We operate two business segments with a wide range of products:
We use many reinsurers, both domestic and foreign, which helps us to avoid concentrations of credit risk associated with our reinsurance. All reinsurers must meet the following minimum criteria: capital and surplus of at least $250.0 million and an A.M. Best rating of at least “A-” or an S&P rating of at least “A-.” If a reinsurer is rated by both rating agencies, then both ratings must be at least an “A-.”
Our commercial automobile insurance covers physical damage to an insured’s vehicle, as well as liabilities to third parties. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft, flood or other causes. Automobile liability insurance covers bodily injury, damage to property resulting from automobile accidents caused by the insured, uninsured or underinsured motorists and the legal costs of defending the insured against lawsuits. Generally, our company policy is to write standard automobile insurance. Our net loss ratio in commercial automobile was 71.9 percent in 2010, 76.7 percent in 2009 and 71.5 percent in 2008.
Our net loss ratio in the workers’ compensation line of business was 60.3 percent in 2010, 79.4 percent in 2009 and 78.5 percent in 2008. We consider our workers’ compensation business to be a companion product; we rarely write stand-alone workers’ compensation policies. Our workers’ compensation insurance covers primarily small- to mid-size accounts.
There were no new claims that exceeded our $1.5 million reinsurance retention level in 2010, 2009 and 2008.
The results reported for 2008 were impacted by a significant level of catastrophe losses totaling $21.6 million.
The fair value of our Level 3 private placement securities is determined by management in reliance upon pricing received from our independent pricing services and brokers consistent with the process to estimate fair value for Level 2 securities.
Our long-tail lines of business include workers’ compensation and other liability. In addition, certain product lines such as personal and commercial auto, commercial multi-peril and surety include both long-tail coverages and short-tail coverages. For many liability claims, significant periods of time, ranging up to several years, may elapse between the occurrence of the loss, the reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for the long-tail liability coverages has limited statistical credibility in our reserving process because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. In addition, long-tail liability claims are more susceptible to litigation and can be significantly affected by changing contract interpretations and the legal environment. Consequently, the estimation of loss reserves for long-tail coverages is more complex and subject to a higher degree of variability than for short-tail coverages.
Included in the other liability line of business are gross reserves for construction defect losses and loss settlement expenses. Construction defect is a liability allegation relating to defective work performed in the construction of structures such as commercial buildings, apartments, condominiums, single family dwellings or other housing, as well as the sale of defective building materials. These claims seek recovery due to damage caused by alleged deficient construction techniques or workmanship. At December 31, 2010, we had $21.1 million in construction defect loss and loss settlement expense reserves, excluding IBNR reserves, which consisted of 326 claims, compared with $15.2 million, excluding IBNR reserves, consisting of 234 claims, at December 31, 2009. The reporting of such claims can be delayed, as the statute of limitations can be up to 10 years. Also, court decisions in recent years have expanded insurers’ exposure to construction defect claims. As a result, claims may be reported more than 10 years after a project has been completed, as litigation can proceed for several years before an insurance company is identified as a potential contributor. Claims have also emerged from parties claiming additional insured status on policies issued to other parties, such as contractors seeking coverage from a subcontractor’s policy.
In 2010, our development resulted in a redundancy in our net reserves for prior accident years totaling $45.9 million, which is consistent with our historical development, excluding the impact of Hurricane Katrina. In 2009 and 2008, our development resulted in deficiencies in our net reserves for prior accident years totaling $26.2 million and $0.5 million, respectively. Our development in these years was negatively impacted by adverse development from Hurricane Katrina claims and related litigation totaling $8.6 million, $38.0 million and $26.6 million in 2010, 2009 and 2008, respectively. Also contributing to our deficiency in 2009 and 2008 was the deterioration in our other liability lines of business which includes claims for construction defects.
Based upon our comparison of carried reserves to actual claims experience over the last several years, we believe that using company historical premium and claims data to establish reserves for losses and loss settlement expenses results in adequate and reasonable reserves. Based upon this comparison, we believe that our total established reserves at December 31, 2010, are unlikely to vary by more than 10 percent of the recorded amounts, either positively or negatively. Historically, our reserves have had an average variance of less than 10 percent of recorded amounts, with our reserves booked as of December 31, 2009, generating a redundancy of 8.0 percent in 2010. Our reserves booked as of December 31, 2008, generated a reserve deficiency of 4.9 percent in 2009. These deficiencies are discussed in detail under the heading “Reserve Development” in the “Property and Casualty Insurance Segment” of the “Results of Operations” section in this item.
Regulation G promulgated by the Securities and Exchange Commission does not require reconciliation to GAAP of data prepared under a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant.
The accompanying Consolidated Financial Statements have been prepared on the basis of U.S. generally accepted accounting principles (“GAAP”), which differ in some respects from those followed in preparing our statutory reports to insurance regulatory authorities. Our stand-alone financial statements submitted to insurance regulatory authorities are presented on the basis of accounting practices prescribed or permitted by the insurance departments of the states in which we are domiciled (“statutory accounting practices”).
In 2010, 2009 and 2008, we recorded a pre-tax realized loss of $459,000, $18,307,000 and $9,904,000, respectively, as a result of the recognition of other-than-temporary impairment (“OTTI”) charges on certain holdings in our investment portfolio. None of the OTTI charges were considered to have a noncredit related loss component. We continue to review all of our investment holdings for appropriate valuation on an ongoing basis. Refer to Note 2 “Summary of Investments” for a discussion of our accounting policy for impairment recognition.
We made payments for income taxes of $14,124,000, $4,324,000 and $13,817,000 during 2010, 2009 and 2008, respectively. In addition, we received refunds totaling $13,491,000, $10,256,000 and $2,904,000 in 2010, 2009 and 2008, respectively, due to the overpayment of prior year tax and carryback of operating losses. There were no significant payments of interest in 2010, 2009 and 2008, other than payments to policyholders’ accounts related to non-traditional life insurance business.
We have evaluated the unrealized losses reported for all of our equity securities at December 31, 2010, and have concluded that the duration and severity of these losses do not warrant the recognition of an OTTI charge at December 31, 2010. Our largest unrealized loss greater than 12 months on an individual equity security at December 31, 2010, was $124,000. We have no intention to sell any of these securities prior to a recovery in value, but will continue to monitor the fair value reported for these securities as part of our overall process to evaluate investments for OTTI recognition.
For cash and cash equivalents and accrued investment income, carrying value is a reasonable estimate of fair value due to its short-term nature.
Realized losses are recorded as a component of current operations whereas unrealized gains are recorded as a component of comprehensive income.
We also offer a health and dental benefit plan (the “other retiree plan”) to all of our eligible employees and retirees, which comprises two programs: (1) the self-funded retiree health and dental benefit plan and (2) the self-funded employee health and dental benefit plan. The other retiree plan provides health and dental benefits to our employees
The pension plan also has a significant investment in United Fire common stock. We believe that even though market fluctuations impact the fair value of this investment, the target allocation is reasonable and the shares held have historically generated investment income, through dividend payments, for the pension plan. Dividends on shares of United Fire common stock totaled $121,000 for 2010, 2009 and 2008, respectively.
In September 2008, our New Orleans claims office in Metairie closed for three days due to Hurricane Gustav and our Gulf Coast regional office in Galveston, Texas, was temporarily closed for three weeks due to Hurricane Ike. We recorded $133,000, net of insurance, and $399,000 of hurricane-related expenses in 2009 and 2008, respectively, which primarily relates to costs incurred to remove damaged contents from the affected areas and establish a temporary facility for our Gulf Coast regional office. We have received insurance reimbursements totaling $275,000 in 2009, which offset a portion of the charges incurred in 2009. There were no such reimbursements recorded in 2008. There were no charges or recoveries for this disaster in 2010.
The following table sets forth certain data for each of our business segments and is reconciled to our Consolidated Financial Statements. Depreciation expense and property and equipment acquisitions for 2010, 2009 and 2008, are reported in the property and casualty insurance segment.
The components of basic and diluted earnings (loss) per share are displayed in the table below: