Group participated in their own pooling arrangement in 2011, which was in place when we acquired Mercer Insurance Group on March 28, 2011. Effective January 1, 2012, one pooling arrangement exists to cover all participating insurance subsidiaries of United Fire Group, Inc. Pooling arrangements permit the participating companies to rely on the capacity of the entire pool’s capital and surplus, rather than being limited to policy exposures of a size commensurate with each participant’s own surplus level.
The following table shows our premiums written and earned for 2011, 2010 and 2009:
Our 2010 losses were the result of 26 catastrophes with our largest single pre-tax catastrophe loss totaling $2.5 million. That loss was the result of a hailstorm that primarily affected the state of Colorado, but also impacted some areas in Wyoming, South Dakota and Nebraska. In 2009, we also experienced 26 catastrophes, with our largest single loss coming from a Midwest storm that caused wind and hail damage that resulted in a pre-tax loss totaling $3.6 million.
Our planned reduction in southern Louisiana that began after Hurricane Katrina was completed in 2011 and reduced our estimated 100-year maximum probable loss by over 60.0 percent. To maintain profitability of our remaining southern Louisiana business, we employed portfolio optimizing techniques (i.e., proximity to the coast, type of construction, the reduction of geographic risk concentration and higher deductibles) to reduce the impact of any one future catastrophe.
The deterioration in 2011 was due to the significant increase in catastrophe activity during the year as compared to 2010. The improvement in 2010 was due to a reduction in adverse development from Hurricane Katrina as compared to 2009, and a decrease in severity.
Losses from construction defect claims were $11.1 million in 2011 compared to $9.7 million and $6.0 million in 2010 and 2009, respectively. At December 31, 2011, we had $42.3 million in construction defect loss and loss settlement expense reserves (excluding IBNR reserves), which consisted of 1,861 claims. The acquisition of Mercer
As of December 31, 2011, we have a net operating loss (“NOL”) carryforward of $24.1 million, $13.1 million of which is due to the net operating loss generated in 2011 and $11.0 million of which is due to our purchase of American Indemnity Financial Corporation in 1999. No NOLs will expire in 2012.
The amounts set forth in the following tables detail the impact of hypothetical interest rate changes on the fair value of fixed maturity securities held at December 31, 2011 and 2010. The sensitivity analysis measures the change in fair values arising from immediate changes in selected interest rate scenarios. We employed hypothetical parallel shifts in the yield curve of plus or minus 100 and 200 basis points in the simulations. Additionally, based upon the yield curve shifts, we employ estimates of prepayment speeds for mortgage-related products and the likelihood of call or put options being exercised within the simulations. According to this analysis, at current levels of interest rates, the duration of the investments supporting the deferred annuity liabilities is 0.34 years longer than the projected duration of the liabilities. If interest rates increase by 100 basis points, the duration of the investments supporting the deferred annuity liabilities would be 0.75 years shorter than the projected duration of the liabilities.
The fair value of securities that are categorized as Level 2 is determined by management after reviewing market prices obtained from independent pricing services and brokers. Such estimated fair values do not necessarily represent the values for which these securities could have been sold at the reporting date. Our independent pricing services and brokers obtain prices from reputable pricing vendors in the marketplace. They continually monitor and review the external pricing sources, while actively participating to resolve any pricing issues that may arise.
The following table illustrates the hypothetical impact on the premium deficiency charge recorded for the quarter ended December 31, 2011, of reasonably likely changes in the assumed loss and loss settlement expense ratio utilized for purposes of this calculation. The entire impact of these changes would be recognized through income as other underwriting expenses. The base amount indicated below is the actual premium deficiency charge recorded as an offset against the established DAC asset as of December 31, 2011.
in the estimates derived from the use of these assumptions, but also in the assumptions themselves. Due to the inherent uncertainty in the loss reserving process, management believes that there is a reasonable chance that modification to key assumptions could individually, or in aggregate, result in reserve levels that are either significantly above or below the actual amount for which the related claims will eventually settle.
As an example, if our loss and loss settlement expense reserves of $945.1 million as of December 31, 2011, is 10.0 percent inadequate, we would experience a reduction in future pre-tax earnings of up to $94.5 million. This reduction could be recorded in one year or multiple years, depending on when we identify the deficiency. The deficiency would also affect our financial position in that our equity would be reduced by an amount equivalent to the reduction in net income. Any deficiency that would be recognized in our loss and loss settlement expense reserves usually does not have a material effect on our liquidity because the claims have not been paid. Conversely, if our estimates of ultimate unpaid loss and loss settlement expense reserves prove to be redundant, our future earnings and financial position would be improved.
A 100 basis point decrease in our estimated long-term rate of return on plan assets would increase the pension benefit expense for the year ended December 31, 2011, by $0.6 million, while a 100 basis point increase in the rate would decrease benefit expense by $0.6 million, for the same period.
Premiums written are deferred and recorded as earned premium on a daily pro rata basis over the terms of the respective policies. Unearned premium reserves are established for the portion of premiums written applicable to the unexpired term of insurance policies in force. Premiums receivable are presented net of an estimated allowance for doubtful accounts, which is based on a periodic evaluation of the aging and collectability of amounts due from policyholders.
Certain costs of underwriting new business, principally commissions, premium taxes and variable underwriting and
A summary of realized investment gains (losses) for 2011, 2010 and 2009, is as follows:
The following tables present the categorization of the pension plan’s assets measured at fair value on a recurring basis at December 31, 2011 and 2010:
The following table summarizes information regarding the stock options outstanding and exercisable at December 31, 2011:
We determine the dilutive effect of our outstanding stock options using the “treasury stock” method. Under this method, we assume the exercise of all of the outstanding stock options whose exercise price is less than the weighted-average fair market value of our common stock during the reporting period. This method also assumes that the proceeds from the hypothetical stock option exercises are used to repurchase shares of our common stock at the weighted-average fair market value of the stock during the reporting period. The net of the assumed stock options exercised and assumed common shares repurchased represents the number of dilutive common shares, which we add to the denominator of the earnings per share calculation.