The following discussion refers to the consolidated financial statements of TRH as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010, which are presented elsewhere herein. Financial data discussed below have been affected by certain transactions between TRH and related parties. (See Notes 12, 14 and 16 of Notes to Consolidated Financial Statements.)
The following table summarizes TRH's revenues, income before income taxes and net income for the periods indicated:
The competitive market conditions generally continued into the January 1, 2011 renewal period. However, certain lines that TRH focuses on did exhibit favorable loss frequency and severity trends and maintained stable terms and conditions. In the property lines, rates decreased slightly but generally remained at acceptable levels. In the casualty lines, certain lines were acceptable while others were more competitive. Marine and offshore energy, domestic medical malpractice, certain errors and omissions liability ("E&O") niches, international A&H and U.K. motor were among the lines that were acceptable. D&O and most general casualty business were among the lines that were more competitive. With the continued competitive market conditions, TRH continued its practice of not renewing certain business that did not meet TRH's underwriting standards.
In the course of these detailed loss reserve reviews, which are performed by underwriting year and by line of business, a point estimate of the loss reserve need is determined. Differences between the indications arising from the various methods are analyzed to understand the drivers of these differences, so that TRH can make a selection based on the methods that are believed to be most appropriate for that line of business. Frequently, the selection is based on an average of the various indications, giving the most weight to the indications deemed most appropriate. Generally speaking, TRH is often able to give more weight to loss development indications for more mature years where credible reported losses exist, as opposed to the more current years, where the B-F method is often highly relied upon due to the lack of credible and mature reported experience. When the actuarial point estimate is compared to the carried reserve, it is recognized that there is an implicit range around the indicated point estimate whereby a carried reserve within that range may be considered reasonable. TRH reviews the appropriateness of the held reserves relative to the indicated point estimate considering many factors. These factors may include, but are not limited to, the amount and direction of any difference between the point estimate and the held reserve, any operational issues which may be difficult to actuarially quantify, various actuarial assumptions on which management may want additional input or any observations regarding optimism or conservatism which management may believe need to be considered. Thus, the carried reserves, as determined by management, may be more or less than the actuarially determined point estimate. As of December 31, 2010 and 2009, TRH's carried loss and LAE reserves, net of related reinsurance recoverable, were $8.21 billion and $7.87 billion, respectively, and were equal to the actuarial point estimate.
TRH has provided no allowance for bad debts relating to the premium estimates based on its historical experience, the general profile of its cedants and the ability TRH has in most cases to significantly offset these premium receivables with losses and LAE or other amounts payable to the same parties.
Realized net capital gains (losses) totaled $30.1 million, ($70.6) million and ($435.5) million in 2010, 2009 and 2008, respectively. Realized net capital gains (losses) generally result from (a) investment dispositions, which reflect TRH's investment and tax planning strategies to optimize after-tax income; (b) OTTI of investments; and (c) foreign currency transaction gains (losses). See Note 4(e) for a breakdown of realized net capital gains (losses).
includes pre-tax net catastrophe costs of $202.4 million, principally relating to the earthquake in Chile, the earthquake in New Zealand, storms and flooding in Australia and the Deepwater Horizon explosion. Net catastrophe costs in the aggregate added (decreased) 5.2%, (0.1)%, 8.2% and 17.4% to the 2010 combined ratios for consolidated, Domestic, International-Europe and International-Other, respectively. (See Note 10 for the amounts of net catastrophe costs by segment and the amounts of consolidated gross and ceded catastrophe losses incurred and reinstatement premiums. See discussion in Catastrophe Exposure of the magnitude of TRH's catastrophe exposures.)
Assets increased by $408 million in 2009 due principally to a $526 million increase in investments. The increase in investments is due largely to increases of $296 million in fixed maturities available for sale and $223 million in short-term investments. The increase in investments generally reflects the investment of net operating cash inflows and changes in the fair value of investments.
Assets increased by $243 million in 2010 due principally to a $157 million increase in investments and a $51 million increase in reinsurance recoverable on paid and unpaid losses and LAE. The increase in investments is due principally to a $172 million increase in fixed maturities. The increase in reinsurance
maturities will mature in less than 10 years as of December 31, 2010 and 2009, respectively. By their nature, asset-backed fixed maturities do not generally have single maturity dates. Activity within the fixed maturities available for sale portfolio for the periods under discussion includes strategic portfolio realignments to optimize after-tax income. TRH adjusts its mix of taxable and tax-exempt investments, as appropriate, generally as a result of strategic investment and tax planning considerations. With respect to the fixed maturities which are classified as held to maturity and carried at amortized cost, TRH has the positive intent and ability to hold each of these securities to maturity. The average duration of TRH's entire fixed income portfolio was 3.6 years as of December 31, 2010 and 3.7 years as of December 31, 2009.
Losses and loss adjustment expenses net of related reinsurance recoverable ("net loss reserves") include amounts for risks relating to environmental impairment and asbestos-related illnesses. The majority of TRH's environmental and asbestos-related net loss reserves arose from contracts entered into after 1985 that were underwritten specifically as environmental or asbestos-related coverages rather than from standard general liability coverages, where the environmental or asbestos-related liabilities were neither clearly defined nor specifically excluded. The reserves carried at December 31, 2010 and 2009 for such claims, including the IBNR portion, are based upon known facts and current law at the respective balance sheet dates. However, significant uncertainty exists in determining the amount of ultimate liability for environment impairment and asbestos-related losses, particularly for those occurring in 1985 and prior. This uncertainty is due to inconsistent court resolutions and judicial interpretations with respect to underlying policy intent and coverage and uncertainties as to the allocation of responsibility for resultant damages, among other things. Further, there is always the possibility of changes in statutes, laws, regulations and other factors that could have a material effect on these liabilities and, accordingly, future earnings.
Assets recorded at fair value in the consolidated balance sheet are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:
(1)Represents only items measured at fair value. (2)Primarily private equities. (3)Short-term investments in Level 2 are carried at cost or amortized cost which approximates fair value.
At December 31, 2010, 2009 and 2008, TRH has no unrecognized tax positions. TRH does not presently anticipate any material change in unrecognized tax positions during the next twelve months.
*Loss on early extinguishment of debt rounds to zero. The balance sheet carrying value, unamortized original issue discount, outstanding principal amount and fair value of the Senior Notes are presented below. The unamortized original issue discount is being amortized over the term of the notes on the effective interest rate method. The fair values are based on quoted market prices.
Common stock activity for each of the three years in the period ended December 31, 2010 was as follows:
The charges made to operations for benefit plans administered by the AIG Group were not material for 2009 and 2008.
As of December 31, 2010, there was $15.1 million of total unrecognized compensation costs relating to Service RSUs granted but not yet vested. These costs are expected to be recognized over a weighted average period of 1.6 years.
(1)Amount undeterminable as of December 31, 2010 as the performance period has not yet ended. Under the Senior Partners Plan, the Compensation Committee awarded to TRH's senior-most executives Performance RSUs with a three-year performance period ("Three-Year Performance RSUs") that pay out in TRH shares if performance goals for a specified period are satisfied. Each Three-Year Performance RSU converts into one TRH share. Three-Year Performance RSUs operate on the basis of successive overlapping three year performance periods, with a new period beginning each year. Recipients earn Performance RSUs based on BVPS Growth during the performance period. Based on the percentage of the BVPS Growth target achieved over the performance period, recipients can earn from 25% to 200% of the awarded number of Performance RSUs. No Performance RSUs will be earned if BVPS Growth is less than 50% of target.
(2)Underwriting expenses represent the sum of net commissions, (increase) decrease in deferred policy acquisition costs and other underwriting expenses. (3)Underwriting profit (loss) represents net premiums earned less net losses and LAE and underwriting expenses. (4)See Note 10 for net catastrophe costs by segment. (5)The Miami and Toronto branch segment data are each considered significant for at least one of the periods presented. Certain key Miami and Toronto data elements which are included in International-Other are as follows:
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 2010 and 2009. However, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the results of operations for such periods have been made. (See Note 5.)