These statements are not historical facts but instead represent only TRH's belief regarding future events and financial performance, many of which, by their nature, are inherently uncertain and outside of TRH's control. These statements may address, among other things, TRH's strategy and expectations for growth, product development, government and industry regulatory actions, legal matters, financial, credit and industry market conditions, financial results and reserves, as well as the expected impact on TRH of natural and man-made (e.g., terrorist attacks) catastrophic events and political, economic, legal and social conditions.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
The operations of the Company are conducted principally by its three major operating subsidiaries-Transatlantic Reinsurance Company® ("TRC"), Trans Re Zurich ("TRZ") and Putnam Reinsurance Company ("Putnam")-and are managed based on its geographic segments. Through its operations on six continents, TRH offers reinsurance capacity on both a treaty and facultative basis-structuring programs for a full range of property and casualty products, with an emphasis on specialty lines, which may exhibit greater volatility of results over time than most other lines. Such capacity is offered through reinsurance brokers and, to a lesser extent, directly to domestic and foreign insurance and reinsurance entities.
TRH conducts its business and assesses performance through segments organized along geographic lines. The Domestic segment principally includes financial data from branches in the United States except Miami, as well as revenues and expenses of the Company (including interest expense on the Company's senior notes and stock-based compensation expense). Data from the London and Paris branches and from TRZ are reported in the aggregate as International-Europe and considered as one segment due to operational and regional similarities. Data from the Miami (which serves Latin America and the Caribbean), Toronto, Hong Kong and Tokyo branches are grouped as International-Other and represents the aggregation of segments that are generally not material.
In 2009, casualty lines comprised 71% of TRH's net premiums written, while property lines totaled 29%. In addition, treaty reinsurance totaled 97% of net premiums written, with the balance representing facultative accounts. Business written by international operations represented 49% of net premiums written in 2009.
TRH's major sources of revenues are net premiums earned for reinsurance risks undertaken and income from investments. The great majority of TRH's investments are in fixed maturity securities held to
Prior to June 10, 2009 and as of December 31, 2008 and 2007, AIG beneficially owned approximately 59% of the Company's outstanding shares. On June 10, 2009, AIG and American Home Assurance Company ("AHAC"), a wholly owned subsidiary of AIG, consummated the secondary public offering (the "Offering") of 29.9 million issued and outstanding shares of the common stock of the Company owned by AIG and AHAC. TRH did not receive any proceeds from the Offering. According to the Form 13F filed on February 18, 2010 by AIG, as of December 31, 2009, the AIG Group had sole voting authority over 9.2 million shares of the Company's common stock, representing approximately 13.8% of the Company's outstanding shares as of December 31, 2009.
As a result of the Offering, the Company is no longer considered a "controlled company" pursuant to the corporate governance listing standards of the New York Stock Exchange ("NYSE") and is no longer able to avail itself of the exemptions from certain of the NYSE's corporate governance listing standards applicable to controlled companies (subject to the rules of the NYSE permitting a phase in period for compliance with such corporate governance listing standards).
In connection with the Offering, TRH entered into a Master Separation Agreement (the "MSA") with AIG and AHAC on May 28, 2009. The MSA sets forth TRH's agreements with AIG and AHAC regarding the orderly separation of TRH from AIG, AHAC and their subsidiaries (the "Separation") and governs certain aspects of TRH's relationship with AIG, AHAC and their subsidiaries on a going forward basis, including their waiver of certain rights they may have under intercompany agreements and insurance agreements.
TRH is a party to numerous contracts, agreements, licenses, permits, authorizations and other arrangements (the "Applicable Arrangements and Authorizations") that contain provisions giving counterparties certain rights (including, in some cases, termination rights) in the event of a change in control of the Company or its subsidiaries. If a change in control occurs, cedants may be permitted to cancel contracts on a cut-off or run-off basis, and TRH may be required to provide collateral to secure premium and reserve balances or may be required to cancel and commute the contract, subject to an agreement between the parties that may be settled in arbitration. If a contract is cancelled on a cut-off basis, TRH may be required to return unearned premiums, net of commissions.
The Offering may be deemed to have constituted a change in control of TRH under a portion of TRH's non-AIG Group reinsurance agreements. Whether a ceding company would have cancellation
Revenues increased in 2009 compared to 2008 due primarily to a decrease in realized net capital losses. The decrease in realized net capital losses was due principally to a decrease in other-than-temporary impairments ("OTTI") and an increase in realized net capital gains (losses) on sales and redemptions of securities in 2009 as financial and credit markets stabilized and partially recovered from the turmoil at the end of 2008. See Note 4(e) of Notes to Consolidated Financial Statements ("Note 4(e)") for a breakdown of realized net capital losses.
Revenues decreased in 2008 compared to 2007 due primarily to significant realized net capital losses and a decrease in net investment income, partially offset by an increase in net premiums earned. The significant realized net capital losses of $435.5 million, including $317.8 million of OTTI, in 2008 generally resulted from declines in market values due to the downturn in the U.S. economy, turmoil in the financial markets, financial market illiquidity and issuer-specific credit events. The decrease in net investment income was due largely to a decrease in investment results from other invested assets, principally related to alternative investments, partially offset by an increase in fixed maturity income. The increase in net premiums earned emanated primarily from Domestic operations and the Miami and London branches. The most significant increases in net premiums earned occurred in the accident and health ("A&H"), property, credit and auto liability lines, partially offset by significant decreases in the fidelity and ocean marine lines. In general, changes in net premiums earned between periods were influenced by prevailing market conditions and strategic decisions by TRH's management in recent periods.
Underwriting profit (loss) is defined as net premiums earned less net losses and LAE incurred, net of commissions and other underwriting expenses, plus (minus) any increase (decrease) in deferred acquisition costs. (See Operational Review for further discussion.)
sheets and the low level of catastrophe losses in 2009 put downward pressure on reinsurance rates. Insurers had greater capacity to retain risk and increased access to capital market alternatives to reinsurance compared to late 2008, while the strengthening of reinsurer balance sheets increased the amount of capacity available in the reinsurance market. Despite weakness in primary rates in several casualty lines and an increase in capacity, reinsurers generally remained disciplined during the January 1, 2010 renewal period. The January 1, 2010 renewals generally saw higher net retentions by cedants and reinsurance rates remaining within acceptable levels while exhibiting greater stability than primary rates.
More specifically, rates on casualty lines were uneven in 2009. Certain lines, like directors' and officers' liability ("D&O") of financial institutions have shown rate increases, while others have been flat or shown decreases. Results in many casualty lines have benefited from favorable accident year loss severity and frequency trends in 2009, but these trends may not be sustainable. During the January 1, 2010 renewal period, casualty insurance rates generally remained under pressure, with some modest improvements in certain lines. Rates will likely remain under pressure in the near future as excess capacity, good results in recent accident years and strong cedant balance sheets hinder improvements. However, the current low investment yield environment combined with the potential of increased inflation in the future and deterioration from current favorable loss severity and frequency trends may lead to a hardening of casualty reinsurance rates in the future.
In property lines, some catastrophe-exposed regions, particularly peak zones, saw significant rate increases in the first half of 2009, which leveled off in the second half of 2009. Overall this business remained acceptable through the January 1, 2010 renewal period, with rates in the U.S. down slightly and rates outside of the U.S. generally flat. The strengthening of insurers' balance sheets also led to higher net retentions by cedants during the January 1, 2010 renewal period. The lack of significant catastrophe losses in 2009 and the strengthening of cedants' balance sheets may lead to more downward pressure on property reinsurance rates going forward.
Starting in mid-2007 and continuing through 2009, the U.S. residential mortgage market and the global credit and financial markets experienced serious disruptions, although some improvement was evident by the end of 2009. TRH's operating results and financial condition have been adversely affected and may continue to be adversely affected by this disruption. (See Disruption in Global Credit and Financial Markets.) However, the current global credit and financial markets may present attractive opportunities for strategic acquisitions and investments, particularly given TRH's strong capital position, financial resources and reputation, which TRH may, from time to time, evaluate and pursue.
TRH believes its most critical accounting estimates are those with respect to loss reserves, fair value measurements of certain financial assets, OTTI of investments, premium revenues and deferred acquisition costs, as they require management's most significant exercise of judgment on both a quantitative and qualitative basis in the preparation of TRH's consolidated financial statements and footnotes. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, TRH's results of operations and financial condition would be affected, possibly materially. A discussion of these most critical accounting estimates follows:
While this process is difficult and subjective for ceding companies, the inherent uncertainties of estimating loss reserves are even greater for reinsurers, due primarily to the longer-term nature of much reinsurance business, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies, which are subject to change without notice. Nevertheless, data received from cedants is subjected to audits periodically by TRH claims and underwriting personnel, to help ensure that reported data is supported by proper documentation and conforms to contract terms, and is analyzed, as appropriate, by TRH underwriting and actuarial personnel. Such analysis often includes a detailed review of reported data to assess the underwriting results of reinsurance assumed and to explain any significant departures from expected performance. Over time, reported loss information is ultimately corroborated when such information eventually attains paid status.
•ELRs for the latest accident years generally reflect the ELRs from prior accident years adjusted for the loss trend (see Loss trend factors discussion), as well as the impact of rate level changes and other quantifiable factors. For certain longer tail lines of business that are typically lower frequency, higher severity classes, such as excess medical malpractice and D&O, ELRs are often utilized for the last several accident years.
The methodologies that TRH employed to assess the reasonableness of loss reserve estimates included the paid loss development, incurred loss development, paid Bornhuetter-Ferguson ("B-F") and incurred B-F methods. The actuarial methods that TRH employs to determine the appropriate loss reserves for short tail lines of business are the same as those employed for longer-tail lines. However, the judgments that are made with regard to factors such as loss trends, ELRs and loss development factors for shorter-tail lines generally have much less of an effect on the determination of the loss reserve amount than when those same judgments are made regarding longer-tailed lines of business. In contrast to the longer-tailed lines of business, reported losses for the shorter-tailed classes, such as the property lines of business (e.g., fire and homeowners multiple peril) and certain marine and energy classes, generally reach the ultimate level of incurred losses in a relatively short period of time. Rather than having to rely on assumptions regarding ELRs and loss development factors for many accident years for a given line, these assumptions are generally only relevant for the most recent accident year or two. Therefore, these assumptions tend to be less critical and the reserves calculated pursuant to these assumptions are subject to less variability for the shorter-tailed lines of business.
The characteristics of each line of business are considered in the reserving process. TRH's major lines of business and reserve methodologies are discussed below:
•Excess Casualty: The vast majority of this class consists of domestic treaties, including pro rata and excess-of-loss contracts of general liability business. Excess casualty is dominated by umbrella business, some of which have very high attachment points. This business is generally very long tailed and characterized by relatively low frequency and high severity type losses. Therefore, expected loss ratio methods, such as the incurred B-F method, are heavily relied upon for most years due to the lack of mature reported experience available. The ELRs utilized for the most recent years are based on the projected ultimate loss ratios of prior years adjusted for rate level changes, estimated loss cost trends and other quantifiable changes, as well as actuarial pricing indications.
reserve need is then determined (by year, by line of business) by subtracting the reported losses (which are equal to the sum of inception to date paid losses and the case reserves as of the balance sheet date) from the indicated ultimate losses.
In the course of these detailed loss reserve reviews, which are performed by 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, 2009 and 2008, TRH's carried loss and LAE reserves, net of related reinsurance recoverable, were $7.87 billion and $7.35 billion, respectively, and were equal to the actuarial point estimate.
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 as standard general liability coverages, where the environmental or asbestos-related liabilities were neither clearly defined nor specifically excluded. The reserves carried for these claims, including losses and LAE IBNR, are based upon known facts and current law. However, significant uncertainty exists in determining the amount of ultimate liability for environmental 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.
As of December 31, 2009, of TRH's $10.0 billion of available for sale fixed maturity and equity securities and other invested assets measured at fair value on a recurring basis, $9.9 billion was based on prices received from independent pricing services and $0.1 billion was based on non-binding broker quotes or internal valuation sources. Fair values from all external sources are reviewed by management, but none were adjusted.
See Note 3 of Notes to Consolidated Financial Statements ("Note 3") for discussion of how TRH determines the fair value of its fixed maturities available for sale, equities available for sale and certain short-term investments.
•Other invested assets: Fair values for other invested assets, principally direct equity investments and alternative investments, are initially valued at the transaction price. Subsequently, fair value is based on the net asset value or financial statement information of the investee.
There can, however, be no assurance that TRH has accurately assessed the level of impairments reflected in its financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.
At December 31, 2009, TRH had gross unrealized losses on all fixed maturities (including fixed maturities classified as held to maturity) and equities totaling $173 million which did not meet the criteria for OTTI. If TRH's determination of OTTI is materially incorrect, it could have a material adverse effect on TRH's financial condition, results of operations and cash flows.
Management must make certain judgments in the determination of premiums written and earned by TRH. For pro rata treaty contracts, premiums written and earned are based on reports received from ceding companies. For excess-of-loss treaty contracts, premiums are generally recorded as written based on contract terms and are earned ratably over the terms of the related coverages provided. In recent years, treaty contracts have generated approximately 97% of TRH's premium revenues. Unearned premiums and prepaid reinsurance premiums represent the portion of gross premiums written and ceded premiums written, respectively, relating to the unexpired terms of such coverages. The relationship between net premiums written and net premiums earned will, therefore, vary depending generally on the volume and inception dates of the business assumed and ceded and the mix of such business between pro rata and excess-of-loss reinsurance.
TRH's financial statements reflected estimates of gross premiums written, commissions and premium balances receivable, for which data had as yet to be reported by cedants as of December 31, 2009 and 2008, as follows:
Net premiums written decreased in 2009 compared to 2008 due in large part to changes in foreign currency exchange rates, but also reflected competitive market conditions which led TRH not to renew certain business that did not meet TRH's underwriting standards.
Net premiums written increased in 2008 compared to 2007 due to increases in Domestic and International operations. Overall premium growth in 2008 was mitigated by increased ceding company retentions in certain lines and price erosion in many classes and regions in 2007 and the first half of 2008.
In 2009 and 2008, as compared to the respective immediately prior year, the changes in net premiums written were primarily from treaty business. In general, premium fluctuations reflect prevailing market conditions and strategic decisions by TRH's management in recent periods as discussed earlier in MD&A.
A breakdown of total net premiums written in 2009, 2008 and 2007 is as follows:
As premiums written are primarily earned ratably over the terms of the related coverage, the reasons for changes in net premiums earned are generally similar to the reasons for changes in net premiums written over time.
included in net investment income. As a result of conditions affecting the financial and credit markets, in the fourth quarter of 2008, counterparties were successful in negotiating significantly reduced collateral levels (i.e., collateral received as a percentage of the fair value of the security loaned). Due to the lower collateral levels, during the fourth quarter of 2008, many of such loaned securities were accounted for as sales at the time of transfer and as purchases when the securities were subsequently returned.
In 2008, TRH repaid certain securities lending payables using cash from sources other than the sale of securities lending invested collateral. In that regard, certain fixed maturities, including CMBS, RMBS and other asset-backed securities were transferred from securities lending invested collateral to fixed maturities available for sale.
In 2009 and 2008, TRH repurchased portions of its 5.75% senior notes due in 2015 (the "2015 Notes") from non-related parties as detailed below:
The property and casualty insurance and reinsurance industries use the combined ratio as a measure of underwriting profitability. The combined ratio reflects only underwriting results and does not include income from investments. Generally, a combined ratio under 100% indicates an underwriting profit and a combined ratio exceeding 100% indicates an underwriting loss. Underwriting profitability is subject to significant fluctuations due to competition, natural and man-made catastrophic events, economic and social conditions, foreign currency exchange rate fluctuations, interest rates and other factors. TRH's combined ratio and its components, for all periods in this Form 10-K, are presented in accordance with the methodology commonly used by insurance industry analysts and TRH's peers. The combined ratio represents the sum of the loss ratio and the underwriting expense ratio. The loss ratio represents net losses and LAE incurred expressed as a percentage of net premiums earned. The underwriting expense ratio represents the sum of the commission ratio and the other underwriting expense ratio. The commission ratio represents the sum of net commissions and the decrease (increase) in deferred acquisition costs expressed as a percentage of net premiums earned. The other underwriting expense ratio represents other underwriting expenses expressed as a percentage of net premiums earned.
The lower loss ratio for consolidated TRH in 2009 compared to 2008 is due principally to lower catastrophe costs and increased favorable loss reserve development. The increase in the loss ratio for consolidated TRH in 2008 compared to 2007 reflects an increased current accident year loss ratio excluding catastrophe losses and increased net catastrophe costs, partially offset by lower net loss reserve development. In the aggregate, catastrophe costs and net loss reserve development (decreased) added (0.9)%, 4.4% and 3.4% (from) to the consolidated TRH combined ratio in 2009, 2008 and 2007, respectively.
includes net catastrophe costs of $169.7 million, principally relating to Hurricane Ike. Net catastrophe costs in the aggregate added 4.2%, 7.2%, 1.4% and 0.0% to the 2008 combined ratios for consolidated, Domestic, International-Europe and International-Other, respectively.
In addition, in 2008, TRH decreased its estimates of the ultimate amounts of net losses occurring in 2007 and prior years by $0.5 million. This net favorable development was comprised of net favorable development of $209.7 million for losses occurring in 2003 to 2007, offset by net adverse development of $209.2 million relating to losses occurring in 2002 and prior. The detail of the $0.5 million net favorable development by line of business relating to all prior years is presented in the table below:
(1)Amount of reestimation represents the (increase) decrease in net losses and LAE incurred in 2007 relating to losses occurring in 2006 and prior years.
The underwriting expense ratio for consolidated TRH in 2009 remained level with 2008 as an increase of 0.7% in the other underwriting expense ratio was offset by a decrease of 0.6% in the commission ratio. The increase in the other underwriting expense ratio in 2009 compared to 2008 is related largely to additional compensation costs associated with improved results in 2009 compared to 2008 and expenses incurred related to an employee retention plan (the "Retention Plan") covering a significant number of its employees, including its senior-most management. The decrease in the commission ratio occurred in the International-Europe and International-Other segments. The underwriting expense ratio for consolidated TRH decreased in 2008 compared to 2007 due to a decrease of 0.8% in the commission ratio, partially offset by an increase of 0.3% in the other underwriting expense ratio. The decrease in the commission ratio is due in part to a change in the mix of business. The increase in the other underwriting expense ratio in 2008 compared to 2007 is due in part to expenses incurred related to the Retention Plan.
General corporate expenses, certain stock-based compensation costs and expenses relating to Professional Risk Management Services, Inc. ("PRMS") are the primary components of "other, net" expenses on the Consolidated Statement of Operations. PRMS is an insurance program manager specializing in professional liability insurance services.
Income tax expense in 2009 includes $56.7 million of deferred tax benefits from minimum tax credit carryforwards. In 2008, TRH reversed $15.0 million of previously recorded deferred tax benefits from minimum tax credit carryforwards. In 2007, TRH generated $32.9 million of deferred tax benefits from minimum tax credit carryforwards.
TRH recognized income tax expenses (benefits) of $2.0 million, ($59.4) million and ($19.3) million relating to catastrophe costs occurring in 2009, 2008 and 2007, respectively.
Net income and net income per common share on a diluted basis, respectively, were as follows: 2009-$477.7 million, $7.15; 2008-$102.3 million, $1.53; 2007-$487.1 million, $7.31. Reasons for the changes between years are as discussed earlier. (See Note 9 of Notes to Consolidated Financial Statements for the calculation of net income per common share.)
The increases in NOI, NOI per Common Share (diluted) and Operating ROE in 2009 compared to 2008 is due largely to a decrease in catastrophe costs in 2009. The decreases in NOI, NOI per Common Share (diluted) and Operating ROE in 2008 compared to 2007 is due largely to an increase in catastrophe costs in 2008.
2008 compared to 2007-Revenues increased slightly due to increases in net premiums written, net of the change in unearned premiums, and net investment income, largely offset by an increase in realized net capital losses. Changes in foreign currency exchange rates between the U.S. dollar and the currencies in which premiums are written in 2008 as compared to 2007 lessened the increase in net premiums written by $10.0 million. Revenues increased in the Paris branch and in TRZ, largely offset by a decrease in the London branch. Net premiums earned increased principally in the credit, A&H and boiler & machinery lines offset in part by a significant decrease in the ocean marine and property lines. The increase in realized net capital losses was due in part to OTTI. Income before income taxes for 2008 decreased due primarily to a decrease in underwriting profit and increased realized net capital losses, partially offset by an increase in net investment income. The decrease in underwriting profit reflects a higher loss ratio, despite a reduction in net catastrophe costs, partially offset by a lower underwriting expense ratio.
includes net catastrophe costs of $22.1 million principally relating to Hurricane Ike, offset in part by favorable development on catastrophe events occurring in 2007 and 2005. 2007 includes net catastrophe costs of $47.4 million principally relating to Windstorm Kyrill in Europe and floods in the U.K.
As a holding company, the Company's assets consist primarily of the stock of its subsidiaries. The Company's liabilities consist primarily of the Senior Notes and related interest payable. The Company's cash inflows depend on the availability of dividends or other statutorily permissible payments from TRC and its wholly-owned operating subsidiaries, TRZ and Putnam. (See Note 15 of Notes to Consolidated Financial Statements for a discussion of restrictions on dividend payment and Schedule II-Condensed Financial Information of Registrant As of December 31, 2009 and 2008 and For the Years Ended December 31, 2009, 2008 and 2007 for the condensed financial statements of the Company.) In 2009, cash inflows also included the proceeds from the issuance of the 2039 Notes. TRH considers TRC's ability to pay dividends to the Company to be adequate for the Company's liquidity needs through the end of 2010 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year. In 2009, 2008 and 2007, the Company received cash dividends, primarily from TRC, of $121.5 million, $103.5 million and $81.0 million, respectively. In accordance with the statutory formula, based on December 31, 2009 statutory surplus, for the twelve months ended December 31, 2009, TRC could have paid dividends to the Company of approximately $401.6 million without regulatory approval. The Company uses cash primarily to pay interest to the holders of the Senior Notes, dividends to its common stockholders and, to a lesser extent, operating expenses. In 2009, the Company also used cash to repurchase a portion of the 2015 Notes and repurchase common shares. In 2008, the Company also used cash to repurchase a portion of the 2015 Notes.
While the expected payout pattern of liabilities (see the contractual obligations table later in this section) is considered in the investment management process, it is not the only factor considered as TRH has historically funded its claims payments from current operating cash flows. As a result of such funding history, TRH has not historically maintained a credit facility, though it may do so in the future. TRH's primary investment goal is to optimize after-tax income through a high quality diversified taxable fixed maturity and tax-exempt municipal fixed maturity portfolio, while maintaining an adequate level of liquidity. See discussion later in this section of the potential liquidity strain that could arise as a result of significant acceleration of paid losses beyond TRH's ability to fund such cash needs.
The following table summarizes the investments of TRH (on the basis of carrying value) as of December 31, 2009 and 2008:
TRH's fixed maturities classified as held to maturity and available for sale are predominantly investment grade, liquid securities. Approximately 45.3% and 44.5% of the non-asset-backed fixed maturities will mature in less than 10 years as of December 31, 2009 and 2008, respectively. By their nature, asset-backed fixed maturities do not generally have single maturity dates. The average duration of these fixed maturities was 3.7 years as of December 31, 2009 and 6.0 years as of December 31, 2008. The decrease in duration as of December 31, 2009 compared to December 31, 2008 is due to a change in the calculation which more appropriately captures the underlying characteristics of the fixed maturities, such as call features on municipal bonds. 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.
(1)Principally Standard & Poor's ratings. (2)Consists of $1 million of B rated securities, $27 million of CCC rated securities and $37 million of not-rated securities.
Through 2008, TRH participated in the Securities Lending Program, whereby certain securities (principally fixed maturities available for sale) from its portfolio were loaned to third parties. Under such program, TRH loaned securities to counterparties and received collateral, generally cash, which was invested to earn a spread. The collateral received was invested in separate portfolios containing floating rate bonds (i.e., fixed maturities), including asset-backed securities, and interest-bearing cash equivalents. These portfolios were maintained in segregated accounts for TRH by the program manager. The collateral was returned to the counterparties when the loaned securities were returned to TRH at a future date. In the fourth quarter of 2008, TRH terminated its participation in the Securities Lending Program.
(1)At December 31, 2009, includes no gross unrealized gains and gross unrealized losses of ($34.0) million on fixed maturities rated below BBB and gross unrealized gains of $0.1 million and gross unrealized losses of ($0.1) million on fixed maturities which are not-rated. At December 31, 2008, includes gross unrealized gains of $0.2 million and gross unrealized losses of ($1.0) million on fixed maturities rated below BBB. The vast majority of the increase in gross unrealized losses on fixed maturities rated below BBB at December 31, 2009 compared to December 31, 2008 is related to the reclassification of OTTI losses pursuant to the adoption of new accounting guidance on April 1, 2009.
At December 31, 2009, reinsurance recoverable on gross loss reserves totaled $725.3 million (a component of reinsurance recoverable on paid and unpaid losses on the Consolidated Balance Sheet, which is net of an allowance for uncollectible reinsurance recoverable of approximately $12 million), a decrease of $38.1 million, or 5.0%, from the prior year-end. Of the amount of reinsurance recoverable on paid and unpaid losses and LAE, which totaled $747.1 million as of December 31, 2009, $375 million represented balances that were unsecured. Of such unsecured balances, $36 million was due from related parties and 96% of the remaining balance was due from companies rated A- or better. (See Note 16.)
In the ordinary course of business, TRH is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine TRH's rights and obligations under reinsurance agreements and other more general contracts. In some disputes, TRH seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, TRH is resisting attempts by others to enforce alleged rights. Such disputes are resolved through formal and informal means, including litigation, arbitration and mediation. (See Item 3. Legal Proceedings.)
As significant losses from catastrophes occurring in prior years remain unpaid, TRH expects that payments relating to these events will negatively impact operating cash flows in 2010 and perhaps thereafter.
TRH's stockholders' equity totaled $4.03 billion at December 31, 2009, an increase of $836.2 million from year-end 2008. The net increase consisted primarily of net income of $477.7 million and other comprehensive income of $399.0 million, partially offset by cash dividends declared of $52.5 million.
The abovementioned other comprehensive income consisted of net unrealized appreciation of investments, net of income taxes, of $446.3 million, partially offset by net unrealized foreign currency translation loss from functional currencies, net of income taxes, of ($47.4) million. The net unrealized appreciation of investments, net of income taxes, is composed principally of increases of $367.0 million in net unrealized appreciation (depreciation) of fixed maturities available for sale, principally states, municipalities and political subdivision and corporate fixed maturities, and an increase of $80.8 million in
unrealized appreciation of equities available for sale. (See Note 4 for details of gross unrealized gains and losses by security type.)
Net unrealized appreciation (depreciation) of investments, net of income taxes, is subject to significant volatility resulting from changes in the fair value of fixed maturities available for sale, equities available for sale and other invested assets. Fair values may fluctuate due to changes in general economic and political conditions, market interest rates, prospects of investee companies and other factors.
In December 2009, the Company's Board of Directors authorized the repurchase of up to $200 million of its shares from time to time in the open market or via privately negotiated transactions through December 31, 2011. In 2009, the Company repurchased 59,600 shares of it common stock at an aggregate cost of $3.1 million. The Company did not repurchase shares of its common stock in 2008 or 2007. (See Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.)
In November 2009, the Company issued $350 million principal amount of the 2039 Notes, all of which remains outstanding as of December 31, 2009. In 2009 and 2008, TRH repurchased $30 million and $25 million, respectively, principal amount of the 2015 Notes from non-related parties. $695 million and $725 million principal amount of the 2015 Notes were outstanding at December 31, 2009 and 2008, respectively. See Results of Operations for the gain realized on the early extinguishment of the 2015 Notes in 2009 and 2008.
As of December 31, 2009, the amounts due and the estimated period between year-end 2009 and the dates of payment, under specified contractual obligations of TRH are as follows:
(1)Includes anticipated interest payments. (2)Represents commitments to invest in limited partnerships.
With respect to commitments and contingent liabilities, see Note 18 of Notes to Consolidated Financial Statements.
Risk Based Capital ("RBC") standards, promulgated by the National Association of Insurance Commissioners ("NAIC"), relate an individual company's statutory policyholders' surplus to the risk inherent in its overall operations and set thresholds at which certain company and regulatory corrective actions are mandated. At December 31, 2009 the statutory surpluses of TRC and Putnam each exceeded the level of surplus required under RBC requirements for regulatory attention.
It is important to recognize that there is no single standard methodology to project the possible losses from catastrophe exposures. Further, there are no industry standard assumptions to be utilized in projecting these losses and the form and quality of the data obtained from ceding companies used in these models are not uniformly compatible with the data requirements of all models. The use of different methodologies and assumptions could materially change the projected losses. Therefore, these modeled losses may not be comparable to estimates made by other companies.
Projections of potential catastrophe losses are typically expressed in terms of the probable maximum loss ("PML"). TRH defines PML as its anticipated maximum loss (taking into account contract limits) caused by a single catastrophic event affecting a broad contiguous area. These modeled losses are estimated based upon contracts in force at January 1, 2010.
The operating results and financial condition of TRH have been and may continue to be adversely affected by factors related to the market disruptions referred to above, among others. The duration and severity of the downward cycle could extend further if there is an increase in the severity of the economic difficulties being experienced around the world, including the U.S. TRH expects that the difficulties in the economy may continue to have an adverse effect on TRH's operating results in the future. TRH also incurred realized and unrealized market valuation losses in 2009, 2008 and 2007 on its available for sale securities, including asset-backed fixed maturities. The impact on TRH's operations with exposure to the residential mortgage market will be somewhat dependent on future market conditions.
TRH's operating results, investment portfolio and overall consolidated financial condition could be further adversely impacted if global economic conditions deteriorate in the future, although TRH attempts to mitigate these, as well as other financial and operational risks, by disciplined underwriting of a diversified book of business, generally conservative investment strategies and risk management. While TRH cannot predict with any certainty the ultimate impact the recent economic deterioration will have on TRH, these events may have a material adverse effect on TRH's results of operations, financial condition and cash flows and the Company's stock price.
Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 2009, 2008 and
Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and 2007
II-Condensed Financial Information of Registrant As of December 31, 2009 and 2008 and For the Years Ended December 31, 2009, 2008 and 2007
III-Supplementary Insurance Information As of December 31, 2009, 2008 and 2007 and For the Years Then Ended
premium revenues and deferred acquisition costs, as they require management's most significant exercise of judgment on both a quantitative and qualitative basis in the preparation of TRH's consolidated financial statements and footnotes. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, TRH's results of operations and financial condition would be affected, possibly materially.
Short-term investments are carried at cost or amortized cost, which approximates fair value, and principally include money market instruments, treasury bills and commercial paper.
(g) Unearned Premiums and Premium Revenues: In recent years, premiums from treaty contracts have approximated 97% of net premiums written, while facultative contracts have approximated 3%. For pro rata treaty contracts, premiums written and earned are based on reports received from ceding companies. For excess-of-loss treaty contracts, premiums are generally recorded as written based on contract terms. Premiums are earned ratably over the term of the related coverages. Unearned premiums and prepaid reinsurance premiums represent the portion of gross premiums written and ceded premiums written, respectively, relating to the unexpired terms of such coverages. Premiums written and earned, along with related costs, for which data has not been reported by the ceding companies, are estimated based on historical patterns and other relevant information. These estimates are subject to change when actual data for such estimated items becomes available. In the Consolidated Statements of Operations, premiums written and earned and the change in unearned premiums are presented net of reinsurance ceded.
•Interest income from fixed maturities, as well as amortization and accretion of premiums and discounts on fixed maturities
(i) Realized Net Capital Gains and Losses: Realized capital gains and losses principally emanate from the following sources:
•Sales and redemptions of fixed maturities, equities, securities lending invested collateral and alternative investments
•Reductions to the cost basis of fixed maturities, equity securities, securities lending invested collateral and other invested assets (except for where the fair value option has been elected) for OTTI which are recognized through earnings
(j) Losses and LAE: Unpaid losses and LAE ("gross loss reserves") are principally based on reports and individual case estimates received from ceding companies. The incurred but not reported ("IBNR") portion of gross loss reserves is based on past experience and other factors. The methods used to determine such estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments are reflected in income currently. Net losses and LAE incurred consists of the estimated ultimate cost of settling claims incurred within the reporting period (net of related reinsurance recoverable), including IBNR claims, plus changes in estimates of prior period losses.
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 great 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, 2009 and
(k) Currency Translation: Assets and liabilities related to investing activities and denominated in foreign currencies are translated into U.S. dollars at period-end exchange rates. All other assets and liabilities denominated in foreign currencies, which are principally related to underwriting activities, are translated using rates prior to period-end. The effect of changes in rates used compared to period-end rates are reviewed and any material differences are recorded. Income and expense accounts are translated at average exchange rates for the year. The resulting unrealized currency translation gain (loss) for functional currencies is recorded, net of tax, in AOCI, a component of stockholders' equity.
In April 2009, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on OTTI. This guidance amended prior OTTI guidance for fixed maturities to make it more operational and to improve presentation and disclosure of OTTI on fixed maturity and equity securities in the financial statements. This guidance also requires recognition of OTTI on a fixed maturity in an unrealized loss position if (a) an entity intends to sell the security; (b) it is more likely than not the entity will be required to sell the security prior to an anticipated recovery in fair value in order to meet a liquidity, regulatory or other business need; or (c) an entity determines it will not recover the entire amortized cost basis of the security. If an impaired fixed maturity security is designated for sale, or if it is more likely than not it will have to be sold, the total amount of the unrealized loss position is recognized in earnings as a realized capital loss.
TRH adopted this guidance effective April 1, 2009. Upon adoption, this guidance required entities to assess the credit versus non-credit components of previously recognized OTTI on fixed maturities still held, and for which the entity did not intend to sell or more likely than not would not be
In May 2009, the FASB issued new accounting guidance on subsequent events. This guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In addition, an entity shall disclose the date through which subsequent events have been evaluated.
(3) Adoption of new accounting guidance on the FASB Accounting Standards Codification (the "ASC")
TRH adopted this guidance on January 1, 2008, its required effective date. In general, this guidance must be applied prospectively. At January 1, 2008, in accordance with this guidance, TRH made no adjustment to opening retained earnings. In addition, there were no significant changes to valuation methodologies applied as of December 31, 2008 compared to those used as of December 31, 2007.
In October 2008, the FASB issued additional guidance on determining the fair value of a security when the market for that security is inactive. TRH adopted this additional guidance in the third quarter of 2008 with no significant changes to valuation methods applied compared to those used prior to adoption.
In February 2007, the FASB issued new accounting guidance which permits entities to choose to measure at fair value many financial instruments and certain other items that are not required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in income. This guidance also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. This guidance was effective for TRH on January 1, 2008. The adoption of this guidance did not have a material effect on TRH's consolidated financial condition, results of operations or cash flows.
(6) Adoption of new accounting guidance on the fair value measurement of and disclosures for investments in certain entities that calculate net asset value per share (FASB Accounting Standards Update ("ASU") 2009-12).
In September 2009, the FASB issued new accounting guidance on the fair value measurement of and disclosures for investments in certain entities that calculate net asset value per share. This guidance permits entities to measure the fair value of an investment on the basis of the net asset value per share of the investment if (a) the investment does not have a readily determinable fair value; and (b) the net asset value of the investment is calculated in a manner consistent with the measurement principles of investment companies under GAAP. This guidance also requires disclosure by major category of investment about the attributes of investments within the scope of this guidance, including the nature of any restrictions to the entities ability to redeem its investment at the measurement date, any unfunded commitments and the investment strategy of the investee. TRH adopted this guidance in the fourth quarter of 2009 with its provisions applied prospectively. The adoption of this guidance was not material to TRH's consolidated financial condition, results of operations or cash flows.
(i) In January 2010, the FASB issued new accounting guidance on disclosures about fair value measurements (ASU 2010-06). This guidance requires the amounts and reasons for significant transfers in and out of levels 1 and 2 to be discussed. In addition, a greater level of disaggregation of asset and liability classes will be required in fair value measurement disclosures. For fair value measurements that fall in either Level 2 or Level 3, a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and
(ii) In June 2009, the FASB issued new accounting guidance on the consolidation of variable interest entities (ASU 2009-17). This guidance makes significant changes to an enterprise's analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity. This guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity's economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, this guidance adds an additional reconsideration event for determining whether an entity is a variable interest entity, requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and requires additional disclosures about an enterprise's involvement in variable interest entities. For TRH, this guidance will be effective for interim and annual reporting periods beginning after November 15, 2009 and shall be applied prospectively. TRH does not currently expect the implementation of this guidance to be material to TRH's consolidated financial condition, results of operations or cash flows.
For TRH, this guidance will be effective for interim and annual reporting periods beginning after November 15, 2009 and shall be applied prospectively. TRH does not currently expect the implementation of this guidance to be material to TRH's consolidated financial condition, results of operations or cash flows.
TRH measures at fair value on a recurring basis financial instruments included principally in its available for sale securities portfolios and certain short-term investments. The fair value of a financial
instrument is the amount that would be received to sell an asset in an orderly transaction between willing, able and knowledgeable market participants at the measurement date.
The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An active market is one in which transactions for the asset being valued occurs with sufficient frequency and volume to provide pricing information on an ongoing basis. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or in which little information is released publicly for the asset being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and general market conditions.
Short-term investments are carried at amortized cost, which approximates fair value, and principally include money market instruments, treasury bills and commercial paper. These
instruments are typically not traded in active markets; however, their fair values are based on market observable inputs.
•Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. These measurements may be made under circumstances in which there is little, if any, market activity for the asset. TRH's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, TRH considers factors specific to the asset. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets measured at fair value on a recurring basis and classified as Level 3 principally include certain RMBS, CMBS, other-asset backed securities and other invested assets.
At December 31, 2009 and 2008, Level 3 assets totaled $150.0 million and $121.1 million, respectively, representing 1.4% and 1.4%, respectively, of total assets measured at fair value on a recurring basis.
(1)There were $1.7 million of OTTI related to RMBS fixed maturities available for sale that was recorded in realized net capital losses in 2009 on instruments still held at December 31, 2009.
Net unrealized depreciation related to Level 3 investments approximated $23.9 million and $22.7 million at December 31, 2009 and 2008, respectively.
(1)Includes net unrealized appreciation (depreciation) from securities lending invested collateral of $41.2 million and ($41.2) million in 2008 and 2007, respectively.
In 2008, sales of fixed maturity available for sale securities, which produced pre-tax gross realized losses of $62 million, related primarily to corporate, municipalities, U.S. Government and U.S. Government agency securities.
Of such amount, gross realized losses of $44 million (which is a component of the $16 million of realized net capital losses discussed in Note 4(h)) related to the "deemed sales" treatment accorded transfers of securities under the Securities Lending Program in the fourth quarter of 2008 as a result of significantly reduced collateral levels.
In addition, sales generating approximately $18 million of gross realized losses resulted, in part, from TRH's desire to manage the duration of the investment portfolio as part of its overall view of prudent management of an available for sale fixed maturity investment portfolio, and were also driven by unprecedented financial and credit market turmoil where TRH determined, subsequent to prior reporting dates, that a sale of such investments was a preferred alternative to their retention as the market became highly volatile and uncertain.
As discussed in Note 4(g), the OTTI amounts on certain fixed maturities are separated into credit loss and non-credit loss components. The credit loss impairments are recognized in earnings as realized capital losses, while the non-credit loss impairments are recorded in OCI. The following table sets forth the amount of credit loss impairments on fixed maturities held by TRH as of December 31, 2009, for which a portion of the OTTI amount was recorded in OCI.
As of December 31, 2009 and 2008, no single issuer accounted for more than 10% and 5%, respectively, of the aggregate gross unrealized losses.
The fair value of fixed maturities in an unrealized loss position at December 31, 2009 and 2008, by contractual maturity, is shown below:
The determination that a security has incurred OTTI requires the judgment of management and consideration of the fundamental condition of the issuer, its near-term prospects and all the relevant facts and circumstances. The above criteria also consider circumstances of a rapid and severe market valuation decline, such as that experienced in credit markets in recent years, in which TRH could not reasonably assert that the impairment period would be temporary (severity losses). The analysis of any individual security for OTTI is performed based on its functional currency. Additional criteria considered includes a security's business prospects, the investment's credit ratings and whether there have been any recent downgrades, whether the issuer is current on all payments in accordance with the contractual terms of the investment and is expected to meet all of its obligations under the term of the investment, market values, issuer specific financial information and available information from asset managers and rating agencies for individual securities.
OTTI on all investments other than fixed maturities are recognized through earnings as a realized capital loss. OTTI on fixed maturities prior to the second quarter of 2009 were recognized through earnings as a realized capital loss. Effective in the second quarter of 2009, at each balance sheet date,
TRH recognizes an OTTI on a fixed maturity in an unrealized loss position if (a) TRH intends to sell the security; (b) it is more likely than not TRH will be required to sell the security prior to an anticipated recovery in fair value, in order to meet a liquidity, regulatory or other business need; or (c) TRH determines it will not recover the entire amortized cost basis of the security.
If TRH intends to sell an impaired fixed maturity, or if it is more likely than not it will have to be sold, the total amount of the unrealized loss position is recognized in earnings as a realized capital loss. On a quarterly basis, TRH develops for fixed maturities, a best estimate of the present value of expected cash flows on a security by security basis. TRH recognizes OTTI equal to the difference between the present value of expected cash flows and the amortized cost basis of the security, if the results of the cash flow analysis indicate TRH will not recover the full amount of its amortized cost basis in the investment. This amount is the credit component of the OTTI and is recorded in earnings as a realized capital loss. The difference between the total unrealized loss position on the security and the OTTI amount recognized in earnings is non-credit related and is recorded in OCI as "net unrealized holding losses of fixed maturities on which other-than-temporary impairments were taken".
Through 2008, TRH participated in the Securities Lending Program managed by a subsidiary of AIG, whereby certain securities (principally fixed maturities available for sale) from its portfolio were loaned to third parties. Under such program, TRH loaned securities to counterparties and received collateral, generally cash, which was invested to earn a spread. The collateral received was invested in separate portfolios containing floating rate bonds (i.e., fixed maturities), including asset-backed securities, and interest-bearing cash equivalents. These portfolios were maintained in segregated accounts for TRH by the program manager. The collateral was returned to the counterparties when the loaned securities were returned to TRH at a future date. In the fourth quarter of 2008, TRH terminated its participation in the Securities Lending Program.
Income (loss) before income taxes from Domestic operations was $327.1 million, ($263.9) million and $268.1 million in 2009, 2008 and 2007, respectively. Income before income taxes from foreign operations was $269.0 million, $267.1 million and $327.6 million in 2009, 2008 and 2007, respectively.
The domestic current tax expense for 2009 includes a tax capital loss of $209.2 million. Of that amount, $21.3 million can be carried back to prior years and the remainder can be carried forward five years to offset future capital gains. The domestic deferred tax expense for 2009 is net of $56.7 million resulting from minimum tax credit carryforwards. By law, minimum tax credits may be carried forward indefinitely. The domestic current tax benefit for 2008 includes the tax benefit on $100.3 million of tax capital loss carrybacks to prior years. The actual capital loss included in the 2008 U.S. consolidated tax return was $114.0 million. The 2009 tax expense includes an adjustment to align the amounts reflected in the 2008 tax expense with the amounts included in the 2008 income tax return. In addition, the 2008 deferred tax benefit includes the reversal of a previously recorded minimum tax credit carryforward in the
amount of $15.0 million. The domestic deferred tax benefit for 2007 includes $32.9 million resulting from a minimum tax credit carryforward.
The components of the net deferred income tax asset at December 31, 2009 and 2008 were as follows:
Interest and penalties relating to unrecognized tax benefits/expenses are recognized in income tax expense, when applicable. As of December 31, 2009 and 2008, there was $10.2 million and $9.1 million, respectively, of net interest receivable on income taxes. There was no liability for interest or penalties accrued as of December 31, 2009. Current income tax expense was reduced by $1.1 million, $3.7 million and $4.3 million of interest on net tax refunds in 2009, 2008 and 2007, respectively.
The following table lists the tax years that remain subject to examination by major tax jurisdiction as of December 31, 2009:
The favorable development in 2004 through 2008 results generally from favorable loss trends. The net adverse development arising from losses occurring in 2001 and prior, generally relates to various excess casualty lines such as general liability and excess umbrella liability which were impacted by late reported high layer excess claims. Ceding companies and their reinsurers continue to experience
TRH writes a significant amount of non-proportional assumed casualty reinsurance as well as proportional assumed reinsurance of excess liability business for such volatile classes as medical malpractice, D&O, E&O and general casualty. At the primary level, there are significant risk factors which contribute to the variability and unpredictability of the loss trend factor for this business such as jury awards, social inflation, medical inflation, tort reforms and court interpretations of coverage. In addition, as a reinsurer, TRH is also highly dependent upon the claims reserving and reporting practices of its cedants, which vary greatly by size, specialization and country of origin and whose practices are subject to change without notice.
includes net catastrophe losses incurred of $180.4 million, principally relating to Hurricane Ike. In addition, in 2008, TRH decreased its estimates of the ultimate amounts of net losses occurring in 2007 and prior years by $0.5 million. This net favorable development was comprised of net favorable development of $209.7 million for losses occurring in 2003 to 2007, offset by net adverse development of $209.2 million relating to losses occurring in 2002 and prior.
Interest expense incurred and paid in connection with the Senior Notes was as follows:
Common stock activity for each of the three years in the period ended December 31, 2009 was as follows:
(1)2009 excludes the effect of 2.2 million anti-dilutive shares (from a total of 3.2 million potential shares). 2008 excludes the effect of 1.3 million anti-dilutive shares (from a total of 3.1 million potential shares). 2007 excludes the effect of 0.6 million anti-dilutive shares (from a total of 3.0 million potential shares).
Net catastrophe costs represent TRH's best estimates, including net changes from prior estimates, of the aggregate ultimate costs to be incurred relating to significant catastrophe events based upon information available at the time the estimate was made. These catastrophe cost estimates reflect significant judgment relating to many factors, including the ultimate resolution of certain legal and other issues.
There were no significant net catastrophe costs for events occurring during 2009. Net catastrophe costs in 2008 principally related to Hurricane Ike. Net catastrophe costs in 2007 principally related to
Summaries of the components of pre-tax net catastrophe costs for 2009, 2008 and 2007 are presented below:
The components of AOCI and changes in such amounts between years are as follows:
The charges made to operations for benefit plans administered by the AIG Group for 2009, 2008 and 2007 were $7.0 million, $6.4 million and $4.4 million, respectively.
The 2009 Plan replaced the Transatlantic Holdings, Inc. 2000 Stock Option Plan, as amended, (the "2000 Plan") and the 2003 Plan. No further awards can be granted under the 2000 Plan or the 2003 Plan.
In 2008, the Board adopted, and the stockholders approved, the Transatlantic Holdings, Inc. 2008 Non-Employee Directors' Stock Plan (the "Non-Employee Directors' Plan"). The Non-Employee Directors' Plan provides that equity-based or equity-related awards can be granted to non-employee directors as determined by the Compensation Committee of the Board (the "Compensation Committee"). The maximum number of shares available for grant under the Non-Employee Directors' Plan is 100,000. As of December 31, 2009, there were 66,000 shares of common stock available for issuance in connection with future grants of awards under the Non-Employee Directors' Plan.
Expenses relating to stock-based compensation arrangements totaled $13.2 million, $18.7 million and $14.8 million in 2009, 2008 and 2007, respectively. Income tax benefits recognized related to stock-based compensation arrangements totaled $4.5 million, $6.4 million and $4.9 million in 2009, 2008 and 2007, respectively.
Income tax benefits realized by TRH on stock-based compensation exercises totaled $0.8 million, $2.5 million and $2.7 million in 2009, 2008 and 2007, respectively.
No options were granted in 2009. 197,500 and 210,000 options were granted in 2008 and 2007, respectively. The fair value of each option grant is estimated on the date of grant using a binomial option pricing model. The following table presents the weighted average grant date fair value and the weighted average assumptions which were used in the calculation for options granted in 2008 and 2007:
(1)Represents the aggregate intrinsic value of options outstanding and exercisable with exercise prices below the closing price of TRH shares on the NYSE on December 31, 2009.
A summary of unvested Two-Year Performance RSUs grants as of December 31, 2009 follows:
The fair values of Performance RSUs are estimated based on the NYSE closing price of TRH shares on the date of grant.
(a) Secondary Public Offering of the Company's Common Stock by AIG (the "Offering")
TRH is a party to numerous contracts, agreements, licenses, permits, authorizations and other arrangements that contain provisions giving counterparties certain rights (including, in some cases, termination rights) in the event of a change in control of the Company or its subsidiaries. If a change in control occurs, cedants may be permitted to cancel contracts on a cut-off or run-off basis, and TRH may be required to provide collateral to secure premium and reserve balances or may be required to cancel and commute the contract, subject to an agreement between the parties that may be settled in arbitration. If a contract is cancelled on a cut-off basis, TRH may be required to return unearned premiums, net of commissions.
Gross premiums written of approximately $263 million (6.3%), $310 million (7.0%) and $307 million (7.2%) in 2009, 2008 and 2007, respectively, were originated by the AIG Group and ceded to TRH. These amounts exclude (a) premiums assumed that initially were insured by AIG subsidiaries as a result of TRH's marketing efforts and then ceded to TRH by prearrangement; and (b) amounts assumed from an AIG subsidiary and ceded in an equal amount to other AIG subsidiaries. The amount of premiums assumed that initially were insured by AIG subsidiaries as a result of TRH's marketing efforts and then ceded to TRH by prearrangement are not material. (See Note 16 for the amount of premiums assumed from an AIG subsidiary and ceded in an equal amount to other AIG subsidiaries.)
As of December 31, 2009 and 2008, $266.5 million and $250.5 million, respectively, of reinsurance recoverables on paid and unpaid losses and LAE were recoverable from the AIG Group. (See Note 16.)
Amounts recoverable from retrocessionnaires are recognized in a manner consistent with the claims liabilities associated with the retrocession and are presented on the balance sheet as reinsurance recoverable on paid and unpaid losses and LAE. Such balances at December 31, 2009 and 2008 are comprised as follows:
(1)A large majority of the amounts within the other liability line relates to complex risks such as E&O and D&O, to general casualty risks and, to a lesser extent, environmental impairment liability.
TRH considers not only monetary increases in the cost of what it reinsures, but also changes in societal factors that influence jury verdicts and case law, TRH's approach to claim resolution, and, in turn, claim costs. TRH believes its aggregate loss reserves reduce the potential that an adverse resolution of one or more of these matters, at any point in time, would have a material impact on TRH's financial condition or results of operations. However, there can be no assurance that adverse resolutions of such matters in any one period or in the aggregate will not result in a material adverse effect on TRH's results of operations or financial condition.
In addition, from time to time, regulators commence investigations into insurance and reinsurance-industry practices. TRH has cooperated, and will continue to cooperate, in producing documents and other information in response to subpoenas and other requests. While TRH does not believe that any of these inquiries will have a material impact on TRH's business or financial results, it is not possible to predict with any certainty at this time what impact, if any, these inquiries may have on TRH's business or financial results.
Rent expense approximated $12.9 million, $12.0 million and $11.3 million in 2009, 2008 and 2007, respectively.
In October 2008, TRH adopted a retention program (the "Retention Plan") covering a significant number of its employees, including its senior-most management. Salary expenses incurred related to the Retention Plan totaled approximately $20 million and $8 million in 2009 and 2008, respectively.
The following is a summary of unaudited quarterly financial data for each of the years ended December 31, 2009 and 2008. 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.