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;
(i) exceeds their fair value by 20 percent or more as of the balance sheet date; or
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 conditions or social trends, interest rates or credit ratings.
Approximate yields of AIHL’s debt securities for 2011, 2010 and 2009 are as follows (in millions, except for percentages):
* Represents cash commitments we made in connection with the pending merger with Transatlantic, consisting of $816.0 million cash consideration payable to Transatlantic shareholders upon consummation of the merger, as well as $30.7 million of estimated merger-related costs, which include $18.0 million payable to our investment bankers (see Note 2 to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K Report for further details). The merger is expected to close in the first quarter of 2012.
We produced positive cash flow in the three-year period ending December 31, 2011. Our positive cash flow from 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 4.1 percent in the fair market value of our debt securities portfolio. In this regard, as of December 31, 2011, our debt securities portfolio had an effective duration of approximately 4.0 years, with approximately $0.7 billion, or 26.4 percent, of our debt securities portfolio in securities with maturities of five years or less and $1.1 billion of short-term investments. See Note 3 to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K Report for further details concerning the contractual maturities of our consolidated 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.
(1) Of the $871.0 million of fair value as of December 31, 2011, $573.3 million related to certain energy sector businesses. Of the $1,500.7 million of fair value as of December 31, 2010, $1,004.8 million related to certain energy sector businesses.
Other invested assets generally 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.
Alleghany incurred due diligence, legal, investment bank and other merger-related costs of $19.3 million in the fourth quarter of 2011 in connection with the pending merger. Such costs are reported as a component of corporate administration. In the first quarter of 2012 and upon the closing of the merger, Alleghany expects to incur additional estimated costs of $30.7 million, including $18.0 million payable to Alleghany’s investment bankers.
As of December 31, 2011 and 2010, investments carried at fair value totaling $272.8 million and $322.1 million, respectively, were on deposit with various states or governmental agencies to comply with applicable state insurance regulations. Both amounts include $40.0 million that was contributed by AIHL to PCC on September 27, 2010, and these funds were used to increase PCC’s workers’ compensation deposit.
PCC. 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 catastrophe losses.
Reinsurance recoverables as of December 31, 2011 and 2010 consist of the following (in millions):
During 2011, Alleghany repurchased an aggregate of 399,568 shares of Common Stock in the open market for $120.3 million, at an average price per share of $301.14. 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.
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:
(3) Level 3 securities consist of partnership investments. The carrying value of partnership investments of $23.6 million as of December 31, 2011 decreased by $1.2 million from the December 31, 2010 carrying value of $24.8 million, due primarily to net return of capital during 2011.