Our life insurance segment reported a small loss because most of its investment income is included in our investments segment results. We discuss results for the segment in Life Insurance Results of Operations, Page 79. In addition to investment income, realized investment gains from the life insurance investment portfolio are also included in our investments segment results.
Key assumptions used in developing the 2011 net pension expense for our qualified plan were a 5.85 percent discount rate, a 7.50 percent expected return on plan assets and rates of compensation increases ranging from 3.50 percent to 5.50 percent. See Note 13, Page 130 for additional information on assumptions.
The combined ratio before catastrophe losses and prior year reserve development improved in 2011, in part benefiting from recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices.
Other underwriting expenses for 2011 and the corresponding ratio was essentially flat compared with the 2010 level.
The 2011 total loss and loss expense ratio rose 6.7 percentage points, largely due to a 3.6 point increase from higher large losses. The refined line of business allocation process for loss expenses contributed 1.7 percentage points to the 2011 total loss and loss expense ratio and also contributed to the increase in the ratio for the current accident year before catastrophe losses.
· Combined ratio - The 2011 combined ratio was 16.2 percentage points higher than in 2010, primarily due to higher catastrophe losses totaling 14.6 percentage points, plus other weather-related losses that offset the favorable effects of improved pricing and a lower underwriting expense ratio. Additional ceded premiums to reinstate coverage layers of our property catastrophe reinsurance treaty and the effect of a refined line of business allocation process for loss expenses also contributed to the higher 2011 combined ratio.
The current accident year loss and loss expense ratio before catastrophe losses remained high in 2011 and rose 6.7 points above the 2010 ratio, largely due to the same non-catastrophe weather related losses and reinsurance reinstatement effects noted above that impacted the total loss and loss expense ratio.
Over the past several years, we have worked to maintain a portfolio of simple, yet competitive products, primarily under the LifeHorizons banner. Our product development efforts emphasize death benefit protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a high priority. In the past several years, we have added life field marketing representatives for the western, southeastern and northeastern states. Our 32 life field marketing representatives work in partnership with our 125 property casualty field marketing representatives. Approximately 69 percent of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.
While the economic picture for the U.S. appears to be improving, there is still a lot of uncertainty in a sustained recovery due to high unemployment, low GDP, declining home values and the eurozone crisis. These same factors adversely affected life insurance industry application activity, which was effectively flat last year. Any material uptick will likely be contingent on a stronger U.S. economy and will remain vulnerable to these factors if they continue.
· Realized investment gains and losses - We reported realized investment gains in all three years, largely due to investment sales that were discretionary in timing and amount. Those sales were somewhat offset by OTTI charges.
The table below shows a summary, by the direct method, of the major sources and uses of liquidity by the parent company. Dividends received from subsidiaries in 2011 were $100 million less than 2010 due to higher catastrophe losses that reduced net cash provided by operating activities. No dividends were received from our insurance subsidiary in 2009, in order to maintain strong statutory surplus and financial strength ratings. We expect sources of liquidity to increase in 2012 and beyond, primarily from improved profitability from our property casualty operations, assuming a more normal level of catastrophe losses. The majority of expenditures for the parent company have been consistent during the last three years, and we expect future expenditures to remain fairly stable. Share repurchases are discretionary, depending on cash availability and capital management decisions.
Our insurance subsidiary’s primary means of meeting liquidity requirements are collection of premiums, investment income, and sale proceeds from investments held at the subsidiary level. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Our insurance subsidiary’s expenditures are property casualty loss and loss expenses, commissions, salaries and other ongoing operating expenses. Over the past three years, premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flow was partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results over the next 12 months, other than fluctuations in catastrophe claims. We discuss the factors that affected insurance operations in Commercial Lines and Personal Lines Insurance Results of Operations, Page 57 and Page 69.
Our $75 million unsecured line of credit with PNC Bank, N.A. was renewed effective August 29, 2011, for a one-year term to expire on August 27, 2012. CFC Investment Company also is a borrower under this line of credit. PNC Bank is a subsidiary of The PNC Financial Services Group Inc. (NYSE:PNC).
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines segment, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, Page 42.
Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $225 million at year-end 2011. As discussed in 2012 Reinsurance Programs, Page 98, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2011, ceded death benefits represented approximately 45.9 percent of our total policy face amounts in force.
· Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002
In the fourth quarter of 2011, we changed our presentation of long-term debt in our consolidated balance sheets to include capital lease obligations now under the single caption, “Long-term debt and capital lease obligation.” Previously capital lease obligations were included in the single caption, “Other liabilities.” We reclassified $17 million of capital lease obligations into “Long-term debt and capital lease obligation” for the prior year presented.
The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010. We do not have any material liabilities carried at fair value. There were also no significant transfers between Level 1 and Level 2.
We expect to contribute $14 million to our qualified plan and $2 million to the SERP during 2012. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:
Options outstanding and exercisable consisted of the following at December 31, 2011:
We have market-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of total shareholder return achieved compared to a peer group over a three-year period. These awards are valued using a Monte-Carlo valuation on the date of grant, which uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each peer and the correlations of each peer being modeled. Compensation cost is recognized regardless of whether the market-based performance objective has been satisfied. We make assumptions to develop the Monte-Carlo model as follows: