•Total investments of $72.70 billion; fixed maturities and short-term securities comprise 93% of total investments
Other net realized investment gains in 2009 were $275 million. In October 2009, the Company sold a portion of its common stock holdings in Verisk for total proceeds of approximately $184 million as part of the initial public offering of Verisk. The Company recorded a pretax realized investment gain of $159 million on this sale in 2009. Other net realized investment gains in 2009 also included $100 million of net realized investment gains related to fixed maturity investments, $23 million of net realized investment gains associated with the U.S. Treasury futures contracts and $23 million of net realized investment losses related to foreign exchange.
The consolidated GAAP combined ratio of 93.2% in 2010 was 4.0 points higher than the consolidated GAAP combined ratio of 89.2% in 2009.
Target Risk Underwriting. Net written premiums of $1.59 billion in 2011 increased slightly over 2010, as premium growth in Inland Marine and Excess Casualty was largely offset by a decline in National Property. Net written premiums of $1.57 billion in 2010 were slightly higher than in 2009, as premium growth in the Boiler & Machinery and Inland Marine business units was largely offset by a decline in National Property premium volume.
Operating income of $620 million in 2010 was $22 million, or 3%, lower than in 2009, primarily driven by increases in catastrophe losses, non-catastrophe weather-related losses, and general and administrative expenses, as well as lower business volumes, which were partially offset by an increase in net favorable prior year reserve development. Net favorable prior year reserve development in 2010 and 2009 was $259 million and $168 million, respectively. Catastrophe losses in 2010 and 2009 were $82 million and $3 million, respectively.
Claims and claim adjustment expenses of $6.34 billion in 2011 were $1.34 billion, or 27%, higher than in 2010. The increase primarily reflected the significant increase in catastrophe losses, along with the impact of loss cost trends, higher than expected non-catastrophe weather-related losses and higher business volumes. These factors were partially offset by an increase in net favorable prior year reserve development. Catastrophe losses in 2011 and 2010 were $1.49 billion and $594 million, respectively. Catastrophe losses in 2011 included the impact of multiple tornadoes and hail storms, primarily in the Midwest and Southeast regions of the United States, as well as Hurricane Irene. Catastrophe losses in 2010 resulted from several severe wind and hail storms. Net favorable prior year reserve development in 2011 and 2010 was $110 million and $87 million, respectively. The 2011 total was driven by better than expected loss development related to catastrophe losses incurred in the first half of 2010, as well as better than expected loss development in the 2006-2010 accident years for the umbrella line of business in the Homeowners and Other product line, partially offset by worse than expected loss development in the Automobile product line for the 2007-2010 accident years.
scheduled times. Included in this category are TPC's reserves for the settlements of the Statutory and Hawaii Actions and the Common Law Claims, which are described in the "Asbestos Direct Action Litigation" section of note 15 of notes to the consolidated financial statements. Coverage in place arrangements represent agreements with policyholders on specified amounts of coverage to be provided. Payment obligations may be subject to annual maximums and are only made when valid claims are presented. Wellington accounts refer to the 35 defendants that are parties to a 1985 agreement settling certain disputes concerning insurance coverage for their asbestos claims. Many of the aspects of the Wellington agreement are similar to those of coverage in place arrangements in which the parties have agreed on specific amounts of coverage and the terms under which the coverage can be accessed.
(1)Transatlantic Holdings, Inc. has entered into a merger agreement with Alleghany Corporation in a transaction expected to be finalized in the first quarter of 2012.
Also included in reinsurance recoverables are certain amounts related to structured settlements, which are annuities purchased from various life insurance companies to settle certain personal physical injury claims, of which workers' compensation claims comprise a significant portion. In cases where the Company did not receive a release from the claimant, the amount due from the life insurance company related to the structured settlement is included in the Company's consolidated balance sheet as a liability and as a reinsurance recoverable, as the Company retains the contingent liability to the claimant. In the event that the life insurance company fails to make the required annuity payments, the Company would be required to make such payments if and to the extent the purchased annuities are not covered by state guaranty associations. The following table presents the Company's top five groups
fixed maturity investments. Short-term interest rates are expected to remain at or near historically low levels during 2012. Given recent unfavorable general economic and investment market conditions, the Company expects investment income from the non-fixed maturity portfolio in 2012 to be lower than in 2011. If general economic conditions and/or investment market conditions deteriorate in 2012, the Company could also experience further reduction in net investment income and/or significant realized investment losses, including impairments. For further discussion of the Company's investment portfolio, see "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations-Investment Portfolio" in this report. For a discussion of the risks to our business during or following a financial market disruption and risks to our investment portfolio, see the risk factors entitled "During or following a period of financial market disruption or economic downturn, our business could be materially and adversely affected" and "Our investment portfolio may suffer reduced returns or material realized or unrealized losses" included in "Risk Factors" in Part I, Item 1A of this report.
The debt-to-total capital ratio excluding net unrealized gains on investments is calculated by dividing (a) debt by (b) total capitalization excluding net unrealized gains and losses on investments, net of taxes. Net unrealized gains and losses on investments can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends. Accordingly, in the opinion of the Company's management, the debt-to-total capital ratio calculated on this basis provides another useful metric for investors to understand the Company's financial leverage position. The Company's debt-to-total capital ratio of 23.4% at December 31, 2011 calculated on this basis was within the Company's target range.
(8)Workers' compensation large deductible policies provide third party coverage in which the Company typically is responsible for paying the entire loss under such policies and then seeks reimbursement from the insured for the deductible amount. "Claims from large deductible
A basic premise in most actuarial analyses is that past patterns demonstrated in the data will repeat themselves in the future, absent a material change in the associated risk factors discussed below. To the extent a material change affecting the ultimate claim liability is known, such change is quantified to the extent possible through an analysis of internal company data and, if available and when appropriate, external data. Such a measurement is specific to the facts and circumstances of the
•Distortions from losses resulting from large single accounts or single issues
The Company's change in reserve estimate for this product line was -11% for 2011, -6% for 2010 and -7% for 2009. The 2011 change primarily reflected better than expected development for accident years 2008 and prior for the contract surety business. The 2010 change was driven by better than expected loss development due to lower than expected claim activity and loss severity, primarily for the contract surety business in this product line for the 2008 and prior accident years. The 2009 change was a result of better than expected loss development for the contract surety business within this product line, primarily driven by favorable settlements on large claims from older accident years.
(2)Included in the Company's reinsurance recoverables are certain structured settlements issued by Fidelity & Guaranty Life, which was previously a subsidiary of Old Mutual U.S. Life Holdings, Inc. prior to being sold by its U.K. parent company to Harbinger Group Inc. and being renamed.
forced transaction. The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally, the valuation of investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.
the Company separates the credit loss component of the impairment from the amount related to all other factors and reports the credit loss component in net realized investment gains (losses). The impairment related to all other factors is reported in accumulated other changes in equity from nonowner sources.
(1)The major components of other assets at December 31, 2011 and 2010 were other intangible assets and deferred taxes.
In 2010 and 2009, the Company also sold portions of its investment in Verisk that were classified as an "other investment" at the time of sale due to transfer restrictions that were scheduled to expire after one year. Proceeds from those sales of Verisk shares in 2010 and 2009 totaled $115 million and $184 million, respectively. Gross gains realized on those sales were $103 million and $159 million, respectively.
The following table summarizes, for all fixed maturities and equity securities reported at fair value for which fair value is less than 80% of amortized cost at December 31, 2011, the gross unrealized investment loss by length of time those securities have continuously been in an unrealized loss position of greater than 20% of amortized cost:
Included in fixed maturities are below investment grade assets totaling $1.96 billion and $1.88 billion at December 31, 2011 and 2010, respectively. The Company defines its below investment grade assets as those securities rated below investment grade by external rating agencies, or the equivalent by the Company when a public rating does not exist. Such assets include publicly traded below investment grade bonds and certain other privately issued bonds that are classified as below investment grade loans.
terrorist attack (including those involving nuclear, biological, chemical or radiological events), explosions, infrastructure failures or as a consequence of political instability. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in larger areas, especially those that are heavily populated. The Company generally seeks to mitigate its exposure to catastrophes through individual risk selection and the purchase of catastrophe reinsurance.
in accordance with FASB Topic 450, Contingencies, and accordingly has not been recognized in the Company's consolidated financial statements.
Investment Commitments-The Company has unfunded commitments to private equity limited partnerships and real estate partnerships in which it invests. These commitments totaled $1.15 billion and $1.26 billion at December 31, 2011 and 2010, respectively.
17. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES