Table of Contents
Washington, D.C. 20549
Delaware | 6331 | 51-0290450 | ||
(State or Other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
Susan J. Sutherland, Esq. Robert J. Sullivan, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 (212) 735-3000 (212) 735-2000 (facsimile) | Richard P. Quinlan, Esq. Senior Vice President & Deputy General Counsel Liberty Mutual Group 175 Berkeley Street Boston, Massachusetts 02116 (617) 357-9500 (617) 574-5830 (facsimile) | Richard J. Sandler, Esq. Ethan T. James, Esq. Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000 (212) 701-5800 (facsimile) |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Table of Contents
The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. |
Per Share | Total | |||||||
Public Offering Price | $ | $ | ||||||
Underwriting Discount | $ | $ | ||||||
Net proceeds to us (before expenses) | $ | $ |
Citi | BofA Merrill Lynch |
J.P. Morgan | Mitsubishi UFJ Securities | Wells Fargo Securities |
Barclays Capital | Deutsche Bank Securities | HSBC | Morgan Stanley |
BNP PARIBAS | BNY Mellon Capital Markets, LLC | Dowling & Partners Securities LLC | Keefe, Bruyette & Woods | Lloyds TSB Corporate Markets |
Macquarie Capital | Piper Jaffray | Ramirez & Co., Inc. | RBS | Sandler O’Neill + Partners, L.P. | The Williams Capital Group, L.P. |
1 | ||||||||
15 | ||||||||
48 | ||||||||
49 | ||||||||
50 | ||||||||
51 | ||||||||
52 | ||||||||
53 | ||||||||
57 | ||||||||
64 | ||||||||
175 | ||||||||
202 | ||||||||
209 | ||||||||
257 | ||||||||
258 | ||||||||
279 | ||||||||
289 | ||||||||
290 | ||||||||
293 | ||||||||
299 | ||||||||
299 | ||||||||
299 | ||||||||
299 | ||||||||
F-1 | ||||||||
Ex-10.3 | ||||||||
Ex-10.5 | ||||||||
Ex-10.203 | ||||||||
Ex-10.204 | ||||||||
Ex-10.205 | ||||||||
Ex-10.206 | ||||||||
Ex-23.1 | ||||||||
Ex-23.2 | ||||||||
Ex-23.3 |
i
Table of Contents
• | Commercial: We are the fifth largest writer of commercial lines property and casualty insurance distributed through independent agencies in the United States, based on 2009 net written premiums, according to A.M. Best data. We offer insurance coverage for commercial multiple peril, commercial |
1
Table of Contents
automobile, workers compensation, general liability and other commercial risks to small and mid-size businesses (generally fewer than 150 employees and annual insurance premiums under $150,000). Approximately 95% of our commercial lines accounts have annual premiums of less than $15,000. We have minimal exposure to the highly competitive commercial insurance market segment consisting of accounts with annual insurance premiums in excess of $150,000. Our Commercial segment markets products through eight regional operating units, each with a distinct brand, except for excess casualty products, which are marketed under a national brand. Our Commercial segment generated $4.6 billion, or 45%, of our total net written premiums in 2009. |
• | Personal: We are the third largest writer of personal lines property and casualty insurance distributed through independent agencies in the United States, based on 2009 net written premiums, according to A.M. Best data. Using the Safeco Insurance brand, we offer insurance coverage to individuals on a national basis for private passenger automobile, homeowners and other personal property and liability risks. We market our personal lines products through eight regions covering geographic territories that are identical to those of our Commercial segment. Our Personal segment generated $4.7 billion, or 46%, of our total net written premiums in 2009. | |
• | Surety: We are the second largest writer of surety business in the United States, based on 2009 net written premiums, according to A.M. Best data. We utilize the Liberty Mutual Surety brand for large national accounts and the Liberty SuretyFirst brand for regional and individual accounts. Our Surety segment generated $707 million, or 7%, of our total net written premiums in 2009. |
2
Table of Contents
• | Strong Agency Relationships Resulting in High Quality Business: As many of our insurance subsidiaries have been in business for over 80 years, we have a deep understanding of our agents’ and policyholders’ needs. Our local reach through our 111 offices in the United States provides our agents with direct access to our regional executives and enables us to work closely with those agents by providing planning, support and training services. Our franchise has been built over many years through these relationships, particularly with our top performing agents. Given our deep and long-standing agency relationships, we believe we have the opportunity to write the highest quality business and the value of our franchise cannot be easily or quickly replicated. |
• | Localized Knowledge from Multiple Regional Operations with a Highly Efficient National Infrastructure: We are able to combine the high quality service and responsiveness of a regional carrier with the sophisticated underwriting, product development, claims management capability and capital base of a national carrier. This unique combination enables us to develop and maintain deep, long-lasting relationships with independent agencies and policyholders. | |
• | Well-Diversified and Balanced Business Mix: Our business is highly diversified and balanced by product, geographic region, agency relationship and customer account. Our Commercial and Personal segments contributed approximately 45% and 46%, respectively, of our 2009 net written premiums. We believe that this diversification enables us to effectively manage through property and casualty pricing cycles and reduces the capital and earnings impact of any single catastrophic event. | |
• | Sophisticated Pricing, Underwriting and Risk Management: Our pricing, underwriting and risk management strategy emphasizes profitable growth and optimization of our risk-adjusted returns in each of our operating segments, product lines and product offerings. We use proprietary models in conjunction with rigorous analytical review to make pricing and underwriting decisions and to manage risk exposures across geographies, product lines, product offerings and customer segments. Our objective is to achieve (i) underwriting profitability, (ii) disciplined, opportunistic growth and (iii) attractive risk-adjusted returns. |
• | Superior Financial Strength: Our capitalization and financial strength create a competitive advantage in retaining and attracting new business. After giving pro forma effect to this offering and the transactions for which we have made pro forma adjustments as described under “Pro Forma Consolidated Financial Statements,” at June 30, 2010 we would have had total assets and stockholders’ equity of $ billion and $ billion, respectively. Furthermore, we believe our reserve position is strong and is bolstered by an aggregate stop loss reinsurance agreement, which we refer to in this prospectus as the “Run-Off Reinsurance Agreement,” between us and Liberty Mutual, which provides for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Run-Off Reinsurance Agreement.” We believe our strong balance sheet and the Run-Off Reinsurance Agreement will afford us continued future financial flexibility, enabling us to write more desirable business. |
3
Table of Contents
• | Disciplined Acquisition Strategy and Proven Integration Experience: We have proven experience in acquiring and successfully integrating property and casualty businesses, including Safeco and Ohio Casualty. We are a disciplined acquirer and have a demonstrated ability to realize significant transaction synergies and accelerate earnings growth. | |
• | Experienced Management Team with a Successful Track Record: We have a talented and experienced management team led by our Chief Executive Officer and President, Gary Gregg, who has 21 years of service in the property and casualty insurance industry. Our senior management team has worked in the property and casualty insurance industry for an average of 27 years and has an extensive track record of profitably underwriting, growing and acquiring commercial and personal lines businesses. |
• | Pursue Profitable Growth While Maintaining Pricing and Underwriting Discipline: We expect to grow each of our businesses and achieve attractive risk-adjusted returns, while maintaining our underwriting discipline, well-diversified business mix and broad geographic presence. We believe that the key to success across our businesses lies in our disciplined pricing and underwriting and a culture that focuses on management accountability for the profitability of their respective businesses. We historically have been, and will continue to be, a highly disciplined growth organization. | |
• | Attract High Quality Independent Agencies and Strengthen Existing Relationships: A critical competitive advantage in the property and casualty insurance industry is a loyal, high quality and well managed distribution network that matches the insurer’s products and services with the needs of its policyholders. We believe that our strong agency relationships are the key to success across all of our businesses. It is our objective to be one of the top three insurers within the agencies that distribute our products. We intend to continue strengthening our relationships and building our franchise with top performing agents by providing them with planning, support, training and competitive compensation that supports profitable growth. We also intend to grow our business with our agents by increasing cross-selling efforts, providing comprehensive risk management and insurance solutions for the policyholders served by those agents and delivering a broad array of innovative products and services. | |
• | Focus on Small and Mid-Size Commercial Segment and Personal Lines Customers with Multi-Faceted Insurance Needs: We seek to leverage our strong independent agency network by targeting small and mid-size commercial accounts and individuals with multi-faceted insurance needs. We believe that many customers prefer to purchase insurance products from trusted independent agents with a presence in their communities. Our unique combination of local expertise and decision-making authority, coupled with the strength of our national platform and strong brands, positions us well to offer agencies the products and services that address policyholders’ needs at competitive prices. We believe this focus provides us with relatively consistent and predictable risk-adjusted returns and enables us to selectively pursue business with favorable underwriting characteristics. |
• | Leverage Scale, Technical Expertise andState-of-the-Art Underwriting Platforms to Provide Competitive Insurance Products and High Quality Services: We are the third largest writer of personal lines and the fifth largest writer of commercial lines property and casualty insurance distributed through independent agencies in the United States, and the second largest writer of surety business in the United States, in each case based on 2009 net written premiums. We intend to continue to build on our scale and technical expertise to provide competitive insurance products and high quality services. As a result of our two most recent acquisitions, we are in the process of unifying our existing underwriting platforms in both our Commercial and Personal segments. The implementation of our unified underwriting platforms will allow us to retire our other underwriting platforms and, once fully implemented, we believe it will result in a decrease in our expense ratio. Our organization has the resources and financial flexibility to continue to devote significant efforts toward technology-based |
4
Table of Contents
innovations and scale-based efficiencies, both of which are key factors for furthering our competitive advantage in the marketplace. |
• | Capitalize on Fragmentation in the Property and Casualty Insurance Market: We believe we are well positioned to capitalize on the fragmentation in the property and casualty insurance market by capturing market share. Based on A.M. Best data, in commercial lines, we believe approximately $72 billion, or 60%, of the industry’s total 2009 net written premiums were written by approximately 520 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining approximately $49 billion, or 40%. In personal lines, we believe approximately $29 billion, or 46%, of the industry’s total 2009 net written premiums were written by approximately 400 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining approximately $34 billion, or 54%. We believe our national infrastructure will provide us with a competitive advantage over regional carriers in capturing market share, while our regional focus will provide us with a competitive advantage over larger national carriers. |
• | Maintain a Strong Balance Sheet: We focus on maintaining levels of capital adequacy, liquidity and leverage that allow us to pursue attractive growth opportunities. We are committed to disciplined underwriting, earnings growth, effective investment management and capital generation to maintain our claims-paying ratings. |
• | Pursue Accretive Strategic Acquisitions: We have successfully acquired and integrated businesses to accelerate the growth of our company. We intend to continue our strategy of pursuing economically attractive business combinations and acquisitions. Our market presence and strong balance sheet and cash flow, together with management’s demonstrated acquisition integration experience, create an effective platform for our continued growth through strategic acquisitions. We will selectively pursue accretive strategic acquisitions with a focus on maximizing value for our stockholders. |
5
Table of Contents
• | Run-Off Reinsurance Agreement. On June 30, 2010, we entered into the Run-Off Reinsurance Agreement with Liberty Mutual. We paid Liberty Mutual a one-time payment of $125 million in July 2010 and Liberty Mutual will indemnify us for up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. |
• | Services Agreement. Liberty Mutual currently provides all of our employees and executives to us under various services agreements. Liberty Mutual will provide interim services to us prior to the transfer to us of the employees and executives dedicated to our business, which is expected to occur on January 1, 2011. In addition, Liberty Mutual will continue to provide important administrative services to us under these agreements and will administer a portion of our run-off liabilities following the offering. |
• | Intercompany Agreement. We will enter into an agreement with Liberty Mutual which will provide for, among other things, mutual indemnification of obligations relating to the business and operations of the other party, information rights, restrictive covenants that will prohibit actions by us without Liberty Mutual’s consent, equity purchase rights, rights to participate in share repurchases, rights of first offer on property and casualty coverage, intellectual property licenses and other matters governing our ongoing relationship with Liberty Mutual. |
6
Table of Contents
• | Unpredictable Catastrophic Events. Our insurance operations expose us to claims arising out of unpredictable natural and other catastrophic events, including man-made disasters such as acts of terrorism. Catastrophe losses could have a material adverse effect on our results of operations and may materially harm our financial condition, which could in turn adversely affect our claims-paying ratings and could impair our ability to raise capital. |
7
Table of Contents
• | Uncertainty in Estimating Reserves. Our reserves for unpaid claims and claim adjustment expenses are established based on estimates leveraging actuarial methodologies and assumptions and the knowledge and judgments of our management. Establishing an appropriate level of reserves is an inherently uncertain process. Our estimates regarding liabilities for unpaid claims and claim adjustment expenses, including our liabilities for asbestos and environmental exposures, which we refer to in this prospectus as “A&E,” and for other run-off liabilities may prove to be materially deficient and our reserves at any given time could prove inadequate. | |
• | Disruptions to our Agency Relationships. Our products are marketed solely through independent agencies, which also sell our competitors’ products. A number of factors, including aggressive pricing and compensation structures by our competitors, could negatively affect our ability to maintain a strong network of independent agencies, which in turn could have a material adverse effect on our future business volume and results of operations. | |
• | Potential Inability to Alleviate Risk Through Reinsurance Arrangements. We attempt to limit our risk of loss through reinsurance arrangements. Our existing reinsurance arrangements may be inadequate to cover our liabilities. In addition, we remain liable to our policyholders if a reinsurer is unable or unwilling to pay amounts owed to us. Our potential inability to mitigate risk through reinsurance arrangements could have a material adverse effect on our results of operations, financial condition or liquidity. | |
• | Potential Losses in our Investment Portfolio. Returns on our investment portfolio are an important part of our overall profitability. A major economic downturn could cause the value of state and municipal bonds, which constitute a substantial portion of our investment portfolio, to decline. In addition, during or following an economic downturn or period of financial market disruption, our investment portfolio could be subject to higher risk. A decrease in the value of our investment portfolio, a reduction in our investment income or the incurrence of realized investment losses could have a material adverse effect on our results of operations, financial condition or liquidity. |
• | Potential for Downgrades of Claims-Paying Ratings. Claims-paying ratings are used by policyholders and independent agents as a means of assessing the suitability of insurers as counterparties and are an important factor in establishing our competitive position. A downgrade or withdrawal of our claimspaying ratings could prevent our insurance subsidiaries from writing new business, which could have a material adverse effect on our results of operations, financial condition or liquidity. |
• | Potential for High Severity Losses in our Surety Segment. Claims arising out of our Surety segment expose us to potentially high severity losses, which could have a material adverse effect on our results of operations, financial condition or liquidity. | |
• | Constraints Related to Our Holding Company Structure. As a holding company, Liberty Mutual Agency Corporation has no direct operations. Dividends and other permitted distributions from our insurance subsidiaries are expected to be Liberty Mutual Agency Corporation’s sole source of funds to meet ongoing cash requirements. These payments are limited by regulations in the jurisdictions in which our insurance subsidiaries operate. If our insurance subsidiaries are unable to pay dividends, we may have difficulty paying dividends on our common stock and meeting holding company expenses. Our insurance subsidiaries have exhausted their ability to pay any dividends to us without prior approval by regulatory authorities, at least for the twelve months following the date their most recent dividends were paid. |
• | We are Dependent on Liberty Mutual for Services. Until January 1, 2011, we will have no employees. We currently rely on Liberty Mutual for necessary services for our business and operations. Following January 1, 2011, when certain employees dedicated to our business and operations will be transferred to one of our subsidiaries, we will remain reliant on Liberty Mutual to provide us with |
8
Table of Contents
critical services. If we are unable to successfully operate our business under such arrangements, it may have a material adverse impact on our results of operations, financial condition or liquidity. |
• | We Rely on Liberty Mutual to Manage our Investment Portfolio. We are highly dependent on Liberty Mutual in connection with the management of our investment portfolio. If we lose our investment relationship with Liberty Mutual, we may not be able to secure an investment manager who will produce returns on investments similar to those provided by Liberty Mutual in the past or any positive returns at all. | |
• | Limited Influence of Holders of Class A Common Stock. Holders of our Class A common stock will be entitled to one vote per share while holders of our Class B common stock will generally be entitled to ten votes per share. Liberty Mutual, as holder of our Class B common stock, will also be entitled to elect 80% of the members of our board of directors and remove such directors and will also have other significant rights including the conversion of shares of Class B common stock into shares of Class A common stock and the right to consent to certain actions before they are taken by our company. As a result, holders of Class A common stock will have limited ability to influence any matters requiring stockholder approval as long as we are controlled by Liberty Mutual. | |
• | Liberty Mutual’s Control of Us and Conflicts of Interest with Liberty Mutual. Liberty Mutual, as holder of our Class B common stock, will hold % of the combined voting power of our outstanding common stock immediately following this offering. As a result, holders of our Class A common stock will have very limited influence over our company. In addition, certain of our directors are also directors and officers of Liberty Mutual, which may cause conflicts of interest. |
9
Table of Contents
Class A common stock offered by us | shares | |
Common stock to be outstanding after this offering | shares of Class A common stock | |
shares of Class B common stock | ||
Common stock to be beneficially owned by Liberty Mutual after this offering | No shares of Class A common stock | |
shares of Class B common stock | ||
Over-allotment option | We have granted the underwriters a30-day option to purchase up to an additional shares of our Class A common stock to cover over-allotments. | |
Dividend policy | We intend to pay quarterly cash dividends on all classes of our common stock at an initial rate of $ per share of common stock, commencing in the first quarter of 2011, subject to financial results, declaration by our board of directors and other factors. See “Dividend Policy.” | |
Use of proceeds | We intend to use the net proceeds of this offering to repay a portion of indebtedness that we owe or will owe to Liberty Mutual. See “Use of Proceeds.” | |
Voting rights | ||
Class A common stock | One vote per share | |
Class B common stock | Ten votes per share |
Proposed Nasdaq Global Select Market trading symbol | We have applied to have our Class A common stock listed on the Nasdaq Global Select Market under the symbol “LMAC.” |
• | assume we have effected a recapitalization, whereby the 1,000 then outstanding shares of our common stock, all of which were owned by Liberty Mutual, will be exchanged for shares of Class B common stock and we will create a new class of Class A common stock; | |
• | assume the underwriters’ over-allotment option will not be exercised; and |
• | exclude: (i) shares of our Class A common stock that will be reserved for issuance under our benefit plans, and (ii) shares of Class A common stock underlying equity awards to be granted in connection with this offering to certain of our officers and others who provide services to us. |
10
Table of Contents
11
Table of Contents
Historical | Pro Forma | |||||||||||||||||||||||||||
Six Months | Six Months | Year Ended | ||||||||||||||||||||||||||
Ended June 30, | Year Ended December 31, | Ended June 30, | December 31, | |||||||||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | 2010 | 2009 | ||||||||||||||||||||||
(Dollars in millions, except share data) | ||||||||||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||||||||||
Net written premiums | $ | 5,180 | $ | 4,975 | $ | 10,148 | $ | 6,704 | $ | 4,407 | $ | $ | ||||||||||||||||
Net premiums earned | 5,113 | 5,080 | 9,983 | 6,913 | 4,325 | |||||||||||||||||||||||
Net investment income | 463 | 439 | 910 | 719 | 405 | |||||||||||||||||||||||
Fee and other revenues | 50 | 49 | 97 | 50 | 33 | |||||||||||||||||||||||
Net realized investment gains (losses) | 227 | (53 | ) | (53 | ) | (407 | ) | (5 | ) | |||||||||||||||||||
Total revenues | 5,853 | 5,515 | 10,937 | 7,275 | 4,758 | |||||||||||||||||||||||
Claims and claim adjustment expenses | 3,636 | 3,291 | 6,157 | 4,326 | 2,601 | |||||||||||||||||||||||
General and administrative expenses | 638 | 494 | 1,005 | 777 | 551 | |||||||||||||||||||||||
Goodwill impairment (1) | — | — | — | 973 | — | |||||||||||||||||||||||
Amortization of deferred policy acquisition costs | 1,186 | 1,209 | 2,392 | 1,664 | 1,056 | |||||||||||||||||||||||
Interest expense | 10 | 2 | 4 | 21 | 6 | |||||||||||||||||||||||
Total claims and expenses | 5,470 | 4,996 | 9,558 | 7,761 | 4,214 | |||||||||||||||||||||||
Income (loss) before income tax expense | 383 | 519 | 1,379 | (486 | ) | 544 | ||||||||||||||||||||||
Income tax expense | 94 | 142 | 377 | 78 | 167 | |||||||||||||||||||||||
Net income (loss) | $ | 289 | $ | 377 | $ | 1,002 | $ | (564 | ) | $ | 377 | $ | $ | |||||||||||||||
Less: Preferred stock dividends | 18 | 32 | 63 | — | — | |||||||||||||||||||||||
Income (loss) available to common stockholders | $ | 271 | $ | 345 | $ | 939 | $ | (564 | ) | $ | 377 | |||||||||||||||||
Share Data | ||||||||||||||||||||||||||||
Net income (loss) available to common stockholders per common share: | ||||||||||||||||||||||||||||
Basic | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Diluted | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||||
Basic (2) | ||||||||||||||||||||||||||||
Diluted (2) | ||||||||||||||||||||||||||||
Non-GAAP Financial Measure (3) | ||||||||||||||||||||||||||||
Pre-tax operating income | $ | 421 | $ | 588 | $ | 1,455 | $ | 934 | $ | 599 | $ | $ | ||||||||||||||||
Reconciliation to net income (loss): | ||||||||||||||||||||||||||||
Net income (loss) | 289 | 377 | 1,002 | (564 | ) | 377 | ||||||||||||||||||||||
Less: Net realized investment gains (losses) | 227 | (53 | ) | (53 | ) | (407 | ) | (5 | ) | |||||||||||||||||||
Add: Income tax expense | 94 | 142 | 377 | 78 | 167 | |||||||||||||||||||||||
Add: Goodwill impairment (1) | — | — | — | 973 | — | |||||||||||||||||||||||
Add: Integration and other acquisition related costs | (2 | ) | 16 | 23 | 40 | 50 | ||||||||||||||||||||||
Add: Run-off reserves (Run-Off Reinsurance Agreement) (4) | 267 | — | — | — | — | |||||||||||||||||||||||
Pre-tax operating income | $ | 421 | $ | 588 | $ | 1,455 | $ | 934 | $ | 599 | $ | $ | ||||||||||||||||
Combined Ratio | ||||||||||||||||||||||||||||
Claims and claim adjustment expense ratio (5) | 62.2 | % | 64.6 | % | 63.7 | % | 64.7 | % | 65.4 | % | ||||||||||||||||||
Underwriting expense ratio (6) | 31.2 | 31.4 | 31.7 | 33.0 | 35.0 | |||||||||||||||||||||||
Subtotal | 93.4 | 96.0 | 95.4 | 97.7 | 100.4 | |||||||||||||||||||||||
Catastrophes (7) | 8.0 | 5.6 | 4.4 | 5.1 | 2.1 | |||||||||||||||||||||||
Net incurred losses attributable to prior years | 0.9 | (5.4 | ) | (6.2 | ) | (7.2 | ) | (7.4 | ) | |||||||||||||||||||
Combined ratio (8) | 102.3 | % | 96.2 | % | 93.6 | % | 95.6 | % | 95.1 | % | ||||||||||||||||||
Segment Data | ||||||||||||||||||||||||||||
Net written premiums: | ||||||||||||||||||||||||||||
Commercial | $ | 2,257 | $ | 2,328 | $ | 4,585 | $ | 3,975 | $ | 3,039 | ||||||||||||||||||
Personal | 2,495 | 2,231 | 4,689 | 2,122 | 948 | |||||||||||||||||||||||
Surety | 363 | 337 | 707 | 479 | 312 | |||||||||||||||||||||||
Corporate and Other | 65 | 79 | 167 | 128 | 108 | |||||||||||||||||||||||
Pre-tax operating income: | ||||||||||||||||||||||||||||
Commercial | $ | 84 | $ | 197 | $ | 521 | $ | 613 | $ | 500 | ||||||||||||||||||
Personal | 139 | 200 | 429 | 86 | 71 | |||||||||||||||||||||||
Surety | 145 | 93 | 252 | 156 | 96 | |||||||||||||||||||||||
Corporate and Other | 53 | 98 | 253 | 79 | (68 | ) | ||||||||||||||||||||||
Segment combined ratios: | ||||||||||||||||||||||||||||
Commercial | 105.6 | % | 100.6 | % | 97.9 | % | 94.1 | % | 92.8 | % | ||||||||||||||||||
Personal | 98.8 | 95.5 | 94.8 | 101.1 | 97.1 | |||||||||||||||||||||||
Surety | 67.2 | 80.8 | 72.3 | 74.7 | 75.7 |
12
Table of Contents
Historical | Pro Forma | |||||||||||||||||||||||
As of June 30, | As of December 31, | As of June 30, | ||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2010 | ||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||
Cash and investments | $ | 19,732 | $ | 22,504 | $ | 20,062 | $ | 11,313 | $ | |||||||||||||||
Premium and other receivables, net | 2,491 | 2,405 | 2,567 | 1,438 | ||||||||||||||||||||
Goodwill | 3,054 | 3,054 | 3,054 | 1,345 | ||||||||||||||||||||
Other assets | 4,172 | 4,423 | 5,187 | 2,543 | ||||||||||||||||||||
Total assets | 29,449 | 32,386 | 30,870 | 16,639 | ||||||||||||||||||||
Unpaid claims and claim adjustment expenses | 12,222 | 12,053 | 12,651 | 7,307 | ||||||||||||||||||||
Unearned premiums | 4,749 | 4,658 | 4,837 | 2,519 | ||||||||||||||||||||
Debt | 1,958 | 78 | 82 | 216 | ||||||||||||||||||||
Other liabilities | 2,018 | 3,400 | 2,999 | 1,132 | ||||||||||||||||||||
Total liabilities | 20,947 | 20,189 | 20,569 | 11,174 | ||||||||||||||||||||
Stockholders’ equity | 8,502 | 12,197 | 10,301 | 5,465 |
(1) | Our goodwill asset as of June 30, 2010 was $3.054 billion, which remained unchanged from December 31, 2009 and 2008, and largely consists of purchase price in excess of net assets relating to the Ohio Casualty and Safeco acquisitions. These acquisitions resulted in significant cost synergies and other benefits throughout Liberty Mutual Group. Liberty Mutual Group performed an impairment analysis in the third quarter of 2009 using an income-based approach. Based on that analysis, the fair market value of Liberty Mutual Group’s Agency Markets business unit exceeded its carrying value and thus no impairment was necessary. However, because the legal entities that gave rise to this goodwill are part of our company, when we prepared our carve-out financial statements we were required under GAAP to record the full amount of the historical goodwill on our balance sheet and to test that goodwill for our financial statements at each of our reporting units (i.e., segments), only taking into account the synergies and benefits realized by each of our segments, without regard to synergies and benefits realized elsewhere in the Liberty Mutual Group. We conducted an impairment analysis on each of our segments on this required basis in the fourth quarter of 2008, and determined that the carrying value of the goodwill for our Personal segment exceeded its fair value, and recognized an impairment charge in our Personal segment of $973 million in 2008. However, the carrying value of goodwill recorded in the consolidated financial statements of Liberty Mutual Group was unaffected. |
(2) | Shares used in the historical earnings per share calculation represent the shares of Class B common stock outstanding subsequent to the , 2010 share recapitalization that increased the common shares outstanding from 1,000 to Class B shares. The shares used in the pro forma earnings per share calculation represent the sum of the shares of Class B common stock as well as the shares of Class A common stock expected to be outstanding subsequent to this offering. There is no difference between basic and diluted earnings per share because there were no outstanding options to purchase shares of our common stock or other potentially dilutive securities outstanding. |
(3) | We consider pre-tax operating income to be a useful supplement to net income (loss), its most comparable GAAP measure, in evaluating our financial performance. We believe that the presentation of pre-tax operating income is valuable because it assists an investor in determining the degree to which our insurance-related revenues, composed primarily of net premiums earned, net investment income and fee and other revenues, have generated operating earnings after meeting our insurance-related obligations, composed primarily of claims and claim adjustment expenses and other operating costs. |
(4) | Represents unfavorable incurred losses attributable to prior years of $142 million related to run-off reserves in our Corporate and Other segment and a one-time charge of $125 million associated with the Run-Off Reinsurance Agreement. On June 30, 2010 we entered into the Run-Off Reinsurance Agreement providing for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. |
(5) | Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses. |
(6) | Calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses. |
13
Table of Contents
(7) | Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses. |
(8) | Calculated by adding the claims and claim adjustment expense ratio, the underwriting expense ratio, the catastrophes ratio, and net incurred losses attributable to prior years’ combined ratio. |
14
Table of Contents
15
Table of Contents
16
Table of Contents
17
Table of Contents
18
Table of Contents
19
Table of Contents
20
Table of Contents
21
Table of Contents
• | claims relating to alleged abuse by clergy; | |
• | judicial expansion of policy coverage and the impact of new theories of liability; | |
• | plaintiffs targeting property and casualty insurers, including us, in purported class action litigation relating to claims-handling and other practices; | |
• | claims relating to construction defects, which often present complex coverage and damage valuation questions; |
22
Table of Contents
• | the assertion of “public nuisance” theories of liability, pursuant to which plaintiffs seek to recover money spent to administer public health care programs or to abate hazards to public health and safety; | |
• | claims relating to Chinese drywall, which may involve drywall manufacturers, distributors, installers, contractors, homeowners and others; and | |
• | our use of medical bill review vendors. |
23
Table of Contents
24
Table of Contents
25
Table of Contents
• | licensing companies and agents to transact business, and authorizing lines of business; | |
• | calculating the value of assets to determine compliance with statutory requirements; | |
• | mandating certain insurance benefits; | |
• | regulating certain premium rates; | |
• | reviewing and approving policy forms; | |
• | regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; | |
• | establishing statutory capital and surplus requirements; | |
• | approving changes in control of insurance companies; | |
• | restricting the payment of dividends and other transactions, including loans, advances and transfers of property and assets, between affiliates; | |
• | establishing assessments and surcharges for guaranty funds, second-injury funds and other mandatory pooling arrangements; | |
• | requiring insurers to dividend to policyholders any excess profits; | |
• | regulating the types, amounts and valuation of investments; and | |
• | regulating a variety of other financial and non-financial components of an insurer’s business. |
26
Table of Contents
27
Table of Contents
28
Table of Contents
29
Table of Contents
30
Table of Contents
31
Table of Contents
32
Table of Contents
33
Table of Contents
• | the potential disruption of our ongoing business; | |
• | the reduction in cash available for operations and other uses and the potential dilutive issuance of equity securities or the incurrence of debt; | |
• | the ineffective integration of underwriting, claims handling and actuarial practices and systems; | |
• | the increase in the inherent uncertainty of reserve estimates for a period of time, until stable trends re-establish themselves within the combined organization, as past trends (that were a function of past products, past claims handling procedures, past claims departments and past legal and other experts) may not repeat themselves; | |
• | the diversion of management time and resources to acquisition integration challenges; | |
• | the loss of key employees; and | |
• | the cultural challenges associated with integrating employees. |
34
Table of Contents
35
Table of Contents
36
Table of Contents
37
Table of Contents
• | any determination with respect to our business plans and policies; | |
• | any determination with respect to mergers, acquisitions and other business combinations; | |
• | our acquisition or disposition of assets; | |
• | our financing activities; | |
• | certain changes to our certificate of incorporation; | |
• | changes to agreements providing for our transition to becoming a public company; and | |
• | determinations with respect to enforcement of rights we may have against third parties. |
• | the adoption or implementation of any stockholder rights plan; | |
• | any consolidation or merger of us with any person, or entry into any other transaction or series of transactions that would otherwise result in a change of control; | |
• | any acquisition by us or any sale, lease, exchange or other disposition, or any series of related acquisitions or dispositions, involving consideration in excess of $25 million; | |
• | the issuance by us or one of our subsidiaries of any stock or stock equivalents; | |
• | the incurrence, issuance, assumption, guarantee or otherwise becoming liable for any debt, other than up to $200 million of debt in connection with our current revolving credit facility; | |
• | our dissolution, liquidation or winding up; | |
• | the election, designation, appointment or removal of any of our executive officers; | |
• | the declaration of dividends on any class or series of our capital stock other than preferred stock; | |
• | any change in our authorized capital stock or our creation of any class or series of capital stock; |
38
Table of Contents
• | any change in the number of directors on our board of directors, or filling any newly created seats or vacancies on our board of directors; or | |
• | the amendment of various provisions of our certificate of incorporation and bylaws. |
39
Table of Contents
• | engaging in the same or similar business activities or lines of business as we do; | |
• | doing business with any of our clients or customers; or | |
• | employing or otherwise engaging any of our officers or employees. |
• | labor, tax, employee benefit, indemnification and other matters arising from our separation from Liberty Mutual; |
40
Table of Contents
• | services to be provided to us by Liberty Mutual; | |
• | employee retention and recruiting; | |
• | business combinations involving us; | |
• | sales or dispositions by Liberty Mutual of all or any portion of its beneficial ownership interest in us; | |
• | the nature, quality and pricing of services Liberty Mutual has agreed to provide us; | |
• | investment opportunities that may be attractive to both Liberty Mutual and us; | |
• | issues arising under the tax sharing agreement; | |
• | the Run-Off Reinsurance Agreement; and | |
• | business opportunities that may be attractive to both Liberty Mutual and us. |
• | Significant changes in our cost structure, financing and business operations have occurred as a result of the Transactions. As a result, the costs reflected in our historical consolidated and pro forma financial statements may not represent our costs in future periods including, but not limited to, the legal, |
41
Table of Contents
accounting, compliance and other costs associated with being a public company with listed equity; see “— We have no experience operating as a stand-alone company and immediately following this offering we will not have our own employees or executives until January 1, 2011 and will be solely dependent on the management, personnel and facilities of Liberty Mutual, and will thereafter remain significantly dependent on Liberty Mutual”; and |
• | Under some of our agreements with third parties, our separation from Liberty Mutual allows the other party to the agreement to terminate the agreement pursuant to a change of control provision, which may be triggered when Liberty Mutual’s ownership of our company decreases to less than 50%. If the other party to any of these agreements does not wish to continue the agreement, we may be required to terminate or modify our existing agreement or seek alternative arrangements, which could result in reduced sales, increased costs or other disruptions to our business. |
• | that a majority of our board of directors consist of independent directors; | |
• | that we have a nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; | |
• | that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and | |
• | for an annual performance evaluation of the nominating and governance committee and compensation committee. |
42
Table of Contents
43
Table of Contents
• | the perceived prospects for the insurance industry in general or for our company or Liberty Mutual; | |
• | differences between our actual financial and operating results and those expected by investors; | |
• | changes in the share price of public companies with which we compete; | |
• | news about our industry and our competitors; | |
• | changes in our relationship with Liberty Mutual; | |
• | news about our new products or services, enhancements, significant contracts, acquisitions or strategic investments; |
• | changes in our capital structure, such as future issuances of securities, repurchases of our common stock or our incurrence of debt; |
• | changes in general economic or market conditions; | |
• | broad market fluctuations; | |
• | regulatory actions or changes in applicable laws, rules or regulations; | |
• | unfavorable or lack of published research by securities or industry analysts; and |
44
Table of Contents
• | departures of key personnel. |
45
Table of Contents
• | a board of directors that is divided into three classes with staggered terms; | |
• | after Liberty Mutual ceases to beneficially own a majority of the voting power of our common stock, elimination of the right of our stockholders to act by written consent; | |
• | rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings; | |
• | following a distribution of Class B common stock by Liberty Mutual intended to qualify as a tax-free spin-off, the restriction that a beneficial owner of 10% or more of our Class B common stock may not vote in any election of directors unless such person or group also owns at least an equivalent percentage of Class A common stock or obtains approval of our board of directors either prior to acquiring beneficial ownership of at least 5% of our Class B common stock or, where such person acquires |
46
Table of Contents
beneficial ownership of at least 5% of our Class B common stock solely as a result of such a distribution, prior to acquiring one additional share of our Class B common stock; |
• | the prohibition of cumulative voting in the election of directors or any other matters; | |
• | the right of our board of directors to issue preferred stock without stockholder approval; and | |
• | limitations on the right of stockholders to remove directors. |
47
Table of Contents
• | business strategy; | |
• | reinsurance coverage; | |
• | catastrophic losses; | |
• | investment performance; | |
• | financial and operating targets or plans; | |
• | investment, economic and underwriting market conditions; | |
• | incurred unpaid claims and claim adjustment expenses and the adequacy of our claims and claim adjustment expense reserves and related reinsurance; | |
• | projections of revenues (including, but not limited to, premium rates (either for new or renewal business) and premium volume), income (or loss), earnings (or loss) per share, combined ratio, dividends, market share or other financial forecasts; | |
• | expansion and growth of our business and operations; and | |
• | liquidity and future capital expenditures. |
48
Table of Contents
49
Table of Contents
• | an estimated $ million to repay a portion of the $ million principal amount that remains outstanding under our note payable that we issued to Liberty Mutual in the original principal amount of $4 billion in February 2010 (the “February 2010 Note”), which note matures on February 29, 2012 and bears interest at an annual rate of 0.72%; and |
• | an estimated $ million to repay a portion of a note payable that we will issue to Liberty Mutual prior to the closing of this offering, to complete the transfer of Ohio Casualty (the “Ohio Casualty Note”) to us. The principal amount of the Ohio Casualty Note will be equal to the net proceeds of this offering plus $ , and such note will mature on and will bear interest at an annual rate of %. |
50
Table of Contents
51
Table of Contents
• | our actual cash and short-term investments and capitalization; and |
• | our pro forma cash and short-term investments and capitalization after giving effect to this offering (assuming no exercise of the underwriters’ over-allotment option) and the Transactions for which we have made pro forma adjustments as if they had occurred on June 30, 2010. |
As of June 30, 2010 | ||||||||||||
Actual | Adjustments | Pro Forma | ||||||||||
(Dollars in millions) | ||||||||||||
Cash and short-term investments | $ | 1,415 | $ | (A) | $ | |||||||
Debt | ||||||||||||
February 2010 Note payable | 1,901 | (B) | — | |||||||||
Ohio Casualty Note payable | — | (C) | — | |||||||||
Other long-term debt | 57 | — | ||||||||||
Total long-term debt | 1,958 | |||||||||||
Stockholders’ equity | ||||||||||||
Common Stock: | ||||||||||||
Class A (par value $ ; actual: shares issued and outstanding; pro forma: shares issued and outstanding) | — | — | (D) | — | ||||||||
Class B (par value $ ; actual: shares issued and outstanding; pro forma: shares issued and outstanding) | — | — | — | |||||||||
Additional paid-in capital | 7,786 | (D) | ||||||||||
Retained earnings | 167 | |||||||||||
Accumulated other comprehensive income | 549 | |||||||||||
Total stockholders’ equity | 8,502 | |||||||||||
Total capitalization | $ | 10,460 | $ | $ | ||||||||
(A) | Reflects the cash portion of the transfers made in August 2010 to Liberty Mutual to reduce the balance of the February 2010 Note. |
(B) | Reflects the transfer of cash and investments in August 2010 and the transfer of a portion of the estimated net proceeds of this offering to Liberty Mutual to reduce the balance of the February 2010 Note. |
(C) | Reflects the issuance of the Ohio Casualty Note in a principal amount equal to the net proceeds of this offering plus $ , less the transfer of a portion of the net offering proceeds to Liberty Mutual to reduce the balance of the Ohio Casualty Note. |
(D) | Reflects a decrease for the dividend issued in the form of the Ohio Casualty Note (see Note (C)) and an increase for the estimated net proceeds of this offering. In the event that the underwriters’ over-allotment option is exercised, stockholders’ equity will increase and we will use the additional net proceeds for general corporate purposes. |
52
Table of Contents
53
Table of Contents
Six Months | ||||||||||||||||||||||||||||
Ended | ||||||||||||||||||||||||||||
June 30, | Year Ended December 31, | |||||||||||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
(Dollars in millions, except share data) | ||||||||||||||||||||||||||||
Statement of Operations Data | ||||||||||||||||||||||||||||
Net written premiums | $ | 5,180 | $ | 4,975 | $ | 10,148 | $ | 6,704 | $ | 4,407 | $ | 3,748 | 3,530 | |||||||||||||||
Net premiums earned | 5,113 | 5,080 | 9,983 | 6,913 | 4,325 | 3,636 | 3,474 | |||||||||||||||||||||
Net investment income | 463 | 439 | 910 | 719 | 405 | 308 | 272 | |||||||||||||||||||||
Fee and other revenues | 50 | 49 | 97 | 50 | 33 | 31 | 33 | |||||||||||||||||||||
Net realized investment gains (losses) | 227 | (53 | ) | (53 | ) | (407 | ) | (5 | ) | — | 45 | |||||||||||||||||
Total revenues | 5,853 | 5,515 | 10,937 | 7,275 | 4,758 | 3,975 | 3,824 | |||||||||||||||||||||
Claims and claim adjustment expenses | 3,636 | 3,291 | 6,157 | 4,326 | 2,601 | 2,342 | 2,205 | |||||||||||||||||||||
General and administrative expenses | 638 | 494 | 1,005 | 777 | 551 | 401 | 413 | |||||||||||||||||||||
Goodwill impairment(1) | — | — | — | 973 | — | — | — | |||||||||||||||||||||
Amortization of deferred policy acquisition costs | 1,186 | 1,209 | 2,392 | 1,664 | 1,056 | 866 | 808 | |||||||||||||||||||||
Interest expense | 10 | 2 | 4 | 21 | 6 | 1 | 1 | |||||||||||||||||||||
Total claims and expenses | 5,470 | 4,996 | 9,558 | 7,761 | 4,214 | 3,610 | 3,427 | |||||||||||||||||||||
Income (loss) before income tax expense | 383 | 519 | 1,379 | (486 | ) | 544 | 365 | 397 | ||||||||||||||||||||
Income tax expense | 94 | 142 | 377 | 78 | 167 | 113 | 150 | |||||||||||||||||||||
Net income (loss) | $ | 289 | $ | 377 | $ | 1,002 | $ | (564 | ) | $ | 377 | $ | 252 | 247 | ||||||||||||||
Less: Preferred stock dividends | 18 | 32 | 63 | — | — | — | — | |||||||||||||||||||||
Income (loss) available to common stockholders | $ | 271 | $ | 345 | $ | 939 | $ | (564 | ) | $ | 377 | $ | 252 | $ | 247 | |||||||||||||
Share Data | ||||||||||||||||||||||||||||
Net income (loss) available to common stockholders per common share: | ||||||||||||||||||||||||||||
Basic | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Diluted | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||||
Basic (2) | ||||||||||||||||||||||||||||
Diluted (2) | ||||||||||||||||||||||||||||
Non-GAAP Financial Measure(3) | ||||||||||||||||||||||||||||
Pre-tax operating income | $ | 421 | $ | 588 | $ | 1,455 | $ | 934 | $ | 599 | 365 | 352 | ||||||||||||||||
Reconciliation to net income (loss): | ||||||||||||||||||||||||||||
Net income (loss) | 289 | 377 | 1,002 | (564 | ) | 377 | 252 | 247 | ||||||||||||||||||||
Less: Net realized investment gains (losses) | 227 | (53 | ) | (53 | ) | (407 | ) | (5 | ) | — | 45 | |||||||||||||||||
Add: Income tax expense | 94 | 142 | 377 | 78 | 167 | 113 | 150 | |||||||||||||||||||||
Add: Goodwill impairment(1) | — | — | — | 973 | — | — | — | |||||||||||||||||||||
Add: Integration and other acquisition related costs | (2 | ) | 16 | 23 | 40 | 50 | — | — | ||||||||||||||||||||
Add: Run-off reserves (Run-Off Reinsurance Agreement) (4) | 267 | — | — | — | — | — | — | |||||||||||||||||||||
Pre-tax operating income | $ | 421 | $ | 588 | $ | 1,455 | $ | 934 | $ | 599 | $ | 365 | $ | 352 | ||||||||||||||
54
Table of Contents
Six Months | ||||||||||||||||||||||||||||
Ended | ||||||||||||||||||||||||||||
June 30, | Year Ended December 31, | |||||||||||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||
(Dollars in millions, except share data) | ||||||||||||||||||||||||||||
Combined Ratio | ||||||||||||||||||||||||||||
Claims and claim adjustment expense ratio(5) | 62.2 | % | 64.6 | % | 63.7 | % | 64.7 | % | 65.4 | % | 62.2 | % | 58.7 | % | ||||||||||||||
Underwriting expense ratio(6) | 31.2 | 31.4 | 31.7 | 33.0 | 35.0 | 34.3 | 34.0 | |||||||||||||||||||||
Subtotal | 93.4 | 96.0 | 95.4 | 97.7 | 100.4 | 96.5 | 92.7 | |||||||||||||||||||||
Catastrophes(7) | 8.0 | 5.6 | 4.4 | 5.1 | 2.1 | 4.0 | 3.1 | |||||||||||||||||||||
Net incurred losses attributable to prior years | 0.9 | (5.4 | ) | (6.2 | ) | (7.2 | ) | (7.4 | ) | (1.8 | ) | 1.7 | ||||||||||||||||
Combined ratio(8) | 102.3 | % | 96.2 | % | 93.6 | % | 95.6 | % | 95.1 | % | 98.7 | % | 97.5 | % | ||||||||||||||
As of June 30, | As of December 31, | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||
Cash and investments | $ | 19,732 | $ | 22,504 | $ | 20,062 | $ | 11,313 | $ | 6,694 | $ | 6,140 | ||||||||||||
Premium and other receivables, net | 2,491 | 2,405 | 2,567 | 1,438 | 1,090 | 1,012 | ||||||||||||||||||
Goodwill | 3,054 | 3,054 | 3,054 | 1,345 | 290 | 290 | ||||||||||||||||||
Other assets | 4,172 | 4,423 | 5,187 | 2,543 | 1,570 | 1,557 | ||||||||||||||||||
Total assets | 29,449 | 32,386 | 30,870 | 16,639 | 9,644 | 8,999 | ||||||||||||||||||
Unpaid claims and claim adjustment expenses | 12,222 | 12,053 | 12,651 | 7,307 | 4,327 | 3,944 | ||||||||||||||||||
Unearned premiums | 4,749 | 4,658 | 4,837 | 2,519 | 1,741 | 1,644 | ||||||||||||||||||
Debt | 1,958 | 78 | 82 | 216 | 10 | 28 | ||||||||||||||||||
Other liabilities | 2,018 | 3,400 | 2,999 | 1,132 | 1,006 | 837 | ||||||||||||||||||
Total liabilities | 20,947 | 20,189 | 20,569 | 11,174 | 7,084 | 6,453 | ||||||||||||||||||
Stockholders’ equity(9) | 8,502 | 12,197 | 10,301 | 5,465 | 2,560 | 2,546 |
(1) | Our goodwill asset as of June 30, 2010 was $3.054 billion, which remained unchanged from December 31, 2009 and 2008 and largely consists of purchase price in excess of net assets relating to the Ohio Casualty and Safeco acquisitions. These acquisitions resulted in significant cost synergies and other benefits throughout Liberty Mutual Group. Liberty Mutual Group performed an impairment analysis in the third quarter of 2009 using an income-based approach. Based on that analysis, the fair market value of Liberty Mutual Group’s Agency Markets business unit exceeded its carrying value and thus no impairment was necessary. However, because the legal entities that gave rise to this goodwill are part of our company, when we prepared our carve-out financial statements we were required under GAAP to record the full amount of the historical goodwill on our balance sheet and to test that goodwill for our financial statements at each of our reporting units (i.e., segments), only taking into account the synergies and benefits realized by each of our segments, without regard to synergies and benefits realized elsewhere in the Liberty Mutual Group. We conducted an impairment analysis on each of our segments on this required basis in the fourth quarter of 2008, and determined that the carrying value of the goodwill for our Personal segment exceeded its fair value, and recognized an impairment charge in our Personal segment of $973 million in 2008. However the carrying value of goodwill recorded in the consolidated financial statements of Liberty Mutual Group was unaffected. |
(2) | Shares used in the historical earnings per share calculation represent shares of the Class B common stock outstanding subsequent to the , 2010 share recapitalization that increased the common shares outstanding from 1,000 to Class B shares. There is no difference between basic and diluted earnings per share because there were no outstanding options to purchase shares of our common stock or other potentially dilutive securities outstanding. |
(3) | We consider pre-tax operating income to be a useful supplement to net income (loss), its most comparable GAAP measure, in evaluating our financial performance. We believe that the presentation of pre-tax operating income is valuable because it assists an investor in determining the degree to which our insurance-related revenues, composed primarily of net premiums earned, net investment income and fee and |
55
Table of Contents
other revenues, have generated operating earnings after meeting our insurance-related obligations, composed primarily of claims and claim adjustment expenses and other operating costs. |
(4) | Represents unfavorable incurred losses attributable to prior years of $142 million related to run-off reserves in our Corporate and Other segment and a one-time charge of $125 million associated with the Run-Off Reinsurance Agreement. On June 30, 2010 we entered into the Run-Off Reinsurance Agreement providing for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. |
(5) | Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses. |
(6) | Calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses. |
(7) | Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses. |
(8) | Calculated by adding the claims and claim adjustment expense ratio, the underwriting expense ratio, the catastrophes ratio, and net incurred losses attributable to prior years’ combined ratio. |
(9) | For the purposes of presenting the Selected Historical Consolidated Financial Data, the cumulative effect of the change in the method of accounting that resulted in an increase in the opening balance of retained earnings as of January 1, 2007 in the consolidated statement of changes in stockholders’ equity has been recognized in 2005. |
56
Table of Contents
• | February 2010 Note. On February 3, 2010, we declared and paid a dividend to Liberty Mutual in the form of a note payable in the aggregate principal amount of $4 billion due February 29, 2012, bearing interest at an annual rate of 0.72%. In April 2010, we repaid $2.099 billion of this note through a transfer to Liberty Mutual of investments and cash. In August 2010, we repaid an additional $811 million of this note through a transfer to Liberty Mutual of investments and cash. |
• | Ohio Casualty Transfer. Prior to the closing of this offering, Liberty Mutual will cause Ohio Casualty to be transferred to us through a combination of a sale of Ohio Casualty common stock in exchange for the Ohio Casualty Note, payable by us to Liberty Mutual, and the contribution of the remaining Ohio Casualty common stock not already owned by us. At the time of the transfer, we will recognize the principal amount of the Ohio Casualty Note as a liability and reflect a dividend in an equal amount as a reduction to our stockholders’ equity. The contribution of shares will have no impact on our balance sheet because the results of Ohio Casualty have been included in our historical results for all periods presented through the application of carve-out accounting. The Ohio Casualty Note will mature on , and will bear interest at an annual rate of %. The actual aggregate principal amount of the Ohio Casualty Note will not be determinable until the pricing of this offering, but will equal the net proceeds of this offering plus $ . Regardless of the amount of the net proceeds of the offering, our pro forma stockholders’ equity and pro forma total long-term debt as of June 30, 2010 will remain constant at approximately $ million and approximately $ million, respectively, while the principal amount of the Ohio Casualty Note will fluctuate with the proceeds. See Note (F) of the accompanying notes to the pro forma financial statements. |
• | Offering Proceeds. We expect to repay approximately $ million of the February 2010 Note and approximately $ million of the Ohio Casualty Note with net proceeds of this offering, which amounts assume that each share of Class A common stock offered hereby is sold at a price equal to the midpoint of the offering price range as set forth on the cover page of this prospectus. See “Use of Proceeds”. If the over-allotment option is exercised in full, our pro forma stockholders’ equity as of June 30, 2010 will increase to approximately $ million. |
• | Investment Income. Investment income will decrease on a pro forma basis due to transfers of cash and investments to Liberty Mutual in partial satisfaction of the February 2010 Note; and |
57
Table of Contents
• | Interest Expense. Interest expense will increase on a pro forma basis due to higher average levels of outstanding debt following this offering. |
• | Cash and Investments. Cash and investments will decrease by approximately $811 million on a pro forma basis due to the transfer of cash and investments to Liberty Mutual in partial satisfaction of the February 2010 Note; |
• | Debt. Debt will decrease by approximately $ million on a pro forma basis due to the transfer of cash and investments to Liberty Mutual in partial satisfaction of the February 2010 Note, the issuance of the Ohio Casualty Note to Liberty Mutual prior to the closing of this offering, and transfers to Liberty Mutual from the net proceeds of this offering in partial satisfaction of the February 2010 Note and the Ohio Casualty Note; and |
• | Stockholders’ Equity. Stockholders’ equity will decrease by approximately $ million on a pro forma basis due to the dividend to Liberty Mutual associated with the Ohio Casualty Note issuance, partially offset by an increase in stockholders’ equity from the issuance and sale of Class A common stock in this offering. |
• | preferred stock dividends relating to the preferred stock cancelled on April 14, 2010. These dividends decreased the income (loss) available to common stockholders and will not be recurring; and |
• | incremental ongoing costs or charges associated with being a publicly-traded company. |
58
Table of Contents
Actual | Adjustments | Pro forma | ||||||||||
Net premiums earned | $ | 5,113 | $ | $ | ||||||||
Net investment income | 463 | (A) | ||||||||||
Fee and other revenues | 50 | |||||||||||
Net realized investment gains | 227 | |||||||||||
Total revenues | 5,853 | |||||||||||
Claims and claim adjustment expenses | 3,636 | |||||||||||
General and administrative expenses | 638 | |||||||||||
Amortization of deferred policy acquisition costs | 1,186 | |||||||||||
Interest expense | 10 | (B) | ||||||||||
Total claims and expenses | 5,470 | |||||||||||
Income before income tax expense | 383 | |||||||||||
Income tax expense | 94 | (C) | ||||||||||
Net income | $ | 289 | $ | $ | ||||||||
Less: Preferred stock dividends | 18 | |||||||||||
Income available to common stockholders | $ | 271 | $ | $ | ||||||||
Income available to common stockholders per common share: | ||||||||||||
Basic | $ | $ | $ | |||||||||
Diluted | $ | $ | $ | |||||||||
Weighted average common shares outstanding(D) | ||||||||||||
Basic | ||||||||||||
Diluted |
59
Table of Contents
Actual | Adjustments | Pro forma | ||||||||||
Net premiums earned | $ | 9,983 | $ | $ | ||||||||
Net investment income | 910 | (A) | ||||||||||
Fee and other revenues | 97 | |||||||||||
Net realized investment losses | (53 | ) | ||||||||||
Total revenues | 10,937 | |||||||||||
Claims and claim adjustment expenses | 6,157 | |||||||||||
General and administrative expenses | 1,005 | |||||||||||
Amortization of deferred policy acquisition costs | 2,392 | |||||||||||
Interest expense | 4 | (B) | ||||||||||
Total claims and expenses | 9,558 | |||||||||||
Income before income tax expense | 1,379 | |||||||||||
Income tax expense | 377 | (C) | ||||||||||
Net income | $ | 1,002 | $ | $ | ||||||||
Less: Preferred stock dividends | 63 | |||||||||||
Income available to common stockholders | $ | 939 | $ | $ | ||||||||
Income available to common stockholders per common share: | ||||||||||||
Basic | $ | $ | $ | |||||||||
Diluted | $ | $ | $ | |||||||||
Weighted average common shares outstanding(D) | ||||||||||||
Basic | ||||||||||||
Diluted |
60
Table of Contents
Actual | Adjustments | Pro forma | ||||||||||
Cash and investments | $ | 19,732 | $ | (E) | $ | |||||||
Premium and other receivables, net | 2,491 | |||||||||||
Goodwill | 3,054 | |||||||||||
Other assets | 4,172 | |||||||||||
Total assets | $ | 29,449 | $ | $ | ||||||||
Unpaid claims and claim adjustment expenses | $ | 12,222 | $ | $ | ||||||||
Unearned premiums | 4,749 | |||||||||||
Long-term debt | 1,958 | (F) | ||||||||||
Other liabilities | 2,018 | |||||||||||
Total liabilities | $ | 20,947 | $ | $ | ||||||||
Stockholders’ equity | ||||||||||||
Common stock: | ||||||||||||
Class A (par value $ ; actual: shares issued and outstanding; pro forma: shares issued and outstanding) | (G) | |||||||||||
Class B (par value $ ; actual and pro forma: shares issued and outstanding) | ||||||||||||
Additional paid-in capital | 7,786 | (G) | ||||||||||
Retained earnings | 167 | |||||||||||
Accumulated other comprehensive income | 549 | |||||||||||
Total stockholders’ equity | 8,502 | (G) | ||||||||||
Total liabilities and stockholders’ equity | $ | 29,449 | $ | $ | ||||||||
61
Table of Contents
• | % on the estimated $ million outstanding principal amount of the Ohio Casualty Note (see Note F below); and |
• | 0.72% on the estimated $ million outstanding principal amount of the February 2010 Note. |
62
Table of Contents
Estimated Net | Principal Amount of | Total | ||||||||||||||
Public offering price | Proceeds | Ohio Casualty Note | Long-term Debt | Stockholders’ Equity | ||||||||||||
Low | $ | $ | $ | $ | ||||||||||||
Mid | $ | $ | $ | $ | ||||||||||||
High | $ | $ | $ | $ |
63
Table of Contents
• | Commercial: Our Commercial segment uses our eight regional brands to offer insurance coverage for commercial multiple peril, commercial automobile, workers compensation, general liability and other commercial risks to small and mid-size businesses (generally fewer than 150 employees and annual insurance premiums under $150,000) and a national brand for excess casualty products. | |
• | Personal: Our Personal segment uses the Safeco Insurance brand to offer insurance coverage on a national basis for private passenger automobile, homeowners and other personal property and liability risks to individuals. | |
• | Surety: Our Surety segment offers contract and commercial surety bonds utilizing the Liberty Mutual Surety brand for large national accounts and the Liberty SuretyFirst brand for regional and individual accounts. |
64
Table of Contents
65
Table of Contents
66
Table of Contents
67
Table of Contents
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial | $ | 2,257 | $ | 2,328 | $ | (71 | ) | (3.0 | )% | |||||||
Personal | 2,495 | 2,231 | 264 | 11.8 | ||||||||||||
Surety | 363 | 337 | 26 | 7.7 | ||||||||||||
Corporate and Other | 65 | 79 | (14 | ) | (17.7 | ) | ||||||||||
Total net written premiums | $ | 5,180 | $ | 4,975 | $ | 205 | 4.1 | % | ||||||||
68
Table of Contents
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Net premiums earned | $ | 5,113 | $ | 5,080 | $ | 33 | 0.6 | % | ||||||||
Net investment income | 463 | 439 | 24 | 5.5 | ||||||||||||
Fee and other revenues | 50 | 49 | 1 | 2.0 | ||||||||||||
Net realized investment gains (losses) | 227 | (53 | ) | 280 | * | |||||||||||
Total revenues | 5,853 | 5,515 | 338 | 6.1 | ||||||||||||
Claims and expenses | ||||||||||||||||
Claims and claim adjustment expenses | 3,636 | 3,291 | 345 | 10.5 | ||||||||||||
General and administrative expenses | 638 | 494 | 144 | 29.1 | ||||||||||||
Amortization of deferred policy acquisition costs | 1,186 | 1,209 | (23 | ) | (1.9 | ) | ||||||||||
Interest expense | 10 | 2 | 8 | * | ||||||||||||
Total claims and expenses | 5,470 | 4,996 | 474 | 9.5 | ||||||||||||
Income before income tax expense | 383 | 519 | (136 | ) | (26.2 | ) | ||||||||||
Income tax expense | 94 | 142 | (48 | ) | (33.8 | ) | ||||||||||
Net income | $ | 289 | $ | 377 | $ | (88 | ) | (23.3 | )% | |||||||
Reconciliation of net income | ||||||||||||||||
Net income | $ | 289 | $ | 377 | $ | (88 | ) | (23.3 | )% | |||||||
Less: Net realized investment gains (losses) | 227 | (53 | ) | 280 | * | |||||||||||
Add: Income tax expense | 94 | 142 | (48 | ) | (33.8 | ) | ||||||||||
Add: Integration and other acquisition related (benefits) costs | (2 | ) | 16 | (18 | ) | (112.5 | ) | |||||||||
Add: Run-off reserves (Run-off Reinsurance Agreement) | 267 | — | 267 | * | ||||||||||||
Pre-tax operating income | $ | 421 | $ | 588 | $ | (167 | ) | (28.4 | )% | |||||||
* | Not meaningful. |
69
Table of Contents
70
Table of Contents
71
Table of Contents
Six Months Ended | Change in | |||||||||||
June 30, | Percentage | |||||||||||
2010 | 2009 | Points | ||||||||||
Claims and claim adjustment expense ratio (1) | 62.2 | % | 64.6 | % | (2.4 | ) | ||||||
Underwriting expense ratio (2) | 31.2 | 31.4 | (0.2 | ) | ||||||||
Subtotal | 93.4 | 96.0 | (2.6 | ) | ||||||||
Catastrophes (3) | 8.0 | 5.6 | 2.4 | |||||||||
Net incurred losses attributable to prior years | 0.9 | (5.4 | ) | 6.3 | ||||||||
Combined ratio (4) | 102.3 | % | 96.2 | % | 6.1 | |||||||
(1) | Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses. | |
(2) | The underwriting expense ratio is calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Safeco acquisition, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses. | |
(3) | Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses. |
(4) | Calculated by adding the claims and claim adjustment expense ratio, the underwriting expense ratio, catastrophes ratio, and net incurred losses attributable to prior years ratio. |
72
Table of Contents
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial multiple peril | $ | 879 | $ | 913 | $ | (34 | ) | (3.7 | )% | |||||||
Commercial automobile | 555 | 578 | (23 | ) | (4.0 | ) | ||||||||||
Workers compensation | 440 | 443 | (3 | ) | (0.7 | ) | ||||||||||
General liability | 242 | 248 | (6 | ) | (2.4 | ) | ||||||||||
Other(1) | 141 | 146 | (5 | ) | (3.4 | ) | ||||||||||
Total net written premiums | $ | 2,257 | $ | 2,328 | $ | (71 | ) | (3.0 | )% | |||||||
(1) | Other net written premiums consist primarily of inland marine, farmowners multiple peril, allied lines, and fire. |
73
Table of Contents
Six Months | ||||||||||||||||
Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Net premiums earned | $ | 2,272 | $ | 2,384 | $ | (112 | ) | (4.7 | )% | |||||||
Net investment income | 233 | 228 | 5 | 2.2 | ||||||||||||
Fee and other revenues | 17 | 20 | (3 | ) | (15.0 | ) | ||||||||||
Total revenues | 2,522 | 2,632 | (110 | ) | (4.2 | ) | ||||||||||
Total claims and expenses(1) | 2,438 | 2,435 | 3 | 0.1 | ||||||||||||
Pre-tax operating income | $ | 84 | $ | 197 | $ | (113 | ) | (57.4 | )% | |||||||
(1) | Integration and other acquisition related costs associated with the Safeco acquisition of $6 million in the six months ended June 30, 2009 have been excluded from total claims and expenses. |
74
Table of Contents
Six Months Ended | Change in | |||||||||||
June 30, | Percentage | |||||||||||
2010 | 2009 | Points | ||||||||||
Claims and claim adjustment expense ratio | 66.9 | % | 66.9 | % | — | |||||||
Underwriting expense ratio | 34.0 | 34.4 | (0.4 | ) | ||||||||
Subtotal | 100.9 | 101.3 | (0.4 | ) | ||||||||
Catastrophes | 6.4 | 5.7 | 0.7 | |||||||||
Net incurred losses attributable to prior years | (1.7 | ) | (6.4 | ) | 4.7 | |||||||
Combined ratio | 105.6 | % | 100.6 | % | 5.0 | |||||||
75
Table of Contents
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Private passenger automobile | $ | 1,566 | $ | 1,592 | $ | (26 | ) | (1.6 | )% | |||||||
Homeowners | 718 | 445 | 273 | 61.3 | ||||||||||||
Other(1) | 211 | 194 | 17 | 8.8 | ||||||||||||
Total net written premiums | $ | 2,495 | $ | 2,231 | $ | 264 | 11.8 | % | ||||||||
(1) | Other net written premiums consist primarily of fire, allied lines, general liability and inland marine. |
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Net premiums earned | $ | 2,422 | $ | 2,243 | 179 | 8.0 | % | |||||||||
Net investment income | 136 | 122 | 14 | 11.5 | ||||||||||||
Fee and other revenues | 33 | 29 | 4 | 13.8 | ||||||||||||
Total revenues | 2,591 | 2,394 | 197 | 8.2 | ||||||||||||
Total claims and expenses(1) | 2,452 | 2,194 | 258 | 11.8 | ||||||||||||
Pre-tax operating income | $ | 139 | $ | 200 | (61 | ) | (30.5 | )% | ||||||||
(1) | Integration and other acquisition related costs associated with the Safeco acquisition of $5 million in 2009 have been excluded from total claims and expenses. |
76
Table of Contents
77
Table of Contents
Six Months Ended | Change in | |||||||||||
June 30, | Percentage | |||||||||||
2010 | 2009 | Points | ||||||||||
Claims and claim adjustment expense ratio | 62.2 | % | 67.1 | % | (4.9 | ) | ||||||
Underwriting expense ratio | 26.8 | 26.7 | 0.1 | |||||||||
Subtotal | 89.0 | 93.8 | (4.8 | ) | ||||||||
Catastrophes | 10.9 | 6.6 | 4.3 | |||||||||
Net incurred losses attributable to prior years | (1.1 | ) | (4.9 | ) | 3.8 | |||||||
Combined ratio | 98.8 | % | 95.5 | % | 3.3 | |||||||
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Contract bond | $ | 226 | $ | 204 | $ | 22 | 10.8 | % | ||||||||
Commercial bond | 65 | 56 | 9 | 16.1 | ||||||||||||
Small bond (1) | 72 | 77 | (5 | ) | (6.5 | ) | ||||||||||
Total net written premiums | $ | 363 | $ | 337 | $ | 26 | 7.7 | % | ||||||||
(1) | Small bond net written premiums consist of contract and commercial bonds covering small and mid-size businesses and individuals distributed through our network of independent property and casualty insurance agencies. |
78
Table of Contents
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Net premiums earned | $ | 357 | $ | 375 | $ | (18 | ) | (4.8 | )% | |||||||
Net investment income | 30 | 22 | 8 | 36.4 | ||||||||||||
Total revenues | 387 | 397 | (10 | ) | (2.5 | ) | ||||||||||
Total claims and expenses (1) | 242 | 304 | (62 | ) | (20.4 | ) | ||||||||||
Pre-tax operating income | $ | 145 | $ | 93 | $ | 52 | 55.9 | % | ||||||||
(1) | Integration and other acquisition related costs associated with the Safeco acquisition of $3 million in the six months ended June 30, 2009 have been excluded from total claims and expenses. |
79
Table of Contents
Six Months Ended | Change in | |||||||||||
June 30, | Percentage | |||||||||||
2010 | 2009 | Points | ||||||||||
Claims and claim adjustment expense ratio | 36.2 | % | 35.1 | % | 1.1 | |||||||
Underwriting expense ratio | 45.9 | 45.7 | 0.2 | |||||||||
Subtotal | 82.1 | 80.8 | 1.3 | |||||||||
Net incurred losses attributable to prior years | (14.9 | ) | — | (14.9 | ) | |||||||
Combined ratio | 67.2 | % | 80.8 | % | (13.6 | ) | ||||||
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Assumed inter-segment reinsurance arrangements | $ | 107 | $ | 119 | $ | (12 | ) | (10.1 | )% | |||||||
External ceded reinsurance | (42 | ) | (40 | ) | (2 | ) | 5.0 | |||||||||
Total net written premiums | $ | 65 | $ | 79 | $ | (14 | ) | (17.7 | )% | |||||||
80
Table of Contents
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial | $ | (84 | ) | $ | (87 | ) | $ | 3 | (3.4 | )% | ||||||
Personal | (23 | ) | (32 | ) | 9 | (28.1 | ) | |||||||||
Corporate and Other | 107 | 119 | (12 | ) | (10.1 | ) | ||||||||||
Total net written premiums | $ | — | $ | — | $ | — | — | % | ||||||||
Six Months Ended | ||||||||||||||||
June 30, | Change | |||||||||||||||
2010 | 2009 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Net premiums earned | $ | 62 | $ | 78 | $ | (16 | ) | (20.5 | )% | |||||||
Net investment income(1) | 64 | 67 | (3 | ) | (4.5 | ) | ||||||||||
Net realized investment gains (losses) | 227 | (53 | ) | 280 | * | |||||||||||
Total revenues | 353 | 92 | 261 | * | ||||||||||||
Total claims and expenses | 328 | 47 | 281 | * | ||||||||||||
Interest expense | 10 | 2 | 8 | * | ||||||||||||
Income before income tax expense | 15 | 43 | (28 | ) | (65.1 | ) | ||||||||||
Pre-tax operating income(2) | $ | 53 | $ | 98 | $ | (45 | ) | (45.9 | )% |
(1) | The difference between our actual net investment income and the allocated business segment investment income is reported in Corporate and Other. |
(2) | Pre-tax operating income excludes net realized investment gains (losses), unfavorable incurred losses attributable to prior years of $142 million related to run-off reserves in our Corporate and Other segment, a one-time charge of $125 million associated with the Run-Off Reinsurance Agreement in the six months ended June 30, 2010, and integration and other acquisition related (benefits) costs associated with the Safeco acquisition of $(2) million and $2 million for the six months ended June 30, 2010 and 2009, respectively. |
* | Not meaningful. |
81
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial | $ | 4,585 | $ | 3,975 | $ | 610 | 15.3 | % | ||||||||
Personal | 4,689 | 2,122 | 2,567 | 121.0 | ||||||||||||
Surety | 707 | 479 | 228 | 47.6 | ||||||||||||
Corporate and Other | 167 | 128 | 39 | 30.5 | ||||||||||||
Total net written premiums | $ | 10,148 | $ | 6,704 | $ | 3,444 | 51.4 | % | ||||||||
82
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Net premiums earned | $ | 9,983 | $ | 6,913 | $ | 3,070 | 44.4 | % | ||||||||
Net investment income | 910 | 719 | 191 | 26.6 | ||||||||||||
Fee and other revenues | 97 | 50 | 47 | 94.0 | ||||||||||||
Net realized investment losses | (53 | ) | (407 | ) | 354 | (87.0 | ) | |||||||||
Total revenues | 10,937 | 7,275 | 3,662 | 50.3 | ||||||||||||
Claims and expenses | ||||||||||||||||
Claims and claim adjustment expenses | 6,157 | 4,326 | 1,831 | 42.3 | ||||||||||||
General and administrative expenses | 1,005 | 777 | 228 | 29.3 | ||||||||||||
Goodwill impairment | — | 973 | (973 | ) | (100.0 | ) | ||||||||||
Amortization of deferred policy acquisition costs | 2,392 | 1,664 | 728 | 43.8 | ||||||||||||
Interest expense | 4 | 21 | (17 | ) | (81.0 | ) | ||||||||||
Total claims and expenses | 9,558 | 7,761 | 1,797 | 23.2 | ||||||||||||
Income (loss) before income tax expense | 1,379 | (486 | ) | 1,865 | * | |||||||||||
Income tax expense | 377 | 78 | 299 | * | ||||||||||||
Net income (loss) | $ | 1,002 | $ | (564 | ) | $ | 1,566 | * | ||||||||
Reconciliation of Net Income (Loss) | ||||||||||||||||
Net income (loss) | $ | 1,002 | $ | (564 | ) | $ | 1,566 | * | ||||||||
Less: Net realized investment losses | (53 | ) | (407 | ) | 354 | (87.0 | ) | |||||||||
Add: Income tax expense | 377 | 78 | 299 | * | ||||||||||||
Add: Goodwill impairment | — | 973 | (973 | ) | (100.0 | ) | ||||||||||
Add: Integration and other acquisition related costs | 23 | 40 | (17 | ) | (42.5 | ) | ||||||||||
Pre-tax operating income | $ | 1,455 | $ | 934 | $ | 521 | 55.8 | % | ||||||||
* | Not meaningful. |
83
Table of Contents
84
Table of Contents
85
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2009 | 2008 | Points | ||||||||||
Claims and claim adjustment expense ratio (1) | 63.7 | % | 64.7 | % | (1.0 | ) | ||||||
Underwriting expense ratio (2) | 31.7 | 33.0 | (1.3 | ) | ||||||||
Subtotal | 95.4 | 97.7 | (2.3 | ) | ||||||||
Catastrophes (3) | 4.4 | 5.1 | (0.7 | ) | ||||||||
Net incurred losses attributable to prior years | (6.2 | ) | (7.2 | ) | 1.0 | |||||||
Combined ratio (4) | 93.6 | % | 95.6 | % | (2.0 | ) | ||||||
(1) | Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses. | |
(2) | The underwriting expense ratio is calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses. | |
(3) | Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses. |
(4) | Calculated by adding the claims and claim adjustment expense ratio, the underwriting expense ratio, the catastrophes ratio, and net incurred losses attributable to prior years ratio. |
86
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial multiple peril | $ | 1,825 | $ | 1,531 | $ | 294 | 19.2 | % | ||||||||
Commercial automobile | 1,118 | 923 | 195 | 21.1 | ||||||||||||
Workers compensation | 880 | 886 | (6 | ) | (0.7 | ) | ||||||||||
General liability | 474 | 380 | 94 | 24.7 | ||||||||||||
Other (1) | 288 | 255 | 33 | 12.9 | ||||||||||||
Total net written premiums | $ | 4,585 | $ | 3,975 | $ | 610 | 15.3 | % | ||||||||
(1) | Other net written premiums consist primarily of inland marine, farmowners multiple peril, allied lines, and fire. |
87
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 4,606 | $ | 4,024 | $ | 582 | 14.5 | % | ||||||||
Net investment income | 458 | 402 | 56 | 13.9 | ||||||||||||
Fee and other revenues | 34 | 30 | 4 | 13.3 | ||||||||||||
Total revenues | 5,098 | 4,456 | 642 | 14.4 | ||||||||||||
Total claims and expenses (1) | 4,577 | 3,843 | 734 | 19.1 | ||||||||||||
Pre-tax operating income | $ | 521 | $ | 613 | $ | (92 | ) | (15.0 | )% | |||||||
(1) | Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $11 million in 2009 and $19 million in 2008 have been excluded from total claims and expenses. |
88
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2009 | 2008 | Points | ||||||||||
Claims and claim adjustment expense ratio | 65.4 | % | 66.3 | % | (0.9 | ) | ||||||
Underwriting expense ratio | 34.8 | 34.8 | — | |||||||||
Subtotal | 100.2 | 101.1 | (0.9 | ) | ||||||||
Catastrophes | 4.5 | 4.2 | 0.3 | |||||||||
Net incurred losses attributable to prior years | (6.8 | ) | (11.2 | ) | 4.4 | |||||||
Combined ratio | 97.9 | % | 94.1 | % | 3.8 | |||||||
89
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Private passenger automobile | $ | 3,134 | $ | 1,500 | $ | 1,634 | 108.9 | % | ||||||||
Homeowners | 1,164 | 472 | 692 | 146.6 | ||||||||||||
Other (1) | 391 | 150 | 241 | 160.7 | ||||||||||||
Total net written premiums | $ | 4,689 | $ | 2,122 | $ | 2,567 | 121.0 | % | ||||||||
(1) | Other net written premiums consist primarily of fire, allied lines, general liability and inland marine. |
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 4,458 | $ | 2,277 | $ | 2,181 | 95.8 | % | ||||||||
Net investment income | 246 | 131 | 115 | 87.8 | ||||||||||||
Fee and other revenues | 62 | 20 | 42 | * | ||||||||||||
Total revenues | 4,766 | 2,428 | 2,338 | 96.3 | ||||||||||||
Total claims and expenses (1) | 4,337 | 2,342 | 1,995 | 85.2 | ||||||||||||
Pre-tax operating income | $ | 429 | $ | 86 | $ | 343 | * | |||||||||
(1) | Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $9 million in 2009 and $29 million in 2008 have been excluded from total claims and expenses. The goodwill impairment of $973 million realized in our Personal segment in 2008 has been excluded from total claims and expenses. | |
* | Not meaningful. |
90
Table of Contents
91
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2009 | 2008 | Points | ||||||||||
Claims and claim adjustment expense ratio | 67.1 | % | 68.9 | % | (1.8 | ) | ||||||
Underwriting expense ratio | 27.1 | 28.7 | (1.6 | ) | ||||||||
Subtotal | 94.2 | 97.6 | (3.4 | ) | ||||||||
Catastrophes | 5.3 | 5.4 | (0.1 | ) | ||||||||
Net incurred losses attributable to prior years | (4.7 | ) | (1.9 | ) | (2.8 | ) | ||||||
Combined ratio | 94.8 | % | 101.1 | % | (6.3 | ) | ||||||
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Contract bond | $ | 434 | $ | 298 | $ | 136 | 45.6 | % | ||||||||
Commercial bond | 118 | 66 | 52 | 78.8 | ||||||||||||
Small bond(1) | 155 | 115 | 40 | 34.8 | ||||||||||||
Total net written premiums | $ | 707 | $ | 479 | $ | 228 | 47.6 | % | ||||||||
(1) | Small bond net written premiums consist of contract and commercial bonds covering small and mid-size businesses and individuals distributed through our network of independent property and casualty insurance agencies. |
92
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 753 | $ | 478 | $ | 275 | 57.5 | % | ||||||||
Net investment income | 47 | 37 | 10 | 27.0 | ||||||||||||
Fee and other revenues | 1 | — | 1 | * | ||||||||||||
Total revenues | 801 | 515 | 286 | 55.5 | ||||||||||||
Total claims and expenses(1) | 549 | 359 | 190 | 52.9 | ||||||||||||
Pre-tax operating income | $ | 252 | $ | 156 | $ | 96 | 61.5 | % | ||||||||
(1) | Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $4 million in 2009 and $3 million in 2008 have been excluded from total claims and expenses. |
93
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2009 | 2008 | Points | ||||||||||
Claims and claim adjustment expense ratio | 33.7 | % | 32.3 | % | 1.4 | |||||||
Underwriting expense ratio | 45.2 | 46.2 | (1.0 | ) | ||||||||
Subtotal | 78.9 | 78.5 | 0.4 | |||||||||
Catastrophes | — | — | — | |||||||||
Net incurred losses attributable to prior years | (6.6 | ) | (3.8 | ) | (2.8 | ) | ||||||
Combined ratio | 72.3 | % | 74.7 | % | (2.4 | ) | ||||||
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Assumed inter-segment reinsurance arrangements | $ | 236 | $ | 207 | $ | 29 | 14.0 | % | ||||||||
External ceded reinsurance | (69 | ) | (79 | ) | 10 | (12.7 | ) | |||||||||
Total net written premiums | $ | 167 | $ | 128 | $ | 39 | 30.5 | % | ||||||||
94
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial | $ | (173 | ) | $ | (163 | ) | $ | (10 | ) | 6.1 | % | |||||
Personal | (63 | ) | (44 | ) | (19 | ) | 43.2 | |||||||||
Corporate and Other | 236 | 207 | 29 | 14.0 | ||||||||||||
Total net written premiums | $ | — | $ | — | $ | — | — | % | ||||||||
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2009 | 2008 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 166 | $ | 134 | $ | 32 | 23.9 | % | ||||||||
Net investment income(1) | 159 | 149 | 10 | 6.7 | ||||||||||||
Net realized investment losses | (53 | ) | (407 | ) | 354 | (87.0 | ) | |||||||||
Total revenues | 272 | (124 | ) | 396 | * | |||||||||||
Total claims and expenses | 67 | 172 | (105 | ) | (61.0 | ) | ||||||||||
Interest expense | 4 | 21 | (17 | ) | (81.0 | ) | ||||||||||
Income (loss) before income tax expense | 201 | (317 | ) | 518 | * | |||||||||||
Pre-tax operating income(2) | $ | 253 | $ | 79 | $ | 174 | * |
(1) | The difference between our actual net investment income and the allocated business segment investment income is reported in Corporate and Other. | |
(2) | For Corporate and Other, pre-tax operating income excludes net realized investment losses and integration and other acquisition related benefits associated with the Ohio Casualty and Safeco acquisitions of $1 million in 2009 and $11 million in 2008. | |
* | Not meaningful. |
95
Table of Contents
96
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial | $ | 3,975 | $ | 3,039 | $ | 936 | 30.8 | % | ||||||||
Personal | 2,122 | 948 | 1,174 | 123.8 | ||||||||||||
Surety | 479 | 312 | 167 | 53.5 | ||||||||||||
Corporate and Other | 128 | 108 | 20 | 18.5 | ||||||||||||
Total net written premiums | $ | 6,704 | $ | 4,407 | $ | 2,297 | 52.1 | % | ||||||||
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Revenues | ||||||||||||||||
Net premiums earned | $ | 6,913 | $ | 4,325 | $ | 2,588 | 59.8 | % | ||||||||
Net investment income | 719 | 405 | 314 | 77.5 | ||||||||||||
Fee and other revenues | 50 | 33 | 17 | 51.5 | ||||||||||||
Net realized investment losses | (407 | ) | (5 | ) | (402 | ) | * | |||||||||
Total revenues | $ | 7,275 | 4,758 | 2,517 | 52.9 | |||||||||||
Claims and expenses | ||||||||||||||||
Claims and claim adjustment expenses | 4,326 | 2,601 | 1,725 | 66.3 | ||||||||||||
General and administrative expenses | 777 | 551 | 226 | 41.0 | ||||||||||||
Goodwill impairment | 973 | — | 973 | * | ||||||||||||
Amortization of deferred policy acquisition costs | 1,664 | 1,056 | 608 | 57.6 | ||||||||||||
Interest expense | 21 | 6 | 15 | * | ||||||||||||
Total claims and expenses | $ | 7,761 | 4,214 | 3,547 | 84.2 | |||||||||||
Income (loss) before income tax expense | (486 | ) | 544 | (1,030 | ) | (189.3 | ) | |||||||||
Income tax expense | 78 | 167 | (89 | ) | (53.3 | ) | ||||||||||
Net income (loss) | $ | (564 | ) | $ | 377 | $ | (941 | ) | * | |||||||
97
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Reconciliation of Net Income (Loss) | ||||||||||||||||
Net income | $ | (564 | ) | $ | 377 | $ | (941 | ) | * | |||||||
Less: Net realized investment losses | (407 | ) | (5 | ) | (402 | ) | * | |||||||||
Add: Income tax expense | 78 | 167 | (89 | ) | (53.3 | ) | ||||||||||
Add: Goodwill impairment | 973 | — | 973 | * | ||||||||||||
Add: Integration and other acquisition related costs | 40 | 50 | (10 | ) | (20.0 | ) | ||||||||||
Pre-tax operating income | $ | 934 | $ | 599 | $ | 335 | 55.9 | % | ||||||||
* | Not meaningful |
98
Table of Contents
99
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2008 | 2007 | Points | ||||||||||
Claims and claim adjustment expense ratio(1) | 64.7 | % | 65.4 | % | (0.7 | ) | ||||||
Underwriting expense ratio(2) | 33.0 | 35.0 | (2.0 | ) | ||||||||
Subtotal | 97.7 | 100.4 | (2.7 | ) | ||||||||
Catastrophes(3) | 5.1 | 2.1 | 3.0 | |||||||||
Net incurred losses attributable to prior years | (7.2 | ) | (7.4 | ) | 0.2 | |||||||
Combined ratio(4) | 95.6 | % | 95.1 | % | 0.5 | |||||||
(1) | Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses. | |
(2) | The underwriting expense ratio is calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses. | |
(3) | Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses. |
(4) | Calculated by adding the claims and claim adjustment expense ratio, the underwriting expense ratio, the catastrophes ratio, and net incurred losses attributable to prior years ratio. |
100
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial multiple peril | $ | 1,531 | $ | 1,193 | $ | 338 | 28.3 | % | ||||||||
Commercial automobile | 923 | 662 | 261 | 39.4 | ||||||||||||
Workers compensation | 886 | 748 | 138 | 18.4 | ||||||||||||
General liability | 380 | 228 | 152 | 66.7 | ||||||||||||
Other(1) | 255 | 208 | 47 | 22.6 | ||||||||||||
Total net written premiums | $ | 3,975 | $ | 3,039 | $ | 936 | 30.8 | % | ||||||||
(1) | Other net written premiums consist primarily of inland marine, farmowners multiple peril, allied lines and fire. |
101
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 4,024 | $ | 3,025 | $ | 999 | 33.0 | % | ||||||||
Net investment income | 402 | 287 | 115 | 40.1 | ||||||||||||
Fee and other revenues | 30 | 23 | 7 | 30.4 | ||||||||||||
Total revenues | 4,456 | 3,335 | 1,121 | 33.6 | ||||||||||||
Total claims and expenses (1) | 3,843 | 2,835 | 1,008 | 35.6 | ||||||||||||
Pre-tax operating income | $ | 613 | $ | 500 | $ | 113 | 22.6 | % | ||||||||
(1) | Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $19 million in 2008 and $26 million in 2007 have been excluded from total claims and expenses. |
102
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2008 | 2007 | Points | ||||||||||
Claims and claim adjustment expense ratio | 66.3 | % | 66.4 | % | (0.1 | ) | ||||||
Underwriting expense ratio | 34.8 | 35.5 | (0.7 | ) | ||||||||
Subtotal | 101.1 | 101.9 | (0.8 | ) | ||||||||
Catastrophes | 4.2 | 1.8 | 2.4 | |||||||||
Net incurred losses attributable to prior years | (11.2 | ) | (10.9 | ) | (0.3 | ) | ||||||
Combined ratio | 94.1 | % | 92.8 | % | 1.3 | |||||||
103
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Private passenger automobile | $ | 1,500 | $ | 572 | $ | 928 | 162.2 | % | ||||||||
Homeowners | 472 | 321 | 151 | 47.0 | ||||||||||||
Other (1) | 150 | 55 | 95 | 172.7 | ||||||||||||
Total net written premiums | $ | 2,122 | $ | 948 | $ | 1,174 | 123.8 | % | ||||||||
(1) | Other net written premiums consist primarily of fire, allied lines, general liability, and inland marine |
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 2,277 | $ | 894 | $ | 1,383 | 154.7 | % | ||||||||
Net investment income | 131 | 47 | 84 | 178.7 | ||||||||||||
Fee and other revenues | 20 | 7 | 13 | 185.7 | ||||||||||||
Total revenues | 2,428 | 948 | 1,480 | 156.1 | ||||||||||||
Total claims and expenses (1) | 2,342 | 877 | 1,465 | 167.0 | ||||||||||||
Pre-tax operating income | $ | 86 | $ | 71 | $ | 15 | 21.1 | % | ||||||||
(1) | Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $29 million in 2008 and $3 million in 2007 have been excluded from total claims and expenses. The goodwill impairment of $973 million in our Personal segment in 2008 has been excluded from total claims and expenses. |
104
Table of Contents
105
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2008 | 2007 | Points | ||||||||||
Claims and claim adjustment expense ratio | 68.9 | % | 66.0 | % | 2.9 | |||||||
Underwriting expense ratio | 28.7 | 33.1 | (4.4 | ) | ||||||||
Subtotal | 97.6 | 99.1 | (1.5 | ) | ||||||||
Catastrophes | 5.4 | 3.1 | 2.3 | |||||||||
Net incurred losses attributable to prior years | (1.9 | ) | (5.1 | ) | 3.2 | |||||||
Combined ratio | 101.1 | % | 97.1 | % | 4.0 | |||||||
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Contract bond | $ | 298 | $ | 213 | $ | 85 | 39.9 | % | ||||||||
Commercial bond | 66 | 43 | 23 | 53.5 | ||||||||||||
Small bond(1) | 115 | 56 | 59 | 105.4 | ||||||||||||
Total net written premiums | $ | 479 | $ | 312 | $ | 167 | 53.5 | % | ||||||||
(1) | Small bond net written premiums consist of contract and commercial bonds covering small- and mid-size businesses and individuals distributed through our network of independent property and casualty insurance agencies. |
106
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 478 | $ | 289 | $ | 189 | 65.4 | % | ||||||||
Net investment income | 37 | 25 | 12 | 48.0 | ||||||||||||
Fee and other revenues | — | 3 | (3 | ) | (100.0 | ) | ||||||||||
Total revenues | 515 | 317 | 198 | 62.5 | ||||||||||||
Total claims and expenses(1) | 359 | 221 | 138 | 62.4 | ||||||||||||
Pre-tax operating income | $ | 156 | $ | 96 | $ | 60 | 62.5 | % | ||||||||
(1) | Integration and other acquisition related costs, associated with the Ohio Casualty and Safeco acquisitions, of $3 million in 2008 and $1 million in 2007 have been excluded from total claims and expenses. |
107
Table of Contents
Year Ended | Change in | |||||||||||
December 31, | Percentage | |||||||||||
2008 | 2007 | Points | ||||||||||
Claims and claim expense ratio | 32.3 | % | 36.7 | % | (4.4 | ) | ||||||
Underwriting expense ratio | 46.2 | 46.6 | (0.4 | ) | ||||||||
Subtotal | 78.5 | 83.3 | (4.8 | ) | ||||||||
Catastrophes | — | — | — | |||||||||
Net incurred losses attributable to prior years | (3.8 | ) | (7.6 | ) | 3.8 | |||||||
Combined ratio | 74.7 | % | 75.7 | % | (1.0 | ) | ||||||
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Assumed inter-segment reinsurance arrangements | $ | 207 | $ | 141 | $ | 66 | 46.8 | % | ||||||||
External ceded reinsurance | (79 | ) | (33 | ) | (46 | ) | 139.4 | |||||||||
Total net written premiums | $ | 128 | $ | 108 | $ | 20 | 18.5 | % | ||||||||
108
Table of Contents
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Commercial | $ | (163 | ) | $ | (109 | ) | $ | (54 | ) | 49.5 | % | |||||
Personal | (44 | ) | (32 | ) | (12 | ) | 37.5 | |||||||||
Corporate and Other | 207 | 141 | 66 | 46.8 | ||||||||||||
Total net written premiums | $ | — | $ | — | $ | — | — | % | ||||||||
Year Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net premiums earned | $ | 134 | $ | 117 | $ | 17 | 14.5 | % | ||||||||
Net investment income(1) | 149 | 46 | 103 | * | ||||||||||||
Net realized investment losses | (407 | ) | (5 | ) | (402 | ) | * | |||||||||
Fee and other revenues | — | — | — | — | ||||||||||||
Total revenues | (124 | ) | 158 | (282 | ) | (178.5 | ) | |||||||||
Total claims and expenses | 172 | 245 | (73 | ) | (29.8 | ) | ||||||||||
Interest expense | 21 | 6 | 15 | * | ||||||||||||
Loss before income tax expense | (317 | ) | (93 | ) | (224 | ) | * | |||||||||
Pre-tax operating income (loss)(2) | $ | 79 | $ | (68 | ) | $ | 147 | * |
(1) | The difference between our actual net investment income and the allocated business segment investment income is reported in Corporate and Other. | |
(2) | For Corporate and Other, pre-tax operating income excludes net realized investment losses and integration and other acquisition related (benefits) costs associated with the Ohio Casualty and Safeco acquisitions of $(11) million in 2008 and $20 million in 2007. | |
* | Not meaningful. |
109
Table of Contents
110
Table of Contents
• | Reduced our U.S. state and municipal bond exposure by 29.6%, or $2.461 billion, of amortized cost primarily through targeted dispositions, calls, scheduled maturities, the use of investments to settle an affiliate payable outstanding as a result of the termination of reinsurance agreements, the use of investments to pay down a portion of the outstanding principal amount of the February 2010 Note to Liberty Mutual, as well as strategic changes to our investment portfolio; |
• | Decreased our residential mortgage backed securities by 22.2%, or $1.048 billion, of amortized cost primarily through the use of investments to settle an affiliate payable outstanding as a result of the termination of reinsurance agreements, the use of investments to pay down a portion of the outstanding principal amount of the February 2010 Note to Liberty Mutual, as well as strategic changes to our investment portfolio; and |
• | Increased our exposure to corporate and other securities by 24.2%, or $993 million, of amortized cost primarily due to the strategic realignment of our investment portfolio. |
Six Months Ended | ||||||||||||||||||||
June 30, | Year Ended December 31, | |||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Net investment income | $ | 463 | $ | 439 | $ | 910 | $ | 719 | $ | 405 | ||||||||||
Net realized investment gains/(losses) | 227 | (53 | ) | (53 | ) | (407 | ) | (5 | ) | |||||||||||
Total investment results | $ | 690 | $ | 386 | $ | 857 | $ | 312 | $ | 400 | ||||||||||
Average invested assets (1) | $ | 19,015 | $ | 18,835 | $ | 19,501 | $ | 14,769 | $ | 8,416 | ||||||||||
Average adjusted investment yield (2) | 4.96 | % | 5.07 | % | 4.93 | % | 5.01 | % | 4.80 | % | ||||||||||
Average investment yield on fixed maturities (3) | 5.14 | 5.16 | 5.06 | 4.77 | 4.59 |
(1) | Amortized cost is used to calculate the average invested balance for fixed maturities. Cost is used for equity securities. Carrying value is used for short-term investments, mortgage loans and other investments. |
(2) | Excludes net realized investment gains and losses, net unrealized investment gains and losses and net investment income attributable to limited partnerships and LLCs. | |
(3) | Excludes net realized investment gains and losses and net unrealized investment gains and losses. |
111
Table of Contents
Six Months Ended | ||||||||||||||||||||
June 30, | Year Ended December 31, | |||||||||||||||||||
Net Investment Income | 2010 | 2009 | 2009 | 2008 | 2007 | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Fixed maturities | $ | 470 | $ | 453 | $ | 932 | $ | 651 | $ | 356 | ||||||||||
Equity securities | 5 | 20 | 28 | 45 | 30 | |||||||||||||||
Limited partnerships and LLCs | (5 | ) | (35 | ) | (43 | ) | (15 | ) | 3 | |||||||||||
Mortgage loans | 10 | 6 | 14 | 7 | 1 | |||||||||||||||
Cash and cash equivalent interest | 1 | 10 | 12 | 27 | 18 | |||||||||||||||
Other investment income | 2 | 4 | 5 | 8 | 3 | |||||||||||||||
Gross investment income | 483 | 458 | 948 | 723 | 411 | |||||||||||||||
Investment expenses | (20 | ) | (19 | ) | (38 | ) | (4 | ) | (6 | ) | ||||||||||
Net investment income | $ | 463 | $ | 439 | $ | 910 | $ | 719 | $ | 405 | ||||||||||
112
Table of Contents
Fixed Maturities Portfolio as of | ||||||||||||||||
June 30, | December 31, | December 31, | ||||||||||||||
Type of Investment | 2010 | 2009 | 2008 | |||||||||||||
Security credit quality | ||||||||||||||||
Investment grade | 91.5 | % | 95.4 | % | 97.4 | % | ||||||||||
Non-investment grade | 8.5 | 4.6 | 2.6 | |||||||||||||
Asset category | ||||||||||||||||
Municipal bonds | 34.9 | 43.4 | 49.1 | |||||||||||||
Corporate and other | 30.2 | 21.3 | 20.7 | |||||||||||||
Mortgage and asset-backed securities | 30.7 | 31.4 | 26.2 | |||||||||||||
Other | 4.2 | 3.9 | 4.0 | |||||||||||||
Total fixed maturities portfolio | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
113
Table of Contents
As of June 30, | As of December 31, | As of December 31, | ||||||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||
Carrying | % of | Carrying | % of | Carrying | % of | |||||||||||||||||||
Type of Investment | Value | Total | Value | Total | Value | Total | ||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
Fixed maturities, available for sale, at fair value | $ | 17,755 | 90.0 | % | $ | 20,125 | 89.4 | % | $ | 16,820 | 83.9 | % | ||||||||||||
Equity securities, available for sale, at fair value | 221 | 1.1 | 301 | 1.3 | 501 | 2.5 | ||||||||||||||||||
Short-term investments | 100 | 0.5 | 109 | 0.5 | 382 | 1.9 | ||||||||||||||||||
Mortgage loans | 304 | 1.5 | 271 | 1.2 | 201 | 1.0 | ||||||||||||||||||
Other investments | 37 | 0.2 | 150 | 0.7 | 190 | 0.9 | ||||||||||||||||||
Cash and cash equivalents | 1,315 | 6.7 | 1,548 | 6.9 | 1,968 | 9.8 | ||||||||||||||||||
Total invested assets | $ | 19,732 | 100.0 | % | $ | 22,504 | 100.0 | % | $ | 20,062 | 100.0 | % | ||||||||||||
114
Table of Contents
As of June 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(Dollars in millions) | ||||||||||||||||
U.S. government and agency securities | $ | 669 | $ | 34 | $ | — | $ | 703 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | 3,682 | 184 | (21 | ) | 3,845 | |||||||||||
Commercial | 758 | 22 | (2 | ) | 778 | |||||||||||
Other mortgage and asset-backed securities | 787 | 50 | (11 | ) | 826 | |||||||||||
U.S. state and municipal | 5,858 | 371 | (29 | ) | 6,200 | |||||||||||
Corporate and other | 5,104 | 291 | (38 | ) | 5,357 | |||||||||||
Foreign government securities | 17 | 1 | — | 18 | ||||||||||||
Redeemable preferred stock | 26 | 2 | — | 28 | ||||||||||||
Total fixed maturities | 16,901 | 955 | (101 | ) | 17,755 | |||||||||||
Common stock | 68 | 30 | (3 | ) | 95 | |||||||||||
Preferred stock | 131 | 15 | (20 | ) | 126 | |||||||||||
Total equity securities | 199 | 45 | (23 | ) | 221 | |||||||||||
Total fixed and equity securities available for sale | $ | 17,100 | $ | 1,000 | $ | (124 | ) | $ | 17,976 | |||||||
115
Table of Contents
As of December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(Dollars in millions) | ||||||||||||||||
U.S. government and agency securities | $ | 706 | $ | 20 | $ | (1 | ) | $ | 725 | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | 4,730 | 132 | (36 | ) | 4,826 | |||||||||||
Commercial | 558 | 8 | (14 | ) | 552 | |||||||||||
Other mortgage and asset-backed securities | 920 | 36 | (18 | ) | 938 | |||||||||||
U.S. state and municipal | 8,319 | 464 | (41 | ) | 8,742 | |||||||||||
Corporate and other | 4,111 | 221 | (36 | ) | 4,296 | |||||||||||
Foreign government securities | 18 | — | (1 | ) | 17 | |||||||||||
Redeemable preferred stock | 26 | 3 | — | 29 | ||||||||||||
Total fixed maturities | 19,388 | 884 | (147 | ) | 20,125 | |||||||||||
Common stock | 53 | 32 | — | 85 | ||||||||||||
Preferred stock | 205 | 26 | (15 | ) | 216 | |||||||||||
Total equity securities | 258 | 58 | (15 | ) | 301 | |||||||||||
Total fixed and equity securities available for sale | $ | 19,646 | $ | 942 | $ | (162 | ) | $ | 20,426 | |||||||
As of December 31, 2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(Dollars in millions) | ||||||||||||||||
U.S. government and agency securities | $ | 604 | $ | 46 | $ | (1 | ) | $ | 649 | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | 3,162 | 73 | (80 | ) | 3,155 | |||||||||||
Commercial | 551 | — | (66 | ) | 485 | |||||||||||
Other mortgage and asset-backed securities | 792 | 11 | (37 | ) | 766 | |||||||||||
U.S. state and municipal | 8,568 | 93 | (405 | ) | 8,256 | |||||||||||
Corporate and other | 3,746 | 38 | (295 | ) | 3,489 | |||||||||||
Foreign government securities | 18 | 2 | — | 20 | ||||||||||||
Total fixed maturities | 17,441 | 263 | (884 | ) | 16,820 | |||||||||||
Common stock | 282 | — | (67 | ) | 215 | |||||||||||
Preferred stock | 329 | 21 | (64 | ) | 286 | |||||||||||
Total equity securities | 611 | 21 | (131 | ) | 501 | |||||||||||
Total fixed and equity securities available for sale | $ | 18,052 | $ | 284 | $ | (1,015 | ) | $ | 17,321 | |||||||
116
Table of Contents
June 30, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||||||||||||||
Fair | % of | Fair | % of | Fair | % of | |||||||||||||||||||
Fixed Maturities by Credit Quality (1) | Value | Total | Value | Total | Value | Total | ||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||
AAA | $ | 8,092 | 45.5 | % | $ | 9,863 | 49.0 | % | $ | 8,071 | 48.0 | % | ||||||||||||
AA+, AA, AA− | 2,852 | 16.1 | 4,193 | 20.8 | 4,223 | 25.1 | ||||||||||||||||||
A+, A, A− | 2,939 | 16.6 | 3,191 | 15.9 | 2,599 | 15.4 | ||||||||||||||||||
BBB+, BBB, BBB− | 2,365 | 13.3 | 1,943 | 9.7 | 1,506 | 8.9 | ||||||||||||||||||
Total investment grade | 16,248 | 91.5 | 19,190 | 95.4 | 16,399 | 97.4 | ||||||||||||||||||
BB+, BB, BB− | 685 | 3.9 | 472 | 2.3 | 213 | 1.3 | ||||||||||||||||||
B+, B, B− | 682 | 3.8 | 382 | 1.9 | 196 | 1.2 | ||||||||||||||||||
CCC or lower | 140 | 0.8 | 81 | 0.4 | 12 | 0.1 | ||||||||||||||||||
Total below investment grade | 1,507 | 8.5 | 935 | 4.6 | 421 | 2.6 | ||||||||||||||||||
Total fixed maturities | $ | 17,755 | 100.0 | % | $ | 20,125 | 100.0 | % | $ | 16,820 | 100.0 | % | ||||||||||||
(1) | For purposes of this disclosure, credit quality is primarily based upon Standard & Poor’s (referred to as “S&P’’ in this prospectus) ratings. |
As of December 31, 2009 | ||||||||||||||||||||||||||||||||
Mortgage and Asset-Backed Fixed | B or | % of | ||||||||||||||||||||||||||||||
Maturities by Credit Quality | AAA | AA | A | BBB | BB | Lower | Total | Total | ||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||
SBA (1) loans | $ | 727 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 727 | 11.5 | % | ||||||||||||||||
GNMA (2) residential mortgage | 2,384 | — | — | — | — | — | 2,384 | 37.8 | ||||||||||||||||||||||||
FNMA (3) residential mortgage | 935 | — | — | — | — | — | 935 | 14.8 | ||||||||||||||||||||||||
FHLMC (4) residential mortgage | 1,208 | — | — | — | — | — | 1,208 | 19.1 | ||||||||||||||||||||||||
Prime residential mortgage | 133 | — | 6 | 15 | 6 | 37 | 197 | 3.1 | ||||||||||||||||||||||||
Alt-A residential mortgage | 38 | — | 1 | 1 | — | 24 | 64 | 1.0 | ||||||||||||||||||||||||
Sub-prime residential mortgage | 7 | 5 | 11 | 3 | — | 12 | 38 | 0.6 | ||||||||||||||||||||||||
Commercial mortgage backed securities | 439 | 33 | 39 | 41 | — | — | 552 | 8.8 | ||||||||||||||||||||||||
Non-mortgage asset backed securities | 121 | 22 | 28 | 19 | 18 | 3 | 211 | 3.3 | ||||||||||||||||||||||||
Total | $ | 5,992 | $ | 60 | $ | 85 | $ | 79 | $ | 24 | $ | 76 | $ | 6,316 | 100.0 | % | ||||||||||||||||
% of Total | 94.9 | % | 0.9 | % | 1.3 | % | 1.3 | % | 0.4 | % | 1.2 | % | 100.0 | % |
(1) | SBA is the Small Business Administration. | |
(2) | GNMA is the Government National Mortgage Association. | |
(3) | FNMA is the Federal National Mortgage Association. | |
(4) | FMLMC is the Federal Home Loan Mortgage Corporation. |
117
Table of Contents
As of December 31, 2008 | ||||||||||||||||||||||||||||||||
Mortgage and Asset-Backed Fixed | B or | % of | ||||||||||||||||||||||||||||||
Maturities by Credit Quality | AAA | AA | A | BBB | BB | Lower | Total | Total | ||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||
SBA loans | $ | 496 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 496 | 11.3 | % | ||||||||||||||||
GNMA residential mortgage | 143 | — | — | — | — | — | 143 | 3.2 | ||||||||||||||||||||||||
FNMA residential mortgage | 1,162 | — | — | — | — | — | 1,162 | 26.4 | ||||||||||||||||||||||||
FHLMC residential mortgage | 1,444 | — | — | — | — | — | 1,444 | 32.8 | ||||||||||||||||||||||||
Prime residential mortgage | 265 | 9 | 3 | 5 | — | — | 282 | 6.4 | ||||||||||||||||||||||||
Alt-A residential mortgage | 55 | — | — | 6 | — | — | 61 | 1.4 | ||||||||||||||||||||||||
Sub-prime residential mortgage | 47 | 8 | 5 | 1 | — | 2 | 63 | 1.4 | ||||||||||||||||||||||||
Commercial mortgage backed securities | 452 | 27 | 4 | 2 | — | — | 485 | 11.0 | ||||||||||||||||||||||||
Non-mortgage asset backed securities | 165 | 28 | 46 | 27 | 3 | 1 | 270 | 6.1 | ||||||||||||||||||||||||
Total | $ | 4,229 | $ | 72 | $ | 58 | $ | 41 | $ | 3 | $ | 3 | $ | 4,406 | 100.0 | % | ||||||||||||||||
% of Total | 96.0 | % | 1.6 | % | 1.3 | % | 0.9 | % | 0.1 | % | 0.1 | % | 100.0 | % |
As of December 31, | ||||||||||||||||||||||||
As of June 30, 2010 | 2009 | 2008 | ||||||||||||||||||||||
Fair | % of | Fair | % of | Fair | % of | |||||||||||||||||||
Fixed Maturities by Maturity Date | Value | Total | Value | Total | Value | Total | ||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||
1 year or less | $ | 677 | 3.8 | % | $ | 565 | 2.8 | % | $ | 352 | 2.1 | % | ||||||||||||
Over 1 year through 5 years | 3,759 | 21.2 | 3,494 | 17.4 | 2,975 | 17.7 | ||||||||||||||||||
Over 5 years through 10 years | 4,045 | 22.8 | 3,241 | 16.1 | 2,706 | 16.1 | ||||||||||||||||||
Over 10 years | 3,825 | 21.5 | 6,509 | 32.3 | 6,381 | 37.9 | ||||||||||||||||||
Mortgage and asset-backed securities | 5,449 | 30.7 | 6,316 | 31.4 | 4,406 | 26.2 | ||||||||||||||||||
Total fixed maturities | $ | 17,755 | 100.0 | % | $ | 20,125 | 100.0 | % | $ | 16,820 | 100.0 | % | ||||||||||||
118
Table of Contents
As of December 31, 2009 | ||||||||
Carrying | Average Credit | |||||||
Credit Sector | Value | Rating (1) | ||||||
(Dollars in millions) | ||||||||
Corporate and other fixed maturities: | ||||||||
Financial: | ||||||||
Banks | $ | 398 | A | |||||
Diversified Financial Services | 281 | A− | ||||||
Other | 252 | A− | ||||||
Total Financial | 931 | A− | ||||||
Communications: | ||||||||
Telecommunications | 445 | BBB+ | ||||||
Media | 221 | BBB | ||||||
Advertising | 10 | B+ | ||||||
Total Communications | 676 | BBB+ | ||||||
Consumer non-cyclical: | ||||||||
Beverages | 222 | A− | ||||||
Other | 404 | BBB | ||||||
Total Consumer non-cyclical | 626 | BBB+ | ||||||
Industrials | 508 | BBB | ||||||
Utilities | 408 | BBB+ | ||||||
Other | 1,147 | BBB | ||||||
Total Corporate and other fixed maturities | $ | 4,296 | BBB+ | |||||
(1) | For purposes of this disclosure, credit quality is primarily based upon S&P ratings. |
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||
2010 | 2009 | 2009 | 2008 | 2007 | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Gross gains on sales | $ | 249 | $ | 17 | $ | 72 | $ | 34 | $ | 23 | ||||||||||
Gross losses on sales | (12 | ) | (12 | ) | (23 | ) | (232 | ) | (25 | ) | ||||||||||
Net OTTI losses recognized in earnings | (10 | ) | (58 | ) | (102 | ) | (209 | ) | (3 | ) | ||||||||||
Total net realized investment gains (losses) | $ | 227 | $ | (53 | ) | $ | (53 | ) | $ | (407 | ) | $ | (5 | ) | ||||||
119
Table of Contents
Year Ended December 31, 2009 | ||||||||||||||||||||
Fixed | Preferred | Common | Total by | |||||||||||||||||
Impairments by Issuer | Maturities | Stock | Stock | Other | Issuer | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
LMIA High Yield Fund | $ | — | $ | — | $ | (28 | ) | $ | — | $ | (28 | ) | ||||||||
Bank of America | (5 | ) | (9 | ) | — | — | (14 | ) | ||||||||||||
Commonwealth of Puerto Rico | (9 | ) | — | — | — | (9 | ) | |||||||||||||
Citigroup Inc. | — | (9 | ) | — | — | (9 | ) | |||||||||||||
AIG | (4 | ) | (4 | ) | — | — | (8 | ) | ||||||||||||
Other | (26 | ) | (3 | ) | — | (5 | ) | (34 | ) | |||||||||||
Total by security type | $ | (44 | ) | $ | (25 | ) | $ | (28 | ) | $ | (5 | ) | $ | (102 | ) | |||||
Year Ended December 31, 2008 | ||||||||||||||||
Fixed | Preferred | Common | Total by | |||||||||||||
Impairments by Issuer | Maturities | Stock | Stock | Issuer | ||||||||||||
(Dollars in millions) | ||||||||||||||||
Freddie Mac | $ | — | $ | (44 | ) | $ | — | $ | (44 | ) | ||||||
Fannie Mae | — | (32 | ) | (8 | ) | (40 | ) | |||||||||
Lehman Brothers | (13 | ) | — | — | (13 | ) | ||||||||||
General Electric | — | — | (10 | ) | (10 | ) | ||||||||||
Wells Fargo Company | — | (9 | ) | — | (9 | ) | ||||||||||
Other | (48 | ) | (9 | ) | (36 | ) | (93 | ) | ||||||||
Total by security type | $ | (61 | ) | $ | (94 | ) | $ | (54 | ) | $ | (209 | ) | ||||
Year Ended December 31, 2007 | ||||||||||||||||
Fixed | Preferred | Common | Total by | |||||||||||||
Impairments by Issuer | Maturities | Stock | Stock | Issuer | ||||||||||||
(Dollars in millions) | ||||||||||||||||
Fannie Mae | $ | (1 | ) | $ | — | $ | — | $ | (1 | ) | ||||||
Other | (2 | ) | — | — | (2 | ) | ||||||||||
Total by security type | $ | (3 | ) | $ | — | $ | — | $ | (3 | ) | ||||||
120
Table of Contents
As of June 30, 2010 | ||||||||||||||||
Less than 12 Months | 12 Months or longer | |||||||||||||||
Unrealized Losses and Fair Value by | Unrealized | Unrealized | ||||||||||||||
Security Type | Losses | Fair Value | Losses | Fair Value | ||||||||||||
(Dollars in millions) | ||||||||||||||||
U.S. government and agency securities | $ | — | $ | — | $ | — | $ | 11 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | (2 | ) | 29 | (19 | ) | 127 | ||||||||||
Commercial | (1 | ) | 27 | (1 | ) | 25 | ||||||||||
Other mortgage and ABS securities | (3 | ) | 7 | (8 | ) | 34 | ||||||||||
U.S. state and municipal | (2 | ) | 154 | (27 | ) | 216 | ||||||||||
Corporate and other | (20 | ) | 675 | (18 | ) | 153 | ||||||||||
Total fixed maturities | (28 | ) | 892 | (73 | ) | 566 | ||||||||||
Common stock | (3 | ) | 8 | — | — | |||||||||||
Preferred stock | (2 | ) | 23 | (18 | ) | 60 | ||||||||||
Total equity securities | (5 | ) | 31 | (18 | ) | 60 | ||||||||||
Total securities available for sale | $ | (33 | ) | $ | 923 | $ | (91 | ) | $ | 626 | ||||||
121
Table of Contents
As of December 31, 2009 | ||||||||||||||||
Less than 12 Months | 12 Months or longer | |||||||||||||||
Unrealized Losses and Fair Value by | Unrealized | Unrealized | ||||||||||||||
Security Type | Losses | Fair Value | Losses | Fair Value | ||||||||||||
(Dollars in millions) | ||||||||||||||||
U.S. government and agency securities | $ | (1 | ) | $ | 156 | $ | — | $ | — | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | (6 | ) | 545 | (30 | ) | 188 | ||||||||||
Commercial | — | 38 | (14 | ) | 206 | |||||||||||
Other mortgage and ABS securities | (5 | ) | 126 | (13 | ) | 42 | ||||||||||
U.S. state and municipal | (11 | ) | 404 | (30 | ) | 253 | ||||||||||
Corporate and other | (7 | ) | 314 | (29 | ) | 278 | ||||||||||
Foreign government securities | (1 | ) | 13 | — | — | |||||||||||
Total fixed maturities | (31 | ) | 1,596 | (116 | ) | 967 | ||||||||||
Preferred stock | — | — | (15 | ) | 94 | |||||||||||
Total equity securities | — | — | (15 | ) | 94 | |||||||||||
Total securities available for sale | $ | (31 | ) | $ | 1,596 | $ | (131 | ) | $ | 1,061 | ||||||
As of December 31, 2008 | ||||||||||||||||
Less than 12 Months | 12 Months or longer | |||||||||||||||
Unrealized Losses and Fair Value by | Unrealized | Unrealized | ||||||||||||||
Security Type | Losses | Fair Value | Losses | Fair Value | ||||||||||||
(Dollars in millions) | ||||||||||||||||
U.S. government and agency securities | $ | (1 | ) | $ | 14 | $ | — | $ | — | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | (68 | ) | 306 | (12 | ) | 62 | ||||||||||
Commercial | (56 | ) | 391 | (10 | ) | 81 | ||||||||||
Other mortgage and ABS securities | (34 | ) | 239 | (3 | ) | 17 | ||||||||||
U.S. state and municipal | (330 | ) | 4,403 | (75 | ) | 373 | ||||||||||
Corporate and other | (192 | ) | 2,217 | (103 | ) | 305 | ||||||||||
Total fixed maturities | (681 | ) | 7,570 | (203 | ) | 838 | ||||||||||
Common stock | (10 | ) | 52 | (57 | ) | 160 | ||||||||||
Preferred stock | (24 | ) | 137 | (40 | ) | 63 | ||||||||||
Total equity securities | (34 | ) | 189 | (97 | ) | 223 | ||||||||||
Total securities available for sale | $ | (715 | ) | $ | 7,759 | $ | (300 | ) | $ | 1,061 | ||||||
122
Table of Contents
123
Table of Contents
• | treaty reinsurance (including catastrophe reinsurance), in which reinsurance is provided for a specified type or category of risks; and | |
• | facultative reinsurance, in which reinsurance is provided for all or a portion of the insurance provided by a single policy or policies for the same insured and each policy reinsured is separately negotiated. |
124
Table of Contents
125
Table of Contents
Reinsurer | A.M. Best Rating | |
Amlin Bermuda Ltd. | A | |
Allied World Assurance Holdings Group | A | |
Berkshire Hathaway Insurance Group | A++ | |
HDI Haftpflichtverband Deutschen Industrie | A | |
Munich Re Group | A+ | |
Liberty Mutual Group | A | |
Fairfax Financial (USA) Group | A | |
Swiss Re Group | A | |
Transatlantic Holdings, Inc. Group | A |
126
Table of Contents
Single | Single | |||||||
Likelihood of Exceedance (1) | Hurricane | Earthquake | ||||||
(Dollars in millions) | ||||||||
2.0% (1-in-50) | $ | 335 | $ | 142 | ||||
1.0% (1-in-100) | 354 | 272 | ||||||
0.4% (1-in-250) | 524 | 347 | ||||||
0.1% (1-in-1,000) | 1,150 | 910 |
(1) | An event that has, for example, a 2% likelihood of exceedance is sometimes described as a “1-in-50 year event.” As noted above, however, the probabilities in the table represent the likelihood of losses from a single event equaling or exceeding the indicated threshold loss amount in a one-year timeframe, not over a multi-year timeframe. Also, because the probabilities relate to a single event, the probabilities do not address the likelihood of more than one event occurring in a particular period, and therefore the amounts do not address potential aggregate catastrophe losses occurring in a one-year timeframe. |
127
Table of Contents
• | Increasingly unpredictable and severe weather conditions could result in unfavorable frequency and severity of claims under policies we issue. See “Risk Factors — Risks Relating to Our Business — Unpredictable catastrophic events could adversely affect our results of operations, financial condition or liquidity.” | |
• | A number of legal and regulatory measures as well as social initiatives have been introduced in response to changing climate conditions. We cannot predict how these will impact our business. See “Risk Factors — Risks Relating to Our Business — We cannot predict the impact that changing climate conditions, including, but not limited to, legal, regulatory and social responses thereto, may have on our business.” |
128
Table of Contents
Reinsurance | Collateral | Net | ||||||||||
Recoverables | Held | Recoverables | ||||||||||
(Dollars in millions) | ||||||||||||
A.M. Best Rated Reinsurers | $ | 1,013 | $ | 147 | $ | 866 | ||||||
Involuntary pools | 253 | — | 253 | |||||||||
Voluntary pools | 6 | — | 6 | |||||||||
Other (1) | 117 | 17 | 100 | |||||||||
Gross recoverables | 1,389 | 164 | 1,225 | |||||||||
Less: allowance | 75 | — | 75 | |||||||||
Net recoverables | $ | 1,314 | $ | 164 | $ | 1,150 | ||||||
(1) | Includes $89 million of net recoverables from non-rated reinsurers and $11 million of net recoverables from captive and program business. |
A.M. Best | Gross | Net | ||||||||||||
Reinsurer | Rating | Recoverable | Collateral | Recoverable | ||||||||||
(Dollars in millions) | ||||||||||||||
Swiss Reinsurance Group | A | $ | 313 | $ | 76 | $ | 237 | |||||||
Liberty Mutual Group | A | 163 | — | 163 | ||||||||||
Berkshire Hathaway Insurance Group | A++ | 142 | 1 | 141 | ||||||||||
Munich Re Group | A+ | 88 | — | 88 | ||||||||||
Equitas Insurance Limited | Not rated | 42 | — | 42 | ||||||||||
Lincoln Financial Group | A+ | 40 | — | 40 | ||||||||||
PartnerRe Group | A+ | 49 | 17 | 32 | ||||||||||
American International Group, Inc. | A | 21 | — | 21 | ||||||||||
White Mountains Insurance Group | A- | 31 | 11 | 20 | ||||||||||
Chubb Group Insurance Companies | A++ | 17 | — | 17 | ||||||||||
Total significant reinsurers | $ | 906 | $ | 105 | $ | 801 | ||||||||
129
Table of Contents
130
Table of Contents
131
Table of Contents
June 30, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
(Dollars in millions) | ||||||||||||
4.875% Notes, due 2010 | $ | — | $ | — | $ | 19 | ||||||
0.72% Notes, due 2012 (the February 2010 Note) | 1,901 | (A) | — | — | ||||||||
7.25% Notes, due 2012 | 17 | 17 | 17 | |||||||||
7.30% Notes, due 2014 | 20 | 20 | 20 | |||||||||
Capital lease | 19 | 21 | 25 | |||||||||
Subtotal | 1,957 | 58 | 81 | |||||||||
Unamortized fair value adjustments | 1 | 1 | 1 | |||||||||
Total long-term debt excluding current maturities | $ | 1,958 | $ | 59 | $ | 82 | ||||||
(A) | At the date of this prospectus, the outstanding principal amount of the February 2010 Note is $1.090 billion. |
• | Liberty Mutual Group Inc. (“LMGI”), a subsidiary of Liberty Mutual, exchanged $281 million of the outstanding $300 million Safeco 4.875% Senior Notes due 2010 for a like principal amount of newly issued LMGI 4.875% Senior Notes due 2010; | |
• | LMGI exchanged $187 million of the outstanding $204 million Safeco 7.25% Senior Notes due 2012 for a like principal amount of newly issued LMGI 7.25% Senior Notes due 2012; and | |
• | LMGI exchanged $180 million of the outstanding $200 million Ohio Casualty 7.30% Senior Notes due 2014 for a like principal amount of newly issued LMGI 7.30% Senior Notes due 2014. |
132
Table of Contents
133
Table of Contents
134
Table of Contents
135
Table of Contents
136
Table of Contents
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Debt | $ | 37 | $ | — | $ | 17 | $ | 20 | $ | — | ||||||||||
Capital lease | 21 | 5 | 10 | 6 | — | |||||||||||||||
Interest on debt | 12 | 4 | 6 | 2 | — | |||||||||||||||
Total long-term debt obligations(1) | 70 | 9 | 33 | 28 | — | |||||||||||||||
Operating leases(2) | 267 | 41 | 84 | 60 | 82 | |||||||||||||||
Estimated claims and claims related payments | ||||||||||||||||||||
Claims and claim adjustment expenses(3) | 12,053 | 4,578 | 4,272 | 1,707 | 1,496 | |||||||||||||||
Payout from ceded funds withheld(4) | 70 | 18 | 29 | 11 | 12 | |||||||||||||||
Subtotal | 12,123 | 4,596 | 4,301 | 1,718 | 1,508 | |||||||||||||||
Loss based assessments and guaranty funds | 31 | 14 | 11 | 3 | 3 | |||||||||||||||
Liabilities related to unrecognized tax benefits (5) | 6 | — | — | — | — | |||||||||||||||
Total(6) | $ | 12,497 | $ | 4,660 | $ | 4,429 | $ | 1,809 | $ | 1,593 | ||||||||||
�� |
(1) | See Note 8 — “Debt Outstanding” to our historical consolidated financial statements. | |
(2) | Represents all agreements related to lease office space, equipment and furniture. | |
(3) | Represents the estimated timing of future payments for both reported and unreported claims incurred and related claim adjustment expenses, gross of reinsurance recoverable. | |
(4) | Represents estimated payments for losses and return of funds held related to certain reinsurance arrangements whereby we hold a portion of the premium due to the reinsurer and are allowed to pay claims from the amounts held. |
(5) | Our gross current and deferred liabilities related to unrecognized tax benefits were $6 million at December 31, 2009. |
(6) | Purchase obligations are not included in the disclosure. Our purchase obligations are held with Liberty Mutual and the costs associated are passed through to us by a management fee. |
Less | More | |||||||||||||||||||
than 1 | 1-3 | 3-5 | than 5 | |||||||||||||||||
Total | Year | Years | Years | Years | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Reinsurance recoverables | $ | 1,366 | $ | 341 | $ | 461 | $ | 259 | $ | 305 |
Less | More | |||||||||||||||||||
than 1 | 3-5 | than 5 | ||||||||||||||||||
Total | Year | 1-3 Years | Years | Years | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Claims and claim adjustment expenses | $ | 10,757 | $ | 4,255 | $ | 3,840 | $ | 1,459 | $ | 1,203 |
137
Table of Contents
138
Table of Contents
139
Table of Contents
At June 30, 2010 | At December 31, 2009 | At December 31, 2008 | ||||||||||||||||||||||||||||||||||
Case | IBNR | Total | Case | IBNR | Total | Case | IBNR | Total | ||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||||||
Commercial multiple peril | $ | 1,009 | $ | 1,280 | $ | 2,289 | $ | 986 | $ | 1,212 | $ | 2,198 | $ | 1,072 | $ | 1,246 | $ | 2,318 | ||||||||||||||||||
Commercial automobile | 595 | 540 | 1,135 | 605 | 538 | 1,143 | 685 | 514 | 1,199 | |||||||||||||||||||||||||||
Workers compensation | 1,958 | 1,028 | 2,986 | 1,886 | 1,093 | 2,979 | 1,819 | 1,196 | 3,015 | |||||||||||||||||||||||||||
General liability | 286 | 602 | 888 | 332 | 581 | 913 | 328 | 721 | 1,049 | |||||||||||||||||||||||||||
Other | 53 | 30 | 83 | 58 | 28 | 86 | 77 | 32 | 109 | |||||||||||||||||||||||||||
Subtotal | 3,901 | 3,480 | 7,381 | 3,867 | 3,452 | 7,319 | 3,981 | 3,709 | 7,690 | |||||||||||||||||||||||||||
Personal | ||||||||||||||||||||||||||||||||||||
Private passenger automobile | 1,419 | 537 | 1,956 | 1,457 | 564 | 2,021 | 1,430 | 637 | 2,067 | |||||||||||||||||||||||||||
Homeowners | 264 | 254 | 518 | 202 | 153 | 355 | 269 | 162 | 431 | |||||||||||||||||||||||||||
Other | 95 | 141 | 236 | 98 | 113 | 211 | 110 | 108 | 218 | |||||||||||||||||||||||||||
Subtotal | 1,778 | 932 | 2,710 | 1,757 | 830 | 2,587 | 1,809 | 907 | 2,716 | |||||||||||||||||||||||||||
Surety | (62 | ) | 429 | 367 | (42 | ) | 432 | 390 | (6 | ) | 342 | 336 | ||||||||||||||||||||||||
Corporate and Other | 947 | 817 | 1,764 | 1,049 | 708 | 1,757 | 1,191 | 718 | 1,909 | |||||||||||||||||||||||||||
Total | $ | 6,564 | $ | 5,658 | $ | 12,222 | $ | 6,631 | $ | 5,422 | $ | 12,053 | $ | 6,975 | $ | 5,676 | $ | 12,651 | ||||||||||||||||||
140
Table of Contents
(Favorable) Unfavorable Development | ||||||||
Six Months Ended | ||||||||
June 30, | ||||||||
Accident Year | 2010 | 2009 | ||||||
(Dollars in millions) | ||||||||
2009 | $ | (7 | ) | $ | — | |||
2008 | (43 | ) | (106 | ) | ||||
2007 | (20 | ) | (130 | ) | ||||
2006 | — | (40 | ) | |||||
2005 | (3 | ) | (21 | ) | ||||
2004 | (2 | ) | (20 | ) | ||||
2003 | (2 | ) | (5 | ) | ||||
2002 | 3 | 9 | ||||||
2001 | 1 | 13 | ||||||
2000 and prior | 113 | 71 | ||||||
All Years | $ | 40 | $ | (229 | ) | |||
141
Table of Contents
(Favorable) Unfavorable Development | ||||||||||||
Accident Year | 2009 | 2008 | 2007 | |||||||||
(Dollars in millions) | ||||||||||||
2009 | ||||||||||||
2008 | $ | (326 | ) | |||||||||
2007 | (399 | ) | $ | (141 | ) | |||||||
2006 | (122 | ) | (126 | ) | $ | (65 | ) | |||||
2005 | (63 | ) | (28 | ) | (159 | ) | ||||||
2004 | (60 | ) | (26 | ) | (134 | ) | ||||||
2003 | (15 | ) | (32 | ) | 19 | |||||||
2002 | 27 | (28 | ) | (23 | ) | |||||||
2001 | 40 | (40 | ) | 14 | ||||||||
2000 and prior | 216 | (71 | ) | 36 | ||||||||
All Years | $ | (702 | ) | $ | (492 | ) | $ | (312 | ) | |||
• | We experienced favorable development of about $305 million in our commercial general liability line in 2009. This determination was primarily attributable to a detailed review we conducted in 2009 of this line of business by product type. In particular we reviewed umbrella coverages separate from non-umbrella general liability coverages to reflect the distinct patterns in reporting and settlement of these claims. Losses in this line continued to emerge more favorably than expected in accident years 2003 through 2008. | |
• | We experienced favorable development in our private passenger automobile liability line of $160 million in 2009. This improvement was driven by results in 2007 and 2008, and was primarily attributable to frequency of losses in this line continuing to be lower than previously expected, coupled with moderate severity trends. We also have seen loss emergence well below expected levels due in part to economic and other environmental conditions that impacted driver behavior during late 2007 and through 2008. | |
• | We experienced favorable development in our commercial multiple peril line of $121 million during 2009. Much of this development was attributable to paid and reported claims on the commercial liability coverages emerging below expected amounts. The favorable development was most evident in accident years 2006 through 2008. | |
• | We experienced favorable development in our surety business of $58 million during 2009. Given the inherent volatility in this line, we continue to rely on long-term averages to project and plan losses. Loss emergence in the 2009 year was materially better than expected, resulting in this improvement primarily on 2007 and 2008 accident years. | |
• | We experienced favorable development in our commercial automobile liability line of $41 million in 2009. Losses on this line continue to emerge more favorably than expectations on the most recent |
142
Table of Contents
accident years. This favorable emergence was primarily driven by development in the 2008 accident year as a result of frequency and severity trends emerging better than expected. |
• | We experienced favorable development of $194 million in our commercial general liability line for 2008. This result was primarily driven by umbrella coverage where, given the volatile nature of the line, long-term history helps inform the more recent year projections. Losses emerged on this line in 2008 at levels below the long-term average, and below expected levels resulting in favorable development primarily in accident years 2005 through 2007. | |
• | We experienced favorable development of $165 million in our commercial multiple peril line for 2008. This development emerged across accident years 2000 through 2008, and was driven by both paid and incurred losses emerging well below expected amounts due to better than expected frequency trends. | |
• | We experienced favorable development of $64 million for 2008 in our commercial automobile liability line across multiple accident years, but primarily driven by improvement in the 2006 and 2007 accident years due to better than expected emergence of frequency and severity trends. | |
• | We experienced favorable development of $43 million in our private passenger automobile liability line in 2008. This emergency was evident across multiple accident years and was attributable to continued favorable frequency and moderate severity trends. | |
• | We experienced $18 million of favorable development in our surety business in 2008. Given the inherent volatility of this line, we continue to rely on long-term averages to project and plan losses. Loss emergence in 2008 was better than the long-term average across multiple accident years. |
• | We experienced favorable development in our commercial automobile line of $85 million in 2007. This development emerged across multiple accident years, primarily driven by 2002 through 2006, and was attributable to better than expected frequency trends. | |
• | We experienced favorable development of $119 million in our commercial multiple peril line in 2007. This development was most pronounced on accident years 2004 and 2005, driven by better than expected frequency and severity trends. | |
• | We experienced favorable development of $46 million in our workers compensation line in 2007. Workers compensation development was primarily attributable to medical severity trends on paid claims emerging at more favorable levels than planned. In estimating losses in this product line, we consider a long-term view of medical severity and medical inflation. These trends emerged favorably in 2007 on the accident years prior to 2007. | |
• | We experienced favorable development of $9 million in our homeowners line in 2007. This emergence was driven by better than expected loss emergence on property coverage for the 2006 accident year, emerging during the first quarter of 2007. |
143
Table of Contents
144
Table of Contents
145
Table of Contents
146
Table of Contents
147
Table of Contents
148
Table of Contents
• | Trends in jury awards | |
• | Changes in case law | |
• | Litigation trends | |
• | Frequency of claims with payment capped by policy limits | |
• | Change in average severity of accidents or proportion of severe accidents | |
• | Changes in vehicle safety technology | |
• | Subrogation opportunities | |
• | Changes in claim handling philosophies | |
• | Frequency of visits to health providers |
149
Table of Contents
• | Number of medical procedures given during visits to health providers | |
• | Types of health providers used | |
• | Types of medical treatments received | |
• | Changes in cost of medical treatments | |
• | Degree of patient responsiveness to treatment |
• | Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.) | |
• | Changes in mix of insured vehicles (e.g., long haul trucks versus local and smaller vehicles, fleet risks versus non-fleets) | |
• | Changes in underwriting standards |
150
Table of Contents
• | Time required to recover from the injury | |
• | Degree of available transitional jobs | |
• | Degree of legal involvement | |
• | Changes in the interpretations and processes of state workers compensation commissions’ oversight of claims (these are administrative bodies that evaluate whether or not a given claim for workers compensation benefits is valid) | |
• | Future wage inflation for states that index benefits | |
• | Changes in the administrative policies of second injury funds |
• | Changes in the cost of medical treatments (including prescription drugs) and underlying fee schedules (“medical inflation”) | |
• | Changes in need for attendant care | |
• | Frequency of visits to health providers | |
• | Number of medical procedures given during visits to health providers | |
• | Types of health providers used | |
• | Type of medical treatments received | |
• | Use of preferred provider networks and other medical cost containment practices | |
• | Availability of new medical processes, equipment and drugs | |
• | Changes in the use of pharmaceutical drugs | |
• | Degree of patient responsiveness to treatment |
• | Frequency of claim reopening on claims previously closed | |
• | Mortality trends of injured workers with lifetime benefits and medical treatment | |
• | Degree of cost shifting between workers compensation and private/group health insurance |
• | Product mix | |
• | Injury type mix | |
• | Changes in underwriting standards |
151
Table of Contents
152
Table of Contents
• | Changes in claim handling philosophies | |
• | Changes in policy provisions or court interpretation of such provisions | |
• | New theories of liability | |
• | Trends in jury awards | |
• | Changes in the propensity to sue, in general with specificity to particular issues | |
• | Changes in statutes of limitations | |
• | Changes in the underlying court system | |
• | Distortions from losses resulting from large single accounts or single issues | |
• | Changes in tort law | |
• | Shifts in law suit mix between federal and state courts | |
• | Changes in claims adjuster office structure (causing distortions in the data) | |
• | Changes in settlement patterns (e.g., medical malpractice) |
• | Changes in policy provisions (e.g., deductibles, policy limits, endorsements) | |
• | Changes in underwriting standards | |
• | Product mix (e.g., size of account, industries insured, jurisdiction mix) |
153
Table of Contents
• | Physical concentration of policyholders | |
• | Availability and cost of local contractors | |
• | For the more severe catastrophic events, “demand surge” inflation, which refers to significant short-term increases in building material and labor costs due to a sharp increase in demand for those materials and services | |
• | Local building codes | |
• | Amount of time to return property to full usage (for business interruption claims) | |
• | Court interpretation of policy provisions (e.g., occurrence definition, wind versus flooding) | |
• | Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an earthquake) | |
• | Court or legislative changes to the statute of limitations |
• | Policy provisions mix (e.g., deductibles, policy limits, endorsements) | |
• | Changes in underwriting standards |
154
Table of Contents
• | Trends in jury awards | |
• | Changes in the underlying court system | |
• | Changes in case law | |
• | Litigation trends | |
• | Frequency of claims with payment capped by policy limits | |
• | Change in average severity of accidents or proportion of severe accidents | |
• | Subrogation opportunities | |
• | Degree of patient responsiveness to treatment | |
• | Changes in claim handling philosophies |
• | Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.) | |
• | Changes in underwriting standards | |
• | Changes in the use of credit data for rating and underwriting |
155
Table of Contents
• | Salvage opportunities | |
• | Amount of time to return property to residential use | |
• | Changes in weather patterns | |
• | Local building codes | |
• | Litigation trends | |
• | Trends in jury awards |
• | Physical concentration of policyholders | |
• | Availability and cost of local contractors | |
• | Local building codes |
156
Table of Contents
• | Quality of construction of damaged homes | |
• | Amount of time to return property to residential use | |
• | For the more severe catastrophic events, “demand surge” inflation, which refers to significant short-term increases in building material and labor costs due to a sharp increase in demand for those materials and services |
• | Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.) | |
• | Degree of concentration of policyholders | |
• | Changes in underwriting standards | |
• | Changes in the use of credit data for rating and underwriting |
• | Salvage opportunities | |
• | Amount of time to return property to residential use | |
• | Changes in weather patterns | |
• | Local building codes |
157
Table of Contents
• | Litigation trends | |
• | Trends in jury awards | |
• | Physical concentration of policyholders | |
• | Availability and cost of local contractors | |
• | Local building codes | |
• | Quality of construction of damaged homes | |
• | Amount of time to return property to residential use | |
• | Adequacy of stolen jewelry replacement | |
• | Valuation of antiques and other unique properties |
• | Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.) | |
• | Degree of concentration of policyholders | |
• | Changes in underwriting standards | |
• | Changes in the use of credit data for rating and underwriting |
• | Economic trends, including, but not limited to, the general level of construction activity | |
• | Concentration of reserves in a relatively few large claims | |
• | Type of business insured |
158
Table of Contents
• | Type of obligation insured | |
• | Cumulative limits of liability for insured | |
• | Assets available to mitigate loss | |
• | Defective workmanship/latent defects | |
• | Financial strategy of insured | |
• | Changes in statutory obligations | |
• | Geographic spread of business |
• | Changes in policy provisions (e.g., deductibles, limits, endorsements) | |
• | Changes in underwriting standards |
Six Months Ended | Year Ended | |||||||||||
June 30, 2010 | December 31, 2009 | |||||||||||
(Dollars in millions) | ||||||||||||
Reinsurance Operations | $ | 420 | $ | 505 | ||||||||
Run-Off Operations | 1,344 | 1,252 | ||||||||||
Total Corporate and Other | $ | 1,764 | $ | 1,757 | ||||||||
159
Table of Contents
Year Ended | ||||||||||||
Six Months Ended | December 31, | |||||||||||
June 30, 2010 | 2009 | 2008 | ||||||||||
(Dollars in millions) | ||||||||||||
A&E | $ | 458 | $ | 474 | $ | 516 | ||||||
Safeco Commercial Insurance Run-Off Block | 518 | 409 | 456 | |||||||||
Ohio Casualty Great American Run-Off Block | 61 | 71 | 79 | |||||||||
Safeco Assumed Reinsurance | 171 | 161 | 148 | |||||||||
Other Run-Off | 136 | 137 | 171 | |||||||||
Total Reserves | 1,344 | 1,252 | 1,370 | |||||||||
Other Assumed Run-Off Liabilities | 112 | 113 | 127 | |||||||||
Reinsurance Recoverables | (325 | ) | (330 | ) | (349 | ) | ||||||
Total Run-Off Reserves | $ | 1,131 | $ | 1,035 | $ | 1,148 | ||||||
160
Table of Contents
161
Table of Contents
162
Table of Contents
Direct | Assumed | Ceded (1) | Net | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Asbestos | $ | 151 | $ | 155 | $ | (50 | ) | $ | 256 | |||||||
Environmental | 128 | 24 | (20 | ) | 132 | |||||||||||
Total | $ | 279 | (1) | $ | 179 | $ | (70 | ) | $ | 388 | ||||||
Direct | Assumed | Ceded (1) | Net | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Asbestos | $ | 156 | $ | 158 | $ | (47 | ) | $ | 267 | |||||||
Environmental | 136 | 24 | (20 | ) | 140 | |||||||||||
Total | $ | 292 | (1) | $ | 182 | $ | (67 | ) | $ | 407 | ||||||
(1) | The ceded A&E reserves exclude an allowance of $8 million. |
163
Table of Contents
June 30, | ||||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Asbestos: | ||||||||
Balance as of January 1 | $ | 314 | $ | 347 | ||||
Less: Unpaid reinsurance recoverables | 47 | 54 | ||||||
Net balance as of January 1 | 267 | 293 | ||||||
Total incurred | — | — | ||||||
Total paid | 11 | 10 | ||||||
Net balance as of June 30 | 256 | 283 | ||||||
Add: Unpaid reinsurance recoverables | 50 | 51 | ||||||
Balance as of June 30 | 306 | 334 | ||||||
Allowance for reinsurance on unpaid losses | 8 | 8 | ||||||
Total unpaid losses including allowance for unpaid losses | $ | 314 | $ | 342 | ||||
Environmental: | ||||||||
Balance as of January 1 | $ | 160 | $ | 169 | ||||
Less: Unpaid reinsurance recoverables | 20 | 19 | ||||||
Net balance as of January 1 | 140 | 150 | ||||||
Total incurred | — | — | ||||||
Total paid | 8 | 9 | ||||||
Net balance as of June 30 | 132 | 141 | ||||||
Add: Unpaid reinsurance recoverables | 20 | 20 | ||||||
Balance as of June 30 | $ | 152 | $ | 161 | ||||
164
Table of Contents
2009 | 2008 | 2007 | ||||||||||
(Dollars in millions) | ||||||||||||
Asbestos: | ||||||||||||
Balance as of January 1 | $ | 347 | $ | 75 | $ | 21 | ||||||
Less: Unpaid reinsurance recoverables | 54 | 17 | 7 | |||||||||
Net balance as of January 1 | 293 | 58 | 14 | |||||||||
Balance attributable to acquisitions | — | 234 | 45 | |||||||||
Total incurred | (3 | ) | 6 | — | ||||||||
Total paid | 23 | 5 | 1 | |||||||||
Net balance as of December 31 | 267 | 293 | 58 | |||||||||
Add: Unpaid reinsurance recoverables | 47 | 54 | 17 | |||||||||
Balance as of December 31 | 314 | 347 | 75 | |||||||||
Allowance for reinsurance on unpaid losses | 8 | — | — | |||||||||
Total unpaid losses including allowance for unpaid losses | $ | 322 | $ | 347 | $ | 75 | ||||||
Environmental: | ||||||||||||
Balance as of January 1 | $ | 169 | $ | 93 | $ | 24 | ||||||
Less: Unpaid reinsurance recoverables | 19 | 4 | 10 | |||||||||
Net balance as of January 1 | 150 | 89 | 14 | |||||||||
Balance attributable to acquisitions | — | 83 | 33 | |||||||||
Total incurred | 6 | (5 | ) | 49 | ||||||||
Total paid | 16 | 17 | 7 | |||||||||
Net balance as of December 31 | 140 | 150 | 89 | |||||||||
Add: Unpaid reinsurance recoverables | 20 | 19 | 4 | |||||||||
Balance as of December 31 | $ | 160 | $ | 169 | $ | 93 | ||||||
2010 | 2009 | |||||||
Asbestos: | ||||||||
Open claims as of January 1 | 2,265 | 2,721 | ||||||
Add: Count of claims reported | 15 | 59 | ||||||
Less: Count of claims paid/closed or otherwise resolved | 21 | 496 | ||||||
Open claims as of June 30 | 2,259 | 2,284 | ||||||
Environmental: | ||||||||
Open claims as of January 1 | 1,166 | 1,268 | ||||||
Add: Count of claims reported | 66 | 100 | ||||||
Less: Count of claims paid/closed or otherwise resolved | 80 | 196 | ||||||
Open claims as of June 30 | 1,152 | 1,172 |
165
Table of Contents
2009 | 2008 | 2007 | ||||||||||
Asbestos: | ||||||||||||
Open claims as of January 1 | 2,721 | 2,935 | 3,253 | |||||||||
Add: Count of claims reported | 94 | 146 | 234 | |||||||||
Less: Count of claims paid/closed or otherwise resolved | 550 | 360 | 552 | |||||||||
Open claims as of December 31 | 2,265 | 2,721 | 2,935 | |||||||||
Environmental: | ||||||||||||
Open claims as of January 1 | 1,268 | 1,314 | 1,337 | |||||||||
Add: Count of claims reported | 167 | 269 | 363 | |||||||||
Less: Count of claims paid/closed or otherwise resolved | 269 | 315 | 386 | |||||||||
Open claims as of December 31 | 1,166 | 1,268 | 1,314 |
166
Table of Contents
167
Table of Contents
• | Liability related to workers compensation and workers compensation large deductible exposure, general liability and umbrella liability; | |
• | Liability arising from alleged clergy abuse claims; | |
• | Liability related to all pre-1998 Safeco and former American States commercial lines policies including select exited product lines, such as errors and omissions and director and officers liability insurance; and | |
• | Liability related to Safeco’s construction defect program on all activity from 1997 and prior years and exposure on commercial multiple peril and monoline general liability lines only from 1999 and prior years, which primarily consists of direct business. |
• | Liability related to Ohio Casualty’s exited California commercial lines business, predominantly related to workers compensation; | |
• | Liability related to our former“Go-America” non-standard private passenger automobile business that we discontinued in 2007, predominantly related to liability coverage; and | |
• | Liability related to our exposure on various other discontinued programs. |
168
Table of Contents
At June 30, | At December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses | $ | 1,136 | $ | 1,296 | ||||
Allowance for uncollectible reinsurance | (75 | ) | (75 | ) | ||||
Net reinsurance recoverables | 1,061 | 1,221 | ||||||
Mandatory pools and associations | 253 | 259 | ||||||
Total reinsurance recoverables | $ | 1,314 | $ | 1,480 | ||||
169
Table of Contents
170
Table of Contents
171
Table of Contents
At June 30, | At December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Commercial | $ | 1,497 | $ | 1,497 | ||||
Personal | 988 | 988 | ||||||
Surety | 569 | 569 | ||||||
Total Goodwill | $ | 3,054 | $ | 3,054 | ||||
At June 30, | At December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in millions) | ||||||||
Commercial | $ | 343 | $ | 353 | ||||
Personal | 605 | 619 | ||||||
Surety | 83 | 85 | ||||||
Total intangible assets | $ | 1,031 | $ | 1,057 | ||||
172
Table of Contents
As of June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Value | Amortization | Net | ||||||||||
Intangible Assets Subject to Amortization | ||||||||||||
Agency relationship | $ | 766 | $ | (94 | ) | $ | 672 | |||||
Non-compete agreements | 4 | (4 | ) | — | ||||||||
Leases | 12 | 5 | 17 | |||||||||
Other | 1 | (1 | ) | — | ||||||||
Total intangible assets subject to amortization | 783 | (94 | ) | 689 | ||||||||
Total intangible assets not subject to amortization | 342 | — | 342 | |||||||||
Total other intangible assets | $ | 1,125 | $ | (94 | ) | $ | 1,031 | |||||
As of December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Value | Amortization | Net | ||||||||||
(Dollars in millions) | ||||||||||||
Intangible Assets Subject to Amortization | ||||||||||||
Agency relationships | $ | 766 | $ | (70 | ) | $ | 696 | |||||
Non-compete agreements | 4 | (4 | ) | — | ||||||||
Leases | 12 | 5 | 17 | |||||||||
Other | 1 | (1 | ) | — | ||||||||
Total intangible assets subject to amortization | 783 | (70 | ) | 713 | ||||||||
Total intangible assets not subject to amortization | 344 | — | 344 | |||||||||
Total other intangible assets | $ | 1,127 | $ | (70 | ) | $ | 1,057 | |||||
173
Table of Contents
174
Table of Contents
175
Table of Contents
176
Table of Contents
• | Strong Agency Relationships Resulting in High Quality Business: As many of our insurance subsidiaries have been in business for over 80 years, we have a deep understanding of our agents’ and policyholders’ needs. Our local reach through our 111 offices in the United States provides our agents with direct access to our regional executives and enables us to work closely with those agents by providing planning, support and training services. Our franchise has been built over many years through these relationships, particularly with our top performing agents. Given our deep and long-standing agency relationships, we believe we have the opportunity to write the highest quality business and the value of our franchise cannot be easily or quickly replicated. |
• | Localized Knowledge from Multiple Regional Operations with a Highly Efficient National Infrastructure: We are able to combine the high quality service and responsiveness of a regional carrier with the sophisticated underwriting, product development, claims management capability and capital base of a national carrier. This unique combination enables us to develop and maintain deep, long-lasting relationships with independent agencies and policyholders. | |
• | Well-Diversified and Balanced Business Mix: Our business is highly diversified and balanced by product, geographic region, agency relationship and customer account. Our Commercial and Personal segments contributed approximately 45% and 46%, respectively, of our 2009 net written premiums. We believe this diversification enables us to effectively manage through property and casualty pricing cycles and reduces the capital and earnings impact of any single catastrophic event. | |
• | Sophisticated Pricing, Underwriting and Risk Management: Our pricing, underwriting and risk management strategy emphasizes profitable growth and optimization of our risk-adjusted returns in each of our operating segments and product lines. We use proprietary models in conjunction with rigorous analytical review to make pricing and underwriting decisions and to manage risk exposures across geographies, product lines and customer segments. Our objective is to achieve (i) underwriting profitability, (ii) disciplined, opportunistic growth and (iii) attractive risk-adjusted returns. |
• | Superior Financial Strength: Our capitalization and financial strength create a competitive advantage in retaining and attracting new business. After giving pro forma effect to this offering and the transactions for which we have made pro forma adjustments as described under “Pro Forma Consolidated Financial Statements,” at June 30, 2010 we would have had total assets, debt and stockholders’ equity of $ billion, $ million and $ billion, respectively. Furthermore, we believe our reserve position is strong and is bolstered by the Run-Off Reinsurance Agreement between us and Liberty Mutual, which provides for indemnification by Liberty Mutual for up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Run-Off Reinsurance Agreement.” We believe our strong balance sheet and the Run-Off Reinsurance Agreement will afford us continued future financial flexibility enabling us to write more desirable business. |
177
Table of Contents
• | Disciplined Acquisition Strategy and Proven Integration Experience: We have proven experience in acquiring and successfully integrating property and casualty businesses, including Safeco and Ohio Casualty. We are a disciplined acquirer and have a demonstrated ability to realize significant transaction synergies and accelerate earnings growth. | |
• | Experienced Management Team with a Successful Track Record: We have a talented and experienced management team led by our Chief Executive Officer and President, Gary Gregg, who has 21 years of service in the property and casualty insurance industry. Our senior management team has worked in the property and casualty insurance industry for an average of 27 years and has an extensive track record of profitably underwriting, growing and acquiring commercial and personal lines businesses. |
• | Pursue Profitable Growth While Maintaining Pricing and Underwriting Discipline: We expect to grow each of our businesses and achieve attractive risk-adjusted returns, while maintaining our underwriting discipline, well-diversified business mix and broad geographic presence. We believe that the key to success across our businesses lies in our disciplined pricing and underwriting and a culture that focuses on management accountability for the profitability of their respective businesses. We historically have been, and will continue to be, a highly disciplined growth organization. | |
• | Attract High Quality Independent Agencies and Strengthen Existing Relationships: A critical competitive advantage in the property and casualty insurance industry is a loyal, high quality and well managed distribution network that matches the insurer’s products and services with the needs of its policyholders. We believe that our strong agency relationships are the key to success across all of our businesses. It is our objective to be one of the top three insurers within the agencies that distribute our products. We intend to continue strengthening our relationships and building our franchise with top performing agents by providing them with planning, support, training and competitive compensation that supports profitable growth. We also intend to grow our business with our agents by increasing cross-selling efforts, providing comprehensive risk management and insurance solutions for the policyholders served by those agents and delivering a broad array of innovative products and services. | |
• | Focus on Small and Mid-Size Commercial Segment and Personal Lines Customers with Multi-Faceted Insurance Needs: We seek to leverage our strong independent agency network by targeting small and mid-size commercial accounts and individuals with multi-faceted insurance needs. We believe that many customers prefer to purchase insurance products from trusted independent agents with a presence in their communities. Our unique combination of local expertise and decision-making authority, coupled with the strength of our national platform and strong brands, positions us well to offer agencies the products and services that address policyholders’ needs at competitive prices. We believe this focus provides us with relatively consistent and predictable risk-adjusted returns and enables us to selectively pursue business with favorable underwriting characteristics. | |
• | Leverage Scale, Technical Expertise andState-of-the-Art Underwriting Platforms to Provide Competitive Insurance Products and High Quality Services: We are the third largest writer of personal lines and the fifth largest writer of commercial lines property and casualty insurance distributed through independent agencies in the United States, and the second largest writer of surety business in the United States, in each case based on 2009 net written premiums. We intend to continue to build on our scale and technical expertise to provide competitive insurance products and high quality services. As a result of our two most recent acquisitions, we are in the process of unifying our existing underwriting platforms in both our Commercial and Personal segments. The implementation of our unified underwriting platforms will allow us to retire our other underwriting platforms and, once fully implemented, we believe it will result in a decrease in our expense ratio. Our organization has the resources and financial flexibility to continue to devote significant efforts toward technology-based innovations and scale-based efficiencies, both of which are key factors for furthering our competitive advantage in the marketplace. |
178
Table of Contents
• | Capitalize on Fragmentation in the Property and Casualty Insurance Market: We believe we are well positioned to capitalize on the fragmentation in the property and casualty insurance market by capturing market share. Based on A.M. Best data, in commercial lines we believe approximately $72 billion, or 60%, of the industry’s total 2009 net written premiums were written by approximately 520 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining $49 billion, or 40%. In personal lines, we believe approximately $29 billion, or 46%, of the industry’s total 2009 net written premiums were written by approximately 400 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining approximately $34 billion, or 54%. We believe our national infrastructure will provide us with a competitive advantage over regional carriers in capturing market share, while our regional focus will provide us with a competitive advantage over larger national carriers. |
• | Maintain a Strong Balance Sheet: We focus on maintaining levels of capital adequacy, liquidity, and leverage that allow us to pursue attractive growth opportunities. We are committed to disciplined underwriting, earnings growth, effective investment management and capital generation to maintain our claims paying ratings. | |
• | Pursue Accretive Strategic Acquisitions: We have successfully acquired and integrated businesses to accelerate the growth of our company. We intend to continue our strategy of pursuing economically attractive business combinations and acquisitions. Our market presence and strong balance sheet and cash flow, together with management’s demonstrated acquisition integration experience, create an effective platform for our continued growth through strategic acquisitions. We will selectively pursue accretive strategic acquisitions with a focus on maximizing value for our stockholders. |
Six Months Ended June 30, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2010 | 2009 | 2009 | 2008(1) | 2007(2) | ||||||||||||||||||||||||||||||||||||
$ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||||||||||
Commercial multiple peril | $ | 879 | 17% | $ | 913 | 18% | $ | 1,825 | 18% | $ | 1,531 | 23% | $ | 1,193 | 27% | |||||||||||||||||||||||||
Commercial automobile | 555 | 11 | 578 | 12 | 1,118 | 11 | 923 | 14 | 662 | 15 | ||||||||||||||||||||||||||||||
Workers compensation | 440 | 8 | 443 | 9 | 880 | 9 | 886 | 13 | 748 | 17 | ||||||||||||||||||||||||||||||
General liability | 242 | 5 | 248 | 5 | 474 | 5 | 380 | 6 | 228 | 5 | ||||||||||||||||||||||||||||||
Other | 141 | 3 | 146 | 3 | 288 | 2 | 255 | 3 | 208 | 5 | ||||||||||||||||||||||||||||||
Subtotal (Commercial) | $ | 2,257 | 44% | $ | 2,328 | 47% | $ | 4,585 | 45% | $ | 3,975 | 59% | $ | 3,039 | 69% | |||||||||||||||||||||||||
Personal | ||||||||||||||||||||||||||||||||||||||||
Private passenger automobile | $ | 1,566 | 30% | $ | 1,592 | 32% | $ | 3,134 | 31% | $ | 1,500 | 22% | $ | 572 | 13% | |||||||||||||||||||||||||
Homeowners | 718 | 14 | 445 | 9 | 1,164 | 11 | 472 | 7 | 321 | 7 | ||||||||||||||||||||||||||||||
Other | 211 | 4 | 194 | 4 | 391 | 4 | 150 | 3 | 55 | 1 | ||||||||||||||||||||||||||||||
Subtotal (Personal) | $ | 2,495 | 48% | $ | 2,231 | 45% | $ | 4,689 | 46% | $ | 2,122 | 32% | $ | 948 | 21% | |||||||||||||||||||||||||
Surety | ||||||||||||||||||||||||||||||||||||||||
Contract bond | $ | 226 | 4% | $ | 204 | 4% | $ | 434 | 4% | $ | 298 | 4% | $ | 213 | 5% | |||||||||||||||||||||||||
Commercial bond | 65 | 1 | 56 | 1 | 118 | 1 | 66 | 1 | 43 | 1 | ||||||||||||||||||||||||||||||
Small bond | 72 | 2 | 77 | 1 | 155 | 2 | 115 | 2 | 56 | 1 | ||||||||||||||||||||||||||||||
Subtotal (Surety) | $ | 363 | 7% | $ | 337 | 6% | $ | 707 | 7% | $ | 479 | 7% | $ | 312 | 7% | |||||||||||||||||||||||||
Corporate and Other | $ | 65 | 1% | $ | 79 | 2% | $ | 167 | 2% | $ | 128 | 2% | $ | 108 | 3% | |||||||||||||||||||||||||
Consolidated Net Written Premiums | $ | 5,180 | 100% | $ | 4,975 | 100% | $ | 10,148 | 100% | $ | 6,704 | 100% | $ | 4,407 | 100% |
(1) | Includes the results of Safeco subsequent to September 22, 2008. | |
(2) | Includes the results of Ohio Casualty subsequent to August 24, 2007. |
179
Table of Contents
180
Table of Contents
Number of Policies in | ||||||||
Force at | Total Direct Written | |||||||
Annual Policy Premiums | June 30, 2010 | Premiums | ||||||
(In thousands) | (Dollars in millions) | |||||||
<$5K | 904 | $ | 1,410 | |||||
$5-$15K | 152 | 1,305 | ||||||
$15K-$50K | 47 | 1,189 | ||||||
$50K-$100K | 6 | 400 | ||||||
$100K | 2 | 420 | ||||||
Total | 1,111 | $ | 4,724 | |||||
181
Table of Contents
Number of Policies in | ||||||||
Force at | Total Direct Written | |||||||
Annual Policy Premiums | December 31, 2009 | Premiums | ||||||
(In thousands) | (Dollars in millions) | |||||||
<$5K | 899 | $ | 1,408 | |||||
$5-$15K | 151 | 1,316 | ||||||
$15K-$50K | 47 | 1,229 | ||||||
$50K-$100K | 6 | 424 | ||||||
$100K | 2 | 440 | ||||||
Total | 1,105 | $ | 4,817 | |||||
• | Commercial Multiple Peril: Provides coverage tailored to small and mid-size businesses in the form of a package policy that includes property and liability insurance coverages. The property portion covers damage arising from various perils, including fire, wind, hail, water and theft, as well as financial loss due to business interruption. The liability portion covers small and mid-size businesses for liability resulting from bodily injury and property damage to third parties arising from their business operations, accidents on their premises and the products they manufacture or sell. | |
• | Commercial Automobile: Consists of physical damage and liability coverage. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft or other causes. Automobile liability insurance covers bodily injury of others, damage to their property and costs of legal defense resulting from the ownership, maintenance or use of automobiles and trucks in a business. | |
• | Workers Compensation: Provides coverage for employers for specified benefits payable under state or federal law for workplace injuries to employees. There are typically four types of benefits payable under workers compensation policies: medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. | |
• | General Liability: Covers businesses for liability resulting from bodily injury and property damage arising from their general business operations, accidents on their premises and the products they manufacture or sell. | |
• | Other: Consists primarily of inland marine, farmowners multiple peril, allied lines and fire. |
182
Table of Contents
Direct Written | % of | |||||||
Premiums | Total | |||||||
(Dollars in millions) | ||||||||
By State: | ||||||||
California | $ | 312 | 13 | % | ||||
Texas | 151 | 6 | ||||||
New York | 137 | 6 | ||||||
New Jersey | 123 | 5 | ||||||
Washington | 121 | 5 | ||||||
Oregon | 108 | 4 | ||||||
Pennsylvania | 98 | 4 | ||||||
Connecticut | 85 | 4 | ||||||
Illinois | 84 | 4 | ||||||
Indiana | 83 | 4 | ||||||
Top 10 States | 1,302 | 55 | ||||||
Other States | 1,069 | 45 | ||||||
Total Commercial | $ | 2,371 | 100 | % | ||||
183
Table of Contents
Direct Written | % of | |||||||
Premiums | Total | |||||||
(Dollars in millions) | ||||||||
By State: | ||||||||
California | $ | 636 | 13 | % | ||||
Texas | 303 | 7 | ||||||
New York | 263 | 6 | ||||||
Washington | 242 | 5 | ||||||
New Jersey | 236 | 5 | ||||||
Oregon | 230 | 5 | ||||||
Illinois | 208 | 4 | ||||||
Pennsylvania | 201 | 4 | ||||||
Indiana | 163 | 3 | ||||||
Connecticut | 160 | 3 | ||||||
Top 10 States | 2,642 | 55 | ||||||
Other States | 2,175 | 45 | ||||||
Total Commercial | $ | 4,817 | 100 | % | ||||
184
Table of Contents
• | Private Passenger Automobile: Consists of physical damage and liability coverage. Automobile physical damage insurance covers loss or damage to vehicles from collision, vandalism, fire, theft or various other perils. Automobile liability insurance covers bodily injury of others, damage to their property and costs of legal defense resulting from a collision caused by the insured. In addition, many states require policies to provide what is frequently referred to as “no-fault” coverage whereby policyholders recover medical and related expenses from their own insurance company, regardless of fault, and their right to commence litigation to recover for pain and suffering is restricted. | |
• | Homeowners: Covers losses to an insured’s home, including its contents, as a result of weather, fire, theft and various other perils, and losses resulting from liability for acts of negligence by the insured or the insured’s immediate family. We provide homeowners insurance for dwellings, condominiums and rental property contents. We also offer identity theft resolution assistance and identity theft expense reimbursement coverage as an option that can be added to a homeowners policy. | |
• | Other: Includes products covering fire, allied lines, general liability and inland marine. |
185
Table of Contents
Direct Written | % of | |||||||
Premiums | Total | |||||||
(Dollars in millions) | ||||||||
By State: | ||||||||
California | $ | 336 | 14 | % | ||||
Washington | 236 | 10 | ||||||
Texas | 161 | 7 | ||||||
Oregon | 109 | 4 | ||||||
Connecticut | 92 | 4 | ||||||
Ohio | 88 | 4 | ||||||
Missouri | 82 | 3 | ||||||
New York | 79 | 3 | ||||||
Kentucky | 78 | 3 | ||||||
Pennsylvania | 74 | 3 | ||||||
Top 10 States | 1,335 | 55 | ||||||
Other States | 1,103 | 45 | ||||||
Total Personal | $ | 2,438 | 100 | % | ||||
186
Table of Contents
Direct Written | % of | |||||||
Premiums | Total | |||||||
(Dollars in millions) | ||||||||
By State: | ||||||||
California | $ | 649 | 13 | % | ||||
Washington | 479 | 10 | ||||||
Texas(1) | 328 | 7 | ||||||
Oregon | 221 | 4 | ||||||
Connecticut | 188 | 4 | ||||||
Ohio | 180 | 4 | ||||||
Missouri | 179 | 4 | ||||||
Kentucky | 159 | 3 | ||||||
Pennsylvania | 151 | 3 | ||||||
Illinois | 151 | 3 | ||||||
Top 10 States | 2,685 | 55 | ||||||
Other States | 2,186 | 45 | ||||||
Total Personal | $ | 4,871 | 100 | % | ||||
(1) | Excludes $77 million of private passenger automobile written premiums assumed through a fronting arrangement with a third-party insurer. |
187
Table of Contents
188
Table of Contents
Direct Written | % of | |||||||
Premiums | Total | |||||||
(Dollars in millions) | ||||||||
By State: | ||||||||
California | $ | 49 | 13 | % | ||||
New York | 37 | 10 | ||||||
Texas | 32 | 9 | ||||||
Pennsylvania | 19 | 5 | ||||||
Florida | 19 | 5 | ||||||
New Jersey | 14 | 4 | ||||||
Washington | 13 | 3 | ||||||
Illinois | 13 | 3 | ||||||
Massachusetts | 12 | 3 | ||||||
Virginia | 11 | 3 | ||||||
Top 10 States | 219 | 58 | ||||||
Other States | 157 | 42 | ||||||
Total Surety | $ | 376 | 100 | % | ||||
Direct Written | % of | |||||||
Premiums | Total | |||||||
(Dollars in millions) | ||||||||
By State: | ||||||||
California | $ | 86 | 12 | % | ||||
New York | 73 | 10 | ||||||
Texas | 64 | 9 | ||||||
Florida | 43 | 6 | ||||||
Pennsylvania | 36 | 5 | ||||||
Washington | 26 | 4 | ||||||
Virginia | 26 | 4 | ||||||
Illinois | 25 | 3 | ||||||
New Jersey | 25 | 3 | ||||||
Massachusetts | 20 | 2 | ||||||
Top 10 States | 424 | 58 | ||||||
Other States | 305 | 42 | ||||||
Total Surety | $ | 729 | 100 | % | ||||
189
Table of Contents
190
Table of Contents
191
Table of Contents
192
Table of Contents
193
Table of Contents
2010 | 2009 | |||||||
Balance as of January 1 | $ | 12,053 | $ | 12,651 | ||||
Less: Unpaid reinsurance recoverables | 1,366 | 1,517 | ||||||
Net balance as of January 1 | 10,687 | 11,134 | ||||||
Balance attributable to acquisitions | — | — | ||||||
Incurred attributable to: | ||||||||
Current year | 3,596 | 3,520 | ||||||
Prior years | 40 | (229 | ) | |||||
Total incurred | 3,636 | 3,291 | ||||||
Paid attributable to: | ||||||||
Current year | 1,524 | 1,440 | ||||||
Prior years | 1,840 | 1,891 | ||||||
Total paid | 3,364 | 3,331 | ||||||
Add: Unpaid reinsurance recoverables | 1,263 | 1,521 | ||||||
Balance as of June 30 | $ | 12,222 | $ | 12,615 | ||||
2009 | 2008 | 2007 | ||||||||||
(Dollars in millions) | ||||||||||||
Balance as of January 1 | $ | 12,651 | $ | 7,307 | $ | 4,327 | ||||||
Less: Unpaid reinsurance recoverables | 1,517 | 1,158 | 620 | |||||||||
Net balance as of January 1 | 11,134 | 6,149 | 3,707 | |||||||||
Balance attributable to acquisitions | — | 4,928 | 2,128 | |||||||||
Incurred attributable to: | ||||||||||||
Current year | 6,859 | 4,818 | 2,913 | |||||||||
Prior years | (702 | ) | (492 | ) | (312 | ) | ||||||
Total incurred | 6,157 | 4,326 | 2,601 | |||||||||
Paid attributable to: | ||||||||||||
Current year | 3,443 | 2,414 | 1,223 | |||||||||
Prior years | 3,161 | 1,855 | 1,064 | |||||||||
Total paid | 6,604 | 4,269 | 2,287 | |||||||||
Add: Unpaid reinsurance recoverables | 1,366 | 1,517 | 1,158 | |||||||||
Balance as of December 31 | $ | 12,053 | $ | 12,651 | $ | 7,307 | ||||||
194
Table of Contents
At December 31, | ||||||||||||||||||||||||||||||||||||||||||||
2008 | 2009 | |||||||||||||||||||||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007(a) | (a)(b) | (a)(b) | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||
I. Reserves for claims and claim adjustment expenses originally estimated | $ | 1,682 | $ | 1,639 | $ | 2,340 | $ | 2,430 | $ | 2,556 | $ | 3,012 | $ | 3,244 | $ | 3,707 | $ | 6,149 | $ | 11,134 | $ | 10,687 | ||||||||||||||||||||||
II. Cumulative amounts paid as of(c) | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 737 | 733 | 1,030 | 900 | 916 | 954 | 956 | 1,064 | 1,855 | 3,162 | ||||||||||||||||||||||||||||||||||
Two years later | 1,111 | 1,122 | 1,499 | 1,421 | 1,397 | 1,469 | 1,465 | 1,689 | 2,946 | |||||||||||||||||||||||||||||||||||
Three years later | 1,329 | 1,317 | 1,795 | 1,708 | 1,687 | 1,763 | 1,863 | 2,108 | ||||||||||||||||||||||||||||||||||||
Four years later | 1,443 | 1,449 | 1,940 | 1,899 | 1,869 | 2,018 | 2,084 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,525 | 1,525 | 2,063 | 2,005 | 2,030 | 2,151 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,583 | 1,595 | 2,155 | 2,131 | 2,126 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,638 | 1,648 | 2,259 | 2,206 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,679 | 1,710 | 2,327 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,746 | 1,756 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,805 | |||||||||||||||||||||||||||||||||||||||||||
III. Reserves re-estimated as of(c) | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 1,723 | 1,724 | 2,375 | 2,540 | 2,468 | 2,874 | 3,120 | 3,395 | 5,657 | 10,432 | ||||||||||||||||||||||||||||||||||
Two years later | 1,742 | 1,763 | 2,479 | 2,491 | 2,434 | 2,879 | 2,858 | 3,176 | 5,628 | |||||||||||||||||||||||||||||||||||
Three years later | 1,757 | 1,800 | 2,414 | 2,479 | 2,440 | 2,757 | 2,759 | 3,269 | ||||||||||||||||||||||||||||||||||||
Four years later | 1,776 | 1,759 | 2,446 | 2,479 | 2,565 | 2,643 | 2,861 | |||||||||||||||||||||||||||||||||||||
Five years later | 1,742 | 1,785 | 2,445 | 2,553 | 2,451 | 2,743 | ||||||||||||||||||||||||||||||||||||||
Six years later | 1,778 | 1,802 | 2,591 | 2,450 | 2,552 | |||||||||||||||||||||||||||||||||||||||
Seven years later | 1,793 | 1,871 | 2,518 | 2,543 | ||||||||||||||||||||||||||||||||||||||||
Eight years later | 1,848 | 1,850 | 2,603 | |||||||||||||||||||||||||||||||||||||||||
Nine years later | 1,857 | 1,906 |
195
Table of Contents
At December 31, | ||||||||||||||||||||||||||||||||||||||||||||
2008 | 2009 | |||||||||||||||||||||||||||||||||||||||||||
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007(a) | (a)(b) | (a)(b) | ||||||||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Ten years later | 1,926 | |||||||||||||||||||||||||||||||||||||||||||
IV. Cumulative deficiency (redundancy) | 244 | 267 | 263 | 113 | (4 | ) | (269 | ) | (383 | ) | (438 | ) | (521 | ) | (702 | ) | ||||||||||||||||||||||||||||
Gross liability-end of year | $ | 2,184 | $ | 2,108 | $ | 2,560 | $ | 2,851 | $ | 2,889 | $ | 3,516 | $ | 3,944 | $ | 4,327 | $ | 7,307 | $ | 12,651 | $ | 12,053 | ||||||||||||||||||||||
Reinsurance recoverables | 502 | 469 | 220 | 421 | 333 | 504 | 700 | 620 | 1,158 | 1,517 | 1,366 | |||||||||||||||||||||||||||||||||
Net liability-end of year | $ | 1,682 | $ | 1,639 | $ | 2,340 | $ | 2,430 | $ | 2,556 | $ | 3,012 | $ | 3,244 | $ | 3,707 | $ | 6,149 | $ | 11,134 | $ | 10,687 | ||||||||||||||||||||||
V. Gross re-estimated liability-latest | $ | 2,501 | $ | 2,451 | $ | 2,848 | $ | 2,984 | $ | 2,884 | $ | 3,202 | $ | 3,478 | $ | 3,816 | $ | 6,688 | $ | 11,853 | ||||||||||||||||||||||||
Re-estimated reinsurance recoverables-latest | 575 | 545 | 245 | 441 | 332 | 459 | 617 | 547 | 1,060 | 1,421 | ||||||||||||||||||||||||||||||||||
Net re-estimated liability-latest | $ | 1,926 | $ | 1,906 | $ | 2,603 | $ | 2,543 | $ | 2,552 | $ | 2,743 | $ | 2,861 | $ | 3,269 | $ | 5,628 | $ | 10,432 | ||||||||||||||||||||||||
VI. Gross cumulative deficiency (redundancy) | $ | 317 | $ | 343 | $ | 288 | $ | 133 | $ | (5 | ) | $ | (314 | ) | $ | (466 | ) | $ | (511 | ) | $ | (619 | ) | $ | (798 | ) | ||||||||||||||||||
(a) | Data for year ended December 31, 2007 and subsequent include reserves of Ohio Casualty, which was acquired on August 24, 2007. | |
(b) | Data for year ended December 31, 2008 and subsequent include reserves of Safeco, which was acquired on September 22, 2008. | |
(c) | Cumulative amounts paid and reserves reestimated for years ended December 31, 2006 and prior are based on statutory annual statement data found in Schedule P and includes history for all of our insurance subsidiaries as of December 31, 2006 whether or not individual subsidiaries or affiliates were originally part of our company. Development taking place on these reserves during calendar years 2007 and 2008 was determined on a pooled basis using the pooling percentages in place at that time. |
196
Table of Contents
Rating Agency | Rating | Rank of Rating | Outlook | |||
S&P | A- (Strong) | (7th highest of 21 ratings) | Stable | |||
A.M. Best | A (Excellent) | (3rd highest of 15 ratings) | Negative | |||
Moody’s | A2 (Good) | (6th highest of 21 ratings) | Negative |
• | Agency and policyholder channel management, including portals ande-bonding | |
• | Billing services | |
• | Claims processing and management | |
• | Policy administration systems, underwriting, pricing and rules engines | |
• | Content and document management | |
• | Financial systems |
197
Table of Contents
• | Information management, business intelligence and data warehousing |
• | Data center operations and facilities management | |
• | Disaster recovery and backup services/storage | |
• | Centralized and distributed computing, data storage management and desktop support, asset management, and change management | |
• | Data networking, multi-protocol label switching and related carrier services, and remote access | |
• | Voice and video communications, voice over internet protocol, wireless services and contact center support | |
• | Help desk operations | |
• | Print and publishing processing services |
198
Table of Contents
199
Table of Contents
200
Table of Contents
201
Table of Contents
202
Table of Contents
203
Table of Contents
Insurance Subsidiary | IRIS Ratio(s) | |
American Economy Insurance Company | Gross Change in Policyholders Surplus | |
Change in Adjusted Policyholders Surplus | ||
America First Insurance Company | Gross Written Premium to Surplus | |
America First Lloyd’s Insurance Company | Gross Written Premium to Surplus | |
American States Preferred Insurance Company | Change in Adjusted Policyholders Surplus | |
Colorado Casualty Insurance Company | Investment Yield | |
Golden Eagle Insurance Corporation | Change in Adjusted Policyholders Surplus | |
Hawkeye-Security Insurance Company | Investment Yield | |
The Midwestern Indemnity Company | Investment Yield | |
Gross Change in Policyholders Surplus | ||
Change in Adjusted Policyholders Surplus | ||
North Pacific Insurance Company | Gross Written Premium to Surplus | |
Investment Yield | ||
Adjusted Liabilities to Liquid Assets | ||
The Ohio Casualty Insurance Company | Change in Adjusted Policyholders Surplus | |
Peerless Insurance Company | Adjusted Liabilities to Liquid Assets | |
Safeco Insurance Company of America | Change in Adjusted Policyholders Surplus | |
Safeco Insurance Company of Indiana | Gross Written Premium to Surplus | |
Safeco Insurance Company of Oregon | Gross Written Premium to Surplus | |
Adjusted Liabilities to Liquid Assets | ||
Safeco National Insurance Company | Change in Net Written Premium | |
Two Year Overall Operating | ||
Investment Yield |
204
Table of Contents
• | The “Company Action Level” is triggered if a company’s total adjusted capital is less than 200% but greater than or equal to 150% of its RBC. At the “Company Action Level,” a company must submit a comprehensive plan to the state insurance regulator that discusses proposed corrective actions to improve its capital position. In states where the property/casualty trend test has been enacted, the “Company Action Level” is triggered if a company’s total adjusted capital is between 200% and 300% of its RBC with a combined ratio greater than 120%. | |
• | The “Regulatory Action Level” is triggered if a company’s total adjusted capital is less than 150% but greater than or equal to 100% of its RBC. At the “Regulatory Action Level,” the state insurance regulator will perform a special examination of the company and issue an order specifying corrective actions that must be followed. | |
• | The “Authorized Control Level” is triggered if a company’s total adjusted capital is less than 100% but greater than or equal to 70% of its RBC, at which level the state insurance regulator may take any action it deems necessary, including placing the company under regulatory control. | |
• | The “Mandatory Control Level” is triggered if a company’s total adjusted capital is less than 70% of its RBC, at which level the state insurance regulator is mandated to place the company under its control. |
205
Table of Contents
206
Table of Contents
207
Table of Contents
208
Table of Contents
Name | Age | Position | ||||
Edmund F. Kelly (1) | 65 | Chairman of the Board | ||||
Gary R. Gregg (2) | 55 | Chief Executive Officer, President and Director | ||||
Michael J. Fallon | 42 | Senior Vice President and Chief Financial Officer | ||||
Joseph A. Gilles | 54 | Senior Vice President and Manager, Actuarial and Corporate Research | ||||
Scott R. Goodby | 55 | President, Commercial Segment | ||||
Michael H. Hughes | 55 | President, Personal Segment | ||||
Edmund C. Kenealy | 47 | Senior Vice President, General Counsel and Secretary | ||||
Timothy A. Mikolajewski | 52 | President, Surety Segment | ||||
Paul G. Alexander (3) | 49 | Director | ||||
A. Alexander Fontanes (4) | 55 | Director | ||||
Dennis J. Langwell (5) | 51 | Director | ||||
David H. Long (6) | 49 | Director | ||||
Christopher C. Mansfield (7) | 60 | Director | ||||
Helen E. R. Sayles (8) | 59 | Director | ||||
(9) | Director nominee |
(1) | Class director. | |
(2) | Class director. | |
(3) | Class director. | |
(4) | Class director. | |
(5) | Class director. | |
(6) | Class director. | |
(7) | Class director. | |
(8) | Class director. | |
(9) | Will be one of our Class directors upon the consummation of this offering. |
209
Table of Contents
210
Table of Contents
211
Table of Contents
212
Table of Contents
• | to monitor our financial reporting process and internal control system; | |
• | to appoint and replace our independent registered public accounting firm from time to time, determine their compensation and other terms of engagement and oversee their work; | |
• | to oversee the performance of our internal audit function; and | |
• | to oversee our compliance with legal, ethical and regulatory matters. |
213
Table of Contents
• | A significant percentage of a named executive officer’s total direct compensation should be performance-based. | |
• | Senior executives should have a meaningful continuing stake in Liberty Mutual Group’s enterprise value. | |
• | A total rewards package should be strongly competitive with other size-appropriate companies in the insurance industry. |
214
Table of Contents
• | A significant percentage of a named executive officer’s total direct compensation should be performance-based. | |
• | A significant percentage of the incentive compensation for our named executives should be provided using our stock instead of being tied to the overall value of Liberty Mutual Group. | |
• | A total rewards package should be strongly competitive with other size-appropriate companies in the insurance industry. | |
• | Our named executive officers should own a meaningful percentage of our stock to motivate them to manage with a long-term owner’s perspective. |
215
Table of Contents
• | Growth is the average of year over year growth in net written premium for the property and casualty business during the plan cycle. Net written premium for this purpose includes premiums assumed from or ceded to reinsurers by us or the Agency Markets SBU. |
• | Combined ratio refers to the consolidated combined ratio of the Liberty Mutual Group’s Agency Markets SBU (for 2009) and us (2010 and 2011). |
216
Table of Contents
Combined Ratio | ||||||||||||||||||||||||||||||||
Worse | -3% | |||||||||||||||||||||||||||||||
GROWTH | than 3% | +3% | +2% | +1% | Avg | -1% | -2% | or better | ||||||||||||||||||||||||
3.0% or more | — | 50 | 100 | 150 | 175 | 200 | 200 | 200 | ||||||||||||||||||||||||
2.5% | — | 25 | 75 | 125 | 150 | 175 | 175 | 200 | ||||||||||||||||||||||||
2.0% | — | — | 50 | 100 | 125 | 150 | 175 | 200 | ||||||||||||||||||||||||
1.5% | — | — | 25 | 75 | 100 | 125 | 150 | 175 | ||||||||||||||||||||||||
1.0% | — | — | — | 50 | 75 | 100 | 125 | 150 | ||||||||||||||||||||||||
0.5% | — | — | — | 25 | 50 | 75 | 100 | 125 | ||||||||||||||||||||||||
0.0% | — | — | — | — | 25 | 50 | 75 | 100 | ||||||||||||||||||||||||
Less than 0.0% | — | — | — | — | — | — | — | — |
Annual | Annual | Long-Term | Long-Term | EPP/ | ||||||||||||||||||||||||||||||||
Salary | Salary | Incentive | Incentive | Incentive | Incentive | EPDCP | EPP/ EPDCP | Total | ||||||||||||||||||||||||||||
Name | $ | (% of Total) | ($)(1) | (% of Total) | ($)(2) | (% of Total) | ($)(3) | (% of Total) | ($)(4) | |||||||||||||||||||||||||||
Gary R. Gregg | $ | 775,000 | 20 | % | $ | 968,750 | 24 | % | $ | 775,000 | 20 | % | $ | 1,424,401 | 36 | % | $ | 3,943,151 | ||||||||||||||||||
Michael J. Fallon | $ | 330,000 | 47 | % | $ | 132,000 | 19 | % | $ | 82,500 | 12 | % | $ | 150,651 | 22 | % | $ | 695,151 | ||||||||||||||||||
Joseph A. Gilles | $ | 485,000 | 38 | % | $ | 266,750 | 21 | % | $ | 121,250 | 10 | % | $ | 391,339 | 31 | % | $ | 1,264,339 | ||||||||||||||||||
Scott R. Goodby | $ | 550,000 | 38 | % | $ | 357,500 | 25 | % | $ | 137,500 | 10 | % | $ | 391,339 | 27 | % | $ | 1,436,339 | ||||||||||||||||||
Michael H. Hughes | $ | 550,000 | 38 | % | $ | 357,500 | 25 | % | $ | 137,500 | 10 | % | $ | 391,339 | 27 | % | $ | 1,436,339 |
217
Table of Contents
(1) | Equals the 2009 annual incentive target award for the named executive officer. |
(2) | Equals the payment that normally would be made at the end of the 2009-2011 plan cycle to the named executive officer if the target level of performance is achieved. |
(3) | Equals the sum of the assigned dollar value for compensation setting purposes of AUs and RUs granted to the named executive officer under EPP and EPDCP for 2009. The total reported dollar value under this column is equally split between AUs and RUs. For purposes of determining the dollar value assigned to AUs, each AU is considered to be equal in value to 40% of the dollar value of a RU. | |
(4) | Equals the sum of a named executive officer’s base salary and amount of incentive compensation at target as described in footnotes (1), (2) and (3) above. |
218
Table of Contents
219
Table of Contents
Percentage of | ||||||||
Performance Criteria | Weighting | Target Award | ||||||
Profitability | 45 | % | 29.25 | % | ||||
Growth — Commercial lines | 17.5 | % | 11.375 | % | ||||
Growth — Personal lines | 17.5 | % | 11.375 | % | ||||
Qualitative | 20 | % | 13.00 | % | ||||
65.00 | % |
220
Table of Contents
Performance | Results | Profit | Target | Earned | ||||||||||||||||
Weight(1) | vs. Target(2) | Modifier(3) | Award(4) | Payment(5) | ||||||||||||||||
Agency Markets SBU | 65 | % | 113.5 | % | 122.7 | % | $ | 968,750 | $ | 877,155 | ||||||||||
Individual | 25 | % | 150.0 | % | 122.7 | % | $ | 968,750 | $ | 445,867 | ||||||||||
Liberty Mutual Group | 10 | % | 122.2 | % | 122.7 | % | $ | 968,750 | $ | 145,216 | ||||||||||
Total Annual Incentive Payment = $1,468,238 |
(1) | Sets forth the weight given to the performance criteria under the Liberty Mutual annual incentive plan for 2009. |
(2) | Sets forth the percentage of the target award attributable to performance criteria earned based on 2009 performance. |
(3) | Sets forth the adjustment to the payments earned under the Liberty Mutual annual incentive plan due to the Agency Markets SBU’s pre-tax operating income exceeding target. |
(4) | Sets forth the total target award for the named executive officer from the Grants of Plan-Based Awards in Fiscal 2009 table. |
(5) | Reflects the product of the performance weight multiplied by the results against target multiplied by the profit modifier multiplied by the target award for each performance criteria. The product of the figures noted above varies slightly from the earned payment for each performance criteria due to rounding. The total annual incentive payment to Mr. Gregg is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. |
221
Table of Contents
Performance | Results | Profit | Target | Earned | ||||||||||||||||
Weight(1) | vs. Target(2) | Modifier(3) | Award(4) | Payment(5) | ||||||||||||||||
Agency Markets SBU | 75 | % | 130.5 | % | 122.7 | % | $ | 132,000 | $ | 158,499 | ||||||||||
Individual | 25 | % | 140.0 | % | 122.7 | % | $ | 132,000 | $ | 56,694 | ||||||||||
Total Annual Incentive Payment = $215,193 |
(1) | Sets forth the weight given to the performance criteria under the Liberty Mutual annual incentive plan for 2009. |
(2) | Sets forth the percentage of the target award attributable to performance criteria earned based on 2009 performance. |
(3) | Sets forth the adjustment to the payments earned under the Liberty Mutual annual incentive plan due to the Agency Markets SBU’s pre-tax operating income exceeding target. |
(4) | Sets forth the total target award for the named executive officer from the Grants of Plan-Based Awards in Fiscal 2009 table. |
(5) | Reflects the product of the performance weight multiplied by the results against target multiplied by the profit modifier multiplied by the target award for each performance criteria. The product of the figures noted above varies slightly from the earned payment for each performance criteria due to rounding. The total annual incentive payment to Mr. Fallon is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. |
Performance | Results | Profit | Target | Earned | ||||||||||||||||
Weight(1) | vs. Target(2) | Modifier(3) | Award(4) | Payment(5) | ||||||||||||||||
Agency Markets SBU | 75 | % | 113.5 | % | 122.7 | % | $ | 266,750 | $ | 278,687 | ||||||||||
Individual | 25 | % | 140.0 | % | 122.7 | % | $ | 266,750 | $ | 114,569 | ||||||||||
Total Annual Incentive Payment = $393,256 |
(1) | Sets forth the weight given to the performance criteria under the Liberty Mutual annual incentive plan for 2009. |
(2) | Sets forth the percentage of the target award attributable to performance criteria earned based on 2009 performance. |
222
Table of Contents
(3) | Sets forth the adjustment to the payments earned under the Liberty Mutual annual incentive plan due to the Agency Markets SBU’s pre-tax operating income exceeding target. |
(4) | Sets forth the total target award for the named executive officer from the Grants of Plan-Based Awards in Fiscal 2009 table. |
(5) | Reflects the product of the performance weight multiplied by the results against target multiplied by the profit modifier multiplied by the target award for each performance criteria. The product of the figures noted above varies slightly from the earned payment for each performance criteria due to rounding. The total annual incentive payment to Mr. Gilles is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. |
Percentage of | ||||||||
Performance Criteria | Weighting | Target Award | ||||||
Profitability | 50.0 | % | 33.75 | % | ||||
Growth | 27.8 | % | 18.75 | % | ||||
Qualitative | 22.2 | % | 15.00 | % | ||||
67.50 | % |
223
Table of Contents
Performance | Results | Profit | Plan | Target | Earned | |||||||||||||||||||
Weight(1) | vs. Target(2) | Modifier(3) | Modifier(4) | Payment(5) | Payment(6) | |||||||||||||||||||
Commercial Lines Segment | 67.5 | % | 127.0 | % | 125 | % | 110 | % | $ | 357,500 | $ | 421,466 | ||||||||||||
Individual | 25.0 | % | 160.0 | % | 125 | % | 110 | % | $ | 357,500 | $ | 178,750 | ||||||||||||
Agency Markets SBU | 7.50 | % | 113.5 | % | 125 | % | 110 | % | $ | 357,500 | $ | 41,854 | ||||||||||||
Total Annual Incentive Payment = $642,070 |
(1) | Sets forth the weight given to the performance criteria under the Liberty Mutual annual incentive plan for 2009. |
(2) | Sets forth the percentage of the target award attributable to performance criteria earned based on 2009 performance. |
(3) | Sets forth the adjustment to the payments earned under the Liberty Mutual annual incentive plan due to the Commercial lines segment’s pre-tax operating income exceeding target. |
(4) | Sets forth the adjustment to the payments earned under the Liberty Mutual annual incentive plan based on the difficulty to achieve target performance for the performance criteria. |
(5) | Sets forth the total target award for the named executive officer from the Grants of Plan-Based Awards in Fiscal 2009 table. |
(6) | Reflects the product of the performance weight multiplied by the results against target multiplied by the profit modifier multiplied by the plan modifier multiplied by the target award for each performance criteria. The product of the figures noted above varies slightly from the earned payment for each performance criteria due to rounding. The total annual incentive payment to Mr. Goodby is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. |
Percentage of | ||||||||
Performance Criteria | Weighting | Target Award | ||||||
Profitability | 50.0 | % | 33.75 | % | ||||
Growth | 27.8 | % | 18.75 | % | ||||
Qualitative | 22.2 | % | 15.00 | % | ||||
67.50 | % |
224
Table of Contents
Performance | Results | Profit | Plan | Target | Earned | |||||||||||||||||||
Weight(1) | vs. Target(2) | Modifier(3) | Modifier(4) | Payment(5) | Payment(6) | |||||||||||||||||||
Personal Lines Segment | 67.5 | % | 73.5 | % | 86.2 | % | 120 | % | $ | 357,500 | $ | 183,558 | ||||||||||||
Individual | 25.0 | % | 140.0 | % | 86.2 | % | 120 | % | $ | 357,500 | $ | 129,415 | ||||||||||||
Agency Markets SBU | 7.50 | % | 113.5 | % | 86.2 | % | 120 | % | $ | 357,500 | $ | 31,478 | ||||||||||||
Total Annual Incentive Payment = $344,451 |
(1) | Sets forth the weight given to the performance criteria under the Liberty Mutual annual incentive plan for 2009. |
(2) | Sets forth the percentage of the target award attributable to performance criteria earned based on 2009 performance. |
(3) | Sets forth the adjustment to the payments earned under the Liberty Mutual annual incentive plan due to the Personal lines segment’s pre-tax operating income exceeding target. |
(4) | Sets forth the adjustment to the payments earned under the Liberty Mutual annual incentive plan based on the difficulty to achieve target performance for the performance criteria. |
(5) | Sets forth the total target award for the named executive officer from the Grants of Plan-Based Awards in Fiscal 2009 table. |
(6) | Reflects the product of the performance weight multiplied by the results against target multiplied by the profit modifier multiplied by the plan modifier multiplied by the target award for each performance criteria. The product of the figures noted above varies slightly from the earned payment for each performance |
225
Table of Contents
criteria due to rounding. The total annual incentive payment to Mr. Hughes is reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. |
ACE Limited | Aetna | Allstate Corp | ||
Chubb Corp | CIGNA | CNA Financial | ||
Hartford Financial Services | Lincoln National | MetLife | ||
Principal Financial | Progressive | Prudential Financial | ||
Travelers Companies | XL Capital |
226
Table of Contents
Change in | ||||||||||||||||||||||||||||||||
Pension Value | ||||||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||||||
Nonqualified | ||||||||||||||||||||||||||||||||
Non-Equity | Deferred | |||||||||||||||||||||||||||||||
Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||||||||
Name and | Awards | Compensation | Earnings | Compensation | ||||||||||||||||||||||||||||
Principal Position | Year | Salary ($) | Bonus ($)(1) | ($)(2) | ($)(3)(4) | ($)(5)(6) | ($)(7) | Total ($) | ||||||||||||||||||||||||
Gary R. Gregg, | 2009 | $ | 797,115 | — | — | $ | 1,468,238 | $ | 626,023 | $ | 935,645 | $ | 3,827,021 | |||||||||||||||||||
Chief Executive Officer and President | ||||||||||||||||||||||||||||||||
Michael J. Fallon, | 2009 | $ | 342,692 | — | — | $ | 215,193 | $ | 22,582 | $ | 96,931 | $ | 677,398 | |||||||||||||||||||
Senior Vice President and Chief Financial Officer | ||||||||||||||||||||||||||||||||
Joseph A. Gilles, | 2009 | $ | 500,577 | — | — | $ | 393,256 | $ | 208,558 | $ | 298,911 | $ | 1,401,302 | |||||||||||||||||||
Senior Vice President and Manager, Actuarial and Corporate Research | ||||||||||||||||||||||||||||||||
Scott R. Goodby, | 2009 | $ | 571,154 | — | — | $ | 642,070 | $ | 293,804 | $ | 297,858 | $ | 1,804,886 | |||||||||||||||||||
President, Commercial Segment | ||||||||||||||||||||||||||||||||
Michael H. Hughes, | 2009 | $ | 550,000 | $ | 3,851,563 | — | $ | 344,451 | $ | 160,948 | $ | 1,771,186 | $ | 6,678,148 | ||||||||||||||||||
President, Personal Segment |
(1) | We paid Mr. Hughes a retention bonus in connection with our acquisition of Safeco. See the discussion under “— 2009 Liberty Mutual Executive Compensation Program — Post-Employment Compensation and Benefits.” |
(2) | Each named executive officer received AUs under EPP in 2009. These awards provide a cash payment based solely on an increase in the overall value of Liberty Mutual Holding Company Inc. a non-stock mutual holding company. As of December 31, 2009, these AUs were not“in-the-money.” No dollar value is reported in the Summary Compensation Table with respect to these awards. See the discussion under “— Executive Partnership Plan” following the Nonqualified Deferred Compensation Table for Fiscal Year 2009 for details regarding the number of AUs Liberty Mutual granted to our named executive officers in 2009, the discussion under “— Equity Awards” for information regarding the cancellation and replacement of these AUs with stock options and restricted stock units in connection with this offering, and the Targeted Direct Compensation Table for the dollar value of AUs and RUs allocated to each named executive officer during the compensation setting process. |
(3) | This column represents the non-equity short-term incentive plan compensation earned by the named executive officers for 2009. Further information regarding this payment is set forth in the narrative discussion following the Grants of Plan-Based Awards table. |
(4) | Messrs. Gregg, Goodby and Gilles received a long-term incentive award opportunity with respect to the2007-2009 plan cycle. The performance goals and peer groups applicable to the 2007-2009 plan cycle are the same as those that apply to the 2008-2010 plan cycle, which is described under “— Assumption of Cash-Based Long Term Incentive Awards.” Calculating the amount earned under these awards requires us to obtain and evaluate the 2009 financial statements for our long-term incentive award peer group companies. Liberty Mutual typically determines and pays long-term incentive awards each September after the end of a three-year plan cycle. The long-term incentive award payments will be disclosed in either an amendment to theS-1 (if our offering is not yet then effective) or a filing under Item 5.02(f) ofForm 8-K (if our offering is then effective). The compensation expense accrued for each of these long-term incentive awards through December 31, 2009 (based on actual results for 2007 and 2008 and assumed performance |
227
Table of Contents
at target for 2009) was as follows: Mr. Gregg — $1,002,880; Mr. Goodby — $183,861; and Mr. Gilles — $158,789. |
Estimated Long-term Incentive Award Opportunities | ||||||||||||||
Name and Principal | for the 2007-2009 Plan Cycle | |||||||||||||
Position | Grant Date | Threshold ($) | Target ($) | Maximum ($) | ||||||||||
Gary R. Gregg, Chief Executive Officer and President | 2/13/2007 | $ | — | $ | 775,000 | $ | 1,500,000 | |||||||
Michael J. Fallon, Senior Vice President and Chief Financial Officer | 2/13/2007 | $ | — | $ | — | $ | — | |||||||
Joseph A. Gilles, Senior Vice President and Manager, Actuarial and Corporate Research | 2/13/2007 | $ | — | $ | 121,500 | $ | 242,500 | |||||||
Scott R. Goodby, President, Commercial Segment | 2/13/2007 | $ | — | $ | 137,500 | $ | 275,000 | |||||||
Michael H. Hughes, President, Personal Segment | 2/13/2007 | $ | — | $ | — | $ | — |
(5) | These amounts reported in this column include the positive changes in the present value of pension benefits under the Liberty Mutual Retirement Benefit Plan and the defined benefit portion of SIRP during 2009 with respect to each of our named executive officers based on their service with us. This is not a cash payment made to our named executive officers. The amount of the positive change in the present value of pension benefits for each of the named executive officers included in this column is as follows: Mr. Gregg — $390,160; Mr. Fallon — $22,582; Mr. Gilles — $127,521; Mr. Goodby — $148,932; and Mr. Hughes — $106,717. For additional details, see the discussion under “— Pension Benefits Table for Fiscal Year 2009.” | |
(6) | Earnings (and losses) are credited on the account balances of participants in EPDCP and the defined contribution portion of SIRP using the asset classes in Liberty Mutual Group’s surplus investment portfolio. We believe that this is a reasonable method for adjusting the account balance under these plans based on actual investment experience. Nevertheless, the earnings based on these investment alternatives may be considered to be “preferential” under an SEC interpretation, and are reported in both this column and the aggregate earnings (losses) column in the Nonqualified Deferred Compensation Table. The amount of earnings for the named executive officers which are included in this column are as follows: Mr. Gregg — $235,863; Mr. Fallon — $0; Mr. Gilles — $81,037; Mr. Goodby — $144,872; and Mr. Hughes — $54,231. EPDCP and SIRP activity for 2009 is detailed under “— Nonqualified Deferred Compensation Table for Fiscal Year 2009.” |
228
Table of Contents
(7) | The amounts disclosed for All Other Compensation consist of the following elements of compensation: |
Company | ||||||||||||||||||||
Contributions — | RUs | |||||||||||||||||||
Defined | under | Tax | ||||||||||||||||||
Perquisites | Contribution | EPDCP | Reimbursements | Total | ||||||||||||||||
Name and Principal Position | ($)(a) | Plans ($)(b) | ($)(c) | ($)(d) | ($)(e) | |||||||||||||||
Gary R. Gregg, | $ | 46,965 | $ | 146,211 | $ | 712,369 | $ | 30,100 | $ | 935,645 | ||||||||||
Chief Executive Officer and President | ||||||||||||||||||||
Michael J. Fallon, | $ | 4,920 | $ | 15,510 | $ | 75,452 | $ | 1,049 | $ | 96,931 | ||||||||||
Senior Vice President and Chief Financial Officer | ||||||||||||||||||||
Joseph A. Gilles, | $ | 28,713 | $ | 58,376 | $ | 195,585 | $ | 16,237 | $ | 298,911 | ||||||||||
Senior Vice President and Manager, Actuarial and Corporate Research | ||||||||||||||||||||
Scott R. Goodby, | $ | 22,141 | $ | 69,584 | $ | 195,585 | $ | 10,548 | $ | 297,858 | ||||||||||
President, Commercial Segment | ||||||||||||||||||||
Michael M. Hughes, | $ | 14,829 | $ | 38,424 | $ | 195,585 | $ | 1,522,348 | $ | 1,771,186 | ||||||||||
President, Personal Segment |
(a) | The following perquisites were provided to Mr. Gregg during 2009: club membership dues, car allowance, financial consulting, home security monitoring, a physical examination, spousal travel and tax preparation services. Mr. Fallon received a parking allowance during 2009. Mr. Hughes received a car allowance and spousal travel during 2009. The following perquisites were provided to Mr. Goodby and Mr. Gilles during 2009: car allowance, financial consulting, spousal travel and tax preparation services. All perquisites are reported on the basis of our aggregate incremental cost. | |
(b) | Consists of matching contribution made under Liberty Mutual Group’s tax-qualified 401(k) plan and SIRP. | |
(c) | Reflects initial dollar value of RUs awarded to our named executive officers under EPDCP during 2009. See the discussion under “— Executive Partnership Deferred Compensation Plan” that follows the Nonqualified Deferred Compensation Table for Fiscal Year 2009 for further details regarding these awards. | |
(d) | Reflects taxgross-up payments to the named executive officers on certain perquisites. Solely with respect to Mr. Hughes, the reported tax reimbursement amount includes an excise taxgross-up payment paid by us with respect to the retention bonus received by Mr. Hughes that is disclosed under the Bonus column to the Summary Compensation Table. | |
(e) | Amount reflected in the All Other Compensation column to the Summary Compensation Table. |
229
Table of Contents
Estimated Future Payouts | ||||||||||||||
Name and Principal | Under Non-Equity Incentive Plan Awards | |||||||||||||
Position | Grant Date | Threshold ($) | Target ($) | Maximum ($) | ||||||||||
Gary R. Gregg, | 2/11/2009 (1) | — | $ | 968,750 | $ | 1,937,500 | ||||||||
Chief Executive Officer and President | 2/11/2009 (2) | — | $ | 775,000 | $ | 1,550,000 | ||||||||
Michael J. Fallon, | 2/11/2009 (1) | — | $ | 132,000 | $ | 264,000 | ||||||||
Senior Vice President and Chief Financial Officer | 2/11/2009 (2) | — | $ | 82,500 | $ | 165,000 | ||||||||
Joseph A. Gilles, | 2/11/2009 (1) | — | $ | 266,750 | $ | 533,500 | ||||||||
Senior Vice President and Manager, Actuarial and Corporate Research | 2/11/2009 (2) | — | $ | 121,250 | $ | 242,500 | ||||||||
Scott R. Goodby, | 2/11/2009 (1) | — | $ | 357,500 | $ | 715,000 | ||||||||
President, Commercial Segment | 2/11/2009 (2) | — | $ | 137,500 | $ | 275,000 | ||||||||
Michael H. Hughes, | 2/11/2009 (1) | — | $ | 357,500 | $ | 715,000 | ||||||||
President, Personal Segment | 2/11/2009 (2) | — | $ | 137,500 | $ | 275,000 |
(1) | The amounts reported in this row of the table reflect the threshold, target and maximum annual cash incentive award opportunities that could have been earned for service to us during 2009. Actual annual incentive payments for 2009 performance to the named executive officers are set forth in the Non-Equity Incentive Compensation column to the Summary Compensation Table. Additional information regarding the 2009 annual cash incentive award is provided following this table. | |
(2) | The amounts reported in this row of the table reflect the threshold, target and maximum cash-based long-term incentive award opportunity that can be earned for services to us during the2009-2011 plan cycle. Payments for this plan cycle, if they are earned, will not be made until September of 2012. Information regarding the2009-2011 cash-based long-term award is summarized in the narrative following this table. |
Mr. Gregg | 125 | % | ||
Mr. Fallon | 40 | % | ||
Mr. Gilles | 55 | % | ||
Mr. Goodby | 65 | % | ||
Mr. Hughes | 65 | % |
230
Table of Contents
Target Award Percentage | x | Goal Achieved Percentage | x | Salary | = | Long-Term Incentive Award |
Mr. Gregg | 100 | % | ||
Mr. Fallon | 25 | % | ||
Mr. Gilles | 25 | % | ||
Mr. Goodby | 25 | % | ||
Mr. Hughes | 25 | % |
231
Table of Contents
Number of Years of | Present Value | Payments | ||||||||||||
Credited | of Accumulated | During Last | ||||||||||||
Name | Plan Name | Service (#)(1)(2) | Benefit ($) | Fiscal Year ($) | ||||||||||
Gary R. Gregg, | Liberty Mutual | |||||||||||||
Chief Executive Officer | Retirement Benefit Plan | 4.50 | $ | 158,813 | — | |||||||||
and President | SIRP | 4.50 | $ | 2,142,816 | — | |||||||||
Michael J. Fallon, | Liberty Mutual | |||||||||||||
Senior Vice President & | Retirement Benefit Plan | 1.67 | $ | 64,568 | — | |||||||||
Chief Financial Officer | SIRP | 1.67 | $ | 81,367 | — | |||||||||
Joseph A. Gilles, | Liberty Mutual | |||||||||||||
Senior Vice President and | Retirement Benefit Plan | 4.24 | $ | 160,390 | — | |||||||||
Manager, Actuarial and | SIRP | 4.24 | $ | 614,549 | — | |||||||||
Corporate Research | ||||||||||||||
Scott R. Goodby, | Liberty Mutual | |||||||||||||
President, Commercial | Retirement Benefit Plan | 4.50 | $ | 166,100 | — | |||||||||
Segment | SIRP | 4.50 | $ | 711,846 | — | |||||||||
Michael H. Hughes, | Liberty Mutual | |||||||||||||
President, Personal | Retirement Benefit Plan | 1.00 | $ | 36,759 | — | |||||||||
Segment | SIRP | 1.00 | $ | 69,958 | — | |||||||||
Safeco Cash Balance Plan | 5.00 | $ | 37,557 | — |
(1) | Reflects the number of years of service under the Liberty Mutual Retirement Benefit Plan and SIRP credited for purposes of benefit accrual for services rendered by the named executive officers to us. |
(2) | The years of credited service for Mr. Hughes with respect to the Safeco Cash Balance Plan reflect Mr. Hughes’ service with Safeco prior to its acquisition by Liberty Mutual Group. |
232
Table of Contents
233
Table of Contents
• | A named executive officer is generally not entitled to elect when to commence payment of benefits under SIRP. Benefits generally commence after separation from service, but no earlier than age 55, regardless of when benefits are paid under the Liberty Mutual Retirement Benefit Plan. Amounts earned or vested under SIRP are subject to payment restrictions under Section 409A of the Code. | |
• | SIRP provides for settlement of the named executive officer’s SIRP benefits after receiving annuity payments for two years. Settlement is provided either in the form of a lump sum payment (calculated using the actuarial assumptions under the Liberty Mutual Retirement Benefit Plan) or an equivalent benefit provided in the form of an annuity from another insurance carrier with a taxgross-up payment. |
234
Table of Contents
235
Table of Contents
LMGI | Aggregate | Aggregate | Aggregate | |||||||||||||||||||
Executive | Contributions | Earnings | Withdrawals/ | Balance | ||||||||||||||||||
Contributions | in Last FY ($) | in Last | Distributions ($) | at Last | ||||||||||||||||||
Name and Principal Position | Plan Name | in Last FY ($)(1) | (2)(3) | FY ($) | (4) | FYE ($)(5) | ||||||||||||||||
Gary R. Gregg, | SIRP | $ | 139,043 | $ | 130,701 | $ | 176,121 | — | $ | 1,225,244 | ||||||||||||
President and Chief | EPP | — | — | $ | (309,500 | ) | $ | 1,981,209 | $ | 915,917 | ||||||||||||
Executive Officer | EPDCP | — | $ | 712,369 | $ | 35,601 | — | $ | 1,657,810 | |||||||||||||
Michael J. Fallon, | EPDCP | — | $ | 75,452 | — | — | $ | 75,452 | ||||||||||||||
Senior Vice President & Chief Financial Officer | ||||||||||||||||||||||
Joseph A. Gilles, | SIRP | $ | 60,563 | $ | 39,925 | $ | 75,052 | — | $ | 545,960 | ||||||||||||
Senior Vice President | EPP | — | — | $ | (48,675 | ) | — | $ | 429,527 | |||||||||||||
and Manager, Actuarial | EPDCP | — | $ | 195,585 | $ | (669 | ) | — | $ | 418,602 | ||||||||||||
and Corporate Research | ||||||||||||||||||||||
Scott R. Goodby, | SIRP | $ | 92,000 | $ | 60,536 | $ | 137,348 | — | $ | 953,041 | ||||||||||||
President, Commercial | EPP | — | — | $ | (48,675 | ) | $ | 190,589 | $ | 238,937 | ||||||||||||
Segment | EPDCP | — | $ | 195,585 | $ | (609 | ) | — | $ | 423,985 | ||||||||||||
Michael H. Hughes, | SIRP | $ | 125,050 | $ | 29,954 | $ | 54,231 | — | $ | 676,868 | ||||||||||||
President, Personal | EPDCP | — | $ | 195,585 | — | — | $ | 195,585 | ||||||||||||||
Segment |
(1) | Reflects deferrals of base salary and incentive compensation under SIRP by our named executive officers during 2009. Please see the narrative discussion below this table under “— Executive Partnership Plan” for the number of AUs granted to our named executive officers for services to us during 2009. | |
(2) | Reflects matching contributions provided by LMGI under SIRP with respect to deferrals of base salary and annual incentive compensation that would otherwise be subject to a matching contribution under the LMGI tax-qualified Section 401(k) plan but for applicable tax limits. | |
(3) | Reflects dollar value of RUs granted under EPDCP to each named executive officer during 2009. Please see the narrative discussion below this table under “— Executive Partnership Deferred Compensation Plan” for the number of RUs granted to our named executive officers for services to us during 2009. |
(4) | Reflects redemptions of vested AUs under EPP during 2009. |
(5) | Reflects a transfer of $467,633 from a Safeco nonqualified deferred compensation plan to SIRP which was attributable to services performed by Mr. Hughes to Safeco prior to its acquisition by Liberty Mutual Group. |
236
Table of Contents
237
Table of Contents
• | unpaid base salary through the date of termination; | |
• | any accrued and unused flexible time-off; | |
• | all accrued and vested benefits under a Section 401(k) plan; | |
• | all accrued and vested benefits under the Liberty Mutual Retirement Benefit Plan and the defined benefit portion of SIRP; | |
• | all vested benefits under the defined contribution portions of SIRP, EPP and EPDCP; and | |
• | all other benefits under LMGI’s compensation and benefit programs that are available to all salaried employees and do not discriminate in scope, terms or operation in favor of the named executive officers. |
• | continued vesting of unvested AUs and RUs provided that the named executive officer enters into a non-compete agreement with us and continues to comply with such agreement; | |
• | pro rata payment of the outstanding annual incentive award for the year of termination based on actual company performance and paid at the same time as annual incentive payments are generally paid to active employees; | |
• | pro rata payment of the earliest outstanding long-term incentive award granted to the named executive based on actual company performance and paid at the same time as long-term incentive award payments generally are made to employees for that cycle (i.e., the September next following retirement) — this payment will not be prorated if the named executive officer was employed for the entire three-year plan cycle; | |
• | pro rata payment with respect to each remaining outstanding long-term incentive award based on actual company performance for that award’s three-year plan cycle and paid at the same time as each such long-term incentive award is generally paid to active employees; | |
• | with respect to Messrs. Gregg, Goodby and Gilles, continued split-dollar life insurance coverage for the remainder of the executive’s life at noout-of-pocket cost to the named executive officer; |
• | with respect to Mr. Fallon, his beneficiary is eligible to receive a death benefit in cash from our general assets equal to five times the sum of Mr. Fallon’s highest base salary and annual incentive payment earned during a single calendar year; a taxgross-up is then paid with respect to income taxes assessed on the death benefit payment; and |
• | continued financial planning assistance and tax preparation services for the year of retirement and one additional calendar year. |
238
Table of Contents
• | the named executive officer is not required to sign a non-compete agreement as a condition of continued vesting of all outstanding and unvested AUs and RUs and vesting is subject to our discretion; and | |
• | we pay the named executive officer continued salary payments until age sixty-five from our general assets under the Liberty Mutual Insurance Company Executive Long Term Disability Plan (“LTD Plan”). |
• | full vesting and cash-out of all outstanding AUs and RUs; | |
• | pro rata payment of the outstanding annual incentive award for the year of termination based on actual company performance and paid at the same time as the annual incentive payments are generally paid to active employees; | |
• | payment of the earliest outstanding long-term incentive award granted to the named executive based on actual company performance and paid at the same time as long-term incentive award payments generally are made to employees for that cycle (i.e., the September next following death) — this payment will be prorated only if the named executive officer was not employed for the entire three-year plan cycle for his earliest long-term incentive award; | |
• | pro rata payment with respect to each remaining outstanding long-term incentive award plan cycle based solely on actual company performance for the earliest plan cycle and paid during the September immediately following the date of death; | |
• | with respect to Messrs. Gregg, Goodby and Gilles, payment of the death benefit proceeds directly from the insurance carrier under the terms of the split-dollar life insurance arrangement; and | |
• | with respect to Mr. Fallon, payment of a death benefit in cash from our general assets equal to 3 times the sum of his highest base salary and annual incentive payment earned during a single calendar year; a taxgross-up is then paid with respect to income taxes assessed on the death benefit payment |
• | reorganization, job relocation, or staff reduction efforts without being offered a comparable position, provided that the named executive officer continues employment until his scheduled termination date; | |
• | poor performance; |
239
Table of Contents
• | loss of employment despite being able to return to work following a disability leave exceeding twenty-six (26) weeks due to the position having since been filled and a comparable position not being offered; or |
• | employment termination by us after the named executive officer has exhausted long-term disability benefits due to limits in the applicable long-term disability plan, and is unable to return to work. |
• | an unrelated person acquires more than 49% of both a Liberty Company’s common stock and the combined voting power of a Liberty Company’s outstanding voting securities; | |
• | a merger or reorganization of a Liberty Company in which its stockholders do not own immediately thereafter more than 50% of the common stock and the combined voting power of the merged or reorganized entity’s outstanding voting securities; | |
• | a liquidation or sale of all or substantially all of the assets of a Liberty Company in one or more transactions; or | |
• | an unapproved change in at least two-thirds of the board of directors of a Liberty Company. |
• | conviction of, or the pleading of nolo contendere to, a felony; |
240
Table of Contents
• | misconduct creating a reasonable likelihood that continued employment will materially injure the reputation of us or an affiliate; or | |
• | gross negligence. |
• | a reduction in base salary; | |
• | a material reduction in job responsibilities; | |
• | relocation of the named executive officer’s job location by more than fifty miles; or | |
• | a change in job responsibilities that requires an increase in travel of more than twenty-five percent. |
• | Assumes all unvested AUs as of December 31, 2009 remain outstanding and are not converted into equity awards using our stock — as discussed above, we intend to convert all outstanding AUs as of June 30, 2010 into stock options. | |
• | Assumes all unvested and outstanding AUs and RUs vest in connection with the named executive officer’s disability. | |
• | The additional value to the named executive officer resulting from full vesting of AUs and RUs due to death or disability on December 31, 2009 shall be determined based on a unit value of $105.38. | |
• | Each named executive officer signs and continues to comply with all requirements under any applicable non-compete agreement. |
• | The amount payable under the annual incentive for the then-current year and the long-term incentive plan for all outstanding awards shall be based on target performance — the actual amount that is payable may vary depending upon actual performance. |
• | The cost of the split-dollar life insurance continuation is computed based on the present value of the one-year cost of term life insurance protection for the duration of the named executive officer’s life expectancy based on the current rate used by Liberty Mutual Group to report the named executive officer’s imputed income for federal income tax purposes. | |
• | Present value is calculated using a 6.15% interest rate and IRS mortality tables. |
241
Table of Contents
• | Assumes that the named executive officer is considered to be disabled and remains disabled for purposes of all applicable plans. |
• | Assumes that the named executive officer has met minimum individual performance standards to be eligible for an annual incentive and long-term incentive award payment. |
• | Present value is calculated using the interest and mortality assumptions for the Retirement Benefit Plan. |
Termination by Us | ||||||||||||||||||||||||
Without Cause or by the | ||||||||||||||||||||||||
Executive for Good | ||||||||||||||||||||||||
Qualifying | Reason in Connection | |||||||||||||||||||||||
Voluntary | Termination | Retirement | Disability | Death | with a Change in Control | |||||||||||||||||||
Type of Payment | Termination ($) | by Us ($) | ($) (11) | ($) | ($) | ($) | ||||||||||||||||||
Severance Benefit (1) | $ | — | $ | 640,865 | $ | — | $ | — | $ | — | $ | 640,865 | ||||||||||||
Payment of Annual Incentive Award (2) | $ | — | $ | — | $ | — | $ | 968,750 | $ | 968,750 | $ | — | ||||||||||||
AUs (3) | $ | — | $ | — | $ | — | $ | 915,917 | $ | 915,917 | $ | — | ||||||||||||
RUs (4) | $ | — | $ | — | $ | — | $ | 1,140,528 | $ | 1,140,528 | $ | — | ||||||||||||
Long-Term Incentive (5) | $ | — | $ | — | $ | — | $ | 1,550,236 | $ | 1,550,236 | $ | — | ||||||||||||
Life Insurance (6)(7) | $ | — | $ | — | $ | — | $ | 1,065,837 | $ | 4,976,000 | $ | — | ||||||||||||
LTD Plan (8) | $ | — | $ | — | $ | — | $ | 4,783,000 | N/A | $ | — | |||||||||||||
Enhanced SIRP — Defined Benefit (9) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 784,176 | ||||||||||||
Total (10) | $ | — | $ | 640,865 | $ | — | $ | 10,424,268 | $ | 9,551,431 | $ | 1,425,041 |
Termination by Us | ||||||||||||||||||||||||
Without Cause or by the | ||||||||||||||||||||||||
Executive for Good | ||||||||||||||||||||||||
Voluntary | Qualifying | Reason in Connection | ||||||||||||||||||||||
Termination | Termination | Retirement | Disability | Death | with a Change in Control | |||||||||||||||||||
Type of Payment | ($) | by Us ($) | ($) (11) | ($) | ($) | ($) | ||||||||||||||||||
Severance Benefit (1) | $ | — | $ | 222,115 | $ | — | $ | — | $ | — | $ | 222,115 | ||||||||||||
Payment of Annual Incentive Award (2) | $ | — | $ | — | $ | — | $ | 132,000 | $ | 132,000 | $ | — | ||||||||||||
AUs (3) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
RUs (4) | $ | — | $ | — | $ | — | $ | 75,452 | $ | 75,452 | $ | — | ||||||||||||
Long-Term Incentive (5) | $ | — | $ | — | $ | — | $ | 27,500 | $ | 27,500 | $ | — | ||||||||||||
Company Death Benefit/TaxGross-up (6)(7) | $ | — | $ | — | $ | — | $ | — | $ | 4,020,101 | $ | — | ||||||||||||
LTD Plan (8) | $ | — | $ | — | $ | — | $ | 2,532,000 | N/A | $ | — | |||||||||||||
Enhanced SIRP — Defined Benefit (9) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 57,269 | ||||||||||||
Total (10) | $ | — | $ | 222,115 | $ | — | $ | 2,766,952 | $ | 4,225,053 | $ | 279,384 |
242
Table of Contents
Termination by Us | ||||||||||||||||||||||||
Without Cause or by the | ||||||||||||||||||||||||
Voluntary | Qualifying | Executive for Good | ||||||||||||||||||||||
Termination | Termination | Retirement | Disability | Death | Reason in Connection with | |||||||||||||||||||
Type of Payment | ($) | by Us ($) | ($) (11) | ($) | ($) | a Change in Control ($) | ||||||||||||||||||
Severance Benefit (1) | $ | — | $ | 345,096 | $ | — | $ | — | $ | — | $ | 345,096 | ||||||||||||
Payment of Annual Cash Incentive Award (2) | $ | — | $ | — | $ | — | $ | 266,750 | $ | 266,750 | $ | — | ||||||||||||
AUs (3) | $ | — | $ | — | $ | — | $ | 238,937 | $ | 238,937 | $ | — | ||||||||||||
RUs (4) | $ | — | $ | — | $ | — | $ | 294,326 | $ | 294,326 | $ | — | ||||||||||||
Long-Term Incentive (5) | $ | — | $ | — | $ | — | $ | 242,537 | $ | 242,537 | $ | — | ||||||||||||
Life Insurance (6)(7) | $ | — | $ | — | $ | — | $ | 614,955 | $ | 2,871,000 | $ | — | ||||||||||||
LTD Plan (8) | $ | — | $ | — | $ | — | $ | 2,993,000 | N/A | $ | — | |||||||||||||
Enhanced SIRP — Defined Benefit (9) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 246,202 | ||||||||||||
Total (10) | $ | 0 | $ | 345,096 | $ | 0 | $ | 4,650,505 | $ | 3,913,550 | $ | 591,298 |
Termination by Us | ||||||||||||||||||||||||
Without Cause or by the | ||||||||||||||||||||||||
Voluntary | Qualifying | Executive for Good | ||||||||||||||||||||||
Termination | Termination | Retirement | Disability | Death | Reason in Connection with | |||||||||||||||||||
Type of Payment | ($) | by Us ($) | ($) (11) | ($) | ($) | a Change in Control ($) | ||||||||||||||||||
Severance Benefit (1) | $ | — | $ | 550,000 | $ | — | $ | — | $ | — | $ | 550,000 | ||||||||||||
Payment of Annual Incentive Award (2) | $ | — | $ | — | $ | — | $ | 357,500 | $ | 357,500 | $ | — | ||||||||||||
AUs (3) | $ | — | $ | — | $ | — | $ | 238,937 | $ | 238,937 | $ | — | ||||||||||||
RUs (4) | $ | — | $ | — | $ | — | $ | 294,326 | $ | 294,326 | $ | — | ||||||||||||
Long-Term Incentive (5) | $ | — | $ | — | $ | — | $ | 275,042 | $ | 275,042 | $ | — | ||||||||||||
Life Insurance (6)(7) | $ | — | $ | — | $ | — | $ | 1,077,617 | $ | 5,031,000 | $ | — | ||||||||||||
LTD Plan (8) | $ | — | $ | — | $ | — | $ | 3,395,000 | $ | N/A | $ | — | ||||||||||||
Enhanced SIRP — Defined Benefit (9) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 296,705 | ||||||||||||
Total (10) | $ | 0 | $ | 550,000 | $ | — | $ | 5,638,422 | $ | 6,196,805 | $ | 846,705 |
243
Table of Contents
Termination by Us | ||||||||||||||||||||
Without Cause or by the | ||||||||||||||||||||
Qualifying | Executive for Good | |||||||||||||||||||
Termination | Retirement | Disability | Death | Reason in Connection with | ||||||||||||||||
Type of Payment | by Us ($) | ($) (11) | ($) | ($) | a Change in Control ($) | |||||||||||||||
Severance Benefit (1) | $ | 217,371 | $ | — | $ | — | $ | — | $ | 217,371 | ||||||||||
Payment of Annual Incentive Award (2) | $ | — | $ | 357,500 | $ | 357,500 | $ | 357,500 | $ | — | ||||||||||
AUs (3) | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
RUs (4) | $ | — | $ | 195,585 | $ | 195,585 | $ | 195,585 | $ | — | ||||||||||
Long-Term Incentive (5) | $ | — | $ | 104,296 | $ | 104,296 | $ | 104,296 | $ | — | ||||||||||
Life Insurance (6)(7) | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
LTD Plan (8) | $ | — | $ | — | $ | 3,239,000 | $ | N/A | $ | — | ||||||||||
Enhanced SIRP-Defined Benefit (9) | $ | — | $ | — | $ | — | $ | — | $ | 52,584 | ||||||||||
Total (10) | $ | 217,371 | $ | 657,381 | $ | 3,896,381 | $ | 657,381 | $ | 269,955 |
(1) | Reflects the cash amount payable under the Severance Plan due to a qualifying termination by us without cause assuming the named executive officer’s performance at the time of termination is within or above the range of effective performance. Solely with respect to Mr. Hughes, this amount also includes an estimate of the cost of continued disability insurance coverage for a thirty-six month period as required under his change in control agreement. | |
(2) | Reflects the estimated payment of the named executive officer’s annual incentive award at target. As noted above, the actual payment is based on actual company performance. The 2009 annual incentive award was actually paid to the named executive officers as set forth under the Non-Equity Incentive Compensation column in the Summary Compensation Table. | |
(3) | Reflects only the“in-the-money” value of the unvested AUs under EPP that vest on account of death, disability or retirement based on a unit value of $105.38. All AUs will either be cashed out or converted into our stock options and restricted stock units before completion of this offering. | |
(4) | Reflects the value of unvested RUs under EPDCP, based on a unit value of $105.38, that vest on account of death, disability or retirement. Unvested RUs do not automatically vest upon a change of control of Liberty Mutual, Liberty Mutual Group or us. | |
(5) | Estimated amount reflects each outstanding long-term incentive award being paid at target. With respect to Messrs. Gregg, Goodby and Gilles, this estimate reflects payment of the 2007 — 2009 plan cycle as a contingent payment even though each named executive officer has actually provided services to us during the entire three-year plan cycle. No discount has been applied to reflect that these amounts are paid over time in the event of employment termination due to retirement or disability. | |
(6) | The amount under the Disability column in this row reflects the present value cost of the one-year cost of term life insurance protection for the duration of the life expectancy of Mr. Gregg, Mr. Gilles and Mr. Goodby. |
(7) | The amount under the Death column in this row reflects the dollar amount of the split-dollar insurance proceeds payable to named beneficiaries upon the death of Messrs. Gregg, Goodby and Gilles. With respect to Mr. Fallon, the dollar amount in the Death Column in this row reflects the total death benefit amount payable to Mr. Fallon’s beneficiaries in cash of $2,500,000 and a taxgross-up payment of $1,520,101 with respect to the amount payable to Mr. Fallon’s beneficiaries. The taxgross-up payment is based on a 30.3% rate on up to $1 million and a 40.3% tax rate on amounts over $1 million. This contingent liability obligation is hedged by a company-owned life insurance policy on Mr. Fallon’s life. No |
244
Table of Contents
death benefit is payable under split-dollar life insurance or our executive death benefit only plan to Mr. Hughes. | ||
(8) | Reflects the present value of salary continuation from December 31, 2009 through age 65 after applying a mortality assumption based on the 1987 Group LTD Mortality Table and an interest rate for 6.15%. | |
(9) | Reflects the present value of the enhanced SIRP benefit upon a qualifying involuntary termination in connection with a change in control. | |
(10) | The amount in this row reflects the sum of all rows above. | |
(11) | Messrs. Gregg, Fallon, Goodby and Gilles were not retirement eligible as of December 31, 2009. Mr. Hughes is retirement eligible and any voluntary termination by him will be treated as a retirement for purposes of the annual incentive, long-term incentive awards, EPP and EPDCP. |
245
Table of Contents
246
Table of Contents
• | earnings per share; | |
• | income before interest and taxes; | |
• | net income; operating income; | |
• | operating cash flow; | |
• | net written premiums; | |
• | revenue or market share; | |
• | return on equity; | |
• | assets or capital; | |
• | expense, loss, or combined ratios; | |
• | book value or surplus; | |
• | book value or surplus per share; | |
• | stock price or total shareholder return; | |
• | budget achievement; | |
• | expense reduction or cost savings; | |
• | operating margins; and | |
• | productivity improvements. |
• | extraordinary items; |
• | restructuringand/or other nonrecurring charges (as reported in our financial statements for the applicable performance period); |
• | losses from catastrophes; | |
• | exchange rate effects, as applicable, fornon-U.S. dollar denominated operated earnings; | |
• | the effects of any statutory adjustments to corporate tax rates; and | |
• | the impact of discontinued operations; |
247
Table of Contents
248
Table of Contents
249
Table of Contents
250
Table of Contents
Converted to Stock Options and Restricted Stock Units
Dollar Value to | ||||||||||||||||
Total | be Provided as | |||||||||||||||
Underwater | In-the-Money | Number of | Restricted Stock | |||||||||||||
Name and Principal Position | AUs (#)(1) | AUs (#)(2) | AUs (#)(3) | Units ($)(4) | ||||||||||||
Gary R. Gregg, | 67,440 | 8,502 | 75,942 | $ | 161,283 | |||||||||||
Chief Executive Officer and President | ||||||||||||||||
Michael J. Fallon, | 5,224 | 481 | 5,705 | $ | 9,125 | |||||||||||
Senior Vice President and Chief Financial Officer | ||||||||||||||||
Joseph A. Gilles, | 15,696 | 24,615 | 40,311 | $ | 1,312,746 | |||||||||||
Senior Vice President and Manager, Actuarial and Corporate Research | ||||||||||||||||
Scott R. Goodby, | 15,696 | 2,145 | 17,841 | $ | 40,691 | |||||||||||
President, Commercial Segment | ||||||||||||||||
Michael M. Hughes, | 9,248 | — | 9,248 | $ | — | |||||||||||
President, Personal Segment | ||||||||||||||||
Other Executive Officers | 2,896 | — | 2,896 | $ | — | |||||||||||
Other Employees (26) | 79,028 | 14,560 | 93,588 | $ | 393,821 | |||||||||||
Total | 195,228 | 50,303 | 245,531 | $ | 1,917,666 |
(1) | Underwater AU means an AU with a strike price greater than the April 1, 2010 unit value of $101.81. |
(2) | In-the-money AU means an AU with a strike price less than the April 1, 2010 unit value of $101.81. |
(3) | Represents the total number of underwater AUs plus the total number of in-the-money AUs. |
(4) | Represents the difference between the April 1, 2010 unit value and the strike price of the applicable outstanding AUs. |
251
Table of Contents
• | Benchmark Group (National Carriers): Travelers Companies, Hartford Insurance Group, Zurich American Insurance Company |
• | Benchmark Group (Regional Carriers): Auto-Owners Insurance, American International, Arch Capital Group, Cincinnati Insurance Group, CNA, Employers Mutual Casualty Company, Mutual of Enumclaw Insurance, Erie Insurance Group, FCCI Insurance Group, Fireman’s Fund Insurance Companies, General Casualty Company of Wisconsin, Hanover Insurance Company, Harleysville Group, Nationwide Mutual Group, OneBeacon Insurance Group, Oregon Mutual Insurance Company, Republic Companies Group, Selective Insurance Company, Sentry Insurance, Southern Farm Bureau, Texas Mutual Insurance Company, Unitrin Inc., W.R. Berkley Corporation |
252
Table of Contents
Assumed under the LMAC 2010 Executive Long-Term Incentive Plan
Applicable | Maximum | |||||||||||||||
Base Salary as of | Three-Year | (200% of | ||||||||||||||
Named Executive Officer | 12/31/2009 | Plan Cycle | Target* | Target) | ||||||||||||
Gary R. Gregg, | $ | 775,000 | 2008-2010 | $ | 775,000 | $ | 1,550,000 | |||||||||
Chief Executive Officer and President | 2009-2011 | $ | 775,000 | $ | 1,550,000 | |||||||||||
2010-2012 | $ | 775,000 | $ | 1,550,000 | ||||||||||||
Michael J. Fallon, | $ | 330,000 | 2008-2010 | $ | 0 | $ | 0 | |||||||||
Senior Vice President and Chief Financial Officer | 2009-2011 | $ | 82,500 | $ | 165,000 | |||||||||||
2010-2012 | $ | 82,500 | $ | 165,000 | ||||||||||||
Joseph A. Gilles, | $ | 485,000 | 2008-2010 | $ | 121,250 | $ | 242,500 | |||||||||
Senior Vice President and Manager, Actuarial and | 2009-2011 | $ | 121,250 | $ | 242,500 | |||||||||||
Corporate Research | 2010-2012 | $ | 121,250 | $ | 242,500 | |||||||||||
Scott R. Goodby, | $ | 550,000 | 2008-2010 | $ | 137,500 | $ | 275,000 | |||||||||
President, Commercial Segment | 2009-2011 | $ | 137,500 | $ | 275,000 | |||||||||||
2010-2012 | $ | 137,500 | $ | 275,000 | ||||||||||||
Michael H. Hughes, | $ | 550,000 | 2008-2010 | $ | 104,500 | $ | 209,000 | |||||||||
President, Personal Segment | 2009-2011 | $ | 137,500 | $ | 275,000 | |||||||||||
2010-2012 | $ | 137,500 | $ | 275,000 |
* | Assumes 100% result achieved, calculated based on 12/31/2009 salary and actual dates of eligibility. Mr. Fallon has no cash-based long-term incentive award under the LMAC 2010 Executive Long-Term Incentive Plan with respect to the 2008 — 2010 plan cycle. The cash-based long-term incentive award for Mr. Hughes with respect to the 2008 — 2010 plan cycle is a pro-rata amount to reflect that he commenced covered employment during 2008. |
253
Table of Contents
254
Table of Contents
• | extraordinary items; |
• | restructuringand/or other nonrecurring charges as reported in our financial statements for the applicable performance period; |
• | losses from catastrophes; |
• | exchange rate effects, as applicable, fornon-U.S. dollar denominated operated earnings; |
• | the effects of any statutory adjustments to corporate tax rates; and |
• | the impact of discontinued operations; |
255
Table of Contents
256
Table of Contents
257
Table of Contents
258
Table of Contents
• | February 2010 Note. On February 3, 2010, we declared and paid a dividend to Liberty Mutual in the form of a note payable in the aggregate principal amount of $4 billion due February 29, 2012, bearing interest at an annual rate of 0.72%. In April 2010, we repaid $2.099 billion of this note through a transfer to Liberty Mutual of investments and cash. In August 2010, we repaid an additional $811 million of this note through a transfer to Liberty Mutual of investments and cash. |
• | Ohio Casualty Transfer. Prior to the closing of this offering, Liberty Mutual will cause Ohio Casualty to be transferred to us through a combination of a sale of Ohio Casualty common stock in exchange for the Ohio Casualty Note bearing interest at an annual rate of %, and the contribution of the remaining Ohio Casualty common stock not already owned by us. The actual aggregate principal amount of the Ohio Casualty Note will not be determinable until the pricing of this offering, but will equal the net proceeds of this offering plus $ . See “— Agreements with Liberty Mutual Related to the Offering — Ohio Casualty SPA.” |
• | Offering Proceeds. We expect to repay approximately $ million of the February 2010 Note and approximately $ million of the Ohio Casualty Note with net proceeds of this offering, which amounts assume that each share of Class A common stock offered hereby is sold at a price equal to the midpoint of the offering price range as set forth on the cover page of this prospectus. See “Use of Proceeds.” |
259
Table of Contents
260
Table of Contents
261
Table of Contents
262
Table of Contents
263
Table of Contents
264
Table of Contents
• | Property per risk excess of loss program; | |
• | Property catastrophe excess of loss reinsurance program; | |
• | Casualty excess of loss reinsurance program; | |
• | Commercial umbrella excess of loss reinsurance program; | |
• | Workers compensation catastrophe excess of loss reinsurance program; | |
• | Workers compensation clash excess of loss reinsurance program; and | |
• | Reinsurance treaties designed to remove business from the LMAC Pool that Liberty Mutual no longer deemed to be part of our business. |
• | Reinsurance treaties designed to cede multi-state business written on our behalf by Liberty Mutual affiliates as an accommodation to us into the LMAC Pool; | |
• | Inter affiliate reinsurance programs covering periods of time when certain operations were part of part of our business, such as umbrella quota share, casualty excess of loss, property per risk, workers compensation excess of loss, and workers compensation catastrophe excess of loss programs; and | |
• | Programs where we provided reinsurance coverage to Liberty Mutual, but solely as a result of our acquisition of a previously unrelated party (e.g., Safeco). |
265
Table of Contents
266
Table of Contents
267
Table of Contents
• | $281 million of the outstanding $300 million Safeco 4.875% Senior Notes due 2010 for a like principal amount of newly issued LMGI 4.875% Senior Notes due 2010; | |
• | $187 million of the outstanding $204 million Safeco 7.25% Senior Notes due 2012 for a like principal amount of newly issued LMGI 7.25% Senior Notes due 2012; and | |
• | $180 million of the outstanding $200 million Ohio Casualty 7.30% Senior Notes due 2014 for a like principal amount of newly issued LMGI 7.30% Senior Notes due 2014. |
268
Table of Contents
• | the Intercompany Agreement; | |
• | the Services Agreement; | |
• | the Restated Surety Reinsurance Agreement; | |
• | a Registration Rights Agreement; | |
• | Real Estate License Agreements; | |
• | the Run-Off Reinsurance Agreement; and | |
• | a Trademark License Agreement. |
• | the ownership or the operation of our assets or properties, and the operation or conduct of our business on or after the effective date of the Intercompany Agreement; |
• | the ownership or the operation of our assets or properties, and the operation or conduct of our business prior to the effective date of the Intercompany Agreement, other than for actions or inactions taken at the sole discretion and control of Liberty Mutual; |
• | certain guaranty, keep well, net worth or financial condition maintenance agreements of or by Liberty Mutual provided to any person with respect to any of our actual or contingent obligations; | |
• | certain employment and service related liabilities with respect to Agency Corporation Dedicated Employees and other employees dedicated to our business for the periods that they were dedicated to our business, whether before or after the effective date of the Intercompany Agreement; |
• | all liabilities under our benefit plans, our participation in the Liberty Mutual benefit plans on or after January 1, 2011, and any control group liability for underfunding of the Agency Markets Pension Plan; and |
• | other matters described in the Intercompany Agreement. |
269
Table of Contents
• | any breach by Liberty Mutual of the Intercompany Agreement; | |
• | the ownership or the operation of Liberty Mutual’s assets or properties, and the operation or conduct of Liberty Mutual’s business, whether before, on or after the effective date of the Intercompany Agreement, in each case excluding us; |
• | all liabilities under Liberty Mutual benefit plans, other than liabilities related to our participation in Liberty Mutual benefit plans on or after January 1, 2011, and any control group liability of Agency Markets for underfunding, if any, of the Liberty Mutual Retirement Benefit Plan; |
• | certain employment and service-related liabilities with respect to Agency Corporation Dedicated Employees or other employees of Liberty Mutual for the periods that they were not dedicated to our business, whether before or after the effective date of the Intercompany Agreement; and | |
• | other matters described in the Intercompany Agreement. |
270
Table of Contents
• | copies of monthly, quarterly and annual financial information and other reports and documents we intend to file with the SEC prior to those filings; | |
• | copies of our budgets and financial projections, as well as the opportunity to meet with our management to discuss those budget projections; | |
• | information regarding the timing and content of earnings releases; | |
• | such materials and information as necessary to cooperate fully, and cause our accountants to cooperate fully, with Liberty Mutual in connection with its preparation of financial information; | |
• | access to personnel and working papers; | |
• | quarterly management certifications; and | |
• | the right to designate our accountants (subject to stockholder approval). |
• | access to our books and records for their internal auditors; | |
• | notice of changes in our accounting estimates or discretionary accounting principles, and in some cases refrain from making those changes without Liberty Mutual’s prior consent; and | |
• | copies of correspondence with our accountants. |
• | the adoption or implementation of any stockholder rights plan; | |
• | any consolidation or merger of us with any person, or entry into any other transaction or series of transactions that would otherwise result in a change of control; | |
• | any acquisition by us or any sale, lease, exchange or other disposition, or any series of related acquisitions or dispositions, involving consideration in excess of $25 million; | |
• | the issuance by us or one of our subsidiaries of any stock or stock equivalents; |
• | the incurrence, issuance, assumption, guarantee or otherwise becoming liable for any debt, other than debt in an amount less than $200 million in connection with our current revolving credit facility; |
• | our dissolution, liquidation or winding up; | |
• | the election, designation, appointment or removal of any of our executive officers; | |
• | the declaration of dividends on any class or series of our capital stock other than preferred stock; | |
• | any change in our authorized capital stock or our creation of any class or series of capital stock; | |
• | any change in the number of directors on our board of directors, or filling any newly created seats or vacancies on our board of directors; or | |
• | the amendment of various provisions of our certificate of incorporation and bylaws. |
271
Table of Contents
272
Table of Contents
273
Table of Contents
• | access to shared historical records; | |
• | promotional and marketing arrangements; | |
• | litigation and settlement cooperation; | |
• | compliance and non-disparagement; | |
• | policies and procedures; | |
• | release of guarantees; | |
• | insurance coverage; | |
• | regulatory approvals; | |
• | notice of certain stock sales; | |
• | consent to certain agreements between us and affiliates of Liberty Mutual; | |
• | continuation of philanthropic obligations; and | |
• | volume purchasing. |
274
Table of Contents
• | accounting, actuarial, risk management, financial, tax and auditing services, | |
• | purchasing, payroll processing, human resources and employee relationsand/or benefits services, | |
• | marketing and strategic support services, | |
• | information technology, software support and business continuity services, | |
• | policy administration and production services, | |
• | real estate management services, | |
• | legal, compliance and complex and emerging risks claims services, | |
• | reinsurance services; | |
• | general administration services; and | |
• | other mutuallyagreed-upon services. |
275
Table of Contents
276
Table of Contents
277
Table of Contents
278
Table of Contents
• | where such person or group obtains the consent of our board of directors prior to acquiring beneficial ownership of at least 5% of our Class B common stock; or | |
• | where such person or group acquires beneficial ownership of at least 5% of our common stock solely as a result of such a distribution and, prior to acquiring one additional share of our Class B common stock, such person or group obtains the consent of our board of directors. |
279
Table of Contents
• | the designation of each series; |
280
Table of Contents
• | the number of shares of each series; | |
• | the rate of dividends, if any; | |
• | whether dividends, if any, shall be cumulative or noncumulative; | |
• | the dates at which dividends, if any, shall be payable; | |
• | the terms of redemption and sinking fund, if any; |
• | the rights of the series in the event of any voluntary or involuntary liquidation, dissolution orwinding-up of the affairs of our company; |
• | rights and terms of conversion or exchange, if any; | |
• | restrictions on the issuance of shares of the same series or any other series, if any; and | |
• | voting rights, if any. |
281
Table of Contents
282
Table of Contents
• | the name and record address of that stockholder; | |
• | the class or series and number of shares of each class or series of our capital stock which are owned beneficially or of record by that stockholder and any affiliates or associates of that stockholder; | |
• | whether and the extent to which any transaction or agreement, arrangement or understanding (including any short position or any stock borrowing or lending of our capital stock) has been made by or on behalf of the stockholder; | |
• | information as to derivatives, swaps, options, warrants, short positions, hedge or profit interest and transactions or arrangements with respect to our capital stock; | |
• | a representation that the stockholder is a holder of record of our stock entitled to vote at that meeting and that the stockholder intends to appear in person or by proxy at the meeting to bring that nomination before the meeting; and | |
• | a representation whether the stockholder intends to deliver a proxy statement in the form of proxy to holders of at least the percentage of our capital stock required to elect the nominee or approve the proposal; |
• | the name, age, business and residence addresses, and the principal occupation and employment of the person; | |
• | the class and series and number of shares of each class and series of our capital stock which are owned beneficially or of record by the person and any affiliates or associates of that person; | |
• | information as to derivatives, swaps, options, warrants, short positions, hedges or profit interests and transactions or arrangements with respect to our capital stock; | |
• | whether and the extent to which any transaction or agreement, arrangement or understanding (including any short position or any stock borrowing or lending of our capital stock) has been made by or on behalf of such person; | |
• | any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for election of directors pursuant to the Securities Exchange Act of 1934, as amended, which we refer to in this prospectus as the “Exchange Act”; and | |
• | such person’s written consent to be named in the proxy statement as a nominee and to serve as a director if elected. |
283
Table of Contents
• | a description of the business desired to be brought before the meeting and the reasons for conducting that business at the meeting; | |
• | any material interest of that stockholder in that business; | |
• | a representation that the stockholder is a holder of record of our stock entitled to vote at that meeting and that the stockholder intends to appear in person or by proxy at the meeting to bring that business before the meeting; and | |
• | any other information relating to the business to be brought before the meeting that would be required to be disclosed in a proxy statement or other filing, required to be made in connection with the solicitation of proxies for the proposal of business pursuant to the Exchange Act. |
284
Table of Contents
• | prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; | |
• | upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding specified shares); | |
• | on or subsequent to the date of the transaction, the business combination is; (i) approved by the board of directors of the corporation; and (ii) authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of the holders of at least 662/3% of the outstanding voting stock which is not owned by the interested stockholder. |
• | any derivative action or proceeding brought on behalf of us; | |
• | any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us or our stockholders; | |
• | any action asserting a claim against us arising pursuant to Delaware law or our certificate of incorporation or bylaws; or | |
• | any action asserting a claim against us which is governed by the “internal affairs doctrine,” which doctrine provides that a corporation that acts in more than one state is subject to the laws of its state of incorporation with respect to the regulation of the internal affairs of the corporation. |
285
Table of Contents
• | engaging in the same or similar business activities or product lines as us, | |
• | doing business with any of our clients or customers, or | |
• | employing or otherwise engaging any of our officers or employees. |
• | will have fully satisfied his or her fiduciary duties to us and our stockholders with respect to that corporate opportunity, | |
• | will not be liable to us or our stockholders for breach of fiduciary duty by reason of Liberty Mutual’s actions with respect to that corporate opportunity, | |
• | will be deemed to have acted in good faith and in a manner he or she believed to be in, and not opposed to, our best interests for purposes of our certificate of incorporation, and | |
• | will be deemed not to have breached his or her duty of loyalty to us or our stockholders and not to have derived an improper personal benefit therefrom for purposes of our certificate of incorporation, |
• | we may not pursue a corporate opportunity offered to any of our officers or directors who is also a director or an officer of Liberty Mutual, unless that opportunity is expressly offered to that person solely in his or her capacity as our officer or director, in which case we may pursue it. |
• | will have fully satisfied and fulfilled its fiduciary duties to us and our stockholders with respect to the contract, agreement, arrangement or transaction, |
286
Table of Contents
• | will not be liable to us or our stockholders for breach of fiduciary duty by reason of entering into, performance or consummation of any such contract, agreement, arrangements or transactions, | |
• | will be deemed to have acted in good faith and in a manner it reasonably believed to be in, and not opposed to, the best interests of us for purposes of the certificate of incorporation, and | |
• | will be deemed not to have breached its duties of loyalty to us and our stockholders and not to have derived an improper personal benefit therefrom for purposes of the certificate of incorporation, if: |
• | the material facts as to the contract, agreement, arrangement or transaction are disclosed or are known to our board of directors or the committee of our board of directors that authorizes the contract, agreement, arrangement or transaction and our board of directors or that committee in good faith authorizes the contract, agreement, arrangement or transaction by the affirmative vote of a majority of the disinterested directors; or | |
• | the transaction, as of the time it is authorized, approved or ratified by our stockholders, the board of directors, or a committee thereof, is established to have been fair to us. |
• | the adoption or implementation of any stockholder rights plan; | |
• | any consolidation or merger of us with any person, or entry into any other transaction or series of transactions that would otherwise result in a change of control; | |
• | any acquisition by us or any sale, lease, exchange or other disposition, or any series of related acquisitions or dispositions, involving consideration in excess of $25 million; | |
• | the issuance by us or one of our subsidiaries of any stock or stock equivalents; |
• | the incurrence, issuance, assumption, guarantee or otherwise becoming liable for any debt, other than debt in an amount less than $200 million in connection with our current revolving credit facility; |
• | our dissolution, liquidation or winding up; | |
• | the election, designation, appointment or removal of any executive officer of Liberty Mutual Agency Corporation; | |
• | the declaration of dividends on any class or series of our capital stock other than preferred stock; | |
• | any change in our authorized capital stock or our creation of any class or series of capital stock; | |
• | any change in the number of directors on our board of directors, or filling any newly created seats or vacancies on our board of directors; or | |
• | the amendment of various provisions of our certificate of incorporation and bylaws. |
287
Table of Contents
• | Liberty Mutual’s being required to obtain any approval, consent or the authorization of, or otherwise become subject to any rules, regulations or other legal restrictions of any governmental, administrative or regulatory authority, or | |
• | any of our directors who is also a director or officer of Liberty Mutual being ineligible to serve or prohibited from serving as a director of Liberty Mutual under applicable law. |
288
Table of Contents
• | one percent of the then outstanding Class A common stock or |
• | the average weekly trading volume in Class A common stock on Nasdaq during the four calendar weeks preceding the date on which notice of this sale is filed, so long as requirements concerning availability of public information, manner of sale and notice of sale are satisfied. |
289
Table of Contents
290
Table of Contents
291
Table of Contents
292
Table of Contents
Number | ||||
Underwriter | of Shares | |||
Citigroup Global Markets Inc. | ||||
Merrill Lynch, Pierce, Fenner & Smith Incorporated | ||||
J.P. Morgan Securities Inc. | ||||
Mitsubishi UFJ Securities (USA), Inc. | ||||
Wells Fargo Securities, LLC | ||||
Barclays Capital Inc. | ||||
Deutsche Bank Securities Inc. | ||||
HSBC Securities (USA) Inc. | ||||
Morgan Stanley & Co. Incorporated | ||||
BNP Paribas Securities Corp. | ||||
BNY Mellon Capital Markets, LLC | ||||
Dowling & Partners Securities LLC | ||||
Keefe, Bruyette & Woods, Inc. | ||||
Lloyds TSB Bank plc | ||||
Macquarie Capital (USA) Inc. | ||||
Piper Jaffray & Co. | ||||
Ramirez & Co., Inc. | ||||
RBS Securities Inc. | ||||
Sandler O’Neill & Partners, L.P. | ||||
The Williams Capital Group, L.P. | ||||
Total | ||||
293
Table of Contents
Paid by us | ||||||||
No Exercise | Full Exercise | |||||||
Per share | $ | $ | ||||||
Total | $ | $ |
• | Short sales involve secondary market sales by the underwriters of a greater number of shares than they are required to purchase in the offering. |
• | “Covered” short sales are sales of shares in an amount up to the number of shares represented by the underwriters’ over-allotment option. | |
• | “Naked” short sales are sales of shares in an amount in excess of the number of shares represented by the underwriters’ over-allotment option. |
• | Covering transactions involve purchases of shares either pursuant to the over-allotment option or in the open market after the distribution has been completed in order to cover short positions. |
• | To close a naked short position, the underwriters must purchase shares in the open market after the distribution has been completed. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. | |
• | To close a covered short position, the underwriters must purchase shares in the open market after the distribution has been completed or must exercise the over-allotment option. In determining the source of shares to close the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. |
294
Table of Contents
• | Stabilizing transactions involve bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum. |
• | to any legal entity that is authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; | |
• | to any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; | |
• | to fewer than 100 natural or legal persons (other than qualified investors as defined below) subject to obtaining the prior consent of the representatives for any such offer; or | |
• | in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive. |
295
Table of Contents
• | released, issued, distributed or caused to be released, issued or distributed to the public in France; or | |
• | used in connection with any offer for subscription or sale of the shares to the public in France. |
• | to qualified investors (investisseurs qualifiés)and/or to a restricted circle of investors (cercle restreint d’investisseurs), in each case investing for their own account, all as defined in, and in accordance witharticles L.411-2,D.411-1,D.411-2,D.734-1,D.744-1,D.754-1 andD.764-1 of the FrenchCode monétaire et financier; | |
• | to investment services providers authorized to engage in portfolio management on behalf of third parties; or | |
• | in a transaction that, in accordance witharticle L.411-2-II-1°-or-2°-or 3° of the FrenchCode monétaire et financierandarticle 211-2 of the General Regulations (Règlement Général) of theAutorité des Marchés Financiers, does not constitute a public offer (appel public à l’épargne). |
296
Table of Contents
• | a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or | |
• | a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, |
• | to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275 of the SFA; | |
• | where no consideration is or will be given for the transfer; or | |
• | where the transfer is by operation of law. |
297
Table of Contents
298
Table of Contents
• | Consolidated financial statements of Ohio Casualty at December 31, 2006 and 2005, and for each of the three years in the period ended December 31, 2006 and | |
• | Consolidated financial statements of Safeco at December 31, 2007 and 2006, and for each of the three years in the period ended December 31, 2007. |
299
Table of Contents
Audited Consolidated Financial Statements | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
Unaudited Condensed Consolidated Financial Statements | ||||
F-64 | ||||
F-65 | ||||
F-66 | ||||
F-67 | ||||
F-68 | ||||
Financial Statement Schedules | ||||
S-1 | ||||
S-2 | ||||
S-3 | ||||
S-4 | ||||
S-5 | ||||
S-6 | ||||
S-7 |
F-1
Table of Contents
F-2
Table of Contents
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues | ||||||||||||
Net premiums earned | $ | 9,983 | $ | 6,913 | $ | 4,325 | ||||||
Net investment income | 910 | 719 | 405 | |||||||||
Fee and other revenues | 97 | 50 | 33 | |||||||||
Net realized investment losses | (53 | ) | (407 | ) | (5 | ) | ||||||
Total revenues | 10,937 | 7,275 | 4,758 | |||||||||
Claims and expenses | ||||||||||||
Claims and claim adjustment expenses | 6,157 | 4,326 | 2,601 | |||||||||
General and administrative expenses | 1,005 | 777 | 551 | |||||||||
Goodwill impairment | — | 973 | — | |||||||||
Amortization of deferred policy acquisition costs | 2,392 | 1,664 | 1,056 | |||||||||
Interest expense | 4 | 21 | 6 | |||||||||
Total claims and expenses | 9,558 | 7,761 | 4,214 | |||||||||
Income (loss) before income tax expense | 1,379 | (486 | ) | 544 | ||||||||
Income tax expense | 377 | 78 | 167 | |||||||||
Net income (loss) | $ | 1,002 | $ | (564 | ) | $ | 377 | |||||
Less: Preferred stock dividends | 63 | — | — | |||||||||
Income (loss) available to common stockholders | $ | 939 | $ | (564 | ) | $ | 377 | |||||
Income (loss) per share available to common stockholders (see Note 16) | ||||||||||||
Basic | ||||||||||||
Diluted | ||||||||||||
Weighted average number of common shares outstanding (see Note 16): | ||||||||||||
Basic (shares in millions) | ||||||||||||
Diluted (shares in millions) | ||||||||||||
Unaudited pro forma basic earnings per share (see Note 17): | ||||||||||||
Basic | $ | |||||||||||
Diluted | $ | |||||||||||
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net realized investment gains (losses) | ||||||||||||
Net realized investment gains (losses), excludingother-than-temporary impairment losses | $ | 49 | $ | (198 | ) | $ | (2 | ) | ||||
Other-than-temporary impairment losses: | ||||||||||||
Totalother-than-temporary impairment losses | (107 | ) | (209 | ) | (3 | ) | ||||||
Portion of loss recognized in other comprehensive income | 5 | — | — | |||||||||
Net impairment losses recognized in earnings | (102 | ) | (209 | ) | (3 | ) | ||||||
Net realized investment losses, includingother-than-temporary impairment losses | $ | (53 | ) | $ | (407 | ) | $ | (5 | ) |
F-3
Table of Contents
December 31, | ||||||||
2009 | 2008 | |||||||
Assets | ||||||||
Investments | ||||||||
Fixed maturities, available for sale, at fair value (amortized cost of $19,388 and $17,441) | $ | 20,125 | $ | 16,820 | ||||
Equity securities, available for sale, at fair value (cost of $258 and $611) | 301 | 501 | ||||||
Short-term investments | 109 | 382 | ||||||
Mortgage loans | 271 | 201 | ||||||
Other investments | 150 | 190 | ||||||
Total investments | 20,956 | 18,094 | ||||||
Cash and cash equivalents | 1,548 | 1,968 | ||||||
Accrued investment income | 233 | 229 | ||||||
Premium and other receivables (net of allowance of $22 and $22) | 2,405 | 2,567 | ||||||
Reinsurance recoverables (net of allowance of $75 and $75) | 1,480 | 1,581 | ||||||
Net deferred tax assets | — | 446 | ||||||
Deferred policy acquisition costs and acquired in-force policy intangibles | 1,070 | 1,042 | ||||||
Goodwill | 3,054 | 3,054 | ||||||
Prepaid reinsurance premiums | 53 | 297 | ||||||
Other intangible assets | 1,057 | 1,107 | ||||||
Other assets | 530 | 485 | ||||||
Total assets | $ | 32,386 | $ | 30,870 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities: | ||||||||
Unpaid claims and claim adjustment expenses | $ | 12,053 | $ | 12,651 | ||||
Unearned premiums | 4,658 | 4,837 | ||||||
Funds held under reinsurance treaties | 70 | 96 | ||||||
Net deferred tax liabilities | 115 | — | ||||||
Short-term debt | 19 | — | ||||||
Long-term debt | 59 | 82 | ||||||
Payable to affiliates | 1,350 | 1,310 | ||||||
Other liabilities | 1,865 | 1,593 | ||||||
Total liabilities | 20,189 | 20,569 | ||||||
Stockholders’ Equity: | ||||||||
Common stock (par value $1.00; 1,000 shares issued and outstanding) | — | — | ||||||
Preferred stock (par value $0.00; 10,920 shares issued and outstanding) | 633 | 633 | ||||||
Additionalpaid-in-capital | 8,858 | 8,858 | ||||||
Retained earnings | 2,218 | 1,297 | ||||||
Accumulated other comprehensive income (loss) | 488 | (487 | ) | |||||
Total stockholders’ equity | 12,197 | 10,301 | ||||||
Total liabilities and stockholders’ equity | $ | 32,386 | $ | 30,870 | ||||
F-4
Table of Contents
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Preferred | Common | Preferred | Common | Paid-in- | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Capital | Earnings | Income (Loss) | Equity | |||||||||||||||||||||||||
(Shares) | (Dollars) | |||||||||||||||||||||||||||||||
Balance, January 1, 2007 | — | 1,000 | $ | — | $ | — | $ | 127 | $ | 2,443 | $ | (30 | ) | $ | 2,540 | |||||||||||||||||
Cumulative effect of change in accounting for workers compensation reserves | — | — | — | — | — | 20 | — | 20 | ||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 377 | — | 377 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||||||||||||||||||
Unrealized gains on securities | — | — | — | — | — | — | 39 | 39 | ||||||||||||||||||||||||
Less: reclassification adjustment for gains and losses included in net income | — | — | — | — | — | — | 3 | 3 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | — | — | 42 | 42 | ||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 377 | 42 | 419 | ||||||||||||||||||||||||
Other capital transactions | ||||||||||||||||||||||||||||||||
Contributed capital | — | — | — | — | 2,486 | — | — | 2,486 | ||||||||||||||||||||||||
Total other capital transactions | — | — | — | — | 2,486 | — | — | 2,486 | ||||||||||||||||||||||||
Balance, December 31, 2007 | — | 1,000 | $ | — | $ | — | $ | 2,613 | $ | 2,840 | $ | 12 | $ | 5,465 | ||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (564 | ) | — | (564 | ) | ||||||||||||||||||||||
Other comprehensive loss, net of taxes: | ||||||||||||||||||||||||||||||||
Unrealized losses on securities | — | — | — | — | — | — | (754 | ) | (754 | ) | ||||||||||||||||||||||
Less: reclassification adjustment for gains and losses included in net (loss) | — | — | — | — | — | — | 265 | 265 | ||||||||||||||||||||||||
Pension liability adjustments | — | — | — | — | — | — | (10 | ) | (10 | ) | ||||||||||||||||||||||
Other comprehensive loss, net of taxes | — | — | — | — | — | — | (499 | ) | (499 | ) | ||||||||||||||||||||||
Total comprehensive loss | — | — | — | — | — | (564 | ) | (499 | ) | (1,063 | ) | |||||||||||||||||||||
Other capital transactions | ||||||||||||||||||||||||||||||||
Preferred stock issuance | 10,920 | — | 633 | — | — | — | — | 633 | ||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (979 | ) | — | (979 | ) | ||||||||||||||||||||||
Contributed capital | — | — | — | — | 6,245 | — | — | 6,245 | ||||||||||||||||||||||||
Total other capital transactions | — | — | 633 | — | 6,245 | (979 | ) | — | 5,899 | |||||||||||||||||||||||
Balance, December 31, 2008 | 10,920 | 1,000 | $ | 633 | $ | — | $ | 8,858 | $ | 1,297 | $ | (487 | ) | $ | 10,301 | |||||||||||||||||
Cumulative effect of adoption of ASC 320 at January 1, 2009 | — | — | — | — | — | 3 | (3 | ) | — | |||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 1,002 | — | 1,002 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||||||||||||||||||
Unrealized gains on securities | — | — | — | — | — | — | 949 | 949 | ||||||||||||||||||||||||
Less: reclassification adjustment for gains and losses included in net income | — | — | — | — | — | — | 34 | 34 | ||||||||||||||||||||||||
Pension liability adjustments | — | — | — | — | — | — | (5 | ) | (5 | ) | ||||||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | — | — | 978 | 978 | ||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 1,002 | 978 | 1,980 | ||||||||||||||||||||||||
Other capital transactions | ||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (84 | ) | — | (84 | ) | ||||||||||||||||||||||
Total other capital transactions | — | — | — | — | — | (84 | ) | — | (84 | ) | ||||||||||||||||||||||
Balance, December 31, 2009 | 10,920 | 1,000 | $ | 633 | $ | — | $ | 8,858 | $ | 2,218 | $ | 488 | $ | 12,197 | ||||||||||||||||||
F-5
Table of Contents
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income (loss) | $ | 1,002 | $ | (564 | ) | $ | 377 | |||||
Adjustments to reconcile net income to net cash provided by operating activities, net of effects from purchases of companies: | ||||||||||||
Net realized investment losses | 53 | 407 | 5 | |||||||||
Undistributed private equity investment losses (gains) | 47 | 16 | (2 | ) | ||||||||
Depreciation and amortization | 96 | 46 | 18 | |||||||||
Goodwill impairment | — | 973 | — | |||||||||
Deferred income taxes | 34 | (174 | ) | 27 | ||||||||
Premium and other receivables | 162 | (58 | ) | 48 | ||||||||
Reinsurance recoverables and funds held under reinsurance treaties | 75 | 19 | 101 | |||||||||
Deferred policy acquisition costs and acquired in-force policy intangibles | (2,420 | ) | (1,606 | ) | (1,089 | ) | ||||||
Amortization of deferred policy acquisition costs | 2,392 | 1,664 | 1,056 | |||||||||
Unpaid claims and claim adjustment expenses | (598 | ) | 22 | 282 | ||||||||
Unearned premiums | (179 | ) | 17 | 80 | ||||||||
Taxes payable | 126 | 28 | 76 | |||||||||
Change in payable to affiliates | 19 | 164 | (4 | ) | ||||||||
Other, net | (61 | ) | (470 | ) | (213 | ) | ||||||
Net cash provided by operating activities | 748 | 484 | 762 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of investments: | ||||||||||||
Fixed maturities | (6,509 | ) | (1,695 | ) | (1,321 | ) | ||||||
Equity securities | (65 | ) | (62 | ) | (117 | ) | ||||||
Short-term investments | (116 | ) | (296 | ) | (134 | ) | ||||||
Mortgage loans | (79 | ) | (177 | ) | (15 | ) | ||||||
Other investments | (19 | ) | (42 | ) | (24 | ) | ||||||
Sales and maturities of investments: | ||||||||||||
Fixed maturities | 4,489 | 2,130 | 841 | |||||||||
Equity securities | 373 | 821 | 162 | |||||||||
Short-term investments | 392 | 540 | 176 | |||||||||
Mortgage loans | 7 | 3 | 1 | |||||||||
Other investments | 15 | 28 | 8 | |||||||||
Property and equipment purchased, net | — | (1 | ) | (5 | ) | |||||||
Net cash from acquisitions and dispositions | 30 | (5,273 | ) | (117 | ) | |||||||
Other investing activities | 137 | (115 | ) | (35 | ) | |||||||
Net cash used in investing activities | (1,345 | ) | (4,139 | ) | (580 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Capital contributions: | ||||||||||||
Preferred | — | 416 | — | |||||||||
Common | — | 6,191 | — | |||||||||
Debt financing, net | (4 | ) | (422 | ) | (1 | ) | ||||||
Dividends paid: | ||||||||||||
Common | — | (862 | ) | — | ||||||||
Preferred | (63 | ) | — | — | ||||||||
Net securities lending activity and other financing activities | 244 | (286 | ) | (217 | ) | |||||||
Net cash provided by (used in) financing activities | 177 | 5,037 | (218 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (420 | ) | 1,382 | (36 | ) | |||||||
Cash and cash equivalents, beginning of year | 1,968 | 586 | 622 | |||||||||
Cash and cash equivalents, end of year | $ | 1,548 | $ | 1,968 | $ | 586 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Income taxes paid | $ | 202 | $ | 178 | $ | 73 | ||||||
Summary of non-cash transactions: | ||||||||||||
Operating activities: | ||||||||||||
Change in payable to affiliates | $ | 21 | $ | 1,272 | $ | 72 | ||||||
Investing activities: | ||||||||||||
Purchases of investments: fixed maturities | — | (1,326 | ) | — | ||||||||
Sales of investments: fixed maturities | — | 115 | — | |||||||||
Sales of investments: equity securities | — | 2 | — | |||||||||
Acquisitions and dispositions | — | — | (2,558 | ) | ||||||||
Total investing activities | — | (1,209 | ) | (2,558 | ) | |||||||
Financing activities: | ||||||||||||
Capital contributions | — | 54 | 2,486 | |||||||||
Preferred capital contributions | — | 217 | — | |||||||||
Debt financing, net | — | (217 | ) | — | ||||||||
Common dividends paid | (21 | ) | (117 | ) | — | |||||||
Total financing activities | $ | (21 | ) | $ | (63 | ) | $ | 2,486 |
F-6
Table of Contents
(1) | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
F-7
Table of Contents
F-8
Table of Contents
F-9
Table of Contents
F-10
Table of Contents
F-11
Table of Contents
F-12
Table of Contents
F-13
Table of Contents
(2) | ACQUISITIONS |
F-14
Table of Contents
Assets: | ||||
Total investments | $ | 8,600 | ||
Cash and cash equivalents | 971 | |||
Premium and other receivables | 1,071 | |||
Reinsurance recoverables | 427 | |||
Goodwill | 2,683 | |||
Other assets | 1,732 | |||
Total assets | $ | 15,484 | ||
Liabilities: | ||||
Unpaid claims and claim adjustment expenses | $ | 5,332 | ||
Unearned premiums | 2,301 | |||
Long-term debt | 505 | |||
Other liabilities | 1,102 | |||
Total liabilities | $ | 9,240 | ||
Carrying | Carrying | |||||||||||||||
Value | Value | |||||||||||||||
December 31, | December 31, | Opening | ||||||||||||||
2009 | 2008 | Balance Sheet | Period (Years) | Method | ||||||||||||
Agency relationship | $ | 564 | $ | 605 | $ | 616 | 15 | Straight-line | ||||||||
Trademarks | 229 | 229 | 229 | Not subject to amortization | Not subject to amortization | |||||||||||
State licenses(1) | 60 | 63 | 63 | Not subject to amortization | Not subject to amortization | |||||||||||
Leases | 17 | 14 | 12 | Variable up to 10 | Present value mid-year convention | |||||||||||
Total intangible assets(2) | $ | 870 | $ | 911 | $ | 920 | ||||||||||
(1) | On August 31, 2009 the Company transferred state insurance licenses to an insurance subsidiary of Liberty Mutual for consideration of $3. | |
(2) | The above table excludes the acquired in-force policy intangible, which is included in deferred policy acquisition costs and acquired in-force policy intangibles on the Company’s consolidated balance sheets. See Note 4 — Deferred Policy Acquisition Costs and Acquired In-Force Policy Intangibles for additional detail. |
F-15
Table of Contents
2009 | 2008 | |||||||
Agency relationship | $ | 41 | $ | 11 | ||||
Leases | (3 | ) | (2 | ) | ||||
Total amortization | $ | 38 | $ | 9 | ||||
Safeco | ||||||||||||||||||||||||||||
Cumulative and for the Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
2008 | ||||||||||||||||||||||||||||
Adjustment | ||||||||||||||||||||||||||||
to Opening | Accrued as of | Accrued as of | Expected | |||||||||||||||||||||||||
Balance | 2008 | December 31, | 2009 | 2009 | December 31, | Cumulative | ||||||||||||||||||||||
Sheet | Payments | 2008 | Adjustments | Payments | 2009 | Costs | ||||||||||||||||||||||
Costs included in allocation of purchase price: | ||||||||||||||||||||||||||||
Employment Reductions: | ||||||||||||||||||||||||||||
Commercial | $ | 3 | $ | — | $ | 3 | $ | — | $ | (3 | ) | $ | — | $ | 3 | |||||||||||||
Personal | 4 | — | 4 | — | (4 | ) | — | 4 | ||||||||||||||||||||
Corporate and Other | 68 | (58 | ) | 10 | — | (10 | ) | — | 68 | |||||||||||||||||||
Contract terminations and other transitional activities: | ||||||||||||||||||||||||||||
Corporate and Other | 37 | (3 | ) | 34 | — | (12 | ) | 22 | 37 | |||||||||||||||||||
Total included in Allocation of Purchase Price | $ | 112 | $ | (61 | ) | $ | 51 | $ | — | $ | (29 | ) | $ | 22 | $ | 112 |
F-16
Table of Contents
Accrued as of | Accrued as of | Expected | ||||||||||||||||||||||||||
2008 | 2008 | December 31, | 2009 | 2009 | December 31, | Cumulative | ||||||||||||||||||||||
Adjustments | Payments | 2008 | Adjustments | Payments | 2009 | Costs | ||||||||||||||||||||||
Costs included in general and administrative expenses: | ||||||||||||||||||||||||||||
Employment Reductions: | ||||||||||||||||||||||||||||
Commercial | $ | 6 | $ | — | $ | 6 | $ | 8 | $ | (13 | ) | $ | 1 | $ | 14 | |||||||||||||
Personal | 7 | — | 7 | 8 | (15 | ) | — | 15 | ||||||||||||||||||||
Surety | 2 | — | 2 | 4 | (6 | ) | — | 6 | ||||||||||||||||||||
Contract terminations and other transitional activities: | ||||||||||||||||||||||||||||
Commercial | 3 | — | 3 | 3 | (6 | ) | — | 6 | ||||||||||||||||||||
Personal | 2 | — | 2 | — | (2 | ) | — | 2 | ||||||||||||||||||||
Surety | — | — | — | 1 | (1 | ) | — | 1 | ||||||||||||||||||||
Corporate and Other | 13 | (1 | ) | 12 | (1 | ) | (6 | ) | 5 | 12 | ||||||||||||||||||
Total costs included in general and administrative expenses | 33 | (1 | ) | 32 | 23 | (49 | ) | 6 | 56 | |||||||||||||||||||
Total Restructuring Costs | $ | 145 | $ | (62 | ) | $ | 83 | $ | 23 | $ | (78 | ) | $ | 28 | $ | 168 |
F-17
Table of Contents
Assets: | ||||
Total investments | $ | 4,176 | ||
Cash and cash equivalents | 105 | |||
Premium and other receivables | 396 | |||
Reinsurance recoverables | 611 | |||
Goodwill | 1,054 | |||
Other assets | 581 | |||
Total assets | $ | 6,923 | ||
Liabilities: | ||||
Unpaid claims and claim adjustment expenses | $ | 2,698 | ||
Unearned premiums | 698 | |||
Funds held under reinsurance treaties | 113 | |||
Long-term debt | 207 | |||
Other liabilities | 427 | |||
Total liabilities | $ | 4,143 | ||
Carrying Value | Carrying Value | Opening | ||||||||||||||
December 31, | December 31, | Balance | ||||||||||||||
2009 | 2008 | Sheet | Period (Years) | Method | ||||||||||||
Agency relationship | $ | 132 | $ | 140 | $ | 150 | 20 | Straight-line | ||||||||
Non-compete agreements | — | 1 | 4 | 2 | Straight-line | |||||||||||
Trademarks | 33 | 33 | 33 | Not subject to amortization | Not subject to amortization | |||||||||||
State licenses | 22 | 22 | 22 | Not subject to amortization | Not subject to amortization | |||||||||||
Total intangible assets(1) | $ | 187 | $ | 196 | $ | 209 | ||||||||||
(1) | The above table excludes the acquired in-force policy intangible, which is included in deferred policy acquisition costs and acquired in-force policy intangibles on the consolidated balance sheets. See Note 4 — Deferred Policy Acquisition Costs and Acquired In-Force Policy Intangibles for additional detail. |
2009 | 2008 | 2007 | ||||||||||
Agency relationship | $ | 8 | $ | 8 | $ | 2 | ||||||
Non-compete agreements | 1 | 2 | 1 | |||||||||
Total amortization | $ | 9 | $ | 10 | $ | 3 | ||||||
F-18
Table of Contents
Ohio Casualty | ||||||||||||||||||||||||||||
Cumulative and for the Year Ended December 31, 2009 | ||||||||||||||||||||||||||||
2007 | ||||||||||||||||||||||||||||
Adjustment | Accrued | Accrued | ||||||||||||||||||||||||||
to Opening | as of | as of | Expected | |||||||||||||||||||||||||
Balance | 2007-2008 | December 31, | 2009 | 2009 | December 31, | Cumulative | ||||||||||||||||||||||
Sheet | Payments | 2008 | Adjustments | Payments | 2009 | Costs | ||||||||||||||||||||||
Costs included in allocation of purchase price: | ||||||||||||||||||||||||||||
Employment Reductions: | ||||||||||||||||||||||||||||
Commercial | $ | 1 | $ | (1 | ) | $ | — | $ | — | $ | — | — | $ | 1 | ||||||||||||||
Corporate and Other | 21 | (15 | ) | 6 | 1 | (7 | ) | — | 22 | |||||||||||||||||||
Contract terminations and other transitional activities: | ||||||||||||||||||||||||||||
Corporate and Other | 4 | (2 | ) | 2 | (1 | ) | (1 | ) | — | 3 | ||||||||||||||||||
Total included in Allocation of Purchase Price | $ | 26 | $ | (18 | ) | $ | 8 | $ | — | $ | (8 | ) | $ | — | $ | 26 |
F-19
Table of Contents
Accrued | Accrued | |||||||||||||||||||||||||||
as of | as of | Expected | ||||||||||||||||||||||||||
2007-2008 | 2007-2008 | December 31, | 2009 | 2009 | December 31, | Cumulative | ||||||||||||||||||||||
Adjustments | Payments | 2008 | Adjustments | Payments | 2009 | Costs | ||||||||||||||||||||||
Costs included in general and administrative expenses: | ||||||||||||||||||||||||||||
Employment Reductions: | ||||||||||||||||||||||||||||
Commercial | $ | 4 | $ | (4 | ) | $ | — | $ | — | $ | — | $ | — | $ | 4 | |||||||||||||
Personal | 2 | (2 | ) | — | — | — | — | 2 | ||||||||||||||||||||
Surety | 1 | (1 | ) | — | — | — | — | 1 | ||||||||||||||||||||
Corporate and Other | 1 | (1 | ) | — | — | — | — | 1 | ||||||||||||||||||||
Contract terminations and other transitional activities: | ||||||||||||||||||||||||||||
Commercial | 2 | (2 | ) | — | — | — | — | 2 | ||||||||||||||||||||
Personal | 1 | (1 | ) | — | — | — | — | 1 | ||||||||||||||||||||
Total costs included in general and administrative expenses | 11 | (11 | ) | — | — | — | — | 11 | ||||||||||||||||||||
Total Restructuring Costs | $ | 37 | $ | (29 | ) | $ | 8 | $ | — | $ | (8 | ) | $ | — | $ | 37 |
2009 | 2008 | |||||||
Commercial | $ | 1,497 | $ | 1,497 | ||||
Personal | 988 | 988 | ||||||
Surety | 569 | 569 | ||||||
Total goodwill | $ | 3,054 | $ | 3,054 | ||||
F-20
Table of Contents
2009 | 2008 | |||||||
Commercial | $ | 353 | $ | 369 | ||||
Personal | 619 | 649 | ||||||
Surety | 85 | 89 | ||||||
Total intangible assets | $ | 1,057 | $ | 1,107 | ||||
As of December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Value | Amortization | Net | ||||||||||
Intangible assets subject to amortization: | ||||||||||||
Agency relationship | $ | 766 | $ | (70 | ) | $ | 696 | |||||
Non-compete agreements | 4 | (4 | ) | — | ||||||||
Leases | 12 | 5 | 17 | |||||||||
Other | 1 | (1 | ) | — | ||||||||
Total intangible assets subject to amortization | 783 | (70 | ) | 713 | ||||||||
Total intangible assets not subject to amortization(1) | 344 | — | 344 | |||||||||
Total other intangible assets | $ | 1,127 | $ | (70 | ) | $ | 1,057 | |||||
(1) | On August 31, 2009 the Company transferred state insurance licenses to an insurance subsidiary of Liberty Mutual for consideration of $3. |
As of December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Value | Amortization | Net | ||||||||||
Intangible assets subject to amortization: | ||||||||||||
Agency relationship | $ | 766 | $ | (21 | ) | $ | 745 | |||||
Non-compete agreements | 4 | (3 | ) | 1 | ||||||||
Leases | 12 | 2 | 14 | |||||||||
Other | 1 | (1 | ) | — | ||||||||
Total intangible assets subject to amortization | 783 | (23 | ) | 760 | ||||||||
Total intangible assets not subject to amortization | 347 | — | 347 | |||||||||
Total other intangible assets | $ | 1,130 | $ | (23 | ) | $ | 1,107 | |||||
F-21
Table of Contents
Years Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Agency relationship | $ | 49 | $ | 19 | $ | 2 | ||||||
Non-compete agreements | 1 | 2 | 1 | |||||||||
Leases | (3 | ) | (2 | ) | — | |||||||
Other | — | — | — | |||||||||
Total amortization expense | $ | 47 | $ | 19 | $ | 3 | ||||||
For the Years Ended | ||||||||
December 31, | ||||||||
2008 | 2007 | |||||||
Total revenues | $ | 11,383 | $ | 12,055 | ||||
Net (loss) income | (689 | ) | 1,261 |
(3) | INVESTMENTS |
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Fixed maturities | $ | 932 | $ | 651 | $ | 356 | ||||||
Equity securities | 28 | 45 | 30 | |||||||||
Limited partnerships and limited liability companies | (43 | ) | (15 | ) | 3 | |||||||
Mortgage loans | 14 | 7 | 1 | |||||||||
Cash and cash equivalent interest | 12 | 27 | 18 | |||||||||
Other investment income | 5 | 8 | 3 | |||||||||
Gross investment income | 948 | 723 | 411 | |||||||||
Investment expenses | (38 | ) | (4 | ) | (6 | ) | ||||||
Net investment income | $ | 910 | $ | 719 | $ | 405 | ||||||
F-22
Table of Contents
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Fixed maturities | ||||||||||||
Gross realized gains | $ | 42 | $ | 20 | $ | 16 | ||||||
Gross realized losses | (61 | ) | (121 | ) | (17 | ) | ||||||
Equities | ||||||||||||
Gross realized gains | 30 | 7 | 7 | |||||||||
Gross realized losses | (56 | ) | (320 | ) | (11 | ) | ||||||
Other | ||||||||||||
Gross realized gains | — | 7 | — | |||||||||
Gross realized losses | (8 | ) | — | — | ||||||||
Net realized investment losses | $ | (53 | ) | $ | (407 | ) | $ | (5 | ) | |||
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Fixed maturities | $ | (44 | ) | $ | (61 | ) | $ | (3 | ) | |||
Equity securities | (53 | ) | (148 | ) | — | |||||||
Other | (5 | ) | — | — | ||||||||
Total | $ | (102 | ) | $ | (209 | ) | $ | (3 | ) | |||
F-23
Table of Contents
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Fixed maturities | $ | 1,358 | $ | (684 | ) | $ | 117 | |||||
Equities | 153 | (66 | ) | (52 | ) | |||||||
Other | 1 | (3 | ) | — | ||||||||
Net change in unrealized investment gains (losses) | 1,512 | (753 | ) | 65 | ||||||||
Deferred income taxes | (529 | ) | 264 | (23 | ) | |||||||
Net change in unrealized investment gains (losses), net of tax | $ | 983 | $ | (489 | ) | $ | 42 | |||||
As of December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. government and agency securities | $ | 706 | $ | 20 | $ | (1 | ) | $ | 725 | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | 4,730 | 132 | (36 | ) | 4,826 | |||||||||||
Commercial | 558 | 8 | (14 | ) | 552 | |||||||||||
Other mortgage and asset-backed securities | 920 | 36 | (18 | ) | 938 | |||||||||||
U.S. state and municipal | 8,319 | 464 | (41 | ) | 8,742 | |||||||||||
Corporate and other | 4,137 | 224 | (36 | ) | 4,325 | |||||||||||
Foreign government securities | 18 | — | (1 | ) | 17 | |||||||||||
Total fixed maturities | 19,388 | 884 | (147 | ) | 20,125 | |||||||||||
Common stock | 53 | 32 | — | 85 | ||||||||||||
Preferred stock | 205 | 26 | (15 | ) | 216 | |||||||||||
Total equity securities | 258 | 58 | (15 | ) | 301 | |||||||||||
Total securities available for sale | $ | 19,646 | $ | 942 | $ | (162 | ) | $ | 20,426 | |||||||
F-24
Table of Contents
As of December 31, 2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. government and agency securities | $ | 604 | $ | 46 | $ | (1 | ) | $ | 649 | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | 3,162 | 73 | (80 | ) | 3,155 | |||||||||||
Commercial | 551 | — | (66 | ) | 485 | |||||||||||
Other mortgage and asset-backed securities | 792 | 11 | (37 | ) | 766 | |||||||||||
U.S. state and municipal | 8,568 | 93 | (405 | ) | 8,256 | |||||||||||
Corporate and other | 3,746 | 38 | (295 | ) | 3,489 | |||||||||||
Foreign government securities | 18 | 2 | — | 20 | ||||||||||||
Total fixed maturities | 17,441 | 263 | (884 | ) | 16,820 | |||||||||||
Common stock | 282 | — | (67 | ) | 215 | |||||||||||
Preferred stock | 329 | 21 | (64 | ) | 286 | |||||||||||
Total equity securities | 611 | 21 | (131 | ) | 501 | |||||||||||
Total securities available for sale | $ | 18,052 | $ | 284 | $ | (1,015 | ) | $ | 17,321 | |||||||
F-25
Table of Contents
December 31, 2009 | December 31, 2008 | |||||||||||||||
Average | Average | |||||||||||||||
Carrying | Credit | Carrying | Credit | |||||||||||||
Value | Rating(1) | Value | Rating(1) | |||||||||||||
State: | ||||||||||||||||
Texas | $ | 1,078 | AA | + | $ | 1,038 | AA | + | ||||||||
California | 739 | AA | − | 730 | A | + | ||||||||||
New York | 594 | AA | 609 | AA | ||||||||||||
Florida | 586 | AA | 520 | AA | ||||||||||||
Washington | 469 | AA | 438 | AA | ||||||||||||
Massachusetts | 394 | AA | 361 | AA | ||||||||||||
Illinois | 264 | AA | 255 | AA | − | |||||||||||
South Carolina | 256 | AA | − | 240 | AA | − | ||||||||||
Ohio | 237 | AA | 218 | AA | + | |||||||||||
Pennsylvania | 233 | AA | 216 | AA | ||||||||||||
Other | 3,892 | AA | 3,631 | AA | ||||||||||||
Total | $ | 8,742 | AA | $ | 8,256 | AA | ||||||||||
(1) | For purposes of this disclosure, credit quality is primarily based upon Standard & Poor’s ratings. |
December 31, 2009 | December 31, 2008 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Due to mature: | ||||||||||||||||
One year or less | $ | 557 | $ | 565 | $ | 355 | $ | 352 | ||||||||
Over one year through five years | 3,335 | 3,494 | 3,046 | 2,975 | ||||||||||||
Over five years through ten years | 3,074 | 3,241 | 2,759 | 2,706 | ||||||||||||
Over ten years | 6,214 | 6,509 | 6,776 | 6,381 | ||||||||||||
Mortgage and asset-backed securities of government and corporate agencies | 6,208 | 6,316 | 4,505 | 4,406 | ||||||||||||
Total fixed maturities | $ | 19,388 | $ | 20,125 | $ | 17,441 | $ | 16,820 | ||||||||
F-26
Table of Contents
Less Than 12 Months | 12 Months or Longer | |||||||||||||||
Fair Value of | Fair Value of | |||||||||||||||
Unrealized | Investments with | Unrealized | Investments with | |||||||||||||
Losses | Unrealized Losses | Losses | Unrealized Losses | |||||||||||||
U.S. government and agency securities | $ | (1 | ) | $ | 156 | $ | (— | ) | $ | — | ||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | (6 | ) | 545 | (30 | ) | 188 | ||||||||||
Commercial | — | 38 | (14 | ) | 206 | |||||||||||
Other mortgage and asset-backed securities | (5 | ) | 126 | (13 | ) | 42 | ||||||||||
U.S. state and municipal | (11 | ) | 404 | (30 | ) | 253 | ||||||||||
Corporate and other | (7 | ) | 314 | (29 | ) | 278 | ||||||||||
Foreign government securities | (1 | ) | 13 | — | — | |||||||||||
Total fixed maturities | (31 | ) | 1,596 | (116 | ) | 967 | ||||||||||
Preferred stock | — | — | (15 | ) | 94 | |||||||||||
Total equity securities | — | — | (15 | ) | 94 | |||||||||||
Total securities available for sale | $ | (31 | ) | $ | 1,596 | $ | (131 | ) | $ | 1,061 | ||||||
F-27
Table of Contents
Less Than 12 Months | 12 Months or Longer | |||||||||||||||
Fair Value of | Fair Value of | |||||||||||||||
Unrealized | Instruments with | Unrealized | Instruments with | |||||||||||||
Losses | Unrealized Losses | Losses | Unrealized Losses | |||||||||||||
U.S. government and agency securities | $ | (1 | ) | $ | 14 | $ | — | $ | — | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | (68 | ) | 306 | (12 | ) | 62 | ||||||||||
Commercial | (56 | ) | 391 | (10 | ) | 81 | ||||||||||
Other mortgage and asset-backed securities | (34 | ) | 239 | (3 | ) | 17 | ||||||||||
U.S. state and municipal | (330 | ) | 4,403 | (75 | ) | 373 | ||||||||||
Corporate and other | (192 | ) | 2,217 | (103 | ) | 305 | ||||||||||
Foreign government securities | — | — | — | — | ||||||||||||
Total fixed maturities | (681 | ) | 7,570 | (203 | ) | 838 | ||||||||||
Common stock | (10 | ) | 52 | (57 | ) | 160 | ||||||||||
Preferred stock | (24 | ) | 137 | (40 | ) | 63 | ||||||||||
Total equity securities | (34 | ) | 189 | (97 | ) | 223 | ||||||||||
Total securities available for sale | $ | (715 | ) | $ | 7,759 | $ | (300 | ) | $ | 1,061 | ||||||
F-28
Table of Contents
(4) | DEFERRED POLICY ACQUISITION COSTS AND ACQUIRED IN-FORCE POLICY INTANGIBLES |
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of year | $ | 1,042 | $ | 629 | $ | 432 | ||||||
Acquisition costs deferred | 2,420 | 1,606 | 1,089 | |||||||||
Acquired in-force policy intangible (1) | — | 471 | 164 | |||||||||
Amortization charged to income | (2,392 | ) | (1,664 | ) | (1,056 | ) | ||||||
Balance at end of year | $ | 1,070 | $ | 1,042 | $ | 629 | ||||||
F-29
Table of Contents
(1) | For 2008, the acquired in-force policy intangibles were recognized in conjunction with the Company’s purchase of Safeco on September 22, 2008. For 2007, the acquired in-force policy intangibles were recognized in conjunction with the Company’s purchase of Ohio Casualty on August 24, 2007. |
(5) | UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES |
2009 | 2008 | 2007 | ||||||||||
Balance as of January 1 | $ | 12,651 | $ | 7,307 | $ | 4,327 | ||||||
Less: unpaid reinsurance recoverables | 1,517 | 1,158 | 620 | |||||||||
Net balance as of January 1 | 11,134 | 6,149 | 3,707 | |||||||||
Balance attributable to acquisitions | — | 4,928 | 2,128 | |||||||||
Incurred attributable to: | ||||||||||||
Current year | 6,859 | 4,818 | 2,913 | |||||||||
Prior years | (702 | ) | (492 | ) | (312 | ) | ||||||
Total incurred | 6,157 | 4,326 | 2,601 | |||||||||
Paid attributable to: | ||||||||||||
Current year | 3,443 | 2,414 | 1,223 | |||||||||
Prior years | 3,161 | 1,855 | 1,064 | |||||||||
Total paid | 6,604 | 4,269 | 2,287 | |||||||||
Add: unpaid reinsurance recoverables | 1,366 | 1,517 | 1,158 | |||||||||
Balance as of December 31 | $ | 12,053 | $ | 12,651 | $ | 7,307 | ||||||
F-30
Table of Contents
(6) | ASBESTOS AND ENVIRONMENTAL RESERVES |
F-31
Table of Contents
F-32
Table of Contents
2009 | 2008 | 2007 | ||||||||||
Asbestos: | ||||||||||||
Balance as of January 1 | $ | 347 | $ | 75 | $ | 21 | ||||||
Less: unpaid reinsurance recoverables | 54 | 17 | 7 | |||||||||
Net balance as of January 1 | 293 | 58 | 14 | |||||||||
Balance attributable to acquisitions | — | 234 | 45 | |||||||||
Total incurred | (3 | ) | 6 | — | ||||||||
Total paid | 23 | 5 | 1 | |||||||||
Net balance as of December 31 | 267 | 293 | 58 | |||||||||
Add: unpaid reinsurance recoverables | 47 | 54 | 17 | |||||||||
Balance as of December 31 | 314 | 347 | 75 | |||||||||
Allowance for reinsurance on unpaid losses | 8 | — | — | |||||||||
Total unpaid losses including allowance for unpaid reinsurance | $ | 322 | $ | 347 | $ | 75 | ||||||
2009 | 2008 | 2007 | ||||||||||
Environmental: | ||||||||||||
Balance as of January 1 | $ | 169 | $ | 93 | $ | 24 | ||||||
Less: unpaid reinsurance recoverables | 19 | 4 | 10 | |||||||||
Net balance as of January 1 | 150 | 89 | 14 | |||||||||
Balance attributable to acquisitions | — | 83 | 33 | |||||||||
Total incurred | 6 | (5 | ) | 49 | ||||||||
Total paid | 16 | 17 | 7 | |||||||||
Net balance as of December 31 | 140 | 150 | 89 | |||||||||
Add: unpaid reinsurance recoverables | 20 | 19 | 4 | |||||||||
Balance as of December 31 | $ | 160 | $ | 169 | $ | 93 | ||||||
(7) | REINSURANCE |
F-33
Table of Contents
For the Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Direct | $ | 10,142 | $ | 10,221 | $ | 6,715 | $ | 6,715 | $ | 4,177 | $ | 4,114 | ||||||||||||
Assumed | 454 | 457 | 442 | 440 | 389 | 371 | ||||||||||||||||||
Ceded | (448 | ) | (695 | ) | (453 | ) | (242 | ) | (159 | ) | (160 | ) | ||||||||||||
Net premiums | $ | 10,148 | $ | 9,983 | $ | 6,704 | $ | 6,913 | $ | 4,407 | $ | 4,325 | ||||||||||||
For the Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Claims and claim adjustment expenses | ||||||||||||
Direct | $ | 6,279 | $ | 4,343 | $ | 2,513 | ||||||
Assumed | 151 | 206 | 149 | |||||||||
Ceded | (273 | ) | (223 | ) | (61 | ) | ||||||
Net | $ | 6,157 | $ | 4,326 | $ | 2,601 | ||||||
As of December 31, | ||||||||
2009 | 2008 | |||||||
Unpaid claims and claim adjustment expenses | ||||||||
Direct | $ | 10,952 | $ | 11,516 | ||||
Assumed | 1,101 | 1,135 | ||||||
Ceded | (1,366 | ) | (1,517 | ) | ||||
Net | $ | 10,687 | $ | 11,134 | ||||
As of December 31, | ||||||||
2009 | 2008 | |||||||
Unearned premiums | ||||||||
Direct | $ | 4,428 | $ | 4,606 | ||||
Assumed | 230 | 231 | ||||||
Ceded | (53 | ) | (297 | ) | ||||
Net | $ | 4,605 | $ | 4,540 | ||||
F-34
Table of Contents
Reinsurance | Collateral | Net | ||||||||||
Recoverables | Held | Recoverables | ||||||||||
A.M. Best Rated Reinsurers | $ | 1,164 | $ | 205 | $ | 959 | ||||||
Involuntary pools | 259 | — | 259 | |||||||||
Voluntary pools | 8 | — | 8 | |||||||||
Other(1) | 124 | 17 | 107 | |||||||||
Gross recoverables | 1,555 | 222 | 1,333 | |||||||||
Less: allowance | 75 | — | 75 | |||||||||
Net recoverables | $ | 1,480 | $ | 222 | $ | 1,258 | ||||||
(1) | Includes $98 of net recoverables from non-rated reinsurers and $9 of net recoverables from captive and program business. |
Reinsurance Recoverables, Net of Offsetting Collateral | ||||
Swiss Reinsurance Group | $ | 288 | ||
Liberty Mutual Group | 179 | |||
Berkshire Hathaway Insurance Group | 140 | |||
Munich Re Group | 89 | |||
Equitas Insurance Limited | 48 | |||
PartnerRe Group | 42 | |||
American International Group Inc. | 24 | |||
Chubb Group of Insurance Companies | 22 | |||
Everest Re Group | 22 | |||
White Mountains Insurance Group | 22 | |||
Total significant reinsurers | $ | 876 | ||
F-35
Table of Contents
F-36
Table of Contents
(8) | DEBT OUTSTANDING |
• | Liberty Mutual exchanged $281 of the outstanding $300 Safeco 4.875% Senior Notes due 2010 for a like principal amount of newly issued Liberty Mutual 4.875% Senior Notes due 2010. | |
• | Liberty Mutual exchanged $187 of the outstanding $204 Safeco 7.25% Senior Notes due 2012 for a like principal amount of newly issued Liberty Mutual 7.25% Senior Notes due 2012. | |
• | Liberty Mutual exchanged $180 of the outstanding $200 Ohio Casualty 7.30% Senior Notes due 2014 for a like principal amount of newly issued Liberty Mutual 7.30% Senior Notes due 2014. |
2009 | 2008 | |||||||
4.875% Notes, due 2010 | $ | — | $ | 19 | ||||
7.25% Notes, due 2012 | 17 | 17 | ||||||
7.30% Notes, due 2014 | 20 | 20 | ||||||
Capital lease (1) | 21 | 25 | ||||||
Subtotal | 58 | 81 | ||||||
Unamortized fair value adjustments | 1 | 1 | ||||||
Total long-term debt excluding current maturities | $ | 59 | $ | 82 | ||||
(1) | Capital lease amounts represents a net amount that includes a gross asset of $25 as of December 31, 2009 and 2008 and accumulated amortization as of December 31, 2009 and 2008 of $4 and $0, respectively. |
F-37
Table of Contents
(9) | INCOME TAXES |
Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Current tax expense: | ||||||||||||
Federal | $ | 339 | $ | 249 | $ | 138 | ||||||
State | 4 | 3 | 2 | |||||||||
Total current tax expense | 343 | 252 | 140 | |||||||||
Total Federal deferred tax expense (benefit) | 34 | (174 | ) | 27 | ||||||||
Income tax expense | $ | 377 | $ | 78 | $ | 167 | ||||||
F-38
Table of Contents
Years Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Expected Federal income tax expense (benefit) | $ | 483 | $ | (170 | ) | $ | 190 | |||||
Tax effect of: | ||||||||||||
Nontaxable investment income | (120 | ) | (89 | ) | (31 | ) | ||||||
Non-deductible Goodwill | — | 341 | — | |||||||||
Revision to estimates | — | (9 | ) | 14 | ||||||||
State | 4 | 3 | 2 | |||||||||
Other | 10 | 2 | (8 | ) | ||||||||
Actual income tax expense | $ | 377 | $ | 78 | $ | 167 | ||||||
2009 | 2008 | |||||||
Deferred tax assets: | ||||||||
Unpaid claims discount | $ | 386 | $ | 384 | ||||
Unearned premium reserves | 326 | 339 | ||||||
Employee benefits/compensation | 44 | 65 | ||||||
Other investment related items | 166 | 164 | ||||||
Net unrealized losses andother-than-temporary impairments | — | 311 | ||||||
Capital loss tax attribute | 20 | — | ||||||
State insurance assessments | 10 | 27 | ||||||
Other | 65 | 49 | ||||||
Subtotal | 1,017 | 1,339 | ||||||
Less: valuation allowance | — | — | ||||||
Total deferred tax assets | 1,017 | 1,339 | ||||||
Deferred tax liabilities: | ||||||||
Deferred acquisition costs | 375 | 365 | ||||||
Net unrealized gains | 225 | — | ||||||
Goodwill | 108 | 98 | ||||||
Intangibles | 395 | 398 | ||||||
Other | 29 | 32 | ||||||
Total deferred tax liabilities | 1,132 | 893 | ||||||
Net deferred tax (liabilities) assets | $ | (115 | ) | $ | 446 | |||
F-39
Table of Contents
Balance at January 1, 2008 | $ | 2 | ||
Reductions for tax positions of prior years | (1 | ) | ||
Increases in unrecognized tax benefits acquired or assumed in a business combination | 5 | |||
Balance at December 31, 2008 | 6 | |||
Additions for tax positions of prior years | 17 | |||
Reductions for tax positions of prior years | (15 | ) | ||
Settlements | (2 | ) | ||
Balance at December 31, 2009 | $ | 6 | ||
(10) | FAIR VALUE OF FINANCIAL INSTRUMENTS |
F-40
Table of Contents
Assets, at Fair Value as of December 31, 2009 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed maturities, available for sale: | ||||||||||||||||
U.S. government and agency securities | $ | 613 | $ | 82 | $ | 30 | $ | 725 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | — | 4,820 | 6 | 4,826 | ||||||||||||
Commercial | — | 537 | 15 | 552 | ||||||||||||
Other mortgage and asset-backed securities | — | 890 | 48 | 938 | ||||||||||||
U.S. state and municipal | — | 8,729 | 13 | 8,742 | ||||||||||||
Corporate and other | — | 4,133 | 192 | 4,325 | ||||||||||||
Foreign government securities | — | 17 | — | 17 | ||||||||||||
Total fixed maturities, available for sale | 613 | 19,208 | 304 | 20,125 | ||||||||||||
Equity securities, available for sale: | ||||||||||||||||
Common stock | 41 | 42 | 2 | 85 | ||||||||||||
Preferred stock | — | 215 | 1 | 216 | ||||||||||||
Total equity securities, available for sale | 41 | 257 | 3 | 301 | ||||||||||||
Short-term investments | 107 | — | 2 | 109 | ||||||||||||
Total assets at fair value | $ | 761 | $ | 19,465 | $ | 309 | $ | 20,535 | ||||||||
Assets, at Fair Value as of December 31, 2008 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed maturities, available for sale: | ||||||||||||||||
U.S. government and agency securities | $ | 495 | $ | 139 | $ | 15 | $ | 649 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | — | 3,150 | 5 | 3,155 | ||||||||||||
Commercial | — | 474 | 11 | 485 | ||||||||||||
Other mortgage and asset-backed securities | — | 723 | 43 | 766 | ||||||||||||
U.S. state and municipal | — | 8,247 | 9 | 8,256 | ||||||||||||
Corporate and other | — | 3,264 | 225 | 3,489 | ||||||||||||
Foreign government securities | — | 20 | — | 20 | ||||||||||||
Total fixed maturities, available for sale | 495 | 16,017 | 308 | 16,820 | ||||||||||||
Equity securities, available for sale | ||||||||||||||||
Common stock | — | 189 | 26 | 215 | ||||||||||||
Preferred stock | — | 285 | 1 | 286 | ||||||||||||
Total equity securities, available for sale | — | 474 | 27 | 501 | ||||||||||||
Short-term investments | 1 | 381 | — | 382 | ||||||||||||
Total assets at fair value | $ | 496 | $ | 16,872 | $ | 335 | $ | 17,703 | ||||||||
F-41
Table of Contents
Net | Net | Net | ||||||||||||||||||||||
Balance | Realized | Unrealized | Purchases, | Transfer in | Balance | |||||||||||||||||||
January 1, | Gains | Gains | (Sales) and | and/or (out) | December 31, | |||||||||||||||||||
2009 | (Losses) | (Losses) | (Maturities) | of Level 3 | 2009 | |||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
U.S. government and agency securities | $ | 15 | $ | — | $ | 1 | $ | (1 | ) | $ | 15 | $ | 30 | |||||||||||
Mortgage and asset-backed securities: | ||||||||||||||||||||||||
Residential | 5 | — | — | (1 | ) | 2 | 6 | |||||||||||||||||
Commercial | 11 | — | 1 | (1 | ) | 4 | 15 | |||||||||||||||||
Other mortgage and asset-backed securities | 43 | 2 | — | (9 | ) | 12 | 48 | |||||||||||||||||
U.S. state and municipal | 9 | — | 1 | (1 | ) | 4 | 13 | |||||||||||||||||
Corporate and other | 225 | (1 | ) | 20 | (40 | ) | (12 | ) | 192 | |||||||||||||||
Total fixed maturities | 308 | 1 | 23 | (53 | ) | 25 | 304 | |||||||||||||||||
Equity securities: | ||||||||||||||||||||||||
Common stock | 26 | — | — | (24 | ) | — | 2 | |||||||||||||||||
Preferred stock | 1 | (5 | ) | 5 | — | — | 1 | |||||||||||||||||
Total equity securities | 27 | (5 | ) | 5 | (24 | ) | — | 3 | ||||||||||||||||
Short-term investments | — | — | — | 2 | — | 2 | ||||||||||||||||||
Total assets | $ | 335 | $ | (4 | ) | $ | 28 | $ | (75 | ) | $ | 25 | $ | 309 | ||||||||||
F-42
Table of Contents
Net | Net | Net | ||||||||||||||||||||||
Balance | Realized | Unrealized | Purchases, | Transfer in | Balance | |||||||||||||||||||
January 1, | Gains | Gains | (Sales) and | and/or (out) | December 31, | |||||||||||||||||||
2008 | (Losses) | (Losses) | (Maturities) | of Level 3 | 2008 | |||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
U.S. government and agency securities | $ | — | $ | — | $ | — | $ | 1 | $ | 14 | $ | 15 | ||||||||||||
Mortgage and asset-backed securities: | ||||||||||||||||||||||||
Residential | 18 | (1 | ) | 1 | 1 | (14 | ) | 5 | ||||||||||||||||
Commercial | 5 | — | (1 | ) | 7 | — | 11 | |||||||||||||||||
Other mortgage and asset-backed securities | 21 | (6 | ) | (5 | ) | (7 | ) | 40 | 43 | |||||||||||||||
U.S. state and municipal | 14 | — | (6 | ) | 2 | (1 | ) | 9 | ||||||||||||||||
Corporate and other | 160 | (3 | ) | (25 | ) | 54 | 39 | 225 | ||||||||||||||||
Total fixed maturities | 218 | (10 | ) | (36 | ) | 58 | 78 | 308 | ||||||||||||||||
Equity securities: | ||||||||||||||||||||||||
Common stock | 27 | — | (3 | ) | 2 | — | 26 | |||||||||||||||||
Preferred stock | — | — | — | — | 1 | 1 | ||||||||||||||||||
Total equity securities | 27 | — | (3 | ) | 2 | 1 | 27 | |||||||||||||||||
Short-term investments | — | — | — | — | — | — | ||||||||||||||||||
Total assets | $ | 245 | $ | (10 | ) | $ | (39 | ) | $ | 60 | $ | 79 | $ | 335 | ||||||||||
2009 | 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Other investments | $ | 150 | $ | 150 | $ | 190 | $ | 190 | ||||||||
Mortgage loans | 271 | 260 | 201 | 195 | ||||||||||||
Cash and cash equivalents | 1,548 | 1,548 | 1,968 | 1,968 | ||||||||||||
Debt outstanding | 78 | 81 | 82 | 77 |
F-43
Table of Contents
(11) | COMMITMENTS AND CONTINGENT LIABILITIES |
F-44
Table of Contents
Operating | Rental | Net Lease | ||||||||||
Leases | Income | Obligations | ||||||||||
2010 | $ | 41 | $ | 4 | $ | 37 | ||||||
2011 | 42 | 4 | 38 | |||||||||
2012 | 42 | 3 | 39 | |||||||||
2013 | 31 | 3 | 28 | |||||||||
2014 | 29 | 2 | 27 | |||||||||
2015 — 2018 | 82 | — | 82 | |||||||||
Total | $ | 267 | $ | 16 | $ | 251 | ||||||
F-45
Table of Contents
(12) | STOCKHOLDERS’ EQUITY AND DIVIDEND AVAILABILITY |
F-46
Table of Contents
F-47
Table of Contents
As of December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Unrealized gains (losses) on securities | $ | 503 | $ | (477 | ) | $ | 12 | |||||
Minimum pension liability adjustments | (15 | ) | (10 | ) | — | |||||||
Accumulated other comprehensive income (loss), net of tax | $ | 488 | $ | (487 | ) | $ | 12 | |||||
(13) | SEGMENT INFORMATION |
F-48
Table of Contents
F-49
Table of Contents
Total | ||||||||||||||||||||||||
Operating | Corporate | |||||||||||||||||||||||
Commercial | Personal | Surety | Segments | and Other | Consolidated | |||||||||||||||||||
As of and for the year ended December 31, 2009 | ||||||||||||||||||||||||
Net written premiums | $ | 4,585 | $ | 4,689 | $ | 707 | $ | 9,981 | $ | 167 | $ | 10,148 | ||||||||||||
Net premiums earned | 4,606 | 4,458 | 753 | 9,817 | 166 | 9,983 | ||||||||||||||||||
Net investment income | 458 | 246 | 47 | 751 | 159 | 910 | ||||||||||||||||||
Fee and other revenues | 34 | 62 | 1 | 97 | — | 97 | ||||||||||||||||||
Total operating revenues(1) | 5,098 | 4,766 | 801 | 10,665 | 325 | 10,990 | ||||||||||||||||||
Claims and expenses(2) | 4,588 | 4,346 | 553 | 9,487 | 71 | 9,558 | ||||||||||||||||||
Operating income before income tax expense(3) | 510 | 420 | 248 | 1,178 | 254 | 1,432 | ||||||||||||||||||
Total assets | 15,102 | 9,028 | 2,321 | 26,451 | 5,935 | 32,386 | ||||||||||||||||||
Summary of inter-segment revenue and expenses | ||||||||||||||||||||||||
Inter-segment net premiums earned (4) | (193 | ) | (63 | ) | — | (256 | ) | 256 | — | |||||||||||||||
Inter-segment claims and underwriting expenses(4) | (9 | ) | (8 | ) | — | (17 | ) | 17 | — |
Total | ||||||||||||||||||||||||
Operating | Corporate | |||||||||||||||||||||||
Commercial | Personal | Surety | Segments | and Other | Consolidated | |||||||||||||||||||
As of and for the year ended December 31, 2008 | ||||||||||||||||||||||||
Net written premiums | $ | 3,975 | $ | 2,122 | $ | 479 | $ | 6,576 | $ | 128 | $ | 6,704 | ||||||||||||
Net premiums earned | 4,024 | 2,277 | 478 | 6,779 | 134 | 6,913 | ||||||||||||||||||
Net investment income | 402 | 131 | 37 | 570 | 149 | 719 | ||||||||||||||||||
Fee and other revenues | 30 | 20 | — | 50 | — | 50 | ||||||||||||||||||
Total operating revenues(1) | 4,456 | 2,428 | 515 | 7,399 | 283 | 7,682 | ||||||||||||||||||
Claims and expenses(2) | 3,862 | 3,344 | 362 | 7,568 | 193 | 7,761 | ||||||||||||||||||
Operating income (loss) before income tax expense(3) | 594 | (916 | ) | 153 | (169 | ) | 90 | (79 | ) | |||||||||||||||
Total assets | 15,757 | 9,580 | 2,461 | 27,798 | 3,072 | 30,870 | ||||||||||||||||||
Summary of inter-segment revenue and expenses | ||||||||||||||||||||||||
Inter-segment net premiums earned (4) | (188 | ) | (44 | ) | — | (232 | ) | 232 | — | |||||||||||||||
Inter-segment claims and underwriting expenses(4) | (193 | ) | (64 | ) | — | (257 | ) | 257 | — |
F-50
Table of Contents
Total | ||||||||||||||||||||||||
Operating | Corporate | |||||||||||||||||||||||
Commercial | Personal | Surety | Segments | and Other | Consolidated | |||||||||||||||||||
As of and for the year ended December 31, 2007 | ||||||||||||||||||||||||
Net written premiums | $ | 3,039 | $ | 948 | $ | 312 | $ | 4,299 | $ | 108 | $ | 4,407 | ||||||||||||
Net premiums earned | 3,025 | 894 | 289 | 4,208 | 117 | 4,325 | ||||||||||||||||||
Net investment income | 287 | 47 | 25 | 359 | 46 | 405 | ||||||||||||||||||
Fee and other revenues | 23 | 7 | 3 | 33 | — | 33 | ||||||||||||||||||
Total operating revenues(1) | 3,335 | 948 | 317 | 4,600 | 163 | 4,763 | ||||||||||||||||||
Claims and expenses(2) | 2,861 | 880 | 222 | 3,963 | 251 | 4,214 | ||||||||||||||||||
Operating income (loss) before income tax expense(3) | 474 | 68 | 95 | 637 | (88 | ) | 549 | |||||||||||||||||
Total assets | 11,380 | 2,700 | 858 | 14,938 | 1,701 | 16,639 | ||||||||||||||||||
Summary of inter-segment revenue and expenses | ||||||||||||||||||||||||
Inter-segment net premiums earned (4) | (109 | ) | (32 | ) | — | (141 | ) | 141 | — | |||||||||||||||
Inter-segment claims and underwriting expenses(4) | (115 | ) | (5 | ) | — | (120 | ) | 120 | — |
(1) | Total operating revenues exclude net realized investment losses as they are significantly impacted by both discretionary and economic factors and are not necessarily indicative of operating results. | |
(2) | Reflects a goodwill impairment in 2008 in the amount of $973 in the Personal operating segment, see Note 2 — Acquisitions for additional detail. | |
(3) | Operating income (loss) before income tax expense is defined by the Company as net income (loss) excluding net realized gains (losses) and income tax expense (benefit). | |
(4) | Inter-segment revenue and claims and underwriting expenses represent the Company’s inter-segment reinsurance arrangements through which the segments have certain reinsurance coverages with Corporate and Other. |
F-51
Table of Contents
For the Year Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Revenue Reconciliation | ||||||||||||
Net premiums earned | ||||||||||||
Commercial: | ||||||||||||
Commercial multiple peril | $ | 1,825 | $ | 1,548 | $ | 1,196 | ||||||
Commercial automobile | 1,168 | 948 | 679 | |||||||||
Workers compensation | 841 | 877 | 735 | |||||||||
General liability | 474 | 401 | 210 | |||||||||
Other | 298 | 250 | 205 | |||||||||
Total Commercial | 4,606 | 4,024 | 3,025 | |||||||||
Personal: | ||||||||||||
Private passenger automobile | 3,173 | 1,453 | 534 | |||||||||
Homeowners | 894 | 670 | 307 | |||||||||
Other | 391 | 154 | 53 | |||||||||
Total Personal | 4,458 | 2,277 | 894 | |||||||||
Surety: | ||||||||||||
Contract | 471 | 294 | 191 | |||||||||
Specialty | 158 | 113 | 57 | |||||||||
Commercial | 124 | 71 | 41 | |||||||||
Total Surety | 753 | 478 | 289 | |||||||||
Corporate and Other: | ||||||||||||
Total Corporate and Other | 166 | 134 | 117 | |||||||||
Total net premiums earned | 9,983 | 6,913 | 4,325 | |||||||||
Net investment income | 910 | 719 | 405 | |||||||||
Fee and other revenues | 97 | 50 | 33 | |||||||||
Total operating revenue | 10,990 | 7,682 | 4,763 | |||||||||
Net realized investment losses | (53 | ) | (407 | ) | (5 | ) | ||||||
Total revenue | $ | 10,937 | $ | 7,275 | $ | 4,758 | ||||||
For the Year Ended December 31, | 2009 | 2008 | 2007 | |||||||||
Income Reconciliation, net of tax | ||||||||||||
Total operating income (loss) before income tax expense | $ | 1,432 | $ | (79 | ) | $ | 549 | |||||
Net realized investment losses | (53 | ) | (407 | ) | (5 | ) | ||||||
Income (loss) before income tax expense | 1,379 | (486 | ) | 544 | ||||||||
Income tax expense | 377 | 78 | 167 | |||||||||
Net income (loss) | $ | 1,002 | $ | (564 | ) | $ | 377 | |||||
F-52
Table of Contents
(14) | RELATED PARTY TRANSACTIONS |
F-53
Table of Contents
(15) | BENEFIT PLANS |
F-54
Table of Contents
F-55
Table of Contents
ASI | Safeco | |||||||||||||||||||||||
Safeco | Supplemental | Post-Retirement | ||||||||||||||||||||||
Pension Plan | Pension | Welfare | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Change in benefit obligations: | ||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 164 | $ | — | $ | 12 | $ | — | $ | — | $ | — | ||||||||||||
Service costs | — | — | — | — | — | 1 | ||||||||||||||||||
Interest costs | 8 | 3 | 1 | — | — | 1 | ||||||||||||||||||
Actuarial (gains) losses | 5 | 1 | — | 1 | — | 15 | ||||||||||||||||||
Business combinations | — | 164 | — | 11 | — | 79 | ||||||||||||||||||
Divestitures | — | — | — | — | — | (95 | ) | |||||||||||||||||
Benefits paid | (23 | ) | (4 | ) | (1 | ) | — | — | (1 | ) | ||||||||||||||
Benefit obligations at end of year | 154 | 164 | 12 | 12 | — | — | ||||||||||||||||||
Accumulated benefit obligation | 154 | 164 | 12 | 12 | — | — | ||||||||||||||||||
Change in plan assets: | ||||||||||||||||||||||||
Fair value of plan assets at beginning of year | 142 | — | — | — | — | — | ||||||||||||||||||
Actual return on plan assets | 1 | (12 | ) | — | — | — | — | |||||||||||||||||
Business combinations | — | 158 | — | — | — | — | ||||||||||||||||||
Benefits paid | (23 | ) | (4 | ) | — | — | — | — | ||||||||||||||||
Fair value of plan assets at end of year | 120 | 142 | — | — | — | — | ||||||||||||||||||
Funded status of Plan | (34 | ) | (22 | ) | (12 | ) | (12 | ) | — | — | ||||||||||||||
F-56
Table of Contents
ASI | Safeco | |||||||||||||||||||||||
Safeco | Supplemental | Post-Retirement | ||||||||||||||||||||||
Pension Plan | Pension | Welfare | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
Amounts recognized in the Statements of Financial Position: | ||||||||||||||||||||||||
Noncurrent assets | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Current liabilities | (34 | ) | — | (1 | ) | (1 | ) | — | — | |||||||||||||||
Noncurrent liabilities | — | (22 | ) | (11 | ) | (11 | ) | — | — | |||||||||||||||
Net liability at end of year | $ | (34 | ) | $ | (22 | ) | $ | (12 | ) | $ | (12 | ) | $ | — | $ | — | ||||||||
Amounts recognized in Accumulated Other Comprehensive Loss: | ||||||||||||||||||||||||
Net loss | $ | 22 | $ | 15 | $ | 1 | $ | 1 | $ | — | $ | — | ||||||||||||
Total | $ | 22 | $ | 15 | $ | 1 | $ | 1 | $ | — | $ | — | ||||||||||||
Other changes in Plan assets and projected benefit obligation recognized in Other Comprehensive Loss (Income): | ||||||||||||||||||||||||
Net actuarial loss | $ | 10 | $ | 15 | $ | — | $ | 1 | $ | — | $ | — | ||||||||||||
Amortization of net actuarial (gain) loss | (3 | ) | — | — | — | — | — | |||||||||||||||||
Total | $ | 7 | $ | 15 | $ | — | $ | 1 | $ | — | $ | — |
ASI | Safeco | |||||||||||||||||||||||
Safeco | Supplemental | Post-Retirement | ||||||||||||||||||||||
Pension Plan | Pension | Welfare | ||||||||||||||||||||||
December 31, | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
Components of net periodic benefit costs: | ||||||||||||||||||||||||
Service costs | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1 | ||||||||||||
Interest costs | 8 | 3 | 1 | — | — | 1 | ||||||||||||||||||
Expected return on plan assets | (4 | ) | (2 | ) | — | — | — | — | ||||||||||||||||
Settlement charge | 2 | — | — | — | — | — | ||||||||||||||||||
Net periodic benefit costs | $ | 6 | $ | 1 | $ | 1 | $ | — | $ | — | $ | 2 | ||||||||||||
F-57
Table of Contents
ASI | Safeco | |||||||||||||||||||||||
Safeco | Supplemental | Post-Retirement | ||||||||||||||||||||||
Pension Plan | Pension | Welfare | ||||||||||||||||||||||
December 31, | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
Discount rate | 2.00 | % | 5.00 | % | 5.30 | % | 6.25 | % | N/A | 6.00 | % | |||||||||||||
Rate of compensation increase | N/A | N/A | N/A | N/A | N/A | N/A |
ASI | Safeco | |||||||||||||||||||||||
Safeco | Supplemental | Post-Retirement | ||||||||||||||||||||||
Pension Plan | Pension | Welfare | ||||||||||||||||||||||
December 31, | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||
Discount rate | 5.00 | % | 5.75 | % | 6.25 | % | 7.25 | % | N/A | 6.50 | % | |||||||||||||
Expected return on plan assets | 4.00 | % | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||
Rate of compensation increase | N/A | N/A | N/A | N/A | N/A | 4.70 | % |
F-58
Table of Contents
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Fair Value Measurements at December 31, 2009 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Asset Category(1) | ||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 92 | $ | 92 | $ | — | $ | — | ||||||||
Investment grade bonds: | ||||||||||||||||
U.S. government and agencies | 18 | 18 | — | — | ||||||||||||
Corporate and other | 10 | — | 10 | — | ||||||||||||
Total | $ | 120 | $ | 110 | $ | 10 | $ | — | ||||||||
(1) | See Note 10 — Fair Value of Financial Instruments for a description of the three Levels of fair value presentation. |
Asset Category | 2008 | |||
Equity | — | |||
Debt investments | 65 | % | ||
Money market | 35 | % | ||
Total | 100 | % | ||
Qualified | Supplemental | Post-Retirement | ||||||||||
For the Year Ended December 31, 2007 | Pension | Pension | Welfare | |||||||||
Components of net periodic benefit costs | ||||||||||||
Service costs | $ | 4 | $ | — | $ | — | ||||||
Interest costs | 7 | — | 2 | |||||||||
Expected return on plan assets | (9 | ) | — | — | ||||||||
Net periodic benefit costs | $ | 2 | $ | — | $ | 2 | ||||||
Qualified | Supplemental | Post-Retirement | ||||||||||
For the Year Ended December 31, 2007 | Pension | Pension | Welfare | |||||||||
Discount rate | 6.25 | % | 6.25 | % | 6.25 | % | ||||||
Expected return on plan assets | 7.50 | % | N/A | 7.15 | % | |||||||
Rate of compensation increase | 4.70 | % | 4.70 | % | 4.70 | % |
F-59
Table of Contents
Safeco | ASI | |||||||
Pension | Supplemental | |||||||
Plan | Pension | |||||||
2010(1) | $ | 156 | $ | 1 | ||||
2011 | — | 1 | ||||||
2012 | — | 1 | ||||||
2013 | — | 1 | ||||||
2014 | — | 1 | ||||||
2015-2019 | — | 5 |
(1) | The 2010 Safeco Pension Plan benefit payment amount is the estimated final distribution. |
(16) | EARNINGS PER SHARE |
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net income available to common stockholders | ||||||||||||
Net income (loss), as reported | $ | 1,002 | $ | (564 | ) | $ | 377 | |||||
Less: Preferred stock dividends | 63 | — | — | |||||||||
Net income (loss) available to common stockholders | $ | 939 | $ | (564 | ) | $ | 377 |
F-60
Table of Contents
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Basic earnings per share | ||||||||||||
Net income (loss) available to common stockholders | $ | 939 | $ | (564 | ) | $ | 377 | |||||
Basic shares outstanding (shares in millions) | ||||||||||||
Net income (loss) per common share — basic | $ | $ | ( | ) | $ | |||||||
Diluted earnings per share | ||||||||||||
Net income (loss) available to common stockholders | $ | 939 | $ | (564 | ) | $ | 377 | |||||
Diluted shares outstanding (shares in millions) | ||||||||||||
Net income (loss) per common share — diluted | $ | $ | ( | ) | $ | |||||||
(17) | PRO FORMA INFORMATION (UNAUDITED) |
F-61
Table of Contents
Pro Forma | ||||
for the Year Ended | ||||
December 31, 2009 | ||||
Net income | $ | 1,002 | ||
Less: Pro forma investment income adjustment(A) | ( | ) | ||
Less: Pro forma interest expense adjustment(B) | ( | ) | ||
Less: Preferred stock dividends | 63 | |||
Unaudited pro forma income available to common stockholders | $ | |||
Unaudited pro forma income per share available to common stockholders | ||||
Basic | $ | |||
Diluted | $ | |||
Weighted average pro forma number of common shares outstanding: | ||||
Basic (shares in millions) | ||||
Diluted (shares in millions) |
(A) | Reflects a reduction of $ for the year ended December 31, 2009 of net investment income based on a pro-rata share of income allocated to the $2,910 in cash and investments transferred to Liberty Mutual in April 2010 and August 2010 in partial satisfaction of the February 2010 Note. Tax expense on the $ reduction of net investment income was $ . The reduction in net investment income represents the balance of the actual cash and investments transferred to Liberty Mutual broken out by asset category multiplied by the yield for the respective period associated with that asset category. |
(B) | This adjustment reflects the interest expense of 0.72% on the estimated $ outstanding principal amount of the February 2010 Note and % on the estimated $ outstanding principal amount of the Ohio Casualty Note in each case following application of the proceeds from this Offering and assumes the notes were outstanding from January 1, 2009. Tax expense on the $ increase in interest expense was $ . |
(18) | SUBSEQUENT EVENTS |
F-62
Table of Contents
Ordinary | Extraordinary | Total | ||||||||||
Insurance Legal Entity | Dividend | Dividend | Dividend | |||||||||
Ohio Casualty Insurance Company | $ | 99 | $ | 281 | $ | 380 | ||||||
Peerless Insurance Company | 202 | 574 | 776 | |||||||||
Indiana Insurance Company | 37 | 85 | 122 | |||||||||
American States Insurance Company | 58 | 267 | 325 | |||||||||
American States Preferred Insurance Company | 2 | 18 | 20 | |||||||||
American Economy Insurance Company | 55 | 212 | 267 | |||||||||
Safeco Insurance Company of America | — | 425 | 425 | |||||||||
General Insurance Company of America | — | 156 | 156 | |||||||||
Total Dividends Paid | $ | 453 | $ | 2,018 | $ | 2,471 | ||||||
F-63
Table of Contents
Six Months Ended June 30, | ||||||||
2010 | 2009 | |||||||
Revenues | ||||||||
Net premiums earned | $ | 5,113 | $ | 5,080 | ||||
Net investment income | 463 | 439 | ||||||
Fee and other revenues | 50 | 49 | ||||||
Net realized investment gains (losses) | 227 | (53 | ) | |||||
Total revenues | 5,853 | 5,515 | ||||||
Claims and expenses | ||||||||
Claims and claim adjustment expenses | 3,636 | 3,291 | ||||||
General and administrative expenses | 638 | 494 | ||||||
Amortization of deferred policy acquisition costs | 1,186 | 1,209 | ||||||
Interest expense | 10 | 2 | ||||||
Total claims and expenses | 5,470 | 4,996 | ||||||
Income before income tax expense | 383 | 519 | ||||||
Income tax expense | 94 | 142 | ||||||
Net income | $ | 289 | $ | 377 | ||||
Less: Preferred stock dividends | 18 | 32 | ||||||
Income available to common stockholders | $ | 271 | $ | 345 | ||||
Income per share available to common stockholders (see Note 15) | ||||||||
Basic | $ | $ | ||||||
Diluted | $ | $ | ||||||
Weighted average number of common shares outstanding (see Note 16): | ||||||||
Basic (shares in millions) | ||||||||
Diluted (shares in millions) | ||||||||
Pro forma basic earnings per share (see Note 16): | ||||||||
Basic | $ | |||||||
Diluted | $ | |||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net realized investment gains (losses) | ||||||||
Net realized investment gains, excludingother-than-temporary impairment losses | $ | 237 | $ | 5 | ||||
Other-than-temporary impairment losses: | ||||||||
Totalother-than-temporary impairment losses | (10 | ) | (58 | ) | ||||
Portion of loss recognized in other comprehensive income | — | — | ||||||
Net impairment losses recognized in earnings | (10 | ) | (58 | ) | ||||
Net realized investment gains (losses), includingother-than-temporary impairment losses | $ | 227 | $ | (53 | ) |
F-64
Table of Contents
Pro Forma | ||||||||||||
June 30, | December 31, | As of June 30, | ||||||||||
2010 | 2009 | 2010 | ||||||||||
(see Note 16) | ||||||||||||
Assets | ||||||||||||
Investments | ||||||||||||
Fixed maturities, available for sale, at fair value (amortized cost of $16,901 and $19,388) | $ | 17,755 | $ | 20,125 | $ | |||||||
Equity securities, available for sale, at fair value (cost of $199 and $258) | 221 | 301 | ||||||||||
Short-term investments | 100 | 109 | ||||||||||
Mortgage loans | 304 | 271 | ||||||||||
Other investments | 37 | 150 | ||||||||||
Total investments | 18,417 | 20,956 | ||||||||||
Cash and cash equivalents | 1,315 | 1,548 | ||||||||||
Accrued investment income | 201 | 233 | ||||||||||
Premium and other receivables (net of allowance of $25 and $22) | 2,491 | 2,405 | ||||||||||
Reinsurance recoverables (net of allowance of $75 and $75) | 1,314 | 1,480 | ||||||||||
Deferred policy acquisition costs | 1,139 | 1,070 | ||||||||||
Goodwill | 3,054 | 3,054 | ||||||||||
Prepaid reinsurance premiums | 57 | 53 | ||||||||||
Other intangible assets | 1,031 | 1,057 | ||||||||||
Other assets | 430 | 530 | ||||||||||
Total assets | $ | 29,449 | $ | 32,386 | $ | |||||||
Liabilities and Stockholders’ Equity | ||||||||||||
Liabilities: | ||||||||||||
Unpaid claims and claim adjustment expenses | $ | 12,222 | $ | 12,053 | $ | |||||||
Unearned premiums | 4,749 | 4,658 | ||||||||||
Funds held under reinsurance treaties | 67 | 70 | ||||||||||
Net deferred tax liabilities | 182 | 115 | ||||||||||
Short-term debt | — | 19 | ||||||||||
Long-term debt | 1,958 | 59 | ||||||||||
Payable to affiliates | 511 | 1,350 | ||||||||||
Other liabilities | 1,258 | 1,865 | ||||||||||
Total liabilities | $ | 20,947 | $ | 20,189 | $ | |||||||
Stockholders’ Equity: | ||||||||||||
Common stock (par value $1.00; 1,000 shares issued and outstanding) | — | — | — | |||||||||
Preferred stock (par value $0.00; 0 and 10,920 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively) | — | 633 | — | |||||||||
Additionalpaid-in-capital | 7,786 | 8,858 | ||||||||||
Retained earnings | 167 | 2,218 | ||||||||||
Accumulated other comprehensive income | 549 | 488 | ||||||||||
Total stockholders’ equity | 8,502 | 12,197 | ||||||||||
Total liabilities and stockholders’ equity | $ | 29,449 | $ | 32,386 | $ | |||||||
F-65
Table of Contents
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Preferred | Common | Preferred | Common | Paid-in- | Retained | Comprehensive | Stockholders’ | |||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Capital | Earnings | (Loss) Income | Equity | |||||||||||||||||||||||||
(Shares) | (Dollars) | |||||||||||||||||||||||||||||||
Balance, January 1, 2009 | 10,920 | 1,000 | $ | 633 | $ | — | $ | 8,858 | $ | 1,297 | $ | (487 | ) | $ | 10,301 | |||||||||||||||||
Cumulative effect of adoption of ASC 320 at January 1, 2009 | — | — | — | — | — | 3 | (3 | ) | — | |||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 377 | — | 377 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||||||||||||||||||
Unrealized gains on securities | — | — | — | — | — | — | 500 | 500 | ||||||||||||||||||||||||
Less: reclassification adjustment for gains and losses included in net income | — | — | — | — | — | — | 34 | 34 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | — | — | 534 | 534 | ||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 377 | 534 | 911 | ||||||||||||||||||||||||
Other capital transactions | ||||||||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (32 | ) | — | (32 | ) | ||||||||||||||||||||||
Total other capital transactions | — | — | — | — | — | (32 | ) | — | (32 | ) | ||||||||||||||||||||||
Balance, June 30, 2009 | 10,920 | 1,000 | $ | 633 | $ | — | $ | 8,858 | $ | 1,645 | $ | 44 | $ | 11,180 | ||||||||||||||||||
Balance, January 1, 2010 | 10,920 | 1,000 | $ | 633 | $ | — | $ | 8,858 | $ | 2,218 | $ | 488 | $ | 12,197 | ||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 289 | — | 289 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||||||||||||||||||
Unrealized gains on securities | — | — | — | — | — | — | 210 | 210 | ||||||||||||||||||||||||
Less: reclassification adjustment for gains and losses included in net income | — | — | — | — | — | — | (148 | ) | (148 | ) | ||||||||||||||||||||||
Pension liability adjustments | — | — | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | — | — | 61 | 61 | ||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 289 | 61 | 350 | ||||||||||||||||||||||||
Other capital transactions | ||||||||||||||||||||||||||||||||
Preferred stock cancellation | (10,920 | ) | — | (633 | ) | — | — | — | — | (633 | ) | |||||||||||||||||||||
Dividends paid | — | — | — | — | (1,707 | ) | (2,340 | ) | — | (4,047 | ) | |||||||||||||||||||||
Capital contributed | — | — | — | — | 635 | — | — | 635 | ||||||||||||||||||||||||
Total other capital transactions | (10,920 | ) | — | (633 | ) | — | (1,072 | ) | (2,340 | ) | — | (4,045 | ) | |||||||||||||||||||
Balance, June 30, 2010 | — | 1,000 | $ | — | $ | — | $ | 7,786 | $ | 167 | $ | 549 | $ | 8,502 | ||||||||||||||||||
F-66
Table of Contents
Six Months | ||||||||
Ended June 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 289 | $ | 377 | ||||
Adjustments to reconcile net income to net cash provided by operating activities, net of effects from purchases of companies: | ||||||||
Net realized investment (gains) losses | (227 | ) | 53 | |||||
Undistributed private equity investment losses | 6 | 37 | ||||||
Depreciation and amortization | 73 | 74 | ||||||
Deferred income taxes | 34 | 6 | ||||||
Changes in assets and liabilities | ||||||||
Premium and other receivables | (86 | ) | 3 | |||||
Reinsurance recoverables and funds held under reinsurance treaties | 163 | (64 | ) | |||||
Deferred policy acquisition costs | (1,255 | ) | (1,184 | ) | ||||
Amortization of deferred policy acquisition costs | 1,186 | 1,209 | ||||||
Unpaid claims and claim adjustment expenses | 169 | (36 | ) | |||||
Unearned premiums | 91 | (107 | ) | |||||
Taxes payable | (111 | ) | (63 | ) | ||||
Change in payable to affiliates | 62 | 103 | ||||||
Other, net | 22 | (171 | ) | |||||
Total adjustments | 127 | (140 | ) | |||||
Net cash provided by operating activities | 416 | 237 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of investments: | ||||||||
Fixed maturities | (3,462 | ) | (2,904 | ) | ||||
Equity securities | (18 | ) | (41 | ) | ||||
Short-term investments | (100 | ) | (5 | ) | ||||
Mortgage loans | (37 | ) | — | |||||
Other investments | (16 | ) | (7 | ) | ||||
Sales and maturities of investments: | ||||||||
Fixed maturities | 3,467 | 1,973 | ||||||
Equity securities | 3 | 68 | ||||||
Short-term investments | 109 | 194 | ||||||
Mortgage loans | 4 | 2 | ||||||
Other investments | 122 | — | ||||||
Other investing activities | (63 | ) | 789 | |||||
Net cash provided by investing activities | 9 | 69 | ||||||
Cash flows from financing activities: | ||||||||
Debt financing, net | (256 | ) | (2 | ) | ||||
Net securities lending activity and other financing activities | (386 | ) | 64 | |||||
Dividends paid: | ||||||||
Preferred | (16 | ) | (32 | ) | ||||
Net cash (used in) provided by financing activities | (658 | ) | 30 | |||||
Net (decrease) increase in cash and cash equivalents | (233 | ) | 336 | |||||
Cash and cash equivalents, beginning of period | 1,548 | 1,968 | ||||||
Cash and cash equivalents, end of period | $ | 1,315 | $ | 2,304 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Income taxes paid | $ | 171 | $ | 197 | ||||
Summary of non-cash transactions: | ||||||||
Operating activities: | ||||||||
Change in payable to affiliates | $ | (901 | ) | $ | — | |||
Other, net | 19 | — | ||||||
Total operating activities | $ | (882 | ) | $ | — | |||
Investing activities: | ||||||||
Sales of investments: fixed maturities | $ | 2,692 | $ | — | ||||
Sales of investments: equity securities | 83 | — | ||||||
Total investing activities | $ | 2,775 | $ | — | ||||
Financing activities: | ||||||||
Capital contributions | $ | 635 | $ | — | ||||
Preferred capital contributions | (633 | ) | — | |||||
Debt financing, net | 2,136 | — | ||||||
Preferred dividends paid | (2 | ) | — | |||||
Common dividends paid | (4,029 | ) | — | |||||
Total financing activities | $ | (1,893 | ) | $ | — |
F-67
Table of Contents
(1) | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
F-68
Table of Contents
F-69
Table of Contents
(2) | ACQUISITIONS |
F-70
Table of Contents
Safeco | ||||||||||||||||||||||||||||
Cumulative and for the Six Months Ended June 30, 2010 | ||||||||||||||||||||||||||||
2008 | ||||||||||||||||||||||||||||
Adjustment | ||||||||||||||||||||||||||||
to Opening | Accrued as of | Accrued as of | Expected | |||||||||||||||||||||||||
Balance | 2008-2009 | December 31, | 2010 | 2010 | June 30, | Cumulative | ||||||||||||||||||||||
Sheet | Payments | 2009 | Adjustments | Payments | 2010 | Costs | ||||||||||||||||||||||
Costs included in allocation of purchase price: | ||||||||||||||||||||||||||||
Employment Reductions: | ||||||||||||||||||||||||||||
Commercial | $ | 3 | $ | (3 | ) | $ | — | $ | — | $ | — | $ | — | $ | 3 | |||||||||||||
Personal | 4 | (4 | ) | — | — | — | — | 4 | ||||||||||||||||||||
Corporate and Other | 68 | (68 | ) | — | — | — | — | 68 | ||||||||||||||||||||
Contract terminations and other transitional activities: | ||||||||||||||||||||||||||||
Corporate and Other | 37 | (15 | ) | 22 | (2 | ) | (2 | ) | 18 | 35 | ||||||||||||||||||
Total included in Allocation of Purchase Price | $ | 112 | $ | (90 | ) | $ | 22 | $ | (2 | ) | $ | (2 | ) | $ | 18 | $ | 110 |
Accrued as of | Accrued as of | Expected | ||||||||||||||||||||||||||
2008-2009 | 2008-2009 | December 31, | 2010 | 2010 | June 30, | Cumulative | ||||||||||||||||||||||
Adjustments | Payments | 2009 | Adjustments | Payments | 2010 | Costs | ||||||||||||||||||||||
Costs included in general and administrative expenses: | ||||||||||||||||||||||||||||
Employment Reductions: | ||||||||||||||||||||||||||||
Commercial | $ | 14 | $ | (13 | ) | $ | 1 | $ | — | $ | (1 | ) | $ | — | $ | 14 | ||||||||||||
Personal | 15 | (15 | ) | — | — | — | — | 15 | ||||||||||||||||||||
Surety | 6 | (6 | ) | — | — | — | — | 6 | ||||||||||||||||||||
Contract terminations and other transitional activities: | ||||||||||||||||||||||||||||
Commercial | 6 | (6 | ) | — | — | — | — | 6 | ||||||||||||||||||||
Personal | 2 | (2 | ) | — | — | — | — | 2 | ||||||||||||||||||||
Surety | 1 | (1 | ) | — | — | — | — | 1 | ||||||||||||||||||||
Corporate and Other | 12 | (7 | ) | 5 | — | (1 | ) | 4 | 12 | |||||||||||||||||||
Total costs included in general and administrative expenses | 56 | (50 | ) | 6 | — | (2 | ) | 4 | 56 | |||||||||||||||||||
Total Restructuring Costs | $ | 168 | $ | (140 | ) | $ | 28 | $ | (2 | ) | $ | (4 | ) | $ | 22 | $ | 166 |
F-71
Table of Contents
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Commercial | $ | 1,497 | $ | 1,497 | ||||
Personal | 988 | 988 | ||||||
Surety | 569 | 569 | ||||||
Total goodwill | $ | 3,054 | $ | 3,054 | ||||
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Commercial | $ | 343 | $ | 353 | ||||
Personal | 605 | 619 | ||||||
Surety | 83 | 85 | ||||||
Total intangible assets | $ | 1,031 | $ | 1,057 | ||||
As of June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Value | Amortization | Net | ||||||||||
Intangible assets subject to amortization: | ||||||||||||
Agency relationship | $ | 766 | $ | (94 | ) | $ | 672 | |||||
Non-compete agreements | 4 | (4 | ) | — | ||||||||
Leases | 12 | 5 | 17 | |||||||||
Other | 1 | (1 | ) | — | ||||||||
Total intangible assets subject to amortization | 783 | (94 | ) | 689 | ||||||||
Total intangible assets not subject to amortization(1) | 342 | — | 342 | |||||||||
Total other intangible assets | $ | 1,125 | $ | (94 | ) | $ | 1,031 | |||||
F-72
Table of Contents
As of December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Carrying | Accumulated | |||||||||||
Value | Amortization | Net | ||||||||||
Intangible assets subject to amortization: | ||||||||||||
Agency relationship | $ | 766 | $ | (70 | ) | $ | 696 | |||||
Non-compete agreements | 4 | (4 | ) | — | ||||||||
Leases | 12 | 5 | 17 | |||||||||
Other | 1 | (1 | ) | — | ||||||||
Total intangible assets subject to amortization | 783 | (70 | ) | 713 | ||||||||
Total intangible assets not subject to amortization(1) | 344 | — | 344 | |||||||||
Total other intangible assets | $ | 1,127 | $ | (70 | ) | $ | 1,057 | |||||
(1) | On February 23, 2010, the Company merged one of its insurance subsidiaries, Avomark Insurance Company, with and into another of its insurance subsidiary West American Insurance Company. As of May 17, 2010, authorization was given by all states to terminate certificates of authority resulting in a decrease in value of $2. |
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Agency relationship | $ | 24 | $ | 24 | ||||
Non-compete agreements | — | — | ||||||
Leases | — | (3 | ) | |||||
Other | — | — | ||||||
Total amortization expense | $ | 24 | $ | 21 | ||||
F-73
Table of Contents
(3) | INVESTMENTS |
For the Six Months | ||||||||
Ended June 30, | ||||||||
2010 | 2009 | |||||||
Fixed maturities | $ | 470 | $ | 453 | ||||
Equity securities | 5 | 20 | ||||||
Limited partnerships and limited liability companies | (5 | ) | (35 | ) | ||||
Mortgage loans | 10 | 6 | ||||||
Other investment income | 3 | 14 | ||||||
Gross investment income | 483 | 458 | ||||||
Investment expenses | (20 | ) | (19 | ) | ||||
Net investment income | $ | 463 | $ | 439 | ||||
For the Six Months | ||||||||
Ended June 30, | ||||||||
2010 | 2009 | |||||||
Gross realized gains | $ | 249 | $ | 17 | ||||
Gross realized losses | (12 | ) | (12 | ) | ||||
Netother-than-temporary impairment losses recognized in earnings | (10 | ) | (58 | ) | ||||
Net realized investment gains (losses) | $ | 227 | $ | (53 | ) | |||
F-74
Table of Contents
As of June 30, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. government and agency securities | $ | 669 | $ | 34 | $ | — | $ | 703 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | 3,682 | 184 | (21 | ) | 3,845 | |||||||||||
Commercial | 758 | 22 | (2 | ) | 778 | |||||||||||
Other mortgage and asset-backed securities | 787 | 50 | (11 | ) | 826 | |||||||||||
U.S. state and municipal | 5,858 | 371 | (29 | ) | 6,200 | |||||||||||
Corporate and other | 5,104 | 291 | (38 | ) | 5,357 | |||||||||||
Foreign government securities | 17 | 1 | — | 18 | ||||||||||||
Redeemable preferred stock | 26 | 2 | — | 28 | ||||||||||||
Total fixed maturities | 16,901 | 955 | (101 | ) | 17,755 | |||||||||||
Common stock | 68 | 30 | (3 | ) | 95 | |||||||||||
Preferred stock | 131 | 15 | (20 | ) | 126 | |||||||||||
Total equity securities | 199 | 45 | (23 | ) | 221 | |||||||||||
Total securities available for sale | �� | $ | 17,100 | $ | 1,000 | $ | (124 | ) | $ | 17,976 | ||||||
As of December 31, 2009 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. government and agency securities | $ | 706 | $ | 20 | $ | (1 | ) | $ | 725 | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | 4,730 | 132 | (36 | ) | 4,826 | |||||||||||
Commercial | 558 | 8 | (14 | ) | 552 | |||||||||||
Other mortgage and asset-backed securities | 920 | 36 | (18 | ) | 938 | |||||||||||
U.S. state and municipal | 8,319 | 464 | (41 | ) | 8,742 | |||||||||||
Corporate and other | 4,111 | 221 | (36 | ) | 4,296 | |||||||||||
Foreign government securities | 18 | — | (1 | ) | 17 | |||||||||||
Redeemable preferred stock | 26 | 3 | — | 29 | ||||||||||||
Total fixed maturities | 19,388 | 884 | (147 | ) | 20,125 | |||||||||||
Common stock | 53 | 32 | — | 85 | ||||||||||||
Preferred stock | 205 | 26 | (15 | ) | 216 | |||||||||||
Total equity securities | 258 | 58 | (15 | ) | 301 | |||||||||||
Total securities available for sale | $ | 19,646 | $ | 942 | $ | (162 | ) | $ | 20,426 | |||||||
F-75
Table of Contents
June 30, 2010 | December 31, 2009 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Due to mature: | ||||||||||||||||
One year or less | $ | 665 | $ | 677 | $ | 557 | $ | 565 | ||||||||
Over one year through five years | 3,577 | 3,759 | 3,335 | 3,494 | ||||||||||||
Over five years through ten years | 3,810 | 4,045 | 3,074 | 3,241 | ||||||||||||
Over ten years | 3,622 | 3,825 | 6,214 | 6,509 | ||||||||||||
Mortgage and asset-backed securities of government and corporate agencies | 5,227 | 5,449 | 6,208 | 6,316 | ||||||||||||
Total fixed maturities | $ | 16,901 | $ | 17,755 | $ | 19,388 | $ | 20,125 | ||||||||
Less Than 12 Months | 12 Months or Longer | |||||||||||||||
Fair Value of | Fair Value of | |||||||||||||||
Investments | Investments | |||||||||||||||
with | with | |||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||
As of June 30, 2010 | Losses | Losses | Losses | Losses | ||||||||||||
U.S. government and agency securities | $ | — | $ | — | $ | — | $ | 11 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | (2 | ) | 29 | (19 | ) | 127 | ||||||||||
Commercial | (1 | ) | 27 | (1 | ) | 25 | ||||||||||
Other mortgage and asset-backed securities | (3 | ) | 7 | (8 | ) | 34 | ||||||||||
U.S. state and municipal | (2 | ) | 154 | (27 | ) | 216 | ||||||||||
Corporate and other | (20 | ) | 675 | (18 | ) | 153 | ||||||||||
Total fixed maturities | (28 | ) | 892 | (73 | ) | 566 | ||||||||||
Common stock | (3 | ) | 8 | — | — | |||||||||||
Preferred stock | (2 | ) | 23 | (18 | ) | 60 | ||||||||||
Total equity securities | (5 | ) | 31 | (18 | ) | 60 | ||||||||||
Total securities available for sale | $ | (33 | ) | $ | 923 | $ | (91 | ) | $ | 626 | ||||||
F-76
Table of Contents
Less Than 12 Months | 12 Months or Longer | |||||||||||||||
Fair Value of | Fair Value of | |||||||||||||||
Investments | Investments | |||||||||||||||
with | with | |||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | |||||||||||||
As of December 31, 2009 | Losses | Losses | Losses | Losses | ||||||||||||
U.S. government and agency securities | $ | (1 | ) | $ | 156 | $ | — | $ | — | |||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | (6 | ) | 545 | (30 | ) | 188 | ||||||||||
Commercial | — | 38 | (14 | ) | 206 | |||||||||||
Other mortgage and asset-backed securities | (5 | ) | 126 | (13 | ) | 42 | ||||||||||
U.S. state and municipal | (11 | ) | 404 | (30 | ) | 253 | ||||||||||
Corporate and other | (7 | ) | 314 | (29 | ) | 278 | ||||||||||
Foreign government securities | (1 | ) | 13 | — | — | |||||||||||
Total fixed maturities | (31 | ) | 1,596 | (116 | ) | 967 | ||||||||||
Preferred stock | — | — | (15 | ) | 94 | |||||||||||
Total equity securities | — | — | (15 | ) | 94 | |||||||||||
Total securities available for sale | $ | (31 | ) | $ | 1,596 | $ | (131 | ) | $ | 1,061 | ||||||
F-77
Table of Contents
(4) | DEFERRED POLICY ACQUISITION COSTS |
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of year | $ | 1,070 | $ | 1,042 | ||||
Acquisition costs deferred | 1,255 | 1,184 | ||||||
Amortization charged to income | (1,186 | ) | (1,209 | ) | ||||
Balance at end of period | $ | 1,139 | $ | 1,017 | ||||
F-78
Table of Contents
(5) | UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES |
2010 | 2009 | |||||||
Balance as of January 1 | $ | 12,053 | $ | 12,651 | ||||
Less: Unpaid reinsurance recoverables | 1,366 | 1,517 | ||||||
Net balance as of January 1 | 10,687 | 11,134 | ||||||
Incurred attributable to: | ||||||||
Current year | 3,596 | 3,520 | ||||||
Prior years | 40 | (229 | ) | |||||
Total incurred | 3,636 | 3,291 | ||||||
Paid attributable to: | ||||||||
Current year | 1,524 | 1,440 | ||||||
Prior years | 1,840 | 1,891 | ||||||
Total paid | 3,364 | 3,331 | ||||||
Add: Unpaid reinsurance recoverables | 1,263 | 1,521 | ||||||
Balance as of June 30 | $ | 12,222 | $ | 12,615 | ||||
F-79
Table of Contents
(6) | ASBESTOS AND ENVIRONMENTAL RESERVES |
2010 | 2009 | |||||||
Asbestos: | ||||||||
Balance as of January 1 | $ | 314 | $ | 347 | ||||
Less: Unpaid reinsurance recoverables | 47 | 54 | ||||||
Net balance as of January 1 | 267 | 293 | ||||||
Total incurred | — | — | ||||||
Total paid | 11 | 10 | ||||||
Net balance as of June 30 | 256 | 283 | ||||||
Add: Unpaid reinsurance recoverables | 50 | 51 | ||||||
Balance as of June 30 | 306 | 334 | ||||||
Allowance for reinsurance on unpaid losses | 8 | 8 | ||||||
Total unpaid losses including allowance for unpaid reinsurance | $ | 314 | $ | 342 | ||||
2010 | 2009 | |||||||
Environmental: | ||||||||
Balance as of January 1 | $ | 160 | $ | 169 | ||||
Less: Unpaid reinsurance recoverables | 20 | 19 | ||||||
Net balance as of January 1 | 140 | 150 | ||||||
Total incurred | — | — | ||||||
Total paid | 8 | 9 | ||||||
Net balance as of June 30 | 132 | 141 | ||||||
Add: Unpaid reinsurance recoverables | 20 | 20 | ||||||
Balance as of June 30 | $ | 152 | $ | 161 | ||||
F-80
Table of Contents
(7) | REINSURANCE |
Reinsurance | Collateral | Net | ||||||||||
Recoverables | Held | Recoverables | ||||||||||
A.M. Best Rated Reinsurers | $ | 1,013 | $ | 147 | $ | 866 | ||||||
Involuntary pools | 253 | — | 253 | |||||||||
Voluntary pools | 6 | — | 6 | |||||||||
Other(1) | 117 | 17 | 100 | |||||||||
Gross recoverables | 1,389 | 164 | 1,225 | |||||||||
Less: Allowance | 75 | — | 75 | |||||||||
Net recoverables | $ | 1,314 | $ | 164 | $ | 1,150 | ||||||
(1) | Includes $89 of net recoverables from non-rated reinsurers and $11 of net recoverables from captive and program business. |
Reinsurance Recoverables, Net of Offsetting Collateral | ||||
Swiss Reinsurance Group | $ | 237 | ||
Liberty Mutual Group | 163 | |||
Berkshire Hathaway Insurance Group | 141 | |||
Munich Re Group | 88 | |||
Equitas Insurance Limited | 42 | |||
Lincoln Financial Group | 40 | |||
PartnerRe Group | 32 | |||
American International Group Inc. | 21 | |||
White Mountains Insurance Group | 20 | |||
Chubb Group of Insurance Companies | 17 | |||
Total significant reinsurers | $ | 801 | ||
(8) | DEBT OUTSTANDING |
F-81
Table of Contents
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
0.72% Notes, due 2012 | $ | 1,901 | $ | — | ||||
7.25% Notes, due 2012 | 17 | 17 | ||||||
7.30% Notes, due 2014 | 20 | 20 | ||||||
Capital lease (1) | 19 | 21 | ||||||
Subtotal | 1,957 | 58 | ||||||
Unamortized fair value adjustments | 1 | 1 | ||||||
Total long-term debt outstanding excluding current maturities | $ | 1,958 | $ | 59 | ||||
(1) | Capital lease relates to a gross asset of $25 as of June 30, 2010 and December 31, 2009 and accumulated amortization as of June 30, 2010 and December 31, 2009 of $6 and $4, respectively. |
F-82
Table of Contents
(9) | INCOME TAXES |
F-83
Table of Contents
(10) | FAIR VALUE OF FINANCIAL INSTRUMENTS |
• | Level 1 — Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access. | |
• | Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. |
• | Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement and involve management judgment. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants might use. |
F-84
Table of Contents
F-85
Table of Contents
Assets, at Fair Value as of June 30, 2010 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed maturities, available for sale: | ||||||||||||||||
U.S. government and agency securities | $ | 601 | $ | 90 | $ | 12 | $ | 703 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | — | 3,823 | 22 | 3,845 | ||||||||||||
Commercial | — | 750 | 28 | 778 | ||||||||||||
Other mortgage and asset-backed securities | — | 792 | 34 | 826 | ||||||||||||
U.S. state and municipal | — | 6,189 | 11 | 6,200 | ||||||||||||
Corporate and other | — | 5,193 | 164 | 5,357 | ||||||||||||
Foreign government securities | — | 18 | — | 18 | ||||||||||||
Redeemable preferred stock | — | 28 | — | 28 | ||||||||||||
Total fixed maturities, available for sale | 601 | 16,883 | 271 | 17,755 | ||||||||||||
Equity securities, available for sale: | ||||||||||||||||
Common stock | 48 | — | 47 | 95 | ||||||||||||
Preferred stock | — | 126 | — | 126 | ||||||||||||
Total equity securities, available for sale | 48 | 126 | 47 | 221 | ||||||||||||
Short-term investments | — | 100 | — | 100 | ||||||||||||
Total assets at fair value | $ | 649 | $ | 17,109 | $ | 318 | $ | 18,076 | ||||||||
F-86
Table of Contents
Assets, at Fair Value as of December 31, 2009 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed maturities, available for sale: | ||||||||||||||||
U.S. government and agency securities | $ | 613 | $ | 82 | $ | 30 | $ | 725 | ||||||||
Mortgage and asset-backed securities: | ||||||||||||||||
Residential | — | 4,820 | 6 | 4,826 | ||||||||||||
Commercial | — | 537 | 15 | 552 | ||||||||||||
Other mortgage and asset-backed securities | — | 890 | 48 | 938 | ||||||||||||
U.S. state and municipal | — | 8,729 | 13 | 8,742 | ||||||||||||
Corporate and other | — | 4,104 | 192 | 4,296 | ||||||||||||
Foreign government securities | — | 17 | — | 17 | ||||||||||||
Redeemable preferred stock | — | 29 | — | 29 | ||||||||||||
Total fixed maturities, available for sale | 613 | 19,208 | 304 | 20,125 | ||||||||||||
Equity securities, available for sale: | ||||||||||||||||
Common stock | 41 | 42 | 2 | 85 | ||||||||||||
Preferred stock | — | 215 | 1 | 216 | ||||||||||||
Total equity securities, available for sale | 41 | 257 | 3 | 301 | ||||||||||||
Short-term investments | 107 | — | 2 | 109 | ||||||||||||
Total assets at fair value | $ | 761 | $ | 19,465 | $ | 309 | $ | 20,535 | ||||||||
Net | Net | |||||||||||||||||||||||||||
Balance at | Net | Unrealized | Net Purchases | Net | Transfers | Balance as of | ||||||||||||||||||||||
January 1, | Realized | Gains | (Sales) and | Transfers | Out of | June 30, | ||||||||||||||||||||||
2010 | (Losses) | (Losses) | (Maturities) | into Level 3 | Level 3 | 2010 | ||||||||||||||||||||||
Fixed maturities, available for sale: | ||||||||||||||||||||||||||||
U.S. government and agency securities | $ | 30 | $ | — | $ | 1 | $ | (6 | ) | $ | 11 | $ | (24 | ) | $ | 12 | ||||||||||||
Mortgage and asset-backed securities: | ||||||||||||||||||||||||||||
Residential | 6 | — | 1 | 37 | — | (22 | ) | 22 | ||||||||||||||||||||
Commercial | 15 | — | 1 | 97 | — | (85 | ) | 28 | ||||||||||||||||||||
Other mortgage and asset-backed securities | 48 | (4 | ) | 7 | (2 | ) | 1 | (16 | ) | 34 | ||||||||||||||||||
U.S. state and municipal | 13 | — | 1 | — | — | (3 | ) | 11 | ||||||||||||||||||||
Corporate and other | 192 | — | 3 | (45 | ) | 31 | (17 | ) | 164 | |||||||||||||||||||
Equity securities and short-term investments | 5 | (1 | ) | — | 2 | 42 | (1 | ) | 47 | |||||||||||||||||||
Total | $ | 309 | $ | (5 | ) | $ | 14 | $ | 83 | $ | 85 | $ | (168 | ) | $ | 318 | ||||||||||||
F-87
Table of Contents
Net | Net | Net | ||||||||||||||||||||||||||
Balance at | Realized | Unrealized | Net Purchases | Net | Transfers | Balance as of | ||||||||||||||||||||||
January 1, | Gains | Gains | (Sales) and | Transfers | Out of | June 30, | ||||||||||||||||||||||
2009 | (Losses) | (Losses) | (Maturities) | into Level 3 | Level 3 | 2009 | ||||||||||||||||||||||
Fixed maturities, available for sale: | ||||||||||||||||||||||||||||
U.S. government and agency securities | $ | 15 | $ | — | $ | — | $ | (1 | ) | $ | 14 | $ | (2 | ) | $ | 26 | ||||||||||||
Mortgage and asset-backed securities: | ||||||||||||||||||||||||||||
Residential | 5 | — | — | (2 | ) | 5 | — | 8 | ||||||||||||||||||||
Commercial | 11 | — | — | (2 | ) | 9 | — | 18 | ||||||||||||||||||||
Other mortgage and asset-backed securities | 43 | — | (5 | ) | — | 26 | (12 | ) | 52 | |||||||||||||||||||
U.S. state and municipal | 9 | — | — | — | 8 | (4 | ) | 13 | ||||||||||||||||||||
Corporate and other | 225 | (4 | ) | 7 | (15 | ) | 11 | (22 | ) | 202 | ||||||||||||||||||
Equity securities and short-term investments | 27 | (5 | ) | 8 | — | 21 | (22 | ) | 29 | |||||||||||||||||||
Total | $ | 335 | $ | (9 | ) | $ | 10 | $ | (20 | ) | $ | 94 | $ | (62 | ) | $ | 348 | |||||||||||
As of June 30, | As of December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Other investments | $ | 37 | $ | 37 | $ | 150 | $ | 150 | ||||||||
Mortgage loans | 304 | 310 | 271 | 260 | ||||||||||||
Cash and cash equivalents | 1,315 | 1,315 | 1,548 | 1,548 | ||||||||||||
Debt outstanding | 1,958 | 1,945 | 78 | 81 |
(11) | COMMITMENTS AND CONTINGENT LIABILITIES |
F-88
Table of Contents
F-89
Table of Contents
(12) | STOCKHOLDERS’ EQUITY AND DIVIDEND AVAILABILITY |
F-90
Table of Contents
June 30, | ||||||||
2010 | 2009 | |||||||
Unrealized gains on securities | $ | 565 | $ | 54 | ||||
Pension liability adjustments | (16 | ) | (10 | ) | ||||
Accumulated other comprehensive income, net of tax | $ | 549 | $ | 44 | ||||
(13) | SEGMENT INFORMATION |
F-91
Table of Contents
Total | ||||||||||||||||||||||||
Operating | Corporate | |||||||||||||||||||||||
Commercial | Personal | Surety | Segments | and Other | Consolidated | |||||||||||||||||||
For the six months ended June 30, 2010 | ||||||||||||||||||||||||
Net written premiums | $ | 2,257 | $ | 2,495 | $ | 363 | $ | 5,115 | $ | 65 | $ | 5,180 | ||||||||||||
Net premiums earned | 2,272 | 2,422 | 357 | 5,051 | 62 | 5,113 | ||||||||||||||||||
Net investment income | 233 | 136 | 30 | 399 | 64 | 463 | ||||||||||||||||||
Fee and other revenues | 17 | 33 | — | 50 | — | 50 | ||||||||||||||||||
Total operating revenues(1) | 2,522 | 2,591 | 387 | 5,500 | 126 | 5,626 | ||||||||||||||||||
Claims and expenses | 2,438 | 2,452 | 242 | 5,132 | 338 | 5,470 | ||||||||||||||||||
Operating income before income tax expense(2) | 84 | 139 | 145 | 368 | (212 | ) | 156 | |||||||||||||||||
Summary of inter-segment revenue and expenses | ||||||||||||||||||||||||
Inter-segment net premiums earned(3) | (82 | ) | (23 | ) | — | (105 | ) | 105 | — | |||||||||||||||
Inter-segment claims and underwriting expenses(3) | (26 | ) | (3 | ) | — | (29 | ) | 29 | — |
Total | ||||||||||||||||||||||||
Operating | Corporate | |||||||||||||||||||||||
Commercial | Personal | Surety | Segments | and Other | Consolidated | |||||||||||||||||||
For the six months ended June 30, 2009 | ||||||||||||||||||||||||
Net written premiums | $ | 2,328 | $ | 2,231 | $ | 337 | $ | 4,896 | $ | 79 | $ | 4,975 | ||||||||||||
Net premiums earned | 2,384 | 2,243 | 375 | 5,002 | 78 | 5,080 | ||||||||||||||||||
Net investment income | 228 | 122 | 22 | 372 | 67 | 439 | ||||||||||||||||||
Fee and other revenues | 20 | 29 | — | 49 | — | 49 | ||||||||||||||||||
Total operating revenues(1) | 2,632 | 2,394 | 397 | 5,423 | 145 | 5,568 | ||||||||||||||||||
Claims and expenses | 2,441 | 2,199 | 307 | 4,947 | 49 | 4,996 | ||||||||||||||||||
Operating income before income tax expense(2) | 191 | 195 | 90 | 476 | 96 | 572 | ||||||||||||||||||
Summary of inter-segment revenue and expenses | ||||||||||||||||||||||||
Inter-segment net premiums earned(3) | (87 | ) | (31 | ) | — | (118 | ) | 118 | — | |||||||||||||||
Inter-segment claims and underwriting expenses(3) | (65 | ) | (10 | ) | — | (75 | ) | 75 | — |
F-92
Table of Contents
(1) | Total operating revenues exclude net realized investment gains (losses) as they are significantly impacted by both discretionary and economic factors and are not necessarily indicative of operating results. |
(2) | Operating income before income tax expense is defined by the Company as net income excluding net realized investment gains (losses) and income tax expense. |
(3) | Inter-segment revenue and claims and underwriting expenses represent the Company’s inter-segment reinsurance arrangements through which the segments have certain reinsurance coverages with Corporate and Other. |
As of | As of | |||||||
June 30, | December 31, | |||||||
Total Assets | 2010 | 2009 | ||||||
Commercial | $ | 14,531 | $ | 15,102 | ||||
Personal | 8,986 | 9,028 | ||||||
Surety | 2,135 | 2,321 | ||||||
Total Operating Segments | 25,652 | 26,451 | ||||||
Corporate and Other | 3,797 | 5,935 | ||||||
Consolidated | $ | 29,449 | $ | 32,386 | ||||
For the Six Months Ended June 30, | 2010 | 2009 | ||||||
Revenue Reconciliation | ||||||||
Net premiums earned | ||||||||
Commercial: | ||||||||
Commercial multiple peril | $ | 904 | $ | 941 | ||||
Commercial automobile | 552 | 592 | ||||||
Workers compensation | 433 | 451 | ||||||
General liability | 242 | 250 | ||||||
Other | 141 | 150 | ||||||
Total Commercial | 2,272 | 2,384 | ||||||
Personal: | ||||||||
Private passenger automobile | 1,513 | 1,603 | ||||||
Homeowners | 705 | 443 | ||||||
Other | 204 | 197 | ||||||
Total Personal | 2,422 | 2,243 | ||||||
Surety: | ||||||||
Contract | 220 | 238 | ||||||
Specialty | 74 | 77 | ||||||
Commercial | 63 | 60 | ||||||
Total Surety | 357 | 375 | ||||||
Corporate and Other: | ||||||||
Total Corporate and Other | 62 | 78 | ||||||
Total net premiums earned | 5,113 | 5,080 | ||||||
Net investment income | 463 | 439 | ||||||
Fee and other revenues | 50 | 49 | ||||||
Total operating revenue | 5,626 | 5,568 | ||||||
Net realized investment gains (losses) | 227 | (53 | ) | |||||
Total revenue | $ | 5,853 | $ | 5,515 | ||||
F-93
Table of Contents
For the Six Months Ended June 30, | 2010 | 2009 | ||||||
Income Reconciliation, net of tax | ||||||||
Total operating income before income tax expense | $ | 156 | $ | 572 | ||||
Net realized investment gain (losses) | 227 | (53 | ) | |||||
Income before income tax expense | 383 | 519 | ||||||
Income tax expense | 94 | 142 | ||||||
Net income | $ | 289 | $ | 377 | ||||
(14) | RELATED PARTY TRANSACTIONS |
F-94
Table of Contents
(15) | EARNINGS PER SHARE |
F-95
Table of Contents
For the Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net income available to common stockholders | ||||||||
Net income, as reported | $ | 289 | $ | 377 | ||||
Preferred stock dividends | ||||||||
Net income available to common stockholders | $ | $ | ||||||
Basic earnings per share | ||||||||
Net income available to common stockholders | $ | |||||||
Basic shares outstanding (shares in millions) | ||||||||
Net income per common share — basic | $ | $ | ||||||
Diluted earnings per share | ||||||||
Net income available to common stockholders | $ | $ | ||||||
Diluted shares outstanding (shares in millions) | ||||||||
Net income per common share — diluted | $ | $ |
(16) | PRO FORMA INFORMATION |
F-96
Table of Contents
Pro Forma | ||||
For the Six | ||||
Months Ended | ||||
June 30, 2010 | ||||
Net income | $ | 289 | ||
Less: Pro forma investment income adjustment(A) | ||||
Less: Pro forma interest expense adjustment(B) | ||||
Less: Preferred stock dividends | 18 | |||
Pro forma income available to common stockholders | $ | |||
Pro forma income per share available to common stockholders: | ||||
Basic | $ | |||
Diluted | $ | |||
Weighted average pro forma number of common shares outstanding: | ||||
Basic (shares in millions) | ||||
Diluted (shares in millions) |
(A) | Reflects a reduction of $ for the six months ended June 30, 2010, of net investment income based on a pro-rata share of income allocated to the $2,910 in cash and investments transferred to Liberty Mutual in April 2010 and August 2010 in partial satisfaction of the February 2010 Note. Tax expense on the $ reduction of net investment income was $ . The reduction in net investment represents the balance of the actual cash and investments transferred to Liberty Mutual broken out by asset category multiplied by the yield for the respective period associated with that asset category. |
(B) | This adjustment reflects the interest expense of 0.72% on the estimated $ outstanding principal amount of the February 2010 Note and % on the estimated $ outstanding principal amount of the Ohio Casualty Note, in each case following application of the proceeds from this Offering, and assumes the notes were outstanding from January 1, 2010. Tax expense on the $ increase in interest expense was $ . |
Estimated Net | Principal Amount of | Total | ||||||||||||||
Public offering price | Proceeds | Ohio Casualty Note | Long-term Debt | Stockholders’ Equity | ||||||||||||
Low | $ | $ | �� | $ | $ | |||||||||||
Mid | $ | $ | $ | $ | ||||||||||||
High | $ | $ | $ | $ |
F-97
Table of Contents
(17) | SUBSEQUENT EVENTS |
F-98
Table of Contents
Summary of Investments — Other than Investments in Related Parties
At December 31, 2009
Cost | Fair Value | Carrying Value | ||||||||||
Dollars in millions | ||||||||||||
Fixed Maturities | ||||||||||||
Bonds: | ||||||||||||
U.S. government and agency securities | $ | 706 | $ | 725 | $ | 725 | ||||||
U.S. state and municipal | 8,319 | 8,742 | 8,742 | |||||||||
Foreign government securities | 18 | 17 | 17 | |||||||||
Public utilities | 391 | 408 | 408 | |||||||||
All other corporate bonds | 9,928 | 10,204 | 10,204 | |||||||||
Redeemable preferred stock | 26 | 29 | 29 | |||||||||
Total fixed maturities | 19,388 | 20,125 | 20,125 | |||||||||
Equity Securities | ||||||||||||
Common stocks: | ||||||||||||
Banks, trusts and insurance companies | 52 | 85 | 85 | |||||||||
Industrial, miscellaneous and all other | 1 | — | — | |||||||||
Nonredeemable preferred stock | 205 | 216 | 216 | |||||||||
Total equity securities | 258 | 301 | 301 | |||||||||
Mortgage loans | 272 | 271 | ||||||||||
Other long-term investments | 195 | 150 | ||||||||||
Short-term investments | 109 | 109 | ||||||||||
Total investments | $ | 20,222 | $ | 20,956 | ||||||||
S-1
Table of Contents
(Registrant only)
Condensed Financial Information of Registrant
Statements of Operations
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Dollars in millions | ||||||||||||
Revenues: | ||||||||||||
Net investment income | $ | 5 | $ | 1,026 | $ | 1 | ||||||
Net realized investment (losses) gains | — | — | — | |||||||||
Fee and other revenue | — | — | — | |||||||||
Total revenues | 5 | 1,026 | 1 | |||||||||
Expenses: | ||||||||||||
Other | — | — | — | |||||||||
Total expenses | — | — | — | |||||||||
Income before income taxes and equity in net income of subsidiaries | 5 | 1,026 | 1 | |||||||||
Income tax expense | — | 2 | — | |||||||||
Income before equity in net income of subsidiaries | 5 | 1,024 | 1 | |||||||||
Equity in net income of subsidiaries | 997 | (1,588 | ) | 376 | ||||||||
Net income (loss) | $ | 1,002 | $ | (564 | ) | $ | 377 | |||||
S-2
Table of Contents
(Registrant only)
Condensed Financial Information of Registrant
Balance Sheets
December 31, | ||||||||
2009 | 2008 | |||||||
Dollars in millions | ||||||||
Assets: | ||||||||
Investments | ||||||||
Investment in subsidiaries | $ | 12,197 | $ | 10,305 | ||||
Total investments | 12,197 | 10,305 | ||||||
Cash and cash equivalents | — | 7 | ||||||
Total assets | 12,197 | 10,312 | ||||||
Liabilities: | ||||||||
Other liabilities | — | 11 | ||||||
Total liabilities | — | 11 | ||||||
Total stockholders’ equity | 12,197 | 10,301 | ||||||
Total liabilities and stockholders’ equity | $ | 12,197 | $ | 10,312 | ||||
S-3
Table of Contents
(Registrant only)
Condensed Financial Information of Registrant
Statements of Cash Flows
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Dollars in millions | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 1,002 | $ | (564 | ) | $ | 377 | |||||
Adjustments to reconcile net income to net cash provided by operating activities, net of effects from purchases of companies | ||||||||||||
Equity in net income of subsidiaries | (997 | ) | 1,471 | (376 | ) | |||||||
Taxes payable, net of deferred | (2 | ) | 2 | — | ||||||||
Other, net | (10 | ) | 10 | — | ||||||||
Net cash (used in) provided by operating activities | (7 | ) | 919 | 1 | ||||||||
Cash flows from investing activities: | ||||||||||||
Acquisitions and dispositions | — | (6,244 | ) | — | ||||||||
Other investing activities | — | — | — | |||||||||
Net cash used in investing activities | — | (6,244 | ) | — | ||||||||
Cash flows from financing activities: | ||||||||||||
Capital contribution | — | 6,191 | — | |||||||||
Dividends paid to stockholders | — | (862 | ) | — | ||||||||
Net cash provided by financing activities | — | 5,329 | — | |||||||||
Net (decrease) increase in cash and cash equivalents | (7 | ) | 4 | 1 | ||||||||
Cash and cash equivalents, beginning of year | 7 | 3 | 2 | |||||||||
Cash and cash equivalents, end of year | $ | — | $ | 7 | $ | 3 | ||||||
Summary of non-cash transactions: | ||||||||||||
Cash flows from operating activities: | ||||||||||||
Equity in net income of subsidiaries | $ | — | $ | 117 | $ | — | ||||||
Capital contributed to subsidiaries | 21 | (54 | ) | 72 | ||||||||
Total cash flows from operating activities | 21 | 63 | 72 | |||||||||
Cash flows from investing activities: | ||||||||||||
Acquisitions and dispositions | — | — | (2,558 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Contributed capital | — | 54 | 2,486 | |||||||||
Common dividends paid | (21 | ) | — | — | ||||||||
Total cash from financing activities | (21 | ) | 54 | 2,486 |
S-4
Table of Contents
Supplementary Insurance Information
As of December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||
Deferred | ||||||||||||||||||||||||||||||||||||
Policy | ||||||||||||||||||||||||||||||||||||
Acquisition | ||||||||||||||||||||||||||||||||||||
Costs and | Unpaid | Amortization | ||||||||||||||||||||||||||||||||||
Acquired | Claims and | Claims and | of Deferred | |||||||||||||||||||||||||||||||||
In-force | Claim | Net | Net | Claim | Policy | General and | Net | |||||||||||||||||||||||||||||
Policy | Adjustment | Unearned | Premiums | Investment | Adjustment | Acquisitions | Administrative | Written | ||||||||||||||||||||||||||||
Intangibles | Expenses | Premiums | Earned | Income | Expenses | Costs | Expenses | Premiums | ||||||||||||||||||||||||||||
Dollars in millions | ||||||||||||||||||||||||||||||||||||
2009 | ||||||||||||||||||||||||||||||||||||
Commercial Lines | $ | 515 | $ | 7,319 | $ | 2,280 | $ | 4,606 | $ | 458 | $ | 2,883 | $ | 1,162 | $ | 543 | $ | 4,585 | ||||||||||||||||||
Personal Lines | 396 | 2,587 | 1,923 | 4,458 | 246 | 3,016 | 964 | 366 | 4,689 | |||||||||||||||||||||||||||
Surety | 159 | 390 | 441 | 753 | 47 | 204 | 266 | 83 | 707 | |||||||||||||||||||||||||||
Total Operating Segments | 1,070 | 10,296 | 4,644 | 9,817 | 751 | 6,103 | 2,392 | 992 | 9,981 | |||||||||||||||||||||||||||
Corporate and Other | — | 1,757 | 14 | 166 | 159 | 54 | — | 13 | 167 | |||||||||||||||||||||||||||
Consolidated | $ | 1,070 | $ | 12,053 | $ | 4,658 | $ | 9,983 | $ | 910 | $ | 6,157 | $ | 2,392 | $ | 1,005 | $ | 10,148 | ||||||||||||||||||
2008 | ||||||||||||||||||||||||||||||||||||
Commercial Lines | $ | 540 | $ | 7,690 | $ | 2,373 | $ | 4,024 | $ | 402 | $ | 2,387 | $ | 946 | $ | 529 | $ | 3,975 | ||||||||||||||||||
Personal Lines | 334 | 2,716 | 1,965 | 2,277 | 131 | 1,648 | 582 | 141 | 2,122 | |||||||||||||||||||||||||||
Surety | 168 | 336 | 478 | 478 | 37 | 136 | 136 | 90 | 479 | |||||||||||||||||||||||||||
Total Operating Segments | 1,042 | 10,742 | 4,816 | 6,779 | 570 | 4,171 | 1,664 | 760 | 6,576 | |||||||||||||||||||||||||||
Corporate and Other | — | 1,909 | 21 | 134 | 149 | 155 | — | 17 | 128 | |||||||||||||||||||||||||||
Consolidated | $ | 1,042 | $ | 12,651 | $ | 4,837 | $ | 6,913 | $ | 719 | $ | 4,326 | $ | 1,664 | $ | 777 | $ | 6,704 | ||||||||||||||||||
2007 | ||||||||||||||||||||||||||||||||||||
Commercial Lines | $ | 411 | $ | 5,559 | $ | 1,548 | $ | 3,025 | $ | 287 | $ | 1,733 | $ | 750 | $ | 378 | $ | 3,039 | ||||||||||||||||||
Personal Lines | 153 | 670 | 744 | 894 | 47 | 571 | 203 | 106 | 948 | |||||||||||||||||||||||||||
Surety | 65 | 166 | 216 | 289 | 25 | 84 | 102 | 36 | 312 | |||||||||||||||||||||||||||
Total Operating Segments | 629 | 6,395 | 2,508 | 4,208 | 359 | 2,388 | 1,055 | 520 | 4,299 | |||||||||||||||||||||||||||
Corporate and Other | — | 912 | 11 | 117 | 46 | 213 | 1 | 31 | 108 | |||||||||||||||||||||||||||
Consolidated | $ | 629 | $ | 7,307 | $ | 2,519 | $ | 4,325 | $ | 405 | $ | 2,601 | $ | 1,056 | $ | 551 | $ | 4,407 | ||||||||||||||||||
S-5
Table of Contents
Reinsurance
% of Assumed | ||||||||||||||||||||
Premiums Earned | Direct | Assumed | Ceded | Net | to Net | |||||||||||||||
Dollars in millions | ||||||||||||||||||||
December 31, 2009 | ||||||||||||||||||||
Commercial | $ | 4,837 | $ | 46 | $ | (277 | ) | $ | 4,606 | 1.0 | % | |||||||||
Personal | 4,871 | 113 | (526 | ) | 4,458 | 2.5 | ||||||||||||||
Surety | 500 | 283 | (30 | ) | 753 | 37.6 | ||||||||||||||
Total Operating Segments | 10,208 | 442 | (833 | ) | 9,817 | 4.5 | ||||||||||||||
Corporate and Other | 13 | 272 | (119 | ) | 166 | 163.9 | ||||||||||||||
Consolidated | $ | 10,221 | $ | 714 | $ | (952 | ) | $ | 9,983 | 7.2 | % | |||||||||
December 31, 2008 | ||||||||||||||||||||
Commercial | $ | 4,211 | $ | 75 | $ | (262 | ) | $ | 4,024 | 1.9 | % | |||||||||
Personal | 2,309 | 31 | (63 | ) | 2,277 | 1.4 | ||||||||||||||
Surety | 192 | 297 | (11 | ) | 478 | 62.1 | ||||||||||||||
Total Operating Segments | 6,712 | 403 | (336 | ) | 6,779 | 5.9 | ||||||||||||||
Corporate and Other | 3 | 269 | (138 | ) | 134 | 200.7 | ||||||||||||||
Consolidated | $ | 6,715 | $ | 672 | $ | (474 | ) | $ | 6,913 | 9.7 | % | |||||||||
December 31, 2007 | ||||||||||||||||||||
Commercial | $ | 3,156 | $ | 71 | $ | (202 | ) | $ | 3,025 | 2.3 | % | |||||||||
Personal | 923 | 6 | (35 | ) | 894 | 0.7 | ||||||||||||||
Surety | 23 | 266 | — | 289 | 92.0 | |||||||||||||||
Total Operating Segments | 4,102 | 343 | (237 | ) | 4,208 | 8.2 | ||||||||||||||
Corporate and Other | 12 | 169 | (64 | ) | 117 | 144.4 | ||||||||||||||
Consolidated | $ | 4,114 | $ | 512 | $ | (301 | ) | $ | 4,325 | 11.8 | % | |||||||||
S-6
Table of Contents
Valuation and Qualifying Accounts
Balance at the | Charged | Charged to | ||||||||||||||
Beginning of | Operating Costs | Other | Balance at the End | |||||||||||||
Period | and Expenses | Accounts | of Period | |||||||||||||
Dollars in millions | ||||||||||||||||
December 31, 2009 | ||||||||||||||||
Reinsurance recoverables on unpaid losses: | ||||||||||||||||
Allowance for reinsurance balances | $ | 75 | $ | — | $ | — | $ | 75 | ||||||||
Premiums receivable | ||||||||||||||||
Allowance for uncollectible accounts | 22 | — | — | 22 | ||||||||||||
December 31, 2008 | ||||||||||||||||
Reinsurance recoverables on unpaid losses: | ||||||||||||||||
Allowance for reinsurance balances | 9 | 4 | 62 | 75 | ||||||||||||
Premiums receivable | ||||||||||||||||
Allowance for uncollectible accounts | 7 | 2 | 13 | 22 | ||||||||||||
December 31, 2007 | ||||||||||||||||
Reinsurance recoverables on unpaid losses: | ||||||||||||||||
Allowance for reinsurance balances | 5 | — | 4 | 9 | ||||||||||||
Premiums receivable | ||||||||||||||||
Allowance for uncollectible accounts | 8 | (2 | ) | 1 | 7 |
S-7
Table of Contents
Citi | BofA Merrill Lynch |
J.P. Morgan | Mitsubishi UFJ Securities | Wells Fargo Securities |
Barclays Capital | Deutsche Bank Securities | HSBC | Morgan Stanley |
BNP PARIBAS | BNY Mellon Capital Markets, LLC | Dowling & Partners Securities LLC | Keefe, Bruyette & Woods | Lloyds TSB Corporate Markets |
Macquarie Capital | Piper Jaffray | Ramirez & Co., Inc. | RBS | Sandler O’Neill + Partners, L.P. | The Williams Capital Group, L.P. |
Table of Contents
ITEM 13. | Other Expenses of Issuance and Distribution |
Amount | ||||
SEC registration fee | $ | 7,130 | ||
FINRA fee | $ | 10,500 | ||
Stock exchange listing fee | * | |||
Blue Sky fees and expenses | * | |||
Printing expenses | * | |||
Legal fees and expenses | * | |||
Accounting fees and expenses | * | |||
Transfer agent and registrar fees | * | |||
Miscellaneous fees and expenses | * | |||
Total | * | |||
* | To be completed by amendment |
ITEM 14. | Indemnification of Directors and Officers |
ITEM 15. | Recent Sales of Unregistered Securities |
ITEM 16. | Exhibits and Financial Statements Schedules |
II-1
Table of Contents
• | should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; | |
• | have been qualified by disclosures that were made to the other party in connection with the negotiation of the application agreement, which disclosures are not necessarily reflected in the agreement; | |
• | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and | |
• | were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
II-2
Table of Contents
Exhibit | ||||
Number | Description | |||
1 | .1 | Form of Underwriting Agreement related to this offering* | ||
3 | .1 | Form of Amended and Restated Certificate of Incorporation of the Registrant* | ||
3 | .2 | Form of Amended and Restated Bylaws of the Registrant* | ||
4 | .1 | Form of specimen Class A common stock certificate* | ||
5 | .1 | Opinion of Skadden, Arps, Slate, Meagher & Flom LLP relating to the Class A common stock* | ||
10 | .1 | Form of Intercompany Agreement between Liberty Mutual Agency Corporation and Liberty Mutual Group Inc.** | ||
10 | .2 | Form of Registration Rights Agreement between Liberty Mutual Agency Corporation and Liberty Insurance Holdings, Inc.* | ||
10 | .3 | Form of Amended and Restated Surety Reinsurance Agreement between Peerless Insurance Company and Liberty Mutual Insurance Company | ||
10 | .4 | Aggregate Stop-Loss Reinsurance Agreement by and between Liberty Mutual Insurance Company and Peerless Insurance Company, dated as of June 30, 2010* | ||
10 | .5 | Federal Tax Sharing Agreement, dated as of January 2002, and Amendment No. 1 thereto dated February 15, 2006 | ||
10 | .6 | Form of Trademark License Agreement between Liberty Mutual Agency Corporation and Liberty Mutual Insurance Company** | ||
10 | .7 | $4,000,000,000 promissory note, dated February 3, 2010, made by Liberty Mutual Agency Corporation and issued to Liberty Insurance Holdings, Inc.** | ||
10 | .8 | Form of Ohio Casualty Note* | ||
10 | .9 | Form of Services Agreement between Liberty Mutual Agency Corporation and Liberty Mutual Insurance Company** | ||
10 | .10 | Form of Indemnification Agreement to be entered into between Liberty Mutual Agency Corporation and certain of its executive officers and directors* | ||
10 | .11(a) | Form of Real Estate License Agreement between Liberty Mutual Agency Corporation and Liberty Mutual Group Inc. for buildings owned by subsidiaries of Liberty Mutual Agency Corporation** | ||
10 | .11(b) | Form of Real Estate License Agreement between Liberty Mutual Agency Corporation and Liberty Mutual Group Inc. for buildings owned by subsidiaries of Liberty Mutual Group Inc.** | ||
10 | .12(a) | Form of Real Estate License Agreement between Liberty Mutual Agency Corporation and Liberty Mutual Group Inc. for buildings leased by subsidiaries of Liberty Mutual Agency Corporation** | ||
10 | .12(b) | Form of Real Estate License Agreement between Liberty Mutual Agency Corporation and Liberty Mutual Group Inc. for buildings leased by subsidiaries of Liberty Mutual Group Inc.** | ||
10 | .13 | Form of Stock Purchase Agreement by and among Liberty Mutual Insurance Company, Liberty Insurance Holdings, Inc. and Liberty Mutual Agency Corporation* | ||
10 | .14 | Workers’ Compensation Catastrophe Excess of Loss Reinsurance Contract No. 2009300, effective January 1, 2009, between Peerless Insurance Company and Liberty Mutual Insurance Company, and the Interest and Liabilities Agreement attached to and forming a part thereof*** | ||
10 | .15 | Workers’ Compensation Catastrophe Excess of Loss Reinsurance Contract No. 2010300, effective January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company, and the Interest and Liabilities Agreement attached to and forming a part thereof*** | ||
10 | .16 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2009250, effective January 1, 2009, between Peerless Insurance Company and Liberty Mutual Insurance Company, and the Interest and Liabilities Agreement attached to and forming a part thereof*** | ||
10 | .17 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2010250, effective January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company, and the Interest and Liability Agreement attached to and forming a part thereof*** | ||
10 | .18 | Commercial Equipment Breakdown Quota Share Reinsurance Contract No. 3200195 between Peerless Insurance Company and Liberty Mutual Insurance Company, effective January 1, 2010*** | ||
Revolving Credit Agreements / Promissory Notes / Repurchase Agreements | ||||
10 | .19 | Revolving Loan Agreement, dated as of May 22, 2006, between Colorado Casualty Insurance Company and Liberty Mutual Insurance Company and $50,000,000 promissory note, dated May 22, 2006, made by Colorado Casualty Insurance Company, and issued to Liberty Mutual Insurance Company** | ||
10 | .20 | Revolving Loan Agreement, dated as of May 22, 2006, between Golden Eagle Insurance Corporation and Liberty Mutual Insurance Company and $50,000,000 promissory note, dated May 22, 2006, made by Golden Eagle Insurance Corporation, and issued to Liberty Mutual Insurance Company** |
II-3
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .21 | Revolving Loan Agreement, dated as of May 22, 2006, between Indiana Insurance Company and Liberty Mutual Insurance Company and $50,000,000 promissory note, dated May 22, 2006, made by Indiana Insurance Company, and issued to Liberty Mutual Insurance Company** | ||
10 | .22 | Revolving Loan Agreement, dated as of May 22, 2006, between Liberty Northwest Insurance Corporation and Liberty Mutual Insurance Company and $50,000,000 promissory note, dated May 22, 2006, made by Liberty Northwest Insurance Corporation, and issued to Liberty Mutual Insurance Company** | ||
10 | .23 | Revolving Loan Agreement, dated as of May 22, 2006, between Peerless Insurance Company and Liberty Mutual Insurance Company and $150,000,000 promissory note, dated May 22, 2006, made by Peerless Insurance Company, and issued to Liberty Mutual Insurance Company** | ||
10 | .24 | Revolving Loan Agreement, dated as of May 22, 2006, between Peerless Indemnity Insurance Company and Liberty Mutual Insurance Company and $100,000,000 promissory note, dated May 22, 2006, made by Peerless Indemnity Insurance Company, and issued to Liberty Mutual Insurance Company** | ||
10 | .25 | Revolving Loan Agreement, dated as of May 22, 2006, between the Netherlands Insurance Company and Liberty Mutual Insurance Company and $50,000,000 promissory note, dated May 22, 2006, made by The Netherlands Insurance Company, and issued to Liberty Mutual Insurance Company** | ||
10 | .26 | Revolving Loan Agreement, dated as of November 8, 2007, between The Ohio Casualty Insurance Company and Liberty Mutual Insurance Company and $130,000,000 promissory note, dated November 8, 2007, made by The Ohio Casualty Insurance Company, and issued to Liberty Mutual Insurance Company** | ||
10 | .27 | Revolving Credit Agreement, dated as of May 12, 2010, by and among Liberty Mutual Agency Corporation, Bank of America, N.A., as Administrative Agent, Fronting L/C Issuer and Several L/C Agent, and the Several Lenders from Time to Time Parties Thereto, and the First Amendment thereto, entered into as of July 7, 2010** | ||
10 | .28 | Master Repurchase Agreement (September 1996 Version), dated as of March 26, 2010, between Peerless Insurance Company, as seller, Liberty Mutual Insurance Company, as guarantor, and Mitsubishi UFJ Securities (USA), Inc., as buyer** | ||
Management Services Agreements | ||||
10 | .29 | Management Services Agreement, dated December 15, 2001, by and between America First Insurance Company and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31, 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .30 | Management Services Agreement, dated January 1, 2006, by and between Gulf States AIF, Inc. for and on behalf of itself and as Attorney-in-Fact for America First Lloyds’ Insurance Company and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31, 2007, and Amendment No. 2 thereto, effective as of January 1, 2006** | ||
10 | .31 | Management Services Agreement, dated January 1, 2009, by and between American Economy Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .32 | Management Services Agreement, dated August 24, 2007, by and between American Fire and Casualty Company and Liberty Mutual Insurance Company and Amendment No. 1 thereto, effective as of December 31, 2007** | ||
10 | .33 | Management Services Agreement, dated January 1, 2009, by and between American States Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .34 | Management Services Agreement, dated January 1, 2009, by and between American States Insurance Company of Texas and Liberty Mutual Insurance Company** | ||
10 | .35 | Management Services Agreement, dated January 1, 2009, by and between American States Lloyds Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .36 | Management Services Agreement, dated January 1, 2009, by and between American States Preferred Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .37 | Management Services Agreement, dated January 1, 2002, by and between Colorado Casualty Insurance Company and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31, 2007, Amendment No. 2 thereto, effective as of January 1, 2004, and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .38 | Management Services Agreement, dated December 15, 2001, by and between Consolidated Insurance Company and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31, 2007, and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .39 | Management Services Agreement, dated December 15, 2001, by and between Excelsior Insurance Company and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31, 2007, and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .40 | Management Services Agreement, dated January 1, 2009, by and between First National Insurance Company of America and Liberty Mutual Insurance Company** |
II-4
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .41 | Management Services Agreement, dated January 1, 2009, by and between General Insurance Company of America and Liberty Mutual Insurance Company** | ||
10 | .42 | Management Services Agreement, dated August 21, 1997, by and between Golden Eagle Insurance Corporation and Liberty Mutual Insurance Company and Amendment No 1, thereto, effective as of December 31, 2007** | ||
10 | .43 | Management Services Agreement, dated December 15, 2001, by and between Hawkeye-Security Insurance Company, f/k/a Tower Insurance Company, Inc., and Liberty Mutual Insurance Company, Amendment No 1, thereto, effective as of December 31, 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .44 | Management Services Agreement, dated December 15, 2001, by and between Indiana Insurance Company and Liberty Mutual Insurance Company, Amendment No 1, thereto, effective as of December 31, 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .45 | Management Services Agreement, dated January 1, 2006, by and between Liberty Northwest Insurance Corporation and Liberty Mutual Insurance Company and Amendment No 1, thereto, effective as of December 31, 2007** | ||
10 | .46 | Management Services Agreement, dated December 15, 2001, by and between Mid-American Fire & Casualty Company and Liberty Mutual Insurance Company, Amendment No 1, thereto, effective as of December 31, 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .47 | Management Services Agreement, dated December 15, 2001, by and between Montgomery Mutual Insurance Company, Liberty Mutual Insurance Company and Liberty Insurance Holdings, Inc. and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .48 | Management Services Agreement, dated January 1, 2006, by and between North Pacific Insurance Company and Liberty Mutual Insurance Company and Amendment No 1, thereto, effective as of December 31, 2007** | ||
10 | .49 | Management Services Agreement, dated August 24, 2007, by and between Ohio Security Insurance Company and Liberty Mutual Insurance Company and Amendment No 1, thereto, effective as of December 31, 2007** | ||
10 | .50 | Management Services Agreement, dated January 1, 2006, by and between Oregon Automobile Insurance Company and Liberty Mutual Insurance Company and Amendment No 1, thereto, effective as of December 31, 2007** | ||
10 | .51 | Management Services Agreement, dated December 15, 2001, by and between Atlas Assurance Company of America, n/k/a Peerless Indemnity Insurance Company, and Liberty Mutual Insurance Company, Amendment No 1, thereto, effective as of December 31, 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .52 | Management Services Agreement, dated December 15, 2001, by and between Peerless Insurance Company, on behalf of itself and its affiliates, and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .53 | Management Services Agreement, dated January 1, 2009, by and between Safeco Insurance Company of America and Liberty Mutual Insurance Company** | ||
10 | .54 | Management Services Agreement, dated January 1, 2009, by and between Safeco Insurance Company of Illinois and Liberty Mutual Insurance Company** | ||
10 | .55 | Management Services Agreement, dated January 1, 2009, by and between Safeco Insurance Company of Indiana and Liberty Mutual Insurance Company** | ||
10 | .56 | Management Services Agreement, dated January 1, 2009, by and between Safeco Insurance Company of Oregon and Liberty Mutual Insurance Company** | ||
10 | .57 | Management Services Agreement, dated January 1, 2009, by and between Safeco Lloyds Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .58 | Management Services Agreement, dated January 1, 2009, by and between Safeco National Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .59 | Management Services Agreement, dated January 1, 2009, by and between Safeco Surplus Lines Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .60 | Management Services Agreement, dated December 15, 2001, by and between The Midwestern Indemnity Company and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31, 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .61 | Management Services Agreement, dated December 15, 2001, by and between The Netherlands Insurance Company and Liberty Mutual Insurance Company, Amendment No. 1 thereto, effective as of December 31, 2007 and Acknowledgement Letter, dated October 13, 2005** | ||
10 | .62 | Management Services Agreement, dated August 24, 2007, by and between The Ohio Casualty Insurance Company and Liberty Mutual Insurance Company and Amendment No. 1 thereto, effective as of December 31, 2007** | ||
10 | .63 | Management Services Agreement, dated August 24, 2007, by and between West American Insurance Company and Liberty Mutual Insurance Company and Amendment No. 1 thereto, effective as of December 31, 2007** | ||
Services Agreements |
II-5
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .64 | Management Agreement, dated as of July 1, 2003, by and between Peerless Insurance Company and Liberty Mutual Insurance Company and Amendment No. 1, dated as of December 31, 2007, thereto** | ||
10 | .65 | Claims Service Agreement, dated January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .66 | Middle Market Claims Service Agreement, effective as of January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .67 | National Market Claims Service Agreement, effective as of January 1, 2010, between Peerless Insurance Company, Helmsman Management Services LLC and Liberty Mutual Insurance Company** | ||
10 | .68 | Reciprocal Claims Service Agreement, dated as of February 14, 2000, by and among The Peerless Insurance Company on behalf of itself and on behalf of the Netherlands Insurance Company, Employers Insurance of Wausau A Mutual Company on behalf of itself and on behalf of the Wausau Underwriters Insurance Company; and Liberty Mutual Insurance Company on behalf of itself and on behalf of LM Insurance Corporation, First Liberty Insurance Corporation, Liberty Mutual Fire Insurance Company and Liberty Insurance and Amendment No. 1, dated as of December 31, 2007, thereto** | ||
10 | .69 | Service Agreement, dated and effective as of April 1, 2006, between Employers Insurance Company of Wausau, Wausau Business Insurance Company, Wausau General Insurance Company, Wausau Underwriters Insurance Company and Peerless Insurance Company and Amendment No. 1, dated as of December 31, 2007, thereto** | ||
Cash Management Agreements | ||||
10 | .70 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between American Economy Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .71 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between American Fire & Casualty Company, Mid-American Fire and Casualty Company, The Midwestern Indemnity Company, The Ohio Casualty Insurance Company, Ohio Security Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .72 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between America First Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .73 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between American States Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .74 | Amended and Restated Cash Management Agreement, effective as of March 1, 2010, by and between American States Preferred Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .75 | Cash Management Agreement, effective as of January 1, 2010, by and between Colorado Casualty Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .76 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Consolidated Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .77 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Excelsior Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .78 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between First National Insurance Company of America and Liberty Mutual Investment Advisors LLC** | ||
10 | .79 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between General Insurance Company of America and Liberty Mutual Investment Advisors LLC** | ||
10 | .80 | Amended and Restated Cash Management Agreement, effective as of March 1, 2010, by and between Golden Eagle Insurance Corporation and Liberty Mutual Investment Advisors LLC** | ||
10 | .81 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Hawkeye-Security Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .82 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Indiana Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .83 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Liberty Northwest Insurance Corporation and Liberty Mutual Investment Advisors LLC** | ||
10 | .84 | Cash Management Agreement, dated as of July 1, 2010, by and between Montgomery Mutual Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .85 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between National Insurance Association and Liberty Mutual Investment Advisors LLC** | ||
10 | .86 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between North Pacific Insurance Company and Liberty Mutual Investment Advisors, LLC** | ||
10 | .87 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Oregon Automobile Insurance Company and Liberty Mutual Investment Advisors LLC** |
II-6
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .88 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Peerless Indemnity Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .89 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Peerless Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .90 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of America and Liberty Mutual Investment Advisors LLC** | ||
10 | .91 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of Illinois and Liberty Mutual Investment Advisors LLC** | ||
10 | .92 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of Indiana and Liberty Mutual Investment Advisors LLC** | ||
10 | .93 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of Oregon and Liberty Mutual Investment Advisors LLC** | ||
10 | .94 | Cash Management Agreement, effective as of January 1, 2010, by and between Safeco National Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .95 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between Safeco Surplus Lines Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .96 | Amended and Restated Cash Management Agreement, effective as of January 1, 2010, by and between The Netherlands Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .97 | Amended and Restated Cash Management Agreement, effective January 1, 2010, by and between West American Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
Investment Management Agreements | ||||
10 | .98 | Investment Management Agreement, effective as of January 1, 2010, by and between America First Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .99 | Investment Management Agreement, effective as of January 1, 2010, by and between America First Lloyd’s Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .100 | Amended and Restated Investment Management Agreement, effective as of January 1, 2010, by and between American Economy Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .101 | Investment Management Agreement, effective as of January 1, 2010, by and between American Economy Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .102 | Investment Management Agreement, effective as of January 1, 2010, by and between American Fire and Casualty Company, Mid-American Fire & Casualty Company, Ohio Security Insurance Company, The Midwestern Indemnity Company, The Ohio Casualty Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .103 | Investment Management Agreement, effective as of January 1, 2010, by and between America States Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .104 | Amended and Restated Investment Management Agreement, effective as of January 1, 2010, by and between American States Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .105 | Investment Management Agreement, effective as of January 1, 2010, by and between American States Insurance Company of Texas and Liberty Mutual Group Inc.** | ||
10 | .106 | Investment Management Agreement, effective as of January 1, 2010, by and between American States Lloyds Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .107 | Investment Management Agreement, effective as of March 1, 2010, by and between American States Preferred Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .108 | Investment Management Agreement, effective as of January 1, 2010, by and between Colorado Casualty Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .109 | Investment Management Agreement, effective as of January 1, 2010, by and between Consolidated Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .110 | Investment Management Agreement, effective as of January 1, 2010, by and between Excelsior Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .111 | Investment Management Agreement, effective as of January 1, 2010, by and between First National Insurance Company of America and Liberty Mutual Group** | ||
10 | .112 | Investment Management Agreement, effective as of January 1, 2010, by and between General Insurance Company of America and Liberty Mutual Group Inc.** | ||
10 | .113 | Amended and Restated Investment Management Agreement, effective as of January 1, 2010, by and between General Insurance Company of America and Liberty Mutual Investment Advisors LLC** |
II-7
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .114 | Investment Management Agreement, effective as of March 1, 2010, by and between Golden Eagle Insurance Corporation and Liberty Mutual Group Inc.** | ||
10 | .115 | Investment Management Agreement, effective as of January 1, 2010, by and between Hawkeye-Security Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .116 | Investment Management Agreement, effective as of January 1, 2010, by and between Indiana Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .117 | Amended and Restated Investment Management Agreement, effective as of January 1, 2010, by and between Indiana Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .118 | Investment Management Agreement, effective as of January 1, 2010, by and between Liberty Northwest Insurance Corporation and Liberty Mutual Group Inc.** | ||
10 | .119 | Investment Management Agreement, effective as of January 1, 2010, by and between Montgomery Mutual Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .120 | Investment Management Agreement, effective as of January 1, 2010, by and between National Insurance Association and Liberty Mutual Group Inc.** | ||
10 | .121 | Investment Management Agreement, effective as of January 1, 2010, by and between North Pacific Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .122 | Investment Management Agreement, effective as of January 1, 2010, by and between Oregon Automobile Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .123 | Investment Management Agreement, effective as of January 1, 2010, by and between Peerless Indemnity Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .124 | Investment Management Agreement, effective as of January 1, 2010, by and between Peerless Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .125 | Investment Management Agreement, effective as of January 1, 2010, by and between Peerless Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .126 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of America and Liberty Mutual Group Inc.** | ||
10 | .127 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of America and Liberty Mutual Investment Advisors LLC** | ||
10 | .128 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of Illinois and Liberty Mutual Group Inc.** | ||
10 | .129 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of Indiana and Liberty Mutual Group Inc.** | ||
10 | .130 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco Insurance Company of Oregon and Liberty Mutual Group Inc.** | ||
10 | .131 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco Lloyds Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .132 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco National Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .133 | Investment Management Agreement, effective as of January 1, 2010, by and between Safeco Surplus Lines Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .134 | Investment Management Agreement, effective as of January 1, 2010, by and between The Netherlands Insurance Company and Liberty Mutual Group Inc.** | ||
10 | .135 | Amended and Restated Investment Management Agreement, effective as of January 1, 2010, by and between The Ohio Casualty Insurance Company and Liberty Mutual Investment Advisors LLC** | ||
10 | .136 | Investment Management Agreement, effective as of January 1, 2010, by and between West American Insurance Company and Liberty Mutual Group Inc.** | ||
Reinsurance Agreements | ||||
10 | .137 | Workers’ Compensation and Employers’ Liability Reinsurance Agreement, effective March 1, 1983, between Liberty Northwest Insurance Corporation and Liberty Mutual Insurance Company and Termination Endorsement thereto dated June 8, 1990** | ||
10 | .138 | Reinsurance Agreement No. 19980929LMIC, effective September 29, 1998, by and between Colorado Casualty Insurance Company and Liberty Mutual Insurance Company** |
II-8
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .139 | Property & Casualty Quota Share Reinsurance Agreement, dated as of June 1, 1996, by and between Albany Insurance Company, n/k/a Liberty Insurance Underwriters Inc., and Atlas Assurance Company of America and Cancellation Addendum thereto effective as of December 31, 1999** | ||
10 | .140 | Property & Casualty Quota Share Retrocession Agreement, effective January 1, 2001, by and between Peerless Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .141 | Reinsurance Agreement, effective as of December 2, 2002, by and between Liberty County Mutual Insurance Company and Liberty Mutual Insurance Company (for business classified as Small Business Group, only)** | ||
10 | .142 | Quota Share Reinsurance Agreement, effective December 1, 2002, between Peerless Insurance Company and Liberty Mutual Insurance Company (with and on behalf of The First Liberty Insurance Corporation), Liberty Mutual Fire Insurance Company, LM Insurance Corporation and Liberty Insurance Corporation** | ||
10 | .143 | Casualty Excess of Loss Reinsurance Agreement No. CXoLSH02, effective January 1, 2002, by and between Bridgefield Casualty Insurance Company, Bridgefield Employers Insurance Company, and Peerless Insurance Company and Endorsement No. 1 to the Interests and Liabilities Contract thereto, effective as of September 30, 2003** | ||
10 | .144 | Reinsurance Agreement, effective as of January 1, 1993, by and between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation, LM Insurance Corporation, The First Liberty Insurance Corporation and Lexco, Limited and Liberty Northwest Insurance Corporation, Endorsement 1 thereto, effective January 1, 1994, Endorsement 2 thereto, effective January 1, 1995, Endorsement 3 thereto, effective January 1, 1996, Endorsement 4 thereto, effective January 1, 1997, Endorsement 5 thereto, effective January 1, 1998 and Endorsement 6 thereto, effective January 1, 1999** | ||
10 | .145 | Property Per Risk Excess of Loss Reinsurance Contract No. LMPpR – 2005, effective January 1, 2005, between Peerless Insurance Company and Liberty Mutual Insurance Company and Interest and Liabilities Contract thereto, effective as of January 1, 2005** | ||
10 | .146 | Quota Share Reinsurance Contract, effective as of January 1, 2005, by and between Liberty Mutual Insurance Company (with and on behalf of The First Liberty Insurance Corporation), Liberty Mutual Fire Insurance Company, LM Insurance Corporation, Liberty Insurance Corporation, Liberty County Mutual Insurance Company and Liberty Northwest Insurance Corporation** | ||
10 | .147 | Casualty Excess of Loss Reinsurance Agreement No. RAMSumCX – 2003, effective January 1, 2003, by and between Bridgefield Casualty Insurance Company, Bridgefield Employers Insurance Company and Peerless Insurance Company, Endorsement No. 1 to the Interest and Liabilities Contract thereto, effective January 1, 2004 and Endorsement No. 2 to the to the Interest and Liabilities Contract thereto, effective January 1, 2005** | ||
10 | .148 | Casualty Excess of Loss Reinsurance Agreement No. RAM Re BSGCX – 2006, effective as of January 1, 2006, by and between Liberty Mutual Insurance Company (with and on behalf of The First Liberty Insurance Corporation), Liberty Mutual Fire Insurance Company, LM Insurance Corporation, and Liberty Insurance Corporation (for business classified as Business Solutions Group) and Peerless Insurance Company** | ||
10 | .149 | Property Per Risk Excess of Loss Reinsurance Agreement No. RAM Re BSGPX – 2006, effective as of January 1, 2006, by and between Liberty Mutual Insurance Company (with and on behalf of The First Liberty Insurance Corporation), Liberty Mutual Fire Insurance Company, LM Insurance Corporation, Liberty Insurance Corporation, Liberty County Mutual Insurance Company (for business classified as LMIC Business Solutions Group) and Peerless Insurance Company** | ||
10 | .150 | Quota Share Reinsurance Agreement, effective as of April 1, 2006, between Employers Insurance Company of Wausau and Peerless Insurance Company** | ||
10 | .151 | Wausau Umbrella Quota Share Reinsurance Contract No. RAMWA06UQS, effective as of January 1, 2006, between Peerless Insurance Company and Employers Insurance Company of Wausau, Wausau General Insurance Company, Wausau Underwriters Insurance Company and Wausau Business Insurance Company** | ||
10 | .152 | Casualty Excess of Loss Reinsurance Agreement No. RAM ReSumCX – 2006, effective as of January 1, 2006, by and between Bridgefield Casualty Insurance Company, Bridgefield Employers Insurance Company and Peerless Insurance Company and Endorsement No. 1 to the Interests and Liabilities Contract thereto, effective as of January 1, 2007** | ||
10 | .153 | Workers Compensation Excess of Loss Reinsurance Agreement, effective as of January 1, 2000, between Bridgefield Casualty Insurance Company, Bridgefield Employers Insurance Company, and Peerless Insurance Company, Addendum No. 1 thereto, effective as of January 1, 2001 and Endorsement No. 2 to the Interests and Liabilities Contract thereto, effective as of January 1, 2002** | ||
10 | .154 | All Lines Casualty Excess of Loss Reinsurance Contract No. 2000260, effective as of January 1, 2007, by and between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interest and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .155 | Casualty Excess of Loss Reinsurance Agreement No. RAMSumCX – 2005, effective as of January 1, 2005, between Bridgefield Casualty Insurance Company, Bridgefield Employers Insurance Company and Peerless Insurance Company and Endorsement No. 1 to the Interests and Liabilities Contract thereto, effective as of January 1, 2006** |
II-9
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .156 | Reinsurance Agreement, effective as of January 1, 2004, by and between Golden Eagle Insurance Corporation and the Liberty Mutual Insurance Company, and Amendment No. 1 thereto, effective as of December 31, 2007** | ||
10 | .157 | Wausau Retrocession Quota Share Contract No. 2100400, effective as of April 1, 2008, between and among Peerless Insurance Company and Liberty Mutual Insurance Company and the Interest and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .158 | Second Casualty Excess of Loss Reinsurance Contract No. 2008159, effective January 1, 2008, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .159 | Casualty Excess of Loss Reinsurance Agreement No. 1000102, effective January 1, 2008, between Employers Insurance Company of Wausau and Liberty Mutual Insurance Company and Peerless Insurance Company** | ||
10 | .160 | First Casualty Excess of Loss Reinsurance Contract No. 2008158, effective January 1, 2008, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .161 | Property Per Risk Excess of Loss Reinsurance Agreement No. 67316, effective January 1, 2008, between Employers Insurance Company of Wausau and Liberty Mutual Insurance Company and Peerless Insurance Company** | ||
10 | .162 | Workers’ Compensation Clash Excess of Loss Reinsurance Contract No. 2000290, effective January 1, 2007, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interest and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .163 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2000240 $300,000,000 XS $50,000,000, effective January 1, 2007, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .164 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2000250 $1,400,000,000 XS $550,000,000, effective January 1, 2007, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .165 | Property Catastrophe Excess of Loss Reinsurance Agreement, effective January 1, 2005, between Peerless Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .166 | Property Catastrophe Excess of Loss Reinsurance Contract, effective January 1, 2006, between Peerless Insurance Company and Liberty Mutual Insurance Company, Amendment No. 1 effective January 1, 2006 and Amendment No. 2 effective January 1, 2006** | ||
10 | .167 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2000252 $20,000,000 XS $30,000,000, effective January 1, 2008, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .168 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2008250 $800,000,000 XS $50,000,000, effective January 1, 2008, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .169 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2009250 $825,000,000 XS $500,000,000, effective January 1, 2009, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .170 | Property Catastrophe Excess of Loss Reinsurance Contract No. 2010250 $825,000,000 XS $500,000,000, effective January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .171 | Agency Markets Discontinued Operations Quota Share Reinsurance Contract No. 3100700, effective January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company** | ||
10 | .172 | 100% Quota Share Reinsurance Agreement, effective January 1, 2010, by and between Peerless Insurance Company and Insurance Company of Illinois** | ||
10 | .173 | 100% Quota Share Reinsurance Agreement, effective January 1, 2010, by and between Peerless Insurance Company and Liberty Mutual Mid-Atlantic Insurance Company** | ||
10 | .174 | Commercial Equipment Breakdown Quota Share Reinsurance Contract No. 3200195, effective January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company and Endorsement No. 1 thereto, effective as of April 1, 2010** | ||
10 | .175 | Workers’ Compensation Catastrophe Excess of Loss Reinsurance Contract No. 2010300, effective January 1, 2010, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interests and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .176 | Workers’ Compensation Catastrophe Clash Excess of Loss Reinsurance Contract No. 2000290, effective January 1, 2007, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interest and Liabilities Agreement attached to and forming a part thereof** |
II-10
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .177 | Casualty Excess of Loss Reinsurance Agreement No. SummitCX2007, effective January 1, 2007, between Bridgefield Casualty Insurance Company, Bridgefield Employers Insurance Company, and Peerless Insurance Company and Endorsement No. 1 to the Interests and Liabilities Contract thereto, effective as of September 30, 2003** | ||
10 | .178 | Commercial Umbrella Excess of Loss Reinsurance Contract No. 2000310, effective January 1, 2007, between Peerless Insurance Company and Liberty Mutual Insurance Company and the Interest and Liabilities Agreement attached to and forming a part thereof** | ||
10 | .179 | Workmen’s Compensation and General Liability Eighth Excess of Loss Reinsurance Contract, effective December 18, 1974, issued to Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company by American Union Insurance Company of New York and Endorsement No. 1 thereto, effective as of December 31, 1975** | ||
10 | .180 | Worker’s Compensation and General Liability Fourth Excess of Loss Reinsurance Contract, effective December 31, 1975, issued to Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company by American Union Insurance Company of New York and the Interests and Liabilities Agreement thereto, effective December 31, 1976** | ||
10 | .181 | Worker’s Compensation and General Liability Seventh Excess of Loss Reinsurance Contract, effective December 31, 1977, issued to Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company, the Interests and Liabilities Agreement thereto, effective December 31, 1977, by and between Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and American Union Insurance Company of New York and the Interests and Liabilities Agreement thereto, effective December 31, 1977, by and between Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and Excess & Treaty Management Corporation Underwriting Manager** | ||
10 | .182 | Workers’ Compensation and General Liability Sixth Excess of Loss Reinsurance Contract, effective December 31, 1978, issued to Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company, the Interests and Liabilities Agreement thereto, effective December 31, 1978, by and between Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and American Union Insurance Company of New York and the Interests and Liabilities Agreement thereto, effective December 31, 1978, by and between Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and Excess and Treaty Management Corporation Underwriting Manager** | ||
10 | .183 | Workers’ Compensation and General Liability Seventh Excess of Loss Reinsurance Contract, effective December 31, 1979, issued to Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company, the Interests and Liabilities Agreement thereto, effective May 15, 1979, by and between Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and American Union Insurance Company of New York and the Interests and Liabilities Agreement thereto, effective May 15, 1979, by and between Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and Excess and Treaty Management Corporation Underwriting Manager** | ||
10 | .184 | Workers’ Compensation and General Liability Sixth Excess of Loss Reinsurance Contract, effective December 31, 1980, issued to Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company, Endorsement No. 2 thereto, effective December 31, 1980, between Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company and American Union Insurance Company of New York and Endorsement No. 3 thereto, effective December 31, 1981, between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company and Liberty Mutual (Bermuda) Ltd. and American Union Insurance Company of New York** | ||
10 | .185 | Workers’ Compensation and General Liability Sixth Excess of Loss Reinsurance Contract, effective December 31, 1982, issued to Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and Endorsement No. 4 thereto, effective December 31, 1982, issued to Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company and Liberty Mutual (Bermuda) Ltd. by American Union Insurance Company of New York** | ||
10 | .186 | Workers’ Compensation and General Liability Sixth Excess of Loss Reinsurance Contract, effective December 31, 1983, issued to Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation, the Interests and Liabilities Agreement thereto, effective December 31, 1983, between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and American Union Insurance Company of New York and the Interests and Liabilities Agreement thereto, effective December 31, 1983, between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and Atlas Assurance Company of America by GRE-Re of America Corp.** | ||
10 | .187 | Workers’ Compensation and General Liability Seventh Excess of Loss Reinsurance Contract, effective December 31, 1984, Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and the Interests and Liabilities Agreement thereto, effective December 31, 1984, between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and American Union Insurance Company of New York** |
II-11
Table of Contents
Exhibit | ||||
Number | Description | |||
10 | .188 | Workers’ Compensation and General Liability Sixth Excess of Loss Reinsurance Contract, effective December 31, 1984, issued to Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and the Interests and Liabilities Agreement thereto, effective December 31, 1984, by and between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and American Union Insurance Company of New York** | ||
10 | .189 | Workers’ Compensation and General Liability Seventh Excess of Loss Reinsurance Contract, effective January 1, 1986, issued to Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and the Interests and Liabilities Agreement thereto, effective January 1, 1986, by and between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and American Union Insurance Company of New York** | ||
10 | .190 | Workers’ Compensation and General Liability Seventh Excess of Loss Reinsurance Contract, effective January 1, 1987, issued to Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and the Interests and Liabilities Agreement thereto, effective January 1, 1987, by and between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and American Union Insurance Company of New York** | ||
10 | .191 | Workers’ Compensation and General Liability Sixth Excess of Loss Reinsurance Contract, effective January 1, 1988, issued to Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and the Interests and Liabilities Agreement thereto, effective January 1, 1988, by and between Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Liberty Mutual (Bermuda) Ltd., Liberty Insurance Corporation and Liberty Northwest Insurance Corporation and American Union Insurance Company of New York** | ||
10 | .192 | Liberty Mutual Surety Reinsurance Agreement, effective January 1, 2008, by and between Peerless Insurance Company and Liberty Mutual Insurance Company** | ||
Executive Compensation Arrangements | ||||
10 | .193 | Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan* | ||
10 | .194 | Form of Restricted Stock Unit Award Notification and Agreement for the Retention Restricted Stock Unit Award under the Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan* | ||
10 | .195 | Form of Restricted Stock Unit Award Notification and Agreement for the Rollover Restricted Stock Unit Award under the Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan* | ||
10 | .196 | Form of Stock Option Grant Notification and Agreement for the Retention Option Award under the Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan* | ||
10 | .197 | Form of Stock Option Grant Notification and Agreement for the Rollover Option Award under the Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan* | ||
10 | .198 | Liberty Mutual Agency Corporation Executive Management Incentive Compensation Plan* | ||
10 | .199 | Liberty Mutual Agency Corporation Supplemental Income at Retirement Plan* | ||
10 | .200 | Liberty Mutual Supplemental Income at Retirement Plan #2* | ||
10 | .201 | Liberty Mutual Group Inc. Executive Partnership Deferred Compensation Plan* | ||
10 | .202 | Liberty Mutual Severance Pay Plan* | ||
10 | .203 | Change in Control Severance Agreement by and between Safeco Corporation and Michael H. Hughes, effective March 28, 2007 | ||
10 | .204 | Confirmation of Change in Control Severance Agreement Terms by and between Safeco Corporation and Michael H. Hughes, dated as of September 15, 2008 | ||
10 | .205 | Amendment to Change in Control Severance Agreement by and between Safeco Corporation and Michael H. Hughes, dated May 15, 2009 | ||
10 | .206 | Release Agreement by and between Liberty Mutual Insurance Company and Michael H. Hughes, dated October 6, 2009 | ||
10 | .207 | Liberty Mutual Death Benefit Only Plan* | ||
10 | .208 | Liberty Mutual Insurance Company Optional Life Insurance Plan* | ||
10 | .209 | Liberty Mutual Insurance Company Executive Long-Term Disability Plan* | ||
10 | .210 | Perquisites* |
II-12
Table of Contents
Exhibit | ||||
Number | Description | |||
Other | ||||
10 | .211 | Office Lease between 600 Holladay Limited Partnerships and Liberty Northwest Insurance Corporation, dated January 2, 1996, Supplement thereto, dated May 20, 1997, and the First, Second, Third, Fourth and Fifth Amendments thereto* | ||
21 | .1 | Subsidiaries of the Registrant** | ||
23 | .1 | Consent of Ernst & Young LLP | ||
23 | .2 | Consent of Ernst & Young LLP (Regarding Consolidated Financial Statements of Safeco Corporation) | ||
23 | .3 | Consent of Ernst & Young LLP (Regarding Consolidated Financial Statements of Ohio Casualty Corporation) | ||
23 | .4 | Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in its opinion filed as Exhibit 5.1 hereto)* | ||
24 | .1 | Powers of Attorney (included on signature page to registration statement) | ||
99 | .1 | Audited Consolidated Financial Statements of Safeco Corporation as of December 31, 2007 and 2006 and for the three years ended December 31, 2007** | ||
99 | .2 | Audited Consolidated Financial Statements of Ohio Casualty Corporation as of December 31, 2006 and 2005 and for the three years ended December 31, 2006** |
* | To be filed by amendment. | |
** | Previously filed. | |
*** | Previously filed and confidential treatment has been requested for certain portions omitted from this exhibit pursuant to Rule 406 under the Securities Act of 1933. Confidential portions of this exhibit have been filed separately with the Securities and Exchange Commission. |
II-13
Table of Contents
Number | Description | |||
Schedule I | Summary of Investments-Other than Investments in Related Parties | |||
Schedule II | Condensed Financial Information of Registrant: Statement of Operations | |||
Schedule II | Condensed Financial Information of Registrant: Balance Sheets | |||
Schedule II | Condensed Financial Information of Registrant: Statement of Cash Flows | |||
Schedule III | Supplementary Insurance Information | |||
Schedule IV | Reinsurance | |||
Schedule V | Valuation and Qualifying Accounts |
ITEM 17. | Undertakings |
II-14
Table of Contents
By: | * |
Title: | Chief Executive Officer, President and Director |
Signature | Title | Date | ||
* Gary R. Gregg | Chief Executive Officer, President and Director | August 16, 2010 | ||
/s/ Michael J. Fallon | Senior Vice President and Chief Financial Officer (principal financial officer and accounting officer) | August 16, 2010 | ||
* | Chairman of the Board of Directors | August 16, 2010 | ||
* | Director | August 16, 2010 | ||
* | Director | August 16, 2010 | ||
* | Director | August 16, 2010 | ||
* | Director | August 16, 2010 | ||
* | Director | August 16, 2010 | ||
* | Director | August 16, 2010 | ||
*By: /s/ Michael J. Fallon | Attorney-in-Fact | August 16, 2010 |
II-15