Net realized losses, pre-tax, were $7.1 million in 2010 compared to $46.0 million in 2009 and $49.5 million in 2008. The improvement of $38.9 million in 2010 compared to 2009 was driven by lower non-cash OTTI charges of $17.7 million compared to $55.4 million in the prior year. While OTTI charges remained relatively consistent between 2009 and 2008 at $55.4 million and $53.1 million, respectively, the slight decrease in net realized losses during the periods was due to sales from our fixed maturity and equity portfolios. For details regarding the OTTI charges, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Pre-tax underwriting losses of $22.2 million in 2010 compared to pre-tax underwriting income of $2.4 million in 2009 and $0.1 million in 2008. The decrease in 2010 was primarily attributable to $56.5 million in catastrophe losses, an increase of $47.9 million compared to 2009. The catastrophe losses were partially offset by favorable prior year casualty development of $39 million compared to $29 million in the prior year.
NPE decreases in 2010 compared to 2009 and 2008 are consistent with the fluctuation in NPW.
Our Insurance Operations segment reported a statutory combined ratio of 101.6% for 2010, which was slightly below A.M. Best’s industry-wide estimated 2010 combined ratio of 103.0% and in line with Fitch’s projection of 101.5%. Consistent with the trend noted by A.M. Best as a driver of industry-wide results, we experienced higher than anticipated catastrophe losses in 2010. Catastrophe losses, by their nature, are volatile as is best illustrated in the table below. In 2010, we incurred unprecedented catastrophe losses, and, conversely, 2009 was the period of lowest losses during the last five years.
The decrease in 2009 compared to 2008 was largely due to reductions in endorsement and audit activity of $48.6 million, coupled with a decline in net renewals of $25.4 million.
During the three-year period, our premium subject to audit in this line ranged from 51% to 58%. At the end of the policy period, actual exposure units (usually sales or payroll) on policies with premium subject to audit are compared to beginning of period estimates and a return premium or additional premium transaction occurs.
2008: favorable by $23 million, or 7.6 points, related to accident years 2004 to 2006, partially offset by adverse development in the 2007 accident year driven by higher than expected severity.
In early 2010, we decided to outsource our investment management operations to two external investment managers. This transition was successfully completed and is now fully operational. This outsourcing does not indicate a change to our overall investment strategy, only a change in the execution model. We expect to benefit from broader sector-specific knowledge and greater flexibility in trade execution.
For further details on how we manage overall credit quality and the various risks that our portfolio is subject to, see
When the fair value of any investment is lower than its cost/amortized cost, an assessment is made to determine if the decline is other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of an AFS security is temporary, we record the decline as an unrealized loss in AOCI. Temporary declines in the value of an HTM security are not recognized in the consolidated financial statements. Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral for fixed maturity investments. Broad changes in the overall market or interest rate environment generally will not lead to a write-down.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820 - Improving Disclosures about Fair Value Measurements. This guidance requires: (i) separate disclosure of significant transfers between Level 1 and Level 2 of the fair value hierarchy and reasons for the transfers; (ii) disclosure, on a gross basis, of purchases, sales, issuances, and net settlements within Level 3 of the fair value hierarchy; (iii) disclosures by class of assets and liabilities; and (iv) a description of the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance is effective for reporting periods beginning after December 15, 2009, except for the Level 3 disclosure requirements, which will be effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years. We have included the disclosures required by this guidance in our notes to the consolidated financial statements, where appropriate.
During 2010, 52 securities with a carrying value of $147.4 million in a net unrecognized gain position of $5.7 million were reclassified from the HTM category to AFS due to credit rating downgrades that occurred by either Moody’s Investors Service (“Moody’s”), Standard and Poor’s Financial Services (“S&P”), or Fitch Ratings (“Fitch”). These unexpected rating downgrades raised significant concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity.
The following tables set forth summarized financial information for alternative investments accounted for by the equity method. This information is presented in the aggregate for our alternative investment portfolio. Since the majority of these investments report results to us on a quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30:
(b) The components of comprehensive income (loss), both gross and net of tax, for 2010, 2009, and 2008 are as follows:
(c) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2010 are as follows:
In 2009, we experienced favorable loss development of approximately $29 million, which was primarily driven by favorable loss development in accident years 2007 and prior, partially offset by unfavorable loss development in accident year 2008 of $29 million. The main driver of this development was favorable prior year development in our workers compensation, commercial automobile, and general liability lines of business. Workers compensation experienced favorable prior year development of approximately $11 million primarily driven by favorable development of $36 million in accident years 2005 to 2007 reflecting the on-going impact from a series of improvement strategies for this line in recent years, partially offset by adverse development of approximately $22 million due to higher than expected severity in accident year 2008. Commercial automobile experienced favorable development of approximately $10 million driven by lower than anticipated severity emergence primarily in accident year 2007. General liability experienced favorable development of approximately $8 million driven by favorable loss emergence for accident years 2004 through 2007, partially offset by adverse development in our products/completed operations business.
We have classified our operations into two segments, the disaggregated results of which are reported to and used by senior management to manage our operations:
We have reclassified prior period amounts on the consolidated financial statements to present the operating results of Selective HR as a discontinued operation.
The deposit administration contract is carried at cost, which approximates fair value. Given the liquid nature of the underlying investments in overnight cash deposits and other short term duration products, we have determined that a correlation exists between the deposit administration contract and other short-term investments such as money market funds. As such, this investment is classified as Level 2 in the fair value hierarchy;
Stockholders approved the amendment and restatement of the Stock Plan effective as of May 1, 2010 (the “Amended Stock Plan”) on April 28, 2010. Under the Amended Stock Plan, the Board's Salary and Employee Benefits Committee ("SEBC") may grant stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), phantom stock, stock bonuses, and other awards in such amounts and with such terms and conditions as it shall determine, subject to the provisions of the Amended Stock Plan. Each award granted under the Amended Stock Plan (except unconditional stock bonuses and the cash component of Director compensation) shall be evidenced by an agreement containing such restrictions as the SEBC may, in its sole discretion, deem necessary or desirable and which are not in conflict with the terms of the Amended Stock Plan. The maximum exercise period for an option grant under this plan is ten years from the date of the grant. During 2010, we granted, net of forfeitures, 374,153 RSUs, and experienced net restricted stock forfeitures of 820 shares. During 2009, we granted, net of forfeitures, 520,011 RSUs, and experienced net restricted stock forfeitures of 7,168 shares. During 2008, we granted, net of forfeitures, 382,521 RSUs, and experienced net restricted stock forfeitures of 45,240. We also granted options to purchase 238,790 shares during 2010, 313,811 shares during 2009, and 191,568 shares during 2008. As of December 31, 2010, 5,717,187 shares of the Parent's common stock remained available for issuance pursuant to outstanding stock options and restricted stock units granted under the Stock Plan and the Amended Stock Plan.
The total intrinsic value of options exercised was $0.8 million during 2010, $0.4 million during 2009, and $2.8 million during 2008.
See Note 12. “Discontinued Operations” for a discussion of discontinued operations.