (6.8 | ) | ||||||
|
Tax-exempt interest
|
(4.3 | ) | (3.5 | ) | (22.2 | ) | ||||||
|
State taxes, net of federal tax benefit
|
1.0 | 0.4 | — | |||||||||
|
Goodwill impairment
|
— | — | 27.9 | |||||||||
|
Other, net
|
0.2 | 0.4 | 0.4 | |||||||||
|
Effective income tax rate
|
28.4 | % | 31.5 | % | 33.6 | % | ||||||
The lower effective income tax rate in 2010 compared with 2009
primarily reflects the recognition of a permanent tax benefit in
the 2010 first quarter. This permanent tax benefit relates to a
finalization of Alleghany’s unused foreign tax credits
arising from its prior ownership of World Minerals, Inc. which
Alleghany sold on July 14, 2005. The lower effective income
tax rate in 2010 compared with 2009 also reflects increased tax
benefits associated with dividends and tax-exempt income. The
higher effective income tax rate in 2008 compared with 2009
reflects certain permanent tax differences that had the effect
of increasing the effective income tax rate for that year. For
2008, such permanent tax differences related to a
$48.7 million non-deductible goodwill impairment charge
incurred.
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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, 2010 and 2009 are as follows
(in millions):
| 2010 | 2009 | |||||||
|
Deferred tax assets
|
||||||||
|
State net operating loss carry forward
|
$ | 15.2 | $ | 15.3 | ||||
|
Reserves for impaired assets
|
3.7 | 3.1 | ||||||
|
Expenses deducted for tax purposes when paid
|
1.9 | 1.4 | ||||||
|
Other than temporary impairment
|
21.7 | 48.4 | ||||||
|
Property and casualty loss reserves
|
62.6 | 67.6 | ||||||
|
Unearned premium reserves
|
26.8 | 29.3 | ||||||
|
Performance shares
|
4.4 | 1.7 | ||||||
|
Compensation accruals
|
64.9 | 48.9 | ||||||
|
Other
|
13.8 | 16.6 | ||||||
|
Gross deferred tax assets before valuation allowance
|
$ | 215.0 | $ | 232.3 | ||||
|
Valuation allowance
|
$ | (15.0 | ) | $ | (14.6 | ) | ||
|
Gross deferred tax assets
|
$ | 200.0 | $ | 217.7 | ||||
|
Deferred tax liabilities
|
||||||||
|
Unrealized gain on investments
|
$ | 84.8 | $ | 54.1 | ||||
|
Tax over book depreciation
|
1.1 | 1.4 | ||||||
|
Deferred gains
|
2.5 | 3.8 | ||||||
|
Deferred acquisition costs
|
24.0 | 25.7 | ||||||
|
Purchase accounting adjustments
|
4.1 | 5.5 | ||||||
|
Other
|
6.4 | 2.9 | ||||||
|
Gross deferred tax liabilities
|
$ | 122.9 | $ | 93.4 | ||||
|
Net deferred tax assets
|
$ | 77.1 | $ | 124.3 | ||||
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
$15.2 million of deferred tax assets for state net
operating and capital loss carryovers. A valuation allowance of
$15.0 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
2009, 2008 and 2007 income tax returns remain open to
examination.
Alleghany believes that, as of December 31, 2010, there
were no material uncertain tax positions that would require
disclosure under GAAP.
| 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. On June 15, 2009, all outstanding
shares of Preferred Stock were mandatorily converted into shares
97
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 9. | Stockholders’ Equity, continued |
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 698,009 shares of its
Common Stock for the 688,621 shares of Preferred Stock that
were outstanding at the date of the mandatory conversion. All of
the foregoing per share data has not been adjusted for
subsequent Alleghany Common Stock dividends.
| (b) | Common Stock and Preferred Stock Repurchases |
In February 2008, Alleghany announced that its Board of
Directors had authorized the repurchase of shares of Common
Stock, at such times and at prices as management determined
advisable, up to an aggregate of $300.0 million. In
November 2008, the authorization to repurchase Common Stock was
expanded to include repurchases of Preferred Stock. As of
December 31, 2010, this program had been fully utilized. In
anticipation of the full utilization of such program, in July
2010, Alleghany’s Board of Directors authorized the
repurchase of additional shares of Common Stock, at such times
and at prices as management may determine advisable, up to an
aggregate of $300.0 million upon such full utilization.
During 2010, Alleghany repurchased an aggregate of
285,056 shares of Common Stock in the open market for
$83.1 million, at an average price per share of $291.64.
During 2009, Alleghany repurchased an aggregate of
295,463 shares of Common Stock in the open market for
$75.9 million, at an average price per share of $256.73.
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 $117.4 million, at
an average price per share of $264.92. All of the foregoing per
share and average price data has not been adjusted for
subsequent Alleghany Common Stock dividends.
| (c) | Regulatory Matters |
At December 31, 2010, $709.1 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 $1.8 billion of Alleghany’s total equity
of $2.9 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, 2010 of
$1.8 billion, a maximum of $41.5 million was available
for dividends without prior approval of the applicable insurance
regulatory authorities.
Statutory net income of Alleghany’s insurance operating
units was $219.2 million and $227.7 million for the
years ended December 31, 2010 and 2009, respectively.
Combined statutory capital and surplus of Alleghany’s
insurance operating units was $1.6 billion and
$1.4 billion at December 31, 2010 and 2009,
respectively.
| 10. | Stock-Based Compensation Plans |
| (a) | General |
As of December 31, 2010, 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 restricted stock 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, 2010, RSUI and PCC had their
own stock-based payment plans, which are 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 $6.5 million, $6.9 million and
$9.1 million in 2010, 2009 and 2008, respectively. The
amount of related income tax benefit recognized as income in the
consolidated statements of earnings and comprehensive income
with respect to these
98
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 10. | Stock-Based Compensation Plans, continued |
plans was $2.3 million, $2.4 million and
$3.2 million in 2010, 2009 and 2008, respectively. In 2010,
2009 and 2008, $2.1 million, $3.8 million and
$6.8 million of Common Stock at fair market value,
respectively, and $2.9 million, $2.1 million and
$3.9 million of cash, respectively, was paid by Alleghany
under plans for parent-level employees and directors. As noted
above, as of December 31, 2010 and December 31, 2009,
all outstanding awards were accounted for under the
fair-value-based method of accounting.
Alleghany does not have an established policy or practice of
repurchasing shares of Common Stock in the open market for the
purpose of delivering Common Stock upon the exercise of stock
options. Alleghany issues authorized but not outstanding shares
of Common Stock to settle option exercises in those instances
where the number of shares it has repurchased are not sufficient
to settle an option exercise.
| (b) | Director Stock Option and Restricted Stock Plans |
Alleghany’s 2005 Directors’ Stock Plan, which
expired on December 31, 2009, provided for the automatic
grant of nonqualified options to purchase 500 shares of
Common Stock, as well as an automatic grant of 250 shares
of restricted Common Stock or, under certain circumstances,
restricted stock units, to each non-employee director on an
annual basis. In 2010, Alleghany established the
2010 Directors’ Stock Plan which provides for the same
automatic grants to directors as the 2005 Directors’
Stock Plan. In 2010 and 2009, Alleghany awarded a total of 2,500
restricted shares and units, and 2,295 restricted shares and
units, respectively, which vest over a one year period.
A summary of option activity under the above plans as of
December 31, 2010 and changes during the year then ended is
presented below:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
Aggregate
|
||||||||||||||
|
Average
|
Remaining
|
Intrinsic
|
||||||||||||||
|
Shares
|
Exercise
|
Contractual
|
Value
|
|||||||||||||
| Options | (000) | Price | Term (years) | ($ millions) | ||||||||||||
|
Outstanding at January 1, 2010
|
58 | $ | 212 | |||||||||||||
|
Granted
|
5 | 301 | ||||||||||||||
|
Exercised
|
(11 | ) | 146 | |||||||||||||
|
Forfeited or expired
|
— | — | ||||||||||||||
|
Outstanding at December 31, 2010
|
52 | $ | 235 | 4.5 | $ | 4.1 | ||||||||||
|
Exercisable at December 31, 2010
|
43 | $ | 224 | 3.6 | $ | 3.8 | ||||||||||
The weighted-average grant-date fair value of options granted
during the years 2010, 2009 and 2008, was $133, $100 and $131,
respectively. The total intrinsic value of options exercised
during the years ended December 31, 2010, 2009 and 2008,
was $1.6 million, $1.1 million and $2.1 million,
respectively.
A summary of the status of Alleghany’s non-vested shares as
of December 31, 2010, and changes during the year ended
December 31, 2010, is presented below:
|
Weighted-Average
|
||||||||
|
Shares
|
Grant-Date
|
|||||||
| Non-vested Shares | (000) | Fair Value | ||||||
|
Non-vested at January 1, 2010
|
9 | $ | 116 | |||||
|
Granted
|
5 | 132 | ||||||
|
Vested
|
(5 | ) | 121 | |||||
|
Forfeited
|
— | — | ||||||
|
Non-vested at December 31, 2010
|
9 | $ | 122 | |||||
99
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 10. | Stock-Based Compensation Plans, continued |
As of December 31, 2010, there was $0.8 million of
total unrecognized compensation cost related to non-vested
stock-based compensation arrangements granted under the 2005 and
2010 Directors’ Stock Plans. 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, 2010, 2009 and 2008, was
$1.5 million, $1.2 million and $1.2 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 of 1986, as amended, 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 LTIP and 2007 LTIP have been achieved; and
the time elapsed with respect to each award period. The
resulting change in accounting in the fourth quarter of 2009
reduced Alleghany’s net earnings by $3.0 million
after-tax.
(ii) Restricted Share Awards
— From time
to time, 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 many
instances, payouts are made provided defined levels of
performance are achieved. As of December 31, 2010, 57,057
restricted shares were outstanding, of which 777 were granted in
2009, 33,306 were granted in 2004 and 22,974 were granted in
2003. The expense is recognized ratably over the performance
period, which can be extended under certain circumstances.
| (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 2010,
2009 and 2008 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 2010, 2009 and 2008, RSUI
recorded $29.6 million, $36.9 million and
$21.7 million, respectively, in compensation expense
related to the RSUI Plan. During the same periods, a deferred
tax benefit of $10.4 million, $12.9 million and
$7.6 million, respectively, related to the compensation
expense was recorded.
100
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 10. | Stock-Based Compensation Plans, continued |
| (e) | PCC Option Plans |
During 2010, PCC granted non-qualified stock options (the
“Options”) to two senior PCC executives. The Options
vest over two years and expire in five years. Under the terms of
the grants, the executives may purchase from AIHL common stock
of PCC representing an aggregate of approximately 5 percent
of PCC common stock outstanding, at a price based on grant-date
book value of PCC. Once the Options are exercised, the PCC
common stock held by each executive may be converted to cash at
either AIHL’s election or the executive’s election,
based on PCC’s book value. The compensation expense
recorded by PCC in 2010 was immaterial.
| 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 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. In December 2010, Alleghany’s Board of Directors
approved an amendment to the executive plan, whereby only salary
(and not the related annual incentive award) is to be taken
account in computing future retirement benefits. This amendment
resulted in an increase in Alleghany’s other comprehensive
income in 2010, and will modestly reduce Alleghany’s
pension expenses beginning in 2011. 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 smaller, non-contributory defined benefit
pension plan for employees, 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.
101
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 11. | Employee Benefit Plans, continued |
The following tables set forth both defined benefit plans’
funded status at December 31, 2010 and 2009 and total cost
for the years ended December 31, 2010, 2009 and 2008 (in
millions, except percentages):
| 2010 | 2009 | |||||||
|
OBLIGATIONS AND FUNDING STATUS:
|
||||||||
|
Change in benefit obligation
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 23.3 | $ | 20.3 | ||||
|
Service cost
|
3.1 | 2.9 | ||||||
|
Interest cost
|
1.4 | 1.1 | ||||||
|
Amendments
|
(3.0 | ) | — | |||||
|
Actuarial (gain)/loss
|
(7.7 | ) | 1.3 | |||||
|
Benefits paid
|
(0.1 | ) | (2.3 | ) | ||||
|
Projected benefit obligation at end of year
|
$ | 17.0 | $ | 23.3 | ||||
|
Change in plan assets
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | 2.3 | $ | 2.6 | ||||
|
Actual return on plan assets, net of expenses
|
0.1 | (0.2 | ) | |||||
|
Company contributions
|
0.1 | 2.2 | ||||||
|
Benefits paid
|
(0.1 | ) | (2.3 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | 2.4 | $ | 2.3 | ||||
|
Funded status
|
$ | (14.6 | ) | $ | (21.0 | ) | ||
|
Amounts recognized in statement of financial position
consist of:
|
||||||||
|
Prepaid benefit cost
|
0.7 | 0.7 | ||||||
|
Accrued benefit liability
|
(20.7 | ) | (16.2 | ) | ||||
|
Accumulated other comprehensive income
|
5.4 | (5.5 | ) | |||||
|
Net amount recognized
|
$ | (14.6 | ) | $ | (21.0 | ) | ||
|
Weighted average asset allocations
|
||||||||
|
Debt securities
|
100 | % | 100 | % | ||||
| 2010 | 2009 | 2008 | ||||||||||
|
COST AND OTHER COMPREHENSIVE INCOME:
|
||||||||||||
|
Net pension cost included the following expense (income)
components:
|
||||||||||||
|
Service cost — benefits earned during the year
|
$ | 3.1 | $ | 2.9 | $ | 2.9 | ||||||
|
Interest cost on benefit obligation
|
1.4 | 1.1 | 0.9 | |||||||||
|
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
|
4.6 | 4.1 | 3.9 | |||||||||
|
Curtailment loss
|
— | — | — | |||||||||
|
Settlement charge
|
— | — | 0.2 | |||||||||
|
Total cost
|
$ | 4.6 | $ | 4.1 | $ | 4.1 | ||||||
|
Change in other comprehensive income (pension-related)*
|
(10.9 | ) | 1.4 | (0.1 | ) | |||||||
|
Net periodic pension cost and other comprehensive income
|
$ | (6.3 | ) | $ | 5.5 | $ | 4.0 | |||||
102
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 11. | Employee Benefit Plans, continued |
| 2010 | 2009 | 2008 | ||||||||||
|
ASSUMPTIONS:
|
||||||||||||
|
Assumptions used in computing the net periodic pension
cost of the plans are as follows
|
||||||||||||
|
Rates for increases in compensation levels
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Weighted average discount rates
|
6.00 | % | 6.00 | % | 6.00 | % | ||||||
|
Expected long-term rates of return
|
5.00 | % | 5.00 | % | 5.00 | % | ||||||
|
Assumptions used in computing the funded status of the
plans are as follows
|
||||||||||||
|
Rates for increases in compensation levels
|
3.00 | % | 4.00 | % | 4.00 | % | ||||||
|
Weighted average discount rates
|
5.50 | % | 6.00 | % | 6.00 | % | ||||||
| * | The change in other comprehensive income in 2010 relates primarily to an amendment to the executive plan (discussed above), and to a lesser extent, a reduction of the assumed rates for increases in future compensation levels (from 4.00% to 3.00%). |
Discount rates for 2010 and 2009 were predicated primarily on
the Citigroup Pension Discount Curve and Liability Index,
rounded to the nearest 25 basis points. Discount rates for
2008 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 2011. The
following benefit payments, which reflect expected future
service, as appropriate, are expected to be made (in millions):
|
2011
|
$ | 0.1 | ||
|
2012
|
0.4 | |||
|
2013
|
0.4 | |||
|
2014
|
0.4 | |||
|
2015
|
0.4 | |||
|
2016-2020
|
2.2 |
The measurement date used to determine pension benefit plans is
December 31, 2010.
| (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 the death of the retiree. RSUI
also has an unfunded retiree health plan for its employees. As
of December 31, 2010 and December 31, 2009, the
liability for all of these plans was $5.5 million and
$3.1 million, respectively, representing the entire
accumulated post-retirement benefit obligation as of that date.
Assumptions used with respect to 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
103
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 11. | Employee Benefit Plans, continued |
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 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):
| 2010 | 2009 | 2008 | ||||||||||
|
Net earnings
|
$ | 198.5 | $ | 271.0 | $ | 148.0 | ||||||
|
Preferred dividends
|
— | 6.2 | 17.2 | |||||||||
|
Income available to common stockholders for basic earnings per
share
|
198.5 | 264.8 | 130.8 | |||||||||
|
Preferred dividends
|
— | 6.2 | — | |||||||||
|
Effect of other dilutive securities
|
— | 0.4 | — | |||||||||
|
Income available to common stockholders for diluted earnings per
share
|
$ | 198.5 | $ | 271.4 | $ | 130.8 | ||||||
|
Weighted average shares outstanding applicable to basic earnings
per share
|
8,903,466 | 8,878,353 | 8,649,460 | |||||||||
|
Preferred Stock
|
— | 438,723 | — | |||||||||
|
Effect of other dilutive securities
|
— | 14,765 | — | |||||||||
|
Adjusted weighted average shares outstanding applicable to
diluted earnings per share
|
8,903,466 | 9,331,841 | 8,649,460 | |||||||||
Contingently issuable shares of 45,918, 48,365 and 1,193,704
were potentially available during 2010, 2009 and 2008,
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.
104
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 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 $10.5 million, $10.7 million and
$10.3 million in 2010, 2009 and 2008, respectively. The
aggregate minimum payments under operating leases with initial
or remaining terms of more than one year as of December 31,
2010 were as follows (in millions):
|
Aggregate
|
||||
|
Minimum
|
||||
|
Lease
|
||||
| Year | Payments | |||
|
2011
|
$ | 9.7 | ||
|
2012
|
9.8 | |||
|
2013
|
9.9 | |||
|
2014
|
10.0 | |||
|
2015
|
8.3 | |||
|
2016 and thereafter
|
27.1 | |||
| (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 loss and LAE includes
$14.1 million of gross reserves and $14.0 million of
net reserves at December 31, 2010, and $18.9 million
of gross reserves and $18.8 million of net reserves at
December 31, 2009, for 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. CATA released $3.5 million of such
net reserves at June 30, 2010 based on a reserve study that
was completed in the 2010 second quarter. 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 LAE
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
105
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 13. | Commitments and Contingencies, continued |
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 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
$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 $0.2 million and $0.3 million at December 31,
2010 and December 31, 2009, respectively.
106
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 13. | Commitments and Contingencies, continued |
| (e) | Equity Holdings Concentration |
At December 31, 2010 and 2009, Alleghany had a
concentration of market risk in its
available-for-sale
equity securities portfolio with respect to certain energy
sector businesses of $1,004.8 million and
$399.2 million, respectively. Of the $1,004.8 million,
$585.0 million represented Alleghany’s ownership of
common stock of Exxon Mobil Corporation.
| 14. | Fair Value of Financial Instruments |
The estimated carrying values and fair values of
Alleghany’s consolidated financial instruments as of
December 31, 2010 and December 31, 2009 were as
follows (in millions):
| December 31, 2010 | December 31, 2009 | |||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
| Value | Value | Value | Value | |||||||||||||
|
Assets
|
||||||||||||||||
|
Investments (excluding equity method investments)*
|
$ | 4,622.7 | $ | 4,622.7 | $ | 4,211.6 | $ | 4,211.6 | ||||||||
|
Liabilities
|
||||||||||||||||
|
Senior Notes**
|
$ | 298.9 | $ | 291.8 | $ | — | $ | — | ||||||||
| * | This table includes available-for-sale investments (securities as well as partnership investments carried at fair value that are included in other invested assets). This table excludes investments accounted for using the equity method (Homesite, ORX and other investments) and certain loans receivable that are carried at cost, all of 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. | |
| ** | See Note 7 herein. |
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. |
107
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 14. | Fair Value of Financial Instruments, continued |
| • | “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. Alleghany’s Level 2 liabilities include the Senior Notes. 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 its 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. | |
| • | “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.
108
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 14. | Fair Value of Financial Instruments, continued |
The estimated fair values of Alleghany’s financial
instruments as of December 31, 2010 and December 31,
2009 allocated among the three levels set forth above were as
follows (in millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|
As of December 31, 2010
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock(1)
|
$ | 1,500.7 | $ | — | $ | — | $ | 1,500.7 | ||||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
307.3 | 30.5 | — | 337.8 | ||||||||||||
|
Mortgage and asset-backed securities(2)
|
— | 866.5 | — | 866.5 | ||||||||||||
|
States, municipalities and political subdivision bonds
|
— | 1,068.5 | — | 1,068.5 | ||||||||||||
|
Foreign bonds
|
— | 114.2 | — | 114.2 | ||||||||||||
|
Corporate bonds and other
|
— | 445.4 | — | 445.4 | ||||||||||||
| 307.3 | 2,525.1 | — | 2.832.4 | |||||||||||||
|
Short-term investments
|
86.4 | 178.4 | — | 264.8 | ||||||||||||
|
Other invested assets(3)
|
— | — | 24.8 | 24.8 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,894.4 | $ | 2,703.5 | $ | 24.8 | $ | 4,622.7 | ||||||||
|
Senior Notes
|
$ | — | $ | 291.8 | $ | — | $ | 291.8 | ||||||||
|
As of December 31, 2009
|
||||||||||||||||
|
Equity securities:
|
||||||||||||||||
|
Common stock(1)
|
$ | 624.5 | $ | — | $ | — | $ | 624.5 | ||||||||
|
Preferred stock
|
— | — | — | — | ||||||||||||
|
Debt securities:
|
||||||||||||||||
|
U.S. Government obligations
|
638.4 | — | — | 638.4 | ||||||||||||
|
Mortgage and asset-backed securities(2)
|
— | 958.8 | — | 958.8 | ||||||||||||
|
States, municipalities and political subdivision 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(3)
|
— | — | 35.2 | 35.2 | ||||||||||||
|
Investments (excluding equity method investments)
|
$ | 1,338.1 | $ | 2,838.3 | $ | 35.2 | $ | 4,211.6 | ||||||||
| (1) | Of the $1,500.7 million of fair value at December 31, 2010, $1,004.8 million related to certain energy sector businesses. Of the $624.5 million of fair value at December 31, 2009, $399.2 million related to certain energy sector businesses. | |
| (2) | Of the $866.5 million of fair value at December 31, 2010, $499.9 million related to RMBS, $173.4 million related to CMBS and $193.2 million related to other asset-backed securities. Of the $958.8 million of fair value |
109
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 14. | Fair Value of Financial Instruments, continued |
| at December 31, 2009, $685.7 million related to RMBS, $75.5 million related to CMBS and $197.6 million related to other asset-backed securities. | ||
| (3) | Level 3 securities consist of partnership investments. The carrying value of partnership investments of $24.8 million decreased by $10.4 million from the December 31, 2009 carrying value of $35.2 million, due primarily to sales of $13.9 million (which generated a realized capital gain of $5.1 million), partially offset by an increase in estimated fair value during the period of $3.5 million. Level 3 securities, consisting of mortgage- and asset-backed securities totaling $1.6 million, were acquired during the 2010 third quarter and sold during the 2010 fourth quarter. |
| 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 PCC. 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.
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.
| 2010 | 2009 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Revenues:
|
||||||||||||
|
AIHL insurance group:
|
||||||||||||
|
Net premiums earned
|
||||||||||||
|
RSUI
|
$ | 593.6 | $ | 633.4 | $ | 689.6 | ||||||
|
CATA
|
164.3 | 166.7 | 186.9 | |||||||||
|
PCC
|
10.2 | 44.9 | 72.0 | |||||||||
|
AIHL Re
|
— | — | 0.2 | |||||||||
| 768.1 | 845.0 | 948.7 | ||||||||||
|
Net investment income
|
128.9 | 116.7 | 112.6 | |||||||||
|
Net realized capital gains (losses)
|
92.9 | 119.8 | (4.4 | ) | ||||||||
|
Other than temporary impairment losses (1)
|
(12.3 | ) | (85.9 | ) | (244.0 | ) | ||||||
|
Other income
|
0.6 | 1.3 | 0.7 | |||||||||
|
Total insurance group
|
978.2 | 996.9 | 813.6 | |||||||||
|
Corporate activities:
|
||||||||||||
|
Net investment income (2)
|
(3.9 | ) | (14.8 | ) | 17.6 | |||||||
|
Net realized capital gains (3)
|
4.5 | 200.6 | 156.2 | |||||||||
|
Other than temporary impairment losses
|
— | — | — | |||||||||
|
Other income (4)
|
6.6 | 1.7 | 1.7 | |||||||||
|
Total
|
$ | 985.4 | $ | 1,184.4 | $ | 989.1 | ||||||
110
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 15. | Segments of Business, continued |
| 2010 | 2009 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Earnings from continuing operations before income
taxes:
|
||||||||||||
|
AIHL insurance group:
|
||||||||||||
|
Underwriting profit (loss) (5)
|
||||||||||||
|
RSUI
|
$ | 159.9 | $ | 189.8 | $ | 137.6 | ||||||
|
CATA
|
1.5 | 10.1 | 15.2 | |||||||||
|
PCC
|
(30.5 | ) | (70.7 | ) | (60.9 | ) | ||||||
|
AIHL Re
|
— | — | 0.2 | |||||||||
| 130.9 | 129.2 | 92.1 | ||||||||||
|
Net investment income
|
128.9 | 116.7 | 112.6 | |||||||||
|
Net realized capital gains
|
92.9 | 119.8 | (4.4 | ) | ||||||||
|
Other than temporary impairment losses (1)
|
(12.3 | ) | (85.9 | ) | (244.0 | ) | ||||||
|
Other income, less other expenses
|
(33.8 | ) | (42.2 | ) | (31.4 | ) | ||||||
|
Total insurance group
|
306.6 | 237.6 | (75.1 | ) | ||||||||
|
Corporate activities:
|
||||||||||||
|
Net investment income (2)
|
(3.9 | ) | (14.8 | ) | 17.6 | |||||||
|
Net realized capital gains (3)
|
4.5 | 200.6 | 156.2 | |||||||||
|
Other than temporary impairment losses
|
— | — | — | |||||||||
|
Other income (4)
|
6.6 | 1.7 | 1.7 | |||||||||
|
Corporate administration and other expenses
|
31.4 | 29.1 | 38.7 | |||||||||
|
Interest expense
|
5.0 | 0.6 | 0.7 | |||||||||
|
Total
|
$ | 277.4 | $ | 395.4 | $ | 61.0 | ||||||
| (1) | Reflects impairment charges for unrealized losses related to AIHL’s investment portfolio that were deemed to be other than temporary. See Note 3. | |
| (2) | Includes $(3.2) million, $(1.1) million and $0.3 million of Alleghany’s equity in (losses) earnings of Homesite for 2010, 2009 and 2008, respectively. Also includes $(2.0) million, $(21.9) million and $1.5 million of Alleghany’s equity in (losses) earnings of ORX for 2010, 2009 and 2008, respectively. See Note 4(b) and 4(c). | |
| (3) | For 2009 and 2008, primarily reflects net realized capital gains from the sale of shares of Burlington Northern common stock. | |
| (4) | Includes Alleghany Properties revenue. | |
| (5) | Represents net premiums earned less loss and LAE and commission, brokerage and other underwriting expenses, all as determined in accordance with GAAP, does not include net investment income, net realized capital gains, other-than-temporary impairment losses, other income or other expenses. Commissions, 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. |
111
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 15. | Segments of Business, continued |
| 2010 | 2009 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Identifiable assets at December 31
|
||||||||||||
|
AIHL insurance group
|
$ | 5,546.7 | $ | 5,659.2 | $ | 5,554.2 | ||||||
|
Corporate activities
|
885.0 | 533.6 | 627.6 | |||||||||
|
Total
|
$ | 6,431.7 | $ | 6,192.8 | $ | 6,181.8 | ||||||
|
Capital expenditures
|
||||||||||||
|
AIHL insurance group
|
$ | 6.6 | $ | 5.5 | $ | 9.8 | ||||||
|
Corporate activities
|
— | — | — | |||||||||
|
Total
|
$ | 6.6 | $ | 5.5 | $ | 9.8 | ||||||
|
Depreciation and amortization
|
||||||||||||
|
AIHL insurance group
|
$ | 29.8 | $ | 30.5 | $ | 25.0 | ||||||
|
Corporate activities
|
4.0 | 1.9 | 0.7 | |||||||||
|
Total
|
$ | 33.8 | $ | 32.4 | $ | 25.7 | ||||||
| 16. | Other Information |
| (a) | Other Assets |
Other assets shown in Alleghany’s consolidated balance
sheets include the following amounts at December 31, 2010
and 2009 (in millions):
| 2010 | 2009 | |||||||
|
Real estate properties
|
$ | 19.9 | $ | 19.8 | ||||
|
Interest and dividends receivable
|
30.8 | 38.1 | ||||||
|
Other
|
47.0 | 43.7 | ||||||
| $ | 97.7 | $ | 101.6 | |||||
| (b) | Other Invested Assets |
Other invested assets shown in Alleghany’s consolidated
balance sheets include the following amounts at
December 31, 2010 and 2009 (in millions):
| 2010 | 2009 | |||||||
|
Investment in Homesite (see Note 4(b))
|
$ | 122.7 | $ | 125.7 | ||||
|
Investment in ORX (see Note 4(c))
|
27.6 | 29.6 | ||||||
|
Partnerships accounted for on an available for sale basis
|
24.8 | 35.2 | ||||||
|
Partnerships accounted for as an equity method investment*
|
— | 47.7 | ||||||
|
Loans and other investments
|
32.2 | — | ||||||
| $ | 207.3 | $ | 238.2 | |||||
| * | Equity method partnership investments were dissolved during the third quarter of 2010, and thus were not outstanding at December 31, 2010. |
112
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, 2010 and 2009, were as
follows (in millions):
| 2010 | 2009 | |||||||
|
Furniture and equipment
|
$ | 52.0 | $ | 46.4 | ||||
|
Leasehold improvements
|
6.0 | 5.9 | ||||||
|
Other
|
0.3 | 0.3 | ||||||
| 58.3 | 52.6 | |||||||
|
Less: accumulated depreciation and amortization
|
(38.8 | ) | (32.5 | ) | ||||
| $ | 19.5 | $ | 20.1 | |||||
| (d) | Deferred Acquisition Costs |
Activity in deferred acquisition cost assets as shown in
Alleghany’s consolidated balance sheets in 2010 and 2009 is
summarized as follows (in millions):
| 2010 | 2009 | |||||||
|
Balance at January 1
|
$ | 71.1 | $ | 71.8 | ||||
|
Current year’s costs deferred
|
140.4 | 146.9 | ||||||
|
Less: amortization to expense for the year
|
(143.8 | ) | (147.6 | ) | ||||
|
Balance at December 31
|
$ | 67.7 | $ | 71.1 | ||||
| (e) | Other Liabilities |
Other liabilities shown in Alleghany’s consolidated balance
sheets include the following amounts at December 31, 2010
and 2009 (in millions):
| 2010 | 2009 | |||||||
|
Accounts payable
|
$ | 3.8 | $ | 4.3 | ||||
|
Incentive plans
|
155.0 | 143.6 | ||||||
|
Accrued salaries and wages
|
13.5 | 10.0 | ||||||
|
Deferred compensation
|
9.3 | 8.1 | ||||||
|
Accrued expenses
|
9.6 | 7.7 | ||||||
|
Taxes other than income
|
1.8 | 2.5 | ||||||
|
Deferred revenue
|
6.1 | 11.8 | ||||||
|
Payable to brokers
|
1.7 | 3.0 | ||||||
|
Pension and postretirement benefits
|
20.9 | 32.5 | ||||||
|
Funds held for surety bonds
|
78.4 | 76.6 | ||||||
|
Other
|
26.4 | 24.6 | ||||||
| $ | 326.5 | $ | 324.7 | |||||
113
Table of Contents
Notes to
Consolidated Financial Statements,
continued
| 17. | Quarterly Results of Operations (unaudited) |
Selected quarterly financial data for 2010 and 2009 are
presented below (in millions, except per share amounts):
| Quarters Ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
|
2010
|
||||||||||||||||
|
Revenues
|
$ | 251.7 | $ | 250.6 | $ | 250.2 | $ | 232.9 | ||||||||
|
Earnings from:
|
||||||||||||||||
|
Continuing operations
|
$ | 58.2 | $ | 66.3 | $ | 36.6 | $ | 37.4 | ||||||||
|
Discontinued operations
|
— | — | — | — | ||||||||||||
|
Net earnings
|
$ | 58.2 | $ | 66.3 | $ | 36.6 | $ | 37.4 | ||||||||
|
Basic earnings per share of common stock: *
|
||||||||||||||||
|
Continuing operations
|
$ | 6.44 | $ | 7.41 | $ | 4.15 | $ | 4.25 | ||||||||
|
Discontinued operations
|
— | — | — | — | ||||||||||||
|
Total
|
$ | 6.44 | $ | 7.41 | $ | 4.15 | $ | 4.25 | ||||||||
|
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
|
$ | 4.73 | $ | 5.01 | $ | 5.39 | $ | 14.43 | ||||||||
|
Discontinued operations
|
— | — | — | — | ||||||||||||
|
Total
|
$ | 4.73 | $ | 5.01 | $ | 5.39 | $ | 14.43 | ||||||||
| * | 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.
114
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,
2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, 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, 2010, 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 23, 2011
expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
/s/ KPMG LLP
New York, New York
February 23, 2011
115
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, 2010, 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, 2010, 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, 2010 and 2009, 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, 2010, and our report dated February 23,
2011 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
New York, New York
February 23, 2011
116
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 (i) recorded, processed, summarized, and
timely reported as specified in the SEC’s rules and forms
and (ii) accumulated and communicated to our management,
including our CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Our disclosure controls
and procedures were designed to provide such assurance; however,
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, 2010, 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 117 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, 2010 that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
None.
117
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 29, 2011, or our
“2011 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 and Compensation Matters,”
“Payments upon Termination of Employment,” and
“Executive Compensation,” in our 2011 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 2011 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
2011 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 2. — Ratification of Selection of
Independent Registered Public Accounting Firm for the year
2011” in our 2011 Proxy Statement, which information is
incorporated herein by reference.
118
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 71 through 116 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 122 through
132 of this
Form 10-K
Report.
3. Exhibits.
See the Index to Exhibits beginning on page 133 of this
Form 10-K
Report for a description of the exhibits filed as part of, or
incorporated by reference in, this
Form 10-K
Report.
119
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)
|
Date: February 24, 2011
|
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 24, 2011
|
By
/s/
Rex
D. Adams
Rex
D. Adams
Director |
|
|
Date: February 24, 2011
|
By
/s/
Jerry
G. Borrelli
Jerry
G. Borrelli
Vice President (principal accounting officer) |
|
|
Date: February 24, 2011
|
By
/s/
Karen
Brenner
Karen
Brenner
Director |
|
|
Date: February 24, 2011
|
By
/s/
John
J. Burns, Jr.
John
J. Burns, Jr.
Vice-Chairman of the Board and Director |
|
|
Date: February 24, 2011
|
By
/s/
Dan R. Carmichael
Dan
R. Carmichael
Director |
|
|
Date: February 24, 2011
|
By
/s/
Roger B. Gorham
Roger
B. Gorham
Senior Vice President (principal financial officer) |
120
Table of Contents
|
Date: February 24, 2011
|
By
/s/
Weston M. Hicks
Weston
M. Hicks
President and Director (principal executive officer) |
|
|
Date: February 24, 2011
|
By
/s/
Thomas S. Johnson
Thomas
S. Johnson
Director |
|
|
Date: February 24, 2011
|
By
/s/
Jefferson W. Kirby
Jefferson
W. Kirby
Chairman of the Board and Director |
|
|
Date: February 24, 2011
|
By
/s/
William K. Lavin
William
K. Lavin
Director |
|
|
Date: February 24, 2011
|
By
/s/
Phillip M. Martineau
Phillip
M. Martineau
Director |
|
|
Date: February 24, 2011
|
By
/s/
James F. Will
James
F. Will
Director |
|
|
Date: February 24, 2011
|
By
/s/
Raymond L.M. Wong
Raymond
L.M. Wong
Director |
121
Table of Contents
Alleghany
Corporation and Subsidiaries
| Description | Page | |||
| 123 | ||||
| 124 | ||||
| 125 | ||||
| 129 | ||||
| 130 | ||||
| 131 | ||||
| 132 | ||||
122
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alleghany Corporation:
Under date of February 23, 2011, we reported on the
consolidated balance sheets of Alleghany Corporation and
subsidiaries (the “Company”) as of December 31,
2010 and 2009, 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, 2010, which are included in this
Annual Report on
Form 10-K
for the year ended December 31, 2010. 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 23, 2011
123
Table of Contents
Schedule I –
Summary of Investments – Other Than Investments in
Related Parties
ALLEGHANY CORPORATION AND SUBSIDIARIES
December 31, 2010
ALLEGHANY CORPORATION AND SUBSIDIARIES
December 31, 2010
|
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
|
$ | 334,416 | $ | 337,840 | $ | 337,840 | ||||||
|
States, municipalities and political subdivision bonds
|
1,058,065 | 1,068,527 | 1,068,527 | |||||||||
|
Foreign governments
|
— | — | — | |||||||||
|
Mortgage and asset-backed securities
|
841,006 | 866,465 | 866,465 | |||||||||
|
All other bonds
|
544,630 | 559,579 | 559,579 | |||||||||
|
Fixed maturities
|
2,778,117 | 2,832,411 | 2,832,411 | |||||||||
|
Equity securities:
|
||||||||||||
|
Common stocks:
|
||||||||||||
|
Public utilities
|
— | — | — | |||||||||
|
Banks, trust, and insurance companies
|
95,191 | 98,889 | 98,889 | |||||||||
|
Industrial, miscellaneous, and all other
|
1,214,818 | 1,401,797 | 1,401,797 | |||||||||
|
Nonredeemable preferred stocks
|
— | — | — | |||||||||
|
Equity securities
|
1,310,009 | 1,500,686 | 1,500,686 | |||||||||
|
Other invested assets
|
207,294 | 207,294 | 207,294 | |||||||||
|
Short-term investments
|
264,811 | 264,811 | 264,811 | |||||||||
|
Total investments
|
$ | 4,560,231 | $ | 4,805,202 | $ | 4,805,202 | ||||||
124
Table of Contents
Schedule II –
Condensed Financial Information of Registrant
Condensed Balance Sheets
ALLEGHANY CORPORATION
December 31, 2010 and 2009
Condensed Balance Sheets
ALLEGHANY CORPORATION
December 31, 2010 and 2009
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
|
Assets
|
||||||||
|
Equity securities (cost: 2010 $470,003; 2009 $14,995)
|
$ | 511,840 | $ | 18,368 | ||||
|
Debt securities (amortized cost: 2010 $17,644; 2009 $221,213)
|
18,532 | 221,438 | ||||||
|
Short-term investments
|
103,086 | 45,744 | ||||||
|
Cash
|
889 | 1,831 | ||||||
|
Property and equipment — at cost, net of accumulated
depreciation
|
847 | 1,095 | ||||||
|
Other assets
|
15,613 | 17,759 | ||||||
|
Current taxes receivable
|
— | 2,469 | ||||||
|
Net deferred tax receivable
|
9,655 | 26,055 | ||||||
|
Investment in subsidiaries
|
2,618,653 | 2,441,924 | ||||||
| $ | 3,279,115 | $ | 2,776,683 | |||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Senior Notes
|
$ | 298,923 | $ | — | ||||
|
Other liabilities
|
58,128 | 59,162 | ||||||
|
Current taxes payable
|
13,196 | — | ||||||
|
Total liabilities
|
370,247 | 59,162 | ||||||
|
Stockholders’ equity
|
2,908,868 | 2,717,521 | ||||||
| $ | 3,279,115 | $ | 2,776,683 | |||||
See accompanying Notes to Condensed Financial Statements.
125
Table of Contents
Schedule II –
Condensed Financial Information of Registrant (continued)
Condensed
Statements of Earnings
ALLEGHANY CORPORATION
Years ended December 31,
ALLEGHANY CORPORATION
Years ended December 31,
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
Revenues:
|
||||||||||||
|
Net investment income
|
$ | 2,642 | $ | 8,341 | $ | 15,806 | ||||||
|
Net realized capital gains
|
4,466 | 200,626 | 156,191 | |||||||||
|
Other than temporary impairment losses
|
— | — | — | |||||||||
|
Other income
|
1,492 | — | 318 | |||||||||
|
Total revenues
|
8,600 | 208,967 | 172,315 | |||||||||
|
Costs and Expenses:
|
||||||||||||
|
Interest expense
|
5,004 | 633 | 700 | |||||||||
|
Corporate administration
|
28,592 | 27,022 | 37,216 | |||||||||
|
Total costs and expenses
|
33,596 | 27,655 | 37,916 | |||||||||
|
Operating profit (losses)
|
(24,996 | ) | 181,312 | 134,399 | ||||||||
|
Equity in earnings of consolidated subsidiaries
|
302,367 | 214,068 | (73,347 | ) | ||||||||
|
Earnings from continuing operations, before income taxes
|
277,371 | 395,380 | 61,052 | |||||||||
|
Income taxes
|
78,869 | 124,381 | 20,485 | |||||||||
|
Earnings from continuing operations
|
198,502 | 270,999 | 40,567 | |||||||||
|
Earnings from discontinued operations (including gain on
disposal of $141,688 in 2008)
|
— | — | 164,193 | |||||||||
|
Income taxes (including tax on gain on disposal of $49,591 in
2008)
|
— | — | 56,789 | |||||||||
|
Earnings from discontinued operations, net of tax
|
— | — | 107,404 | |||||||||
|
Net earnings
|
$ | 198,502 | $ | 270,999 | $ | 147,971 | ||||||
See accompanying Notes to Condensed Financial Statements.
126
Table of Contents
Schedule II –
Condensed Financial Information of Registrant (continued)
Condensed
Statements of Cash Flows
ALLEGHANY CORPORATION
Years ended December 31,
ALLEGHANY CORPORATION
Years ended December 31,
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net earnings
|
$ | 198,502 | $ | 270,999 | $ | 147,971 | ||||||
|
Adjustments to reconcile earnings to cash provided by (used in)
operations:
|
||||||||||||
|
Equity in undistributed net (earnings) losses of consolidated
subsidiaries
|
(210,976 | ) | (158,401 | ) | 47,890 | |||||||
|
Depreciation and amortization
|
1,329 | 1,873 | 716 | |||||||||
|
Net realized capital (gains) losses
|
(4,466 | ) | (200,626 | ) | (156,191 | ) | ||||||
|
Decrease (increase) in other assets
|
166 | 8,135 | 1,614 | |||||||||
|
Increase (decrease) in other liabilities and taxes payable
|
28,172 | (7,334 | ) | 50,470 | ||||||||
|
Earnings of discontinued operations and sale of subsidiary
|
— | — | (107,404 | ) | ||||||||
|
Net adjustments
|
(185,775 | ) | (356,353 | ) | (162,905 | ) | ||||||
|
Net cash provided by (used) in operations
|
12,727 | (85,354 | ) | (14,934 | ) | |||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Purchase of investments
|
(70,883 | ) | (286,330 | ) | (75,357 | ) | ||||||
|
Sales of investments
|
219,665 | 364,967 | 259,745 | |||||||||
|
Maturities of investments
|
5,064 | 1,623 | 31,707 | |||||||||
|
Purchases of property and equipment
|
(3 | ) | (34 | ) | 940 | |||||||
|
Net change in short-term investments
|
(57,342 | ) | 90,996 | (118,408 | ) | |||||||
|
Other, net
|
4,238 | — | — | |||||||||
|
Net cash provided by (used in) investing activities
|
100,739 | 171,222 | 98,627 | |||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Proceeds from issuance of Senior Notes
|
298,893 | — | — | |||||||||
|
Debt issue costs paid
|
(2,736 | ) | — | — | ||||||||
|
Treasury stock acquisitions
|
(83,135 | ) | (75,856 | ) | (25,068 | ) | ||||||
|
Convertible preferred stock acquisitions
|
— | (117,358 | ) | — | ||||||||
|
Convertible preferred stock dividends paid
|
— | (7,456 | ) | (17,350 | ) | |||||||
|
Tax benefit on stock based compensation
|
513 | 312 | 2,330 | |||||||||
|
Capital contributions to consolidated subsidiaries
|
(436,276 | ) | (36,200 | ) | (50,005 | ) | ||||||
|
Distributions from consolidated subsidiaries
|
108,000 | 151,040 | 3,050 | |||||||||
|
Other, net
|
333 | 1,404 | 2,133 | |||||||||
|
Net cash provided by (used in) financing activities
|
(114,408 | ) | (84,114 | ) | (84,910 | ) | ||||||
|
Net decrease in cash
|
(942 | ) | 1,754 | (1,217 | ) | |||||||
|
Cash at beginning of year
|
1,831 | 77 | 1,294 | |||||||||
|
Cash at end of year
|
$ | 889 | $ | 1,831 | $ | 77 | ||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | — | $ | — | $ | — | ||||||
|
Income taxes paid (refunds received)
|
$ | 68,127 | $ | 105,161 | $ | 154,911 | ||||||
See accompanying Notes to Condensed Financial Statements.
127
Table of Contents
Schedule II –
Condensed Financial Information of Registrant (continued)
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.
5. Senior Notes. Reference is made to Note 7 of the
Notes to the Consolidated Financial Statements set forth in
Item 8 of this
Form 10-K
Report.
6. Distributions from consolidated subsidiaries. On
November 30, 2010, AIHL contributed a portion of its equity
securities portfolio to its parent, Alleghany Corporation.
128
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) | ||||||||||||||||||||||||||||||||||||||||||
|
2010
|
Property
and Casualty Insurance |
$ | 67,692 | $ | 2,328,742 | $ | 523,927 | $ | — | $ | 768,134 | $ | 128,878 | $ | 377,937 | $ | 143,842 | $ | 115,493 | $ | 736,154 | |||||||||||||||||||||
|
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 | |||||||||||||||||||||
129
Table of Contents
Schedule IV –
Reinsurance
ALLEGHANY CORPORATION AND SUBSIDIARIES
Three years ended December 31, 2010
ALLEGHANY CORPORATION AND SUBSIDIARIES
Three years ended December 31, 2010
|
Percentage
|
||||||||||||||||||||||||
|
Ceded to
|
Assumed
|
of Amount
|
||||||||||||||||||||||
|
Gross
|
Other
|
From Other
|
Net
|
Assumed
|
||||||||||||||||||||
| Year | Line of Business | Amount | Companies | Companies | Amount | to Net | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
2010
|
Property and casualty | $ | 1,131,680 | $ | 384,538 | $ | 20,992 | $ | 768,134 | 2.7 | % | |||||||||||||
|
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 | % | |||||||||||||
130
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) | ||||||||||||||||||||||
|
2010
|
Allowance for uncollectible
reinsurance recoverables |
$ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
|
Allowance for uncollectible
premiums receivable |
$ | 974 | $ | 769 | $ | — | $ | 679 | $ | 1,064 | ||||||||||||
|
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 | ||||||||||||
131
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) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
2010
|
Property and Casualty | $ | 67,692 | $ | 2,328,742 | $ | — | $ | 523,927 | $ | 768,134 | $ | 128,878 | $ | 411,606 | $ | (33,669 | ) | $ | 143,842 | $ | 469,851 | $ | 736,154 | ||||||||||||||||||||||||
|
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 | ||||||||||||||||||||||||
132
Table of Contents
INDEX TO
EXHIBITS
|
Exhibit
|
||||
| Number | Description | |||
| 1 | .01 | Underwriting Agreement, dated September 15, 2010, by and among Alleghany and U.S. Bancorp Investments, Inc., J.P. Morgan Securities LLC and Wells Fargo Securities, LLC, as representatives of the underwriters named therein, filed as Exhibit 1.1 to Alleghany’s Current Report on Form 8-K filed on September 20, 2010, is incorporated herein by reference. | ||
| 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 18, 2007, filed as Exhibit 3.2 to Alleghany’s Current Report on Form 8-K filed on December 20, 2007, 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. | ||
| 4 | .02 | Indenture, dated as of September 20, 2010, by and between Alleghany and The Bank of New York Mellon, as Trustee, filed as Exhibit 4.1 to Alleghany’s Current Report on Form 8-K filed on September 20, 2010, is incorporated herein by reference. | ||
| 4 | .03 | First Supplemental Indenture, dated as of September 20, 2010, by and between Alleghany and The Bank of New York Mellon, as Trustee, including the form of the Senior Notes attached as Exhibit A thereto, filed as Exhibit 4.2 to Alleghany’s Current Report on Form 8-K filed on September 20, 2010, 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 2010 Management Incentive Plan, filed as Exhibit 10.3 to Alleghany’s Current Report on Form 8-K filed on April 26, 2010, is incorporated herein by reference. | ||
| *10 | .03 | 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 | .04 | Alleghany Officers and Highly Compensated Employees Deferred Compensation Plan, as amended and restated as of January 1, 2011, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on January 20, 2011, is incorporated herein by reference. | ||
| *10 | .05 | 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 | .06 | 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 | .07 | 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. | ||
| * | Compensatory plan or arrangement. |
133
Table of Contents
|
Exhibit
|
||||
| Number | Description | |||
| *10 | .08 | Alleghany Retirement Plan, amended and restated effective January 1, 2011, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on December 17, 2010, is incorporated herein by reference. | ||
| *10 | .09 | 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 | .10 | 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 | .11 | 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 | .12(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 | .12(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. | ||
| *10 | .12(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 | .13(a) | Alleghany 2010 Directors’ Stock Plan, filed as Exhibit 10.1 to Alleghany’s Current Report on Form 8-K filed on April 26, 2010, is incorporated herein by reference. | ||
| *10 | .13(b) | Form of Option Agreement under the Alleghany 2010 Directors’ Stock Plan, filed as Exhibit 10.2 to Alleghany’s Current Report on Form 8-K filed on April 26, 2010, is incorporated herein by reference. | ||
| 10 | .14 | Terms and Provisions Governing 2011 ACP Incentive Awards, filed as Exhibit 10.2 to Alleghany’s Current Report on Form 8-K filed on January 20, 2011, is incorporated herein by reference. | ||
| 10 | .15(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 | .15(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 | .15(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 | .15(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 | .16 | 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. | ||
| * | Compensatory plan or arrangement. |
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| Number | Description | |||
| 10 | .17(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 | .17(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 | .17(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 | .17(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 | .18(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 | .18(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 | .19(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. | ||
| 10 | .19(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 | .20(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 | .20(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 | .21(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 | .21(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. | ||
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| Number | Description | |||
| 10 | .22(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 | .22(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 | .23(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 | .23(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 | .24(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 | .24(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. | ||
| 10 | .25(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 | .25(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 | .26 | 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 | .27 | 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. | ||
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| Number | Description | |||
| 10 | .28 | 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 | .29 | 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 | .30(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 | .30(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 | .31(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 | .31(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 | .32(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. | ||
| 10 | .32(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 | .33(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 | .33(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 | .34(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. | ||
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| Number | Description | |||
| 10 | .34(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 | .35 | 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 | .36 | 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. | ||
| 10 | .37(a) | Credit Agreement, dated as of September 9, 2010, among Alleghany, the lenders which are signatories thereto and U.S. Bank National Association as administrative agent for the lenders (the “Credit Agreement”), filed as Exhibit 10.1(a) to Alleghany’s Current Report on Form 8-K filed on September 14, 2010, is incorporated herein by reference. | ||
| 10 | .37(b) | List of Contents of Exhibits and Schedules to the Credit Agreement, filed as Exhibit 10.1(b) to Alleghany’s Current Report on Form 8-K filed on September 14, 2010, 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 | .38 | Security Agreement, dated as of September 9, 2010, by and among the Company and U.S. Bank National Association, as collateral agent, filed as Exhibit 10.2 to Alleghany’s Current Report on Form 8-K filed on September 14, 2010, is incorporated herein by reference. | ||
| 12 | .1 | Statement regarding Calculation of Ratio of Earnings to Fixed Charges. | ||
| 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. | ||
| 101 | .1 | Interactive Data Files formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009; (ii) Consolidated Statements of Earnings and Comprehensive Income for the years ended December 31, 2010, 2009 and 2008; (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2010, 2009 and 2008; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; and (v) Notes to the Audited Consolidated Financial Statements, tagged as blocks of text. As provided in Rule 406T of Regulation S-T, this Exhibit 101.1 is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act and otherwise is not subject to liability under those sections. | ||
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Part IprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 3. Legal ProceedingsprintItem 4. [removed and Reserved.]printPart 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