legal and regulatory changes, including the new federal financial regulatory reform of the insurance industry mandated by the Dodd-Frank Act;
PCC’s adverse claims emergence related to an unanticipated increase in medical claims emergence and an absence of anticipated favorable indemnity claims emergence. PCC had anticipated favorable indemnity claims emergence based upon prior claims development experience which indicated that injured workers would be returning to work, curtailing lost wage costs. PCC believes the weak California employment environment has hindered the ability of injured workers to return to work and indirectly influenced indemnity claims. Increases in allocated and unallocated LAE reserves primarily reflect increased use of outside counsel to assist in the settlement process and higher litigation costs caused by recent Workers’ Compensation Appeals Board decisions. The decrease in ceded loss and LAE reserves was based on a
(ii) has exceeded fair value continuously for six (6) months or more preceding the balance sheet date.
Additional information regarding PCC’s reserve increases can be found on pages 46 through 47 of this Form 10-K Report.
Net Investment Income. The decrease in AIHL’s net investment income in 2011 from 2010 is due principally to the impact of ongoing negative cash flow at PCC and dividends paid to Alleghany, partially offset by higher dividend income. In addition, the decrease in AIHL’s net investment income in 2011 as compared with 2010 reflects the absence of equity-method partnership income in 2011, as such partnerships were dissolved in the 2010 third quarter.
Debt. On September 20, 2010, we issued $300.0 million of Senior Notes due September 15, 2020. The Senior Notes are unsecured and unsubordinated general obligations of Alleghany as the parent company. Interest is payable semi-annually on March 15 and September 15 of each year. The terms of the Senior Notes permit redemption prior to their maturity. The indenture under which the Senior Notes were issued contains covenants that impose conditions on our ability to create liens on the capital stock of AIHL or RSUI or to engage in sales of the capital stock of AIHL or RSUI. The Senior Notes were issued at a discount of approximately 99.63 percent,
** Other long-term liabilities primarily reflect employee pension obligations, certain retired executive pension obligations and obligations under certain incentive compensation plans.
Overview. On a consolidated basis, our invested asset portfolio was approximately $4.8 billion as of December 31, 2011, an increase of 0.5 percent from December 31, 2010. The small increase is due primarily to positive cash flow at RSUI, largely offset by repurchases of our common stock pursuant to our share repurchase program, which was terminated in connection with our entry into the merger agreement, and negative cash flow at PCC. Negative cash flow at PCC was a result of PCC ceasing to solicit new or renewal business on a direct basis commencing August 1, 2009.
the Senior Notes. Substantially all of the determinations of value in this category are based on a single quote from third-party dealers and pricing services. As we generally do not make any adjustments thereto, such quote typically constitutes the sole input in our determination of the fair value of these types of securities. In developing a quote, such third parties will use the terms of the security and market-based inputs. Terms of the security include coupon, maturity date, and any special provisions that may, for example, enable the investor, at its election, to redeem the security prior to its scheduled maturity date. Market-based inputs include the level of interest rates applicable to comparable securities in the market place and current credit rating(s) of the security. Such quotes are generally non-binding.
Certain prior year amounts have been reclassified to conform to the 2011 presentation.
To the extent that a debt security that is in an unrealized loss position is not impaired based on the initial review described above, and absent an intent to sell, Alleghany will consider a debt security to be impaired when it believes it to be probable that Alleghany will not be able to collect all amounts due under the security’s contractual terms.
After adjusting the cost basis of securities for the recognition of other-than-temporary impairment losses, the gross unrealized investment losses for debt and equity securities as of December 31, 2011 were deemed to be temporary, based on, among other things:
(3) Approximately 99.0 percent of AIHL’s reinsurance recoverables balance as of December 31, 2011 was due from reinsurers having an A.M. Best financial strength rating of A (Excellent) or higher.
Overview. In connection with the acquisition by Alleghany of Platte River in 2002 and the acquisition by RSUI Indemnity Company (“RIC”), a wholly-owned subsidiary of RSUI, of Landmark American Insurance Company (“Landmark”) in 2003 (discussed in more detail below), the sellers contractually retained all of the loss and LAE liabilities. These contractual provisions constituted loss reserve guarantees as contemplated under GAAP.
A valuation allowance is provided against deferred tax assets when, in the opinion of Alleghany management, it is more likely than not that some portion of the deferred tax asset will not be realized. Accordingly, a valuation allowance is maintained for certain state tax items. Alleghany has recognized $15.2 million of deferred tax assets for state net operating and capital loss carryovers. A valuation allowance of $15.2 million has been established against these deferred tax assets since Alleghany does not currently anticipate generating sufficient income in the various states to absorb these loss carryovers.
Alleghany believes that, as of December 31, 2011, there were no material uncertain tax positions that would require disclosure under GAAP.
Statutory net income of Alleghany’s insurance operating units was $147.4 million and $219.2 million for the years ended December 31, 2011 and 2010, respectively. Combined statutory capital and surplus of Alleghany’s insurance operating units was $1.6 billion and $1.6 billion as of December 31, 2011 and 2010, respectively.
$29.6 million and $36.9 million, respectively, in compensation expense related to the RSUI Plan. During the same periods, a deferred tax benefit of $9.2 million, $10.4 million and $12.9 million, respectively, related to the compensation expense was recorded.
Alleghany has two unfunded retiree health plans, one for executives and one for employees. To be eligible for benefits, participants must be age 55 or older. In addition, non-executive employees must have completed at least 10 years of service. Under both plans, participants must pay a portion of the premiums charged by the medical insurance provider. All benefits cease upon the death of the retiree. RSUI also has an unfunded retiree health plan for its employees. As of December 31, 2011 and December 31, 2010, the liability for all of these plans was $7.5 million and $5.5 million, respectively, representing the entire accumulated post-retirement benefit obligation as of that date. Assumptions used with respect to the accounting for these plans are comparable to those cited above for the Alleghany pension plans. Future benefit payments associated with these plans are not expected to be material to Alleghany.