TRH recognized income tax (benefits) expenses relating to pre-tax net catastrophe costs of ($298.1) million, ($70.9) million and $2.0 million in 2011, 2010 and 2009, respectively, and, in 2011, recognized income tax benefits of ($6.1) million associated with merger-related costs.
Specialty casualty lines continued to be competitive. Certain pockets of opportunity existed in errors and omissions liability ("E&O"). Additionally, market volatility and the sovereign debt crisis eased downward pressure on rates in D&O and E&O. Rates in medical malpractice continued to soften slightly although loss frequency and severity trends remain acceptable, with U.S. business being more attractive than international business. General casualty business remained mixed, with international general liability and umbrella business generally remaining highly competitive and unattractive, while U.S. regional and umbrella business started to show modest rate improvements.
The existence of favorable or improving market conditions in certain regions and lines of business does not necessarily translate into ultimate pricing adequacy for business written under such conditions. In addition, there can be no assurance that these favorable or improving conditions will occur or remain in effect in the future.
•Other invested assets: Fair values for other invested assets, principally private equity investments, are initially valued at the transaction price. Subsequently, fair value is based on the financial statement information or net asset value of the investee.
Realized net capital losses in 2011 included ($4.2) million of OTTI write-downs charged to earnings, largely related to equities in an unrealized loss position for 12 or more consecutive months. Realized net
Net favorable development was recorded for losses occurring in the allied lines, fire and credit lines, each arising principally from losses occurring in 2009 to 2010, and in the mortgage guaranty line, arising principally from losses occurring in 2007 to 2008. Net adverse development was recorded in 2011 in the other liability line, arising principally from losses occurring in 2001 and prior, partially offset by favorable development from losses occurring between 2004 and 2006. The other liability line includes certain specialty casualty classes, such as D&O and E&O, and general casualty classes. (See Note 11 for amounts included in net favorable development that relate to catastrophe losses.)
Income tax benefits in 2011 include $78.3 million of deferred tax benefits from minimum tax credit carryforwards, which primarily resulted from alternative minimum tax generated in prior years as a result of the carryback of the 2011 tax-basis net operating loss. Income tax expenses in 2010 include $5.5 million of deferred tax benefits from minimum tax credit carryforwards. Income tax expenses in 2009 include $56.7 million of deferred tax benefits from minimum tax credit carryforwards.
includes net catastrophe costs of $189.1 million, the great majority of which is related to the March 2011 Tohoku earthquake and resulting tsunami in Japan; the February 2011 earthquake in New Zealand; fourth quarter 2011 flooding in Thailand; and third quarter 2011 floods in Denmark. 2010 includes net catastrophe costs of $76.5 million, principally related to the February 2010 earthquake in Chile; the April 2010 Deepwater Horizon explosion; and first quarter 2010 flooding in Australia.
The following table summarizes the investments of TRH (on the basis of carrying value) as of December 31, 2011 and 2010:
On November 20, 2011, the Company entered into an Agreement and Plan of Merger (the "Alleghany Merger Agreement") with Alleghany Corporation ("Alleghany") and Shoreline Merger Sub, Inc. (formerly, Shoreline Merger Sub, LLC), a wholly-owned subsidiary of Alleghany ("Shoreline"). The Alleghany Merger Agreement provides for the merger of the Company with and into Shoreline (the "Alleghany Merger"), with Shoreline continuing as the surviving company and a wholly-owned subsidiary of Alleghany. On February 6, 2012, the stockholders of the Company and the stockholders of Alleghany each approved the proposed transaction. The Alleghany Merger is expected to close in the first quarter of 2012, subject to regulatory approvals and customary closing conditions. (See Note 3.)
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. The Company consolidates subsidiaries in which it holds a controlling financial interest. Entities where the Company holds between 20% to 50% of the voting rights and alternative investments in which TRH holds a 5% or greater interest or where it has more than a minor influence over the operations of the investee are accounted for under the equity method.
Fixed maturities are classified as held to maturity and carried at amortized cost if TRH has the positive intent and ability to hold each of these securities to maturity. When TRH does not have the positive intent to hold fixed maturities to maturity, such fixed maturities are classified as available for sale and carried at fair value. Premiums and discounts arising from the purchase of fixed maturities are treated as yield adjustments over their estimated lives, until maturity or call date, if applicable. Equities are carried at fair value. See Note 4 for TRH's methodology for determining the fair value of its investments.
•Interest income from fixed maturities, as well as amortization and accretion of premiums and discounts on fixed maturities •Dividend income and distributions from common and preferred stock and other investments when receivable •Earnings from investments accounted for under the equity method •Less expenses related to investments
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.
(2)Adoption of new accounting guidance on disclosures about fair value measurements (Accounting Standards Update ("ASU") 2010-06)
3. Merger Agreement with Alleghany and Terminated Merger Agreement with Allied World Assurance Company Holdings, AG ("Allied World")
On June 12, 2011, Allied World and the Company agreed to a "merger of equals" business combination of the two companies pursuant to the terms of an Agreement and Plan of Merger, dated as of June 12, 2011 (the "Allied World Merger Agreement"), between Allied World, the Company and GO Sub, LLC, a wholly-owned subsidiary of Allied World ("GO Sub"). Pursuant to the terms of the Allied World Merger Agreement, GO Sub would have merged with and into the Company (the "Allied World Merger"), with the Company surviving as a wholly-owned subsidiary of Allied World. Pursuant to the terms and conditions of the Allied World Merger Agreement, stockholders of the Company would have been entitled to receive 0.88 common shares of Allied World for each share of the Company's common stock (and cash in lieu of any fractional shares).
TRH estimates the fair value of fixed maturity securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and matrix pricing methodologies, discounted cash flow analyses or internal valuation models. This methodology considers such factors as the issuer's industry, the security's rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For fixed maturity securities that are not traded in active markets or that are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments generally are based on available market evidence. In the absence of such evidence, management's best estimate is used.
(1)There were no unrealized losses recorded in realized net capital losses in 2011 on instruments still held at December 31, 2011. (2)Primarily private equities.
The amortized cost and fair value of fixed maturities at December 31, 2011 by contractual maturity are as follows. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Investments in fixed maturities exclude short-term investments.
The domestic deferred tax benefit for 2011 includes a $78.3 million benefit resulting from minimum tax credit carryforwards primarily attributable to the carryback of the 2011 tax-basis net operating loss to earlier years. By law, minimum tax credits may be carried forward indefinitely. The domestic current tax expense for 2010 included the impact of a capital loss of $48.2 million. The actual capital loss carryforward utilized in the 2010 U.S. consolidated tax return was $54.8 million. The 2011 tax benefit includes an adjustment to align the amounts reflected in the 2010 tax expense with the amounts in the 2010 tax return. In 2011, the remaining capital loss carryforward was fully utilized.
TRH recorded income tax benefits of $298.1 million in 2011 from pre-tax net catastrophe costs incurred in 2011. TRH recorded income tax benefits of $70.9 million in 2010 from pre-tax net catastrophe costs incurred in 2010. Income tax expenses recorded in 2009 from pre-tax net catastrophe costs incurred in 2009 was not material.
A summary of unvested Two-Year Performance RSUs grants as of December 31, 2011 follows:
In connection with the since-terminated Allied World Merger Agreement, five putative stockholder class action lawsuits were filed against the Company and the members of the Board challenging the merger contemplated by the Allied World Merger Agreement. Each lawsuit named the Company, the members of the Board, and Allied World as defendants. Four of the lawsuits also named GO Sub as a defendant, and one of the lawsuits named a former director of the Company as a defendant. Each of the lawsuits asserted that the members of the Board breached a fiduciary duty in connection with the approval of the Allied World Merger, and that Allied World and its subsidiaries aided and abetted the alleged breaches of a fiduciary duty. One of the lawsuits also alleged that the Company aided and abetted its directors' alleged breach of a fiduciary duty. The lawsuits sought to enjoin the Allied World Merger, among other relief.
approval following notice to the Company's stockholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court of Chancery of the State of Delaware will consider the fairness, reasonableness, and adequacy of the settlement. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the Alleghany Merger, the Alleghany Merger Agreement, and any disclosure made in connection therewith (but excluding claims for appraisal under Section 262 of the Delaware General Corporation Law), among other claims, pursuant to terms that will be disclosed to stockholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiffs' counsel will file a petition in the Court of Chancery of the State of Delaware for an award of attorneys' fees and expenses to be paid by the Company or its successor, which the defendants may oppose. The Company or its successor will pay or cause to be paid any attorneys' fees and expenses awarded by the Court of Chancery of the State of Delaware. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court of Chancery of the State of Delaware will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.