UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from: to
Commission file number: 1-13754
THE HANOVER INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 04-3263626 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
440 Lincoln Street, Worcester, Massachusetts | 01653 | |
(Address of principal executive offices) | (Zip Code) |
(508) 855-1000
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock, $.01 par value | New York Stock Exchange | |
7 5/8% Senior Debentures due 2025 | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of accelerated filer, large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Based on the closing sales price of June 30, 2011, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was $1,689,176,913.
The number of shares outstanding of the registrants common stock, $0.01 par value, was 45,007,762 shares as of February 23, 2012.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Hanover Insurance Group, Inc.s Proxy Statement relating to the 2012 Annual Meeting of Shareholders to be held May 15, 2012 to be filed pursuant to Regulation 14A are incorporated by reference in Part III.
THE HANOVER INSURANCE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
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ORGANIZATION
The Hanover Insurance Group, Inc. (THG) is a holding company organized as a Delaware corporation in 1995 and traces its roots to as early as 1852, when the Hanover Fire Insurance Company was founded. Our primary business operations are property and casualty insurance products and services marketed through independent agents and brokers in the U.S. We also conduct business internationally through a wholly-owned subsidiary, Chaucer Holdings plc (Chaucer), which operates through the Society and Corporation of Lloyds (Lloyds) and is domiciled in the United Kingdom (U.K.). Our consolidated financial statements include the accounts of THG; The Hanover Insurance Company (Hanover Insurance) and Citizens Insurance Company of America (Citizens), which are our principal U.S. domiciled property and casualty subsidiaries; Chaucer, which we acquired on July 1, 2011, and certain other insurance and non-insurance subsidiaries. Our results of operations also included the results of our discontinued operations, consisting of our former life insurance businesses and our accident and health business.
FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
We conduct our business operations through four operating segments. These segments are Commercial Lines, Personal Lines, Chaucer and Other Property and Casualty. We report interest expense related to our corporate debt separately from the earnings of our operating segments.
Information with respect to each of our segments is included in Segment Results on pages 44 to 58 in Managements Discussion and Analysis of Financial Condition and Results of Operations and in Note 13 Segment Information on pages 123 and 124 of the Notes to the Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
Information with respect to geographic concentrations is included in the Description of Business by Segment on pages 3 to 20 and in Note 13 Segment Information on pages 123 to 124 of the Notes to the Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
DESCRIPTION OF BUSINESS BY SEGMENT
Following is a discussion of each of our operating segments.
GENERAL
We manage our operations principally through four segments, including three in which we provide insurance products and services: Commercial Lines, Personal Lines, and Chaucer. We underwrite commercial and personal property and casualty insurance through Hanover Insurance, Citizens and other THG subsidiaries, through an independent agent and broker network concentrated in the Northeast, Midwest and Southeast United States. We are also actively growing our Commercial Lines presence in the Western region of the United States. Our Chaucer segment is a specialist underwriting group which operates through Lloyds and writes business internationally. Our fourth segment, Other Property and Casualty, consists of: Opus Investment Management, Inc. (Opus), which provides investment management services to institutions, pension funds and other organizations; earnings on holding company assets; and a run-off voluntary pools business.
Our business strategy focuses on providing our agents and customers stability and financial strength, while prudently growing and diversifying our product and geographical business mix. We conduct our business with an emphasis on agency relationships and active agency management, disciplined underwriting, pricing, quality claim handling, and customer service. On an annualized basis, we write approximately $4 billion in written premium and rank among the top 25 property and casualty insurers in the United States based on direct U.S. premiums written for the first nine months of 2011.
RISKS
The industrys profitability and cash flow, can and historically has been, significantly affected by numerous factors, including price; competition; volatile and unpredictable developments such as extreme weather conditions, catastrophes and other natural disasters; legal and regulatory developments affecting pricing, underwriting, and other aspects of doing business, as well as insurer and insureds' liability; extra-contractual liability; size of jury awards; acts of terrorism; fluctuations in interest and currency rates or the value of investments; and other general economic conditions and trends, such as inflationary pressure or unemployment, that may affect the adequacy of reserves or the demand for insurance products. Our investment portfolio and its future returns may be further impacted by the capital markets and current economic conditions, which could affect our liquidity, the amount of realized losses and
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impairments that will be recognized, credit default levels, our ability to hold such investments until recovery and other factors. Additionally, the economic conditions in geographic locations where we conduct business, especially those locations where our business is concentrated, may affect the growth and profitability of our business. The regulatory environments in those locations, including any pricing, underwriting or product controls, shared market mechanisms or mandatory pooling arrangements, and other conditions, such as our agency relationships, affect the growth and profitability of our business. In addition, our loss and loss adjustment expense (LAE) reserves are based on our estimates, principally involving actuarial projections, at a given time, of what we expect the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity and judicial theories of liability, costs of repairs and replacement, legislative activity and other factors. We expect to regularly change our estimate of loss reserves and LAE, both for current and past years, and such changes will affect our reported profitability and financial position.
Reference is also made to Item 1A Risk Factors on pages 22 to 37 of this Form 10-K.
LINES OF BUSINESS
We underwrite commercial and personal property and casualty insurance coverage through three of our four operating segments.
Commercial Lines
Our Commercial Lines segment generated $1.8 billion, or 46.0%, of consolidated segment revenues; $1.7 billion, or 47.4%, of net written premiums, and $18.0 million, or 24.8%, of segment income before interest expense and income taxes for the year ended December 31, 2011.
The following table provides net written premiums by line of business for our Commercial Lines segment.
FOR THE YEAR ENDED DECEMBER 31, 2011 | GAAP Net | % | ||||||
(in millions, except ratios) |
Premiums Written |
of Total |
||||||
Commercial multiple peril |
$ | 569.5 | 33.4 | % | ||||
Commercial automobile |
248.9 | 14.6 | ||||||
Workers compensation |
174.5 | 10.3 | ||||||
Other commercial lines: |
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AIX program business |
208.0 | 12.2 | ||||||
Inland marine |
149.3 | 8.8 | ||||||
Bonds |
98.4 | 5.8 | ||||||
Other |
254.5 | 14.9 | ||||||
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Total |
$ | 1,703.1 | 100.0 | % | ||||
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Our strategy in Commercial Lines focuses on building deep relationships with partner agents through differentiated product offerings, industry segmentation, and franchise value through limited distribution. We have made a number of enhancements to our products and technology platforms that are intended to drive more total account placements in our small commercial and middle market business, while delivering enhanced margins in our specialty businesses. This aligns with our focus of improving and expanding our partnerships with a limited number of agents.
Our small commercial business, which generally includes premiums of $50,000 or less, middle market and specialty business, constitute approximately 28%, 37%, and 35% of our total Commercial Lines business, respectively. Small commercial offerings deliver value through product expertise, local presence, and ease of doing business. Middle market accounts require greater claim and underwriting expertise, as well as a focus on industry segments where we can deliver differentiation in the market and value to agents and customers. Small and middle market accounts comprise over $1 billion of the Commercial Lines book and are expected to continue to drive growth.
In our small commercial and middle market businesses, we have internally developed several niche insurance programs, such as for schools, religious institutions, moving and storage companies and human services organizations, such as non-profit youth and community service organizations. We have added additional segmentation to our core middle market commercial products, including real estate, hospitality and wholesale distributors. As a complementary initiative in our specialty businesses, we have introduced products focused on management liability, specifically non-profit directors and officers liability and employment practices liability, and coverage for private company directors and officers liability.
During 2011 and 2010, we wrote small and middle market commercial lines business at policy renewal dates in accordance with the renewal rights agreement with OneBeacon Insurance Group (OneBeacon). A significant portion of this business is consistent with our current industry specific programs and middle market niches and continues to help us grow our segmented product portfolio as well as in the western states.
Additionally, growth and product innovation in our specialty lines are expected to generate higher margins over time and enable us to deliver a more complete product portfolio to our agents and policyholders. In our specialty lines, net written premiums grew by over $80 million in 2011 and accounts for approximately one-third of our Commercial Lines net premiums written. Growth in our specialty lines continues to be a significant part of our strategy.
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Over the past several years, we have acquired various specialized businesses aimed at diversifying and growing our specialty lines. Specifically, we built our product portfolio in our Hanover Professionals business through the acquisitions of a professional liability insurance carrier for small to medium-sized legal practices and a provider of insurance solutions to the design professionals industry, including architects and engineers. Additionally, we developed a Hanover Specialty Industrial business through the acquisition of a property insurer of small and medium-sized industrial risks, including chemical, paint, solvent and other manufacturing and distribution companies. To establish our Hanover Healthcare operations, we acquired a provider of insurance solutions for selected portions of the healthcare industry, including durable medical equipment suppliers, behavioral health specialists, eldercare providers, and podiatrists. In addition, our acquisition of specialized program business includes a specialty property and casualty insurance carrier that focuses on underwriting and managing program business. Finally, we geographically expanded and built our surety capabilities in our western expansion states through a renewal rights transaction. Collectively, these acquisitions have allowed us to provide new product offerings to our partner agents and policyholders, and to enter new geographical markets.
We believe our small commercial capabilities, distinctiveness in the middle market, and continued development of specialty business provides us with a more diversified portfolio of products and enables us to deliver significant value to our agents and policyholders. We believe these efforts will enable us to continue to improve the overall mix of our business and ultimately our underwriting profitability.
Our Commercial Lines product suite, provides agents and customers with products designed for small, middle, and specialized markets.
Commercial Lines coverages include:
Commercial multiple peril coverage insures businesses against third party general liability from accidents occurring on their premises or arising out of their operations, such as injuries sustained from products sold. It also insures business property for damage, such as that caused by fire, wind, hail, water damage (except for flooding), theft and vandalism.
Commercial automobile coverage insures businesses against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insureds vehicle, and property damage to other vehicles and property.
Workers compensation coverage insures employers against employee medical and indemnity claims resulting from injuries related to work. Workers compensation policies are often written in conjunction with other commercial policies.
Other commercial lines is comprised of:
| AIX program business provides coverage to under-served markets where there are specialty coverage or risk management needs, including commercial multiple peril, commercial automobile, workers compensation and other commercial coverages; |
| inland marine coverage insures businesses against physical losses to property, such as contractors equipment, builders risk and goods in transit, and also covers jewelers block, fine art, and other valuables; |
| bonds provides businesses with contract surety coverage in the event of performance or payment claims, and commercial surety coverage related to fiduciary or regulatory obligations; and |
| other commercial lines coverages includes professional and management liability, umbrella, specialty property, monoline general liability and fire. |
Personal Lines
Our Personal Lines segment generated $1.6 billion, or 39.8%, of consolidated segment revenues; $1.5 billion, or 40.7%, of net written premiums and $22.7 million, or 31.3%, of segment income before interest expense and income taxes for the year ended December 31, 2011.
The following table provides net written premiums by line of business for our Personal Lines segment.
FOR THE YEAR ENDED DECEMBER 31, 2011 | GAAP Net | % | ||||||
(in millions, except ratios) |
Premiums Written |
of Total |
||||||
Personal automobile |
$ | 910.5 | 62.3 | % | ||||
Homeowners |
507.2 | 34.7 | ||||||
Other |
43.5 | 3.0 | ||||||
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Total |
$ | 1,461.2 | 100.0 | % |
Our strategy in Personal Lines is to build our account oriented business through our partner agencies, with a focus on greater geographic diversification. The market for our Personal Lines business continues to be very competitive, with continued pressure on agents from direct writers, as well as from the increased usage of real time comparative rating tools. We maintain our focus on partnering with high quality, value added agencies that stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and/or additional coverages), and consultative selling. We are focused on making investments that are intended to help us maintain profitability, build a distinctive position in the market, and provide us with profitable growth opportunities. We
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continue to refine our products and to work closely with these high potential agents to increase the percentage of business they place with us and to ensure that it is consistent with our preferred mix of business. Additionally, we remain focused on further diversifying our state mix beyond our historical core states of Michigan, Massachusetts, New York and New Jersey. During 2011, we wrote approximately 65% of our Personal Lines business in these four states. We expect these efforts to decrease our risk concentrations and dependency on these four states and contribute to improved profitability and retention in our Personal Lines segment over time.
Personal Lines coverages include:
Personal automobile coverage insures individuals against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insureds vehicle, and property damage to other vehicles and other property. We actively write our personal automobile business in nineteen states. The majority of our new business and approximately 81% of our personal automobile policies-in-force are written through Connections® Auto, our multivariate automobile product.
Homeowners coverage insures individuals for losses to their residences and personal property, such as those caused by fire, wind, hail, water damage (except for flooding), theft and vandalism, and against third party liability claims. Our homeowners product, Connections® Home, is available in seventeen states in which we actively write homeowners coverage. It is intended to improve our competitiveness for total account business by making it easier and more efficient for our agents to write business with us and by providing more comprehensive coverage options for policyholders.
Other personal lines are comprised of personal inland marine (jewelry, art, etc.), umbrella, fire, personal watercraft, earthquake and other miscellaneous coverages.
Chaucer
Our Chaucer segment generated $0.5 billion, or 13.7%, of consolidated segment revenues; $0.4 billion, or 11.9%, of net written premiums and $32.3 million, or 44.6%, of segment income before interest expense and income taxes for the year ended December 31, 2011. The Chaucer activity reflects the six month period following its acquisition, from July 1, 2011 to December 31, 2011.
The following table provides net written premiums by line of business for our Chaucer segment. With most of our business lines, premium is not written evenly throughout each year. The degree of such seasonality varies by line of business. Accordingly, the following table may not be indicative of the relative proportion of premium from each line for a full year.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 | GAAP Net | % | ||||||
(in millions, except ratios) |
Premiums Written |
of Total |
||||||
U.K. motor |
$ | 121.8 | 28.4 | % | ||||
Marine and aviation |
107.4 | 25.0 | ||||||
Property |
72.8 | 17.0 | ||||||
Energy |
66.7 | 15.6 | ||||||
Casualty and other |
60.1 | 14.0 | ||||||
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Total |
$ | 428.8 | 100.0 | % |
Chaucer is a specialist insurance group that participates in the Lloyds market through the provision of capital to support the underwriting activities of syndicates at Lloyds and the ownership of Chaucer Syndicates Limited (CSL), a managing agent with the responsibility for the management of syndicates. CSL manages four syndicates currently underwriting at Lloyds, two of which it manages on behalf of third party capital providers.
Chaucer provides capital to Syndicate 1084, which underwrites a range of property, marine, aviation and energy products for commercial clients worldwide and motor business for personal and commercial clients in the United Kingdom; and Syndicate 1176, which primarily provides protection against physical damage and liability exposures from power generation at nuclear power stations. The energy line of business includes approximately $4.9 million of net written premiums from Syndicate 1176. Currently, we retain an economic interest in these syndicates of approximately 84% and 55%, respectively. We also provide managing agent and other business services to Syndicates 4242 and 1301, for which we receive fees.
Previously, Chaucer managed and participated in Syndicate 4000. Syndicate 4000 continues to have exposure to potential claims arising from difficulties within the financial and professional liability markets, primarily during 2007 and 2008. Chaucer sold its right to participate in Syndicate 4000 for the 2009 year of account and after.
Chaucer has broad underwriting expertise to support its diversified underwriting portfolio. We believe that our portfolio provides many benefits, including capital diversification, volatility management and long-term protection of our underwriting capabilities. We actively manage our portfolio, transferring underwriting capital to increase premium volumes of more profitable lines of business during periods of increased rates, while remaining selective or reducing our capital and premium volumes in those lines where rates are under pressure.
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2011 was a challenging year for the international insurance industry, with increased frequency and severity of natural catastrophe events, including the Australian floods, New Zealand earthquakes, Japan earthquake and resulting tsunami in the first half of 2011, and then the Thailand floods in the final quarter. As an insurer of international property, marine and energy risks, Chaucer has exposure to these events.
Underwriting opportunities are now increasing, and terms and conditions are improving across the majority of international classes. In particular, property facultative and treaty reinsurance carriers are experiencing significant rate increases in territories affected by recent events. Our objective is to leverage our broad-based underwriting portfolio and specialist underwriters to focus in those areas where returns on capital are most attractive and to remain selective where rates are under pressure, particularly in certain casualty, marine and aviation lines of business.
Although we focus on retaining our existing business, we also seek opportunities to diversify into new lines. One recent example is our effort to expand our international liability business through our hiring a team of people with this expertise, in 2010.
Overall, we believe that the strength and depth of our underwriting teams, the broad diversity of our underwriting portfolio and our membership in the Lloyds platform, together underpin our ability to manage both the scale and composition of our Chaucer business. Moreover, these strengths, combined with our continued active management of our portfolio and the current business prospects across the majority of our markets, provide an opportunity for the profitable development of the Chaucer business.
The Chaucer segment is comprised of international business written through Lloyds, and includes property, marine and aviation, energy, U.K. motor and casualty and other lines.
Property includes treaty business, as well as direct and facultative coverage for commercial and industrial risks against physical damage and business interruption. The treaty account covers cedants on a global basis, predominantly on an excess of loss basis for both per risk and catastrophe coverage, with a limited amount of proportional treaty and reinsurance assumed business.
Marine and aviation includes worldwide direct, facultative and treaty business. The marine account provides cover for hull, liability, war, terrorism, cargo, political risk, specie, fine art and satellite. The aviation account insures airline hull and liability, general aviation, refuellers and aviation products.
Energy encompasses exploration and production, construction, downstream, operational power and renewables, insuring against physical damage, business interruption, control of well, seepage and pollution and liabilities. Energy also includes a nuclear account, which provides coverage across the nuclear fuel cycle from raw uranium and nuclear fuel to the shipment and storage of waste, with the majority of the exposure relating to power generation at nuclear power stations. In addition to providing coverage for physical damage to civil nuclear power stations, nuclear also provides limited liability coverage.
U.K. motor provides primary insurance coverage to U.K. motor policyholders. Chaucer writes personal automobile, commercial and fleet polices, as well as specialist classes, including motorcycles, motor trade, classic and specialist vehicles. In addition, the U.K. motor line includes a small amount of commercial property damage and liability polices protecting small/medium-sized enterprises.
Casualty and other provides liability coverage for professional and commercial risks on a direct and treaty basis, crime and professional liability coverage for financial institutions, medical malpractice and excess workers compensation. Other lines also encompass liabilities arising from previous participations on third party Lloyds syndicates, principally from Syndicate 4000.
Other Property and Casualty
The Other Property and Casualty segment consists of: Opus, which provides investment advisory services to affiliates and also manages approximately $1.4 billion of assets for unaffiliated institutions such as insurance companies, retirement plans and foundations; earnings on holding company assets; and voluntary pools business which is in run-off.
MARKETING AND DISTRIBUTION
We are a diverse property and casualty insurance company serving a variety of standard, specialty and niche markets. Consistent with our objective to diversify our underwriting risks on a geographic and line of business basis, we currently have a distribution split of approximately one third each of domestic standard Commercial Lines, international and domestic specialty lines, and domestic standard Personal Lines. Our Commercial and Personal Lines segments, comprising our principal domestic U.S. subsidiaries, distribute our products primarily through an independent agent network. Our Chaucer segment, comprising our international business, distributes primarily through insurance brokers in the Lloyds market, as well as through comparative website aggregators with respect to the U.K. motor business.
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Commercial and Personal Lines
Our Commercial and Personal Lines agency distribution strategy and field structure allow us to maintain a strong focus on local markets and the flexibility to respond to specific market conditions. During 2011, we wrote 22.8% of our Commercial and Personal Lines business in Michigan and 9.6% in Massachusetts. Our structure is a key factor in the establishment and maintenance of productive, long-term relationships with mid-sized, well-established independent agencies. We maintain thirty-two local branch sales and underwriting offices and maintain a presence in twenty-nine states, reflecting our strong regional focus. Processing support for these locations is provided from Worcester, Massachusetts; Howell, Michigan; Atlanta, Georgia; Salem, Virginia; and Buffalo, New York. Corporate functions are centralized in our headquarters in Worcester, Massachusetts.
Independent agents account for substantially all of the sales of our Commercial and Personal Lines property and casualty products. Agencies are appointed based on profitability, track record, financial stability, professionalism, and business strategy. Once appointed, we monitor performance and, subject to legal and regulatory requirements, may take actions as necessary to change these business relationships, such as discontinuing the authority of the agent to underwrite certain products or revising commissions or bonus opportunities. We compensate agents primarily through base commissions and bonus plans that are tied to an agencys written premium, growth and profitability.
We are licensed to sell property and casualty insurance in all fifty states in the United States, as well as in the District of Columbia. We actively market Commercial Lines policies in thirty-six states and in the District of Columbia and Personal Lines policies in nineteen states.
The following table provides our top commercial and personal geographical markets based on total net written premium in the state in 2011.
Commercial Lines | Personal Lines | Total Commercial and Personal Lines |
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FOR THE YEAR ENDED DECEMBER 31, 2011 | ||||||||||||||||||||||||
(in millions, except ratios) |
GAAP Net Premiums Written |
% of Total |
GAAP Net Premiums Written |
% of Total |
GAAP Net Premiums Written |
% of Total |
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Michigan |
$ | 128.6 | 7.6 | % | $ | 593.7 | 40.6 | % | $ | 722.3 | 22.8 | % | ||||||||||||
Massachusetts |
133.2 | 7.8 | 172.1 | 11.8 | 305.3 | 9.6 | ||||||||||||||||||
New York |
188.7 | 11.1 | 99.5 | 6.8 | 288.2 | 9.1 | ||||||||||||||||||
California |
185.5 | 10.9 | | | 185.5 | 5.9 | ||||||||||||||||||
New Jersey |
97.3 | 5.7 | 80.4 | 5.5 | 177.7 | 5.6 | ||||||||||||||||||
Illinois |
74.5 | 4.4 | 56.0 | 3.8 | 130.5 | 4.1 | ||||||||||||||||||
Florida |
81.5 | 4.8 | 25.2 | 1.7 | 106.7 | 3.4 | ||||||||||||||||||
Connecticut |
47.1 | 2.8 | 57.4 | 3.9 | 104.5 | 3.3 | ||||||||||||||||||
Texas |
95.1 | 5.6 | | | 95.1 | 3.0 | ||||||||||||||||||
Maine |
58.5 | 3.4 | 32.4 | 2.2 | 90.9 | 2.9 | ||||||||||||||||||
Virginia |
52.6 | 3.1 | 34.7 | 2.4 | 87.3 | 2.8 | ||||||||||||||||||
Georgia |
43.7 | 2.6 | 37.5 | 2.6 | 81.2 | 2.6 | ||||||||||||||||||
Louisiana |
34.0 | 2.0 | 42.6 | 2.9 | 76.6 | 2.4 | ||||||||||||||||||
Indiana |
34.2 | 2.0 | 36.9 | 2.5 | 71.1 | 2.2 | ||||||||||||||||||
New Hampshire |
34.0 | 2.0 | 32.3 | 2.2 | 66.3 | 2.1 | ||||||||||||||||||
Oklahoma |
27.7 | 1.6 | 38.3 | 2.6 | 66.0 | 2.1 | ||||||||||||||||||
Tennessee |
27.3 | 1.6 | 33.0 | 2.3 | 60.3 | 1.9 | ||||||||||||||||||
Ohio |
20.6 | 1.2 | 32.3 | 2.2 | 52.9 | 1.7 | ||||||||||||||||||
Arkansas |
12.5 | 0.7 | 30.8 | 2.1 | 43.3 | 1.4 | ||||||||||||||||||
Other |
326.5 | 19.1 | 26.1 | 1.9 | 352.6 | 11.1 | ||||||||||||||||||
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Total |
$ | 1,703.1 | 100.0 | % | $ | 1,461.2 | 100.0 | % | $ | 3,164.3 | 100.0 | % | ||||||||||||
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We manage our Commercial Lines portfolio, which includes our core and specialty businesses, with a focus on growth from the most profitable industry segments within our underwriting expertise. Our core business is generally comprised of several coordinated commercial lines of business, including small and middle market accounts, which include segmented businesses and niches and certain large accounts. Core Commercial Lines direct written premium is comprised of small and mid-sized accounts; such business is split between small accounts generally having less than $50,000 in premium and first-tier middle market accounts, those with premium over $50,000, with most commonly written accounts having less than $250,000 of premium. Additionally, we have multiple specialty lines of business, which consist of program business, inland marine, surety and bonds, professional liability, healthcare, specialty property and management liability. The Commercial Lines segment seeks to maintain strong agency relationships as a strategy to secure and retain our agents best business. The quality of business written is monitored through an ongoing quality review program, accountability for which is shared at the local, regional and corporate levels.
We sponsor local and national agent advisory councils to gain the benefit of our agents insight and enhance our relationships. These councils provide feedback, input on the development of products and services, guidance on marketing efforts, support for our strategies, and assist us in enhancing our local market presence.
We manage Personal Lines business with a focus on acquiring and retaining quality accounts. More than 52% of our Personal Lines net written premium is generated in the combined states of Michigan and Massachusetts. In Michigan, based upon direct written premium for 2010, we underwrite approximately 8% of the states total market.
Approximately 63% of our Michigan Personal Lines business is in the personal automobile line and 36% is in the homeowners line. Michigan business represents approximately 41% of our total personal automobile net written premium and 42% of our total homeowners net written premium. In Michigan, we are a principal provider with many of our agencies, averaging over $1.2 million of total direct written premium per agency in 2011.
Approximately 68% of our Massachusetts Personal Lines business is in the personal automobile line and 28% is in the homeowners line. Massachusetts business represents approximately 13% of our total personal automobile net written premium and approximately 9% of our total homeowners net written premium.
Chaucer
Chaucer underwrites business from two main sources: approximately 75% from Lloyds brokers and underwriting agencies, placed in the open market, and 25% from retail brokers and comparative website aggregators for U.K. motor business. We primarily compensate brokers, underwriting agencies and aggregators through commission payments.
In the Lloyds open market, brokers approach Chaucer with individual insurance and reinsurance risk opportunities for underwriter consideration. Brokers also gain access to Chaucers products through selected underwriting agencies (coverholders), to which Chaucer has granted limited authority to make underwriting decisions on individual risks. In general, risks written through underwriting agencies are smaller in terms of both exposure and premium. Risks are placed in Lloyds through a subscription placement process whereby generally several syndicates take a share of a contract rather than one insurer taking 100% on a direct basis. This facilitates the spreading of large and complex risks across a number of insurers, while limiting the counterparty risk of each insurer.
We have an international network of offices to improve our access to high quality risks worldwide. This is expected to improve the diversification of our underwriting and our ability to manage our portfolio. We have offices in Singapore; Copenhagen, Denmark; and Buenos Aires, Argentina to capitalize upon specific class of business opportunities in these regions. We also have offices in Houston, Texas, to extend our energy network to North America, and Oslo, Norway, to provide access to the Norwegian and regional North Sea energy sector.
The following table provides a geographical breakdown of Chaucers total gross written premiums (GWP) based on the location of risk:
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 |
% of Total GWP in Chaucer Segment |
|||
United Kingdom (1) |
26.0 | % | ||
Asia Pacific |
9.0 | |||
Americas, excluding the United States |
8.4 | |||
United States |
7.4 | |||
Europe |
4.7 | |||
Middle East and Africa |
3.8 | |||
Worldwide and other (2) |
40.7 | |||
|
|
|||
Total |
100.0 | % | ||
|
|
(1) | Primarily U.K. motor. |
(2) | Worldwide and other comprises insured risks that move across multiple geographic areas due to their mobile nature or insured risks that are fixed in locations that span more than one geographic area. These contracts include, for example, marine and aviation hull, satellite and offshore energy exploration and production risks that can move across multiple geographic areas and assumed risks where the cedant insures risks in two or more geographic zones. |
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Other Property and Casualty
With respect to our Other Property and Casualty segment business, we market our investment advisory services directly through Opus.
PRICING AND COMPETITION
We seek to achieve targeted combined ratios in each of our product lines. Our targets vary by product and geography and change with market conditions. The targeted combined ratios reflect competitive market conditions, investment yield expectations, our loss payout patterns, and target returns on equity. This strategy is intended to enable us to achieve measured growth and consistent profitability.
For all major product lines, we employ pricing teams which produce exposure and experience-based rating models to support underwriting decisions. In addition, in our Commercial and Personal Lines segments, we seek to utilize our knowledge of local markets to achieve superior underwriting results. We rely on market information provided by our local agents and on the knowledge of our staff in the local branch offices. Since we maintain a strong regional focus and a significant market share in a number of states, we can apply our knowledge and experience in making underwriting and rate setting decisions. Also, we seek to gather objective and verifiable information at a policy level during the underwriting process, such as past driving records and, where permitted, credit histories.
The property and casualty industry is a very competitive market. Our competitors include national, international, regional and local companies that sell insurance through various distribution channels, including independent agencies, captive agency forces, brokers and direct to consumers through the internet or otherwise. In our Commercial and Personal Lines segments, we market through independent agents and brokers and compete for business on the basis of product, price, agency and customer service, local relationships and ratings, and effective claims handling, among other things. We believe that our emphasis on maintaining strong agency relationships and a local presence in our markets, coupled with investments in products, operating efficiency, technology and effective claims handling, will enable us to compete effectively. Our broad product offerings in Commercial Lines and total account strategy in Personal Lines are instrumental to our strategy to capitalize on these relationships and improve our profitability.
Our Commercial and Personal Lines segments are not dependent on a single customer or even a few customers, for which the loss of any one or more would have an adverse effect upon the insurance operations for these segments.
Although we conduct some business on a direct basis through our Chaucer segment, we market the majority of our Chaucer product offerings through insurance brokers in the Lloyds specialty and the U.K. motor markets, which provides access to business from clients and coverholders. We are able to attract business through our recognized capability to serve as the lead underwriter in most classes we write, particularly in classes where such lead ability is sought by clients and recognized by following markets. This requires significant underwriting and claims handling expertise in very specialized lines of business. Our competitors include large international insurance companies and other Lloyds managing underwriters. In the U.K. motor lines, our competitors include large U.K. personal lines insurers. Broker relationships that are ten percent or more of total Chaucer 2011 gross written premiums are with Marsh (14%) and Aon Benfield (13%).
CLAIMS MANAGEMENT
Claims management includes the receipt of initial loss notifications, generation of appropriate responses to claim reports, identification and handling of coverage issues, determination of whether further investigation is required, retention of legal representation where appropriate, establishment of case reserves, approval of loss payments and notification to reinsurers. Effective claims management is important since claim payments and LAE are our single largest expenditures and quick and fair claim settlements are important to customer and agent relations.
Commercial and Personal Lines
We utilize experienced claims adjusters, appraisers, medical specialists, managers and attorneys to manage our claims. Our U.S. property and casualty operations have field claims adjusters strategically located throughout the states in which we do business. Claims staff members work closely with the independent agents who bound the policies under which coverage is claimed.
Claims office adjusting staff is supported by general adjusters for large property and large casualty losses, by automobile and heavy equipment damage appraisers for automobile material damage losses, and by medical specialists whose principal concentration is on workers compensation and automobile injury cases. In addition, the claims offices are supported by staff attorneys who specialize in litigation defense and claim settlements. We have a
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catastrophe response team to assist policyholders impacted by severe weather events. This team mobilizes quickly to impacted regions, often in advance for a large tracked storm, to support our local claims adjusters and facilitate a timely response to resulting claims. We also maintain a special investigative unit that investigates suspected insurance fraud and abuse. We utilize claims processing technology which allows most of the smaller and more routine Personal Lines claims to be processed at centralized locations.
Chaucer
For international risks, the Chaucer claims team generally is responsible for establishing case reserves, loss and LAE cost management, exposure mitigation and litigation management. Chaucer has engaged a third party administrator to handle aviation claims and authorizes selected agencies to manage claims under risks which they have bound on Chaucers behalf.
For claims under our direct claims team management, where Chaucer is the lead syndicate or designated claims manager, our appointed claims adjusters work with the broker representing the insured. This may involve appointing attorneys, loss adjusters or other third party experts. Where Chaucer is not the lead underwriter or designated claims manager, the lead underwriter and designated claims manager together establish case reserves in conjunction with professional third party adjusters, and then advise all other syndicates participating on the risk of the loss reserve requirements. In such cases, the Chaucer claims team review material claims and developments. Chaucer also engages automobile body and repair shops to assist in managing claims for its U.K. motor business.
CATASTROPHES
We are subject to claims arising out of catastrophes, which historically have had a significant impact on our results of operations and financial condition. Coverage for such events is a core part of our business and we expect to experience catastrophe losses in the future, which could have a material adverse impact on us. Catastrophes can be caused by various events, including snow, ice storm, hurricane, earthquake, tornado, wind, hail, flood, terrorism, fire, explosion, or other extraordinary events. The incidence and severity of catastrophes are inherently unpredictable.
Commercial and Personal Lines
We endeavor to manage our catastrophe risks through underwriting procedures, including the use of deductibles and specific exclusions for floods and earthquakes, subject to regulatory restrictions, and through geographic exposure management and reinsurance. The catastrophe reinsurance program is structured to protect us on a per-occurrence basis. We monitor geographic location and coverage concentrations in order to manage corporate exposure to catastrophic events. Although catastrophes can cause losses in a variety of property and casualty lines, homeowners and commercial multiple peril property coverages have, in the past, generated the majority of catastrophe-related claims.
Chaucer
Individual commercial and industrial risks within our property, marine and aviation, and energy lines include protection against natural or man-made catastrophes worldwide. We accept these risks on direct, facultative and proportional and excess of loss treaty bases. Such risks are managed through limiting the proportion of any individual risk or class of risk we assume, managing geographic concentration and through the purchase of reinsurance.
We purchase reinsurance to limit our exposure to individual risks and catastrophic events. This includes facultative reinsurance, to limit the exposure on a specified risk; specific excess and proportional treaty, to limit exposure to individual contracts or risks within specified classes of business; and catastrophe excess of loss reinsurance, to limit exposure to any one event that might affect more than one individual contract.
The level of reinsurance that Chaucer purchases is dependent on a number of factors, including our underwriting risk appetite for catastrophe risk, the specific risks inherent in each line or class of business risk written and the pricing, coverage and terms and conditions available from the reinsurance market.
TERRORISM
Private sector catastrophe reinsurance is limited and generally unavailable for losses attributed to acts of terrorism, particularly those involving nuclear, biological, chemical and/or radiological events. As a result, our primary reinsurance protection against large-scale terrorist attacks in the U.S. is presently provided through a Federal program that provides compensation for insured losses resulting from
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acts of terrorism. Additionally, certain terrorism-related risks embedded in our Commercial and Personal Lines are covered under the existing Catastrophe, Property per Risk and Casualty Excess of Loss corporate reinsurance treaties (see Reinsurance on pages 17 to 20 of this Form 10-K).
The Terrorism Risk Insurance Act of 2002 established the Terrorism Risk Insurance Program (the "U.S. Program"). Coverage under the U.S. Program applies to workers' compensation, commercial multiple peril and certain other Commercial Lines policies for U.S. direct written policies. The Terrorism Risk Insurance Program Reauthorization Act of 2007 ("TRIPRA") extended the U.S. Program through December 31, 2014.
As required by the current U.S. Program, we offer policyholders in specific lines of insurance the option to elect terrorism coverage. In order for a loss to be covered under the U.S. Program, the loss must meet aggregate industry loss minimums and must be the result of an act of terrorism as certified by the Secretary of the Treasury. The current U.S. Program requires us to retain 15% of any claims from a certified terrorist event in excess of our federally mandated deductible. Our deductible represents 20% of direct earned premium for the covered lines of business of the prior year. In 2011, the deductible was $204.1 million, which represents 11.7% of year-end 2010 statutory policyholder surplus of our U.S. domestic insurers, and is estimated to be $273.9 million in 2012, representing 17.3% of 2011 year-end statutory policyholder surplus. We legally may reinsure our retention and deductible under the U.S Program, although at this time, we have not purchased additional specific terrorism-only reinsurance coverage.
Given the unpredictable nature of the frequency and severity of terrorism losses, future losses from acts of terrorism could be material to our operating results, financial position, and/or liquidity. We attempt to manage our exposures on an individual line of business basis and in the aggregate by zip code.
Additionally, our Chaucer segments direct written U.S. policies are also covered under the provisions of TRIPRA, where the deductible is estimated to be $0.5 million in 2011. For our nuclear energy business, most of our liability coverage sub-limits do not exclude strict liability under the nuclear conventions for terrorism. Where our policies protect nuclear properties from terrorism, we restrict the coverage provided to a maximum of 50% of full policy limits.
REGULATION
Commercial and Personal Lines
Our U.S. property and casualty insurance subsidiaries are subject to extensive regulation in the various states in which they transact business and are supervised by the individual state insurance departments. Numerous aspects of our business are subject to regulation, including premium rates, mandatory covered risks, limitations on the ability to non-renew or reject business, prohibited exclusions, licensing of agents, investments, restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, policy forms and coverages, advertising, and other conduct, including restrictions on the use of credit information and other factors in underwriting, as well as other underwriting and claims practices. States also regulate various aspects of the contractual relationships between insurers and independent agents.
In addition, as a condition to writing business in certain states, insurers are required to participate in various pools or risk sharing mechanisms or to accept certain classes of risk, regardless of whether such risks meet its underwriting requirements for voluntary business. Some states also limit or impose restrictions on the ability of an insurer to withdraw from certain classes of business. For example, Massachusetts, New Jersey, New York, Louisiana and Florida each impose material restrictions on a companys ability to materially reduce its exposures or to withdraw from certain lines of business in their respective states. The state insurance departments can impose significant charges on an insurer in connection with a market withdrawal or refuse to approve withdrawal plans on the grounds that they could lead to market disruption. Laws and regulations that limit cancellation and non-renewal of policies or that subject withdrawal plans to prior approval requirements may significantly restrict our ability to exit unprofitable markets.
Over the past several years, other state-sponsored insurers, reinsurers or involuntary pools have increased significantly, particularly those states which have Atlantic or Gulf Coast storm exposures. As a result, the potential assessment exposure of insurers doing business in such states and the attendant collection risks have increased, particularly, in our case, in the states of Massachusetts, Louisiana and Florida. Such actions and related regulatory restrictions may limit our ability to reduce our potential exposure to hurricane-related losses.
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The insurance laws of many states subject property and casualty insurers doing business in those states to statutory property and casualty guaranty fund assessments. The purpose of this guaranty fund is to protect policyholders by requiring that solvent property and casualty insurers pay insurance claims of insolvent insurers. These guaranty associations generally pay these claims by assessing solvent insurers proportionately based on the insurers share of voluntary written premium in the state. While most guaranty associations provide for recovery of assessments through subsequent rate increases, surcharges or premium tax credits, there is no assurance that insurers will ultimately recover these assessments, which could be material, particularly following a large catastrophe or in markets which become disrupted.
We are subject to periodic financial and market conduct examinations conducted by state insurance departments. We are also required to file annual and other reports relating to the financial condition of our insurance subsidiaries and other matters.
From time to time, proposals have been made to establish a federal based insurance regulatory system and to allow insurers to elect either federal or state-based regulation (optional federal chartering). In light of the recent economic crisis and the focus on increased regulatory controls, particularly with regard to financial institutions, there has been renewed interest in such proposals.
Chaucer
Our Chaucer segment is regulated by the Financial Services Authority ("FSA"), which has responsibility for the financial services industry, including insurers, insurance intermediaries and Lloyd's in the U.K., and is also supervised by the Council of Lloyds, which is the franchisor for all Lloyds operations.
The FSA is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000 (FSMA). The FSA has wide ranging powers in relation to rule-making, investigation and enforcement to enable it to meet its statutory objectives of promoting financial stability, efficient, orderly and fair markets and fair treatment of retail consumers.
From late 2012 and following amendments to the FSMA, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) will replace the FSA. The PRA will be responsible for the prudential supervision of, among other financial institutions, insurers, with a particular focus on financial stability. The FCA will focus on conduct of business issues, with a particular focus on consumer protection. The respective tools of the PRA, FCA, and Lloyds remain to be determined under the new regulatory regime.
The FSA and Council of Lloyd's have common objectives in ensuring the appropriate regulation of the Lloyd's market and, to minimize duplication, the FSA has arrangements with Lloyd's for co-operation on supervision and enforcement. The Council of Lloyds, which has FSA authorization, has responsibility under the Lloyds Act 1982 (the Lloyds Act) for the implementation of certain FSA prescribed rules relating to the operation of the Lloyds market. Lloyds prescribes, in respect of its managing agents and corporate members, certain minimum standards relating to their management and control, solvency and various other requirements. The FSA directly monitors the compliance of Lloyds managing agents with the systems and controls that Lloyds prescribes.
The Council of Lloyds has wide discretionary powers to regulate Lloyds underwriting. For example, it may change the basis of allocation for syndicate expenses or the capital requirements for syndicate participations. Exercising any of these powers might affect the return on an investment of the corporate member in a given underwriting year. In addition, the annual business plans of each syndicate are subject to the review and approval of the Lloyds Franchise Board, which is responsible for business planning and monitoring for all syndicates.
We participate in the Lloyds market through our ownership of CSL, a managing agent with responsibility for the management of Syndicates 1084 and 1176, for which we provide capital to support their underwriting activities. Our membership in Lloyds requires us to comply with its bylaws and regulations, the Lloyds Act and the applicable provisions of the Financial Services and Markets Act. These include the requirement to provide capital (referred to as "Funds at Lloyd's) in the form of cash, securities or letters of credit in an amount agreed with by Lloyds under the capital setting regime of the FSA. The completion of an annual capital adequacy exercise enables each corporate member to calculate the capital required. These requirements allow Lloyd's to evaluate whether each corporate member has sufficient assets to meet its underwriting liabilities plus a required solvency margin.
If a corporate member of Lloyd's is unable to meets its policyholder obligations, such obligations may be payable by the Lloyd's Central Fund, which acts like a state guaranty fund in the U.S. If Lloyd's determines that the Central Fund needs to be increased, it has the power to assess premium levies on all current Lloyd's members. The Council of Lloyd's has discretion to call or assess up to 3% of a member's underwriting capacity in any one year as a Central Fund contribution.
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Solvency II
In 2009, the European Union (E.U.) adopted a directive covering capital requirements, risk management and regulatory reporting for insurance organizations. The directive, known as Solvency II, imposes economic risk based solvency requirements across all E.U. member states that comprise three pillars. First, there are quantitative capital requirements, based on a valuation of the entire balance sheet of an insurance organization. Second, Solvency II requires insurance organizations to undertake a qualitative regulatory review, including governance, internal controls, enterprise risk management and the supervisory review process. Third, to enhance market discipline, insurance organizations must report their financial conditions to regulators.
Under current proposals, the implementation of Solvency II for E.U. Member States must be completed by January 1, 2013, at which date the powers and responsibilities of supervisors and the European Insurance and Occupational Pensions Authority are due to come into effect, and it is anticipated that the requirements for firms will take effect on January 1, 2014. According to the FSA publications, there is still uncertainty as to whether all of the rules giving effect to Solvency II will take effect on January 1, 2014 or whether some rules will have transitional arrangements. It is also possible that some rules, such as those governing reporting requirements, will come into force before 2014.
Chaucer is currently working to ensure compliance with the requirements in accordance with the timetable set out by Lloyds. Lloyds and the FSA are currently defining transition arrangements, some of which are expected to be effective for the Lloyds capital setting process in November 2012.
Other
In addition to the U.K. and European regulations, our Chaucer segment is subject to regulation in the U.S through the Lloyds market. The Lloyds market has licenses to engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible excess and surplus lines insurer in all other states and territories. Lloyds is also an accredited reinsurer in all states and territories. Lloyds maintains various trust funds in the state of New York to protect its U.S. business and is subject to regulation by the New York Insurance Department, which acts as the domiciliary department for Lloyds U.S. trust funds. There are also deposit trust funds in other U.S. states to support Lloyds excess and surplus lines insurance and reinsurance business.
See also to Note 17 Commitments and Contingencies on pages 127 and 128 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
INVOLUNTARY RESIDUAL MARKETS
As a condition of our license to write business in various domestic states and international jurisdictions, we are required to participate in mandatory property and casualty residual market mechanisms which provide various insurance coverages where such coverage may not otherwise be available at rates deemed reasonable. Such mechanisms provide coverage primarily for personal and commercial property, personal and commercial automobile, and workers' compensation, and include assigned risk plans, reinsurance facilities and involuntary pools, joint underwriting associations, fair access to insurance requirements ("FAIR") plans, and commercial automobile insurance plans.
For example, since most states compel the purchase of a minimal level of automobile liability insurance, states have developed shared market mechanisms to provide the required coverages and in many cases, optional coverages, to those drivers who, because of their driving records or other factors, cannot find insurers who will insure them voluntarily. Also, FAIR plans and other similar property insurance shared market mechanisms increase the availability of property insurance in circumstances where homeowners are unable to obtain insurance at rates deemed reasonable, such as in coastal areas or in areas subject to other hazards. Licensed insurers writing business in such states are often required to pay assessments to cover reserve deficiencies generated by such plans.
With respect to FAIR plans and other similar property insurance shared market mechanisms that have experienced increased exposures in recent years due to the growing residual market for coastal property, it is difficult to accurately estimate our potential financial exposure for future events. Assessments following a large coastal event, particularly affecting Louisiana, Massachusetts, Florida, New York or New Jersey, could be material to our results of operations. Our participation in such shared markets or pooling mechanisms is generally proportional to our direct writings for the type of coverage written by the specific pooling mechanism in the applicable state or other jurisdiction. For example, we are subject to mandatory participation in the Michigan Assigned Claims ("MAC") facility. MAC is an assigned claim plan covering people injured in uninsured motor vehicle accidents. Our participation in the MAC facility is based on our share of personal and commercial automobile direct written premium in the state and resulted in underwriting losses of $11.1 million,
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$10.1 million and $10.1 million in 2011, 2010 and 2009, respectively. Additionally, Chaucers U.K. motor line is subject to similar mandatory assessments from the U.K. Motor Insurance Bureau (MIB) although in 2011, these assessments were not significant to our results of operations. Included in other expenses in 2011 was a $4.3 million charge related to a write-off of our equity interest in the accumulated surplus of the North Carolina Beach Plan (NCBP), a mandatory reinsurance facility, as a result of state legislation intended to reform the funding mechanism of the NCBP. In addition, underwriting results in 2009 included $9.4 million of favorable development from the runoff of the Massachusetts Commonwealth Automobile Reinsurers (CAR). Other than MAC, CAR and NCBP there were no other mandatory residual market mechanisms that were significant to our 2011, 2010 or 2009 results of operations.
RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Reference is made to Segment Results Reserve for Losses and Loss Adjustment Expenses on pages 49 to 58 of Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
For our Commercial Lines, Personal Lines and Other Property and Casualty segments, the following table reconciles reserves determined in accordance with accounting principles and practices prescribed or permitted by U.S. insurance statutory authorities (Statutory) to reserves determined in accordance with generally accepted accounting principles in the United States of America (GAAP). The primary difference between the following Statutory reserves and our GAAP reserves is the requirement, on a GAAP basis, to present reinsurance recoverables as an asset, whereas Statutory guidance provides that reserves are reflected net of the corresponding reinsurance recoverables. We do not use discounting techniques in establishing GAAP reserves for losses and LAE, nor have we participated in any loss portfolio transfers or other similar transactions.
DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Statutory reserve for losses and LAE |
$ | 2,350.7 | $ | 2,285.3 | $ | 2,218.3 | ||||||
GAAP adjustments: |
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Chaucer (includes reinsurance recoverables of $733.3) |
2,332.8 | | | |||||||||
Reinsurance recoverables on unpaid losses |
1,198.5 | 1,115.5 | 1,060.2 | |||||||||
Reserves for discontinued operations |
(124.6 | ) | (125.1 | ) | (127.5 | ) | ||||||
Other |
2.9 | 2.0 | 2.9 | |||||||||
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GAAP reserve for losses and LAE |
$ | 5,760.3 | $ | 3,277.7 | $ | 3,153.9 | ||||||
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Reserves for discontinued operations are included in liabilities of discontinued operations for GAAP and loss and loss adjustment expenses for Statutory reporting. Reserves for our Chaucer segment, as indicated above, are determined in accordance with GAAP; however, there is no Statutory reporting equivalent applicable to this business.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
The following table sets forth the development of our GAAP reserves (net of reinsurance recoverables) for unpaid losses and LAE from 2001 through 2011. This table includes our Chaucer segment GAAP reserves beginning December 31, 2011.
DECEMBER 31 |
2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||||||
Net reserve for losses and LAE(1) |
$ | 3,828.5 | $ | 2,162.2 | $ | 2,093.7 | $ | 2,214.9 | $ | 2,227.2 | $ | 2,276.5 | $ | 2,354.1 | $ | 2,166.3 | $ | 2,087.0 | $ | 2,093.8 | $ | 2,074.9 | ||||||||||||||||||||||
Cumulative amount paid as of(2): |
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One year later |
840.7 | 738.6 | 788.5 | 711.1 | 689.9 | 729.5 | 622.0 | 658.3 | 784.5 | 763.6 | ||||||||||||||||||||||||||||||||||
Two years later |
1,120.3 | 1,126.8 | 1,050.5 | 1,061.8 | 1,121.9 | 967.0 | 995.4 | 1,131.7 | 1,213.6 | |||||||||||||||||||||||||||||||||||
Three years later |
1,362.8 | 1,222.7 | 1,268.4 | 1,368.3 | 1,175.4 | 1,217.1 | 1,339.5 | 1,423.9 | ||||||||||||||||||||||||||||||||||||
Four years later |
1,346.8 | 1,364.7 | 1,499.6 | 1,312.9 | 1,351.6 | 1,478.9 | 1,551.5 | |||||||||||||||||||||||||||||||||||||
Five years later |
1,438.8 | 1,555.7 | 1,384.4 | 1,436.5 | 1,566.8 | 1,636.9 | ||||||||||||||||||||||||||||||||||||||
Six years later |
1,606.3 | 1,416.2 | 1,486.5 | 1,629.3 | 1,696.3 | |||||||||||||||||||||||||||||||||||||||
Seven years later |
1,456.3 | 1,508.9 | 1,668.9 | 1,742.3 | ||||||||||||||||||||||||||||||||||||||||
Eight years later |
1,544.4 | 1,685.7 | 1,773.6 | |||||||||||||||||||||||||||||||||||||||||
Nine years later |
1,717.4 | 1,785.8 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later |
1,813.9 | |||||||||||||||||||||||||||||||||||||||||||
Net reserve re-estimated as of(3): |
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End of year |
3,828.5 | 2,162.2 | 2,093.7 | 2,214.9 | 2,227.2 | 2,276.5 | 2,354.1 | 2,166.3 | 2,087.0 | 2,093.8 | 2,074.9 | |||||||||||||||||||||||||||||||||
One year later |
2,094.4 | 1,982.6 | 2,059.6 | 2,075.6 | 2,140.1 | 2,274.1 | 2,086.8 | 2,072.5 | 2,134.2 | 2,081.3 | ||||||||||||||||||||||||||||||||||
Two years later |
1,916.4 | 1,973.3 | 1,865.7 | 2,011.0 | 2,158.8 | 1,994.4 | 2,025.5 | 2,125.3 | 2,140.5 | |||||||||||||||||||||||||||||||||||
Three years later |
1,930.8 | 1,793.7 | 1,852.7 | 2,075.0 | 1,904.4 | 1,979.6 | 2,103.9 | 2,142.3 | ||||||||||||||||||||||||||||||||||||
Four years later |
1,770.6 | 1,810.9 | 1,965.3 | 1,858.0 | 1,925.4 | 2,084.0 | 2,139.6 | |||||||||||||||||||||||||||||||||||||
Five years later |
1,793.9 | 1,936.4 | 1,780.8 | 1,904.2 | 2,051.6 | 2,139.7 | ||||||||||||||||||||||||||||||||||||||
Six years later |
1,922.4 | 1,761.2 | 1,836.2 | 2,044.9 | 2,121.2 | |||||||||||||||||||||||||||||||||||||||
Seven years later |
1,749.0 | 1,823.3 | 1,988.9 | 2,118.6 | ||||||||||||||||||||||||||||||||||||||||
Eight years later |
1,809.9 | 1,978.0 | 2,068.9 | |||||||||||||||||||||||||||||||||||||||||
Nine years later |
1,964.9 | 2,061.4 | ||||||||||||||||||||||||||||||||||||||||||
Ten years later |
2,042.1 | |||||||||||||||||||||||||||||||||||||||||||
Cumulative net redundancy (deficiency) (4) |
$ | | $ | 67.8 | $ | 177.3 | $ | 284.1 | $ | 456.6 | $ | 482.6 | $ | 431.7 | $ | 417.3 | $ | 277.1 | $ | 128.9 | $ | 32.8 | ||||||||||||||||||||||
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Gross reserve for losses and LAE |
$ | 5,760.3 | $ | 3,277.7 | $ | 3,153.9 | $ | 3,203.1 | $ | 3,167.7 | $ | 3,166.0 | $ | 3,461.7 | $ | 3,073.4 | $ | 3,027.0 | $ | 2,971.7 | $ | 2,939.5 | ||||||||||||||||||||||
Reinsurance recoverables |
1,931.8 | 1,115.5 | 1,060.2 | 988.2 | 940.5 | 889.5 | 1,107.6 | 907.1 | 940.0 | 877.9 | 864.6 | |||||||||||||||||||||||||||||||||
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Net liability |
3,828.5 | 2,162.2 | 2,093.7 | 2,214.9 | 2,227.2 | 2,276.5 | 2,345.1 | 2,166.3 | 2,087.0 | 2,093.8 | 2,074.9 | |||||||||||||||||||||||||||||||||
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Re-estimated gross reserve for losses and LAE |
3,272.1 | 3,119.9 | 3,127.6 | 2,955.1 | 2,960.1 | 3,351.1 | 2,978.5 | 3,040.5 | 3,265.5 | 3,355.3 | ||||||||||||||||||||||||||||||||||
Re-estimated reinsurance recoverables |
1,177.7 | 1,203.5 | 1,196.8 | 1,184.5 | 1,166.2 | 1,428.7 | 1,229.5 | 1,230.6 | 1,300.6 | 1,313.2 | ||||||||||||||||||||||||||||||||||
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Re-estimated net liability |
2,094.4 | 1,916.4 | 1,930.8 | 1,770.6 | 1,793.9 | 1,922.4 | 1,749.0 | 1,809.9 | 1,964.9 | 2,042.1 | ||||||||||||||||||||||||||||||||||
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Cumulative gross redundancy (deficiency) |
$ | | $ | 5.6 | $ | 34.0 | $ | 75.5 | $ | 212.6 | $ | 205.9 | $ | 110.6 | $ | 94.9 | $ | (13.5 | ) | $ | (293.8 | ) | $ | (415.8 | ) | |||||||||||||||||||
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(1) | Sets forth the estimated net liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years; represents the estimated amount of net losses and LAE for claims arising in the current and all prior years that are unpaid at the balance sheet date, including incurred but not reported (IBNR) reserves. |
(2) | Cumulative loss and LAE payments made in succeeding years for losses incurred prior to the balance sheet date. |
(3) | Re-estimated amount of the previously recorded liability based on experience for each succeeding year; increased or decreased as payments are made and more information becomes known about the severity of remaining unpaid claims. |
(4) | Cumulative redundancy or deficiency at December 31, 2011 of the net and gross reserve amounts shown in the corresponding column. A redundancy in reserves means the reserves established in prior years exceeded actual losses and LAE or were re-evaluated at less than the original reserved amount. A deficiency in reserves means the reserves established in prior years were less than actual losses and LAE or were re-evaluated at more than the original reserved amount. |
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REINSURANCE
Reinsurance Program Overview
We maintain ceded reinsurance programs designed to protect against large or unusual loss and LAE activity. We utilize a variety of reinsurance agreements, which are intended to control our individual policy and aggregate exposure to large property and casualty losses, stabilize earnings and protect capital resources. These programs include facultative reinsurance (to limit exposure on a specified contract); specific excess and proportional treaty reinsurance (to limit exposure on individual contracts or risks within specified classes of business); and catastrophe excess of loss reinsurance (to limit exposure to any one event that might impact more than one individual contract). Catastrophe reinsurance protects us, as the ceding insurer, from significant losses arising from a single event such as snow, ice storm, hurricane, earthquake, tornado, wind, hail, terrorism, fire, explosion, or other extraordinary events. We determine the appropriate amount of reinsurance based upon our evaluation of the risks insured, exposure analyses prepared by consultants and on market conditions, including the availability and pricing of reinsurance.
We cede to reinsurers a portion of our risk based upon insurance policies subject to such reinsurance. Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to us. We believe that the terms of our reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. We believe our reinsurers are financially sound, based upon our ongoing review of their financial statements, financial strength ratings assigned to them by rating agencies, their reputations in the reinsurance marketplace, our collections history, advice from third parties, and the analysis and guidance of our reinsurance advisors.
Although we exclude coverage of nuclear, chemical or biological events from the Personal Lines and Commercial Lines policies we write in the U.S., we are statutorily required to provide this coverage in our workers' compensation policies. We have reinsurance coverage under our casualty reinsurance treaty of approximately $10 million for losses that result from nuclear, chemical or biological events and approximately $45 million for terrorism losses excluding those that result from nuclear, chemical or biological events. All other U.S.based exposure or treaties exclude such coverage. Further, under TRIPRA, our retention of U.S. domestic losses in 2012 from such events, if deemed certified terrorist events, was limited to 15% of losses in excess of an approximate $273 million deductible, up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. Such events could be material to our financial position or results of operations. See Terrorism on pages 11 and 12 of this Form 10-K.
Reference is made to Note 15 Reinsurance on page 125 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K. Reference is also made to "Involuntary Residual Markets" on pages 14 and 15 of this Form 10-K.
Our 2012 reinsurance program for our Commercial Lines and Personal Lines segments is substantially consistent with our 2011 program. The following discussion summarizes both our 2011 and 2012 reinsurance programs for our Commercial Lines and Personal Lines segments (excluding coverage available under the U.S. federal terrorism program which is described under Terrorism above), but does not purport to be a complete description of the program or the various restrictions or limitations which may apply:
| For 2011, our Commercial Lines and Personal Lines segments were primarily protected by a property catastrophe occurrence treaty, a property per risk excess of loss treaty, as well as a casualty excess of loss treaty, with retentions of $150 million, $2 million, and $2 million, respectively. For 2012, the property catastrophe occurrence treaty retention was increased to $200 million, with no change in retention for either the property per risk excess of loss or casualty excess of loss treaties. |
| The property catastrophe occurrence treaty provides coverage, on an occurrence basis, up to $700 million (up to $1 billion in the Northeast), less a $150 million retention for 2011, with co-participation of 43% in the $150 million to $250 million layer, and a $200 million retention for 2012, with no co-participation, for all defined perils. For 2011 and 2012, the property per risk excess of loss treaty provides coverage, on a per risk basis, up to $100 million, less a $2 million retention, with no co-participation for 2011, and with co-participations for 2012 ranging from 6% to 28.5% for reinsurance placed in the $2 million to $5 million layer. |
| For 2011 and 2012, the casualty excess of loss treaty provides coverage, on a per occurrence basis for each loss, up to $30 million and $50 million, respectively, less a $2 million retention, with co-participation of 25% in the $2 million to $5 million layer. For both years, umbrella lines share coverage with casualty lines at the $2 million to $10 million layer, with the maximum umbrella limit of $5 million subject to the casualty treaty. There is also separate umbrella only coverage that provides protection for the $5 million to $20 million layer. |
| For 2011, Commercial Lines segments are further protected by excess of loss treaty agreements for specific lines of business such as surety and fidelity liability, professional liability, management liability and healthcare |
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liability. A surety and fidelity bond excess of loss treaty provides coverage, on a per principal basis, up to $35 million, less a $5 million retention, with co-participations ranging from 10% to 15% for individual layers placed within the treaty. A professional liability treaty provides coverage up to $10 million, less a $1 million retention on a per insured, each and every claim basis, with a 10% co-participation. A management liability treaty provides coverage up to $5 million, less a $1 million retention on a per insured, each and every claim basis, with a 10% co-participation. For 2012, professional liability and management liability risks are covered in a common treaty up to $10 million, less a $1 million retention, with a 10% co-participation. |
| In addition to certain layers of coverage from our Commercial and Personal Lines segment reinsurance program as described above, the Commercial Lines AIX program business also includes surplus share, quota share, excess of loss, facultative and other forms of reinsurance that cover the writings from AIX specialty and proprietary programs for both 2011 and 2012. There are approximately 40 different AIX programs and the reinsurance structure is customized to fit the exposure profile for each program. |
Our intention is to renew the surety and fidelity bond treaty, property per risk excess of loss treaty, and the $700 million to $1 billion layer of the Northeast property catastrophe occurrence treaty in July 2012 with the same or similar terms and conditions, but there can be no assurance that we will be able to maintain our current levels of reinsurance, pricing and terms and conditions.
For our Chaucer segment, the 2012 reinsurance program is substantially consistent with its 2011 program and contains a combination of reinsurance treaties that either provide coverage across several lines or are specific to individual lines of business or classes of business within certain lines. Generally, for each line or class of Chaucers business, there are a variety of proportional, excess of loss, facultative and other treaty forms, which work in conjunction to provide coverage limits.
Our Chaucer segment also has a capital provision reinsurance treaty with Flagstone Re. The purpose of the treaty is to provide additional gross underwriting capacity to Syndicate 1084 for both 2011 and 2012 of $160 million. The terms of this agreement provide for fixed cessions of the overall account written by Syndicate 1084. This treaty has been renewed for the 2012 treaty year with a 12.0% share. The shares for the 2011, 2010, and 2009 treaty years were 12.0%, 11.6% and 8.0%, respectively.
The Chaucer programs described below are substantially in place as of February 1, 2012 and we expect to implement throughout the year any remaining parts of the program as described; however, there can be no assurances that we will be successful in placing reinsurance for each line as planned. The following discussion summarizes both our 2011 and 2012 reinsurance programs for our Chaucer segment, but does not purport to be a complete description of the program or the various restrictions or limitations which may apply.
For the property lines, we purchase proportional and non-proportional reinsurance which is intended to provide sufficient underwriting capacity to effectively conduct business in the Lloyds market and to protect against frequency and severity of losses.
| For 2011 and 2012, our direct property catastrophe occurrence reinsurance provides coverage up to approximately $69 million and $64 million less retentions of approximately $17 million and $13 million, respectively. |
| For 2011 and 2012, the assumed property catastrophe occurrence reinsurance for selected international territories provides coverage up to approximately $98 million and $102 million, less retentions of approximately $21 million and $17 million, respectively. For 2011 and 2012, the assumed property catastrophe occurrence reinsurance for the United States and the Caribbean provides coverage up to approximately $98 million and $119 million, less retentions of approximately $21 million and $25 million, respectively. |
| For 2011 and 2012, the direct property per risk excess of loss reinsurance provides coverage up to approximately $17 million, less a retention of approximately $4 million for both years. Additionally, for 2011 and 2012, there was an annual aggregate deductible of approximately $3 million and $4 million, respectively. |
For the energy, marine and aviation lines, we purchase reinsurance to manage the effect of a major loss or series of losses.
| For 2011 and 2012, the nuclear energy lines occurrence reinsurance provides coverage up to approximately $158 million and $155 million, less retentions of approximately $53 million and $52 million, respectively. |
| For 2011 and 2012, the non-nuclear energy lines occurrence reinsurance provides coverage up to approximately $167 million and $118 million, respectively, less retentions of approximately $17 million and $12 million, respectively. |
| For 2011 and 2012, the marine lines excess of loss reinsurance provides coverage, on a per occurrence basis, up to approximately $67 million and $50 million, respectively, less a retention of approximately $4 million for both years. |
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| For 2011 and 2012, the aviation lines reinsurance provides coverage, on a per occurrence basis, up to approximately $42 million, less a retention of approximately $2 million for both years. |
The U.K. motor line has protection from a reinsurance program placed on a losses occurring basis, which is unlimited in excess of $1.3 million, both in terms of the amount and the number of losses sustained. For 2011 and 2012, there is co-participation on the $1.3 million to $2.6 million layer of 50% and 30% for each year, respectively.
Reinsurance Recoverables
Other than our investment portfolio, our single largest asset class is our reinsurance receivables, which consist of our estimate of amounts recoverable from reinsurers with respect to losses incurred to date (including losses incurred but not reported) and unearned premiums, net of amounts estimated to be uncollectible. Our estimate depends upon a number of factors, including our estimate of the amount of reserves attributable to business written in various lines and in various years. This estimate is expected to be revised at each reporting period and such revisions, which could be material, affect our results of operations and financial position. Reinsurance recoverables include amounts due from both United States and state mandatory reinsurance or other risk sharing mechanisms, and private reinsurers to whom we have voluntarily ceded business.
We are subject to concentration of risk with respect to reinsurance ceded to various mandatory residual markets, facilities and pooling mechanisms. As a condition to conduct business in various states, we are required to participate in residual market mechanisms, facilities and pooling arrangements which provide insurance coverages to individuals or other entities that are otherwise unable to purchase such coverage voluntarily or at rates deemed reasonable. These market mechanisms, facilities and pooling arrangements comprise $858.8 million of our total reinsurance recoverables on paid and unpaid losses and unearned premiums at December 31, 2011 and include, among others, the Michigan Catastrophic Claims Association ("MCCA"). Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. Reinsurance recoverables related to MCCA were $816.7 million and $752.5 million at December 31, 2011 and 2010, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2011, we believe that we have no significant exposure to uncollectible reinsurance balances from this entity.
In addition to the reinsurance ceded to various residual market mechanisms, facilities and pooling arrangements and our capital provision reinsurance treaty with Flagstone Re, as described below, we have $1,212.7 million of reinsurance assets due from traditional reinsurers. These amounts are due principally from highly-rated reinsurers, defined as rated A- or higher by A.M. Best Rating Agency or other equivalent rating. The following table displays balances recoverable from our ten largest reinsurance groups at December 31, 2011, along with the groups rating from the indicated rating agency. The contractual obligations under reinsurance agreements are typically with individual subsidiaries of the group or syndicates at Lloyds and are not typically guaranteed by other group members or syndicates at Lloyds. Reinsurance recoverables are comprised of paid losses recoverable, outstanding losses recoverable, incurred but not reported losses recoverable, and ceded unearned premium.
Reinsurers |
A.M. Best Rating |
Reinsurance Recoverable |
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(in millions) | ||||||||
Lloyds Syndicates |
A | $ | 185.1 | |||||
Munich Reinsurance Companies |
A+ | 142.5 | ||||||
Partner Re Ltd. Companies |
A+ | 111.9 | ||||||
HDI Group |
A | 101.4 | ||||||
Transatlantic Holdings Inc. Group |
A | 68.5 | ||||||
Axis Capital Holdings Inc. |
A | 41.0 | ||||||
Swiss Re Ltd. |
A+ | 37.6 | ||||||
Toa Reinsurance Company Ltd. |
A+ | 35.6 | ||||||
Aspen Insurance Holdings Ltd. |
A | 32.9 | ||||||
Everest Re Group Ltd. |
A+ | 31.1 | ||||||
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Subtotal |
787.6 | |||||||
All other reinsurers |
425.1 | |||||||
Residual markets, facilities and pooling arrangements |
858.8 | |||||||
Flagstone Re (capital provision reinsurance) |
190.7 | |||||||
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Total |
$ | 2,262.2 | ||||||
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Reinsurance recoverable balances in the table above are shown before consideration of balances owed to reinsurers and any potential rights of offset, including collateral held by us and, are net of an allowance for uncollectible recoverables. Reinsurance treaties are generally purchased on an annual basis. Treaties typically contain provisions that allow us to demand that a reinsurer post letters of credit or assets as security if a reinsurer is an unauthorized reinsurer under applicable regulations or if its rating falls below a predetermined contractual level. In regards to reinsurance recoverables due from Lloyds Syndicates, as part of the Lloyds chain of security afforded to all of its policyholders, recourse is available to the Lloyds Central Fund in the event of the failure of an individual syndicate and its capital providers. In accordance with the terms of our capital provision reinsurance treaty, Flagstone Re is obligated to
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provide Funds at Lloyds in order to support its interest in the agreement and is subject to offsetting funds withheld balances with Chaucer. As a result, in the event of a default, we have access to collateral to pay losses reinsured by Flagstone Re, including losses incurred in the future under the capital provision reinsurance treaty described above.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. In addition, from time to time insurers and reinsurers may disagree on the scope of the reinsurance or on the underlying insured risks. Any of these events would increase our costs and could have a material adverse effect on our business.
We have established a reserve for uncollectible reinsurance of $16.4 million and $2.3 million, as of December 31, 2011 and 2010, respectively, which was determined by considering reinsurer specific default risk on paid and unpaid recoverables as indicated by their financial strength ratings, any current risk of dispute on paid recoverables, our collection experience and the development of our ceded loss reserves. The reserve for uncollectible reinsurance related to our Personal and Commercial Lines segments was $2.3 million as of December 31, 2011 and 2010, respectively, while the Chaucer segment reserve for uncollectible reinsurance was $14.1 million as of December 31, 2011. There have been no significant balances determined to be uncollectible, and thus no significant charges recorded during 2011 and 2010 for uncollectible reinsurance recoverables.
Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. When reinsurance for our Commercial and Personal Lines segments is placed, our standards of acceptability generally require that a reinsurer must have a minimum policyholder surplus of $500 million, a rating from A.M. Best and/or S&P of A or better, or an equivalent financial strength if not rated. Similarly, our Chaucer segment requires all reinsurers to have a rating from S&P of A- or better and minimum net assets of $500 million. In addition, for low rated reinsurers, certain foreign reinsurers for our United States insurance operations with the exception of reinsurers who have been granted authorized status by an insurance company's state of domicile and in certain other circumstances deemed appropriate by the Companys security committee, reinsurers must generally provide collateral equal to 100% of estimated reinsurance recoverables. The collateral can serve to mitigate credit risk.
DISCONTINUED OPERATIONS
Our discontinued operations are segregated into three components: Discontinued First Allmerica Financial Life Insurance Company (FAFLIC) Business, Discontinued Operations of our Variable Life Insurance and Annuity Business, and Discontinued Accident and Health Business.
FAFLIC, our former life insurance company, was sold on January 2, 2009, and our Variable Life Insurance and Annuity business was sold in 2005. Results from the Discontinued FAFLIC Business and Discontinued Operations of our Variable Life Insurance and Annuity Business primarily reflect recoveries or expenses related to our indemnification obligations arising out of these sales.
Our Discontinued Accident and Health Business includes interests in approximately 26 accident and health reinsurance pools and arrangements that were retained in the sale of FAFLIC and assumed by Hanover Insurance. We ceased writing new premiums in this business in 1999, subject to certain contractual obligations. The reinsurance pool business consists primarily of direct and assumed medical stop loss, the medical and disability portions of workers compensation risks, small group managed care, long-term disability and long-term care pools, student accident and special risk business. This business includes residual health insurance policies. Our total reserves for the assumed accident and health business were $127.7 million at December 31, 2011. The total amount recoverable from third party reinsurers was $4.1 million at December 31, 2011. Total net reserves were $123.6 million at December 31, 2011. We will continue to account for this business as Discontinued Operations. Assets and liabilities related to our Discontinued Accident and Health Business are reflected as assets and liabilities of discontinued operations.
Loss estimates associated with substantially all of the Discontinued Accident and Health Business are provided by managers of each pool. We adopt reserve estimates for this business that considers this information, expected returns on assets assigned to this business and other facts. We update these reserves as new information becomes available and further events occur that may affect the ultimate resolution of unsettled claims. We believe that the reserves recorded related to this business are adequate. However, since reserve and loss cost estimates related to our Discontinued Accident and Health Business are dependent on several assumptions, including, but not limited to, future health care costs, persistency of medical care inflation, investment performance, claims, particularly in the long-term care business, morbidity and mortality assumptions, and these assumptions can be impacted by technical developments and advancements in the medical field and other factors, there can be no assurance that the reserves established for this business will prove sufficient. Revisions to these reserves could have a material adverse
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effect on our results of operations for a particular quarterly or annual period or on our financial position.
Our discontinued operations, in total, generated a net gain of $5.2 million during 2011. Reference is made to Discontinued Operations on pages 65 to 66 of Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
INVESTMENT PORTFOLIO
We held $7.5 billion of investment assets at December 31, 2011. Approximately 83% of our investment assets are comprised of fixed maturities, which includes both investment grade and below investment grade public and private debt securities. An additional 11% of our investment assets are comprised of cash and cash equivalents, while the remaining 6% consists of equity securities and other investments. These investments are generally of high quality and our fixed maturities are broadly diversified across sectors of the fixed income market.
Our overall investment strategy is intended to balance investment income with credit and duration risk, while maintaining sufficient liquidity and the opportunity for capital growth. The asset allocation process takes into consideration the types of business written and the level of surplus required to support different businesses and the risk return profiles of the underlying asset classes. We look to balance the goals of capital preservation, net investment income stability, liquidity and total return.
We employ two external asset managers with international market expertise to manage our non-U.S. dollar-denominated fixed maturity portfolio, totaling approximately $660 million.
The majority of our assets are invested in the fixed income markets. Through fundamental research and credit analysis, our investment professionals seek to identify a portfolio of stable income-producing higher quality U.S. government, foreign government, municipal, corporate, residential and commercial mortgage-backed securities and asset-backed securities, as well as undervalued securities in the credit markets. We have a general policy of diversifying investments both within and across major investment and industry sectors to mitigate credit and interest rate risk. We monitor the credit quality of our investments and our exposure to individual markets, borrowers, industries, sectors and, in the case of direct commercial mortgages and commercial mortgage-backed securities, property types and geographic locations.
Investments held by our insurance subsidiaries are subject to diversification requirements under state insurance laws and other regulatory requirements. The investment portfolio duration is approximately 3.9 years and is generally maintained in the range of 1.5 to 3 times the duration of our insurance liabilities. We seek to maintain sufficient liquidity to support our cash flow requirements by monitoring the cash requirements associated with our insurance and corporate liabilities, laddering the maturities within the portfolio, closely monitoring our investment durations, holding high quality liquid public securities and managing the purchases and sales of assets.
Reference is made to Investments on pages 59 to 64 of Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.
RATING AGENCIES
Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers information on specific insurance companies. Higher ratings generally indicate the rating agencies opinion regarding financial stability and a stronger ability to pay claims.
We believe that strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry. We believe that a rating of A-or higher from A.M. Best Co. is particularly important for our business. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security.
EMPLOYEES
We have approximately 5,100 employees, with approximately 4,400 located in the United States, and 700 internationally, almost all of whom are located in the United Kingdom, as of December 31, 2011. We believe our relations with employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to Directors and Executive Officers of the Registrant in Part III, Item 10 on pages 131 to 132 of this Form 10-K.
AVAILABLE INFORMATION
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, periodic information on Form 8-K, our proxy statement, and other required information with the Securities Exchange Commission (SEC). Shareholders may read and copy any materials on file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. Shareholders may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, http://www.sec.gov, which
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contains reports, proxy and information statements and other information with respect to our filings.
Our website address is http://www.hanover.com. We make available free of charge on or through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Additionally, our Code of Conduct is available, free of charge, on our website. The Code of Conduct applies to our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Controller. While we do not expect to grant waivers to our Code of Conduct, any such waivers granted to our Chief Executive Officer, Chief Financial Officer or Controller, or any amendments to our Code will be posted on our website as required by law or rules of the New York Stock Exchange. Our Corporate Governance Guidelines and the charters of our Audit Committee, Compensation Committee, Committee of Independent Directors and Nominating and Corporate Governance Committee, are available on our website. All documents are also available in print to any shareholder who requests them.
RISK FACTORS AND FORWARD LOOKING STATEMENTS
We wish to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, our actual results and could cause our actual results to differ materially from historical results and from those expressed in any forward-looking statements made from time to time by us on the basis of our then-current expectations. When used in this Form 10-K, the words believes, anticipates, expects, projections, outlook, should, could, plan, guidance, likely, on track to, targeted and similar expressions are intended to identify forward-looking statements. The businesses in which we engage are in rapidly changing and competitive markets and involve a high degree of risk and unpredictability. Accuracy with respect to forward-looking projections is difficult.
Our results may fluctuate as a result of cyclical or non-cyclical changes in the property and casualty insurance industry.
We generate most of our total revenues and earnings through our property and casualty insurance subsidiaries, foreign and domestic. The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability could be affected significantly by the following items:
| increases in costs, particularly those occurring after the time our insurance products are priced and including construction, automobile repair, and medical and rehabilitation costs. This includes cost shifting from health insurers to casualty and liability insurers (whether as a result of an increasing number of injured parties without health insurance, coverage changes in health policies to make such coverage, in certain circumstances, secondary to other policies, the recent adoption of national healthcare legislation, lower reimbursement rates for the same procedure by health insurers or government-sponsored insurance, or the implementation of the Medicare Secondary Payer Act which requires reporting and imposes other requirements with respect to medical and related claims paid with respect to Medicare eligible individuals). As it relates to construction, there are often temporary increases in the cost of building supplies and construction labor after a significant event (for example, so called demand surge that causes the cost of labor, construction materials and other items to increase in a geographic area affected by a catastrophe); |
| competitive and regulatory pressures, which may affect the prices of our products and the nature of the risks covered; |
| volatile and unpredictable developments, including severe weather, catastrophes and terrorist actions; |
| legal, regulatory and socio-economic developments, such as new theories of insured and insurer liability and related claims and extra-contractual awards such as punitive damages, and increases in the size of jury awards or changes in applicable laws and regulations (such as changes in the thresholds affecting no fault liability or when non-economic damages are recoverable for bodily injury claims or coverage requirements); |
| fluctuations in interest rates, inflationary pressures, default rates and other factors that affect investment returns; and |
| other general economic conditions and trends that may affect the adequacy of reserves. |
The demand for property and casualty insurance can also vary significantly based on general economic conditions (either nationally or regionally and, with respect to our Chaucer segment, internationally), rising as the overall level of economic activity increases and falling as such activity decreases. Loss patterns also tend to vary inversely with local economic conditions, increasing during difficult economic times and moderating during economic upswings or periods of stability. The fluctuations in demand and competition could produce underwriting results that would have a negative impact on our results of operations and financial condition.
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Actual losses from claims against our property and casualty insurance subsidiaries may exceed their reserves for claims.
Our property and casualty insurance subsidiaries maintain reserves to cover their estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent estimates, involving actuarial projections and judgments at a given time, of what we expect the ultimate settlement and administration of incurred claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims frequency and severity and judicial theories of liability, costs of repair and replacement, legislative activity and other factors.
The inherent uncertainties of estimating reserves are greater for certain types of property and casualty insurance lines. These include workers compensation, where a longer period of time may elapse before a definitive determination of ultimate liability may be made, environmental liability, where the technological, judicial and political climates involving these types of claims are continuously evolving, and casualty coverages such as professional liability. There is also greater uncertainty in establishing reserves with respect to new business, particularly new business that is generated with respect to newly introduced product lines, such as our professional liability and healthcare lines, by newly appointed agents or in geographies where we have less experience in conducting business, such as in our Chaucers international liability lines, Personal Lines growth states and the western states in Commercial Lines. In some of these cases, there is less historical experience or knowledge and less data upon which the actuaries can rely.
Additionally, the introduction of new Commercial Lines products, including through several acquired subsidiaries, and the development of new niche and specialty lines and the introduction of new lines of business at Chaucer, presents new risks. Certain new specialty products, such as the human services program, non-profit directors and officers liability and employment practices liability policies, lawyers and other professional liability policies, healthcare lines and private company directors and officers coverage may also require a longer period of time (the so-called tail) to determine the ultimate liability associated with the claims and may produce more volatility in our results and less certainty in our accident year reserves.
We regularly review our reserving techniques, reinsurance and the overall adequacy of our reserves based upon, among other things:
| our review of historical data, legislative enactments, judicial decisions, legal developments in imposition of damages, changes in political attitudes and trends in general economic conditions; |
| our review of per claim information; |
| historical loss experience of our property and casualty insurance subsidiaries and the industry as a whole; and |
| the terms of our property and casualty insurance policies. |
Underwriting results and segment income could be adversely affected by further changes in our net loss and LAE estimates related to significant events or emerging risks, such as Chinese drywall claims. Chinese drywall claims consist of individual and class action litigation related to the installation of drywall manufactured in China which allegedly emits a foul odor and gases which cause respiratory, sleep and other health problems and cause corrosion of metal substances. Although it is too soon to assess the merits of such claims or our potential liability for indemnity and defense costs, such claims involve or may involve drywall distributors and installers, contractors, homeowners and others.
Estimating losses following any major catastrophe or with respect to emerging issues is an inherently uncertain process. Factors that add to the complexity in these events include the legal and regulatory uncertainty, the complexity of factors contributing to the losses, delays in claim reporting and with respect to areas with significant property damage, the impact of demand surge and a slower pace of recovery resulting from the extent of damage sustained in the affected areas due, in part, to the availability and cost of resources to effect repairs. Emerging issues may involve complex coverage, liability and other costs which could significantly affect LAE. As a result, there can be no assurance that our ultimate costs associated with these events or issues will not be substantially different from current estimates (including with respect to recent catastrophe losses in Denmark, Thailand, Australia, Chile, New Zealand and Japan which have affected Chaucer, and winter, tornado and Hurricane Irene storm related losses which have affected Chaucer and our U.S. domestic operations). Investors should consider the risks and uncertainties in our business that may affect net loss and LAE reserve estimates and future performance, including the difficulties in arriving at such estimates.
Anticipated losses associated with business interruption exposure, the impact of wind versus water as the cause of loss, supplemental payments on previously closed claims caused by the development of latent damages or new theories of liability and inflationary pressures could have a negative impact on future loss reserve development.
Because of the inherent uncertainties involved in setting reserves, including those related to catastrophes, we cannot provide assurance that the existing reserves or
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future reserves established by our property and casualty insurance subsidiaries will prove adequate in light of subsequent events. Our results of operations and financial condition could therefore be materially affected by adverse loss development for events that we insured in prior periods.
Due to geographical concentration in our U.S. property and casualty business, changes in economic, regulatory and other conditions in the regions where we operate could have a significant negative impact on our business as a whole.
We generate a significant portion of our U.S. property and casualty insurance net premiums written and earnings in Michigan, Massachusetts and other states in the Northeast, including New Jersey and New York. For the year ended December 31, 2011, approximately 23% and 10% of our net written premium in our U.S. property and casualty business was generated in the states of Michigan and Massachusetts, respectively. Many states in which we do business impose significant rate control and residual market charges, and restrict an insurers ability to exit such markets. The revenues and profitability of our property and casualty insurance subsidiaries are subject to prevailing economic, regulatory, demographic and other conditions, including adverse weather in Michigan and the Northeast. Because of our geographic concentration in certain regions, our business as a whole could be significantly affected by changes in the economic, regulatory and other conditions in such areas.
Further, certain new catastrophe models assume an increase in frequency and severity of certain weather events, whether as a result of potential global warming or otherwise, and financial strength rating agencies are placing increased emphasis on capital and reinsurance adequacy for insurers with certain geographic concentrations of risk. These factors may result in insurers seeking to diversify their geographic exposure, which could result in increased regulatory restrictions in those markets where insurers seek to exit or reduce coverage, as well as an increase in competitive pressures in non-coastal markets.
Catastrophe losses could materially reduce our profitability or cash flow.
Our property and casualty insurance subsidiaries are subject to claims arising out of catastrophes that may have a significant impact on their results of operations and financial condition. We may experience catastrophe losses, which could have a material adverse impact on our business. Catastrophes can be caused by various events, including hurricanes, floods, earthquakes, tornadoes, wind, hail, fires, severe winter weather, sabotage, terrorist actions, explosions, nuclear accidents, and power outages. The frequency and severity of catastrophes are inherently unpredictable.
The extent of gross losses from a catastrophe is a function of the total amount of insured exposure in the area affected by the event and the severity of the event. The extent of net losses depends on the amount and collectability of reinsurance.
Although catastrophes can cause losses in a variety of property and casualty lines, homeowners and commercial multiple peril property insurance have, in the past, generated the vast majority of our catastrophe-related claims. Our catastrophe losses have historically been principally weather-related, particularly hurricanes, as well as snow and ice damage from winter storms. However, with the acquisition of Chaucer, we are subject to greater diversity in the types and geographic distribution of potential catastrophe losses. For example, in 2011, Chaucer incurred catastrophe losses from the earthquake and ensuing tsunami in Japan, the earthquakes in New Zealand, and flooding in Australia and Thailand.
We purchase catastrophe reinsurance as protection against catastrophe losses. Based upon an ongoing review of our reinsurers financial statements, financial strength ratings assigned to them by rating agencies, their reputations in the reinsurance marketplace, our collections history with them and the analysis and guidance of our reinsurance advisors, we believe that the financial condition of our reinsurers is sound. However, reinsurance is subject to credit risks, including those resulting from over-concentration of exposures within the industry. In setting our retention levels, we also consider our level of surplus and exposures, as well as the current reinsurance pricing environment. There can be no assurance that our reinsurance program will provide adequate coverage levels should we experience losses from one significant or several large catastrophes.
We cannot guarantee our ability to maintain our current level of reinsurance coverage.
Similar to insurance companies, reinsurance companies can also be adversely impacted when catastrophes occur. There can be no assurance that we will be able to maintain our current levels of reinsurance coverage. In particular, and as discussed under Reinsurance Program Overview in Item 1 Business on pages 17 to 19 of this Form 10-K, not all of our 2012 reinsurance programs for the Commercial and Personal Lines and Chaucer business are fully placed. Future catastrophic events and other changes in the reinsurance marketplace, including as a result of investment losses or disruptions due to challenges in the financial markets that have occurred or could occur in the future, may adversely affect our ability to obtain such coverages, as well as adversely affect the cost of obtaining that coverage.
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Additionally, the availability, scope of coverage, cost, and creditworthiness of reinsurance could continue to be adversely affected as a result of not only new catastrophes, but also terrorist attacks and the perceived risks associated with future terrorist activities, global conflicts, and the changing legal and regulatory environment (including changes which could create new insured risks).
From time to time there have been proposals to scale back U.S. federal terrorism coverage under TRIPRA. At this time, we are unable to predict the likelihood of adoption of any such proposals, what will ultimately be included in such proposals if passed, or the predictability and severity of acts of terrorism; however, any such change in TRIPRA coverage could have an adverse effect on our results of operations and financial position.
Climate change may adversely impact our results of operations.
There are concerns that the higher level of weather-related catastrophes and other losses incurred by the industry in recent years is indicative of changing weather patterns, whether as a result of changing climate (global warming) or otherwise, which could cause such events to persist. This would lead to higher overall losses which we may not be able to recoup, particularly in the current economic and competitive environment, and higher reinsurance costs. As noted above, certain catastrophe models assume an increase in frequency and severity of certain weather events which could result in a disproportionate impact on insurers with certain geographic concentrations of risk. This would also likely increase the risks of writing property insurance in coastal areas, particularly in jurisdictions which restrict pricing and underwriting flexibility.
In addition, climate change could have an impact on issuers in which we invest, resulting in realized and unrealized losses in future periods which could have a material adverse impact on our results of operations and/or financial position. It is not possible to foresee which, if any, issuers, industries or markets will be materially and adversely affected, nor is it possible to foresee the magnitude of such effect.
We may incur financial losses resulting from our participation in shared market mechanisms, mandatory reinsurance programs and mandatory and voluntary pooling arrangements.
In most of the jurisdictions in which we operate, our property and casualty insurance subsidiaries are required to participate in mandatory property and casualty shared market mechanisms, government-sponsored reinsurance programs or pooling arrangements. These arrangements are designed to provide various insurance coverages to individuals or other entities that otherwise are unable to purchase such coverage or to support the costs of uninsured motorist claims in a particular state or region. We cannot predict whether our participation in these shared market mechanisms or pooling arrangements will provide underwriting profits or losses to us. For the year ended December 31, 2011, we experienced an underwriting loss of $13.1 million from participation in these mechanisms and pooling arrangements, compared to an underwriting loss of $12.9 million in 2010 and an underwriting gain of $2.3 million in 2009. We may face similar or even more dramatic earnings fluctuations in the future.
Additionally, recent significant increases and expected further increases in the number of participants or insureds in state-sponsored reinsurance pools, FAIR Plans or other residual market mechanisms, particularly in the states of Louisiana, Massachusetts and Florida, combined with regulatory restrictions on the ability to adequately price, underwrite, or non-renew business, as well as new legislation, or changes in existing litigation, could expose us to significant exposures and risks of increased assessments from these residual market mechanisms. There could also be significant adverse impact as a result of losses incurred in those states due to hurricane exposure, as well as the declining number of carriers providing coverage in those regions. We are unable to predict the likelihood or impact of such potential assessments or other actions.
We also have credit risk associated with certain mandatory reinsurance programs such as the Michigan Catastrophic Claims Association. The MCCA was created to fund Michigans unique unlimited personal injury protection benefit. As of December 31, 2011, our estimated reinsurance recoverable from the MCCA was $816.7 million. The MCCA operates with an increasingly large deficit.
In addition, we may be adversely affected by liabilities resulting from our previous participation in certain voluntary property and casualty assumed reinsurance pools. We have terminated participation in virtually all property and casualty voluntary pools, but remain subject to claims related to periods in which we participated. The property and casualty assumed reinsurance businesses have suffered substantial losses during the past several years, particularly related to environmental and asbestos exposure for property and casualty coverages. Due to the inherent volatility in these businesses, possible issues related to the enforceability of reinsurance treaties in the industry and the recent history of increased losses, we cannot provide assurance that our current reserves are adequate or that we will not incur losses in the future. Although we have discontinued participation in these reinsurance pools, we are subject to claims related to prior years or from pools we could not exit entirely. Our operating results and financial position may be adversely affected by liabilities resulting from any such claims in excess of our loss estimates. As of December 31, 2011, our reserves for these pools totaled $38.3 million.
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Our businesses are heavily regulated and changes in regulation may reduce our profitability.
Our U.S. insurance businesses are subject to supervision and regulation by the state insurance authority in each state in which we transact business. This system of supervision and regulation relates to numerous aspects of an insurance company's business and financial condition, including limitations on the authorization of lines of business, underwriting limitations, the ability to utilize credit-based insurance scores in underwriting, the ability to terminate agents, supervisory and liability responsibilities for agents, the setting of premium rates, the requirement to write certain classes of business which we might otherwise avoid or charge different premium rates, restrictions on the ability to withdraw from certain lines of business, the establishment of standards of solvency, the licensing of insurers and agents, compensation of agents, concentration of investments, levels of reserves, the payment of dividends, transactions with affiliates, changes of control, protection of private information of our agents, policyholders, claimants and others (which may include highly sensitive financial or medical information or other private information such as social security numbers, driving records, drivers license numbers, etc) and the approval of policy forms. From time to time, various states and Congress have proposed to prohibit or otherwise restrict the use of credit-based insurance scores in underwriting or rating our Personal Lines business. The elimination of the use of credit-based insurance scores could cause significant disruption to our business and our confidence in our pricing and underwriting. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors.
In addition, in July 2010, in response to the global financial crisis, The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into U.S. law. This legislation provides for enhanced regulation for the financial services industry through initiatives including, but not limited to, the creation of a Federal Insurance Office and several federal oversight agencies, the requiring of more transparency, accountability and focus in protecting investors and businesses, input of shareholders regarding executive compensation, and enhanced empowerment of regulators to pursue those who engage in financial fraud and unethical business practices. The Securities and Exchange Commission adopted regulations designed to encourage, reward, and protect whistleblowers, whether or not they first report the potential infaction to the company for correction or remedial action. We do not yet know what the impact of this legislation and related regulations will be on our business operations or the insurance industry in general.
Also, beginning as of 2011, the federal Medicare, Medicaid and SCHIP Extension Act mandates reporting and other requirements applicable to property and casualty insurance companies which make payments to or on behalf of claimants who are eligible for Medicare benefits. These requirements are expected to make bodily injury claim resolutions more difficult, particularly for complex matters or for injuries requiring treatment over an extended period, and impose significant penalties for non-compliance and reporting errors. It is expected that these new requirements also will increase the circumstances under which the federal government may seek to recover from insurers amounts paid to claimants in circumstances where the government had previously paid benefits.
With respect to our U.K. insurance business, Chaucers regulated subsidiaries are subject to the U.K. Financial Services Authority (FSA) Regulations and as such Chaucers regulated subsidiaries face certain limitations and approval requirements with respect to payment of dividends, return of capital and becoming a borrower, guarantor or provider of security interest on any financial obligations and other aspects of its operations.
The FSA has substantial powers of intervention in relation to the Lloyds managing agents, such as Chaucer, which it regulates, including the power to remove their authorization to manage Lloyds syndicates. In addition, each year the FSA requires Lloyds to satisfy an annual solvency test that measures whether Lloyds has sufficient assets in the aggregate to meet all outstanding liabilities of its members, both current and run-off. If Lloyds fails this test, the FSA may require Lloyds to cease trading and/or its members to cease or reduce underwriting. Future regulatory changes or rulings by the FSA could interfere with our business strategy or financial assumptions, possibly resulting in a material adverse effect on our profitability.
Additionally, Lloyds worldwide insurance and reinsurance business is subject to various regulations, laws, treaties and other applicable policies of the European Union, as well as each nation, state and locality in which it operates. Material changes in governmental requirements and laws could have an adverse affect on Lloyds and its member companies, including Chaucer.
The European Union (E.U.) is phasing in a new composite E.U. directive (known as Solvency II) covering the prudential supervision of all insurance and reinsurance companies that is being developed to replace the existing life, non-life insurance and reinsurance directives that govern the insurance business in the U.K. (among various other obligations, Solvency II will impose new capital requirements on Chaucer). The implementation of Solvency II is split: E.U. Member States must be completed by January 1, 2013 and it is anticipated that the requirements
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for firms will take effect on January 1, 2014, but it is possible some rules, such as those governing reporting requirements, will come into force earlier. We could be impacted by the implementation of Solvency II, depending on the costs associated with implementation by each E.U. country, any increased capital requirements applicable to us, and any costs associated with adjustments to our operations. We are also subject to risks and uncertainties relating to changes to the regulatory framework in the U.K. with the introduction of the Prudential Regulatory Authority and the Financial Conduct Authority to replace the Financial Services Authority. We do not yet know what the impact of this legislation and related regulations will be on Chaucers business operations or the U.K insurance industry.
With respect to our U.S. insurance business, State regulatory oversight and various proposals at the federal level may in the future adversely affect our ability to sustain adequate returns in certain lines of business or in some cases, operate the line profitably. In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, increase state authority to regulate insurance companies and insurance holding company systems.
Our business could be negatively impacted by adverse state, federal and foreign legislation or regulation, including those resulting in:
| decreases in rates; |
| limitations on premium levels; |
| coverage and benefit mandates; |
| limitations on the ability to manage care and utilization or other claim costs; |
| requirements to write certain classes of business or in certain geographies; |
| restrictions on underwriting, on methods of compensating independent producers, or on our ability to cancel or renew certain business; |
| higher liability exposures for our insureds; |
| increased assessments or higher premium or other taxes; and |
| enhanced ability to pierce no fault thresholds or recover non-economic damages (such as pain and suffering). |
These regulations serve to protect the customers and other third parties who deal with us. If we are found to have violated an applicable regulation, administrative or judicial proceedings may be initiated against us which could result in censures, fines, civil penalties (including punitive damages), the issuance of cease-and-desist orders, premium refunds or the reopening of closed claim files, among other consequences. These actions could have a material adverse effect on our financial position and results of operations.
Congress, as well as national, state and local governments, also consider from time to time legislation that could increase our tax costs. If such legislation is adopted, our consolidated net income could decline. We cannot predict whether such legislation will be enacted, what the specific terms of any such legislation will be or how, if at all, it might affect our products.
From time to time, we are also involved in investigations and proceedings by governmental and self-regulatory agencies. We cannot provide assurance that these investigations, proceedings and inquiries will not result in actions that would adversely affect our results of operations or financial condition.
As a specialist in Lloyds insurance group, Chaucer is subject to a number of risks which could materially and adversely affect us.
As a specialist in Lloyds insurance group, Chaucer is subject to a number of specific risk factors and uncertainties, including without limitation:
| its reliance on insurance and reinsurance brokers and distribution channels to distribute and market its products (so called coverholders); |
| its obligations to maintain funds at Lloyds to support its underwriting activities; its risk-based capital requirement being assessed periodically by Lloyds and being subject to variation; |
| its reliance on ongoing approvals from Lloyds, the Financial Services Authority and other regulators to conduct its business, including a requirement that its Annual Business Plan be approved by Lloyds before the start of underwriting for each account year; |
| its obligations to contribute to the Lloyds New Central Fund and pay levies to Lloyds; |
| its rating is derived from the rating assigned to Lloyds, and Chaucer has very limited ability to directly affect the overall Lloyds rating; |
| its ongoing ability to utilize Lloyds trading licenses in order to underwrite business outside the United Kingdom; |
| its ongoing exposure to levies and charges in order to underwrite at Lloyds; and |
| the requirement to maintain deposits in the United States for U.S. site risks it underwrites. |
Whenever a member of Lloyds is unable to pay its policyholder obligations, such obligations may be payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be increased, it has the power to
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assess premium levies on current Lloyds members up to 3% of a members underwriting capacity in any one year. We do not believe that any assessment is likely in the foreseeable future and have not provided allowance for such an assessment. However, based on our 2012 estimated underwriting capacity at Lloyds of £713.6 million, the December 31, 2011 exchange rate of 1.55 dollars per GBP and assuming the maximum 3% assessment, we could be assessed up to approximately $33.2 million.
We are subject to litigation risks, including risks relating to the application and interpretation of contracts, and adverse outcomes in litigation and legal proceedings could adversely affect our results of operations and financial condition.
We are subject to litigation risks, including risks relating to the application and interpretation of insurance and reinsurance contracts, and are routinely involved in litigation that challenges specific terms and language incorporated into property and casualty contracts, such as claims reimbursements, covered perils and exclusion clauses, among others, or the interpretation or administration of such contracts. We are also involved in legal actions that do not arise in the ordinary course of business, some of which assert claims for substantial amounts. Adverse outcomes including with respect to the matters captioned Durand Litigation and Hurricane Katrina Litigation under Commitments and Contingencies Legal Proceedings in Note 17 on pages 127 to 128 of the Notes to the Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K, could materially affect our results of operations and financial condition.
We are subject to mandatory assessments by state guaranty funds; an increase in these assessments could adversely affect our results of operations and financial condition.
All fifty states of the United States and the District of Columbia have insurance guaranty fund laws requiring property and casualty insurance companies doing business within the state to participate in guaranty associations. These associations are organized to pay contractual obligations under insurance policies issued by impaired or insolvent insurance companies. The associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired or insolvent insurer is engaged. Mandatory assessments by state guaranty funds are used to cover losses to policyholders of insolvent or rehabilitated companies and can be partially recovered through a reduction in future premium taxes in many states (provided the collecting insurer continues to write business in such state). During 2011, we had a total assessment of $2.0 million levied against us, with refunds of $0.7 million received in 2011 for a total net assessment of $1.3 million. As of December 31, 2011, we have $0.7 million of reserves related to guaranty fund assessments. In the future, these assessments may increase above levels experienced in the current and prior years. Future increases in these assessments depend upon the rate of insolvencies of insurance companies. An increase in assessments could adversely affect our results of operations and financial condition.
If we are unable to attract and retain qualified personnel, or if we experience the loss or retirement of key executives or other key employees, we may not be able to compete effectively and our operations could be impacted significantly.
Our future success will be affected by our continued ability to attract and retain qualified executives and other key employees, particularly those experienced in the property and casualty industry and the Lloyds market.
Our profitability could be adversely affected by periodic changes to our relationships with our agencies.
We periodically review agencies, including our managing general agencies, with which we do business to identify those that do not meet our profitability standards or are not strategically aligned with our business. Following these periodic reviews, we may restrict such agencies access to certain types of policies or terminate our relationship with them, subject to applicable contractual and regulatory requirements to renew certain policies for a limited time. We may not achieve the desired results from these measures, and our failure to do so could negatively affect our operating results and financial position.
We may be affected by disruptions caused by the introduction of new products in Commercial Lines, Personal Lines and Chaucer businesses and related technology changes, new operating models in Commercial Lines, Personal Lines and Chaucer businesses and recent or future acquisitions, and expansion into new geographic areas. We could also be affected by an inability to retain profitable policies in force and attract profitable policies in our Commercial Lines, Personal Lines and Chaucer segments, particularly in light of a competitive product pricing environment and the adoption by competitors of strategies to increase agency appointments and commissions and increased advertising.
There are increased underwriting risks associated with premium growth and the introduction of new products or programs in our Commercial Lines, Personal Lines and Chaucer businesses. Additionally, we have increased underwriting risks associated with the appointment of new agencies and managing general agencies and with the expansion into new geographical areas, including international expansion.
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The introduction of new Commercial Lines products, including through our acquired subsidiaries and the development of new niche and specialty lines, presents new risks. Certain new specialty products may present longer tail risks and increased volatility in profitability. Our expansion into new western states, including California, presents additional underwriting risks since the regulatory, geographic, natural risk, legal environment, demographic, business, economic and other characteristics of these states present challenges different from those in the states in which we currently do business.
Our Personal Lines production and earnings may be unfavorably affected by the continued introduction of new products, including our multivariate automobile product, as a proportion of our total personal automobile premium as compared to the historically more profitable legacy products, and our focus on account business (i.e., policyholders who have both automobile and homeowner insurance with us) which we believe, despite pricing discounts, will ultimately be more profitable business. We may also experience adverse selection, which occurs when insureds with larger risks purchase our products because of favorable pricing, under-pricing, operational difficulties or implementation impediments with independent agents or the inability to grow new markets after the introduction of new products or the appointment of new agents.
We have experienced increased loss ratios with respect to our personal automobile business, which is written through our Connections Auto product, particularly in certain states where we have less experience and data and less established agency relationships. There can be no assurance that as we enter new states or regions or grow business in our identified growth states, we wont experience higher loss trends than anticipated.
Integration of acquired businesses involves a number of risks and there can be no assurance that we will be successful integrating recent and future acquisitions.
There can be no assurance that we will be able to successfully integrate recent and any future acquisitions or that we will not assume unknown liabilities and reserve deficiencies in connection with such acquisitions. On July 1, 2011, we completed the acquisition of Chaucer. If we are unable to successfully integrate Chaucer into our business, we could be impeded from realizing the benefits of the acquisition. The integration process could disrupt our business and a failure to successfully integrate the two businesses could have a material adverse effect on our business, financial condition and results of operations. In addition, the integration of two formally unaffiliated companies could result in unanticipated problems, expenses, liabilities, competitive responses, loss of agent relationships, and diversion of managements attention. The difficulties of integrating an acquisition and risks to our business include, among others:
| unanticipated issues in integrating information, communications and other systems; |
| unanticipated incompatibility of logistics, marketing and administration methods; |
| maintaining employee morale and retaining key employees; |
| integrating the business cultures of both companies; |
| preserving important strategic, reinsurance and other relationships; |
| integrating legal and financial controls in multiple jurisdictions; |
| consolidating corporate and administrative infrastructures and eliminating duplicative operations; |
| the diversion of managements attention from ongoing business concerns; |
| integrating geographically separate organizations; |
| unexpected or overlapping concentrations of risk where one event or series of events can affect many insured parties |
| significant transaction costs, including the effect of exchange rate fluctuations; |
| risks and uncertainties in our ability to increase the investment yield on the Chaucer investment portfolio; |
| uncertainties in our ability to decrease leverage as a result of adding future earnings to our capital base; |
| risks and uncertainties regarding the volatility of underwriting results in a combined entity; |
| an ability to more efficiently manage capital; |
| tax issues, such as tax law changes and variations in tax laws as compared to the United States, or changes in estimates of the proportion of earnings ultimately subject to the higher U.S. tax rate ; |
| an ability to improve renewal rates and increase new property and casualty policy counts; |
| an ability to increase or maintain certain property and casualty insurance rates (including with respect to catastrophe-exposed property, marine, and U.K. motor business); |
| complying with laws, rules and regulations in multiple jurisdictions, including new and multiple employment regulations, regulations relating to the conduct of business activities such as the U.K. Bribery Act, sanctions imposed by the U.S. or U.K. on doing business with certain foreign countries or other persons, privacy, information security, and environmental-related laws; and |
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| the impact of new product or line of business introductions, such as the international liability division and our ability to meet projected return on capital targets. |
In addition, even if we are able to integrate successfully recent and future acquisitions, we may not realize the full benefits of such acquisitions, including the synergies, cost savings or underwriting or growth opportunities that we expect. It is possible that these benefits may not be achieved within the anticipated time frame, or at all.
Intense competition could negatively affect our ability to maintain or increase our profitability.
We compete, and will continue to compete, with a large number of companies, including international, national and regional insurers, mutual companies, specialty insurance companies, so called off-shore companies which enjoy certain tax advantages, underwriting agencies and financial services institutions. Chaucer competes with numerous other Lloyds syndicates and managing agents, domestic and international insurers and government or government-sponsored insuring or reinsuring mechanisms. In recent years, there has been substantial consolidation and convergence among companies in the financial services industry, resulting in increased competition from large, well-capitalized financial services firms. Many of our competitors have greater financial, technical and operating resources than we do. In addition, competition in the U.S. and international property and casualty insurance markets has intensified over the past several years. This competition has had and may continue to have an adverse impact on our revenues and profitability.
A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include:
| the implementation of commercial lines deregulation in several states; |
| programs in which state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative markets types of coverage; |
| changes in, or restrictions on, the way independent agents may be compensated by insurance companies; |
| increased competition from off-shore tax advantaged insurance companies; |
| changing practices caused by the internet and the increased usage of real time comparative rating tools, which have led to greater competition in the insurance business in general, particularly on the basis of price; and |
| proposals, from time to time, to provide for federal chartering of insurance companies. |
In addition, we could face heightened competition resulting from the entry of new competitors and the introduction of new products by new and existing competitors. Increased competition could make it difficult for us to obtain new customers, retain existing customers or maintain policies in force by existing customers. It could also result in increasing our service, administrative, policy acquisition or general expense due to the need for additional advertising and marketing of our products. In addition, our administrative, technology and management information systems expenditures could increase substantially as we try to maintain or improve our competitive position. We cannot provide assurance that we will be able to maintain a competitive position in the markets in which we operate, or that we will be able to expand our operations into new markets. If we fail to do so, our business could be materially adversely affected.
We are rated by several rating agencies, and changes to our ratings could adversely affect our operations.
Our ratings are important in establishing our competitive position and marketing the products of our insurance companies to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry.
Our insurance company subsidiaries are rated by A.M. Best, Moodys, Fitch, and Standard & Poors. These ratings reflect a rating agencys opinion of our insurance subsidiaries financial strength, operating performance, strategic position and ability to meet their obligations to policyholders. These ratings are not evaluations directed to investors, and are not recommendations to buy, sell or hold our securities. Our ratings are subject to periodic review by the rating agencies and we cannot guarantee the continued retention or improvement of our current ratings. This is particularly true in the current economic environment where rating agencies may increase their capital requirements or other criteria for various rating levels. In addition, Chaucers rating is derived from the rating assigned to Lloyds, and Chaucer has very limited ability to directly affect the overall Lloyds rating.
A downgrade in one or more of our or any of our subsidiaries claims-paying ratings could negatively impact our business volumes and competitive position because demand for certain of our products may be reduced, particularly in lines where customers require us to maintain minimum ratings. Additionally, a downgrade in one or more of our debt ratings could adversely impact our ability to access the capital markets and other sources of funds, and/or adversely affect pricing of new debt sought in the capital markets in the future.
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Negative changes in our level of statutory surplus could adversely affect our ratings and profitability.
The capacity for U.S. insurance companys growth in premiums is in part a function of its statutory surplus. Maintaining appropriate levels of statutory surplus, as measured by state insurance regulators, is considered important by state insurance regulatory authorities and the private agencies that rate insurers claims-paying abilities and financial strength. Regulators may require that additional capital be contributed to increase the level of statutory surplus. Failure to maintain certain levels of statutory surplus could result in increased regulatory scrutiny, action by state regulatory authorities or a downgrade by private rating agencies. Our surplus is affected by, among other things, results of operations and investment gains, losses, impairments, and dividends from the insurance operating company to its parent company.
The National Association of Insurance Commissioners, or NAIC, uses a system for assessing the adequacy of statutory capital for U.S. property and casualty insurers. The system, known as risk-based capital, is in addition to the states fixed dollar minimum capital and other requirements. The system is based on risk-based formulas that apply prescribed factors to the various risk elements in an insurers business and investments to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. We believe that any failure to maintain appropriate levels of statutory surplus would have an adverse impact on our ability to grow our business profitably.
We may not be able to grow as quickly as we intend, which is important to our current strategy.
Over the past several years, we have made and our current plans are to continue to make, significant investments in our Commercial and Personal Lines of business, and we have increased expenses and made acquisitions in order to, among other things, strengthen our product offerings and service capabilities, expand into new geographic areas, improve technology and our operating models, build expertise in our personnel, and expand our distribution capabilities, with the ultimate goal of achieving significant, sustained growth. The ability to achieve significant profitable premium growth in order to earn adequate returns on such investments and expenses, and to grow further without proportionate increases in expenses, is critical to our current strategy. There can be no assurance that we will be successful at profitably growing our business, or that we will not alter our current strategy due to changes in our markets or an inability to successfully maintain acceptable margins on new business or for other reasons, in which case written and earned premium, segment income and net book value could be adversely affected.
An impairment in the carrying value of goodwill and intangible assets could negatively impact our consolidated results of operations and shareholders equity.
Upon an acquisition of a business, we record goodwill and intangible assets at fair value. Goodwill and intangible assets determined to have indefinite useful lives are not amortized, while other intangible assets are amortized over their estimated useful lives. Goodwill and intangible assets that are not amortized are reviewed for impairment at least annually. Evaluating the recoverability of such assets requires us to rely on estimates and assumptions related to return on equity, margin, growth rates, discount rates, and other data. There are inherent uncertainties related to these factors and significant judgment is required in applying these factors. Goodwill and intangible asset impairment charges can result from declines in operating results, divestitures or sustained market declines and other factors. As of December 31, 2011, goodwill and intangible assets represented approximately 13.2% of shareholders equity. Although we believe these assets are recoverable, we cannot provide assurance that future market or business conditions would not result in the impairment of a portion of these assets. Impairment charges could materially affect our financial results in the quarter or annual period in which they are recognized.
We could be subject to additional losses related to the sale of our Discontinued FAFLIC and variable life insurance and annuity businesses.
On January 2, 2009, we sold our remaining life insurance subsidiary, First Allmerica Financial Life Insurance Company (FAFLIC), to Commonwealth Annuity and Life Insurance Company, a subsidiary of Goldman Sachs. Coincident with the sale transaction, Hanover Insurance and FAFLIC entered into a reinsurance contract whereby Hanover Insurance assumed FAFLICs discontinued accident and health insurance business. Goldman Sachs previously purchased, in 2005, our variable life insurance and annuity business.
In connection with these transactions, we have agreed to indemnify Commonwealth Annuity and Goldman Sachs for certain contingent liabilities, including litigation and other regulatory matters (including with respect to existing and potential litigation). We have established a reserve related to these contractual indemnifications. Although we believe that this liability is appropriate, we cannot provide assurance that costs related to these indemnifications when they ultimately settle, will not exceed our current liability.
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We may incur financial losses related to our discontinued assumed accident and health reinsurance pools and arrangements.
We previously participated, through FAFLIC, in approximately 40 assumed accident and health reinsurance pools and arrangements. The business was retained in the sale of FAFLIC and assumed by Hanover Insurance through a reinsurance agreement. During 1999, we ceased writing new premiums in this business, subject to certain contractual obligations. The reinsurance pool business consisted primarily of direct and assumed medical stop loss, the medical and disability portions of workers compensation risks, small group managed care, long-term disability and long-term care pools, student accident and special risk business. We are currently monitoring and managing the run-off of our related participation in the 26 pools with remaining liabilities.
Under these arrangements, we variously acted as a reinsurer, a reinsured or both. In some instances, we ceded significant exposures to other reinsurers in the marketplace. There are disputes ongoing within the industry, which relate to the placement of this type of business with various reinsurers and ultimately may result in an impact to the recovery of the placed reinsurance. The potential risk to us as a participant in these pools is primarily that other companies that reinsured this business from us may seek to avoid or fail to timely pay their reinsurance obligations (especially in light of the fact that historically these pools sometimes involved multiple layers of overlapping reinsurers, or so-called spirals) or may become insolvent. Thus, we are exposed to both assumed losses and to credit risk related to these pools. We are not currently engaged in any significant disputes in respect to this business. At this time, we do not anticipate that any significant portion of recorded reinsurance recoverables will be uncollectible. However, we cannot provide assurance that all recoverables are collectible and should these recoverables prove to be uncollectible, our results of operations and financial position may be negatively affected.
We believe our reserves for the accident and health assumed and ceded reinsurance business appropriately reflect current claims, unreported losses and likely investment returns on related assets supporting these reserves. However, due to the inherent volatility in this business and the reporting lag of losses that tend to develop over time and which ultimately affect excess covers, there can be no assurance that current reserves are adequate or that we will not have additional losses in the future. Although we have discontinued participation in these reinsurance arrangements, unreported claims related to the years in which we were a participant may be reported and previously reported claims may develop unfavorably. If any such unreported claims or unfavorable development is reported to us, our results of operations and financial position may be negatively impacted. In addition, at this time it is unclear what impact the Federal Healthcare Act has on our obligations under the residual healthcare policies which are outstanding, but we may be required to significantly expand benefits without a commensurate ability to increase premiums.
Other market fluctuations and general economic, market and political conditions may also negatively affect our business, profitability and investment portfolio.
It is difficult to predict the impact of the challenging economic environment on our business. In Commercial Lines, the difficult economy has resulted in reductions in demand for insurance products and services as more companies cease to do business and there are fewer business start-ups, particularly as small businesses are affected by a decline in overall consumer and business spending. Additionally, claims frequency could increase as policyholders submit and pursue claims more aggressively than in the past, fraud incidences may increase, or we may experience higher incidents of abandoned properties or poorer maintenance, which may also result in more claims activity. We have experienced higher workers compensation claims as injured employees take longer to return to work, increased surety losses as construction companies experience financial pressures and higher retroactive premium returns as audit results reflect lower payrolls. Our business could also be affected by an ensuing consolidation of independent insurance agencies. Our ability to increase pricing has been impacted as agents and policyholders have been more price sensitive, customers shop for policies more frequently or aggressively, utilize comparative rating models or, in Personal Lines in particular, turn to direct sales channels rather than independent agents. We have also experienced decreased new business premium levels, retention and renewal rates, and renewal premiums. Specifically in Personal Lines, policyholders may reduce coverages or change deductibles to reduce premiums, experience declining home values, or be subject to increased foreclosures, and policyholders may retain older or less expensive automobiles and purchase or insure fewer ancillary items such as boats, trailers and motor homes for which we provide coverages. Additionally, if as a result of the difficult economic environment, drivers continue to eliminate automobile insurance coverage or to reduce their bodily injury limit, we may be exposed to more uninsured and underinsured motorist coverage losses.
Chaucers business is similarly subject to risks related to the economy, both in its traditional Lloyds business, and its U.K. motor business. In addition to the risks noted above, adverse economic conditions could negatively affect
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our ability to obtain letters of credit utilized by Chaucer to underwrite business through Lloyds.
At December 31, 2011, we held approximately $7.5 billion of investment assets in categories such as fixed maturities, cash and short-term investments, equity securities, and other long-term investments. Our investments are primarily concentrated in the U.S. domestic market; however, we have exposure to international markets as well, with approximately 31% of our cash and investment assets invested in foreign markets. Our investment returns, and thus our profitability, surplus and shareholders equity, may be adversely affected from time to time by conditions affecting our specific investments and, more generally, by bond, stock, real estate and other market fluctuations and general economic, market and political conditions, including concerns regarding sub-prime and prime mortgages, as well as residential and commercial mortgage-backed or other debt securities, increasing concerns relating to the municipal bond markets and European sovereign debt, and developments that negatively impact our investment in real estate such as increased development costs, construction delays and tenant defaults. Our ability to make a profit on insurance products depends in part on the returns on investments supporting our obligations under these products, and the value of specific investments may fluctuate substantially depending on the foregoing conditions. We may use a variety of strategies to hedge our exposure to interest and currency rates and other market risks. However, hedging strategies are not always available and carry certain credit risks, and our hedging could be ineffective.
Debt securities comprise a material portion of our investment portfolio. The issuers of those securities, as well as borrowers under the loans we make, customers, trading counterparties, counterparties under swaps and other derivative contracts, banks which have commitments under our various borrowing arrangements, and reinsurers, may be affected by declining market conditions or credit weaknesses. These parties may default on their obligations to us due to lack of liquidity, downturns in the economy or real estate values, operational failure, bankruptcy or other reasons. We cannot assure you that impairment charges will not be necessary in the future. Our ability to fulfill our debt and other obligations could be adversely affected by the default of third parties on their obligations owed to us.
Deterioration in the global financial markets may adversely affect our investment portfolio and have a related impact on our other comprehensive income, shareholders equity and overall investment performance. In recent years, global financial markets experienced unprecedented and challenging conditions, including a tightening in the availability of credit, the failure of several large financial institutions and concerns about the creditworthiness of the sovereign debt of several European and other countries. As a result, certain government bodies and central banks worldwide, including the U.S. Treasury Department and the U.S. Federal Reserve, provided for unprecedented intervention programs, the efficacy of which remain uncertain.
In addition, our current borrowings from the FHLBB to partially finance construction of a building to be leased to a third-party, are secured by collateral. If the fair value of pledged collateral falls below specific levels, we would be required to pledge additional collateral or repay any outstanding FHLBB borrowings.
Market conditions also affect the value of assets under our employee pension plans, including our U.S. Cash Balance Plan and Chaucer pension plan. The expense or benefit related to our employee pension plans results from several factors, including changes in the market value of plan assets, interest rates, regulatory requirements or judicial interpretation of benefits. For the year ended December 31, 2011, we recognized net expenses of $12.6 million related to our employee pension plans. Additionally, in 2010, we contributed $100 million to our U.S. Cash Balance Plan and do not expect to make any significant additional contributions in the near future in order to meet our minimum funding requirements for this plan. At December 31, 2011, our U.S. plan assets included approximately 82% of fixed maturities and 18% of equity securities and other assets. At December 31, 2011, our Chaucer pension plan assets included approximately 78% of equities, 12% of fixed maturities, and 10% of real estate funds. The Chaucer pension plan is approximately $30 million underfunded as of December 31, 2011. Declines in the market value of plan assets and interest rates from levels at December 31, 2011, among other factors, could impact our funding estimates and negatively affect our results of operations. At December 31, 2011, our U.S. qualified plan assets were in excess of its liabilities and for our U.S. non-qualified pension plans, our net liabilities exceeded assets by approximately $39 million. Deterioration in market conditions and differences between our assumptions and actual occurrences, and behaviors, including judicial determinations of ultimate benefit obligations pursuant to the Durand case discussed elsewhere, or otherwise, could result in a need to fund more into the qualified plan to maintain this funding level.
We may experience unrealized losses on our investments, especially during a period of heightened volatility, which could have a material adverse effect on our results of operations or financial condition.
Our investment portfolio and shareholders equity can be and in the past have been significantly impacted by the changes in the market values of our securities. U.S. and global financial markets and economies remain uncertain.
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This could result in unrealized and realized losses in future periods, and adversely affect the liquidity of our investments, which could have a material adverse impact on our results of operations and our financial position.
If, following such declines, we are unable to hold our investment assets until they recover in value or if such asset value never recovers, we would incur other-than-temporary impairments which would be recognized as realized losses in our results of operations, reduce net income and earnings per share and adversely affect our liquidity. Temporary declines in market value are recorded as unrealized losses, which do not affect net income and earnings per share, but reduce other comprehensive income, which is reflected on our Consolidated Balance Sheets. We cannot provide assurance that we will not have additional other-than-temporary impairments and/or unrealized investment losses in the future. Likewise, there can be no assurance that our investment portfolio will retain the net unrealized gains reflected on the balance sheet as of December 31, 2011, since such gains are dependent on prevailing interest rates, credit ratings and creditworthiness and general economic and other factors.
We invest a portion of our portfolio in common stock or preferred stocks. The value of these assets fluctuates with the equity markets. Particularly in times of economic weakness, the market value and liquidity of these assets may decline, and may impact net income, capital and cash flows.
We are exposed to significant capital market risks related to changes in interest rates, credit spreads, equity prices and foreign exchange rates which may adversely affect our results of operations, financial position or cash flows.
We are exposed to significant capital markets risk related to changes in interest rates, credit spreads, equity prices and foreign currency exchange rates. If significant, declines in equity prices, changes in interest rates, changes in credit spreads and the strengthening or weakening of foreign currencies against the U.S. dollar could have a material adverse effect on our results, financial position or cash flows. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed income securities, which may be adversely affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. A rise in interest rates would not only reduce the fair value of our investment portfolio, but also provide the opportunity to earn higher rates of return on funds reinvested. A decline in interest rates would increase the fair value of our investment portfolio, but we would earn lower rates of return on reinvested assets. We may be forced to liquidate investments prior to maturity at a loss in order to cover liabilities. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of our assets relative to our liabilities.
Our fixed income portfolio is invested primarily in high quality, investment-grade securities. However, we also invest in alternative investments such as non-investment-grade high yield fixed income securities. These securities, which pay a higher rate of interest, also have a higher degree of credit or default risk. These securities may also be less liquid in times of economic weakness or market disruptions. While we have procedures to monitor the credit risk and liquidity of our invested assets, we expect from time to time, and particularly in periods of economic weakness, to experience default losses in our portfolio. This would result in a corresponding reduction of net income, capital and cash flows.
Our operations may be adversely impacted by foreign currency fluctuations.
Our reporting currency is the U.S. dollar. The functional currencies of our Chaucer segment are the U.S. dollar, U.K. pound sterling and the Canadian dollar. Exchange rate fluctuations relative to the functional currencies may materially impact our financial position. Further, our Chaucer segment maintains assets and liabilities in currencies different than its functional currency, which exposes us to changes in currency exchange rates. In addition, locally required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations. We attempt to manage our foreign currency exposure through matching of assets and liabilities, as well as through the use of derivatives. Despite our mitigation efforts, exposure to foreign exchange loss could have a material adverse effect on our book value.
We are a holding company and rely on our insurance company subsidiaries for cash flow; we may not be able to receive dividends from our subsidiaries in needed amounts and may be required to provide capital to support their operations.
We are a holding company for a diversified group of insurance and financial services companies and our principal assets are the shares of capital stock of our subsidiaries. Our ability to make required debt service payments, as well as our ability to pay operating expenses and pay dividends to shareholders, depends upon the receipt of sufficient funds from our subsidiaries. The payment of dividends by
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our insurance company subsidiaries is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as these regulatory restrictions. We are required to notify insurance regulators prior to paying any dividends from our U.S. insurance subsidiaries and pre-approval is required with respect to extraordinary dividends, and distributions from Chaucer are subject to various requirements imposed by Lloyds and the FSA.
Because of the regulatory limitations on the payment of dividends from our insurance company subsidiaries, we may not always be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our debt and other obligations. The inability of our subsidiaries to pay dividends to us in an amount sufficient to meet our debt service and funding obligations would have a material adverse effect on us. These regulatory dividend restrictions also impede our ability to transfer cash and other capital resources among our subsidiaries.
Similarly, our insurance subsidiaries may require capital from the holding company to support their operations. For example, our holding company has provided a guaranty for the benefit of our Chaucer segment to support the letter of credit agreement supplied to support Chaucers Funds at Lloyds requirements. We do not currently expect to receive, in the near future, distributions from our Chaucer segment.
Our dependence on our insurance subsidiaries for cash flow, and their potential need for capital support, exposes us to the risk of changes in their ability to generate sufficient cash inflows from new or existing customers or from increased cash outflows. Cash outflows may result from claims activity, expense payments or investment losses. Because of the nature of our business, claims activity can arise suddenly and in amounts which could outstrip our capital or liquidity resources. Reductions in cash flow or capital demands from our subsidiaries could have a material adverse effect on our business and results of operations.
We may require additional capital or credit in the future, which may not be available or only available on unfavorable terms.
We monitor our capital adequacy on a regular basis. Our future capital and liquidity requirements depend on many factors, including our premiums written, loss reserves and claim payments, investment portfolio composition and risk exposures, the availability of our letter of credit and line of credit, as well as regulatory and rating agency capital requirements. In addition, our capital strength can affect our ratings, and therefore is important to our ability to underwrite. More specifically, the quality of our claims paying and financial strength ratings are evaluated by independent rating agencies.
Our Chaucer business is required to satisfy Lloyds standards on minimum capital levels. We satisfy Lloyds member deposit funds requirement (referred to as Funds at Lloyds or FAL), in part, through a standby letter of credit. If the letters of credit were drawn, we would expect to use a syndicated credit facility to pay such obligation, which would increase our debt borrowings. If the syndicated credit facility was not available to repay this letter of credit facility, we would need to obtain capital elsewhere, and face the risk that alternative financing, such as through cash or other borrowings, would not be available at acceptable terms, if at all. In addition, no assurance can be given as to how much business Lloyds will permit Chaucer to underwrite in any single year nor as to the viability and cost of the capital structure we may use as a substitute for the external capital and reinsurance currently used by Chaucer.
To the extent that our existing capital is insufficient to fund our future operating requirements and/or cover claim losses, we may need to raise additional funds through financings or limit our growth. Any equity or debt financing, if available, may be on terms that are unfavorable to us. In the case of equity financings, dilution to our shareholders could result and, in any case, such securities may have rights, preferences, and privileges that are senior to our common stock. If we are not able to obtain additional capital as necessary, our business, results of operations and financial condition could be adversely affected.
Although we monitor their financial soundness, we cannot be sure that our reinsurers will pay in a timely fashion, if at all.
We purchase reinsurance by transferring part of the risk that we have assumed (known as ceding) to reinsurance companies in exchange for part of the premium we receive in connection with the risk. As of December 31, 2011, our reinsurance receivable (including from MCCA) amounted to approximately $2.3 billion. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of our liability to our policyholders or, in cases where we are a reinsurer, to our reinsureds. Accordingly, we bear credit risk with respect to our reinsurers. Although we monitor the credit quality of our reinsurers, we cannot be sure that they will pay the reinsurance recoverables owed to us currently or in the future or that they will pay such recoverables on a timely basis.
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Errors or omissions in connection with the administration of any of our products may cause our business and profitability to be negatively impacted.
We are responsible to our policyholders for administering their policies, premiums and claims and ensuring that appropriate records are maintained which reflect their transactions. We are subject to risks that errors or omissions of information occurred with respect to the administration of our products. As a result, we are subject to risks of liabilities associated with bad faith, unfair claims practices, unfair trade practices or similar allegations. Such risks may stem from allegations of agents, vendors, policyholders, claimants, members of Lloyds syndicates, reinsurers, regulators, states attorneys general, Lloyds, the FSA or other international regulators, or others. We may incur charges associated with any errors and omissions previously made or which are made in future periods. These charges may result from our obligation to policyholders to correct any errors or omissions or refund premiums, non-compliance with regulatory requirements, from fines imposed by regulatory authorities, or from other items, which may affect our financial position or results of operations.
We may experience difficulties with technology, data security and/or outsourcing relationships, which could have a negative impact on our ability to conduct our business.
We use computer systems to store, retrieve, evaluate and utilize customer and company data and information. Our computer, information technology and telecommunications systems, in turn, interface with and rely upon third-party systems. Our business is highly dependent on our ability, and the ability of certain third parties, to access these systems to perform necessary business functions, including, without limitation, providing insurance quotes, processing premium payments, making changes to existing policies, filing and paying claims, providing customer support and managing our investment portfolios. Systems failures or outages could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business and hurt our relationships with our business partners and customers. In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a computer virus, a terrorist attack or war, or interference from solar flares, our systems may be inaccessible to our employees, customers or business partners for an extended period of time. Even if our employees are able to report to work, they may be unable to perform their duties for an extended period of time if our data or systems are disabled or destroyed. This could result in a materially adverse effect on our business results and liquidity.
Our systems, like others in the financial services industry, are potentially vulnerable to cybersecurity risks and we are subject to potential disruption caused by such activities. Although to date such activities have not resulted in material disruptions to our operations or, to our knowledge, breach of any security or confidential information, no assurance can be provided that such disruptions or breach will not occur in the future.
Additionally, we could be subject to liability if confidential customer information is misappropriated from our computer systems, those of our vendors or others with whom we do business, or otherwise. Despite whatever security measures may be in place, any such systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-publicized compromise of security could deter people from entering into transactions that involve transmitting confidential information, which could have a material adverse effect on our business.
We outsource certain technology and business process functions to third parties and may do so increasingly in the future. If we do not effectively develop, implement and monitor our outsourcing strategy, third party providers do not perform as anticipated or we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business. Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security, which could result in monetary and reputational damages. In addition, our ability to receive services from third party providers outside of the United States might be impacted by cultural differences, political instability, unanticipated regulatory requirements or policies inside or outside of the United States. As a result, our ability to conduct our business might be adversely affected.
Inflationary pressures may negatively impact reserves and the value of investments.
Inflationary pressures in the geographies in which we operate may negatively impact reserves and the value of investments, In particular, inflationary pressures in the U.S. with respect to medical and health care, automobile repair and construction costs, all of which are significant components of our indemnity liabilities under policies we issue to our customers, and which could also impact the adequacy of reserves we have set aside for prior accident years, may have a negative affect on our results of operations Inflationary pressures also cause or contribute to, or are the result of, increases in interest rates, which may reduce the fair value of our investment portfolio.
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We are subject to the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, which impose restrictions and may carry substantial penalties. Violations of these laws or allegations of such violations could cause a material adverse effect on our business, financial position and results of operations.
The U.S. Foreign Corrupt Practices Act and anti-bribery laws in other jurisdictions, including new anti-bribery legislation in the U.K. that took effect 2011, generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business or other commercial advantage. Our policies mandate compliance with these anti-bribery laws, which often carry substantial penalties. We cannot assure you that our internal control policies and procedures always will protect us from reckless or other inappropriate acts committed by our affiliates, employees or agents. Violations of these laws, or allegations of such violations, could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.
Our international operations exposes us to additional risks which could cause a material adverse effect on our business, financial position and results of operations.
Our operations extend to countries outside the U.S. and operating globally increases the scope of our risks and exposes us to certain additional risks including but not limited to:
| an expansion in the scope of the risks to which our U.S. operations are subject as an insurance company, such as risk of adverse loss development, litigation, investment risks and the possibility of significant catastrophe losses (as a result of natural disasters, nuclear accidents, severe weather and terrorism) occurring outside the U.S.; |
| requirements, such as those enforced by the U.S. Treasurys Office of Foreign Asset Controls, to comply with various U.S., U.K., E.U. or other sanctions imposed on doing business with, or affecting, certain countries, their citizens, specially designated nationals or other persons doing business with any such countries or persons; |
| compliance with a variety of national and local laws, regulations and practices of the countries in which we do business and adherence to any changes in such laws, regulations and practices affecting the insurance industry in such countries; and |
| adverse changes in the economies in which we operate |
As one of our consolidated companies, Chaucer and its subsidiaries are subject to Sarbanes-Oxley and rules and regulations of the SEC and PCAOB and may face difficulties in complying.
Chaucer and its subsidiaries have become subsidiaries of our consolidated company, and for the year ended December 31, 2012, will be included in our annual assessment of internal control over financial reporting as required under the Sarbanes-Oxley Act of 2002 and the rules and regulations subsequently implemented by the Securities and Exchange Commission and the Public Company Accounting Oversight Board. We will need to ensure that Chaucer establishes and maintains effective disclosure controls, as well as internal controls and procedures for financial reporting.
ITEM 1BUNRESOLVED STAFF COMMENTS
None.
We own our headquarters, located at 440 Lincoln Street, Worcester, Massachusetts, with approximately 944,000 square feet.
We also own office space located at 645 W. Grand River, Howell, Michigan, with approximately 110,000 square feet, a three-building complex located at 808 North Highlander Way, Howell, Michigan, with approximately 178,000 square feet, where various business operations are conducted, and office space located at Thanet Way, Whitstable, United Kingdom, with approximately 40,000 square feet, where we operate our U.K. motor line of business.
We lease our office space located at 30 Fenchurch Street, London, United Kingdom, where we manage our Chaucer segment. We also lease offices throughout the United States and in select locations worldwide for branch sales, underwriting and claims processing functions, and the operations of acquired subsidiaries.
We believe that our facilities are adequate for our present needs in all material respects. Certain of our properties may be made available for lease.
Reference is made to the litigation matter captioned Durand Litigation and Hurricane Katrina Litigation under Commitments and Contingencies Legal Proceedings in Note 17 on pages 127 to 128 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
ITEM 4Mine Safety Disclosures
Not applicable.
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ITEM 5MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK AND STOCKHOLDER OWNERSHIP
Our common stock is traded on the New York Stock Exchange under the symbol THG. On February 23, 2012, we had approximately 24,236 shareholders of record and 45,007,762 shares outstanding. On the same date, the trading price of our common stock was $40.89 per share.
COMMON STOCK PRICES
High (1) | Low (1) | |||||||
2011 |
||||||||
First Quarter |
$ | 48.82 | $ | 45.08 | ||||
Second Quarter |
$ | 46.15 | $ | 36.18 | ||||
Third Quarter |
$ | 37.97 | $ | 31.22 | ||||
Fourth Quarter |
$ | 39.23 | $ | 33.26 | ||||
2010 |
||||||||
First Quarter |
$ | 44.63 | $ | 40.51 | ||||
Second Quarter |
$ | 45.72 | $ | 42.33 | ||||
Third Quarter |
$ | 47.00 | $ | 43.16 | ||||
Fourth Quarter |
$ | 47.73 | $ | 45.25 |
(1) | Common stock prices were obtained from a third party broker. |
DIVIDENDS
The Board of Directors declared dividends in 2011 and 2010 as follows:
2011 Per Share Amount |
2010 Per Share Amount |
|||||||
First Quarter |
$ | 0.275 | $ | 0.25 | ||||
Second Quarter |
$ | 0.275 | $ | 0.25 | ||||
Third Quarter |
$ | 0.275 | $ | 0.25 | ||||
Fourth Quarter |
$ | 0.30 | $ | 0.25 |
We currently expect that comparable cash dividends will be paid in the future; however, the payment of future dividends on our common stock will be determined by the Board of Directors from time to time based upon cash available at our holding company, our results of operations and financial condition and such other factors as the Board of Directors considers relevant.
Dividends to shareholders may be funded from dividends paid to us from our subsidiaries. Dividends from insurance subsidiaries are subject to restrictions imposed by state insurance laws and regulations and for our foreign subsidiaries, to restrictions imposed by the FSA and Lloyds. See Liquidity and Capital Resources on pages 75 to 79 of Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 12 Dividend Restrictions on page 123 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
ISSUER PURCHASES OF EQUITY SECURITIES
The Board of Directors has authorized a stock repurchase program which provides for aggregate repurchases of up to $500 million. Under the repurchase authorizations, we may repurchase our common stock from time to time, in amounts and prices and at such times as deemed appropriate, subject to market conditions and other considerations. Our repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. Total repurchases under this program as of December 31, 2011 were 8.6 million shares at a cost of $364.7 million, including 0.6 million shares at a cost of $21.7 million through open market purchases during 2011. Total repurchases include two accelerated share repurchase agreements with Barclays Bank plc, acting through its agent, Barclays Capital, Inc., for repurchases of 2.3 million shares of our common stock at a cost of $105.0 million on March 30, 2010 and repurchases of 2.4 million shares at a cost of $105.2 million on December 8, 2009.
Shares purchased in the fourth quarter of 2011 are as follows:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs |
||||||||||||
October 1 31, 2011 (1) |
22,261 | $ | 33.51 | 21,432 | $ | 136,300,000 | ||||||||||
November 1 30, 2011 (2) |
8,930 | 35.30 | | 136,300,000 | ||||||||||||
December 1 31, 2011 (3) |
31,866 | 33.51 | 30,000 | 135,200,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
63,057 | $ | 33.76 | 51,432 | $ | 135,200,000 | ||||||||||
|
|
|
|
|
|
|
|
(1) | Includes 829 shares withheld to satisfy tax withholding amounts due from employees related to the receipt of stock which resulted from the vesting of restricted stock units. |
(2) | The total number of shares purchased reflects shares withheld to satisfy tax withholding amounts due from employees related to the receipt of stock which resulted from the vesting of restricted stock units. |
(3) | Includes 1,866 shares withheld to satisfy tax withholding amounts due from employees related to the receipt of stock which resulted from the vesting of restricted stock units. |
-38-
ITEM 6-SELECTED FINANCIAL DATA
Five Year Summary Of Selected Financial Highlights
For The Years Ended December 31 |
2011 (1) | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
(in millions, except per share data) | ||||||||||||||||||||
Statements of Income |
||||||||||||||||||||
Revenues |
||||||||||||||||||||
Premiums |
$ | 3,598.6 | $ | 2,841.0 | $ | 2,546.4 | $ | 2,484.9 | $ | 2,372.0 | ||||||||||
Net investment income |
258.2 | 247.2 | 252.1 | 258.7 | 247.0 | |||||||||||||||
Net realized investment gains (losses) |
28.1 | 29.7 | 1.4 | (97.8 | ) | (0.9 | ) | |||||||||||||
Fees and other income |
46.7 | 34.3 | 34.2 | 34.6 | 56.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
3,931.6 | 3,152.2 | 2,834.1 | 2,680.4 | 2,674.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Losses and Expenses |
||||||||||||||||||||
Losses and loss adjustment expenses |
2,550.8 | 1,856.3 | 1,639.2 | 1,626.2 | 1,457.4 | |||||||||||||||
Policy acquisition expenses |
854.0 | 669.0 | 581.3 | 556.2 | 523.6 | |||||||||||||||
Net loss (gain) from retirement of debt |
2.3 | 2.0 | (34.5 | ) | | | ||||||||||||||
Other operating expenses |
502.2 | 413.8 | 377.2 | 333.6 | 351.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total losses and expenses |
3,909.3 | 2,941.1 | 2,563.2 | 2,516.0 | 2,332.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
22.3 | 211.1 | 270.9 | 164.4 | 341.5 | |||||||||||||||
Income tax expense (benefit) |
(9.6 | ) | 57.9 | 83.1 | 79.9 | 113.2 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income from continuing operations |
31.9 | 153.2 | 187.8 | 84.5 | 228.3 | |||||||||||||||
Discontinued operations (net of taxes): |
||||||||||||||||||||
Gain (loss) from discontinued FAFLIC business |
2.9 | 0.5 | 7.1 | (84.8 | ) | 10.9 | ||||||||||||||
Other discontinued operations |
2.3 | 1.1 | 2.3 | 20.9 | 13.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from discontinued operations |
5.2 | 1.6 | 9.4 | (63.9 | ) | 24.8 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 37.1 | $ | 154.8 | $ | 197.2 | $ | 20.6 | $ | 253.1 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income per common share (diluted) |
$ | 0.81 | $ | 3.34 | $ | 3.86 | $ | 0.40 | $ | 4.83 | ||||||||||
Dividends declared per common share |
$ | 1.13 | $ | 1.00 | $ | 0.75 | $ | 0.45 | $ | 0.40 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance Sheets (at December 31) |
||||||||||||||||||||
Total assets |
$ | 12,624.4 | $ | 8,569.9 | $ | 8,042.7 | $ | 9,230.2 | $ | 9,815.6 | ||||||||||
Debt |
911.1 | 605.9 | 433.9 | 531.4 | 511.9 | |||||||||||||||
Total liabilities |
10,114.6 | 6,109.4 | 5,684.1 | 7,343.0 | 7,516.6 | |||||||||||||||
Shareholders equity |
2,509.8 | 2,460.5 | 2,358.6 | 1,887.2 | 2,299.0 |
(1) | Includes results of Chaucer Holdings plc for the period from July 1, 2011 through December 31, 2011. |
-39-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE OF CONTENTS
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80 |
The following Managements Discussion and Analysis of Financial Condition and Results of Operations is intended to assist readers in understanding the consolidated results of operations and financial condition of The Hanover Insurance Group, Inc. and subsidiaries (THG), and should be read in conjunction with the Consolidated Financial Statements and related footnotes included elsewhere herein.
Our results of operations include the accounts of The Hanover Insurance Company (Hanover Insurance) and Citizens Insurance Company of America (Citizens), our principal U.S. domiciled property and casualty companies; Chaucer Holdings plc (Chaucer), and certain other insurance and non-insurance subsidiaries. Effective July 1, 2011, we acquired Chaucer, a specialist insurance underwriting group which operates through the Society and Corporation of Lloyds (Lloyds) and is domiciled in the United Kingdom (U.K.). Our results of operations include Chaucers results for the period from July 1, 2011 through December 31, 2011. Additionally, our results of operations include our discontinued operations, consisting of our former life insurance and accident and health businesses.
Our business operations consist of four operating segments: Commercial Lines, Personal Lines, Chaucer and Other Property and Casualty.
As further described in Note 2 Acquisitions and Discontinued Operations on pages 96 to 98 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K, we acquired Chaucer on July 1, 2011, which has added meaningful business volumes to the six months ended December 31, 2011 and has affected the comparability of our consolidated financial statements and related footnotes. For the year ended December 31, 2011, our discussion of the results of operations reflects Chaucers results only for the period from July 1, 2011 through December 31, 2011, while the Commercial Lines, Personal Lines, and Other Property and Casualty segments include results for all of 2011. Results of operations for the comparable periods in 2009 and 2010 do not include any results of Chaucer. Chaucers financial results for the six months ended December 31, 2011 will be discussed separately.
Our segment income excluding taxes and interest of $72.5 million in 2011, includes $32.3 million of segment income generated by Chaucer. Our pre-tax segment earnings declined in 2011, principally due to an unprecedented level of weatherrelated events that affected the property and casualty industry. Pre-tax catastrophe losses were $361.6 million during 2011, of which $49.5 million related to our Chaucer segment. During 2010, pre-tax catastrophe losses were $160.3 million. Our 2011 catastrophe losses were principally the result of winter storms, tornado, hail and windstorm activity in both the Midwest and the Northeast in the first half of the year, Hurricane Irene and floods in Thailand and Denmark during the second half of 2011. A decrease of $43.3 million in favorable development on prior years loss and loss adjustment expense (LAE) reserves, primarily from Commercial and Personal lines, also contributed to the overall decline in segment results from the prior year. Segment income for our Commercial, Personal, and Other Property and Casualty lines, excluding catastrophes and development, was $284.5 million in 2011, compared to $276.9 million in 2010, reflecting growth in earned premium and the resulting positive effect on our expense ratio, and what we believe is an improved mix of business, partially offset by increased non-catastrophe weather-related losses.
Commercial Lines
We believe our small commercial capabilities, distinctiveness in the middle market, and continued development of specialty lines provides us with a diversified portfolio of products and delivers significant value to agents and policyholders. The small commercial and middle market accounts are expected to significantly contribute to premium growth in Commercial Lines over the next several years. We expect to pursue our core strategy of developing deep partnerships with agents, distinctive products, franchise value through limited distribution, and industry segmentation.
Growth in our specialty lines continues to be a significant part of our strategy. The expansion of product offerings in our specialized lines has been supported by several acquisitions over the past several years. Our Commercial Lines segment net written premium grew by 7.5% in 2011, with contributions from both our specialty lines and core segments. Our net earned premium increased by 19.5% in 2011, primarily as a result of fully earning in premiums written previously pursuant to the 2010 renewal rights transaction with OneBeacon Insurance Group (OneBeacon).
We believe these efforts have and will continue to drive improvement in our overall mix of business and ultimately our underwriting profitability. Our losses and loss adjustment expenses were higher in 2011 as compared to the prior year, primarily due to the high level of catastrophe losses and, to a lesser extent, non-catastrophe weather-related losses. Notwithstanding the increase in losses and LAE, there was a modest increase in current accident year income primarily due to the growth in earned premium and changes to our mix of business.
-41-
The competitive nature of the Commercial Lines market requires us to be highly disciplined in our underwriting process to ensure that we write business only at acceptable margins. In certain lines of business where a weak economy may be a particularly important factor, such as surety and workers compensation, we endeavor to adjust pricing or take a more conservative approach to risk selection in order to more appropriately reflect the higher risk of loss. Additionally, we are seeking additional rate increases in our property lines as a result of the heightened catastrophe and non-catastrophe weather-related losses that we experienced in 2011.
Personal Lines
In our Personal Lines business, we focus on partnering with high quality, value-added agencies that deliver consultative selling and stress the importance of account rounding (the conversion of single policy customers to accounts with multiple policies and additional coverages). Almost 70% of our policies in force in 2011 were account business. We are focused on making investments that help maintain profitability, build a distinctive position in the market, help diversify us geographically from our historical core states of Michigan, Massachusetts, New York, and New Jersey and provide us with profitable growth opportunities.
Written premiums in Personal Lines in 2011 were comparable to 2010. Underwriting results, excluding catastrophes, improved slightly in 2011, as compared to 2010. Lower operating expenses in 2011 were partially offset by less favorable current accident year results driven by non-catastrophe weather-related losses. Similar to our strategy in Commercial Lines, we are seeking additional rate increases in our property lines (homeowners coverage) as a result of the recent catastrophe and non-catastrophe weather-related losses that the industry experienced. In addition, continued increases in premium are expected in our target growth states as we seek to improve profitability and diversify from our existing core states.
Chaucer
We deploy specialist underwriters in over 30 major insurance and reinsurance classes throughout our diversified portfolio, which includes property, marine and aviation, energy, U.K. motor and casualty. We access business through Lloyds, the leading international insurance and reinsurance market, which provides us with access to specialist business in over 200 countries and territories worldwide through its international licenses, brand reputation and strong security rating.
We currently expect underwriting opportunities to increase, and terms and conditions to improve across the majority of international risk classes for our Chaucer business in 2012. This follows a difficult period for international insurance markets since 2010, with increased frequency and severity of both natural and man-made catastrophes worldwide.
We expect to focus more of our capital and underwriting capabilities in those areas where we expect rates to be more favorable, in particular, for catastrophe-exposed property, marine and energy risks, and less toward business where rates are currently under pressure, notably casualty and aviation. We also expect to benefit from continued rate increases in the U.K. motor market, which comprised approximately 28% of Chaucers net written premium for the six months ended December 31, 2011. We are also seeking opportunities to diversify the business further, including the development of new lines of business, such as international liability, that we expect to meet our return on capital criteria.
Overall, we believe that the strength and depth of our underwriting teams, the broad diversity of our underwriting portfolio and our membership in the Lloyds platform, together underpin our ability to manage both the scale and composition of our business. Moreover, these strengths, combined with our continued active management of our portfolio and the opportunities that we expect to arise across the majority of our markets, provide a strong basis for the profitable development of the Chaucer business.
Description of Operating Segments
Our primary business operations include insurance products and services currently provided through four operating segments. These operating segments are Commercial Lines, Personal Lines, Chaucer and Other Property and Casualty. Commercial Lines includes commercial multiple peril, commercial automobile, workers compensation and other commercial coverages, such as specialty program business, inland marine, surety and other bonds, professional liability and management liability. Personal Lines includes personal automobile, homeowners and other personal coverages. Chaucer includes property, marine and aviation, energy, U.K. motor, and casualty and other coverages (which includes international liability, specialist coverages, and syndicate participations). The Other Property and Casualty segment consists of Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; and, a voluntary pools business which is in run-off. We present the separate financial information of each segment consistent with the manner in which our chief operating decision maker evaluates results in deciding how to allocate resources and in assessing performance.
-42-
We report interest expense related to our debt separately from the earnings of our operating segments. Our debt consists of senior debentures, junior debentures, subordinated notes, advances under our collateralized borrowing program with the Federal Home Loan Bank of Boston (FHLBB), and capital securities.
Results of Operations Net Income
Our consolidated net income includes the results of our four operating segments (segment income), which we evaluate on a pre-tax basis and excluding interest expense on debt. Segment income excludes certain other items which we believe are not indicative of our core operations, such as income taxes and net realized investment gains and losses, including net gains and losses on certain derivative instruments. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses on disposals of businesses, discontinued operations, costs to acquire businesses, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income may be significant components in understanding and assessing our financial performance, we believe a discussion of segment income enhances an investors understanding of our results of operations by segregating income attributable to the core operations of the business. However, segment income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles in the United States of America (GAAP).
Catastrophe losses and prior year reserve development are significant components in understanding and assessing the financial performance of our business. Management reviews and evaluates catastrophes and prior year reserve development separate from the other components of earnings. Catastrophes and prior-year reserve development are not predictable as to timing or the amount that will affect the results of our operations and have affected our results in the past few years. Management believes that providing certain financial metrics and trends excluding the effects of catastrophes and prior year reserve development helps investors to understand the variability in periodic earnings and to evaluate the underlying performance of our operations.
2011 Compared to 2010
Our consolidated net income was $37.1 million in 2011, compared to $154.8 million in 2010. The $117.7 million decrease is primarily driven by an increase in catastrophe losses and non-catastrophe weather-related activity, partially offset by income from our Chaucer segment. Additionally, in the year ended December 31, 2011, advisory, legal, and accounting costs associated with the acquisition of Chaucer and other acquisition expenses totaled $16.4 million. We also recorded an $11.3 million loss in connection with a foreign exchange contract entered into in connection with the acquisition of Chaucer, which was partially offset by net foreign exchange gains of $6.7 million.
2010 Compared to 2009
Our consolidated net income was $154.8 million in 2010, compared to $197.2 million in 2009. The $42.4 million decrease is primarily driven by higher catastrophe losses, which increased $39.9 million, net of taxes. Results in 2009 included a $34.5 million pre-tax gain ($22.3 million, net of taxes) associated with a tender offer, whereby we repurchased at a discount a portion of our mandatorily redeemable preferred securities and our senior debentures. In 2010, we repurchased junior debentures which resulted in a $2.0 million loss. In addition, earnings from our discontinued operations decreased by $7.8 million. Partially offsetting these decreases was a $28.3 million increase in net realized investment gains, from a gain of $1.4 million in 2009, to a gain of $29.7 million in 2010.
The following table reflects segment income as determined in accordance with GAAP and a reconciliation of total segment income to consolidated net income.
For The Years Ended December 31 |
2011 | 2010 | 2009 | |||||||
(in millions) | ||||||||||
Segment income (loss) before income taxes: |
||||||||||
Commercial Lines |
$18.0 | $ | 111.2 | $ | 189.7 | |||||
Personal Lines |
22.7 | 113.0 | 76.4 | |||||||
Chaucer |
32.3 | | | |||||||
Other Property and Casualty |
(0.5) | 3.5 | 4.0 | |||||||
|
|
|
|
|
||||||
Total |
72.5 | 227.7 | 270.1 | |||||||
Interest expense on debt |
(55.0) | (44.3 | ) | (35.1 | ) | |||||
|
|
|
|
|
||||||
Total segment income before income taxes |
17.5 | 183.4 | 235.0 | |||||||
Income tax expense on segment income |
(2.9) | (61.2 | ) | (77.5 | ) | |||||
Net realized investment gains |
28.1 | 29.7 | 1.4 | |||||||
Net gain (loss) from retirement of debt |
(2.3) | (2.0 | ) | 34.5 | ||||||
Costs related to acquired businesses |
(16.4) | | | |||||||
Loss on derivative instruments |
(11.3) | | | |||||||
Net foreign exchange gains |
6.7 | | | |||||||
Income tax benefit (expense) on non-segment items |
12.5 | 3.3 | (5.6 | ) | ||||||
|
|
|
|
|
||||||
Income from continuing operations, net of taxes |
31.9 | 153.2 | 187.8 | |||||||
Gain from discontinued operations, net of taxes |
5.2 | 1.6 | 9.4 | |||||||
|
|
|
|
|
||||||
Net income |
$37.1 | $ | 154.8 | $ | 197.2 | |||||
|
|
|
|
|
-43-
The following is our discussion and analysis of the results of operations by business segment. The segment results are presented before interest expense, taxes and other items which management believes are not indicative of our core operations, including realized gains and losses.
The following table summarizes the results of operations for the periods indicated:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Segment revenues |
||||||||||||
|
|
|
|
|
|
|||||||
Net premiums written |
$ | 3,593.4 | $ | 3,048.0 | $ | 2,608.7 | ||||||
|
|
|
|
|
|
|||||||
Net premiums earned |
3,598.6 | 2,841.0 | 2,546.4 | |||||||||
Net investment income |
258.2 | 247.2 | 251.7 | |||||||||
Other income |
51.9 | 38.9 | 38.6 | |||||||||
|
|
|
|
|
|
|||||||
Total segment revenues |
3,908.7 | 3,127.1 | 2,836.7 | |||||||||
|
|
|
|
|
|
|||||||
Losses and operating expenses |
||||||||||||
Losses and LAE |
2,550.8 | 1,856.3 | 1,639.2 | |||||||||
Policy acquisition expenses |
854.0 | 669.0 | 581.3 | |||||||||
Other operating expenses |
431.4 | 374.1 | 346.1 | |||||||||
|
|
|
|
|
|
|||||||
Total losses and operating expenses |
3,836.2 | 2,899.4 | 2,566.6 | |||||||||
|
|
|
|
|
|
|||||||
Segment income before interest expense and income taxes |
$ | 72.5 | $ | 227.7 | $ | 270.1 | ||||||
|
|
|
|
|
|
2011 Compared to 2010
Segment income was $72.5 million for the year ended December 31, 2011, compared to $227.7 million for the year ended December 31, 2010, a decrease of $155.2 million. Chaucers results accounted for $32.3 million of segment income for the year ended December 31, 2011. Catastrophe related activity for our Commercial and Personal Lines businesses was $312.1 million for the year ended December 31, 2011, compared to $160.3 million for the same period in 2010, an increase of $151.8 million. Excluding the impact of catastrophe related activity, earnings for our Commercial and Personal Lines businesses would have decreased by $35.7 million. This decrease was primarily due to higher non-catastrophe weather-related losses and LAE and lower favorable development on prior years loss and LAE reserves, partially offset by growth in earned premium and the resulting positive effect on our expense ratio and what we believe is an underlying improvement in our mix of business. Favorable development on prior years loss and LAE reserves for the year ended December 31, 2011 was $67.8 million compared to $111.1 million in the prior year, a decrease of $43.3 million.
Net premiums written grew by $545.4 million for the year ended December 31, 2011, compared to the year ended December 31, 2010, and net premiums earned grew by $757.6 million. Chaucer accounted for $428.8 million of net premiums written and $506.3 million of net premiums earned for the year ended December 31, 2011. The balance of the growth in net premiums written is attributable to Commercial Lines. A significant portion of the increase in net premiums earned in Commercial Lines is a result of the growth in net premiums written in 2010 following the OneBeacon renewal rights transaction, as well as growth in our AIX program business and in various niche and segmented businesses.
2010 Compared to 2009
Segment income was $227.7 million for the year ended December 31, 2010, compared to $270.1 million for the year ended December 31, 2009, a decrease of $42.4 million. Catastrophe related activity for our Commercial and Personal Lines businesses was $160.3 million for the year ended December 31, 2010, compared to $98.9 million for the same period in 2009, an increase of $61.4 million. This increase was primarily related to several severe hail, wind and thunderstorm events, particularly in the first half of 2010. Excluding the impact of catastrophe related activity, segment income would have increased by $19.0 million. This increase was primarily due to more favorable current accident year loss results with improvements in both Commercial and Personal Lines, partially offset by lower favorable development on prior years loss and LAE reserves, higher expenses and slightly lower net investment income. Favorable development on prior years loss and LAE reserves for the year ended December 31, 2010 was $111.1 million compared to $155.3 million in the prior year, a decrease of $44.2 million.
PRODUCTION AND UNDERWRITING RESULTS
The following table summarizes net premiums written and loss, LAE, expense and combined ratios for the Commercial Lines, Personal Lines and Chaucer segments. Results for Chaucer reflect the period from July 1, 2011 to December 31, 2011. Loss and LAE, catastrophe loss and combined ratios include prior year reserve development. These items are not meaningful for our Other Property and Casualty segment.
-44-
FOR THE YEAR ENDED DECEMBER 31, 2011 | ||||||||||||||||||||||||||||
(dollars in millions) |
Gross Written Premium |
Net Written Premium |
Net Earned Premium |
Catastrophe Loss Ratios |
Loss & LAE Ratios |
Expense Ratios |
Combined Ratios |
|||||||||||||||||||||
Commercial Lines |
$ | 1,938.0 | $ | 1,703.1 | $ | 1,641.7 | 9.0 | 68.2 | 38.9 | 107.1 | ||||||||||||||||||
Personal Lines |
1,561.3 | 1,461.2 | 1,450.5 | 11.3 | 77.1 | 27.1 | 104.2 | |||||||||||||||||||||
Chaucer |
559.6 | 428.8 | 506.3 | 9.8 | 61.9 | 35.9 | 97.8 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 4,058.9 | $ | 3,593.1 | $ | 3,598.5 | 10.0 | 70.8 | 33.8 | 104.6 | ||||||||||||||||||
|
|
|
|
|
|
FOR THE YEAR ENDED DECEMBER 31, 2010 | ||||||||||||||||||||||||||||
(dollars in millions) |
Gross Written Premium |
Net Written Premium |
Net Earned Premium |
Catastrophe Loss Ratios |
Loss & LAE Ratios |
Expense Ratios |
Combined Ratios |
|||||||||||||||||||||
Commercial Lines |
$ | 1,798.5 | $ | 1,584.8 | $ | 1,373.4 | 4.5 | 59.1 | 42.2 | 101.3 | ||||||||||||||||||
Personal Lines |
1,559.8 | 1,462.9 | 1,467.3 | 6.7 | 71.3 | 27.8 | 99.1 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 3,358.3 | $ | 3,047.7 | $ | 2,840.7 | 5.6 | 65.3 | 34.8 | 100.1 | ||||||||||||||||||
|
|
|
|
|
|
FOR THE YEAR ENDED DECEMBER 31, 2009 | ||||||||||||||||||||||||||||
(dollars in millions) |
Gross Written Premium |
Net Written Premium |
Net Earned Premium |
Catastrophe Loss Ratios |
Loss & LAE Ratios |
Expense Ratios |
Combined Ratios |
|||||||||||||||||||||
Commercial Lines |
$ | 1,352.9 | $ | 1,136.3 | $ | 1,084.8 | 2.6 | 52.8 | 41.3 | 94.1 | ||||||||||||||||||
Personal Lines |
1,562.5 | 1,472.2 | 1,461.3 | 4.8 | 73.8 | 28.3 | 102.1 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 2,915.4 | $ | 2,608.5 | $ | 2,546.1 | 3.9 | 64.3 | 33.8 | 98.2 | ||||||||||||||||||
|
|
|
|
|
|
The following table summarizes net premiums written, and loss and LAE and catastrophe loss ratios by line of business for the Commercial Lines and Personal Lines segments. Loss and LAE and catastrophe loss ratios include prior year reserve development.
FOR THE YEAR ENDED DECEMBER 31, 2011 | ||||||||||||
(dollars in millions) |
Net Premiums Written |
Loss &
LAE Ratios |
Catastrophe Loss Ratios |
|||||||||
Commercial Lines: |
||||||||||||
Commercial multiple peril |
$ | 569.5 | 74.6 | 19.3 | ||||||||
Commercial automobile |
248.9 | 65.1 | 1.0 | |||||||||
Workers compensation |
174.5 | 65.9 | | |||||||||
Other commercial |
710.2 | 64.4 | 5.7 | |||||||||
|
|
|||||||||||
Total Commercial Lines |
1,703.1 | 68.2 | 9.0 | |||||||||
|
|
|||||||||||
Personal Lines: |
||||||||||||
Personal automobile |
910.5 | 72.5 | 1.3 | |||||||||
Homeowners |
507.2 | 88.1 | 30.0 | |||||||||
Other personal |
43.5 | 50.2 | 7.9 | |||||||||
|
|
|||||||||||
Total Personal Lines |
1,461.2 | 77.1 | 11.3 | |||||||||
|
|
|||||||||||
Total |
$ | 3,164.3 | 72.4 | 10.1 | ||||||||
|
|
FOR THE YEAR ENDED DECEMBER 31, 2010 | ||||||||||||
(dollars in millions) |
Net Premiums Written |
Loss &
LAE Ratios |
Catastrophe Loss Ratios |
|||||||||
Commercial Lines: |
||||||||||||
Commercial multiple peril |
$ | 559.8 | 61.9 | 9.7 | ||||||||
Commercial automobile |
246.1 | 59.0 | 0.3 | |||||||||
Workers compensation |
161.3 | 60.6 | | |||||||||
Other commercial |
617.6 | 56.2 | 2.9 | |||||||||
|
|
|||||||||||
Total Commercial Lines |
1,584.8 | 59.1 | 4.5 | |||||||||
|
|
|||||||||||
Personal Lines: |
||||||||||||
Personal automobile |
935.1 | 72.1 | 1.0 | |||||||||
Homeowners |
485.5 | 72.3 | 18.4 | |||||||||
Other personal |
42.3 | 42.3 | 3.3 | |||||||||
|
|
|||||||||||
Total Personal Lines |
1,462.9 | 71.3 | 6.7 | |||||||||
|
|
|||||||||||
Total |
$ | 3,047.7 | 65.3 | 5.6 | ||||||||
|
|
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FOR THE YEAR ENDED DECEMBER 31, 2009 | ||||||||||||
(dollars in millions) |
Net Premiums Written |
Loss &
LAE Ratios |
Catastrophe Loss Ratios |
|||||||||
Commercial Lines: |
||||||||||||
Commercial multiple peril |
$ | 366.7 | 58.3 | 6.5 | ||||||||
Commercial automobile |
187.3 | 56.2 | 0.6 | |||||||||
Workers compensation |
109.7 | 44.1 | | |||||||||
Other commercial |
472.6 | 48.6 | 1.0 | |||||||||
|
|
|||||||||||
Total Commercial Lines |
1,136.3 | 52.8 | 2.6 | |||||||||
|
|
|||||||||||
Personal Lines: |
||||||||||||
Personal automobile |
967.9 | 74.1 | 0.4 | |||||||||
Homeowners |
464.3 | 76.1 | 14.7 | |||||||||
Other personal |
40.0 | 37.5 | 2.3 | |||||||||
|
|
|||||||||||
Total Personal Lines |
1,472.2 | 73.8 | 4.8 | |||||||||
|
|
|||||||||||
Total |
$ | 2,608.5 | 64.4 | 3.9 | ||||||||
|
|
The following table summarizes premiums written on a gross and net basis and net premiums earned by line of business for the Chaucer segment.
FOR THE SIX MONTHS ENDED DECEMBER 31, 2011 | ||||||||||||
(in millions) |
Gross Written Premium |
Net Written Premium |
Net Earned Premium |
|||||||||
Chaucer: |
||||||||||||
Marine and aviation |
$ | 140.0 | $ | 107.4 | $ | 119.0 | ||||||
U.K. motor |
139.8 | 121.8 | 124.4 | |||||||||
Energy |
97.2 | 66.7 | 82.6 | |||||||||
Property |
94.8 | 72.8 | 121.7 | |||||||||
Casualty and other |
87.8 | 60.1 | 58.6 | |||||||||
|
|
|
|
|
|
|||||||
Total Chaucer |
$ | 559.6 | $ | 428.8 | $ | 506.3 | ||||||
|
|
|
|
|
|
The following table summarizes GAAP underwriting results for the Commercial Lines, Personal Lines, Chaucer and Other Property and Casualty segments and reconciles it to segment income. Results for Chaucer reflect the period from July 1, 2011 to December 31, 2011.
FOR THE YEAR ENDED DECEMBER 31, 2011 | ||||||||||||||||||||
(in millions) | Commercial Lines |
Personal Lines |
Chaucer | Other Property and Casualty |
Total | |||||||||||||||
GAAP underwriting profit (loss), excluding prior year reserve development and catastrophes |
$ | (7.6 | ) | $ | 57.7 | $ | 25.3 | $ | (0.4 | ) | $ | 75.0 | ||||||||
Prior year favorable loss and LAE reserve development |
34.7 | 33.0 | 35.5 | 0.1 | 103.3 | |||||||||||||||
Pre-tax catastrophe effect |
(148.4 | ) | (163.7 | ) | (49.5 | ) | | (361.6 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
GAAP underwriting profit (loss) |
(121.3 | ) | (73.0 | ) | 11.3 | (0.3 | ) | (183.3 | ) | |||||||||||
Net investment income |
136.5 | 92.1 | 16.9 | 12.7 | 258.2 | |||||||||||||||
Fees and other income |
20.7 | 13.3 | 10.9 | 7.0 | 51.9 | |||||||||||||||
Other operating expenses |
(17.9 | ) | (9.7 | ) | (6.8 | ) | (19.9 | ) | (54.3 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Segment income (loss) before income taxes |
$ | 18.0 | $ | 22.7 | $ | 32.3 | $ | (0.5 | ) | $ | 72.5 | |||||||||
|
|
|
|
|
|
|
|
|
|
FOR THE YEAR ENDED DECEMBER 31, 2010 | ||||||||||||||||
(in millions) | Commercial Lines |
Personal Lines |
Other Property and Casualty |
Total | ||||||||||||
GAAP underwriting profit (loss), excluding prior year reserve development and catastrophes |
$ | (20.5 | ) | $ | 51.5 | $ | | $ | 31.0 | |||||||
Prior year favorable loss and LAE reserve development |
61.5 | 48.8 | 0.8 | 111.1 | ||||||||||||
Pre-tax catastrophe effect |
(61.6 | ) | (98.7 | ) | | (160.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
GAAP underwriting profit (loss) |
(20.6 | ) | 1.6 | 0.8 | (18.2 | ) | ||||||||||
Net investment income |
129.9 | 102.9 | 14.4 | 247.2 | ||||||||||||
Fees and other income |
19.0 | 13.6 | 6.3 | 38.9 | ||||||||||||
Other operating expenses |
(17.1 | ) | (5.1 | ) | (18.0 | ) | (40.2 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment income before income taxes |
$ | 111.2 | $ | 113.0 | $ | 3.5 | $ | 227.7 | ||||||||
|
|
|
|
|
|
|
|
FOR THE YEAR ENDED DECEMBER 31, 2009 | ||||||||||||||||
(in millions) | Commercial Lines |
Personal Lines | Other Property and Casualty |
Total | ||||||||||||
GAAP underwriting profit (loss), excluding prior year reserve development and catastrophes |
$ | (14.6 | ) | $ | (12.7 | ) | $ | (0.1 | ) | $ | (27.4 | ) | ||||
Prior year favorable loss and LAE reserve development |
104.1 | 39.4 | 11.8 | 155.3 | ||||||||||||
Pre-tax catastrophe effect |
(28.6 | ) | (70.3 | ) | | (98.9 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
GAAP underwriting profit (loss) |
60.9 | (43.6 | ) | 11.7 | 29.0 | |||||||||||
Net investment income |
125.6 | 109.6 | 16.5 | 251.7 | ||||||||||||
Fees and other income |
18.4 | 14.4 | 5.8 | 38.6 | ||||||||||||
Other operating expenses |
(15.2 | ) | (4.0 | ) | (30.0 | ) | (49.2 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment income before income taxes |
$ | 189.7 | $ | 76.4 | $ | 4.0 | $ | 270.1 | ||||||||
|
|
|
|
|
|
|
|
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2011 Compared to 2010
Commercial Lines
Commercial Lines net premiums written was $1,703.1 million for the year ended December 31, 2011, compared to $1,584.8 million for the year ended December 31, 2010. This $118.3 million increase was primarily driven by growth in our specialty businesses, particularly in our AIX program business, which accounted for $57.1 million of this growth. Also benefiting the overall growth comparison in net premiums written were modest rate increases.
Commercial Lines underwriting loss for the year ended December 31, 2011 was $121.3 million, compared to $20.6 million for the year ended December 31, 2010, an increase in losses of $100.7 million. This was due to higher weather-related losses and LAE, including catastrophes, and decreased favorable development on prior years loss and LAE reserves, partially offset by growth in earned premium and the resulting positive effect on our expense ratio. Catastrophe losses for the year ended December 31, 2011 were $148.4 million, primarily due to Hurricane Irene during the third quarter, significant tornado, hail and windstorm activity in the second quarter and winter storms in the first quarter, compared to $61.6 million for the year ended December 31, 2010, an increase of $86.8 million. Favorable development on prior years loss and LAE reserves for the year ended December 31, 2011 was $34.7 million, compared to $61.5 million for the year ended December 31, 2010, a decrease of $26.8 million. Included in 2010 results was $7.5 million of favorable LAE development, principally related to a change in the cost factors used for establishing unallocated LAE reserves.
Commercial Lines underwriting loss, excluding catastrophe and prior year loss and LAE reserve development, for the year ended December 31, 2011, was $7.6 million, compared to $20.5 million for the year ended December 31, 2010. This $12.9 million improvement resulted from growth in earned premium and the resulting positive effect on our expense ratio, and from what we believe to be an improved mix of business. Partially offsetting the effect of this growth were higher non-catastrophe weather-related losses and LAE, and higher losses in our surety business. The higher level of earned premiums primarily resulted from our 2010 OneBeacon transaction, from growth in our AIX program business, and from other growth initiatives.
Our ability to increase Commercial Lines net premiums written while maintaining or improving underwriting results may be affected by competition and the current challenging economic environment.
Personal Lines
Personal Lines net premiums written for the year ended December 31, 2011 was $1,461.2 million, compared to $1,462.9 million for the year ended December 31, 2010, a decrease of $1.7 million. The most significant factors contributing to this small decrease were actions we have taken to reduce our market concentration in Louisiana, and our continued focus on driving profit improvement in our core states through both rate increases and more selective portfolio management, resulting in lower new business activity. These decreases were partially offset by higher rates in both our personal automobile and homeowners lines, and by a net premiums written increase of 7.1% in our target growth states. Continued increases in premium are expected in our target growth states as we seek to improve profitability in those states and diversify from our core states.
Net premiums written in the personal automobile line of business declined 2.6%, primarily as a result of fewer policies in force in Michigan, Massachusetts, New York and Florida. We attribute the decrease in policies in force to more selective portfolio management, and to rate increases we have implemented despite the competitive pricing environment. Net premiums written in the homeowners line of business increased 4.5%, resulting primarily from rate increases.
Personal Lines underwriting loss for the year ended December 31, 2011 was $73.0 million, compared to a profit of $1.6 million for the year ended December 31, 2010, a decrease of $74.6 million. This decrease is due to higher weather-related losses and LAE, including catastrophes, and to decreased favorable development on prior years loss and LAE reserves, partially offset by lower operating expenses. Catastrophe losses were $163.7 million for the year ended December 31, 2011, including significant winter storms, tornado, hail and windstorm activity in the first half of the year and Hurricane Irene during the third quarter, compared to $98.7 million for the year ended December 31, 2010, an increase of $65.0 million. Favorable development on prior years loss and LAE reserves was $33.0 million for the year ended December 31, 2011, compared to $48.8 million for the year ended December 31, 2010, a decrease of $15.8 million. Included in 2010 results was $2.3 million of favorable LAE development, principally related to a change in the cost factors used for establishing unallocated LAE reserves.
Personal Lines underwriting profit, excluding prior year loss and LAE reserve development and catastrophes, was $57.7 million for the year ended December 31, 2011, compared to $51.5 million for the year ended December 31, 2010, an increase of $6.2 million. This increase in non-catastrophe current accident year results was primarily due to lower operating expenses and what we believe is an improved mix of business, partially offset by non-catastrophe weather-related losses.
Although we have been able to obtain rate increases in our Personal Lines markets, our ability to maintain and increase Personal Lines net written premium and to maintain and improve underwriting results could be affected by price competition, regulatory and legal developments and the current challenging economic conditions, particularly
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in Michigan, which is our largest state. Our rate actions have adversely affected our ability to increase our policies in force and new business, particularly in our core states and in Florida. There is no assurance that we will be able to maintain our current level of production or maintain or increase rates in light of the highly competitive environment. We may also implement various rate, underwriting, and other actions to create capacity for growing partner agent account business, reduce our property concentrations, and with a view to increasing our longer-term profitability. Such events may affect our ability to grow.
Chaucer
Chaucers net premiums written was $428.8 million for the six months ended December 31, 2011. By line of business, Chaucers net premiums written were comprised of 28.4% U.K. motor, 25.0% marine and aviation, 17.0% property, 15.6% energy and 14.0% casualty and other lines. This business mix reflects our specialist underwriting strategy and active management of our portfolio.
Chaucers underwriting profit for the six months ended December 31, 2011 was $11.3 million. Catastrophe losses for the six months ended December 31, 2011 were $49.5 million, principally due to floods in Thailand and Denmark. Favorable development on prior years loss and LAE reserves for the six months ended December 31, 2011 was $35.5 million.
Chaucers underwriting profit, excluding prior year loss and LAE development and catastrophes, was $25.3 million in the six months ended December 31, 2011. Underwriting expenses of $181.8 million represented 35.9% of earned premium.
We currently expect to achieve rate increases for a majority of Chaucer lines in 2012. Recent natural catastrophe losses, particularly those affecting the U.S., New Zealand, Japan and Thailand, are triggering rate increases in the majority of catastrophe-exposed territories. We also expect to see terms and conditions improve in our energy portfolio as markets respond to losses in 2011. We expect our casualty and aviation accounts to remain challenging, with over-capacity affecting pricing. In our U.K. motor account, which has experienced significant price increases since 2010, we expect more modest rate increases in 2012, although we anticipate these will exceed claims inflation. There can be no assurance that we will be able to maintain or increase our rates in light of economic and regulatory conditions in our markets.
Other Property and Casualty
Other Property and Casualty segment loss for the year ended December 31, 2011 was $0.5 million, compared to a profit of $3.5 million for the year ended December 31, 2010. The $4.0 million decrease is primarily due to lower net investment income and less favorable development in our run-off voluntary pools.
2010 Compared to 2009
Commercial Lines
Commercial Lines net premiums written was $1,584.8 million for the year ended December 31, 2010, compared to $1,136.3 million for the year ended December 31, 2009. This $448.5 million increase was primarily driven by increased premiums associated with the OneBeacon renewal rights transaction of $289.1 million, and growth in our managed program business through AIX, which accounted for $63.9 million, as well as growth in various niche and segmented businesses. Also benefiting the overall growth comparison in net premiums written was a slight improvement in rate.
Commercial Lines underwriting loss for the year ended December 31, 2010 was $20.6 million, compared to a profit of $60.9 million for the year ended December 31, 2009, a decrease of $81.5 million. This decrease was primarily due to a reduction in favorable prior year loss and LAE reserve development, increased catastrophe losses resulting from several severe hail, wind and thunderstorm events, and to higher expenses, partially offset by more favorable current accident year loss results. Catastrophe losses for the year ended December 31, 2010 were $61.6 million, compared to $28.6 million for the year ended December 31, 2009, an increase of $33.0 million. This increase was primarily in our commercial multiple peril line.
Favorable development on prior years loss and LAE reserves for the year ended December 31, 2010 was $61.5 million, compared to $104.1 million for the year ended December 31, 2009, a decrease of $42.6 million. This change was primarily related to our surety bonds, workers compensation, and commercial multiple peril lines. Included in the current year results was $7.5 million of favorable LAE development, principally related to a change in the cost factors used for establishing unallocated LAE reserves. LAE in 2009 includes a benefit of $18.0 million, including $14.4 million associated with prior accident years, related to a change in our unallocated loss adjustment expense reserving methodology.
Commercial Lines underwriting loss, excluding prior year loss and LAE reserve development and catastrophes, for the year ended December 31, 2010, was $20.5 million, compared to $14.6 million for the year ended December 31, 2009. This $5.9 million increase in losses was primarily due to increased operating expenses, principally attributable to costs associated with our westward expansion initiative, increased variable compensation, and increased costs in our specialty business. These factors were partially offset by more favorable current accident year loss results, primarily in our surety bond and commercial multiple peril businesses.
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Personal Lines
Personal Lines net premiums written for the year ended December 31, 2010 was $1,462.9 million, compared to $1,472.2 million for the year ended December 31, 2009, a decrease of $9.3 million. The most significant factor contributing to lower net premiums written is our continued focus on driving profit improvement in our core states, resulting in lower new business activity. Policies in force in our core states decreased 7% in 2010. This was largely offset by our efforts to diversify our Personal Lines business into targeted growth states. Policies in force in our target growth states increased 4% in 2010.
Net premiums written in the personal automobile line of business declined 3.4%, primarily as a result of lower policies in force in Michigan, Massachusetts, Florida and New York, which we attribute to our efforts to improve or maintain margins in those states and the competitive pricing environment. Net premiums written in the homeowners line of business increased 4.6%, resulting primarily from rate actions in 2010. Policies in force in the homeowners line increased in our targeted growth states, primarily from our account rounding initiatives.
Personal Lines underwriting profit for the year ended December 31, 2010 was $1.6 million, compared to a loss of $43.6 million for the year ended December 31, 2009, an increase of $45.2 million. This increase was primarily due to more favorable current accident year loss results, principally resulting from benign loss trends, which we attribute to improved non-catastrophe weather, and improvement in our mix of business, shifting to a greater proportion of whole account business, continued rate increases in both personal automobile and homeowners lines, and to lower expenses. These were partially offset by increased catastrophe losses due to several severe hail, wind, and thunderstorm events. Catastrophe losses were $98.7 million for the year ended December 31, 2010, compared to $70.3 million for the year ended December 31, 2009, an increase of $28.4 million.
Favorable development on prior years loss and LAE reserves was $48.8 million for the year ended December 31, 2010, compared to $39.4 million for the year ended December 31, 2009, an increase of $9.4 million. Included in the current year results was $2.3 million of favorable LAE development, principally related to a change in the cost factors used for establishing unallocated loss adjustment expense reserves. LAE in 2009 included a benefit of $2.0 million, including $1.6 million associated with prior accident years, related to a change in our unallocated loss adjustment expense reserving methodology.
Personal Lines underwriting profit, excluding prior year loss and LAE reserve development and catastrophes, was $51.5 million for the year ended December 31, 2010, compared to a loss of $12.7 million for the year ended December 31, 2009, an increase of $64.2 million. This increase was primarily due to more favorable current accident year loss results, principally resulting from lower frequency of losses, which we attribute to improved non-catastrophe weather and benign loss trends. Additionally, we experienced an improvement in our mix of business, shifting to a greater proportion of whole account business, as well as continued rate increases in both the personal automobile and homeowners lines. Also, underwriting and other operating expenses decreased, primarily due to lower pension costs, the favorable resolution of a loss contingency and to lower technology costs.
Other Property and Casualty
Other Property and Casualty segment income for the year ended December 31, 2010 was $3.5 million, compared to $4.0 million for the year ended December 31, 2009. The $0.5 million decrease is primarily due to lower favorable development in our run-off voluntary pools, partially offset by lower pension costs in 2010.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Overview of Loss Reserve Estimation Process
We maintain reserves for our property and casualty products to provide for our ultimate liability for losses and loss adjustment expenses (our loss reserves) with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves are estimates, taking into account past loss experience, modified for current trends, as well as prevailing economic, legal and social conditions. Loss reserves represent our largest liability.
Our loss reserves include case estimates for claims that have been reported and estimates for claims that have been incurred but not reported (IBNR) at the balance sheet date. They also include estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Our property and casualty loss reserves are not discounted to present value.
Case reserves are established by our claim personnel individually on a claim by claim basis and based on information specific to the occurrence and terms of the underlying policy. For some classes of business, average case reserves are used initially. Case reserves are periodically reviewed and modified based on new or additional information pertaining to the claim.
IBNR reserves are estimated by management and our reserving actuaries on an aggregate basis for each line of business or coverage for loss and loss expense liabilities not reflected within the case reserves. The sum of the case reserves and the IBNR reserves represents our estimate of total unpaid losses and loss adjustment expenses.
-49-
We regularly review our loss reserves using a variety of industry accepted analytical techniques. We update the loss reserves as historical loss experience develops, additional claims are reported and resolved and new information becomes available. Net changes in loss reserves are reflected in operating results in the period in which the reserves are changed.
IBNR reserves are generally calculated by first projecting the ultimate cost of all claims that have occurred or are expected to occur in the future and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which may not yet be known to the insured, as well as a provision for future development on reported claims. IBNR represents a significant proportion of our total net loss reserves, particularly for long-tail liability classes. In fact, approximately 42% of our aggregate net loss reserves at December 31, 2011 were for IBNR losses and loss expenses.
Managements process for establishing loss reserves is a comprehensive process that involves input from multiple functions throughout our organization, including finance, actuarial, claims, legal, underwriting, distribution and business operations management. The process incorporates facts currently known and the present, and in some cases, the anticipated, state of the law and coverage litigation. Based on information currently available, we believe that the aggregate loss reserves at December 31, 2011 were adequate to cover claims for losses that had occurred as of that date, including both those known to us and those yet to be reported. However, as described below, there are significant uncertainties inherent in the loss reserving process. Our estimate of the ultimate liability for losses that had occurred as of December 31, 2011 is expected to change in future periods as we obtain further information, and such changes could have a material effect on our results of operations and financial condition.
Critical Judgments and Key Assumptions
We determine the amount of our loss reserves based on an estimation process that is very complex and uses information from both company specific and industry data, as well as general economic and other information. The estimation process is a combination of objective and subjective information, the blending of which requires significant professional judgment. There are various assumptions required, including future trends in frequency and severity of claims, operational changes in claim handling, and trends related to general economic and social conditions. Informed subjective estimates and judgments as to our ultimate exposure to losses are an integral component of our loss reserve estimation process.
Given the inherent complexity of our loss reserve estimation process and the potential variability of the assumptions used, the actual emergence of losses will vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly in those instances where settlements or other claim resolutions do not occur until well into the future. Our net loss reserves at December 31, 2011 were $3.8 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on our results of operations.
There is greater inherent uncertainty in estimating insurance reserves for certain types of property and casualty insurance lines, particularly liability lines, where a longer period of time may elapse before a definitive determination of ultimate liability and losses may be made. In addition, the technological, judicial, regulatory and political climates involving these types of claims are continuously evolving. There is also greater uncertainty in establishing reserves with respect to business that is new to us, particularly new business which is generated with respect to newly introduced product lines, by newly appointed agents or in geographies in which we have less experience in conducting business, such as the program business written by our AIX subsidiary, Chaucers international liability lines, our new professional liability specialty lines, and business written in the western part of the United States. In some of these cases, there is less historical experience or knowledge and less data upon which we can rely. A combination of business that is both new to us and has longer development periods, provides even greater uncertainty in estimating insurance reserves. Historically, we have limited the issuance of long-tailed other liability policies, including directors and officers (D&O) liability, errors and omissions (E&O) liability and medical professional liability. With the acquisition of Hanover Professionals in 2007, which writes lawyers professional E&O coverage, the acquisition of Campania in 2010, which writes medical professional liability and product liability coverages, and the introduction of new specialty coverages, such as our other professional management liability products, we are increasing, and expect to continue to increase, our exposure to longer tailed liability lines, including D&O coverages. The Chaucer business acquired this year contains several international and U.S. liability lines, of which financial institution and professional liability, international liability and energy liability, contribute the most uncertainty.
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We regularly update our reserve estimates as new information becomes available and additional events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in the results of operations as adjustments to losses and LAE. Often, these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and the loss event occurred. When these types of subsequent adjustments affect prior years, they are described separately as prior year reserve development. Such development can be either favorable or unfavorable to our financial results and may vary by line of business. As discussed below, estimated loss and LAE reserves for claims occurring in prior years developed favorably by $103.3 million, $111.1 million, and $155.3 million for the years ended December 31, 2011, 2010, and 2009, respectively. However, we have experienced unfavorable development in prior years and there can be no absolute assurance that current loss and LAE reserves will be sufficient.
We regularly review our reserving techniques, our overall reserving position and our reinsurance. Based on (i) our review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages and policy coverage, political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience and that of the industry, (iv) the nature of policies written by us, and (v) our internal estimates of required reserves, we believe that adequate provision has been made for loss reserves. However, establishment of appropriate reserves is an inherently uncertain process and there can be no certainty that current established reserves will prove adequate in light of subsequent actual experience. A significant change to the estimated reserves could have a material impact on our results of operations and financial position. An increase or decrease in reserve estimates would result in a corresponding decrease or increase in financial results. For example, each one percentage point change in the aggregate loss and LAE ratio resulting from a change in reserve estimation is currently projected to have an approximate $36 million impact on segment income, based on 2011 full year premiums.
The major causes of material uncertainty relating to ultimate losses and loss adjustment expenses (risk factors) generally vary for each line of business, as well as for each separately analyzed component of the line of business. In some cases, such risk factors are explicit assumptions of the estimation method and in others, they are implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain unchanged. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.
Some risk factors affect multiple lines of business. Examples include changes in claim department practices, changes in settlement patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state mix of claimants, and degree of claimant fraud. Additionally, there is also a higher degree of uncertainty due to growth in our newly acquired businesses, with respect to which we have less familiarity and, in some cases, limited historical claims experience. The extent of the impact of a risk factor will also vary by components within a line of business. Individual risk factors are also subject to interactions with other risk factors within line of business components. Thus, risk factors can have offsetting or compounding effects on required reserves.
Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation varies by product. Our property and casualty insurance premiums are established before the amount of losses and LAE and the extent to which inflation may affect such expenses are known. Consequently, we attempt, in establishing rates and reserves, to anticipate the potential impact of inflation in the projection of ultimate costs. For example, we have experienced increasing medical and attendant care costs, including those associated with automobile personal injury protection claims, particularly in Michigan, as well as in our workers compensation line in most states. Also, the U.K. motor business written by Chaucer recently has experienced high levels of claims inflation and increases in potential fraud-type claims. These increases are reflected in our current reserve estimates, but continued increases could contribute to increased losses and LAE in the future.
We are also defendants in various litigation matters, including putative class actions, which may claim punitive damages, bad faith or extra-contractual damages, legal fees and interest, or claim a broader scope of policy coverage than our interpretation. Resolution of these cases are often highly unpredictable and could involve material unanticipated damage awards.
Loss and LAE Reserves by Line of Business
Reserving Process Overview
Our loss reserves include amounts related to short-tail and long-tail classes of business. Tail refers to the time period between the occurrence of a loss and the final settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount is likely to vary from our original estimate.
Short-tail classes consist principally of automobile physical damage, homeowners property, commercial property and marine business. The Chaucer business, while having
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a longer tail on average than the our traditional U.S. business, contains a substantial book of U.K. motor property damage, worldwide property insurance and reinsurance business, including certain high excess property layers, marine property, aviation property and energy property business which has relatively short development patterns. For these property coverages, claims are generally reported and settled shortly after the loss occurs because the claims relate to tangible property and are more likely to be discovered shortly after the loss occurs and property losses are often more easily valued. Consequently, the estimation of loss reserves for these classes is generally less complex. However, this is less true for our Chaucer reinsurance business and high excess property layers where there is often a longer period of time between the date a claim is incurred and the date the claim is reported compared with our direct insurance operations. Therefore, the risk of delayed recognition of loss reserve development is higher for our assumed reinsurance and high excess property layers than for our direct insurance lines.
While we estimate that a majority of our written premium is in what we would characterize as shorter tailed classes of business, most of our loss reserves relate to longer tail liability classes of business. Long-tailed classes include commercial liability, automobile liability, workers compensation and other types of third party coverage. Chaucer business longer tailed lines include aviation liability, marine liability, energy liability, nuclear liability, U.K. motor medical and liability, international liability, specialist liability, and financial institutions and professional liability. For many liability claims, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the discovery and reporting of the loss to us and the settlement of the claim. As a result, loss experience in the more recent accident years for long-tailed liability coverage has limited statistical credibility because a relatively small proportion of losses in these accident years are reported claims and an even smaller proportion are paid losses. An accident year is the calendar year in which a loss is incurred. Liability claims are also more susceptible to litigation and can be significantly affected by changing contract interpretations, the legal environment and the risk and expense of protracted litigation. Consequently, the estimation of loss reserves for these coverages is more complex and typically subject to a higher degree of variability compared to short-tail coverages.
Most of our indirect business from voluntary and involuntary pools is long-tailed casualty reinsurance. Reserve estimates for this business are therefore subject to the variability caused by extended loss emergence periods. The estimation of loss reserves for this business is further complicated by delays between the time the claim is reported to the ceding insurer and when it is reported by the ceding insurer to the pool manager and then to us, and by our dependence on the quality and consistency of the loss reporting by the ceding company and actuarial estimates by the pool manager.
A comprehensive review of loss reserves for each of the classes of business which we write is conducted regularly, generally quarterly. This review process takes into consideration a variety of trends that impact the ultimate settlement of claims. Where appropriate, the review includes a review of overall payment patterns and the emergence of paid and reported losses relative to expectations.
The loss reserve estimation process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. As part of this process, we use a variety of analytical methods that consider experience, trends and other relevant factors. Within the comprehensive loss reserving process, standard actuarial methods which include: (1) loss development factor methods; (2) expected loss methods (Bornheutter-Ferguson); and (3) adjusted loss methods (Berquist-Sherman), are given due consideration. These methods are described below:
| Loss development factor methods generally assume that the losses yet to emerge for an accident year are proportional to the paid or reported loss amount observed to date. Historical patterns of the development of paid and reported losses by accident year can be predictive of the expected future patterns that are applied to current paid and reported losses to generate estimated ultimate losses by accident year. |
| Bornheutter-Ferguson methods utilize the product of the expected ultimate losses times the proportion of ultimate losses estimated to be unreported or unpaid (to calculate IBNR directly). The expected ultimate losses are based upon current estimates of ultimate losses from prior accident years, adjusted to reflect expected earned premium, current rating, claims cost levels and changes in business mix. The expected losses, and corresponding loss ratios, are a critical component of Bornheutter-Ferguson methodologies and provide a general reasonability guide. |
| Berquist-Sherman methods are used for estimating reserves in business lines where historical development patterns may be deemed less reliable for more recent accident years ultimate losses. Under these methods, patterns of historical paid or reported losses are first adjusted to reflect current payment settlement patterns and case reserve adequacy and then evaluated in the same manner as the loss development factor methods described above. The reported loss development factor method can be less appropriate when the adequacy of case reserves suddenly changes, while the paid loss development factor method can likewise be less appropriate when settlement patterns suddenly change. |
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In addition to the methods described above, various tailored reserving methodologies are used for certain businesses. For example, for some low volume and high volatility classes of business, special reserving techniques are utilized that estimate IBNR by selecting the loss ratio that balances actual reported losses to expected reported losses as defined by the estimated underlying reporting pattern. Also, for some classes with long exposure periods (e.g. energy construction, engineering and political risks), earnings patterns plus an estimated reporting lag applied to the Bornheutter-Ferguson initial expected loss ratio are used to estimate IBNR. This is done in order to reflect the changing average exposure periods by policy year (and consequently accident year).
In completing the loss reserve analysis, a variety of assumptions must be made for each line of business, coverage and accident year. Each estimation method has its own pattern, parameter and/or judgmental dependencies, with no estimation method being better than the others in all situations. The relative strengths and weaknesses of the various estimation methods, when applied to a particular class of business, can also change over time, depending on the underlying circumstances. In many cases, multiple estimation methods will be valid for the particular facts and circumstances of the relevant class of business. The manner of application and the degree of reliance on a given method will vary by line of business and coverage, and by accident year based on an evaluation of the above dependencies and the potential volatility of the loss frequency and severity patterns. The estimation methods selected or given weight at a particular valuation date are those that are believed to produce the most reliable indication for the loss reserves being evaluated. Selections incorporate input from claims personnel, pricing actuaries, and underwriting management on loss cost trends and other factors that could affect ultimate losses.
For most classes of shorter tailed business in our Commercial and Personal Lines segments, the emergence of paid and incurred losses generally exhibits a relatively stable pattern of loss development from one accident year to the next. Thus, for these classes, the loss development factor method is generally appropriate. For many of the classes of shorter tailed business in our Chaucer segment, the emergence of paid and incurred losses may exhibit a relatively volatile pattern of loss development from one accident year to the next. In certain cases where there is a relatively low level of reliability placed on the available paid and incurred loss data, expected loss methods or adjusted loss methods are considered appropriate for the most recent accident year.
For longer tailed lines of business, applying the loss development factor method often requires even more judgment in selecting development factors, as well as more significant extrapolation. For those long-tailed lines of business with high frequency and relatively low per-loss severity (e.g., personal automobile liability), volatility will often be sufficiently modest for the loss development factor method to be given significant weight, even in the most recent accident years, but expected loss methods and adjusted loss methods are always considered and frequently utilized in the selection process. For those long-tailed lines of business with low frequency and high loss potential (e.g., commercial liability), anticipated loss experience is less predictable because of the small number of claims and erratic claim severity patterns. In these situations, the loss development factor methods may not produce a reliable estimate of ultimate losses in the most recent accident years since many claims either have not yet been reported or are only in the early stages of the settlement process. Therefore, the loss reserve estimates for these accident years are based on methods less reliant on extrapolation, such as Bornheutter-Ferguson. Over time, as a greater number of claims are reported and the statistical credibility of loss experience increases, loss development factor methods or adjusted loss methods are given increasing weight.
Management endeavors to apply as much available data as practicable to estimate the loss reserve amount for each line of business, coverage and accident year, utilizing varying assumptions, projections and methods. The ultimate outcome is likely to fall within a range of potential outcomes around this loss reserve estimated amount.
Our carried reserves for each line of business and coverage are determined based on this quarterly loss reserving process. In making the determination, we consider numerous quantitative and qualitative factors. Quantitative factors include changes in reserve estimates in the period, the maturity of the accident year, trends observed over the recent past, the level of volatility within a particular class of business, the estimated effects of reinsurance, including reinstatement premiums, general economic trends, and other factors. Qualitative factors may include legal and regulatory developments, changes in claim handling, recent entry into new markets or products, changes in underwriting practices, concerns that we do not have sufficient or quality historical reported and paid loss and LAE information with respect to a particular line or segment of our business, effects of the economy and political outlook, perceived anomalies in the historical results, evolving trends or other factors. In doing so, we must evaluate whether a change in the data represents credible actionable information or an anomaly. Such an assessment requires considerable judgment. Even if a change is determined to be apparent, it is not always possible to determine the extent of the change. As a result, there can be a time lag between the emergence of a change and a determination that the change should be partially or fully reflected in the carried loss reserves. In general, changes are made more quickly to reserves for more mature accident years and less volatile classes of business.
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Reserving Process Uncertainties
As stated above, numerous factors (both internal and external) contribute to the inherent uncertainty in the process of establishing loss reserves, including changes in the rate of inflation for goods and services related to insured damages (e.g., medical care, home repairs, etc.), changes in the judicial interpretation of policy provisions, changes in the general attitude of juries in determining damage awards, legislative actions, changes in the extent of insured injuries, changes in the trend of expected frequency and/or severity of claims, changes in our book of business (e.g., change in mix due to new product offerings, new geographic areas, etc.), changes in our underwriting practices, and changes in claim handling procedures and/or systems. Regarding our indirect business from voluntary and involuntary pools, we are provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other facts.
In addition, we must consider the uncertain effects of emerging or potential claims and coverage issues that arise as legal, judicial, social conditions, political risks, and economic conditions change. For example, claims which we consider closed may be re-opened as additional damages surface or new liability theories are presented. These and other issues could have a negative effect on our loss reserves by either extending coverage beyond the original underwriting intent or by increasing the number or size of claims. As a result, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience further complicate the already complex loss reserving process.
As part of our loss reserving analysis, we consider the various factors that contribute to the uncertainty in the loss reserving process. Those factors that could materially affect our loss reserve estimates include loss development patterns and loss cost trends, reporting lags, rate and exposure level changes, the effects of changes in coverage and policy limits, business mix shifts, the effects of regulatory and legislative developments, the effects of changes in judicial interpretations, the effects of emerging claims and coverage issues and the effects of changes in claim handling practices. In making estimates of reserves, however, we do not necessarily make an explicit assumption for each of these factors. Moreover, all estimation methods do not utilize the same assumptions and typically no single method is determinative in the reserve analysis for a line of business and coverage. Consequently, changes in our loss reserve estimates generally are not the result of changes in any one assumption. Instead, the variability will be affected by the interplay of changes in numerous assumptions, many of which are implicit to the approaches used.
For each line of business and coverage, we regularly adjust the assumptions and methods used in the estimation of loss reserves in response to our actual loss experience, as well as our judgments regarding changes in trends and/or emerging patterns. In those instances where we primarily utilize analyses of historical patterns of the development of paid and reported losses, this may be reflected, for example, in the selection of revised loss development factors. In longer tailed classes of business and for which loss experience is less predictable due to potential changes in judicial interpretations, potential legislative actions, the cost of litigation or determining liability and the ultimate loss, inflation and potential claims issues, this may be reflected in a judgmental change in our estimate of ultimate losses for particular accident years.
The Chaucer segment contains run-off business comprised of liability lines, notably financial institutions and professional liability business written by Lloyds Syndicate 4000. There is particular uncertainty around the reserve estimates in respect of business written in 2007 and 2008 which have been subject to claims arising out of the financial turmoil in that time period, particularly in the financial institutions book. These claims are unlikely to be settled for some time since they contain numerous coverage issues and in many cases involve class action lawsuits that are likely to take several years to resolve. We have utilized substantially all of our available reinsurance with respect to losses and LAE related to Syndicate 4000 business written in 2008.
The future impact of the various factors that contribute to the uncertainty in the loss reserving process is impossible to predict. There is potential for significant variation in the development of loss reserves, particularly for long-tailed classes of business and classes of business that are more vulnerable to economic or political risks. We do not derive statistical loss distributions or confidence levels around our loss reserve estimate, and as a result, we do not establish reserve range estimates.
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Reserving Process for Catastrophe Events
The estimation of claims and claims expense reserves for catastrophes also comprises estimates of losses from reported claims and IBNR, primarily for damage to property. In general, our estimates for catastrophe reserves are determined on an event basis by considering various sources of available information, including specific loss estimates reported to us based on claim adjuster inspections, overall industry loss estimates, and our internal data regarding exposures related to the geographical location of the event. However, depending on the nature of the catastrophe, the estimation process can be further complicated by other impediments. For example, for hurricanes, complications often include the inability of insureds to promptly report losses, delays in the ability of claims adjusting staff to inspect losses, difficulties in determining whether losses are covered by our homeowners policy (generally for damage caused by wind or wind driven rain) or are specifically excluded from coverage caused by flood, and challenges in estimating additional living expenses, assessing the impact of demand surge, exposure to mold damage, and the effects of numerous other considerations. Estimates for catastrophes which occur at or near the end of a financial reporting period may be even less reliable since we will have less claims data available and little time to complete our estimation process. In such situations, we may adapt our practices to accommodate the circumstances.
For events designated as catastrophes which affect our Commercial and Personal Lines business segments, we generally calculate IBNR reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. In addition, loss emergence from similar historical events is compared to the estimated IBNR for our current catastrophe events to help assess the reasonableness of our estimates.
For events designated as catastrophes which affect our Chaucer business segment, we initially calculate IBNR reserves using a ground up exposure by exposure analysis based on each cedant or insured. These are supported by broker supplied information, catastrophe modeling and industry event estimates. As more specific claim level data becomes available over time for each catastrophe event, these initial estimates are revised and updated by claim frequency and severity modeling as described above, as appropriate for each event.
Reserving Sensitivity Analysis
The following discussion presents disclosure related to possible variation in reserve estimates due to changes in key assumptions. This information is provided for illustrative purposes only. Many other assumptions may also lead to material reserve adjustments. If any such variations do occur, they would likely occur over a period of several years and therefore their impact on our results of operations would be spread over the same period. It is important to note, however, that there is the potential for future variations greater than the amounts described below and for any such variations to be recognized in a single quarterly or annual period. No consideration has been given to potential correlation or lack of correlation among key assumptions or among lines of business and coverage as described below. As a result and because there are so many other factors which affect our reserve estimate, it would be inappropriate to take the amounts described below and add them together in an attempt to estimate volatility in total. While we believe these are reasonably likely scenarios, the reader should not consider the following sensitivity analysis as illustrative of a reserve range.
| Personal and Commercial Automobile Bodily Injury reserves recorded for bodily injury on voluntary business were $437.1 million as of December 31, 2011. A key assumption for bodily injury is the inflation rate underlying the estimated reserve. A 5% change in the imbedded inflation would have changed estimated IBNR by approximately $47 million, either positive or negative, respectively, at December 31, 2011. |
| Workers Compensation reserves recorded for workers compensation on voluntary business were $295.7 million as of December 31, 2011. A key assumption for workers compensation is the inflation rate underlying the estimated reserve. Given the long reporting pattern for this line of business, an additional key assumption is the amount of additional development required to reach full maturity, thereby reflecting ultimate costs, as represented by the tail factor. A 5% change in the imbedded inflation and a one point change to the tail factor assumption (e.g. 1.02 changed to 1.01 or 1.03) would have changed estimated IBNR by approximately $37 million, either positive or negative, at December 31, 2011. |
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| Monoline and Multi-Peril General Liability reserves recorded for general liability on voluntary business were $275.2 million as of December 31, 2011. A key assumption for general liability is the implied adequacy of the underlying case reserves. A ten point change in case adequacy (e.g. 10% deficiency changed to 0% or 20% deficiency) would have changed estimated IBNR by approximately $19 million, either positive or negative, at December 31, 2011. |
| Specialty Programs reserves recorded (including allocated LAE) for the AIX Companies were $162.7 million as of December 31, 2011. A key assumption for specialty programs is the expected loss and allocated LAE ratio (ELR) underlying the actuarial reserve analysis. A five point change to the ELR on AIX would have changed estimated IBNR by approximately $6 million at December 31, 2011. |
| Chaucer new classes of business- an increase in the ultimate loss ratios on new classes of business (energy, engineering and international liability classes) by 5%, 10%, and 15% in the 2009 and prior, 2010, and 2011 years of account, respectively, would have increased estimated IBNR by approximately $65 million at December 31, 2011. |
| Chaucer Syndicate 4000- a nine month delay in the reporting of claims to the assumed development of Syndicate 4000 financial institution claims and doubling the probabilities of a total indemnity loss for each and every assured with potential exposure (or claims notified) to the fraud relating to Bernard L. Madoff, would have increased estimated IBNR by approximately $48 million at December 31, 2011. |
| Chaucer catastrophe events- assuming a 20% increase in estimated gross ultimate claim deterioration for the 2011 calendar year catastrophe events regarding the Japan and New Zealand earthquakes, Thailand, Denmark and Australia floods and Hurricane Irene, would have increased estimated IBNR by approximately $26 million at December 31, 2011. |
Carried Reserves and Reserve Rollforward
The following table provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses (including Chaucer with respect to the six month period ended December 31, 2011).
(in millions) | ||||||||||||
For the years ended December 31 |
2011 | 2010 | 2009 | |||||||||
Gross loss and LAE reserves, beginning of period |
$ | 3,277.7 | $ | 3,153.9 | $ | 3,203.1 | ||||||
Reinsurance recoverable on unpaid losses |
1,115.5 | 1,060.2 | 988.2 | |||||||||
|
|
|
|
|
|
|||||||
Net loss and LAE reserves, beginning of period |
2,162.2 | 2,093.7 | 2,214.9 | |||||||||
Net incurred losses and LAE in respect of losses occurring in: |
||||||||||||
Current year |
2,654.1 | 1,967.4 | 1,794.5 | |||||||||
Prior years |
(103.3 | ) | (111.1 | ) | (155.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Total incurred losses and LAE |
2,550.8 | 1,856.3 | 1,639.2 | |||||||||
|
|
|
|
|
|
|||||||
Net payments of losses and LAE in respect of losses occurring in: |
||||||||||||
Current year |
1,482.4 | 1,078.7 | 971.9 | |||||||||
Prior years |
1,010.3 | 738.6 | 788.5 | |||||||||
|
|
|
|
|
|
|||||||
Total payments |
2,492.7 | 1,817.3 | 1,760.4 | |||||||||
|
|
|
|
|
|
|||||||
Purchase of Chaucer, net of reinsurance recoverable on unpaid losses of $669.6 |
1,631.0 | | | |||||||||
Purchase of Campania |
| 29.5 | | |||||||||
Effect of foreign exchange rate changes |
(22.8 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Net reserve for losses and LAE, end of period |
3,828.5 | 2,162.2 | 2,093.7 | |||||||||
Reinsurance recoverable on unpaid losses |
1,931.8 | 1,115.5 | 1,060.2 | |||||||||
|
|
|
|
|
|
|||||||
Gross reserve for losses and LAE, end of period |
$ | 5,760.3 | $ | 3,277.7 | $ | 3,153.9 | ||||||
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|
|
|
|
|
The table below summarizes the gross reserve for losses and LAE by line of business.
(in millions) December 31 |
2011 | 2010 | 2009 | |||||||||
Workers compensation |
$ | 544.7 | $ | 529.0 | $ | 525.9 | ||||||
Commercial automobile |
234.9 | 224.5 | 217.4 | |||||||||
Commercial multiple peril |
550.0 | 470.4 | 449.7 | |||||||||
AIX |
239.6 | 211.9 | 178.2 | |||||||||
Other commercial |
360.1 | 347.2 | 339.2 | |||||||||
|
|
|
|
|
|
|||||||
Total Commercial |
1,929.3 | 1,783.0 | 1,710.4 | |||||||||
|
|
|
|
|
|
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Personal automobile |
1,366.3 | 1,358.4 | 1,303.4 | |||||||||
Homeowners and other |
131.9 | 136.3 | 140.1 | |||||||||
|
|
|
|
|
|
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Total Personal |
1,498.2 | 1,494.7 | 1,443.5 | |||||||||
|
|
|
|
|
|
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Total Chaucer |
2,332.8 | | | |||||||||
|
|
|
|
|
|
|||||||
Total loss and LAE reserves |
$ | 5,760.3 | $ | 3,277.7 | $ | 3,153.9 | ||||||
|
|
|
|
|
|
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Loss and LAE reserves for Chaucer were $2,332.8 million as of December 31, 2011. For our Commercial and Personal Lines businesses, total loss and LAE reserves increased by $149.8 million for the year ended December 31, 2011, primarily due to growth in our Commercial Lines business and catastrophe losses in the period. Other commercial lines are primarily comprised of our professional liability, general liability, umbrella, and marine lines. Included in the above table, in the Chaucer segment, is $302.8 million of reserves related to Chaucers participation in Syndicate 4000, consisting of financial and professional liability lines written in 2008 and prior. Also included in the above table, primarily in other commercial lines, are $59.8 million, $63.9 million and $76.8 million of asbestos and environmental reserves as of December 31, 2011, 2010 and 2009, respectively.
Prior Year Development
Loss and LAE reserves for claims occurring in prior years developed favorably by $103.3 million, $111.1 million and $155.3 million during the years ended December 31, 2011, 2010 and 2009, respectively. These amounts for 2011 include favorable loss and LAE reserve development of $34.7 million and $33.0 million, for the full year for Commercial Lines and Personal Lines, respectively, and $35.5 million for Chaucer for the six months ended December 31, 2011. The primary drivers of reserve development for the year ended December 31, 2011 were as follows:
| Lower than expected losses within our personal automobile line, primarily related to bodily injury coverage in the 2008 through 2010 accident years. |
| Lower than expected losses within our commercial multiple peril line related to the 2007 through 2010 accident years. |
| Lower than expected losses within our workers compensation line related to the 2007 through 2010 accident years. |
| Lower than expected losses in Chaucers energy, property and U.K. motor lines, primarily related to the 2009 and 2010 accident years. |
| Additionally, within other commercial lines, unfavorable development in our professional liability and surety lines were partially offset by favorable development in our healthcare and other commercial property lines. |
The primary drivers for reserve development during the year ended December 31, 2010 were as follows:
| Lower than expected losses within our personal automobile line across all coverages, primarily related to the 2009 accident year. |
| Lower than expected losses within the workers compensation line, primarily related to the 2008 and 2009 accident years. |
| Lower than expected losses within the commercial multiple peril line in liability coverages, primarily related to the 2007 through 2009 accident years. |
| Within our other commercial lines, our commercial umbrella line related to the 2007 through 2009 accident years contributed to the favorable development, partially offset by unfavorable development in our surety line, primarily related to the 2009 accident year. |
| In addition, the 2010 amount includes $9.8 million of favorable development resulting from a change in the cost factors used for establishing unallocated loss adjustment expense reserves. |
The primary drivers for reserve development during the year ended December 31, 2009 were as follows:
| Lower than expected losses within the personal automobile line, primarily related to bodily injury coverage in the 2005 through 2008 accident years. |
| Lower than expected losses within the workers compensation line, primarily in the 2000 through 2008 accident years. |
| Lower than expected losses within the commercial multiple peril line, primarily in the 2005 through 2007 accident years. |
| Lower than expected losses within the surety line, lower projected losses in our run-off voluntary pools and lower projected exposures to asbestos and environmental liability for our direct written business. |
| Partially offsetting the favorable development was unfavorable non-catastrophe weather-related property loss development, primarily related to our homeowners, commercial property and personal automobile physical damage lines. |
| In addition, in 2009, we changed our unallocated loss adjustment expense reserving methodology from that based on cash payments to that based on unit costs, which resulted in a $20.0 million benefit, of which $16.0 million related to prior years. We believe that the methodology based on unit costs is more representative of our future costs of settling our existing claims. |
Asbestos and Environmental Reserves
Although we attempt to limit our exposures to asbestos and environmental damage liability through specific policy exclusions, we have been and may continue to be subject to claims related to these exposures. Ending loss and LAE reserves for all direct business written by our property and casualty companies related to asbestos and environmental damage liability were $10.0 million, $10.1 million and $11.3 million, net of reinsurance of $18.7 million for 2011 and $19.9 million for both 2010 and 2009. During 2011, there was minimal activity for our asbestos and environmental
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reserves, resulting in a decrease of $0.1 million. During 2010, we reduced our asbestos and environmental reserves by $1.2 million due to several small settlements. In recent years, average asbestos and environmental payments have declined modestly. As a result of the declining payments, our estimate of asbestos and environmental liability reserves was lowered, resulting in favorable reserve development of $7.1 million during the year ended December 31, 2009.
As a result of our historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to our total loss and LAE incurred experience.
In addition, we have established gross loss and LAE reserves for assumed reinsurance pool business with asbestos and environmental damage liability of $31.1 million, $33.9 million and $45.6 million at December 31, 2011, 2010 and 2009, respectively. These reserves relate to pools in which we have terminated our participation; however, we continue to be subject to claims related to years in which we were a participant. Results of operations from these pools are included in our Other Property and Casualty segment. The $11.7 million decrease in these reserves during 2010 was primarily due to a large claim settlement within these pools. A significant part of our pool reserves relates to our participation in the Excess and Casualty Reinsurance Association (ECRA) voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in run-off. Our percentage of the total pool liabilities varied from 1% to 6% during these years. Our participation in this pool has resulted in average paid losses of approximately $2 million annually over the past ten years.
During the year ended December 31, 2009, our ECRA pool reserves were lowered by $6.3 million as the result of an actuarial study completed by the ECRA pool manager. We reviewed the ECRA actuarial study, concurred that the study was reasonable, and adopted its estimate. In addition, we recorded additional favorable development of $4.3 million in the same year on a separate large claim settlement within these pools. Because of the inherent uncertainty regarding the types of claims in these pools, we cannot provide assurance that our reserves will be sufficient.
We estimate our ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance or pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. We believe that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. Nevertheless, the asbestos, environmental and toxic tort liability reserves could be revised, and any such revisions could have a material adverse effect on our results of operations for a particular quarterly or annual period or on our financial position.
Reinsurance
We maintain a reinsurance program designed to protect against large or unusual losses and LAE activity. We utilize a variety of reinsurance agreements that are intended to control our exposure to large property and casualty losses, stabilize earnings and protect capital resources, including facultative reinsurance, excess of loss reinsurance and catastrophe reinsurance. We determine the appropriate amount of reinsurance based upon our evaluation of the risks insured, exposure analyses prepared by consultants, our capital allocation models and on market conditions, including the availability and pricing of reinsurance. Reinsurance contracts do not relieve us from our primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to us. We believe that the terms of our reinsurance contracts are consistent with industry practice in that they contain standard terms and conditions with respect to lines of business covered, limit and retention, arbitration and occurrence. Based on an ongoing review of our reinsurers' financial statements, reported financial strength ratings from rating agencies, and the analysis and guidance of our reinsurance advisors, we believe that our reinsurers are financially sound.
Catastrophe reinsurance serves to protect us, as the ceding insurer, from significant losses arising from a single event such as snow, ice storm, windstorm, hail, hurricane, tornado, riot or other extraordinary events. Although we believe our catastrophe reinsurance program, including our retention and co-participation amounts for 2011 and 2012, are appropriate given our surplus level and the current reinsurance pricing environment, there can be no assurance that our reinsurance program will provide coverage levels that will prove adequate should we experience losses from one significant or several large catastrophes during 2012. Additionally, as a result of the current economic environment, as well as, losses incurred by reinsurers in recent years, the availability and pricing of appropriate reinsurance programs may be adversely affected in future renewal periods. We may not be able to pass these costs on to policyholders in the form of higher premiums or assessments.
See Reinsurance in Item 1 Business of this Form 10-K on pages 17 to 20 for further information on our reinsurance programs.
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INVESTMENT RESULTS
Net investment income before taxes was $258.2 million, $247.2 million and $251.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in net investment income in 2011 compared to 2010 was due to the acquisition of Chaucer and its related investment income, which contributed $16.9 million, partially offset by the impact of lower new money yields on fixed maturities. Higher dividend income from equity securities and lower investment expenses also contributed to the increase in net investment income. The decrease in net investment income in 2010 compared to 2009 was primarily due to the utilization of fixed maturities to fund certain corporate actions, such as stock and debt repurchases and $100 million contribution to our pension plan in January 2010. Lower new money yields also contributed to the decline. These decreases were partially offset by higher income from the investment of cash, principally into the bond market, and the investment of proceeds from our senior debt issuances. The average pre-tax earned yields on fixed maturities were 5.30%, 5.46% and 5.53% for the years ended December 31, 2011, 2010 and 2009, respectively, for the U.S. domiciled companies. Chaucers average pre-tax earned yield on fixed maturities was 2.10% for the period from acquisition at July 1, 2011 through December 31, 2011. We expect declines in average investment yields to continue as new money rates remain at historically low levels.
INVESTMENT PORTFOLIO
We held cash and investment assets diversified across several asset classes, as follows:
DECEMBER 31 |
2011 | 2010 | ||||||||||||||
(dollars in millions) |
Carrying Value |
% of Total Carrying Value |
Carrying Value |
% of Total Carrying Value |
||||||||||||
Fixed maturities, at fair value |
$ | 6,284.7 | 83.3 | % | $ | 4,797.9 | 91.3 | % | ||||||||
Equity securities, at fair value |
246.4 | 3.3 | 128.6 | 2.4 | ||||||||||||
Cash and cash equivalents |
820.4 | 10.9 | 290.4 | 5.5 | ||||||||||||
Other investments |
190.2 | 2.5 | 39.4 | 0.8 | ||||||||||||
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Total cash and investments |
$ | 7,541.7 | 100.0 | % | $ | 5,256.3 | 100.0 | % | ||||||||
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CASH AND INVESTMENTS
Total cash and investments increased $2.3 billion, or 43.5%, for the year ended December 31, 2011. The increase is attributable to the acquisition of Chaucer, with total cash and investments of $2.4 billion at December 31, 2011, consisting of $1,571.4 million of fixed maturities, $621.6 million of cash and cash equivalents, $137.8 million of other investments and $21.5 million of equity securities. Excluding Chaucers cash and investments, the investment portfolio decreased approximately 1% for the year.
Our fixed maturity portfolio is comprised of corporate securities, taxable and tax-exempt municipal securities, residential mortgage-backed securities, commercial mortgage-backed securities, U.S. government securities, foreign government securities and asset-backed securities.
The following table provides information about the investment types of our fixed maturities portfolio:
DECEMBER 31 |
2011 | |||||||||||||||
(in millions) Investment Type |
Amortized Cost |
Fair Value | Net Unrealized Gain (Loss) |
Change in Net Unrealized for the Year |
||||||||||||
U.S. Treasury and government agencies |
$ | 261.7 | $ | 269.3 | $ | 7.6 | $ | 5.8 | ||||||||
Foreign government |
239.1 | 239.0 | (0.1 | ) | (0.1 | ) | ||||||||||
Municipals: |
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Taxable |
792.5 | 850.9 | 58.4 | 59.4 | ||||||||||||
Tax exempt |
172.0 | 177.1 | 5.1 | 2.1 | ||||||||||||
Corporate |
3,218.2 | 3,375.6 | 157.4 | 13.0 | ||||||||||||
Asset-backed: |
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Residential mortgage-backed |
816.1 | 848.6 | 32.5 | 2.6 | ||||||||||||
Commercial mortgage-backed |
367.6 | 379.1 | 11.5 | (5.8 | ) | |||||||||||
Asset-backed |
141.5 | 145.1 | 3.6 | (0.1 | ) | |||||||||||
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Total fixed maturities |
$ | 6,008.7 | $ | 6,284.7 | $ | 276.0 | $ | 76.9 | ||||||||
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During 2011, our net unrealized gains on fixed maturities increased $76.9 million, or 38.6%, to a net unrealized gain of $276.0 million at December 31, 2011, compared to $199.1 million at December 31, 2010.
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Amortized cost and fair value by rating category were as follows:
DECEMBER 31 |
2011 | 2010 | ||||||||||||||||||||||||
(dollars in millions) NAIC Designation |
Rating Agency Equivalent Designation |
Amortized Cost |
Fair Value | % of
Total Fair Value |
Amortized Cost |
Fair Value |
% of
Total Fair Value |
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1 |
Aaa/Aa/A | $ | 4,325.1 | $ | 4,510.7 | 71.8 | % | $ | 3,175.0 | $ | 3,290.5 | 68.6 | % | |||||||||||||
2 |
Baa | 1,338.7 | 1,419.7 | 22.6 | 1,115.0 | 1,180.4 | 24.6 | |||||||||||||||||||
3 |
Ba | 151.2 | 160.0 | 2.5 | 141.1 | 149.3 | 3.1 | |||||||||||||||||||
4 |
B | 134.5 | 136.4 | 2.2 | 119.7 | 123.5 | 2.6 | |||||||||||||||||||
5 |
Caa and lower | 47.1 | 44.7 | 0.7 | 36.3 | 39.1 | 0.8 | |||||||||||||||||||
6 |
In or near default | 12.1 | 13.2 | 0.2 | 11.7 | 15.1 | 0.3 | |||||||||||||||||||
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Total fixed maturities |
$ | 6,008.7 | $ | 6,284.7 | 100.0 | % | $ | 4,598.8 | $ | 4,797.9 | 100.0 | % | ||||||||||||||
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Based on ratings by the National Association of Insurance Commissioners (NAIC), approximately 94% of the fixed maturity portfolio consisted of investment grade securities at December 31, 2011, compared to 93% at December 31, 2010. The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security, issuer diversification and yield curve position.
Commercial mortgage-backed securities (CMBS) constitute $379.1 million of our invested assets, of which approximately 16% is fully defeased with U.S. government securities. The portfolio is seasoned, with approximately 58% of our CMBS holdings from pre-2005 vintages, 14% from the 2005 vintage, 8% from the 2007 vintage, 4% from the 2006 vintage, and 16% from 2010 and later vintages. The CMBS portfolio is of high quality, with approximately 81% being AAA rated and 19% rated AA or A. The CMBS portfolio has a weighted average loan-to-value ratio of 72% and credit enhancement of approximately 27% as of December 31, 2011.
Our municipal bond portfolio constitutes approximately 14% of invested assets at December 31, 2011 and is 99% investment grade, without regard to any insurance enhancement. Currently, approximately 29% of the municipal bond portfolio has an insurance enhancement. The portfolio is well diversified by geography, sector and source of payment, and consists primarily of taxable securities. Approximately 61% of the portfolio is invested in revenue bonds and 39% in general obligation bonds. Revenue bonds are backed by the revenue stream generated by the services provided by the issuer, while general obligation bonds are backed by the authority that issued the debt and are secured by the taxing powers of those authorities.
Other investments consist primarily of overseas deposits, which are investments maintained in overseas funds and managed exclusively by Lloyds. These funds are required in order to protect policyholders in overseas markets and enable our Chaucer segment to operate in those markets. Access to those funds is restricted and we have no control over the investment strategy. Also included in other investments are investments in limited partnerships, which are accounted for under the equity method of accounting or at cost.
In addition, and in accordance with Lloyds operating guidelines, we are required to deposit funds at Lloyds to support our underwriting operations. These funds are available only to fund claim obligations. These restricted assets consisted of approximately $372 million of fixed maturities and $94 million of cash and cash equivalents as of December 31, 2011. We also deposit funds with various state and governmental authorities in the U.S. For a discussion of our deposits with state, governmental and regulatory authorities, see also Note 3Investments on pages 99 to 102 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
Our fixed maturity and equity securities are classified as available-for-sale and are carried at fair value. Financial instruments whose value is determined using significant management judgment or estimation constitute less than 2% of the total assets we measured at fair value. (See also Note 5Fair Value on pages 105 to 109 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K).
Although we expect to invest new funds primarily in investment grade fixed maturities, we have invested, and expect to continue to invest, a portion of funds in common equity securities and below investment grade fixed maturities and other assets.
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European sovereign and non-sovereign debt exposure
Our European fixed maturity credit exposure at December 31, 2011 was as follows:
Non-Sovereign | ||||||||||||||||||||||||||||||||||||||||
(in millions) |
Sovereign | Foreign Agency | Financial | Non-Financial | Total | |||||||||||||||||||||||||||||||||||
Country: |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
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United Kingdom |
$ | 64.4 | $ | 64.4 | $ | | $ | | $ | 315.2 | $ | 307.1 | $ | 215.2 | $ | 224.9 | $ | 594.8 | $ | 596.4 | ||||||||||||||||||||
Germany |
15.5 | 15.6 | 38.4 | 38.4 | 0.2 | 0.2 | 64.9 | 67.1 | 119.0 | 121.3 | ||||||||||||||||||||||||||||||
France |
8.4 | 8.3 | 5.7 | 5.7 | 17.4 | 15.1 | 60.2 | 61.7 | 91.7 | 90.8 | ||||||||||||||||||||||||||||||
Spain |
| | | | 38.6 | 38.4 | 31.5 | 32.3 | 70.1 | 70.7 | ||||||||||||||||||||||||||||||
Switzerland |
| | | | 17.6 | 17.0 | 47.0 | 49.6 | 64.6 | 66.6 | ||||||||||||||||||||||||||||||
Netherlands |
| | 20.3 | 20.2 | 30.7 | 30.8 | 9.1 | 10.6 | 60.1 | 61.6 | ||||||||||||||||||||||||||||||
Supranationals |
| | 39.5 | 39.4 | | | | | 39.5 | 39.4 | ||||||||||||||||||||||||||||||
Sweden |
| | 1.0 | 1.0 | 11.7 | 11.8 | 12.9 | 13.1 | 25.6 | 25.9 | ||||||||||||||||||||||||||||||
Italy |
| | | | 3.8 | 3.2 | 18.0 | 16.7 | 21.8 | 19.9 | ||||||||||||||||||||||||||||||
Norway |
| | 11.8 | 11.8 | | | 3.2 | 3.5 | 15.0 | 15.3 | ||||||||||||||||||||||||||||||
Ireland |
| | | | 6.9 | 7.0 | 5.1 | 5.9 | 12.0 | 12.9 | ||||||||||||||||||||||||||||||
Luxembourg |
| | | | | | 12.6 | 12.1 | 12.6 | 12.1 | ||||||||||||||||||||||||||||||
Belgium |
| | | | | | 10.4 | 11.0 | 10.4 | 11.0 | ||||||||||||||||||||||||||||||
Portugal |
| | | | | | 10.9 | 9.7 | 10.9 | 9.7 | ||||||||||||||||||||||||||||||
Denmark |
1.0 | 1.0 | | | | | 0.6 | 0.6 | 1.6 | 1.6 | ||||||||||||||||||||||||||||||
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Total fixed maturities |
$ | 89.3 | $ | 89.3 | $ | 116.7 | $ | 116.5 | $ | 442.1 | $ | 430.6 | $ | 501.6 | $ | 518.8 | $ | 1,149.7 | $ | 1,155.2 | ||||||||||||||||||||
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Our sovereign debt totals $89.3 million, or 1.2% of the total portfolio, and is limited to the highly rated countries of the U.K., Germany, France and Denmark. We have no sovereign debt of lower rated countries such as Greece, Portugal, Ireland, Italy and Spain. Our supranational and foreign agency exposure totals $116.5 million, or 1.5% of the total portfolio, and primarily consists of debt securities from the highly rated countries of Germany, Netherlands and Norway. Exposure to European banks, excluding those that are based in the U.K., totals $123.5 million, or 1.6% of investment assets. Also, we hold money market funds totaling $258.9 million, or 3.4% of the total portfolio, which are comprised of a well-diversified portfolio of short-term debt securities of predominately large financial institutions domiciled in highly rated countries. The remainder of our European non-sovereign debt exposure, excluding the U.K., is $293.9 million, which represents 3.9% of the portfolio. Generally, these securities are high quality, large cap multi-national companies that are well diversified by sector, country and issuer.
The table above represents all European countries in which we have exposure. We determined country exposures based on the country of domicile for the ultimate parent company of the various issuers we hold; however, in light of the economic and financial inter-relatedness and dependencies that exist among European countries and related financial systems, economic turmoil in one country could trigger a contagion effect on other countries. We believe the quality of our European credit exposure remains sound based on ratings and issuer strength, position in the capital structure, support through guarantees and partial government ownership by highly rated countries, diversity and quality of non-financial issuers and blend of industry exposures, and yield curve position. We believe that we do not have meaningful indirect exposures in our portfolio or invest in credit derivatives.
We manage our country exposure using fundamental analysis coupled with relative value considerations. Investment decisions are based on the combination of a top-down macroeconomic perspective and bottom-up credit security analysis. We monitor political and economic developments; progress toward attainment of growth and budget targets; developments related to policy, reform and regulatory initiatives from European officials; progress toward funding objectives, including the availability and cost of funding; outlook for credit ratings; ability of banks to meet increased regulatory capital standards, operate in a weakened macroeconomic environment, and maintain adequate liquidity and sufficient access to capital to meet funding requirements; and contagion throughout the financial system as evidenced by increased costs for interbank funding, lower prices for stocks and corporate bonds, as well as the availability of capital.
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We actively manage our current holdings and seek securities with the best combination of credit strength and valuation. As we invest new capital, we have a defensive bias based on the uncertainty regarding the strength and duration of economic recovery, downside risks as a result of the European debt crisis and our belief that volatility will remain high based on these challenges. Accordingly, some areas of our focus include providers of essential services or products best positioned to navigate the period of weak growth; industrials with greater international exposure, either locally or via exports, particularly to the developing world, which we view more favorably based on higher growth assumptions for emerging market economies; and financial institutions best positioned regarding asset quality, liquidity and capital adequacy.
Overall economic growth remains weak throughout the European region and is expected to have a dampening effect on earnings growth and credit quality for some time. Volatility remains high and European sovereign risk premiums are elevated, although down from peak levels. Many attribute the decline in risk premiums to the apparent success of the European Central Banks Long-Term Refinancing Operations (LTRO) since it created enough demand to lower short-term government bond yields in 2012. LTRO is designed to support banks by reducing systemic risk and thereby bank and sovereign funding. Also in 2012, several sovereign debt ratings were downgraded by Standard & Poors and Fitch, which had limited impact on sovereign yields since the bulk of these actions were anticipated by investors. Moodys is assessing all European bank ratings in light of the challenges they face as a result of the crisis and expects negative rating actions on the banks most affected by the crisis, with many bank ratings likely to be placed on review for downgrade during the first quarter 2012. We do not anticipate that any such developments will have a material effect on our financial condition, results of operations or liquidity.
OTHER-THAN-TEMPORARY IMPAIRMENTS
For the year ended December 31, 2011, we recognized in earnings $6.9 million of other-than-temporary impairments (OTTI) on fixed maturity and equity securities. OTTI on debt securities was $5.5 million, primarily on below investment grade corporate and municipal bonds that we intend to sell. Additionally, we recognized OTTI of $0.9 million related to estimated credit losses on residential mortgage-backed securities. We also recognized OTTI on a common stock of $1.4 million. For the year ended December 31, 2010, we recognized $13.9 million of OTTI on fixed maturities, certain low-income housing tax credit limited partnerships (LIHTC) and equity securities in earnings, of which $4.4 million related to LIHTC partnerships, $4.3 million was estimated credit losses on debt securities, $3.3 million related to debt securities classified as intend to sell and $1.9 million related to common stocks. For the year ended December 31, 2009, we recognized OTTI of $32.9 million in earnings, which principally included losses on below investment grade corporate bonds in the industrial sector we intended to sell of $21.2 million and $9.5 million from perpetual preferred securities, primarily in the financial sector.
UNREALIZED LOSSES
The following table provides information about our fixed maturities and equity securities that are in an unrealized loss position. (See also Note 3 Investments on pages 99 to 102 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K).
DECEMBER 31 |
2011 | 2010 | ||||||||||||||
(In millions) |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
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Fixed maturities: |
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Investment grade: |
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12 months or less |
$ | 27.1 | $ | 1,175.5 | $ | 22.9 | $ | 732.3 | ||||||||
Greater than 12 months |
14.3 | 108.9 | 29.7 | 208.2 | ||||||||||||
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Total investment grade fixed maturities |
41.4 | 1,284.4 | 52.6 | 940.5 | ||||||||||||
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Below investment grade: |
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12 months or less |
9.9 | 126.9 | 1.0 | 51.1 | ||||||||||||
Greater than 12 months |
3.7 | 14.7 | 12.0 | 90.0 | ||||||||||||
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Total below investment grade fixed maturities |
13.6 | 141.6 | 13.0 | 141.1 | ||||||||||||
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Equity securities: |
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12 months or less |
8.8 | 87.2 | 1.9 | 45.8 | ||||||||||||
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Total |
$ | 63.8 | $ | 1,513.2 | $ | 67.5 | $ | 1,127.4 | ||||||||
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Gross unrealized losses on fixed maturities and equity securities decreased $3.7 million, or 5.5%, to $63.8 million at December 31, 2011, compared to $67.5 million at December 31, 2010. The decrease in unrealized losses was primarily attributable to lower interest rates, partially offset by greater equity losses and widening of credit spreads across all sectors. At December 31, 2011, gross unrealized losses consist primarily of $40.3 million of corporate fixed maturities, $9.4 million of mortgage-backed securities, $8.8 million of equity securities, and $3.9 million in municipal securities.
We view the gross unrealized losses on fixed maturities and equity securities as being temporary since it is our assessment that these securities will recover in the near term, allowing us to realize their anticipated long-term economic value. With respect to gross unrealized losses on fixed maturities, we do not intend to sell, nor is it more likely than not we will be required to sell, such debt securities before this expected recovery of amortized cost (See also Liquidity and Capital Resources on pages 75 to 79 of this Form 10-K.). With respect to equity securities, we have the intent and ability to retain such investments for the period of time anticipated to allow for this expected recovery in fair value. The risks inherent in our assessment methodology include the risk that, subsequent to the balance sheet date, market factors may differ from our expectations; the global economic recovery is less robust than we expect or reverts to recessionary trends; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment or equity characteristics from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, an OTTI would be recognized as a realized loss. Although unrealized losses are not reflected in the results of financial operations until they are realized or deemed other-than-temporary, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets.
The following table sets forth gross unrealized losses for fixed maturities by maturity period and for equity securities at December 31, 2011 and 2010. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers.
DECEMBER 31 |
2011 | 2010 | ||||||
(in millions) |
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Due in one year or less |
$ | 1.9 | $ | 2.6 | ||||
Due after one year through five years |
18.9 | 11.4 | ||||||
Due after five years through ten years |
11.2 | 17.1 | ||||||
Due after ten years |
12.9 | 21.6 | ||||||
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44.9 | 52.7 | |||||||
Mortgage-backed and asset-backed securities |
10.1 | 12.9 | ||||||
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Total fixed maturities |
55.0 | 65.6 | ||||||
Equity securities |
8.8 | 1.9 | ||||||
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Total fixed maturities and equity securities |
$ | 63.8 | $ | 67.5 | ||||
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The carrying values of defaulted fixed maturity securities on non-accrual status at December 31, 2011 and 2010 were not material. The effects of non-accruals compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, were reductions in net investment income of $2.3 million for both years ended December 31, 2011 and 2010. Any defaults in the fixed maturities portfolio in future periods may negatively affect investment income.
Our investment portfolio and shareholders equity can be significantly impacted by changes in market values of our securities. As the U.S. and global financial markets and economies remain unstable, market volatility could increase and defaults on fixed income securities could occur. As a result, we could incur additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and/or financial position.
Fiscal and monetary policies in place, primarily in the United States and Europe, are supportive of moderate economic growth. The removal or modification of these policies could have an adverse effect on issuers level of business activity or liquidity, increasing the probability of future defaults. While we may experience defaults on fixed income securities, particularly with respect to non-investment grade securities, it is difficult to foresee which issuers, industries or markets will be affected. As a result, the value of our fixed maturity portfolio could change rapidly in ways we cannot currently anticipate. Depending on market conditions, we could incur additional realized and unrealized losses in future periods.
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DERIVATIVE INSTRUMENTS
We maintain an overall risk management strategy that can incorporate the use of derivative instruments to manage significant unplanned fluctuations in earnings caused by foreign currency and interest rate volatility.
In April 2011, we entered into a foreign currency forward contract to hedge the foreign currency exchange risk embedded in the purchase price of Chaucer, which was denominated in U.K. pound sterling (GBP). This contract had a notional amount of £297.9 million and was settled on July 14, 2011. For the year ended December 31, 2011, we recognized a loss of $11.3 million in income from continuing operations. The loss on the contract was due to a decrease in the exchange rate between the GBP and the U.S. dollar, but was more than offset by the lower U.S. dollars required to meet the GBP-based purchase price. Since a foreign currency hedge in which the hedged item is a forecasted transaction relating to a business combination does not qualify for hedge accounting under ASC 815, Derivatives and Hedging (ASC 815), we did not apply hedge accounting to this transaction. See Note 2Acquisitions and Discontinued Operations on pages 96 to 98 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K for additional information.
In May 2011, we entered into a treasury lock forward agreement to hedge the interest rate risk associated with our planned issuance of senior debt, which was completed on June 17, 2011. This hedge qualified as a cash flow hedge under ASC 815. It matured in June 2011 and resulted in a loss of $1.9 million, which was recorded in accumulated other comprehensive income and will be recognized in earnings over the term of the senior notes.
Additionally, Chaucer held foreign currency forward contracts utilized to mitigate changes in fair value caused by foreign currency fluctuation in converting the fair value of GBP and Euro denominated investment portfolios into their U.S. dollar denominated equivalent. These portfolios supported U.S. dollar denominated claim reserve liabilities. We recognized a gain of $6.1 million related to these instruments. All Chaucer forward contracts were terminated in October 2011.
Net income also includes the following items:
(in millions) |
Commercial Lines |
Personal Lines |
Chaucer | Other Property and Casualty |
Discontinued Operations |
Total | ||||||||||||||||||
2011 |
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Net realized investment gains |
$ | 4.7 | $ | 4.0 | $ | 6.7 | $ | 12.7 | $ | | $ | 28.1 | ||||||||||||
Net gain (loss) from retirement of debt |
0.3 | | | (2.6 | ) | | (2.3 | ) | ||||||||||||||||
Costs related to acquired businesses |
| | | (16.4 | ) | | (16.4 | ) | ||||||||||||||||
Loss on derivative instruments |
| | | (11.3 | ) | | (11.3 | ) | ||||||||||||||||
Net foreign exchange gains |
| | | 6.7 | | 6.7 | ||||||||||||||||||
Discontinued operations, net of taxes |
| | | | 5.2 | 5.2 | ||||||||||||||||||
2010 |
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Net realized investment gains (losses) |
$ | 13.3 | $ | 17.8 | $ | | $ | (1.4 | ) | $ | | $ | 29.7 | |||||||||||
Loss from retirement of debt |
| | | (2.0 | ) | | (2.0 | ) | ||||||||||||||||
Discontinued operations, net of taxes |
| | | | 1.6 | 1.6 | ||||||||||||||||||
2009 |
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Net realized investment gains (losses) |
$ | 0.3 | $ | (0.8 | ) | $ | | $ | 1.9 | $ | | $ | 1.4 | |||||||||||
Gain from retirement of debt |
| | | 34.5 | | 34.5 | ||||||||||||||||||
Discontinued operations, net of taxes |
| | | 9.4 | 9.4 |
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We manage investment assets for our Commercial Lines, Personal Lines, and Other Property and Casualty segments based on the requirements of our U.S. combined property and casualty companies. We allocate the investment income, expenses and realized gains to our Commercial Lines, Personal Lines and Other Property and Casualty segments based on actuarial information related to the underlying businesses. We manage investment assets separately for our Chaucer segment.
Net realized gains on investments were $28.1 million, $29.7 million, and $1.4 million for 2011, 2010, and 2009, respectively. Net realized gains in 2011 are primarily due to $27.7 million of gains recognized from the sale of fixed maturities and equity securities and $6.1 million of gains on foreign currency hedges, partially offset by $6.9 million of other-than-temporary impairments from fixed maturities and equity securities. Net realized gains in 2010 are due to $43.6 million of gains recognized, primarily from the sale of fixed maturities and equity securities, partially offset by $13.9 million of other-than-temporary impairments from fixed maturities, low-income housing tax partnerships and equity securities. Net realized investment gains in 2009 resulted from $34.3 million of gains recognized principally from the sale of fixed maturities, partially offset by $32.9 million of other-than-temporary impairments from both fixed maturities and equity securities.
In 2011, we repurchased in several transactions, $69.5 million of our Series B 8.207% Subordinated Deferrable Interest Debentures (Junior Debentures) at a cost of $72.1 million, resulting in a net loss of $2.6 million on the repurchases. In addition, we repurchased $8.0 million of capital securities related to AIX Holdings, Inc. (AIX) at a cost of $7.7 million, resulting in a gain of $0.3 million. The net loss on all debt repurchases in 2011 was $2.3 million. In 2010, we repurchased $36.5 million of these Junior Debentures at a cost of $38.5 million, resulting in a loss of $2.0 million on the repurchase. During 2009, we completed a cash tender offer to repurchase a portion of our 8.207% Series B Capital Securities due in 2027 that were issued by AFC Capital Trust I (subsequently redeemed and exchanged for Junior Debentures) and a portion of our 7.625% Senior Debentures due in 2025 that were issued by THG. AFC Capital Trust I was subsequently liquidated as of July 30, 2009. As a result of these actions and including securities repurchased prior and subsequent to the tender offer, we recorded a pre-tax gain of $34.5 million in 2009.
Acquisition costs were $16.4 million for 2011 and primarily consist of advisory, legal, and accounting costs associated with the acquisition of Chaucer. See Note 2 Acquisitions and Discontinued Operations on pages 96 to 98 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
In connection with the acquisition of Chaucer, we entered into a foreign exchange forward contract, which was settled in July 2011 at a loss of $11.3 million. See Investments on pages 59 to 64 of this Form 10-K. The loss on the contract was offset by the lower U.S. dollars required to meet the GBP based purchase price, which resulted in a $6.4 million gain on foreign exchange. Additional decreases in the exchange rate occurred subsequent to payment of cash proceeds on July 14, 2011. Gains of $0.3 million were recognized related to the loan notes that are due in GBP to certain former shareholders of Chaucer common stock for the year ended December 31, 2011. We will be subject to fluctuations in the currency until such loan notes have been paid.
Discontinued operations consist of: (i) Discontinued First Allmerica Financial Life Insurance Company (FAFLIC) Business, including both the loss associated with the sale of FAFLIC on January 2, 2009 and the loss or income resulting from its prior business operations; (ii) Discontinued Operations of our Variable Life Insurance and Annuity Business in 2005; and (iii) Discontinued Accident and Health Business.
Discontinued FAFLIC and Variable Life Insurance and Annuity Business
On January 2, 2009, we sold our remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity and Life Insurance Company (Commonwealth Annuity), a subsidiary of The Goldman Sachs Group, Inc, (Goldman Sachs). Previously, on December 30, 2005, we sold our variable life insurance and annuity business to Goldman Sachs, including the reinsurance of 100% of the variable business of FAFLIC. We agreed to indemnify Commonwealth Annuity and Goldman Sachs for certain litigation, regulatory matters and other liabilities relating to the pre-closing activities of the businesses that were sold. As of December 31, 2011, our total gross liability related to these guarantees was $3.8 million. We regularly review and update this liability for legal and regulatory matter indemnities. Although we believe our current estimate for this liability is appropriate, there can be no assurance that these estimates will not materially increase in the future. Adjustments to this reserve are recorded in our results in the period in which they are determined.
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In 2011, 2010 and 2009, we recognized a gain of $4.0 million, $1.8 million and $12.0 million, respectively, related to the sale of FAFLIC and the variable life insurance and annuity business. These gains were primarily due to reductions in the estimate of indemnification liabilities related to the sales. Gains in 2011 also included $1.7 million related to a settlement with the Internal Revenue Service (IRS) related to tax years 2005 and 2006 and other tax related items. See also Income Taxes on pages 68 and 69 of this Form 10-K.
Discontinued Accident and Health Insurance Business
The discontinued accident and health business had no significant financial results that impacted 2011 or 2010. The loss of $2.6 million in 2009 was primarily from net realized investment losses resulting from other-than-temporary impairments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
Our operations are subject to risk resulting from interest rate fluctuations which may adversely impact the valuation of the investment portfolio. In a rising interest rate environment, the value of the fixed income sector, which comprises 83% of our investment portfolio, may decline as a result of decreases in the fair value of the securities. Our intent is to hold securities to maturity and recover the decline in valuation as prices accrete to par. However, our intent may change prior to maturity due to changes in the financial markets, our analysis of an issuer's credit metrics and prospects, or as a result of changes in cash flow needs. Interest rate fluctuations may also reduce net investment income and as a result, profitability. The portfolio may realize lower yields and therefore lower net investment income on securities because the securities with prepayment and call features may prepay at a different rate than originally projected. In a declining interest rate environment, prepayments and calls may increase as issuers exercise their option to refinance at lower rates. The resulting funds would be reinvested at lower yields. In a rising interest rate environment, the funds may not be available to invest at higher interest rates.
The following table illustrates the estimated impact on the fair value of our investment portfolio at December 31, 2011 of hypothetical changes in prevailing interest rates, defined as changes in interest rates on U.S. Treasury debt. It does not reflect changes in credit spreads, liquidity spreads and other factors that affect the value of securities. Since changes in prevailing interest rates are often accompanied by changes in these other factors, the reader should not assume that an actual change in interest rates would result in the values illustrated.
(Dollars in millions) Investment Type |
+300bp | +200bp | +100bp | 0 | -100bp | -200bp | -300bp | |||||||||||||||||||||
Residential mortgage-backed securities |
$ | 770 | $ | 795 | $ | 820 | $ | 850 | $ | 860 | $ | 870 | $ | 880 | ||||||||||||||
All other fixed income securities |
4,840 | 5,025 | 5,225 | 5,435 | 5,640 | 5,845 | 6,050 | |||||||||||||||||||||
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Total |
$ | 5,610 | $ | 5,820 | $ | 6,045 | $ | 6,285 | $ | 6,500 | $ | 6,715 | $ | 6,930 | ||||||||||||||
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Our overall investment strategy is intended to balance investment income with credit and duration risk while maintaining sufficient liquidity and the opportunity for capital growth. The asset allocation process takes into consideration the types of business written and the level of surplus required to support our different businesses and the risk return profiles of the underlying asset classes. We look to balance the goals of capital preservation, net investment income stability, liquidity and total return.
The majority of our assets are invested in the fixed income markets. Through fundamental research and credit analysis, our investment professionals seek to identify a portfolio of stable income-producing higher quality U.S. government, foreign government, municipal, corporate, residential and commercial mortgage-backed securities and asset-backed securities, as well as undervalued securities in the credit markets balanced by strong relative value characteristics. We have a general policy of diversifying investments both within and across major investment and industrial sectors to mitigate credit and interest rate risk. We monitor the credit quality of our investments and our exposure to individual markets, borrowers, industries, sectors and, in the case of commercial mortgage-backed securities, property types and geographic locations. In addition, we currently carry debt which is subject to interest rate risk, which was issued at fixed interest rates between 5.50% and 8.207%. Current market conditions do not allow for us to invest assets at similar rates of return; therefore, our earnings on a similar level of assets are not sufficient to cover our current debt interest costs.
The following tables for the years ended December 31, 2011 and 2010 provide information about our financial instruments that are sensitive to changes in interest rates.
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The tables present principal cash flows and related weighted-average interest rates by expected maturities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers. Mortgage-backed and asset-backed securities are included in the category representing their expected maturity. Available-for-sale securities include both U.S. and foreign-denominated fixed maturities. Additionally, we have assumed our available-for-sale securities are similar enough to aggregate those securities for presentation purposes. Specifically, variable rate available-for-sale securities comprise an immaterial portion of the portfolio and do not have a significant impact on weighted-average interest rates. Therefore, the variable rate investments are not presented separately; instead they are included in the tables at their current interest rate. Debt is presented at contractual maturities, except for the debt for previously acquired subsidiaries. We have presented this debt in the category that reflects the more likely payments, which is expected to be earlier than their contractual maturities.
December 31, 2011 |
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | Fair Value 12/31/11 |
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Rate Sensitive Assets: |
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Available-for-sale securities |
$ | 560.9 | $ | 623.1 | $ | 608.7 | $ | 534.0 | $ | 588.6 | $ | 2,873.3 | $ | 5,788.6 | $ | 6,285.1 | ||||||||||||||||
Average interest rate |
3.82 | % | 4.20 | % | 4.35 | % | 4.71 | % | 4.96 | % | 5.11 | % | 4.75 | % | ||||||||||||||||||
Rate Sensitive Liabilities: |
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Debt |
$ | 6.9 | $ | | $ | | $ | | $ | | $ | 904.2 | $ | 911.1 | $ | 1,014.9 | ||||||||||||||||
Average interest rate |
7.12 | % | | | | | 6.53 | % | 6.53 | % |
December 31, 2010 |
2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | Fair Value 12/31/10 |
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Rate Sensitive Assets: |
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Available-for-sale securities |
$ | 238.2 | $ | 263.4 | $ | 406.3 | $ | 336.6 | $ | 398.0 | $ | 3,020.5 | $ | 4,663.0 | $ | 4,806.8 | ||||||||||||||||
Average interest rate |
5.10 | % | 5.58 | % | 4.99 | % | 5.19 | % | 4.78 | % | 5.40 | % | 5.29 | % | ||||||||||||||||||
Rate Sensitive Liabilities: |
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Debt |
$ | 55.0 | $ | 14.5 | $ | | $ | | $ | | $ | 536.4 | $ | 605.9 | $ | 603.9 | ||||||||||||||||
Average interest rate |
7.92 | % | 7.15 | % | | | | 7.10 | % | 7.18 | % |
EQUITY PRICE RISK
Our equity securities portfolio is exposed to equity price risk arising from potential volatility in equity market prices. Portfolio characteristics are analyzed regularly and price risk is actively managed through a variety of techniques. At December 31, 2011, a hypothetical increase or decrease of 10% in the market price of our equity securities would have resulted in an increase or decrease in the fair value of the equity securities portfolio of approximately $25 million. A hypothetical 10% increase or decrease at December 31, 2010 would have resulted in an increase or decrease in the fair value of the equity securities portfolio of $13 million.
FOREIGN CURRENCY EXCHANGE RISK
Our Chaucer segment has exposure to foreign currency risk, most notably in its insurance contracts and its invested assets. Some of its insurance contracts provide that ultimate losses may be payable in foreign currencies depending on the country of original loss. Foreign currency exchange rate risk exists to the extent that there is an increase in the exchange rate of the foreign currency in which losses are ultimately owed. Thus, our Chaucer segment attempts to manage its foreign currency risk by seeking to match its liabilities under insurance and reinsurance policies that are payable in foreign currencies with cash and investments that are denominated in such currencies. We may also utilize foreign currency forward contracts as part of our investment strategy. The principal currencies creating foreign exchange risk for us are the U.K. pound sterling and the Canadian dollar. A hypothetical 10%
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reduction in the value of foreign denominated investments would be expected to produce a loss in fair value of approximately $128 million at December 31, 2011. In 2010, we did not have material exposure to foreign currency related risk.
We are subject to the tax laws and regulations of the U.S. and foreign countries in which we operate. We file a consolidated U.S. federal income tax return that includes the holding company and its U.S. subsidiaries. Generally, taxes are accrued at the U.S. statutory tax rate of 35% for income from the U.S. operations. Our primary non-U.S. jurisdiction is the U.K. with a 26% rate. The U.K. statutory rate decreases from 26% to 25% effective April 1, 2012. We accrue taxes on certain non-U.S. income, which is subject to U.S. tax as a result of being owned by a U.S. shareholder at the U.S. rate. Foreign tax credits, where available, are utilized to offset U.S. tax as permitted. Certain of our non-U.S. income is not subject to U.S. tax until repatriated. Foreign taxes on this non-U.S. income are accrued at the local foreign rate and do not have an accrual for U.S. deferred taxes since these earnings are intended to be permanently reinvested overseas.
The benefit for income taxes from continuing operations was $9.6 million in 2011 and the provision for income taxes from continuing operations were $57.9 million and $83.1 million in 2010 and 2009, respectively. These amounts resulted in consolidated effective federal tax rates of (43.0)%, 27.4%, and 30.7% on pre-tax income for 2011, 2010, and 2009, respectively. These provisions reflect the decreases in our valuation allowance related to capital loss carryforwards of $7.5 million, $9.7 million, and $6.9 million in 2011, 2010, and 2009, respectively. In addition, the 2011 and 2010 provisions reflect benefits related to tax planning strategies implemented in prior years of $9.5 million and $3.2 million, respectively. Absent these benefits, the provision for income taxes for 2011, 2010, and 2009 would have been $7.4 million or 33.2%, $70.8 million or 33.5%, and $90.0 million or 33.2%, respectively.
Our income tax expense on segment income was $2.9 million for 2011, compared to $61.2 million for 2010 and $77.5 million in 2009. The decreases in 2011 and 2010 are primarily due to lower segment income.
Included in our deferred tax net asset as of December 31, 2011 is an asset of $31.7 million related to U.S. capital loss carryforwards. Our pre-tax capital losses carried forward are $90.5 million, including $80.0 million resulting from the sale of FAFLIC in 2009. At December 31, 2011, we have a full valuation allowance against this asset, since it is our opinion that it is more likely than not that the asset will not be realized. In addition, at December 31, 2011, we have a deferred tax asset of $33.6 million related to U.S. net operating loss carryforwards and we have a deferred tax asset of $14.5 million related to foreign net operating loss carryforwards. Our pre-tax U.S. operating loss carryforward of $95.9 will expire beginning in 2031. Our pre-tax foreign operating loss carryforwards of $62.1 million were generated in the U.K. and have no expiration date. It is our opinion that there will be sufficient future U.S. and U.K. taxable income to utilize these loss carryforwards. Our estimate of the gross amount and likely realization of loss carryforwards may change over time.
As of December 31, 2011, we have a deferred tax asset of $112.2 million of alternative minimum tax (AMT) credit carryforwards. We expect to utilize these tax credits during the next four to five years. The result of their utilization will be a lower current tax rate offset by a higher deferred tax provision, and also lower cash expenditures for federal income taxes during the utilization period. Once the minimum tax credits have been fully utilized, we expect our current tax rate to be closer to the statutory rate of 35%. Although there is no expiration on AMT credit carryforwards, we cannot be certain that we will utilize them as quickly as our expectations.
In September 2011, we completed a transaction which resulted in the realization, for tax purposes only, of unrealized gains in our investment portfolio of $98.4 million. This transaction enabled us to realize capital loss carryforwards to offset this gain, and resulted in the release of $29.0 million of the valuation allowance we held against the deferred tax asset related to these capital loss carryforwards. A release of $0.2 million was reflected in income from continuing operations and the remaining amount of $28.8 million was reflected as a benefit in accumulated other comprehensive income. This amount will be released into income from continuing operations, related to non-segment income, in future years, as the investment securities subject to these transactions are sold or mature.
During 2011, we reduced the valuation allowance related to our deferred tax asset by $55.6 million, from $91.5 million to $35.9 million. There were four principal components to this reduction. First, we decreased the valuation allowance by $29.0 million as a result of the transactions described above which utilized our capital loss carryforwards. Second, we decreased the valuation allowance by $21.9 million on certain unrealized losses as a result of unrealized appreciation in our investment portfolio. This decrease was reflected as an increase in accumulated other comprehensive income. Third, as a result of $28.1 million in net realized gains during 2011, we decreased the valuation allowance by $7.5 million as an increase to income from continuing operations, since these gains utilized our capital loss carryforwards. Fourth, in the 2010 U.S. federal income tax return, we were able to utilize an additional $7.6 million of capital loss carryforwards that expired in 2010.
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As such, we increased the valuation allowance by $2.6 million with an equal and offsetting increase to the related deferred tax asset. The remaining increase of $0.2 million was attributable to other items reflected as expense from discontinued operations.
In November 2011, we reached an agreement with the IRS on our 2005 to 2006 audit cycle, resulting in a tax benefit of $2.1 million recognized as income related to our discontinued operations. The benefit is primarily due to the concession of our separate account dividends received deduction issue by the IRS Appeals Division, which resulted in the reduction of our liability for this uncertain tax position. See Note 7 Income Taxes on pages 111 to 113 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K. for additional information. Also in April 2011, we received notification that an interest refund claim filed with the Internal Revenue Service in 2009 had been accepted, resulting in a tax benefit of $0.6 million recognized in discontinued operations. In 2009, a benefit of $0.2 million resulting from the settlement with the IRS of interest claims for 1977 through 1981 was recognized in discontinued operations as income.
In January, July, September, and December 2010, we completed transactions which resulted in the realization, for tax purposes only, of unrealized gains in our investment portfolio of $98.4 million, $37.1 million, $31.1 million, and $120.8 million, respectively. These transactions enabled us to realize capital loss carryforwards to offset these gains, and resulted in the release of $66.2 million and $34.4 million in 2010 and 2009, respectively, of the valuation allowance we held against the deferred tax asset related to these capital loss carryforwards. The total release of $100.6 million was accounted for as an increase in income from continuing operations of $3.2 million and $6.0 million in 2010 and 2009, respectively, with the remaining $91.4 million reflected as a benefit in accumulated and other comprehensive income at December 31, 2010. During 2011, we recognized $9.5 million of the $91.4 million in income from continuing operations, related to non-segment income. The remaining amount will be released into income from continuing operations in future years, as the investment securities subject to these transactions are sold or mature.
In 2010, we reduced the valuation allowance related to our deferred tax asset by a total of $104.1 million, from $195.6 million to $91.5 million. There were four principal components to this reduction. First, we reduced the valuation allowance by $66.2 million as a result of the transactions described above which utilized our capital loss carryforwards. Second, we increased the valuation allowance by $20.3 million for certain tax basis unrealized losses which we did not believe we could utilize. This increase was reflected as a decrease in accumulated other comprehensive income. Third, $135.5 million of our capital loss carryforwards expired in 2010. As a result, we released the $47.4 million of the valuation allowance attributable to these expirations with an equal and offsetting reduction in the related deferred tax asset. Fourth, as a result of $29.7 million in net realized capital gains, we decreased our valuation allowance by $9.7 million as an increase to income from continuing operations since these gains utilized our capital loss carryforwards. The remaining $1.1 million decrease was attributable to other items reflected as income from discontinued operations.
In January 2010, we made a $100.0 million pension contribution, which resulted in both a current deduction of $35.0 million and the utilization (reduction) of a deferred tax asset of the same amount. This contribution is the most significant reason the current tax expense is $5.7 million in 2010, representing only approximately 10% of the total provision for federal income taxes from continuing operations.
During 2009, we reduced the valuation allowance related to our deferred tax asset by $152.6 million, from $348.2 million to $195.6 million. There were two principal components to this reduction. First, we reversed, through other comprehensive income, the $118.4 million valuation allowance that we had recognized at December 31, 2008 associated with the tax benefit related to the net unrealized depreciation in our investment portfolio at that time. During 2009, appreciation in the portfolio changed the nature of the tax attribute from that of an asset to that of a liability, and thus, there was no longer a need for that portion of the valuation allowance. Second, as a result of the aforementioned transactions, we reversed $28.4 million of the valuation allowance as an adjustment to other comprehensive income and $6.0 million of the valuation allowance as an adjustment to income from continuing operations. The remaining $0.2 million net increase in our valuation allowance was attributable to other items, and reflected as a $0.9 million increase in income from continuing operations and a $1.1 million decrease in income from discontinued operations.
The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements. These statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during
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the reporting period. Actual results could differ from those estimates. The following critical accounting estimates are those which we believe affect the more significant judgments and estimates used in the preparation of our financial statements. Additional information about our other significant accounting policies and estimates may be found in Note 1Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data on pages 89 to 96 of this Form 10-K.
RESERVE FOR LOSSES AND LOSS EXPENSES
See Segment Results Reserves for Losses and Loss Adjustment Expenses on pages 49 to 58 of this Form 10-K for a discussion of our critical accounting estimates for loss reserves.
REINSURANCE RECOVERABLE BALANCES
We share a significant amount of insurance risk of the primary underlying contracts with various insurance entities through the use of reinsurance contracts. As a result, when we experience loss events that are subject to a reinsurance contract, reinsurance recoveries are recorded. The amount of the reinsurance recoverable can vary based on the size of the individual loss or the aggregate amount of all losses in a particular line, book of business or an aggregate amount associated with a particular accident year. The valuation of losses recoverable depends on whether the underlying loss is a reported loss, or an incurred but not reported loss. For reported losses, we value reinsurance recoverables at the time the underlying loss is recognized, in accordance with contract terms. For incurred but not reported losses, we estimate the amount of reinsurance recoverable based on the terms of the reinsurance contracts and historical reinsurance recovery information and apply that information to the gross loss reserve estimates. The most significant assumption we use is the average size of the individual losses for those claims that have occurred but have not yet been recorded by us. The reinsurance recoverable is based on what we believe are reasonable estimates and is disclosed separately on the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses are settled.
Reinsurance recoverables recorded on insurance losses ceded under reinsurance contracts are subject to judgments and uncertainties similar to those involved in estimating gross loss reserves, as disclosed above. In addition to these uncertainties, our reinsurance recoverables may prove uncollectible if the reinsurers are unable or unwilling to perform under the reinsurance contracts. In establishing our reinsurance allowance for amounts deemed uncollectible, we evaluate the financial condition of our reinsurers and monitor concentration of credit risk arising from our exposure to individual reinsurers. To determine if an allowance is necessary, we consider, among other factors, published financial information, reports from rating agencies, payment history, collateral held and our legal right to offset balances recoverable against balances we may owe. Our reinsurance allowance for doubtful accounts is subject to uncertainty and volatility due to the time lag involved in collecting amounts recoverable from reinsurers. Over the period of time that losses occur, reinsurers are billed and amounts are ultimately collected, economic conditions, as well as the operational and financial performance of particular reinsurers, may change and these changes may affect the reinsurers' willingness and ability to meet their contractual obligation to us. It is also difficult to fully evaluate the impact of major catastrophic events on the financial stability of reinsurers, as well as the access to capital that reinsurers may have when such events occur. The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk even if the reinsurers fail to meet their obligations under the reinsurance contracts.
PENSION BENEFIT OBLIGATIONS
General
We currently have a U.S. qualified defined benefit plan, a defined benefit pension plan for our international subsidiary, Chaucer, and several smaller qualified and nonqualified benefit plans. We account for our pension plans in accordance with ASC 715, Compensation Retirement Benefits. In order to measure the liabilities and expense associated with these plans, we must make various estimates and key assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates. Additionally, our Chaucer pension plan also must take into consideration inflation rates, specifically related to participant salary increases. These estimates and assumptions are reviewed at least annually and are based on our historical experience, as well as current facts and circumstances. In addition, we use outside actuaries to assist in measuring the expenses and liabilities associated with our defined benefit pension plans.
Two significant assumptions used in the determination of benefit plan obligations and expenses that are dependent on market factors, which have been subject to a greater level of volatility over the past few years, are the discount rate and the return on plan asset assumptions. The discount rate enables us to state expected future cash flows as a present value on the measurement date. We also use this
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discount rate in the determination of our pre-tax pension expense or benefit. A lower discount rate increases the present value of benefit obligations and increases pension expense. To determine the expected long-term return on plan assets, we generally consider historical mean returns by asset class for passive indexed strategies, as well as current and expected asset allocations, and adjust for certain factors that we believe will have an impact on future returns. Actual returns on plan assets in any given year seldom result in the achievement of the expected rate of return on assets. Actual returns on plan assets in excess of these expected returns will generally reduce our net actuarial losses (or increase actuarial gains) that are reflected in our accumulated other comprehensive income balance in shareholders equity, whereas actual returns on plan assets which are less than expected returns will generally increase our net actuarial losses (or decrease actuarial gains) that are reflected in accumulated other comprehensive income. These gains or losses are amortized into expense in future years.
Expenses related to these plans are generally calculated based upon information available at the beginning of the plan year. Our pre-tax expense related to our defined benefit plans was $13.0 million and $12.9 million for 2011 and 2010, respectively. Expenses in 2011 include $0.4 million related to the Chaucer pension plan for the period of July 1, 2011 to December 31, 2011.
U.S. Qualified Defined Benefit Plan
Prior to 2005, we provided pension retirement benefits to substantially all of our U.S. employees based on a defined benefit cash balance formula. In addition to the cash balance allocation, certain transition group employees, who had met specified age and service requirements as of December 31, 1994, were eligible for a grandfathered benefit based primarily on the employees years of service and compensation during their highest five consecutive plan years of employment. As of January 1, 2005, the defined benefit pension plans were frozen.
As of December 31, 2011 and 2010, we determined our discount rate utilizing an independent yield curve which provides for a portfolio of high quality bonds that are expected to match the cash flows of our pension plan. Bond information used in the yield curve included only those rated Aa or better as of December 31, 2011 and 2010, respectively, and had been rated by at least two well-known rating agencies. At December 31, 2011, based upon our qualified plan liabilities and cash flows in relation to this discount curve, we decreased our discount rate to 5.125%, from 5.625% at December 31, 2010.
For the years ended December 31, 2011 and 2010, the expected rate of return on our qualified plan assets was 6.50% and 7.00%, respectively. The decrease reflects our strategy to shift investment assets from equity securities to fixed maturity investments over several years resulting in our composition of 82% fixed maturities and 18% equities at December 31, 2011, as well as declines in the fixed maturities markets in general. Actual returns of the plan investments generated approximately $58 million and $56 million of gains during 2011 and 2010, respectively, as compared to expected returns of approximately $34 million and $35 million, respectively.
The benefit from the investment gains experienced in 2011 was essentially offset by a decrease in the discount rate from the prior year. In 2010, an actuarial loss of approximately $32 million primarily resulting from a decrease in the discount rate from the prior year was partially offset by the benefit from investment gains of approximately $21 million. These net losses resulted in adjustments to our accumulated net actuarial losses in 2011 and 2010 of approximately $0.4 million and $10.7 million, respectively, which are reflected as decreases to our accumulated other comprehensive income. The change in these actuarial gains and losses is amortized into earnings in future years. The adjustments to accumulated other comprehensive income from these actuarial losses occurring in 2011 and 2010 were offset by the amortization of actuarial losses from prior years of $14.0 million and $15.8 million in 2011 and 2010, respectively. Given the effect of our actual investment experience in 2011, and taking into consideration the decrease in discount rates in 2012, U.S. pension related expenses in 2012 are expected to decrease from 2011. Accordingly, we expect our pre-tax pension expense for the U.S. qualified defined benefit pension plan to decrease from approximately $9 million in 2011 to approximately $6 million in 2012.
Holding all other assumptions constant, sensitivity to changes in our key assumptions related to our U.S. qualified defined benefit pension plan are as follows:
Discount Rate A 25 basis point increase in the discount rate would decrease our pension expense in 2012 by $1.9 million and decrease our projected benefit obligation by $12.7 million. A 25 basis point reduction in the discount rate would increase our pension expense by $1.9 million and increase our projected benefit obligation by $13.3 million.
Expected Return on Plan Assets A 25 basis point increase or decrease in the expected return on plan assets would decrease or increase our pension expense in 2012 by $1.4 million.
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Chaucer Pension Plan
Prior to 2002, our Chaucer segment provided defined benefit pension retirement benefits to certain of its employees. As of December 31, 2001, the defined benefit section of the pension plan was closed to new members. The defined benefit obligation for this plan is based on the employees years of service and final pensionable salary.
As of December 31, 2011 and the July 1, 2011 acquisition date, we determined our discount rate utilizing a 15 Year AA corporate bond index. At December 31, 2011, based upon our Chaucer plan liabilities and cash flows in relation to this index, we decreased our discount rate to 4.90%, from 5.50%, at the July 1, 2011 acquisition date.
For the six months ended December 31, 2011, the expected rate of return on plan assets was 7.40%. The composition of our Chaucer plan assets are 78% equities, 12% fixed maturities, and 10% real estate funds at December 31, 2011. Actual returns of the plan investments generated approximately $4.5 million of losses during the six months ended December 31, 2011.
Collectively, investment losses experienced in 2011, combined with the decrease in the discount rate, partially offset by a decrease in the inflation rate and changes in other assumptions, resulted in net actuarial losses for the Chaucer plan of approximately $14.1 million. These losses are reflected as a decrease to our accumulated other comprehensive income. This balance is amortized into earnings in future periods. Taking into consideration actual investment performance and the decrease in discount rates in 2012, pension related expenses for the Chaucer plan are expected to increase in 2012 from $0.4 million to approximately $1.8 million (using the December 31, 2011 GBP to U.S. dollar conversion rate of 1.55).
Holding all other assumptions constant, sensitivity to changes in our key assumptions related to our Chaucer pension plan are as follows:
Discount Rate A 25 basis point increase in the discount rate would decrease our pension expense in 2012 by $0.1 million and decrease our projected benefit obligation by $6.4 million. A 25 basis point reduction in the discount rate would increase our pension expense by $0.1 million and increase our projected benefit obligation by $7.0 million.
Expected Return on Plan Assets A 25 basis point increase or decrease in the expected return on plan assets would decrease or increase our pension expense in 2012 by $0.1 million.
OTHER-THAN-TEMPORARY IMPAIRMENTS
We employ a systematic methodology to evaluate declines in fair values below amortized cost for all fixed maturity and equity security investments. The methodology utilizes a quantitative and qualitative process which seeks to ensure that available evidence concerning the declines in fair value below amortized cost is evaluated in a disciplined manner. In determining whether a decline in fair value below amortized cost is other-than-temporary, we evaluate several factors and circumstances, including the issuers overall financial condition; the issuers credit and financial strength ratings; the issuers financial performance, including earnings trends, dividend payments and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the length of time and the degree to which the fair value of an issuers securities remains below our cost. With respect to fixed maturity investments, we consider factors that might raise doubt about the issuers ability to pay amounts due according to the contractual terms and whether we expect to recover the entire amortized cost basis of the security. With respect to equity securities, we consider our ability and intent to hold the investment for a period of time to allow for a recovery in value. We apply these factors to all securities.
We monitor corporate fixed maturity securities with unrealized losses on a quarterly basis and more frequently when necessary to identify potential credit deterioration as evidenced by ratings downgrades, unexpected price variances, and/or company or industry specific concerns. We apply consistent standards of credit analysis which includes determining whether the issuer is current on its contractual payments and we consider past events, current conditions and reasonable forecasts to evaluate whether we expect to recover the entire amortized cost basis of the security. We utilize valuation declines as a potential indicator of credit deterioration and apply additional levels of scrutiny in our analysis as the severity of the decline increases or duration persists.
For our impairment review of asset-backed fixed maturity securities, we forecast our best estimate of the prospective future cash flows of the security to determine if we expect to recover the entire amortized cost basis of the security. Our analysis includes estimates of underlying collateral default rates based on historical and projected delinquency rates and estimates of the amount and timing of potential recovery. We consider available information relevant to the collectibility of cash flows, including information about the payment terms of the security, prepayment speeds, the financial condition of the underlying
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borrowers, collateral trustee reports, credit ratings analysis and other market data when developing our estimate of the expected cash flows.
When an other-than-temporary impairment of a debt security occurs, and we intend to sell or more likely than not will be required to sell the investment before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings, which reduces net income and earnings per share. If we do not intend to sell the fixed maturity investment or more likely than not will not be required to sell it, we separate the other-than-temporary impairment into the amount we estimate represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings, which reduces net income and earnings per share. The amount of the estimated other-than-temporary impairment that is non-credit related is recognized in other comprehensive income, net of applicable taxes.
We estimate the amount of the other-than-temporary impairment that relates to credit by comparing the amortized cost of the debt maturity security with the net present value of the debt securitys projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the fixed maturity security at the impairment measurement date.
Other-than-temporary impairments of equity securities are recorded as realized losses, which reduce net income and earnings per share. The new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value.
For equity method investments, we recognize impairment when evidence demonstrates that a loss in value that is other-than-temporary has occurred. Evidence of a loss in value that is other-than-temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. During each period, we evaluate whether an impairment indicator has occurred that may have a significant adverse affect on the carrying value of the investment. Impairment indicators may include: lower expectations of residual value from a limited partnership, reduced valuations of the investments held by limited partnerships, actual recent cash flows that are significantly less than expected cash flows or any other adverse events since the last financial statements received that might affect the value of the investees capital. Other-than-temporary impairments of limited partnerships are recorded as realized losses, which reduce net income and earnings per share.
Temporary declines in market value are recorded as unrealized losses, which do not affect net income and earnings per share, but reduce accumulated other comprehensive income, which is reflected in our Consolidated Balance Sheets. We cannot provide assurance that the other-than-temporary impairments will be adequate to cover future losses or that we will not have substantial additional impairments in the future. (See Investments on pages 59 to 64 of this Form 10-K for further discussion regarding other-than-temporary impairments and securities in an unrealized loss position).
DEFERRED TAX ASSETS
Our deferred tax assets and liabilities primarily result from temporary differences between the amounts recorded in our consolidated financial statements and the tax basis of our assets and liabilities and loss and tax credit carryforwards. These temporary differences are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Consideration is given to available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income in each tax jurisdiction, tax planning strategies and recent financial operations. Valuation allowances are established if, based on the weight of available information, it is more likely than not that all or some portion of the deferred tax assets will not be realized. The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance and specific industry and investment market conditions. Changes in valuation allowances are generally reflected in federal income tax expense or as an adjustment to other comprehensive income (loss) depending on the nature of the item for which the valuation allowance is being recorded.
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The following are the components of our deferred tax assets and liabilities with the associated valuation allowance as of December 31, 2011.
Deferred Tax Assets (Liabilities) |
Gross Amount |
Valuation Allowance |
Net Amount |
|||||||||
(in millions) | ||||||||||||
Tax attributes |
||||||||||||
Tax credit carryforwards |
$ | 112.2 | $ | | $ | 112.2 | ||||||
Operating loss carryforwards |
48.1 | | 48.1 | |||||||||
Capital loss carryforwards |
31.7 | (31.7 | ) | | ||||||||
|
|
|
|
|
|
|||||||
192.0 | (31.7 | ) | 160.3 | |||||||||
Other |
||||||||||||
Insurance reserves, net |
178.9 | | 178.9 | |||||||||
Deferred policy acquisition costs |
(123.7 | ) | | (123.7 | ) | |||||||
Employee benefit plans |
36.2 | | 36.2 | |||||||||
Software capitalization |
(29.9 | ) | | (29.9 | ) | |||||||
Lloyds underwriting losses (not subject to tax) |
18.6 | | 18.6 | |||||||||
Other, net |
14.5 | | 14.5 | |||||||||
Investments, net |
9.3 | (4.2 | ) | 5.1 | ||||||||
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|
|
|
|
|
|||||||
103.9 | (4.2 | ) | 99.7 | |||||||||
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|
|
|
|
|
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Total |
$ | 295.9 | $ | (35.9 | ) | $ | 260.0 | |||||
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|
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We have $112.2 million of alternative minimum tax credit carryforwards. The alternative minimum tax credit carryforwards have no expiration date and may be used to offset regular federal income taxes due from future income. Based on our projected future taxable income, we expect to utilize these tax credits during the next four to five years. In addition, we have operating loss carryforwards that relate to current year U.S. net operating loss and foreign net operating loss carryforwards from our recently acquired Chaucer segment. The U.S. net operating loss carryforwards expire in 2031 and the Chaucer net operating loss carryforwards have no expiration date. Based on our projection of future economic conditions, taxable income, reversals of existing taxable temporary liabilities, and our strategic planning strategies, we believe that these operating loss carryforwards will be fully realized.
Our capital loss carryforwards relate to the loss from the sale of FAFLIC in 2009 and expire in 2014. In making our valuation allowance assessment for this deferred tax asset, we considered our carryforward capacity, reversals of deferred tax liabilities related to our investment portfolio, and tax planning strategies that include holding a portion of debt securities with market value losses until recovery and selling appreciated securities to offset capital losses. Given the nature and the magnitude of the loss and our ability to generate limited capital gains based on current market conditions in the next three years, we believe it is more likely than not that these assets will not be realized.
We believe the remaining deferred tax asset from other temporary differences will be fully realizable based on our projected future taxable income and recent financial operations. Although we believe that these assets are fully recoverable, there can be no certainty that future events will not affect their recoverability. Future economic conditions and debt market volatility, including increase in interest rates, can adversely impact our tax planning strategies.
STATUTORY SURPLUS OF U.S. INSURANCE SUBSIDIARIES
The following table reflects statutory surplus for our U.S. insurance subsidiaries:
December 31 |
2011 | 2010 | ||||||
(in millions) | ||||||||
Total Statutory SurplusU.S. Insurance Subsidiaries |
$ | 1,582.8 | $ | 1,747.3 |
The statutory surplus for our U.S. insurance subsidiaries decreased $164.5 million during 2011, primarily due to a $99 million ordinary dividend paid to the holding company by Hanover Insurance in April 2011 and from changes in admitted tax assets. This dividend from Hanover Insurance was used to help fund the acquisition of Chaucer.
The NAIC prescribes an annual calculation regarding risk based capital (RBC). RBC ratios for regulatory purposes, as described in the glossary, are expressed as a percentage of the capital required to be above the Authorized Control Level (the Regulatory Scale); however, in the insurance industry, RBC ratios are widely expressed as a percentage of the Company Action Level. The following table reflects the Company Action Level, the Authorized Control Level and RBC ratios for Hanover Insurance (which includes Citizens and other U.S. insurance subsidiaries), as of December 31, 2011 and 2010, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):
(dollars in millions) | ||||||||||||||||
December 31, 2011 |
Company Action Level |
Authorized Control Level |
RBC
Ratio Industry Scale |
RBC
Ratio Regulatory Scale |
||||||||||||
The Hanover Insurance Company |
$ | 581.9 | $ | 291.0 | 270 | % | 540 | % | ||||||||
December 31, 2010 |
||||||||||||||||
The Hanover Insurance Company |
$ | 566.0 | $ | 283.0 | 306 | % | 613 | % |
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Chaucer corporate members operate in the Lloyds market, which requires that these members deposit funds, referred to as Funds at Lloyds, to support their underwriting interests. Lloyds sets required capital annually for all participating syndicates based on each syndicates business plans, the rating and reserving environment, and discussions with regulatory and rating agencies. Although the minimum capital levels are set by Lloyds, it is the responsibility of Chaucer to continually monitor the risk profiles of its managed syndicates to ensure that the level of funding remains appropriate. Such capital is comprised of cash and cash equivalents, investments, undrawn letters of credit provided by various banks and other assets. At December 31, 2011, the required capital supporting our Lloyds business totaled $737.5 million (using the December 31, 2011 GBP to U.S. dollar conversion rate of 1.55). We have securities, assets and letters of credit pledged to Lloyds to satisfy these capital requirements at December 31, 2011 and expect to be able to meet these capital requirements in the future.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of our ability to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, our primary ongoing source of cash is dividends from our insurance subsidiaries. However, dividend payments to us by our U.S. insurance subsidiaries are subject to limitations imposed by regulators, such as prior notice periods and the requirement that dividends in excess of a specified percentage of statutory surplus or prior years statutory earnings receive prior approval (so called extraordinary dividends). On April 15, 2011, a $99 million ordinary dividend was paid to the holding company by Hanover Insurance. This dividend was used to help fund the acquisition of Chaucer. In 2010 and 2009, dividends of $75.0 million and $153.7 million, respectively, were paid by Hanover, providing cash and securities to the holding company.
Dividend payments to the holding company by our Chaucer business are regulated by U.K. law. Dividends from Chaucer are dependent on dividends from its subsidiaries. Annual dividend payments from Chaucer are limited to retained earnings that are not restricted by capital and other requirements for business at Lloyds. Also, Chaucer must provide advance notice to the U.K.s Financial Services Authority (FSA) of certain proposed dividends or other payments from FSA regulated entities. There are currently no plans to repatriate dividends to our holding company from Chaucer.
Sources of cash for our insurance subsidiaries primarily consist of premiums collected, investment income and maturing investments. Primary cash outflows are paid claims, losses and loss adjustment expenses, policy acquisition expenses, other underwriting expenses and investment purchases. Cash outflows related to losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. We periodically adjust our investment policy to respond to changes in short-term and long-term cash requirements.
Net cash provided by operating activities was $221.7 million during 2011, compared to net cash provided by operations of $83.6 million in 2010 and $91.6 million in 2009. The $138.1 million increase in net cash provided by operating activities in 2011 compared to 2010 primarily resulted from the absence, in 2011, of a $100.0 million contribution made to our qualified defined benefit pension plan in 2010, and increased premium collections in 2011, primarily associated with OneBeacon business written in 2010 and our Chaucer business. The $8.0 million decrease in net cash provided by operating activities in 2010 compared to 2009 primarily resulted from a $100 million contribution to our qualified defined benefit pension plan in January 2010. In addition, cash was used to provide for higher operating expenses and increased loss and LAE payments in 2010. These cash uses in 2010 were almost entirely offset by cash provided by increased written premium in 2010.
Net cash provided by investing activities was $182.8 million during 2011, compared to net cash used in investing activities of $98.8 million in 2010 and $174.2 million in 2009. During 2011, cash provided by investing activities primarily resulted from $756.1 million of cash and cash equivalents acquired from Chaucer. This increase was partially offset by cash paid for the Chaucer acquisition totaling $468.4 million, which included an $11.3 million payment related to a foreign currency exchange forward contract, and the investment of a portion of our Chaucer segments cash into fixed maturities. During 2010, cash used was primarily related to our net purchases of equity securities and fixed maturities. Additionally, cash was used in 2010 in connection with our acquisitions and renewal rights transactions. During 2009, cash was primarily used as we invested a portion of existing cash into fixed maturities and invested the proceeds from the sale of our Life Companies into fixed maturities. Additionally, in 2009, cash was used in connection with the One Beacon renewal rights agreement, which was funded, in part, by the sale of equity securities. This investing activity was partially offset by cash provided from sales of fixed maturities to fund our stock repurchase program.
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Net cash provided by financing activities was $127.3 million during 2011, compared to cash used in financing activities of $8.6 million in 2010 and $130.2 million in 2009. During 2011, cash provided by financing activities primarily resulted from the issuance, on June 17, 2011, of $300.0 million of unsecured senior debentures. Cash received from the issuance of debt was partially offset by the repurchase of $86.8 million of debt, the payment of dividends to our shareholders, repayments of collateral related to our securities lending program, and repurchases of common stock. During 2010, cash used in financing activities primarily resulted from repurchases of common stock and debt, as well as the payment of dividends to our shareholders. These were substantially offset by proceeds from the issuance, on February 23, 2010, of $200.0 million unsecured senior debentures. During 2009, cash used in financing activities primarily resulted from $148.1 million net repurchases of our common stock and $37.5 million to fund annual dividends to shareholders. These uses were partially offset by $53.1 million of cash inflows from our securities lending program. Also during 2009, a $125.0 million advance received as part of the FHLBB collateralized borrowing program was offset by $125.9 million used to repurchase a portion of our corporate debt.
At December 31, 2011, THG, as a holding company, held approximately $206 million of fixed maturities and cash. We believe our holding company assets are sufficient to meet our future obligations, which consists primarily of the interest on our senior debentures, our dividends to shareholders (as and to the extent declared), additional funds relating to the purchase of Chaucer, certain costs associated with benefits due to our former life employees and agents, and to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries. We do not expect that it will be necessary to dividend additional funds from our insurance subsidiaries in order to fund 2012 holding company obligations; however, we may decide to do so.
Dividends to common shareholders are subject to quarterly board approval and declaration. During 2011, as declared by the Board, we paid three quarterly dividends of $0.275 per share and one quarterly dividend of $0.30 per share to our shareholders. The total dividends paid to our shareholders in 2011 were $50.9 million. We believe that our holding company assets are sufficient to provide for future shareholder dividends should the Board of Directors declare them.
We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements relating to current operations, including the funding of our qualified defined benefit pension plan and Chaucer pension plan. Based upon the current estimate of liabilities and certain assumptions regarding investment returns and other factors, our qualified defined benefit pension plan is essentially fully funded as of December 31, 2011. As a result, we currently expect that significant cash contributions will not be required for this plan for several years. The Chaucer pension plan is approximately $30 million underfunded as of December 31, 2011. The ultimate payment amounts for both the defined benefit plan and the Chaucer pension plan are based on several assumptions, including but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates and the ultimate valuation and determination of benefit obligations. Since differences between actual plan experience and our assumptions are likely, changes to our funding obligations in future periods are possible.
Our insurance subsidiaries maintain a high degree of liquidity within their respective investment portfolios in fixed maturity and short-term investments. We believe that the quality of the assets we hold will allow us to realize the long-term economic value of our portfolio, including securities that are currently in an unrealized loss position. We do not anticipate the need to sell these securities to meet our insurance subsidiaries cash requirements. We expect our insurance subsidiaries to generate sufficient operating cash to meet all short-term and long-term cash requirements. However, there can be no assurance that unforeseen business needs or other items will not occur causing us to have to sell those securities in a loss position before their values fully recover, thereby causing us to recognize impairment charges in that time period.
Since October 2007 and through December 2010, our Board of Directors has authorized aggregate repurchases of our common stock of up to $500 million. Our repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. We are not required to purchase any specific number of shares or to make purchases by any certain date under this program. During 2011, we repurchased 0.6 million shares of our common stock through open market purchases at a cost of $21.7 million. On March 30, 2010 and December 8, 2009, we entered into accelerated share repurchase agreements with Barclays Bank plc, acting through its agent Barclays Capital, Inc., and utilized a portion of our existing share repurchase
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authorization for the immediate repurchase of 2.3 million and 2.4 million shares, respectively, of our common stock at a cost of $105.0 million and $105.2 million, respectively. Total repurchases under this program as of December 31, 2011 were 8.6 million shares at a cost of $364.8 million.
Over the past several years, we have issued, through two separate transactions, $500 million in senior debentures and have received advances of $163.9 million through our membership in FHLBB as part of a collateralized borrowing program. Additional information related to these borrowings is provided in Note 6 Debt and Credit Arrangements on pages 110 to 111 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K.
Additionally, from time to time, we may also repurchase our debt. In 2011, we repurchased, in several transactions, $69.5 million of Junior Debentures at a cost of $72.1 million, resulting in a net loss of $2.6 million. In addition, we repurchased $4.0 million of surplus notes outstanding related to AIX, $8.0 million of capital securities related to AIX and $3.0 million of capital securities related to Professionals Direct, Inc. These repurchases are expected to reduce our pre-tax interest costs in 2012 by approximately $6 million. In 2010, we repurchased $36.5 million of our Junior Debentures at a cost of $38.5 million, resulting in a $2.0 million loss on the repurchases. In 2009, we repurchased in several transactions, including a tender offer, our mandatorily redeemable preferred securities and Senior Debentures, resulting in a gain of $34.5 million. These mandatorily redeemable securities were originally issued through AFC Capital Trust I, which was liquidated on July 30, 2009. We may decide to repurchase additional debt on an opportunistic basis.
On August 2, 2011, we entered into a $200.0 million committed syndicated credit agreement which expires in August 2015, with an option to increase the facility to $250.0 million assuming no default and satisfaction of certain other conditions. The agreement also includes a $50 million sub-facility for standby letters of credit that can be used for general corporate purposes. Borrowings, if any, under this agreement are unsecured and incur interest at a rate per annum equal to, at our option, a designated base rate or the three month LIBOR plus applicable margin. The agreement provides covenants, including but not limited to, maintaining at least a certain level of consolidated equity, maximum consolidated leverage ratios, and an RBC ratio at our primary U.S. domiciled property and casualty companies. We had no borrowings under this agreement during 2011. At December 31, 2011, we were in compliance with these covenants.
In 2010, Chaucer entered into a £90.0 million Standby Letter of Credit Facility that is used to provide regulatory capital supporting Chaucers underwriting through two managed syndicates expiring on December 31, 2015, and provides for an annual commitment fee of 1.14 percent. The Standby Facility contains restrictive financial covenants including, but not limited to, maintaining a minimum consolidated tangible net worth and a leverage ratio of less than or equal to 35 percent for Chaucer.
In November 2011, we entered into a Standby Letter of Credit Facility Agreement (the Facility Agreement) not to exceed $180.0 million outstanding at any one time, with the option to increase the amount available for issuances of letters of credit to $270.0 million in the aggregate on one occasion only during the term of the Facility Agreement (subject to the consent of all lenders and assuming no default and satisfaction of other specified conditions). The agreement provides certain covenants including, but not limited to, the syndicates financial condition. The Facility Agreement is used to provide regulatory capital supporting Chaucers underwriting through two managed syndicates. The Facility Agreement expires on December 31, 2016. A letter of credit commission fee on outstanding letters of credit is payable quarterly, and ranges from 1.50% to 2.125% per annum, depending on our credit ratings for portions that are not cash collateralized, and 0.30% per annum for portions that are cash collateralized. A commitment fee in respect of the unutilized commitments under the Facility Agreement is payable quarterly, and ranges from 0.60% to 0.85% per annum, depending on our credit ratings. Chaucer is also required to pay customary agency fees. We were in compliance with the covenants at December 31, 2011. The Facility Agreement replaces the aforementioned £90.0 million Standby Letter of Credit Facility entered into by Chaucer in 2010.
Simultaneous with the Facility Agreement, in November 2011, we entered into a Guaranty Agreement (the Guaranty Agreement) with Lloyds TSB Bank plc, as Facility Agent and Security Agent, pursuant to which, we unconditionally guarantee the obligations of Chaucer under the Facility Agreement. The Guaranty Agreement contains certain financial covenants that require us to maintain a minimum net worth, a minimum risk-based capital ratio at our primary U.S. domiciled property and casualty companies and a maximum leverage ratio, and certain negative covenants that limit our ability, among other things, to incur or assume certain debt, grant liens on our property, merge or consolidate, dispose of assets, materially change the nature or conduct of our business and make restricted payments (except, in each case, as provided by certain exceptions). The Guaranty Agreement also contains certain customary representations and warranties.
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On June 14, 2010, we purchased approximately 11 acres of developable land in Worcester, Massachusetts for $5 million. A portion of the land will be developed with the construction of a new 200,000 square foot office building and the redevelopment of an adjacent parking garage (the City Square Project). In addition, we signed a 17 year lease agreement with a tenant for the new building and garage. The tenant is an unaffiliated public company with an investment grade credit rating. Through December 31, 2011, we capitalized an additional $20.7 million in related construction, lease acquisition, legal, architectural and associated costs. Development costs are estimated between $65 million and $70 million and the project will be financed, in part, through the aforementioned issuance of collateralized debt through our membership in the FHLBB. In July 2010, Hanover Insurance committed to borrow $46.3 million from the FHLBB to finance the project. These borrowings will be drawn down in several increments from July 2010 to January 2012. Through December 31, 2011, Hanover Insurance received advances of $38.9 million from this commitment. Amounts drawn from the $46.3 million mature on July 20, 2020 and carry fixed interest rates with a weighted average of 3.88%.
On March 31, 2010, we acquired Campania Holding Company, Inc. (Campania) for a cash purchase price of approximately $24 million, subject to various terms and conditions. Campania specializes in insurance solutions for portions of the healthcare industry.
On December 3, 2009, we entered into a renewal rights agreement with OneBeacon. Through this agreement, we acquired access to a portion of OneBeacons small and middle market commercial business at renewal, including industry programs and middle market niches. This transaction included consideration of approximately $23 million, plus certain potential additional consideration estimated to total approximately $11 million, primarily representing purchased renewal rights intangible assets which are included as other assets in our Consolidated Balance Sheets. The agreement was effective for renewals beginning January 1, 2010
Contractual Obligations
Our financing obligations generally include repayment of our Senior Debentures, Junior Debentures, subordinated debt, borrowings from the FHLBB, and operating lease payments. The following table represents our annual payments related to the contractual principal and interest payments of these financing obligations as of December 31, 2011 and operating lease payments reflect expected cash payments based upon lease terms. In addition, we also have included our estimated payments related to our loss and LAE obligations and our current expectation of payments to be made to support the obligations of our benefit plans. The following table also includes commitments to purchase investment securities at a future date. Actual payments may differ from the contractual and/or estimated payments in the table.
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December 31, 2011 |
Maturity less than 1 year |
Maturity 1-3 years |
Maturity 4-5 years |
Maturity in excess of 5 years |
Total | |||||||||||||||
(in millions) | ||||||||||||||||||||
Debt (1) |
$ | | $ | | $ | | $ | 911.1 | $ | 911.1 | ||||||||||
Interest associated with debt (1) |
60.3 | 120.6 | 120.6 | 431.9 | 733.4 | |||||||||||||||
Operating lease commitments (2) |
19.7 | 31.7 | 17.5 | | 68.9 | |||||||||||||||
Qualified defined benefit pension plan funding obligations (3) |
| | | | | |||||||||||||||
Chaucer pension plan funding obligations (3) |
2.9 | 5.8 | 5.8 | 8.7 | 23.2 | |||||||||||||||
Non-qualified defined benefit pension and post-retirement benefit obligations (4) |
8.1 | 15.2 | 14.2 | 30.4 | 67.9 | |||||||||||||||
Investment commitments (5) |
81.2 | 6.8 | | | 88.0 | |||||||||||||||
Loss and LAE obligations (6) |
1,906.8 | 1,806.6 | 764.3 | 1,282.6 | 5,760.3 |
(1) | Debt includes our senior debentures due in 2025, which pay annual interest at a rate of 7 5/8%, our senior debentures due in 2020, which pay annual interest at a rate of 7.50%, our senior debentures due in 2021, which pay annual interest at a rate of 6.375%, and our junior subordinated debentures due in 2027, which pay cumulative dividends at an annual rate of 8.207%. In addition, we have subordinated notes denominated in Euros due in 2034, which pay interest semi-annually based on the European Inter bank offer rate (Euribor), plus an agreed margin of 3.75%, and subordinated notes due in 2036, which pay interest semi-annually based on the U.S. dollar 3-month LIBOR, plus an agreed margin of 3.1%. Payments related to the principal amounts of these agreements represent contractual maturity; therefore, principal and interest associated with these obligations are reflected in the above table based upon the contractual maturity dates and current Euribor and LIBOR rates of 1.565% and 0.581%, respectively. The Company has the ability to prepay the subordinated notes, which is not reflected in the table above. The Euro denominated debt is converted from Euro to GBP at current rates and then translated to U.S. dollars based upon the December 31, 2011 exchange rate between the GBP and U.S. dollar of 1.55. In addition, we have $125.0 million of borrowings under a collateralized borrowing program with the FHLBB which pays interest monthly at a rate of 5.50% annually. Such borrowings are available for a twenty-year term or through September 25, 2029. We also have $38.9 million of borrowings under this collateralized borrowing program which pays interest monthly. Furthermore, we borrowed an additional $7.4 million under this program in January 2012. All borrowings under this program with the FHLBB pay interest at a weighted average rate of 3.88%. These borrowings have a maturity date of July 20, 2020. |
(2) | Our U.S. and international subsidiaries are lessees with a number of operating leases. |
(3) | In 2010, we contributed $100.0 million to our qualified defined benefit pension plan and do not expect to make any significant additional contributions in order to meet our minimum funding requirements. However, additional contributions may be required in the future based on the level of pension assets and liabilities in future periods. |
Chaucer pension plan funding obligations reflect estimated payments to be made through plan year 2019 based on a payment schedule determined by the plans trustees. Additional contributions may be required for unfunded benefit obligations, if any, after plan year 2019 as determined by the plans trustees. For purposes of this table, we used the foreign currency exchange rate of 1.55 at December 31, 2011 to determine the future cash payments.
The ultimate payment amount for these pension plans are based on several assumptions, including, but not limited to, the rate of return on plan assets, the discount rate for benefit obligations, mortality experience, interest crediting rates and the ultimate valuation of benefit obligations. Differences between actual plan experience and our assumptions are likely and will likely result in changes to our funding obligations in future periods.
(4) | Non-qualified defined benefit pension and postretirement benefit obligations reflect estimated payments to be made through plan year 2021 for pension, postretirement and postemployment benefits. Estimates of these payments and the payment patterns are based upon historical experience. |
(5) | Investment commitments include $46.8 million related to the City Square Project, $23.6 million related to tax credits, and $17.6 million related to partnerships and other investment commitments. |
(6) | Unlike many other forms of contractual obligations, loss and LAE reserves do not have definitive due dates and the ultimate payment dates are subject to a number of variables and uncertainties. As a result, the total loss and LAE reserve payments to be made by period, as shown in the table, are estimates based principally on historical experience. |
OFF-BALANCE SHEET ARRANGEMENTS
We currently do not have any material off-balance sheet arrangements that are reasonably likely to have an effect on our financial position, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.
CONTINGENCIES AND REGULATORY MATTERS
Information regarding litigation and legal contingencies appears in Note 17Commitments and Contingencies on pages 127 to 128 of the Notes to Consolidated Financial Statements included in Financial Statements and Supplementary Data of this Form 10-K. Information related to certain regulatory and industry developments are contained in Regulation in Item 1Business included on pages 12 to 14 of this Form 10-K and in Item 1A Risk Factors on pages 22 to 37 of this Form 10-K.
Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers information on specific insurance companies. Higher ratings generally indicate the rating agencies opinion regarding financial stability and a stronger ability to pay claims.
We believe that strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security. Customers typically focus on claims-paying ratings, while creditors focus on debt ratings. Investors use both to evaluate a companys overall financial strength.
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RISKS AND FORWARD-LOOKING STATEMENTS
Managements Discussion and Analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of indicators of forward-looking statements and specific important factors that could cause actual results to differ materially from those contained in forward-looking statements, see Part I Item 1A on pages 22 to 37 of this Annual Report of Form 10-K for the fiscal year ended December 31, 2011. This Managements Discussion and Analysis should be read and interpreted in light of such factors.
GLOSSARY OF SELECTED INSURANCE TERMS
Account rounding The conversion of single policy customers to accounts with multiple policies and/or additional coverages.
Benefit payments Payments made to an insured or their beneficiary in accordance with the terms of an insurance policy.
Capacity The maximum amount of business which may be accepted by a syndicate or a corporate member on a syndicate, expressed in terms of gross premium written, net of commission.
Casualty insurance Insurance that is primarily concerned with the losses caused by injuries to third persons and their property (other than the policyholder) and the related legal liability of the insured for such losses.
Catastrophe A severe loss, resulting from natural and manmade events, including risks such as hurricane, fire, earthquake, windstorm, tornado, hailstorm, severe winter weather, explosion, terrorism, riots and other similar events.
Catastrophe loss Loss and directly identified loss adjustment expenses from catastrophes. The Insurance Services Office (ISO) Property Claim Services (PCS) defines a catastrophe loss as an event that causes $25 million or more in U.S. industry insured property losses and affects a significant number of property and casualty policyholders and insurers. In addition to those catastrophe events declared by ISO, claims management also generally includes within the definition of a catastrophe loss, a property loss event that causes approximately $5 million or more in company insured losses and affects in excess of one hundred policyholders or multiple independent risks. For the international business in our Chaucer segment, management utilizes a catastrophe loss definition that is substantially consistent with the ISO definition framework.
Cede; cedent; ceding company When a party reinsures its liability with another, it cedes business and is referred to as the cedent or ceding company.
Combined ratio, GAAP This ratio is the GAAP equivalent of the statutory ratio that is widely used as a benchmark for determining an insurers underwriting performance. A ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income. The combined ratio is the sum of the loss ratio, the loss adjustment expense ratio and the underwriting expense ratio.
Corporate member A company admitted to membership of Lloyds and which provides capital in support of a Lloyds syndicate to enable the syndicate to undertake underwriting risks.
Credit spread The difference between the yield on the debt securities of a particular corporate debt issue and the yield of a similar maturity of U.S. Treasury debt securities.
Current accident year loss results A non-GAAP measure of the estimated earnings impact of current premiums offset by estimated loss experience and expenses for the current accident year. This measure includes the estimated increase in revenue associated with higher prices (premiums), including those caused by price inflation and changes in exposure, partially offset by higher volume driven expenses and inflation of loss costs. Volume driven expenses include policy acquisition costs such as commissions paid to property and casualty agents, which are typically based on a percentage of premium dollars.
Dividends received deduction A corporation is entitled to a special tax deduction from gross income for dividends received from a domestic corporation that is subject to income tax.
Earned premium The portion of a premium that is recognized as income, or earned, based on the expired portion of the policy period, that is, the period for which loss coverage has actually been provided. For example, after six months, $50 of a $100 annual premium is generally considered earned premium. The remaining $50 of annual premium is unearned premium. Net earned premium is earned premium net of reinsurance.
Economic interest The share of syndicate underwriting capacity supported by capital from Chaucer Holdings plc.
Excess of loss reinsurance Reinsurance that indemnifies the insured against all or a specific portion of losses under reinsured policies in excess of a specified dollar amount or retention.
Expense Ratio, GAAP The ratio of underwriting expenses to premiums earned for a given period.
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Exposure As it relates to underwriting, a measure of the rating units or premium basis of a risk; for example, an exposure of a number of automobiles. As it relates to loss events, the maximum value of claims made on an insurer from an event or events that would result in the total exhaustion of the cover or indemnity offered by an insurance policy.
Frequency The number of claims occurring during a given coverage period.
Funds at Lloyds Funds held in trust at Lloyds as security for the policyholders and to support a corporate members overall underwriting activities. The funds must be in a form approved by Lloyds and be maintained at certain specified levels.
Inland Marine Insurance In Commercial Lines, this is a type of coverage developed for shipments that do not involve ocean transport. It covers articles in transit by all forms of land and air transportation as well as bridges, tunnels and other means of transportation and communication. In the context of Personal Lines, this term relates to floater policies that cover expensive personal items such as fine art and jewelry.
Loss adjustment expenses (LAE) Expenses incurred in the adjusting, recording, and settlement of claims. These expenses include both internal company expenses and outside services. Examples of LAE include claims adjustment services, adjuster salaries and fringe benefits, legal fees and court costs, investigation fees and claims processing fees.
Loss adjustment expense (LAE) ratio, GAAP The ratio of loss adjustment expenses to earned premiums for a given period.
Loss costs An amount of money paid for a property and casualty claim.
Loss ratio, GAAP The ratio of losses to premiums earned for a given period.
Loss reserves Liabilities established by insurers to reflect the estimated cost of claims payments and the related expenses that the insurer will ultimately be required to pay in respect of insurance it has written. Reserves are established for losses and for LAE.
Managing agent An agent that runs the affairs of a syndicate.
Multivariate product An insurance product, the pricing for which is based upon the magnitude of, and correlation between, multiple rating factors. In practical application, the term refers to the foundational analytics and methods applied to the product construct. Our Connections Auto product is an example of a multivariate product.
Peril A cause of loss.
Property insurance Insurance that provides coverage for tangible property in the event of loss, damage or loss of use.
Rate The pricing factor upon which the policyholders premium is based.
Rate increase (Commercial Lines and Chaucer) Represents the average change in premium on renewal policies caused by the estimated net effect of base rate changes, discretionary pricing, inflation or changes in policy level exposure.
Rate increase (Personal Lines) The estimated cumulative premium effect of approved rate actions during the prior policy period applied to a policys renewal premium.
Reinstatement premium A pro-rata reinsurance premium that may be charged for reinstating the amount of reinsurance coverage reduced as the result of a reinsurance loss payment under a reinsurance treaty. For events that we are the insured party, the charge would decrease premiums; for events where we provide reinsurance coverage, the charge would increase premiums. For example, in 2005, this premium was required to ensure that our property catastrophe occurrence treaty, which was exhausted by Hurricane Katrina, was available again in the event of another large catastrophe loss in 2005.
Reinsurance An arrangement in which an insurance company, or a reinsurance company, known as the reinsurer, agrees to indemnify another insurance or reinsurance company, known as the ceding company, against all or a portion of the insurance or reinsurance risks underwritten by the ceding company under one or more policies. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on risks and catastrophe protection from large or multiple losses. Reinsurance does not legally discharge the primary insurer from its liability with respect to its obligations to the insured.
Risk based capital (RBC) A method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC ratio for regulatory purposes is calculated as total adjusted capital divided by required risk based capital. Total adjusted capital for property and casualty companies is capital and surplus, adjusted for the non-tabular reserve discount applicable to our assumed discontinued accident and health insurance business. The Company Action Level is the first level at which regulatory involvement is specified based upon the level of capital.
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Regulators may take action for reasons other than triggering various RBC action levels. The various action levels are summarized as follows:
| The Company Action Level, which equals 200% of the Authorized Control Level, requires a company to prepare and submit a RBC plan to the commissioner of the state of domicile. A RBC plan proposes actions which a company may take in order to bring statutory capital above the Company Action Level. After review, the commissioner will notify the company if the plan is satisfactory. |
| The Regulatory Action Level, which equals 150% of the Authorized Control Level, requires the insurer to submit to the commissioner of the state of domicile an RBC plan, or if applicable, a revised RBC plan. After examination or analysis, the commissioner will issue an order specifying corrective actions to be taken. |
| The Authorized Control Level authorizes the commissioner of the state of domicile to take whatever regulatory actions considered necessary to protect the best interest of the policyholders and creditors of the insurer. |
| The Mandatory Control Level, which equals 70% of the Authorized Control Level, authorizes the commissioner of the state of domicile to take actions necessary to place the company under regulatory control (i.e., rehabilitation or liquidation). |
Security Lending We engage our banking provider to lend securities from our investment portfolio to third parties. These lent securities are fully collateralized by cash. We monitor the fair value of the securities on a daily basis to assure that the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. We record securities lending collateral as a cash equivalent, with an offsetting liability in expenses and taxes payable.
Severity A monetary increase in the loss costs associated with the same or similar type of event or coverage.
Solvency II European Commission-led fundamental review of the capital adequacy regime for the European insurance industry.
Specialty Lines A major component of our other commercial lines. There is no accepted industry definition of specialty lines, but for our purpose specialty lines consist of products such as inland and ocean marine, bond business, specialty property, professional liability, management liability and various other program businesses. When discussing net written premiums and other financial measures of our specialty businesses, we may include non-specialty premiums that are written as part of the entire account.
Statutory accounting principles Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by insurance regulatory authorities including the National Association of Insurance Commissioners (NAIC), which in general reflect a liquidating, rather than going concern, concept of accounting.
Supranational An international organization, or union, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the wider grouping. European Investment Bank is an example of a supranational.
Syndicate A group of members underwriting insurance at Lloyds through the agency of a managing agent, to whom a particular syndicate number is assigned.
Underwriting The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept risks.
Underwriting expenses Expenses incurred in connection with the acquisition, pricing and administration of a policy.
Underwriting expense ratio, GAAP The ratio of underwriting expenses to earned premiums in a given period.
Unearned premiums The portion of a premium representing the unexpired amount of the contract term as of a certain date.
Written premium The premium assessed for the entire coverage period of a property and casualty policy without regard to how much of the premium has been earned. See also earned premium. Net written premium is written premium net of reinsurance.
ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Quantitative and Qualitative Disclosures about Market Risk of Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 66 to 68 of this Form 10-K.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Hanover Insurance Group, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of The Hanover Insurance Group, Inc. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for other-than-temporary impairments of debt securities in 2009.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Managements Report on Internal Control Over Financial Reporting, management has excluded Chaucer Holdings PLC (Chaucer), which was acquired on July 1, 2011, from its assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. We have also excluded Chaucer from our audit of internal control over financial reporting. The total assets and total revenues of Chaucer constitute approximately $4 billion or 31.7% and $541 million or 13.8%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2011.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 2012
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THE HANOVER INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions, except per share data) | ||||||||||||
Revenues |
||||||||||||
Premiums |
$ | 3,598.6 | $ | 2,841.0 | $ | 2,546.4 | ||||||
Net investment income |
258.2 | 247.2 | 252.1 | |||||||||
Net realized investment gains (losses): |
||||||||||||
Net realized gains from sales and other |
35.0 | 43.6 | 34.3 | |||||||||
Net otherthantemporary impairment losses on investments recognized in earnings |
(6.9 | ) | (13.9 | ) | (32.9 | ) | ||||||
|
|
|
|
|
|
|||||||
Total net realized investment gains |
28.1 | 29.7 | 1.4 | |||||||||
Fees and other income |
46.7 | 34.3 | 34.2 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
3,931.6 | 3,152.2 | 2,834.1 | |||||||||
|
|
|
|
|
|
|||||||
Losses and expenses |
||||||||||||
Losses and loss adjustment expenses |
2,550.8 | 1,856.3 | 1,639.2 | |||||||||
Policy acquisition expenses |
854.0 | 669.0 | 581.3 | |||||||||
Net loss (gain) from retirement of debt |
2.3 | 2.0 | (34.5 | ) | ||||||||
Interest expense |
55.0 | 44.3 | 35.5 | |||||||||
Other operating expenses |
447.2 | 369.5 | 341.7 | |||||||||
|
|
|
|
|
|
|||||||
Total losses and expenses |
3,909.3 | 2,941.1 | 2,563.2 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
22.3 | 211.1 | 270.9 | |||||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit): |
||||||||||||
Current |
(0.6 | ) | 5.7 | 51.2 | ||||||||
Deferred |
(9.0 | ) | 52.2 | 31.9 | ||||||||
|
|
|
|
|
|
|||||||
Total income tax expense (benefit) |
(9.6 | ) | 57.9 | 83.1 | ||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
31.9 | 153.2 | 187.8 | |||||||||
Gain from discontinued operations (net of income tax benefit of $2.5, $0.2 and $0.4 in 2011, 2010 and 2009) |
5.2 | 1.6 | 9.4 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 37.1 | $ | 154.8 | $ | 197.2 | ||||||
|
|
|
|
|
|
|||||||
Earnings per common share: |
||||||||||||
Basic: |
||||||||||||
Income from continuing operations |
$ | 0.71 | $ | 3.36 | $ | 3.71 | ||||||
Net gain from discontinued operations |
0.11 | 0.03 | 0.19 | |||||||||
|
|
|
|
|
|
|||||||
Net income per share |
$ | 0.82 | $ | 3.39 | $ | 3.90 | ||||||
|
|
|
|
|
|
|||||||
Weighted average shares outstanding |
45.2 | 45.6 | 50.6 | |||||||||
|
|
|
|
|
|
|||||||
Diluted: |
||||||||||||
Income from continuing operations |
$ | 0.70 | $ | 3.31 | $ | 3.68 | ||||||
Net gain from discontinued operations |
0.11 | 0.03 | 0.18 | |||||||||
|
|
|
|
|
|
|||||||
Net income per share |
$ | 0.81 | $ | 3.34 | $ | 3.86 | ||||||
|
|
|
|
|
|
|||||||
Weighted average shares outstanding |
45.8 | 46.3 | 51.1 | |||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC.
DECEMBER 31 |
2011 | 2010 | ||||||
(In millions, except share data) | ||||||||
Assets |
||||||||
Investments: |
||||||||
Fixed maturities, at fair value (amortized cost of $6,008.7 and $4,598.8) |
$ | 6,284.7 | $ | 4,797.9 | ||||
Equity securities, at fair value (cost of $239.9 and $120.7) |
246.4 | 128.6 | ||||||
Other investments |
190.2 | 39.4 | ||||||
|
|
|
|
|||||
Total investments |
6,721.3 | 4,965.9 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
820.4 | 290.4 | ||||||
Accrued investment income |
71.8 | 53.8 | ||||||
Premiums and accounts receivable, net |
1,168.1 | 772.0 | ||||||
Reinsurance recoverable on paid and unpaid losses and unearned premiums |
2,262.2 | 1,254.2 | ||||||
Deferred policy acquisition costs |
498.4 | 345.3 | ||||||
Deferred income taxes |
260.0 | 177.4 | ||||||
Goodwill |
185.5 | 179.2 | ||||||
Other assets |
515.5 | 398.1 | ||||||
Assets of discontinued operations |
121.2 | 133.6 | ||||||
|
|
|
|
|||||
Total assets |
$ | 12,624.4 | $ | 8,569.9 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Loss and loss adjustment expense reserves |
$ | 5,760.3 | $ | 3,277.7 | ||||
Unearned premiums |
2,292.1 | 1,520.3 | ||||||
Expenses and taxes payable |
642.9 | 541.7 | ||||||
Reinsurance premiums payable |
378.9 | 34.4 | ||||||
Debt |
911.1 | 605.9 | ||||||
Liabilities of discontinued operations |
129.3 | 129.4 | ||||||
|
|
|
|
|||||
Total liabilities |
10,114.6 | 6,109.4 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Shareholders Equity |
||||||||
Preferred stock, $0.01 par value, 20.0 million shares authorized, none issued |
| | ||||||
Common stock, $0.01 par value, 300.0 million shares authorized, 60.5 million shares issued |
0.6 | 0.6 | ||||||
Additional paid-in capital |
1,784.8 | 1,796.5 | ||||||
Accumulated other comprehensive income |
210.4 | 136.7 | ||||||
Retained earnings |
1,237.1 | 1,246.8 | ||||||
Treasury stock, at cost (15.9 million and 15.6 million shares) |
(723.1 | ) | (720.1 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
2,509.8 | 2,460.5 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 12,624.4 | $ | 8,569.9 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
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THE HANOVER INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Preferred Stock |
||||||||||||
Balance at beginning and end of year |
$ | | $ | | $ | | ||||||
|
|
|
|
|
|
|||||||
Common Stock |
||||||||||||
Balance at beginning and end of year |
0.6 | 0.6 | 0.6 | |||||||||
|
|
|
|
|
|
|||||||
Additional Paid-in Capital |
||||||||||||
Balance at beginning of year |
1,796.5 | 1,808.5 | 1,803.8 | |||||||||
Settlement of accelerated share repurchases |
| (8.7 | ) | | ||||||||
Employee and director stock-based awards and other |
(11.7 | ) | (3.3 | ) | 4.7 | |||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
1,784.8 | 1,796.5 | 1,808.5 | |||||||||
|
|
|
|
|
|
|||||||
Accumulated Other Comprehensive Income (Loss) |
||||||||||||
Net Unrealized Appreciation (Depreciation) on Investments and Derivative Instruments: |
||||||||||||
Balance at beginning of year |
218.3 | 107.7 | (276.1 | ) | ||||||||
Cumulative effect of change in accounting principle |
| | (33.3 | ) | ||||||||
|
|
|
|
|
|
|||||||
Balance at beginning of year, as adjusted |
218.3 | 107.7 | (309.4 | ) | ||||||||
Net appreciation during the period: |
||||||||||||
Net appreciation on available-for-sale securities and derivative instruments |
75.6 | 104.7 | 415.8 | |||||||||
Benefit for deferred income taxes |
14.8 | 5.9 | 1.3 | |||||||||
|
|
|
|
|
|
|||||||
90.4 | 110.6 | 417.1 | ||||||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
308.7 | 218.3 | 107.7 | |||||||||
|
|
|
|
|
|
|||||||
Defined Benefit Pension and Postretirement Plans: |
||||||||||||
Balance at beginning of year |
(81.6 | ) | (78.9 | ) | (108.7 | ) | ||||||
Amounts arising in the period |
(16.0 | ) | (13.9 | ) | 26.0 | |||||||
Amortization during the period: |
||||||||||||
Amount recognized as net periodic benefit cost |
10.2 | 9.8 | 19.8 | |||||||||
Benefit (provision) for deferred income taxes |
0.6 | 1.4 | (16.0 | ) | ||||||||
|
|
|
|
|
|
|||||||
(5.2 | ) | (2.7 | ) | 29.8 | ||||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
(86.8 | ) | (81.6 | ) | (78.9 | ) | ||||||
|
|
|
|
|
|
|||||||
Cumulative Foreign Currency Translation Adjustment: |
||||||||||||
Balance at beginning of year |
| | | |||||||||
Amount recognized as cumulative foreign currency translation during the year |
(17.7 | ) | | | ||||||||
Benefit for deferred income taxes |
6.2 | | | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
(11.5 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Total accumulated other comprehensive income |
210.4 | 136.7 | 28.8 | |||||||||
|
|
|
|
|
|
|||||||
Retained Earnings |
||||||||||||
Balance at beginning of year, before cumulative effect of accounting change, net of tax |
1,246.8 | 1,141.1 | 949.8 | |||||||||
Cumulative effect of accounting change, net of tax |
| | 33.3 | |||||||||
|
|
|
|
|
|
|||||||
Balance at beginning of year, as adjusted |
1,246.8 | 1,141.1 | 983.1 | |||||||||
Net income |
37.1 | 154.8 | 197.2 | |||||||||
Dividends to shareholders |
(50.9 | ) | (47.2 | ) | (37.5 | ) | ||||||
Treasury stock issued for less than cost |
(6.9 | ) | (9.7 | ) | (5.3 | ) | ||||||
Recognition of employee stock-based compensation |
11.0 | 7.8 | 3.6 | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
1,237.1 | 1,246.8 | 1,141.1 | |||||||||
|
|
|
|
|
|
|||||||
Treasury Stock |
||||||||||||
Balance at beginning of year |
(720.1 | ) | (620.4 | ) | (482.2 | ) | ||||||
Shares purchased at cost |
(21.7 | ) | (126.0 | ) | (148.1 | ) | ||||||
Net shares reissued at cost under employee stock-based compensation plans |
18.7 | 26.3 | 9.9 | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of year |
(723.1 | ) | (720.1 | ) | (620.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Total shareholders equity |
$ | 2,509.8 | $ | 2,460.5 | $ | 2,358.6 | ||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-86-
THE HANOVER INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Net income |
$ | 37.1 | $ | 154.8 | $ | 197.2 | ||||||
Other comprehensive income (loss): |
||||||||||||
Available-for-sale securities: |
||||||||||||
Net appreciation during the period |
66.9 | 97.8 | 423.1 | |||||||||
Portion of other-than-temporary impairment losses transferred from (to) other comprehensive income |
10.5 | 6.9 | (7.3 | ) | ||||||||
Benefit for deferred income taxes |
14.2 | 5.9 | 1.3 | |||||||||
|
|
|
|
|
|
|||||||
Total available-for-sale securities |
91.6 | 110.6 | 417.1 | |||||||||
|
|
|
|
|
|
|||||||
Derivative instruments: |
||||||||||||
Net depreciation during the period |
(1.8 | ) | | | ||||||||
Benefit for deferred income taxes |
0.6 | | | |||||||||
|
|
|
|
|
|
|||||||
Total derivative instruments |
(1.2 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
90.4 | 110.6 | 417.1 | ||||||||||
|
|
|
|
|
|
|||||||
Pension and postretirement benefits: |
||||||||||||
Amounts arising in the period: |
||||||||||||
Net actuarial gain (loss) |
(16.0 | ) | (13.9 | ) | 21.5 | |||||||
Prior service cost |
| | 4.5 | |||||||||
|
|
|
|
|
|
|||||||
Total amounts arising in the period |
(16.0 | ) | (13.9 | ) | 26.0 | |||||||
Amortization recognized as net periodic benefit costs: |
||||||||||||
Net actuarial loss |
15.4 | 17.2 | 27.2 | |||||||||
Prior service cost |
(5.2 | ) | (5.8 | ) | (5.8 | ) | ||||||
Transition asset |
| (1.6 | ) | (1.6 | ) | |||||||
|
|
|
|
|
|
|||||||
Total amortization recognized as net periodic pension and postretirement cost |
10.2 | 9.8 | 19.8 | |||||||||
|
|
|
|
|
|
|||||||
Increase (decrease) in pension and postretirement benefit costs |
(5.8 | ) | (4.1 | ) | 45.8 | |||||||
|
|
|
|
|
|
|||||||
Benefit (provision) for deferred income taxes |
0.6 | 1.4 | (16.0 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total pension and postretirement benefits |
(5.2 | ) | (2.7 | ) | 29.8 | |||||||
|
|
|
|
|
|
|||||||
Cumulative foreign currency translation adjustment: |
||||||||||||
Amount recognized as cumulative foreign currency translation during the period |
(17.7 | ) | | | ||||||||
Benefit for deferred income taxes |
6.2 | | | |||||||||
|
|
|
|
|
|
|||||||
Total cumulative foreign currency translation adjustment |
(11.5 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Other comprehensive income |
73.7 | 107.9 | 446.9 | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income |
$ | 110.8 | $ | 262.7 | $ | 644.1 | ||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-87-
THE HANOVER INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Cash Flows From Operating Activities |
||||||||||||
Net income |
$ | 37.1 | $ | 154.8 | $ | 197.2 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Gain on discontinued operations |
(5.2 | ) | (1.8 | ) | (12.0 | ) | ||||||
Net loss (gain) from retirement of debt |
2.3 | 2.0 | (34.5 | ) | ||||||||
Net realized investment (gains) losses |
(16.2 | ) | (29.3 | ) | 1.8 | |||||||
Net amortization and depreciation |
26.7 | 16.7 | 11.8 | |||||||||
Stock-based compensation expense |
12.0 | 11.3 | 11.7 | |||||||||
Amortization of defined benefit plan costs |
10.2 | 9.8 | 19.8 | |||||||||
Deferred income taxes (benefit) expense |
(8.9 | ) | 52.0 | 31.9 | ||||||||
Change in deferred acquisition costs |
17.6 | (57.7 | ) | (21.5 | ) | |||||||
Change in premiums receivable, net of reinsurance premiums payable |
69.4 | (204.9 | ) | (14.1 | ) | |||||||
Change in accrued investment income |
4.3 | (1.1 | ) | | ||||||||
Change in loss, loss adjustment expense and unearned premium reserves |
94.5 | 288.2 | 9.9 | |||||||||
Change in reinsurance recoverable |
(86.9 | ) | (38.2 | ) | (58.3 | ) | ||||||
Change in expenses and taxes payable |
48.2 | (85.0 | ) | (44.6 | ) | |||||||
Other, net |
16.6 | (33.2 | ) | (7.5 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
221.7 | 83.6 | 91.6 | |||||||||
|
|
|
|
|
|
|||||||
Cash Flows From Investing Activities |
||||||||||||
Proceeds from disposals and maturities of fixed maturities |
1,624.2 | 1,376.2 | 2,162.3 | |||||||||
Proceeds from disposals of equity securities and other investments |
100.4 | 123.6 | 70.9 | |||||||||
Proceeds from mortgages sold, matured or collected |
0.8 | 9.0 | 17.4 | |||||||||
Proceeds from the sale of FAFLIC, net of cash transferred |
| | (2.3 | ) | ||||||||
Purchase of fixed maturities |
(1,688.0 | ) | (1,401.5 | ) | (2,345.8 | ) | ||||||
Purchase of equity securities and other investments |
(128.6 | ) | (184.9 | ) | (44.5 | ) | ||||||
Cash provided by (used for) business acquisitions, net of cash acquired |
287.7 | (13.3 | ) | (21.8 | ) | |||||||
Capital expenditures |
(16.5 | ) | (10.9 | ) | (10.4 | ) | ||||||
Net proceeds related to swap agreements |
3.1 | | | |||||||||
Other investing items |
(0.3 | ) | 3.0 | | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) investing activities |
182.8 | (98.8 | ) | (174.2 | ) | |||||||
|
|
|
|
|
|
|||||||
Cash Flows From Financing Activities |
||||||||||||
Proceeds from exercise of employee stock options |
3.9 | 12.0 | 3.1 | |||||||||
Proceeds from debt borrowings |
325.4 | 207.5 | 125.0 | |||||||||
Change in collateral related to securities lending program |
(42.1 | ) | (7.7 | ) | 53.1 | |||||||
Dividends paid to shareholders |
(50.9 | ) | (47.2 | ) | (37.5 | ) | ||||||
Repurchases of debt |
(86.8 | ) | (38.5 | ) | (125.9 | ) | ||||||
Repurchases of common stock |
(21.7 | ) | (134.7 | ) | (148.1 | ) | ||||||
Other financing activities |
(0.5 | ) | | 0.1 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
127.3 | (8.6 | ) | (130.2 | ) | |||||||
|
|
|
|
|
|
|||||||
Effect of exchange rate changes on cash |
(3.9 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
527.9 | (23.8 | ) | (212.8 | ) | |||||||
Net change in cash related to discontinued operations |
2.1 | (2.3 | ) | 131.6 | ||||||||
Cash and cash equivalents, beginning of year |
290.4 | 316.5 | 397.7 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, end of year |
$ | 820.4 | $ | 290.4 | $ | 316.5 | ||||||
|
|
|
|
|
|
|||||||
Supplemental Cash Flow information |
||||||||||||
Interest payments |
$ | 55.5 | $ | 40.3 | $ | 35.5 | ||||||
Income tax net payments |
$ | 3.0 | $ | 11.3 | $ | 47.9 |
The accompanying notes are an integral part of these consolidated financial statements.
-88-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation and Principles of Consolidation
The consolidated financial statements of The Hanover Insurance Group, Inc. (THG or the Company), include the accounts of The Hanover Insurance Company (Hanover Insurance) and Citizens Insurance Company of America (Citizens), THGs principal U.S. domiciled property and casualty companies; and certain other insurance and non-insurance subsidiaries. In addition, effective July 1, 2011, the Company acquired Chaucer Holdings plc (Chaucer), a specialist underwriting group which operates through the Society and Corporation of Lloyds (Lloyds) (See Note 2 Acquisitions and Discontinued Operations. The consolidated financial statements include Chaucers results for the period from July 1, 2011 through December 31, 2011. These legal entities conduct their operations through several business segments as discussed in Note 13 Segment Information. Additionally, the consolidated financial statements include the Companys discontinued operations, consisting of the Companys former life insurance businesses and its accident and health business. All intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In the opinion of the Companys management these financial statements reflect all adjustments, consisting of normal recurring items necessary for a fair presentation of the financial position and results of operations. The acquisition of Chaucer on July 1, 2011, which has added meaningful business volumes to THGs second half of fiscal year 2011 results, has affected the comparability of the consolidated financial statements.
B. Valuation of Investments
In accordance with the provisions of ASC 320, Investments Debt and Equity Securities (ASC 320), the Company is required to classify its investments into one of three categories: held-to-maturity, available-for-sale or trading. The Company determines the appropriate classification of fixed maturity and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
Fixed maturities and equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported in accumulated other comprehensive income, a separate component of shareholders equity. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in net investment income.
Fixed maturities that are delinquent are placed on non-accrual status, and thereafter interest income is recognized only when cash payments are received.
Realized investment gains and losses are reported as a component of revenues based upon specific identification of the investment assets sold. When an other-than-temporary decline in value of a specific investment is deemed to have occurred, and a charge to earnings is required, the Company recognizes a realized investment loss.
The Company reviews investments in an unrealized loss position to identify other-than-temporary declines in value. On April 1, 2009, the Company adopted accounting guidance which modified the assessment of other-than-temporary impairments (OTTI) on debt securities, as well as the method of recording and reporting other-than-temporary impairments. When it is determined that a decline in value of an equity security is other-than-temporary, the Company reduces the cost basis of the security to fair value with a corresponding charge to earnings. When an other-than-temporary decline in value of a debt security is deemed to have occurred, the Company must assess whether it intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the securitys amortized cost basis and its fair value at the impairment measurement date. If the Company does not intend to sell the debt security and it is not more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, the credit loss portion of an other-than-temporary impairment is recorded through earnings while the portion attributable to all other factors is recorded separately as a component of other comprehensive income. The amount of the other-than-temporary impairment that relates to credit is estimated by comparing the amortized cost of the fixed maturity security with the net present value of the fixed maturity securitys projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the fixed maturity security at the impairment measurement date. Once an OTTI
-89-
has been recognized, the new amortized cost basis of the security is equal to the previous amortized cost less the amount of OTTI recognized in earnings. Prior to the adoption of this guidance on April 1, 2009, an other-than-temporary impairment recognized in earnings for fixed maturity securities was equal to the difference between amortized cost and fair value at the time of impairment. For equity method investments, an impairment is recognized when evidence demonstrates that an other-than-temporary loss in value has occurred, including the absence of the ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
C. Financial Instruments
In the normal course of business, the Company may enter into transactions involving various types of financial instruments, including debt, investments such as fixed maturities, mortgage loans and equity securities, investment and loan commitments, swap contracts, option contracts, forward contracts and futures contracts. These instruments involve credit risk and could also be subject to risk of loss due to interest rate and foreign currency fluctuation. The Company evaluates and monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses.
D. Other Investments
Other investments consist primarily of overseas deposits, which are investments maintained in overseas funds and managed exclusively by Lloyds. These funds are required in order to protect policyholders in overseas markets and enable the Company to operate in those markets. Overseas deposits are carried at fair value. Realized and unrealized gains and losses on overseas deposits, including the impact of foreign currency movements, are reflected in the income statement in the period the gain or loss was generated. Also included in other investments are investments in limited partnerships, which are accounted for by the equity method of accounting or at cost.
E. Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, amounts due from banks and highly liquid debt instruments purchased with an original maturity of three months or less.
F. Deferred Policy Acquisition Costs
Acquisition costs consist of commissions, underwriting costs and other costs, which vary with, and are primarily related to, the production of premiums. Acquisition costs are deferred and amortized over the terms of the insurance policies.
Deferred acquisition costs (DAC) for each line of business are reviewed to determine if it is recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. Although recoverability of DAC is not assured, the Company believes it is more likely than not that all of these costs will be recovered. The amount of DAC considered recoverable, however, could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of a disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised.
G. Reinsurance Recoverables
The Company shares certain insurance risks it has underwritten, through the use of reinsurance contracts, with various insurance entities. Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944, Financial Services Insurance (ASC 944), have been met. As a result, when the Company experiences loss or claims events that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business or an aggregate amount associated with a particular accident year. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, or an incurred but not reported loss. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business and the balance is disclosed separately in the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled. Allowances are established for amounts deemed uncollectible and reinsurance recoverables are recorded net of these allowances. The Company evaluates the financial condition of its reinsurers and monitors concentration risk to minimize its exposure to significant credit losses from individual reinsurers.
-90-
H. Property, Equipment and Capitalized Software
Property, equipment, leasehold improvements and capitalized software are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line or accelerated method over the estimated useful lives of the related assets, which generally range from 3 to 30 years. The estimated useful life for capitalized software is generally 3 to 5 years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements.
The Company tests for the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of long-lived assets exceed the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. When an impairment loss occurs, the Company reduces the carrying value of the asset to fair value. Fair values are estimated using discounted cash flow analysis.
I. Goodwill and Intangible Assets
In accordance with the provisions of ASC 350, Intangibles- Goodwill and Other, the Company carries its goodwill at amortized cost, net of impairments. Increases to goodwill are generated through acquisition and represent the excess of the cost of an acquisition over the fair value of net assets acquired, including any intangibles acquired. Goodwill is no longer amortized but rather, is reviewed for impairment. The Company recorded $6.9 million in goodwill related to the acquisition of Chaucer. Additionally, acquisitions can also produce intangible assets, which have either a definite or indefinite life. Intangible assets with definite lives are amortized over that life, whereas those intangible assets determined to have an indefinite life are reviewed at least annually for impairment.
The Company tests for the recoverability of goodwill and intangible assets with indefinite lives annually or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of reporting units with goodwill exceed the fair value. The amount of the impairment loss that is recognized is determined based upon the excess of the carrying value of goodwill compared to the implied fair value of the goodwill, as determined with respect to all assets and liabilities of the reporting unit. The Company has performed its annual review of goodwill and intangible assets with indefinite lives for impairment in the fourth quarters of 2011 and 2010 with no impairments recognized.
J. Liabilities for Losses, LAE, and Unearned Premiums
Liabilities for outstanding claims, losses and loss adjustment expenses (LAE) are estimates of payments to be made on property and casualty contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments for our property and casualty business are reflected in current operations. Estimated amounts of salvage and subrogation on unpaid property and casualty losses are deducted from the liability for unpaid claims.
Premiums for direct and assumed business are reported as earned on a pro-rata basis over the contract period. The unexpired portion of these premiums is recorded as unearned premiums.
All losses, LAE and unearned premium liabilities are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that these liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised.
K. Debt
The Companys debt includes senior debentures, junior debentures, subordinated notes, trust preferred capital securities, and advances under the Companys collateralized borrowing program with the Federal Home Loan Bank of Boston (FHLBB). The senior debentures and subordinated notes are carried at principal amount borrowed, net of unamortized discounts. The junior subordinated debentures and borrowings under the FHLBB program are carried at principal amount borrowed. Debt also includes liabilities connected to trust preferred capital securities, related to outstanding securities issued by AIX Holdings, Inc. (AIX) and Professionals Direct, Inc. (PDI). Cash distributions on such trust preferred stock are accounted for as interest expense. (See Note 6 Debt and Credit Arrangements).
L. Premium, Premium Receivable, Fee Revenue and Related Expenses
Insurance premiums written are generally recorded at the policy inception and are primarily earned on a pro rata basis over the terms of the policies for all products. Premiums written include estimates, primarily in the Chaucer segment, that are derived from multiple sources which include the historical experience of the underlying
-91-
business, similar businesses and available industry information. These estimates are regularly reviewed and updated and any resulting adjustments are included in the current years results. Unearned premium reserves represent the portion of premiums written that relates to the unexpired terms of the underlying in-force insurance policies and reinsurance contracts. Premium receivables reflect the unpaid balance of premium written as of the balance sheet date. Premium receivables are generally short-term in nature and are reported net of allowance for estimated uncollectible premium accounts. The Company reviews its receivables for collectibility at the balance sheet date. The allowance for uncollectible accounts was not material as of December 31, 2011 and 2010. Ceded premiums are charged to income over the applicable term of the various reinsurance contracts with third party reinsurers. Reinsurance reinstatement premiums, when required, are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through estimated and unpaid losses and amortization of deferred policy acquisition costs.
M. Income Taxes
The Company is subject to the tax laws and regulations of the U.S. and foreign countries in which it operates. The Company files a consolidated U.S. federal income tax return that includes the holding company and its U.S. subsidiaries. Generally, taxes are accrued at the U.S. rate of 35% for income from the U.S. operations. The Companys primary non-U.S. jurisdiction is the U.K. with a current tax rate of 26%. However, THG accrues taxes on certain non-U.S. income which is subject to U.S. tax as a result of being owned by a U.S. shareholder at the U.S. rate. Foreign tax credits, where available, are utilized to offset U.S. tax as permitted. Certain non-U.S. income is not subject to U.S. tax until repatriated. Foreign taxes on this non-U.S. income are accrued at the local foreign rate and do not have an accrual for U.S. deferred taxes as these earnings are intended to be permanently reinvested overseas.
The Companys accounting for income taxes represents its best estimate of various events and transactions.
Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by ASC 740, Income Taxes (ASC 740). These temporary differences are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. These differences result primarily from insurance reserves, deferred policy acquisition costs, tax credit carryforwards, loss carryforwards, and employee benefit plans.
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Consideration is given to all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Valuation allowances are established if, based on available information, it is determined that it is more likely than not that all or some portion of the deferred tax assets will not be realized. Changes in valuation allowances are generally reflected in income tax expense or as an adjustment to other comprehensive income (loss) depending on the nature of the item for which the valuation allowance is being recorded.
N. Stock-Based Compensation
The Company recognizes the fair value of compensation costs for all share-based payments, including employee stock options, in the financial statements. Unvested awards are generally expensed on a straight line basis, by tranche, over the vesting period of the award. The Companys stock-based compensation plans are discussed further in Note 10 Stock-Based Compensation Plans.
O. Earnings Per Share
Earnings per share (EPS) for the years ended December 31, 2011, 2010 and 2009 is based on a weighted average of the number of shares outstanding during each year. Basic and diluted EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. The weighted average shares outstanding used to calculate basic EPS differ from the weighted average shares outstanding used in the calculation of diluted EPS due to the effect of dilutive employee stock options, nonvested stock grants and other contingently issuable shares. If the effect of such items is antidilutive, the weighted average shares outstanding used to calculate diluted EPS equal those used to calculate basic EPS.
Options to purchase shares of common stock whose exercise prices are greater than the average market price of the common shares are not included in the computation of diluted earnings per share because the effect would be antidilutive.
P. Foreign Currency
The Companys reporting currency is the U.S. dollar. The functional currencies of the Companys foreign operations are the U.K. Pounds Sterling (GBP), U.S. dollar, and Canadian dollar. Assets and liabilities of foreign operations are translated into the U.S. dollar using the exchange rates
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in effect at the balance sheet date. Revenues and expenses of foreign operations are translated using the average exchange rate for the period. Gains or losses from translating the financial statements of foreign operations are recorded in cumulative translation adjustment, as a separate component of accumulated other comprehensive income. Gains and losses arising from transactions denominated in a foreign currency, other than the Companys functional currencies, are included in net income (loss), except for the Companys foreign currency denominated available-for-sale investments. The Companys foreign currency denominated available-for-sale investments change in exchange rates between the local currency and the functional currency at each balance sheet date represents an unrealized appreciation or depreciation in value of these securities, and is included as a component of accumulated other comprehensive income.
The Company manages its exposure to foreign currency risk primarily by matching assets and liabilities denominated in the same currency. To the extent that assets and liabilities in foreign currencies are not matched, the Company is exposed to foreign currency risk. For functional currencies, the related exchange rate fluctuations are reflected in other comprehensive income (loss). The Company translated Chaucers balance sheet from GBP to U.S. dollars using the December 31, 2011 conversion rate of 1.55. The Company recognized approximately $0.7 million in foreign currency transaction gains in the Statement of Income during the period from July 1, 2011 to December 31, 2011.
Q. New Accounting Pronouncements
Recently Implemented Standards
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) Update No. 2010-29 (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). This update provides clarity on the presentation of comparable pro forma financial statements for business combinations. Revenues and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Additionally, this update requires the disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The disclosure guidance provided in this ASC update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company implemented this guidance as of January 1, 2011. Implementing this guidance did not have an effect on the Companys financial position or results of operations upon adoption; however, the disclosure requirements were applied to the Companys acquisition of Chaucer. See Note 2 Acquisitions and Discontinued Operations for pro forma results of operations of THG and Chaucer.
In December 2010, the FASB issued ASC Update No. 2010-28 (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). This update modifies Step 1 of the goodwill impairment test for companies with zero or negative carrying amounts to require Step 2 of the goodwill impairment test to be performed if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This ASC update was effective for annual and interim periods beginning after December 15, 2010. The Company implemented this guidance as of January 1, 2011. The effect of implementing this guidance was not material to the Companys financial position or results of operations.
In July 2010, the FASB issued ASC Update No. 2010-20 (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASC update is applicable for financing receivables recognized on a companys balance sheet that have a contractual right to receive payment either on demand or on fixed or determinable dates. This update enhances the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses, at disaggregated levels. The disclosure guidance provided in the update relating to those required as of the end of the reporting period was effective for interim and annual reporting periods ending on or after December 15, 2010. The effect of implementing the guidance was not significant to the Companys financial statement disclosures. The disclosure guidance related to activity that occurs during the reporting period is effective for interim and annual reporting periods beginning on or after December 15, 2010. The implementation of the disclosure guidance related to activity was not significant to the Companys financial statement disclosures.
In January 2010, the FASB issued ASC Update No. 2010-06 (Topic 820) Improving Disclosures about Fair Value Measurements. This update amends ASC 820 and
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requires new and clarified disclosures for fair value measurements. The guidance requires that transfers in and out of Levels 1 and 2 be disclosed separately, including a description of the reasons for such transfers. Additionally, the reconciliation of fair value measurements of Level 3 assets should separately disclose information about purchases, sales, issuance and settlements in a gross, rather than net disclosure presentation. The guidance further clarifies that fair value disclosures should be separately presented for each class of assets and liabilities and disclosures should be provided for valuation techniques and inputs for both recurring and non-recurring fair value measurements related to Level 2 and Level 3 categories. The disclosure guidance provided in the update was effective for reporting periods beginning after December 15, 2009. The Company implemented this guidance effective January 1, 2010. Implementing this guidance did not have an effect on the Companys financial position or results of operations.
In December 2009, the FASB issued ASC Update No. 2009-17, Consolidation (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities which codified Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R). This guidance amends FASB Interpretation No. 46R, Consolidation of Variable Interest Entities an interpretation of ARB No. 51 to require an analysis to determine whether a company has a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has a) the power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The statement requires an ongoing assessment of whether a company is the primary beneficiary of a variable interest entity when the holders of the entity, as a group, lose power, through voting or similar rights, to direct the actions that most significantly affect the entitys economic performance. This statement also enhances disclosures about a companys involvement in variable interest entities. This ASC update was effective as of the beginning of the first annual reporting period that began after November 15, 2009. The Company implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Companys financial position or results of operations.
In December 2009, the FASB issued ASC Update No. 2009-16 Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets which codified Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140. This guidance revises FASB Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Extinguishment of Liabilities a replacement of FASB Statement 125 and requires additional disclosures about transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and enhances disclosure requirements. This ASC update was effective prospectively, for annual periods beginning after November 15, 2009, and interim and annual periods thereafter. The Company implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Companys financial position or results of operations.
As of April 1, 2009, the Company adopted guidance included in ASC 320, which modifies the assessment of OTTI for fixed maturity securities, as well as the method of recording and reporting OTTI. Under the new guidance, if a company intends to sell or more likely than not will be required to sell a fixed maturity security before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings. If a company does not intend to sell the fixed maturity security, or more likely than not will not be required to sell it, the company is required to separate the other-than-temporary impairment into the portion which represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings and the amount related to non-credit factors is recognized in accumulated other comprehensive income, net of applicable taxes. A cumulative effect adjustment was recognized by the Company upon adoption of this guidance to reclassify the non-credit component of previously recognized impairments from retained earnings to accumulated other comprehensive income. The Company increased the amortized cost basis of these fixed maturity securities and recorded a cumulative effect adjustment of $33.3 million as an increase to retained earnings and reduction to accumulated other comprehensive income for the year ended December 31, 2009. (See further disclosure in Note 4 Investment Income and Gains and Losses).
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Recently Issued Standards
In September 2011, the FASB issued ASC Update No. 2011-08 (Topic 350) Testing Goodwill for Impairment. This ASC update allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The update provides that an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The update further improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the update improves the examples of events and circumstances that should be considered by an entity that has a reporting unit with a zero or negative carrying amount in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. This ASC update is effective for annual and interim periods beginning after December 15, 2011, with early adoption permitted. The Company does not expect the adoption of this ASC to have a material impact on its financial position or results of operations.
In June 2011, the FASB issued ASC Update No. 2011-05 (Topic 220) Presentation of Comprehensive Income (ASC Update No. 2011-05). This ASC update requires companies to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. In addition, an entity is required to present on the face of the financial statements reclassification adjustments from other comprehensive income to net income. This ASC update should be applied retrospectively and except for the provisions related to reclassification adjustment, is effective for interim and annual periods beginning after December 15, 2011. In December 2011, the FASB issued ASC Update 2011-12 (Topic 220) Comprehensive Income which deferred the implementation date of the reclassification adjustment guidance in ASC Update No. 2011-05. The Company expects that the implementation of the guidance related to financial statement presentation will not have a significant impact to its current financial statement presentation. The Company is evaluating the impact of presenting the reclassification adjustment to its Consolidated Statements of Income and Comprehensive Income.
In May 2011, the FASB issued ASC Update No. 2011-04 (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASC update results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (IFRS). The new guidance includes changes to how and when the valuation premise of highest and best use applies, clarification on the application of blockage factors and other premiums and discounts, as well as new and revised disclosure requirements. This ASC update is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this ASC to have a material impact on its financial position or results of operations.
In October 2010, the FASB issued ASC Update No. 2010-26 (Topic 944), Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force). This ASC update provides clarity in defining which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, commonly known as deferred acquisition costs. Additionally, this update specifies that only costs associated with the successful acquisition of a policy or contract may be deferred, whereas industry practice historically included costs relating to unsuccessful contract acquisition. This ASC is effective for fiscal years beginning after December 15, 2011. Retrospective application to all prior periods upon the date of adoption is also permitted. The Company has elected to apply this guidance retrospectively. Management anticipates that the implementation of this ASC would result in an after-tax reduction to our stockholders equity as of January 1, 2012 of approximately $26 million, or approximately 1%. The adoption of this guidance is not expected to have a material impact on our results of operations on either a historical or prospective basis.
R. Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
S. Discontinued Operations Significant Accounting Policy Discussion
The following accounting policies relate only to the Companys discontinued operations, which are in run-off. Please refer to the above captions for policies related to assets and liabilities that were held by both the Companys ongoing business and the discontinued business.
Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944 have been met. As a result, when the Company experiences loss
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or claims events, or unfavorable mortality or morbidity experience that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, an incurred but not reported loss or a future policy benefit. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses and future policy benefits, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve and future policy benefit estimates. The reinsurance recoverables are based on what the Company believes are reasonable estimates. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled.
Liabilities for outstanding claims, losses and LAE are estimates of payments to be made on health insurance contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments are reflected in discontinued operations. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that policy liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised.
2. ACQUISITIONS AND DISCONTINUED OPERATIONS
ACQUISITIONS
Chaucer Acquisition
On July 1, 2011, the Company acquired Chaucer, a United Kingdom (U.K.) insurance business. Chaucer is a leading specialist managing agency at Lloyds. Chaucer underwrites business in several lines of business, including property, marine and aviation, energy, U.K. motor and casualty and other coverages (which include international liability, specialist coverages, and syndicate participations). Chaucer is headquartered in London, with a regional presence in Whitstable, England and locations in Houston, Singapore, Buenos Aires, and Copenhagen.
This transaction is expected to advance the Companys specialty lines strategy and result in broader product and underwriting capabilities, as well as greater geographic and product diversification. The acquisition adds a presence in the Lloyds market, which includes access to international licenses, an excess and surplus insurance business and the ability to syndicate certain risks.
Determination of Purchase Price
Shareholders of Chaucer received 53.3 pence for each Chaucer share, which was paid in either cash or loan notes to those shareholders who elected to receive such notes in lieu of cash. Loan notes will be paid over the next five years. The closing of the acquisition followed approval of the transaction by Chaucer shareholders on June 7, 2011, subsequent court approval in the U.K. and regulatory approvals in various jurisdictions. The following table summarizes the transaction in both GBP and U.S. dollars:
(in millions) | ||||||||
Aggregate purchase price announced on April 20, 2011 |
||||||||
Based on 53.3p contract price |
£297.7 | $ | 485.3 | |||||
Actual consideration on July 14, 2011: |
||||||||
Cash |
£287.4 | $ | 455.0 | |||||
Loan notes and other payables |
9.5 | 15.3 | ||||||
Foreign exchange forward settlement |
| 11.3 | ||||||
|
|
|
|
|||||
Total |
£296.9 | $ | 481.6 | |||||
|
|
|
|
The difference between the aggregate purchase price at signing and closing is attributable to the effect of currency fluctuations between the GBP and the U.S. dollar, as well as a change in outstanding shares.
In connection with the transaction, the Company entered into a foreign exchange forward contract, which provided for an economic hedge between the agreed upon purchase price of Chaucer in GBP and currency fluctuations between the GBP and U.S. dollar prior to close. This contract effectively locked in the U.S. dollar equivalent of the purchase price to be delivered in GBP and was settled at a loss of $11.3 million during the year ended December 31, 2011. The loss on the contract was due to a decrease in the exchange rate between the GBP and U.S. dollar, but was partially offset by the lower U.S. dollars required to meet the GBP-based purchase price, resulting in a $6.4 million gain on foreign exchange during the year ended December 31, 2011. Additional decreases in the exchange rate have occurred subsequent to the payment of cash proceeds on July 14, 2011. Foreign exchange gains of $0.3 million
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were recognized related to the loan notes that are due in GBP to certain former shareholders of Chaucer common stock during the year ended December 31, 2011. The Company will be subject to fluctuations in the currency until such loan notes have been paid.
This payment was funded from the THG holding company, which included approximately $300 million of proceeds from the senior unsecured notes issued on June 17, 2011. See Note 6 Debt and Credit Arrangements for additional information.
Allocation of Purchase Price
The purchase price has been allocated as follows based on an estimate of the fair value of assets acquired and liabilities assumed as of July 1, 2011 (converted to U.S. dollars using an exchange rate of 1.6053):
(in millions) | ||||
Cash |
$ | 756.1 | ||
Premiums and accounts receivable, net |
469.5 | |||
Investments |
1,630.8 | |||
Reinsurance recoverables, net |
569.8 | |||
Deferred acquisition costs |
170.6 | |||
Deferred income taxes |
52.4 | |||
Other assets |
18.1 | |||
Loss and loss adjustment expense reserves |
(2,300.6 | ) | ||
Unearned premiums |
(857.3 | ) | ||
Debt |
(63.3 | ) | ||
Other liabilities |
(64.0 | ) | ||
|
|
|||
Net tangible assets |
382.1 | |||
Goodwill |
6.9 | |||
Intangible assets |
87.7 | |||
|
|
|||
Purchase price allocated to Chaucer |
476.7 | |||
Additional hedge-related adjustment based upon July 14, 2011 settlement |
4.9 | |||
|
|
|||
Total purchase price, excluding transaction costs |
481.6 | |||
Transaction costs |
11.7 | |||
|
|
|||
Total purchase price |
$ | 493.3 | ||
|
|
The foregoing allocation of the purchase price is based on information that was available to management at the time the consolidated financial statements were prepared. The allocation may change as additional information becomes available; the impact of such changes, if any, may be material. Transaction costs associated with the acquisition, which included advisory, legal, and accounting costs, were expensed as incurred. Allowances for uncollectible accounts related to reinsurance recoverables are not significant at July 1, 2011.
Identification and Valuation of Intangible Assets
A summary of the preliminary fair value of goodwill and the identifiable intangible assets and their respective estimated useful lives at July 1, 2011 is as follows:
(in millions) | Amount | Estimated Useful Life |
Amortization Method |
|||||||||
Intangibles: |
||||||||||||
Lloyds syndicate capacity |
$ | 78.7 | Indefinite | N/A | ||||||||
Other intangibles |
9.0 | 2 -5 years | Straight line | |||||||||
|
|
|||||||||||
Total intangible assets |
87.7 | |||||||||||
Goodwill |
6.9 | Indefinite | N/A | |||||||||
|
|
|||||||||||
Total goodwill and intangibles |
$ | 94.6 | ||||||||||
|
|
The purchase price of the acquisition exceeded the fair value of the net tangible and intangible assets acquired, with the excess purchase price recorded as goodwill. Factors that contributed to the recognition of goodwill included the expected growth rate and profitability of Chaucer and the value of Chaucers experienced workforce. Goodwill and certain intangible assets are deductible for income tax purposes.
Pro Forma Results
The following unaudited pro forma information presents the combined revenues, net income and net income per share of THG and Chaucer for the years ended December 31, 2011, 2010, and 2009 with pro forma purchase accounting adjustments as if the acquisition had been consummated as of January 1, 2009. This pro forma information is not necessarily indicative of what would have occurred had the acquisition and related transactions been made on the dates indicated, or of future results of the Company. Amounts in 2010 and 2009 are converted from GBP to U.S. dollar at rates of 1.55 and 1.57, respectively.
(in millions, except per share data) |
(Unaudited) For the Year Ended December 31, |
|||||||||||
2011 | 2010 | 2009 | ||||||||||
Revenue |
$ | 4,359.2 | $ | 4,122.8 | $ | 3,873.3 | ||||||
Net income (loss) |
$ | (14.1 | ) | $ | 158.6 | $ | 219.2 | |||||
Net income (loss) per sharebasic |
$ | (0.32 | ) | $ | 3.48 | $ | 4.33 | |||||
Net income (loss) per share diluted (1) |
$ | (0.32 | ) | $ | 3.43 | $ | 4.29 | |||||
Weighted average shares outstandingbasic |
45.2 | 45.6 | 50.6 | |||||||||
Weighted average shares outstanding diluted (1) |
45.2 | 46.3 | 51.1 |
(1) |
Weighted average shares outstanding and per diluted share amounts in 2011 exclude common stock equivalents, since the impact of these instruments would be antidilutive. |
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Other Prior Acquisitions
On March 31, 2010, the Company acquired Campania Holding Company, Inc. (Campania) for a cash purchase price of approximately $24 million, subject to various terms and conditions. During 2011, the Company recognized an additional $4.7 million of consideration based upon the terms of the agreement. Campania specializes in insurance solutions for portions of the healthcare industry.
On December 3, 2009, the Company entered into a renewal rights agreement with OneBeacon Insurance Group, LTD. (OneBeacon). Through this agreement, the Company acquired access to a portion of OneBeacons small and middle market commercial business at renewal, including industry programs and middle market niches. This transaction included consideration of $23 million, plus additional contingent consideration which totaled $11 million, primarily representing purchased renewal rights intangible assets which are included as Other Assets in the Consolidated Balance Sheets. The agreement was effective for renewals beginning January 1, 2010.
DISCONTINUED OPERATIONS
Discontinued operations consist of: (i) Discontinued First Allmerica Financial Life Insurance Company (FAFLIC) Business; (ii) Discontinued Operations of the Companys Variable Life Insurance and Annuity Business; and (iii) Discontinued Accident and Health Business.
Discontinued FAFLIC and Variable Life Insurance and Annuity Business
On January 2, 2009, THG sold its remaining life insurance subsidiary, FAFLIC, to Commonwealth Annuity and Life Insurance Company (Commonwealth Annuity), a subsidiary of The Goldman Sachs Group, Inc. (Goldman Sachs). Previously, on December 30, 2005, the Company sold its variable life insurance and annuity business to Goldman Sachs, including the reinsurance of 100% of the variable business of FAFLIC. THG agreed to indemnify Commonwealth Annuity and Goldman Sachs for certain litigation, regulatory matters and other liabilities relating to the pre-closing activities of the businesses that were sold. As of December 31, 2011, the Companys total gross liability related to these guarantees was $3.8 million. The Company regularly reviews and updates this liability for legal and regulatory matter indemnities. Although the Company believes its current estimate for this liability is appropriate, there can be no assurance that these estimates will not materially increase in the future. Adjustments to this reserve are recorded in the results of the Company in the period in which they are determined.
In 2011, 2010 and 2009, the Company recognized gains of $4.0 million, $1.8 million and $12.0 million, respectively, related to the Discontinued FAFLIC and Variable Life Insurance and Annuity Business. These gains were primarily due to reductions in the estimate of indemnification liabilities related to the sales. Gains in 2011 also included $1.7 million related to a settlement with the Internal Revenue Service (IRS) for tax years 2005 and 2006 and other tax related items. See also Note 7Income Taxes for additional information.
Discontinued Accident and Health Insurance Business
During 1999, the Company exited its accident and health insurance business, consisting of its Employee Benefit Services business, its Affinity Group Underwriters business and its accident and health assumed reinsurance pool business. Prior to 1999, these businesses comprised substantially all of the former Corporate Risk Management Services segment. Accordingly, the operating results of the discontinued segment have been reported in accordance with Accounting Principles Board Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (APB Opinion No. 30). On January 2, 2009, Hanover Insurance directly assumed a portion of the accident and health business; and therefore continues to apply APB Opinion No. 30 to this business. In addition, the remainder of the FAFLIC accident and health business was reinsured by Hanover Insurance in connection with the sale of FAFLIC to Commonwealth Annuity, and has been reported in accordance with ASC 205.
The accident and health business had no significant financial results that impacted 2011 or 2010. The loss of $2.6 million 2009 was primarily from net realized investment losses resulting from other-than-temporary impairments. At December 31, 2011 and 2010, the portion of the discontinued accident and health business that was directly assumed had assets of $70.4 million and $59.3 million, respectively, consisting primarily of invested assets and reinsurance recoverables, and liabilities of $52.1 million and $53.2 million, respectively, consisting primarily of policy liabilities. At December 31, 2011 and 2010, the assets and liabilities of this business, as well as those of the reinsured portion of the accident and health business are classified as assets and liabilities of discontinued operations in the Consolidated Balance Sheets.
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3. INVESTMENTS
A. FIXED MATURITIES AND EQUITY SECURITIES
The amortized cost and fair value of available-for-sale fixed maturities and the cost and fair value of equity securities were as follows:
DECEMBER 31, 2011 | ||||||||||||||||||||
(in millions) | ||||||||||||||||||||
Amortized Cost or Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | OTTI Unrealized Losses |
||||||||||||||||
U.S. Treasury and government agencies |
$ | 261.7 | $ | 7.8 | $ | 0.2 | $ | 269.3 | $ | | ||||||||||
Foreign government |
239.1 | 0.4 | 0.5 | 239.0 | | |||||||||||||||
Municipal |
964.5 | 67.4 | 3.9 | 1,028.0 | | |||||||||||||||
Corporate |
3,218.2 | 197.7 | 40.3 | 3,375.6 | 13.8 | |||||||||||||||
Residential mortgage-backed |
816.1 | 40.9 | 8.4 | 848.6 | 6.1 | |||||||||||||||
Commercial mortgage-backed |
367.6 | 12.5 | 1.0 | 379.1 | | |||||||||||||||
Asset-backed |
141.5 | 4.3 | 0.7 | 145.1 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturities |
$ | 6,008.7 | $ | 331.0 | $ | 55.0 | $ | 6,284.7 | $ | 19.9 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities |
$ | 239.9 | $ | 15.3 | $ | 8.8 | $ | 246.4 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2010 | ||||||||||||||||||||
(in millions) | ||||||||||||||||||||
Amortized Cost or Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | OTTI Unrealized Losses |
||||||||||||||||
U.S. Treasury and government agencies |
$ | 259.4 | $ | 5.0 | $ | 3.2 | $ | 261.2 | $ | | ||||||||||
Municipal |
952.7 | 21.3 | 19.3 | 954.7 | | |||||||||||||||
Corporate |
2,276.0 | 174.6 | 30.2 | 2,420.4 | 19.5 | |||||||||||||||
Residential mortgage-backed |
704.2 | 41.8 | 11.9 | 734.1 | 8.3 | |||||||||||||||
Commercial mortgage-backed |
349.3 | 18.3 | 1.0 | 366.6 | | |||||||||||||||
Asset-backed |
57.2 | 3.7 | | 60.9 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed maturities |
$ | 4,598.8 | $ | 264.7 | $ | 65.6 | $ | 4,797.9 | $ | 27.8 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities |
$ | 120.7 | $ | 9.8 | $ | 1.9 | $ | 128.6 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
OTTI unrealized losses in the tables above represent OTTI recognized in accumulated other comprehensive income. This amount excludes net unrealized gains on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date of $25.1 million and $36.1 million as of December 31, 2011 and 2010, respectively.
The Company participates in a security lending program for the purpose of enhancing income. Securities on loan to various counterparties had a fair value of $24.1 million and $65.2 million at December 31, 2011 and 2010, respectively, and were fully collateralized by cash. The fair value of the loaned securities is monitored on a daily basis, and the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. Securities lending collateral is recorded by the Company in cash and cash equivalents, with an offsetting liability included in expenses and taxes payable.
At December 31, 2011 and 2010, fixed maturities with fair values of $103.5 million and $87.3 million, respectively, and amortized cost of $97.0 million and $84.1 million, respectively, were on deposit with various state and governmental authorities.
In accordance with Lloyds operating guidelines, the Company deposits funds at Lloyds to support underwriting operations. These funds are available only to fund claim obligations. These restricted assets consisted of approximately $372 million of fixed maturities and $94 million of cash and cash equivalents as of December 31, 2011.
The Company enters into various agreements that may require its fixed maturities to be held as collateral by others. At December 31, 2011 and 2010, fixed maturities with a fair value of $212.9 million and $169.8 million, respectively, were held as collateral for collateralized borrowings and other arrangements. Of these amounts, $205.7 million and $162.7 million related to the FHLBB collateralized borrowing program at December 31, 2011 and 2010, respectively.
-99-
The amortized cost and fair value by maturity periods for fixed maturities are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties, or the Company may have the right to put or sell the obligations back to the issuers.
DECEMBER 31 |
2011 | |||||||
(in millions) | ||||||||
Amortized Cost |
Fair Value |
|||||||
Due in one year or less |
$ | 543.3 | $ | 545.1 | ||||
Due after one year through five years |
1,871.8 | 1,943.8 | ||||||
Due after five years through ten years |
1,590.7 | 1,704.6 | ||||||
Due after ten years |
677.7 | 718.4 | ||||||
|
|
|
|
|||||
4,683.5 | 4,911.9 | |||||||
Mortgage-backed and asset-backed securities |
1,325.2 | 1,372.8 | ||||||
|
|
|
|
|||||
Total fixed maturities |
$ | 6,008.7 | $ | 6,284.7 | ||||
|
|
|
|
B. DERIVATIVE INSTRUMENTS
The Company maintains an overall risk management strategy that may incorporate the use of derivative instruments to manage significant unplanned fluctuations in earnings that may be caused by foreign currency exchange and interest rate volatility.
In April 2011, the Company entered into a foreign currency forward contract as an economic hedge of the foreign currency exchange risk embedded in the purchase price of Chaucer, which was denominated in GBP. For the year ended December 31, 2011, the Company recorded a loss of $11.3 million, reflected in other operating expenses in the Consolidated Statements of Income. This contract had a notional amount of £297.9 million and was settled on July 14, 2011. Since a foreign currency hedge in which the hedged item is a forecasted transaction relating to a business combination does not qualify for hedge accounting under ASC 815, Derivatives and Hedging (ASC 815), the Company did not apply hedge accounting to this transaction. See Note 2 Acquisitions and Discontinued Operations for additional information.
In May 2011, the Company entered into a treasury lock forward agreement to hedge the interest rate risk associated with the planned issuance of senior debt, which was completed on June 17, 2011. This hedge qualified as a cash flow hedge under ASC 815. It matured in June 2011 and resulted in a loss of $1.9 million, which was recorded in accumulated other comprehensive income and will be recognized as an expense over the term of the senior notes. All components of the derivatives loss were included in the assessment of hedge effectiveness. There was no ineffectiveness on this hedge. The Company expects $0.2 million will be recognized as an expense over the next 12 months.
During 2011, Chaucer held foreign currency forward contracts utilized to mitigate changes in fair value caused by foreign currency fluctuation in converting the fair value of GBP and Euro denominated investment portfolios into their U.S. dollar denominated equivalent. During the year, the Company recognized a net gain of $6.1 million related to these instruments, reflected in net realized investment gains in the Consolidated Statements of Income. All Chaucer forward contracts were terminated in October 2011.
C. UNREALIZED GAINS AND LOSSES
Unrealized gains and losses on available-for-sale and other securities are summarized in the following table.
FOR THE YEARS ENDED DECEMBER 31 | ||||||||||||
(in millions) | ||||||||||||
2011 |
Fixed Maturities |
Equity Securities And Other |
Total | |||||||||
Net appreciation, beginning of year |
$ | 210.3 | $ | 8.0 | $ | 218.3 | ||||||
Net appreciation (depreciation) on available-for-sale securities and derivative instruments |
66.4 | (1.3 | ) | 65.1 | ||||||||
Portion of OTTI losses recognized in other comprehensive income |
10.5 | | 10.5 | |||||||||
Benefit for deferred income taxes |
13.0 | 1.8 | 14.8 | |||||||||
|
|
|
|
|
|
|||||||
89.9 | 0.5 | 90.4 | ||||||||||
|
|
|
|
|
|
|||||||
Net appreciation, end of year |
$ | 300.2 | $ | 8.5 | $ | 308.7 | ||||||
|
|
|
|
|
|
|||||||
2010 |
||||||||||||
Net appreciation, beginning of year |
$ | 97.8 | $ | 9.9 | $ | 107.7 | ||||||
Net appreciation (depreciation) on available-for-sale securities |
101.1 | (3.3 | ) | 97.8 | ||||||||
Portion of OTTI losses recognized in other comprehensive income |
6.9 | | 6.9 | |||||||||
Benefit for deferred income taxes |
4.5 | 1.4 | 5.9 | |||||||||
|
|
|
|
|
|
|||||||
112.5 | (1.9 | ) | 110.6 | |||||||||
|
|
|
|
|
|
|||||||
Net appreciation, end of year |
$ | 210.3 | $ | 8.0 | $ | 218.3 | ||||||
|
|
|
|
|
|
|||||||
2009 |
||||||||||||
Net depreciation, beginning of year |
$ | (266.0 | ) | $ | (10.1 | ) | $ | (276.1 | ) | |||
Cumulative effect of change in accounting principle |
(33.3 | ) | | (33.3 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at beginning of year, as adjusted |
(299.3 | ) | (10.1 | ) | (309.4 | ) | ||||||
Net appreciation on available-for-sale securities |
403.2 | 19.9 | 423.1 | |||||||||
Portion of OTTI losses recognized in other comprehensive income |
(7.3 | ) | | (7.3 | ) | |||||||
Benefit for deferred income taxes |
1.2 | 0.1 | 1.3 | |||||||||
|
|
|
|
|
|
|||||||
397.1 | 20.0 | 417.1 | ||||||||||
|
|
|
|
|
|
|||||||
Net appreciation, end of year |
$ | 97.8 | $ | 9.9 | $ | 107.7 | ||||||
|
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|
|
|
|
-100-
Equity securities and other balances at December 31, 2011, 2010 and 2009 include after-tax net appreciation on other invested assets of $1.9 million, $1.8 million and $1.3 million, respectively. Fixed maturities at December 31, 2011 include $1.2 million of after-tax net depreciation associated with derivative instruments.
D. SECURITIES IN AN UNREALIZED LOSS POSITION
The following tables provide information about the Companys fixed maturities and equity securities that are in an unrealized loss position at December 31, 2011 and 2010:
DECEMBER 31, 2011 | ||||||||||||||||||||||||
(in millions) | 12 months or less | Greater than 12 months |
Total | |||||||||||||||||||||
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
|||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
Investment grade: |
||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | 0.2 | $ | 57.7 | $ | | $ | | $ | 0.2 | $ | 57.7 | ||||||||||||
Foreign governments |
0.5 | 148.8 | | | 0.5 | 148.8 | ||||||||||||||||||
Municipal |
0.5 | 28.0 | 3.4 | 58.8 | 3.9 | 86.8 | ||||||||||||||||||
Corporate |
19.9 | 699.6 | 8.2 | 35.6 | 28.1 | 735.2 | ||||||||||||||||||
Residential mortgage-backed |
5.1 | 115.8 | 2.4 | 9.9 | 7.5 | 125.7 | ||||||||||||||||||
Commercial mortgage-backed |
0.7 | 58.0 | 0.3 | 4.6 | 1.0 | 62.6 | ||||||||||||||||||
Asset-backed |
0.2 | 67.6 | | | 0.2 | 67.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment grade |
27.1 | 1,175.5 | 14.3 | 108.9 | 41.4 | 1,284.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Below investment grade: |
||||||||||||||||||||||||
Corporate |
8.5 | 118.0 | 3.7 | 14.7 | 12.2 | 132.7 | ||||||||||||||||||
Residential mortgage-backed |
0.9 | 8.0 | | | 0.9 | 8.0 | ||||||||||||||||||
Asset-backed |
0.5 | 0.9 | | | 0.5 | 0.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total below investment grade |
9.9 | 126.9 | 3.7 | 14.7 | 13.6 | 141.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
37.0 | 1,302.4 | 18.0 | 123.6 | 55.0 | 1,426.0 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity securities |
8.8 | 87.2 | | | 8.8 | 87.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 45.8 | $ | 1,389.6 | $ | 18.0 | $ | 123.6 | $ | 63.8 | $ | 1,513.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2010 | ||||||||||||||||||||||||
(in millions) | 12 months or less | Greater than 12 months |
Total | |||||||||||||||||||||
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
|||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
Investment grade: |
||||||||||||||||||||||||
U.S. Treasury and government agencies |
$ | 2.7 | $ | 84.9 | $ | 0.5 | $ | 16.4 | $ | 3.2 | $ | 101.3 | ||||||||||||
Municipal |
10.3 | 289.1 | 9.0 | 86.7 | 19.3 | 375.8 | ||||||||||||||||||
Corporate |
6.7 | 256.1 | 10.5 | 66.8 | 17.2 | 322.9 | ||||||||||||||||||
Residential mortgage-backed |
3.1 | 89.1 | 8.8 | 31.0 | 11.9 | 120.1 | ||||||||||||||||||
Commercial mortgage-backed |
0.1 | 13.1 | 0.9 | 7.3 | 1.0 | 20.4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment grade |
22.9 | 732.3 | 29.7 | 208.2 | 52.6 | 940.5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Below investment grade: |
||||||||||||||||||||||||
Corporate |
1.0 | 51.1 | 12.0 | 90.0 | 13.0 | 141.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
23.9 | 783.4 | 41.7 | 298.2 | 65.6 | 1,081.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity securities |
1.9 | 45.8 | | | 1.9 | 45.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 25.8 | $ | 829.2 | $ | 41.7 | $ | 298.2 | $ | 67.5 | $ | 1,127.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
-101-
The Company employs a systematic methodology to evaluate declines in fair value below amortized cost for fixed maturity securities or cost for equity securities. In determining other-than-temporary impairments of fixed maturity and equity securities, the Company evaluates several factors and circumstances, including the issuers overall financial condition; the issuers credit and financial strength ratings; the issuers financial performance, including earnings trends, dividend payments and asset quality; any specific events which may influence the operations of the issuer; the general outlook for market conditions in the industry or geographic region in which the issuer operates; and the length of time and the degree to which the fair value of an issuers securities remains below the Companys cost. With respect to fixed maturity investments, the Company considers any factors that might raise doubt about the issuers ability to pay all amounts due according to the contractual terms and whether the Company expects to recover the entire amortized cost basis of the security. With respect to equity securities, the Company considers its ability and intent to hold the investment for a period of time to allow for a recovery in value. The Company applies these factors to all securities.
E. OTHER
The Company had no concentration of investments in a single investee that exceeded 10% of shareholders equity except for fixed maturities invested in Federal Home Loan Mortgage Corp., which had a fair value of $455.0 million and $439.1 million as of December 31, 2011 and 2010, respectively.
On June 14, 2010, the Company purchased approximately 11 acres of developable land in Worcester, Massachusetts for $5 million. A portion of the land will be developed with the construction of a new 200,000 square foot office building and the redevelopment of an adjacent parking garage (the City Square Project). In addition, the Company signed a 17 year lease agreement with a tenant for the new building and garage. The tenant is an unaffiliated public company with an investment grade credit rating. During 2011 and 2010, the Company capitalized $8.3 million and $12.4 million, respectively, in related construction, lease acquisition, legal, architectural and associated costs. Development costs are estimated between $65 million and $70 million and the project will be financed, in part, through the issuance of collateralized debt through the Companys membership in the FHLBB. See Note 6Debt and Credit Arrangements for additional information related to the Companys FHLBB program.
At December 31, 2011, there were contractual investment commitments of up to $64.4 million, consisting primarily of the Companys commitment to invest approximately $46.8 million in the City Square Project. In addition to these investment commitments, the Company has contractual obligations to purchase tax credits of up to $23.6 million.
The Company holds overseas deposits of $135.1 million at December 31, 2011 which are investments held in overseas funds and managed exclusively by Lloyds. These investments are reflected in other investments in the Consolidated Balance Sheet.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Fixed maturities |
$ | 254.3 | $ | 248.6 | $ | 249.3 | ||||||
Equity securities |
6.8 | 4.5 | 5.2 | |||||||||
Other investments |
4.8 | 1.0 | 4.2 | |||||||||
|
|
|
|
|
|
|||||||
Gross investment income |
265.9 | 254.1 | 258.7 | |||||||||
Less investment expenses |
(7.7 | ) | (6.9 | ) | (6.6 | ) | ||||||
|
|
|
|
|
|
|||||||
Net investment income |
$ | 258.2 | $ | 247.2 | $ | 252.1 | ||||||
|
|
|
|
|
|
The carrying value of non-income producing fixed maturities, as well as the carrying value of fixed maturity securities on non-accrual status, at December 31, 2011 and 2010 were not material. The effect of non-accruals for the years ended December 31, 2011, 2010 and 2009, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, was a reduction in net investment income of $2.3 million, $2.3 million and $3.1 million, respectively.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Net realized gains (losses) on investments were as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Fixed maturities |
$ | 20.4 | $ | 17.7 | $ | 5.3 | ||||||
Equity securities |
0.9 | 13.0 | (4.3 | ) | ||||||||
Derivative instruments |
5.8 | 3.0 | | |||||||||
Other investments |
1.0 | (4.0 | ) | 0.4 | ||||||||
|
|
|
|
|
|
|||||||
Net realized investment gains |
$ | 28.1 | $ | 29.7 | $ | 1.4 | ||||||
|
|
|
|
|
|
-102-
Included in the net realized investment gains (losses) were other-than-temporary impairments of investment securities recognized in earnings totaling $6.9 million, $13.9 million and $32.9 million in 2011, 2010 and 2009, respectively.
Other-than-temporary-impairments
ASC 320 required a cumulative effect adjustment upon adoption to reclassify the non-credit component of previously recognized impairments from retained earnings to other comprehensive income. The Company reviewed previously recognized OTTI recorded through realized losses on securities held at April 1, 2009, which was approximately $121 million, and determined that $33.3 million of these OTTI were related to non-credit factors, such as interest rates and market conditions. Accordingly, the Company increased the amortized cost basis of these debt securities and recorded a cumulative effect adjustment of $33.3 million within shareholders equity. The cumulative effect adjustment had no effect on total shareholders equity as it increased retained earnings and reduced accumulated other comprehensive income.
For 2011, total OTTI was $4.9 million. Of this amount, $6.9 million was recognized in earnings, including $2.0 million that was transferred from unrealized losses in accumulated other comprehensive income. Of the $6.9 million recorded in earnings, $4.6 million related to fixed maturity securities that the Company intends to sell, $1.4 million related to common stocks and $0.9 million was estimated credit losses on fixed maturity securities. Other-than-temporary impairments recognized on fixed maturity securities during 2011 primarily included $3.4 million on below investment grade corporate bonds principally in the industrial and utilities sectors, $1.0 million on below investment grade municipal bonds and $0.9 million on investment grade residential mortgage-backed securities.
For 2010, total OTTI was $9.4 million. Of this amount, $13.9 million was recognized in earnings, including $4.5 million that was transferred from unrealized losses in accumulated other comprehensive income. Of the $13.9 million recorded in earnings, $4.4 million related to certain low-income housing tax credit limited partnerships, $4.3 million was estimated credit losses on fixed maturity securities, $3.3 million related to fixed maturity securities that the Company intended to sell and $1.9 million related to common stocks. Other-than-temporary impairments recognized on fixed maturity securities during 2010 primarily included $2.9 million on below investment grade corporate bonds principally in the industrial and utilities sectors and $2.7 million on investment grade residential mortgage-backed securities and $1.2 million on investment grade corporate bonds in the industrial sector.
For 2009, total OTTI was $42.2 million. Of this amount, $32.9 million was recognized in earnings and the remaining $9.3 million was recorded as unrealized losses in accumulated other comprehensive income. Of the OTTI recognized in earnings, $15.7 million related primarily to below investment grade corporate bonds in the industrial sector that the Company intended to sell and $9.6 million was from equities, including perpetual preferred securities primarily in the financial sector. In addition, the Company recorded OTTI of $7.6 million that was estimated credit losses, primarily on below investment grade fixed maturity securities, including $4.1 million on corporate bonds, $2.1 million on residential mortgage-backed securities and $1.4 million on a municipal bond.
The methodology and significant inputs used to measure the amount of credit losses on fixed maturities in 2011, 2010 and 2009 were as follows:
Asset-backed securities, including commercial and residential mortgage-backed securitiesthe Company utilized cash flow estimates based on bond specific facts and circumstances that include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayment speeds and structural support, including subordination and guarantees.
Corporate bondsthe Company utilized a financial model that derives expected cash flows based on probability-of-default factors by credit rating and asset duration and loss-given-default factors based on security type. These factors are based on historical data provided by an independent third-party rating agency.
Municipalsthe Company utilized cash flow estimates based on bond specific facts and circumstances that may include the political subdivisions taxing authority, the issuers ability to adjust user fees or other sources of revenue to satisfy its debt obligations and the ability to access insurance or guarantees.
The following table provides rollforwards of the cumulative amounts related to the Companys credit loss portion of the OTTI losses on fixed maturity securities for which the non-credit portion of the loss is included in other comprehensive income.
-103-
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Credit losses as of the beginning of the period |
$ | 16.7 | $ | 20.0 | $ | 15.3 | ||||||
Credit losses for which an OTTI was not previously recognized |
| 1.2 | 3.9 | |||||||||
Additional credit losses on securities for which an OTTI was previously recognized |
0.9 | 3.1 | 3.5 | |||||||||
Reductions for securities sold, matured or called |
(1.8 | ) | (7.2 | ) | (1.3 | ) | ||||||
Reductions for securities reclassified as intend to sell |
(1.3 | ) | (0.4 | ) | (1.4 | ) | ||||||
|
|
|
|
|
|
|||||||
Credit losses as of the end of the year |
$ | 14.5 | $ | 16.7 | $ | 20.0 | ||||||
|
|
|
|
|
|
The effective date of the section of ASC 320 requiring this disclosure was April 1, 2009. Therefore, 2009 data in the above table represents results for the period of April 1 through December 31, 2009.
The proceeds from sales of available-for-sale securities and the gross realized gains and gross realized losses on those sales, were as follows:
FOR THE YEARS ENDED DECEMBER 31 | ||||||||||||
(in millions) | ||||||||||||
2011 |
Proceeds from Sales |
Gross Gains |
Gross Losses |
|||||||||
Fixed maturities |
$ | 678.1 | $ | 20.0 | $ | 1.1 | ||||||
Equity securities |
$ | 86.6 | $ | 3.0 | $ | 0.5 | ||||||
|
|
|
|
|
|
|||||||
2010 |
||||||||||||
Fixed maturities |
$ | 456.2 | $ | 24.1 | $ | 2.2 | ||||||
Equity securities |
$ | 112.1 | $ | 13.5 | $ | | ||||||
|
|
|
|
|
|
|||||||
2009 |
||||||||||||
Fixed maturities |
$ | 1,522.4 | $ | 40.4 | $ | 14.2 | ||||||
Equity securities |
$ | 44.6 | $ | 7.6 | $ | 2.6 | ||||||
|
|
|
|
|
|
C. OTHER COMPREHENSIVE INCOME (LOSS) RECONCILIATION
The following table provides a reconciliation of gross unrealized investment gains (losses) to the net balance shown in the Consolidated Statements of Comprehensive Income.
For the Years Ended December 31, |
||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
(in millions) |
Pre-Tax | Tax Benefit (Expense) |
Net of Tax |
Pre-Tax | Tax Benefit (Expense) |
Net of Tax |
Pre-Tax | Tax Benefit (Expense) |
Net of Tax |
|||||||||||||||||||||||||||
Unrealized gains on available-for- sale securities: |
||||||||||||||||||||||||||||||||||||
Unrealized gains arising during period |
$ | 97.8 | $ | 23.5 | $ | 121.3 | $ | 130.7 | $ | 9.1 | $ | 139.8 | $ | 413.6 | $ | 1.3 | $ | 414.9 | ||||||||||||||||||
Less: reclassification adjustments for gains realized in net income |
20.4 | 9.3 | 29.7 | 26.0 | 3.2 | 29.2 | (2.2 | ) | | (2.2 | ) | |||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total available-for-sale securities |
77.4 | 14.2 | 91.6 | 104.7 | 5.9 | 110.6 | 415.8 | 1.3 | 417.1 | |||||||||||||||||||||||||||
Unrealized losses on derivative instruments: |
||||||||||||||||||||||||||||||||||||
Unrealized losses arising during period |
(1.8 | ) | 0.6 | (1.2 | ) | | | | | | | |||||||||||||||||||||||||
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|
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|
|
|||||||||||||||||||
Other comprehensive income |
$ | 75.6 | $ | 14.8 | $ | 90.4 | $ | 104.7 | $ | 5.9 | $ | 110.6 | $ | 415.8 | $ | 1.3 | $ | 417.1 | ||||||||||||||||||
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|
-104-
5. FAIR VALUE
The Company follows the guidance in ASC 820 as it relates to the fair value of its financial assets and liabilities. ASC 820 provides for a standard definition of fair value to be used in new and existing pronouncements. This guidance requires disclosure of fair value information about certain financial instruments (insurance contracts, real estate, goodwill and taxes are excluded) for which it is practicable to estimate such values, whether or not these instruments are included in the balance sheet at fair value. The Company is responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions. These fair values presented for certain financial instruments are estimates which, in many cases, may differ significantly from the amounts that could be realized upon immediate liquidation.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, i.e., exit price, in an orderly transaction between market participants. ASC 820 provides a hierarchy for determining fair value, which emphasizes the use of observable market data whenever available. The three broad levels defined by the hierarchy are as follows, with the highest priority given to Level 1 as these are the most reliable, and the lowest priority given to Level 3:
Level 1 Unadjusted quoted prices in active markets for identical assets.
Level 2 Quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, including model-derived valuations.
Level 3 Unobservable inputs that are supported by little or no market activity.
When more than one level of input is used to determine fair value, the financial instrument is classified as Level 2 or 3 according to the lowest level input that has a significant impact on the fair value measurement.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Except for a discussion on foreign government fixed maturities and other investments, which have been added as a result of the acquisition of Chaucer, these methods and assumptions have not changed since last year.
Cash and Cash Equivalents
The carrying amount approximates fair value.
Fixed Maturities
Level 1 securities generally include U.S. Treasury issues and other securities that are highly liquid and for which quoted market prices are available. Level 2 securities are valued using pricing for similar securities and pricing models that incorporate observable inputs including, but not limited to yield curves and issuer spreads. Level 3 securities include issues for which little observable data can be obtained, primarily due to the illiquid nature of the securities, and for which significant inputs used to determine fair value are based on the Companys own assumptions. Non-binding broker quotes are also included in Level 3.
The Company utilizes a third party pricing service for the valuation of the majority of its fixed maturity securities and receives one quote per security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value for those securities using pricing applications based on a market approach. Inputs into the fair value pricing common to all asset classes include: benchmark U.S. Treasury security yield curves; reported trades of identical or similar fixed maturity securities; broker/dealer quotes of identical or similar fixed maturity securities and structural characteristics such as maturity date, coupon, mandatory principal payment dates, frequency of interest and principal payments, and optional redemption features. Inputs into the fair value applications that are unique by asset class include, but are not limited to:
| U.S. government agencies determination of direct versus indirect government support and whether any contingencies exist with respect to the timely payment of principal and interest. |
| Foreign government estimates of appropriate market spread versus underlying related sovereign treasury curve(s) dependent on liquidity and direct or contingent support. |
| Municipals overall credit quality, including assessments of the level and variability of: sources of payment such as income, sales or property taxes, levies or user fees; credit support such as insurance; state or local economic and political base; natural resource availability; and susceptibility to natural or man-made catastrophic events such as hurricanes, earthquakes or acts of terrorism. |
-105-
| Corporate fixed maturities overall credit quality, including assessments of the level and variability of: industry economic sensitivity; company financial policies; quality of management; regulatory environment; competitive position; restrictive covenants; and security or collateral. |
| Residential mortgage-backed securities estimates of prepayment speeds based upon: historical prepayment rate trends; underlying collateral interest rates; geographic concentration; vintage year; borrower credit quality characteristics; interest rate and yield curve forecasts; U.S. government support programs; tax policies; delinquency/default trends; and, in the case of non-agency collateralized mortgage obligations, severity of loss upon default and length of time to recover proceeds following default. |
| Commercial mortgage-backed securities overall credit quality, including assessments of the level and variability of: collateral type such as office, retail, residential, lodging, or other; geographic concentration by region, state, metropolitan statistical area and locale; vintage year; historical collateral performance including defeasance, delinquency, default and special servicer trends; and capital structure support features. |
| Asset-backed securities overall credit quality, including assessments of the underlying collateral type such as credit card receivables, auto loan receivables, equipment lease receivables and real property lease receivables; geographic diversification; vintage year; historical collateral performance including delinquency, default and casualty trends; economic conditions influencing use rates and resale values; and contract structural support features. |
Generally, all prices provided by the pricing service, except actively traded securities with quoted market prices, are reported as Level 2.
The Company holds privately placed fixed maturity securities and certain other fixed maturity securities that do not have an active market and for which the pricing service cannot provide fair values. The Company determines fair values for these securities using either matrix pricing utilizing the market approach or broker quotes. The Company will use observable market data as inputs into the fair value applications, as discussed in the determination of Level 2 fair values, to the extent it is available, but is also required to use a certain amount of unobservable judgment due to the illiquid nature of the securities involved. Unobservable judgment reflected in the Companys matrix model accounts for estimates of additional spread required by market participants for factors such as issue size, structural complexity, high bond coupon, long maturity term or other unique features. These matrix-priced securities are reported as Level 2 or Level 3, depending on the significance of the impact of unobservable judgment on the securitys value. Additionally, the Company may obtain non-binding broker quotes which are reported as Level 3.
Equity Securities
Level 1 includes publicly traded securities valued at quoted market prices. Level 2 includes securities that are valued using pricing for similar securities and pricing models that incorporate observable inputs. Level 2 also includes fair values obtained from net asset values provided by mutual fund investment managers, upon which subscriptions and redemptions can be executed. Level 3 consists of common or preferred stock of private companies for which observable inputs are not available.
The Company utilizes a third party pricing service for the valuation of the majority of its equity securities and receives one quote for each equity security. When quoted market prices in an active market are available, they are provided by the pricing service as the fair value and such values are classified as Level 1. Generally, all prices provided by the pricing service, except quoted market prices, are reported as Level 2. The Company holds certain equity securities that have been issued by privately-held entities that do not have an active market and for which the pricing service cannot provide fair values. Generally, the Company estimates fair value for these securities based on the issuers book value and market multiples. These securities are reported as Level 3.
Mortgage Loans
Fair values are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.
Other Investments
Fair values of overseas trust funds are provided by the investment manager based on quoted prices for similar instruments in active markets and are reported as Level 2.
Legal Indemnities
Fair values are estimated using probability-weighted discounted cash flow analyses.
Debt
The fair value of debt was estimated based on quoted market prices. If a quoted market price is not available, fair values are estimated using discounted cash flows that are based on current interest rates and yield curves for debt issuances with maturities and credit risks consistent with the debt being valued.
-106-
The estimated fair values of the financial instruments were as follows:
DECEMBER 31 | 2011 | 2010 | ||||||||||||||
(in millions) | Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
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Financial Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 820.4 | $ | 820.4 | $ | 290.4 | $ | 290.4 | ||||||||
Fixed maturities |
6,284.7 | 6,284.7 | 4,797.9 | 4,797.9 | ||||||||||||
Equity securities |
246.4 | 246.4 | 128.6 | 128.6 | ||||||||||||
Mortgage loans |
4.7 | 5.0 | 5.5 | 5.8 | ||||||||||||
Other investments |
135.1 | 135.1 | | | ||||||||||||
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Total financial assets |
$ | 7,491.3 | $ | 7,491.6 | $ | 5,222.4 | $ | 5,222.7 | ||||||||
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Financial Liabilities |
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Legal indemnities |
$ | 3.8 | $ | 3.8 | $ | 5.4 | $ | 5.4 | ||||||||
Debt |
911.1 | 1,014.9 | 605.9 | 603.9 | ||||||||||||
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Total financial liabilities |
$ | 914.9 | $ | 1,018.7 | $ | 611.3 | $ | 609.3 | ||||||||
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The Company has processes designed to ensure that the values received from its third party pricing service are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. The Company performs a review of the fair value hierarchy classifications and of prices received from its pricing service on a quarterly basis. The Company reviews the pricing services policies describing its methodology, processes, practices and inputs, including various financial models used to value securities. Also, the Company reviews the portfolio pricing. Securities with changes in prices that exceed a defined threshold are verified to independent sources if available. If upon review, the Company is not satisfied with the validity of a given price, a pricing challenge would be submitted to the pricing service along with supporting documentation for its review. The Company does not adjust quotes or prices obtained from the pricing service unless the pricing service agrees with the Companys challenge. During 2011 and 2010, the Company did not adjust any prices received from brokers or its pricing service.
Changes in the observability of valuation inputs may result in a reclassification of certain financial assets within the fair value hierarchy. Reclassifications between levels of the fair value hierarchy are reported as of the beginning of the period in which the reclassification occurs. As previously discussed, the Company utilizes a third party pricing service for the valuation of the majority of its fixed maturities and equity securities. The pricing service has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company will use observable market data to the extent it is available, but may also be required to make assumptions for market based inputs that are unavailable due to market conditions.
The following tables provide, for each hierarchy level, the Companys assets at December 31, 2011 and 2010 that are measured at fair value on a recurring basis. Equity securities exclude FHLBB common stock of $9.4 million at December 31, 2011 and $8.6 million at December 31, 2010, which is carried at cost.
-107-
December 31, 2011 | ||||||||||||||||
(in millions) |
Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. Treasury and government agencies |
$ | 269.3 | $ | 147.3 | $ | 122.0 | $ | | ||||||||
Foreign government |
239.0 | | 239.0 | | ||||||||||||
Municipal |
1,028.0 | | 1,014.4 | 13.6 | ||||||||||||
Corporate |
3,375.6 | | 3,351.8 | 23.8 | ||||||||||||
Residential mortgage-backed, U.S. agency backed |
663.3 | | 663.3 | | ||||||||||||
Residential mortgage-backed, non-agency |
185.3 | | 180.1 | 5.2 | ||||||||||||
Commercial mortgage-backed |
379.1 | | 374.4 | 4.7 | ||||||||||||
Asset-backed |
145.1 | | 116.9 | 28.2 | ||||||||||||
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Total fixed maturities |
6,284.7 | 147.3 | 6,061.9 | 75.5 | ||||||||||||
Equity securities |
237.0 | 177.4 | 36.2 | 23.4 | ||||||||||||
Other investments |
135.1 | | 135.1 | | ||||||||||||
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Total investment assets at fair value |
$ | 6,656.8 | $ | 324.7 | $ | 6,233.2 | $ | 98.9 | ||||||||
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December 31, 2010 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Fixed maturities: |
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U.S. Treasury and government agencies |
$ | 261.2 | $ | 124.0 | $ | 137.2 | $ | | ||||||||
Municipal |
954.7 | | 938.1 | 16.6 | ||||||||||||
Corporate |
2,420.4 | | 2,392.2 | 28.2 | ||||||||||||
Residential mortgage-backed, U.S. agency backed |
600.4 | | 600.4 | | ||||||||||||
Residential mortgage-backed, non-agency |
133.7 | | 132.9 | 0.8 | ||||||||||||
Commercial mortgage-backed |
366.6 | | 361.1 | 5.5 | ||||||||||||
Asset-backed |
60.9 | | 47.4 | 13.5 | ||||||||||||
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Total fixed maturities |
4,797.9 | 124.0 | 4,609.3 | 64.6 | ||||||||||||
Equity securities |
120.0 | 106.6 | 10.5 | 2.9 | ||||||||||||
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Total investment assets at fair value |
$ | 4,917.9 | $ | 230.6 | $ | 4,619.8 | $ | 67.5 | ||||||||
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The tables below provide a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
YEAR ENDED DECEMBER 31, 2011 |
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Fixed Maturities | ||||||||||||||||||||||||||||||||
(in millions) |
Municipal | Corporate | Residential mortgage- backed, non-agency |
Commercial mortgage- backed |
Asset- backed |
Total | Equity Securities |
Total Assets |
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Balance at beginning of year |
$ | 16.6 | $ | 28.2 | $ | 0.8 | $ | 5.5 | $ | 13.5 | $ | 64.6 | $ | 2.9 | $ | 67.5 | ||||||||||||||||
Transfers into Level 3 |
| 14.5 | | | | 14.5 | | 14.5 | ||||||||||||||||||||||||
Transfers out of Level 3 |
| (17.3 | ) | (0.5 | ) | (7.3 | ) | | (25.1 | ) | | (25.1 | ) | |||||||||||||||||||
Total gains (losses): |
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Included in earnings |
(0.1 | ) | (0.7 | ) | | | 0.1 | (0.7 | ) | (1.4 | ) | (2.1 | ) | |||||||||||||||||||
Included in other comprehensive income |
0.2 | 0.3 | (0.1 | ) | (0.1 | ) | 0.8 | 1.1 | (2.3 | ) | (1.2 | ) | ||||||||||||||||||||
Purchases and sales: |
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Purchases |
| 11.8 | | 7.3 | 6.0 | 25.1 | | 25.1 | ||||||||||||||||||||||||
Chaucer acquisition |
| 0.1 | 5.6 | | 8.8 | 14.5 | 24.2 | 38.7 | ||||||||||||||||||||||||
Sales |
(3.1 | ) | (13.1 | ) | (0.6 | ) | (0.7 | ) | (1.0 | ) | (18.5 | ) | | (18.5 | ) | |||||||||||||||||
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Balance at end of year |
$ | 13.6 | $ | 23.8 | $ | 5.2 | $ | 4.7 | $ | 28.2 | $ | 75.5 | $ | 23.4 | $ | 98.9 | ||||||||||||||||
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-108-
YEAR ENDED DECEMBER 31, 2010 |
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Fixed Maturities | ||||||||||||||||||||||||||||||||
(in millions) |
Municipal | Corporate | Residential mortgage- backed, non-agency |
Commercial mortgage- backed |
Asset- backed |
Total | Equity Securities |
Total Assets |
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Balance at beginning of year |
$ | 15.5 | $ | 28.9 | $ | | $ | 6.2 | $ | 9.2 | $ | 59.8 | $ | 2.8 | $ | 62.6 | ||||||||||||||||
Transfers into Level 3 |
| 9.9 | | | 6.9 | 16.8 | | 16.8 | ||||||||||||||||||||||||
Transfers out of Level 3 |
| (2.7 | ) | | | (2.0 | ) | (4.7 | ) | | (4.7 | ) | ||||||||||||||||||||
Total gains (losses): |
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Included in earnings |
| 0.7 | | | | 0.7 | (0.3 | ) | 0.4 | |||||||||||||||||||||||
Included in other comprehensive income |
(0.5 | ) | 0.4 | | | | (0.1 | ) | (0.6 | ) | (0.7 | ) | ||||||||||||||||||||
Purchases and sales: |
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Purchases |
3.0 | 3.3 | 1.4 | | 2.0 | 9.7 | 1.0 | 10.7 | ||||||||||||||||||||||||
Sales |
(1.4 | ) | (12.3 | ) | (0.6 | ) | (0.7 | ) | (2.6 | ) | (17.6 | ) | | (17.6 | ) | |||||||||||||||||
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Balance at end of year |
$ | 16.6 | $ | 28.2 | $ | 0.8 | $ | 5.5 | $ | 13.5 | $ | 64.6 | $ | 2.9 | $ | 67.5 | ||||||||||||||||
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During the years ended December 31, 2011 and 2010, the Company transferred fixed maturities between Level 2 and Level 3 primarily a result of assessing the significance of unobservable inputs on the fair value measurement. There were no transfers between Level 1 and Level 2 during 2011.
The following table summarizes gains and losses due to changes in fair value that are recorded in net income for Level 3 assets.
YEARS ENDED DECEMBER 31, |
2011 | 2010 | ||||||||||||||||||||||
(in millions) |
Other-than- temporary impairments |
Net realized investment gains (losses) |
Total | Other-than- temporary impairments |
Net realized investment gains (losses) |
Total | ||||||||||||||||||
Level 3 Assets: |
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Fixed maturities: |
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Municipal |
$ | | $ | (0.1 | ) | $ | (0.1 | ) | $ | | $ | | $ | | ||||||||||
Corporate |
(0.9 | ) | 0.2 | (0.7 | ) | | 0.7 | 0.7 | ||||||||||||||||
Asset-backed |
| 0.1 | 0.1 | | | | ||||||||||||||||||
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Total fixed maturities |
(0.9 | ) | 0.2 | (0.7 | ) | | 0.7 | 0.7 | ||||||||||||||||
Equity securities |
(1.4 | ) | | (1.4 | ) | (0.3 | ) | | (0.3 | ) | ||||||||||||||
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Total assets |
$ | (2.3 | ) | $ | 0.2 | $ | (2.1 | ) | $ | (0.3 | ) | $ | 0.7 | $ | 0.4 | |||||||||
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There were no Level 3 liabilities held by the Company for the years ended December 31, 2011 and 2010.
-109-
6. DEBT AND CREDIT ARRANGEMENTS
Debt consists of the following:
December 31, |
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(in millions) |
2011 | 2010 | ||||||
Senior debentures (unsecured) maturing June 15, 2021 |
$ | 300.0 | $ | | ||||
Senior debentures (unsecured) maturing March 1, 2020 |
200.0 | 200.0 | ||||||
Senior debentures (unsecured) maturing October 15, 2025 |
121.6 | 121.6 | ||||||
Junior debentures |
59.7 | 129.2 | ||||||
Subordinated note maturing November 16, 2034 |
15.6 | | ||||||
Subordinated note maturing September 21, 2036 |
50.0 | | ||||||
FHLBB borrowings |
163.9 | 134.5 | ||||||
Capital securities |
7.0 | 18.0 | ||||||
Surplus notes |
| 4.0 | ||||||
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Total principal debt |
$ | 917.8 | $ | 607.3 | ||||
Unamortized fair value adjustment |
(2.9 | ) | (0.5 | ) | ||||
Unamortized debt issuance cost |
(3.0 | ) | (0.9 | ) | ||||
Effect of foreign exchange rate changes |
(0.8 | ) | | |||||
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Total |
$ | 911.1 | $ | 605.9 | ||||
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On June 17, 2011, the Company issued $300 million aggregate principal amount of 6.375% senior unsecured notes due June 15, 2021. Additionally, on February 23, 2010, the Company issued $200.0 million aggregate principal amount of 7.50% senior unsecured notes due March 1, 2020. The Company also issued senior unsecured notes with a face value of $200.0 million on October 16, 1995. As of December 31, 2011 and 2010, the remaining senior debentures have a $121.6 million face value, pay interest semi-annually at a rate of 7.625% and mature on October 15, 2025. All of the Companys senior debentures are subject to certain restrictive covenants, including limitations on the issuance or disposition of stock of restricted subsidiaries and limitations on liens. These debentures pay interest semi-annually.
The Companys Series B 8.207% Subordinated Deferrable Interest Debentures (Junior Debentures) have a face value of $59.7 million and $129.2 million as of December 31, 2011 and 2010, respectively.
In 2011, the Company repurchased in several transactions, $69.5 million of these junior debentures at a cost of $72.1 million, resulting in a net loss of $2.6 million on the repurchases. Additionally, in 2011, the Company repurchased $8.0 million and $3.0 million of the capital securities related to AIX and PDI, respectively. In 2010, the Company repurchased $36.5 million of its Junior Debentures at a cost of $38.5 million, resulting in a loss of $2.0 million on the repurchase. These debentures pay cumulative dividends semi-annually at 8.207% and mature February 3, 2027.
On July 1, 2011, the Company acquired all of the outstanding shares of Chaucer. As part of this acquisition, 12.0 million aggregate principal amount of floating rate subordinated unsecured notes issued by Chaucer in 2004, due November 16, 2034, were assumed. These notes pay interest semi-annually based on the European Inter bank offer rate (Euribor) plus 3.75%. These notes are converted from Euro to GBP at current rates and then translated to U.S. dollars based upon the December 31, 2011 exchange rate between the GBP and U.S. dollar of 1.55. Additionally, the Company also assumed $50.0 million aggregate principal amount of floating rate subordinated unsecured notes issued by Chaucer in 2006 and due September 21, 2036. These notes pay interest quarterly based on the three-month LIBOR plus 3.1%.
The Company borrowed $125.0 million in 2009 from the FHLBB. This advance bears interest at a fixed rate of 5.50% per annum over a twenty-year term. In July 2010, the Company committed to borrow an additional $46.3 million from FHLBB to finance the development of the City Square Project. See Note 3 Investments for additional information. These borrowings were drawn in several increments from July 2010 to January 2012. These additional amounts mature on July 20, 2020 and carry fixed interest rates with a weighted average of 3.88%. Through December 31, 2011, the Company has borrowed $38.9 million under this arrangement. Interest associated with the $46.3 million will be capitalized through the construction phase of the City Square Project.
As collateral to FHLBB, Hanover Insurance pledged government agency securities with a fair value of $205.7 million and $162.7 million, for the aggregate borrowings of $163.9 million and $134.5 million as of December 31, 2011 and December 31, 2010, respectively. The fair value of the collateral pledged must be maintained at certain specified levels of the borrowed amount, which can vary depending on the type of assets pledged. If the fair value of this collateral declines below these specified levels, Hanover Insurance would be required to pledge additional collateral or repay outstanding borrowings. Hanover Insurance is permitted to voluntarily repay the outstanding borrowings at any time, subject to a repayment fee. As a requirement of membership in the FHLBB, Hanover Insurance maintains a certain level of investment in FHLBB stock. Total purchases of FHLBB stock were $9.4 million and $8.6 million at December 31, 2011 and 2010, respectively.
-110-
Interest expense was $55.0 million in 2011, $44.3 million in 2010, and $35.5 million in 2009, and included interest related to the Companys senior debentures, junior debentures, subordinated notes, FHLBB borrowings, capital securities and surplus notes. All interest expense is recorded in other operating expenses. At December 31, 2011, the Company was in compliance with the covenants associated with all of its debt indentures and credit arrangements.
7. INCOME TAXES
Provisions for income taxes have been calculated in accordance with the provisions of ASC 740. A summary of the components of income before income taxes and income tax expense in the Consolidated Statements of Income are shown below:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Income (loss) before income taxes: |
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U.S. |
$ | (12.0 | ) | $ | 211.1 | $ | 270.9 | |||||
Non-U.S. |
34.3 | | | |||||||||
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$ | 22.3 | $ | 211.1 | $ | 270.9 | |||||||
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Income tax expense includes the following components:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Current: |
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U.S. |
$ | (0.6 | ) | $ | 5.7 | $ | 51.2 | |||||
Non-U.S. |
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Subtotal |
(0.6 | ) | 5.7 | 51.2 | ||||||||
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Deferred: |
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U.S. |
(19.8 | ) | 52.2 | 31.9 | ||||||||
Non-U.S. |
10.8 | | | |||||||||
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Subtotal |
(9.0 | ) | 52.2 | 31.9 | ||||||||
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Total income tax expense (benefit) |
$ | (9.6 | ) | $ | 57.9 | $ | 83.1 | |||||
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The income tax expense attributable to the consolidated results of operations is different from the amount determined by multiplying income before income taxes by the U.S. statutory federal income tax rate of 35%. The sources of the difference and the tax effects of each were as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Expected income tax expense |
$ | 7.8 | $ | 73.9 | $ | 94.8 | ||||||
Tax difference related to investment disposals and maturities |
(9.7 | ) | (3.2 | ) | | |||||||
Change in valuation allowance |
(7.5 | ) | (57.1 | ) | (6.9 | ) | ||||||
Nondeductible expenses |
4.7 | 0.5 | 0.7 | |||||||||
Expired capital loss carryforward |
| 47.4 | | |||||||||
Tax-exempt interest |
(2.0 | ) | (2.2 | ) | (3.1 | ) | ||||||
Effect of foreign operations |
(1.5 | ) | | | ||||||||
Dividend received deduction |
(1.1 | ) | (0.8 | ) | (0.8 | ) |
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(In millions) | ||||||||||||
Tax credits |
(0.2 | ) | (0.4 | ) | (1.5 | ) | ||||||
Prior years federal income tax settlement |
| | (0.3 | ) | ||||||||
Other, net |
(0.1 | ) | (0.2 | ) | 0.2 | |||||||
|
|
|
|
|
|
|||||||
Income tax expense (benefit) |
$ | (9.6 | ) | $ | 57.9 | $ | 83.1 | |||||
|
|
|
|
|
|
|||||||
Effective tax rate |
(43.0 | )% | 27.4 | % | 30.7 | % | ||||||
|
|
|
|
|
|
The following are the components of the Companys deferred tax assets and liabilities (excluding those associated with their discontinued operations).
DECEMBER 31 |
2011 | 2010 | ||||||
(In millions) | ||||||||
Deferred tax assets |
||||||||
Loss, LAE and unearned premium reserves, net |
$ | 178.9 | $ | 170.1 | ||||
Tax credit carryforwards |
112.2 | 111.1 | ||||||
Loss carryforwards |
79.8 | 69.2 | ||||||
Employee benefit plans |
45.6 | 38.3 | ||||||
Deferred Lloyds underwriting losses |
18.6 | | ||||||
Investments, net |
9.3 | 21.5 | ||||||
Other |
63.0 | 61.0 | ||||||
|
|
|
|
|||||
507.4 | 471.2 | |||||||
Less: Valuation allowance |
35.9 | 91.5 | ||||||
|
|
|
|
|||||
471.5 | 379.7 | |||||||
|
|
|
|
|||||
Deferred tax liabilities |
||||||||
Deferred policy acquisition costs |
123.7 | 120.9 | ||||||
Software capitalization |
29.9 | 28.3 | ||||||
Other |
57.9 | 53.1 | ||||||
|
|
|
|
|||||
211.5 | 202.3 | |||||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 260.0 | $ | 177.4 | ||||
|
|
|
|
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized. Certain prior year amounts have been reclassified to conform to the current year presentation.
At December 31, 2011, the Company has a deferred tax asset of $31.7 million related to U.S. capital loss carryforwards. The pre-tax capital losses carried forward are $90.5 million, including $80.0 million resulting from the sale of
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FAFLIC in 2009. At December 31, 2011, the Company has recorded a full valuation allowance against this asset, since it is the Companys opinion that it is more likely than not that the asset will not be realized. In addition at December 31, 2011, the Company has a deferred tax asset of $33.6 million related to U.S. net operating loss carryforwards and a deferred tax asset of $14.5 million related to foreign net operating carryforwards. The pre-tax U.S. operating loss carryforwards of $95.9 million will expire beginning in 2031. The pre-tax foreign operating loss carryforwards of $62.1 million were generated in the U.K. and have no expiration date. It is the Companys opinion that there will be sufficient future U.S. and U.K. taxable income to utilize these loss carryforwards. The Companys estimate of the gross amount and likely realization of loss carryforwards may change over time.
At December 31, 2011, the Company has a deferred tax asset of $112.2 million of alternative minimum tax credit carryforwards. The alternative minimum tax credit carryforwards have no expiration date. The Company may utilize the credits to offset regular federal income taxes due from future income, and although the Company believes that these assets are fully recoverable, there can be no certainty that future events will not affect their recoverability. The Company believes, based on objective evidence, the remaining deferred tax assets will be realized.
In September 2011, the Company completed a transaction which resulted in the realization, for tax purposes only, of unrealized gains in our investment portfolio of $98.4 million. This transaction enabled the Company to realize capital loss carryforwards to offset this gain, and resulted in the release of $29.0 million of the valuation allowance held against the deferred tax asset related to these capital loss carryforwards. The release of $0.2 million was reflected in income from continuing operations and the remaining amount of $28.8 million was reflected as a benefit in accumulated other comprehensive income. This amount will be released into income from continuing operations, related to non-segment income, in future years, as the investment securities subject to these transactions are sold or mature.
During 2011, the Company reduced its valuation allowance, for both continuing and discontinued operations, related to its deferred tax asset by $55.6 million, from $91.5 million to $35.9 million. There were four principal components to this reduction. First, the Company decreased its valuation allowance by $29.0 million as a result of the aforementioned transaction, which utilized the capital loss carryforwards. Second, the Company decreased its valuation allowance by $21.9 million on certain unrealized losses as a result of unrealized appreciation in its investment portfolio. This decrease was reflected as an increase in accumulated other comprehensive income. Third, as a result of $28.1 million in net realized gains during 2011, the Company decreased its valuation allowance by $7.5 million as an increase to income from continuing operations, since these gains utilized the Companys capital loss carryforwards. Fourth, in the 2010 U.S. federal income tax return the Company was able to utilize an additional $7.6 million of capital loss carryforward that expired in 2010. As such, the valuation allowance was increased by $2.6 million with an equal and offsetting increase to the related deferred tax asset. The remaining increase of $0.2 million was attributable to other items reflected as an expense from discontinued operations.
In January, July, September, and December 2010, the Company completed transactions which resulted in the realization, for tax purposes only, of unrealized gains in its investment portfolio of $98.4 million, $37.1 million, $31.1 million, and $120.8 million, respectively. These transactions enabled the Company to realize capital loss carryforwards to offset these gains, and resulted in the release of $66.2 million and $34.4 million in 2010 and 2009, respectively, of the valuation allowance it held against its deferred tax asset related to these capital loss carryforwards. The total release of $100.6 million was accounted for as an increase in income from continuing operations of $3.2 million and $6.0 million in 2010 and 2009, respectively, with the remaining $91.4 million reflected as a benefit in accumulated other comprehensive income at December 31, 2010. During 2011, the Company recognized $9.5 million of the $91.4 million in income from continuing operations related to non-segment income. The remaining amount will be released into income from continuing operations in future years, as the investment securities subject to these transactions are sold or mature.
During 2010, the Company reduced its valuation allowance, for both continuing and discontinued operations, related to its deferred tax assets by $104.1 million, from $195.6 million to $91.5 million. There were four principal components to this reduction. First, the Company reduced the valuation allowance by $66.2 million as a result of the aforementioned transactions, which utilized the capital loss carryforwards. Second, the Company increased its valuation allowance by $20.3 million for certain tax basis unrealized losses which the Company does not believe it can utilize. This increase was reflected as a decrease in accumulated other comprehensive income. Third, $135.5 million of the capital loss carryforwards expired in 2010. As a result, the Company released $47.4 million of its valuation allowance attributable to these expirations with an equal and offsetting reduction in the related deferred tax asset. Fourth, as a result of $29.7 million in net realized gains during 2010, the Company decreased its valuation allowance by $9.7 million as an increase to income from continuing operations,
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since these gains utilized the Companys capital loss carryforwards. The remaining $1.1 million decrease was attributable to other items reflected as income from discontinued operations.
During 2009, the Company reduced its valuation allowance, for both continuing and discontinued operations, related to its deferred tax asset by $152.6 million, from $348.2 million to $195.6 million. There were two principal components to this reduction. First, the Company reversed through other comprehensive income, the $118.4 million valuation allowance that it had recognized at December 31, 2008 associated with the tax benefit related to the net unrealized depreciation in its investment portfolio at that time. During 2009, appreciation in the portfolio changed the nature of the tax attribute from that of an asset to that of a liability, and thus, there was no longer a need for that portion of the valuation allowance. Second, as a result of the aforementioned transactions, the Company reversed $28.4 million of the valuation allowance as an adjustment to other comprehensive income and $6.0 million of the valuation allowance as an adjustment to income from continuing operations. The remaining $0.2 million net increase in its valuation allowance was attributable to other items, and reflected as a $0.9 million increase in income from continuing operations and a $1.1 million decrease in income from discontinued operations.
Certain of the Companys non-U.S. income is not subject to U.S. tax until repatriated. Foreign taxes on this non U.S. income are accrued at the local foreign tax rate, as opposed to the higher U.S. statutory tax rate, since these earnings currently are expected to be permanently reinvested overseas. This assumption could change, as a result of a sale of the subsidiaries, the receipt of dividends from the subsidiaries, a change in managements intentions, or as a result of various other events. At December 31, 2011, the Company has not made a provision for U.S. taxes on $3.4 million of non-U.S. income. However, in the future, if such earnings were distributed to the Company, taxes of $1.5 million would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested overseas, assuming all foreign tax credits are realized.
The table below provides a reconciliation of the beginning and ending liability for uncertain tax positions as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Liability at beginning and end of year, net |
$ | 0.8 | $ | 0.8 | $ | 0.8 | ||||||
|
|
|
|
|
|
In September 2009, as part of the audit of 2005 and 2006, the IRS issued a Revenue Agents Report (RAR) which disallowed the dividends received deduction related to separate account assets for both 2005 and 2006. The Company challenged the disallowance by filing a formal protest and requested an IRS Appeals Conference. In 2011, the Company received written notification from the IRS Appeals Division reflecting a proposed settlement including a concession of the separate account dividends received deduction issue. As a result of the proposed settlement with the IRS, the liability for uncertain tax position on the Companys dividends received deductions related to separate account assets was reduced in the current year. This reduction was partially offset by the settlement of certain receivable balances. The net tax benefit of $2.1 million is recorded as income from discontinued operations.
There are no tax positions at December 31, 2011 for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. Included in the December 31, 2010 balance is a $3.6 million receivable which was part of the aforementioned 2005 and 2006 proposed settlement.
The Company recognizes interest and penalties related to unrecognized tax benefits in federal income tax expense. In 2011, as part of the settlement of the 2005 and 2006 audit period, the Company reduced its accrued interest by $0.7 million. The Company had accrued interest of $0.3 million and $1.0 million as of December 31, 2011 and 2010, respectively. The Company has not recognized any penalties associated with unrecognized tax benefits.
The Company or its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions, as well as foreign jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2007. The IRS audits of the years 2007 and 2008 commenced in April 2010. In 2011, the Company received a RAR for the 2007 and 2008 IRS audit. The Company has agreed to all proposed adjustments other than a disallowance of deduction for certain loss reserves, for which it has filed a formal protest and requested an IRS Appeals Conference. The Company believes it will ultimately prevail and has not recorded any liabilities for uncertain tax positions. The effect of the proposed disallowance of deductions for certain reserves, if sustained, only impacts the timing of such deduction and does not materially affect the Companys financial position. The Company and its subsidiaries are still subject to U.S. state income tax examinations by tax authorities for years after 2001 and foreign examinations for years after 2008.
-113-
8. PENSION PLANS
Defined Benefit Plans
The Company recognizes the funded status of its defined benefit plans in its Consolidated Balance Sheet. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation of the Companys defined benefit plans. The Company is required to aggregate separately all overfunded plans from all underfunded plans.
U.S. Defined Benefit Plans
Prior to 2005, THG provided retirement benefits to substantially all of its employees under defined benefit pension plans. These plans were based on a defined benefit cash balance formula, whereby the Company annually provided an allocation to each covered employee based on a percentage of that employees eligible salary, similar to a defined contribution plan arrangement. In addition to the cash balance allocation, certain transition group employees who had met specified age and service requirements as of December 31, 1994 were eligible for a grandfathered benefit based primarily on the employees years of service and compensation during their highest five consecutive plan years of employment. The Companys policy for the plans is to fund at least the minimum amount required by the Employee Retirement Income Security Act of 1974 (ERISA).
As of January 1, 2005, the defined benefit pension plans were frozen and since that date, no further cash balance allocations have been credited to participants. Participants accounts are credited with interest daily, based upon the General Agreement of Trades and Tariffs (GATT). In addition, the grandfathered benefits for the transition group were also frozen at January 1, 2005 levels with an annual transition pension adjustment calculated at an interest rate equal to 5% per year up to 35 years of completed service, and 3% thereafter.
On January 4, 2010 the Company made a discretionary contribution of $100 million to the qualified defined benefit pension plan. With this contribution, and based on current estimates of plan liabilities and other assumptions, including future returns of plan assets, its qualified defined benefit pension plan is essentially fully funded.
Chaucer Pension Plan
Prior to 2002, our Chaucer segment provided defined benefit pension retirement benefits to certain of its employees. As of December 31, 2001, the defined benefit pension plan was closed to new members. The defined benefit obligation for this plan is based on the employees years of service and final pensionable salary.
Assumptions
In order to measure the expense associated with these plans, management must make various estimates and assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates, for example. The estimates used by management are based on the Companys historical experience, as well as current facts and circumstances. In addition, the Company uses outside actuaries to assist in measuring the expense and liability associated with these plans.
The Company measures the funded status of its plans as of the date of its year-end statement of financial position. The Company utilizes a measurement date of December 31st to determine its benefit obligations, consistent with the date of its Consolidated Balance Sheets.
Weighted-average assumptions used to determine the U.S. pension benefit obligations are as follows:
DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
Discount rate qualified plan |
5.13 | % | 5.63 | % | 6.13 | % | ||||||
Discount ratenon-qualified plan |
5.00 | % | 5.50 | % | 6.00 | % | ||||||
Cash balance interest crediting rate |
4.00 | % | 4.50 | % | 4.50 | % |
Weighted-average assumptions used to determine the Chaucer pension benefit obligations are as follows:
DECEMBER 31 |
2011 | |||
Discount rate |
4.90 | % | ||
Rate of increase in future compensation |
4.30 | % |
The Company utilizes a measurement date of January 1st to determine its periodic pension costs. Weighted-average assumptions used to determine net periodic pension costs for the U.S. defined benefit plans are as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
Discount rate |
5.63 | % | 6.13 | % | 6.63 | % | ||||||
Expected return on plan assets |
6.50 | % | 7.00 | % | 7.50 | % | ||||||
Cash balance interest crediting rate |
4.50 | % | 4.50 | % | 5.00 | % |
Weighted-average assumptions used to determine net periodic pension costs for the Chaucer pension Plan are as follows:
FOR THE SIX MONTHS ENDED DECEMBER 31 |
2011 | |||
Discount rate |
5.50 | % | ||
Rate of increase in future compensation |
4.60 | % | ||
Expected return on plan assets |
7.40 | % |
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The expected rates of return were determined by using historical mean returns, adjusted for certain factors believed to have an impact on future returns. Specifically, for the U.S. defined benefit plans, because the allocation of assets between fixed maturities and equities has changed, as discussed in Plan Assets below, the historical mean return was adjusted downward slightly to reflect this asset mix. The adjusted mean returns were weighted to the plans expected target asset allocation at December 31, 2011, resulting in an expected rate of return on plan assets for 2011 of 6.50%. The Company reviews and updates, at least annually, its expected return on plan assets based on changes in the actual assets held by the plans.
Plan Assets
U.S. Qualified Defined Benefit Plans
The Company utilizes a target allocation strategy, which focuses on creating a mix of assets that will generate modest growth from equity securities while minimizing volatility in the Companys earnings from changes in the markets and economic environment. Various factors are taken into consideration in determining the appropriate asset mix, such as census data, actuarial valuation information and capital market assumptions. During 2011 and 2010, the plan assets were shifted out of equity securities and into fixed income securities to the current allocation of 82% in fixed income securities and 18% in equity securities. The Company reviews and updates, at least annually, the target allocation and makes changes periodically.
The following table provides target allocations and actual invested asset allocations for 2011 and 2010.
DECEMBER 31 |
2011 TARGET LEVELS |
2011 | 2010 | |||||||||
Fixed Income Securities: |
||||||||||||
Fixed Maturities |
80 | % | 81 | % | 73 | % | ||||||
Money Market Funds |
2 | % | 1 | % | 1 | % | ||||||
|
|
|
|
|
|
|||||||
Total Fixed Income Securities |
82 | % | 82 | % | 74 | % | ||||||
Equity Securities: |
||||||||||||
Domestic |
13 | % | 11 | % | 18 | % | ||||||
International |
5 | % | 4 | % | 7 | % | ||||||
THG Common Stock |
| 3 | % | 1 | % | |||||||
|
|
|
|
|
|
|||||||
Total Equity Securities |
18 | % | 18 | % | 26 | % | ||||||
|
|
|
|
|
|
|||||||
Total Assets |
100 | % | 100 | % | 100 | % | ||||||
|
|
|
|
|
|
Included in total plan assets of $574.7 million at December 31, 2011 were $568.8 million of invested assets carried at fair value and $5.9 million of cash and equivalents. Total plan assets at December 31, 2010 of $547.8 million included $541.7 million of invested assets carried at fair value and $6.1 million of cash and equivalents.
The following tables present for each hierarchy level the U.S. qualified defined benefit plans investment assets that are measured at fair value at December 31, 2011 and 2010. (Please refer to Note 5 Fair Value for a description of the different levels in the Fair Value Hierarchy).
December 31, 2011 |
||||||||||||||||
(in millions) | Fair Value | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Description |
||||||||||||||||
Fixed Income Securities: |
||||||||||||||||
Fixed Maturities |
$ | 465.9 | $ | 3.2 | $ | 462.7 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity Securities: |
||||||||||||||||
Domestic |
61.4 | 0.3 | 61.1 | | ||||||||||||
International |
25.2 | 0.2 | 25.0 | | ||||||||||||
THG Common Stock |
16.3 | 16.3 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Equity Securities |
102.9 | 16.8 | 86.1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Investments at Fair Value |
$ | 568.8 | $ | 20.0 | $ | 548.8 | $ | | ||||||||
|
|
|
|
|
|
|
|
December 31, 2010 |
||||||||||||||||
(in millions) | Fair Value | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Description |
||||||||||||||||
Fixed Income Securities: |
||||||||||||||||
Fixed Maturities |
$ | 397.0 | $ | 2.8 | $ | 394.2 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity Securities: |
||||||||||||||||
Domestic |
96.7 | 0.4 | 96.3 | | ||||||||||||
International |
41.4 | 0.2 | 41.2 | | ||||||||||||
THG Common Stock |
6.6 | 6.6 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Equity Securities |
144.7 | 7.2 | 137.5 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Investments at Fair Value |
$ | 541.7 | $ | 10.0 | $ | 531.7 | $ | | ||||||||
|
|
|
|
|
|
|
|
Fixed Income Securities
Securities classified as Level 1 at December 31, 2011 and 2010 include actively traded mutual funds that are publicly traded securities which are valued at quoted market prices. Securities classified as Level 2 at December 31, 2011 and 2010 include a separate investment account, which is invested entirely in the Vanguard Total Bond Market Index Fund, a mutual fund that in turn invests in investment grade fixed maturities. Additionally, included in Level 2 at December 31, 2011 is a custom fund that invests in commingled pools and investment grade fixed income securities. The fair value of each of the Level 2 investments is determined daily as the Net Asset Value (NAV) based on the value of the underlying investments,
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which is determined independently by the investment manager. The daily NAV, which is not published as a quoted market price for these investments, is used as the basis for transactions. Redemption of these funds is not subject to restriction.
Equity Securities
Level 1 securities primarily consist of 466,755 shares and 141,462 shares of THG common stock held by the plan at December 31, 2011 and 2010, respectively. THG common stock is valued at quoted market prices. Securities also classified as Level 1 at December 31, 2011 and 2010 include actively traded mutual funds that are publicly traded and which primarily invest in equity securities that are valued at quoted market prices. Securities classified as Level 2 include investments in commingled pools that primarily invest in publicly traded common stocks and international equity securities. The fair value of each of the Level 2 investments is determined daily as the NAV based on the value of the underlying investments, which is determined independently by the investment manager. The daily NAV, which is not published as a quoted market price for these investments, is used as the basis for transactions. Redemption of these funds is not subject to restriction.
Chaucer Pension Plan
The investment strategy of the Chaucer defined benefit pension plan is to invest primarily in growth assets in the form of equity funds which are expected to provide a positive return that exceeds inflation over the longer term in order to protect the existing and future liabilities of the pension plan. In order to reduce volatility and diversify the portfolio, the target allocation includes an exposure to corporate bond and commercial property funds. The plan will be reviewed annually and target allocation changes will be made as appropriate. The following table provides target allocations and actual invested asset allocations for 2011.
DECEMBER 31 |
2011 TARGET LEVELS |
2011 | ||||||
Fixed Income Securities: |
||||||||
Fixed Maturities |
10 | % | 12 | % | ||||
Money Market Funds |
| | ||||||
|
|
|
|
|||||
Total Fixed Income Securities |
10 | % | 12 | % | ||||
Equity Securities: |
||||||||
Domestic (United Kingdom) |
35 | % | 34 | % | ||||
International |
45 | % | 44 | % | ||||
|
|
|
|
|||||
Total Equity Securities |
80 | % | 78 | % | ||||
Real Estate Funds |
10 | % | 10 | % | ||||
|
|
|
|
|||||
Total Assets |
100 | % | 100 | % | ||||
|
|
|
|
Included in total plan assets of $74.3 million at December 31, 2011 were $74.1 million of invested assets carried at fair value and $0.2 million of cash and equivalents.
The following table presents for each hierarchy level the Chaucer defined benefit plans investment assets that are measured at fair value at December 31, 2011.
December 31, 2011 |
||||||||||||||||
(in millions) | Fair Value | |||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Description |
||||||||||||||||
Fixed Income Securities: |
||||||||||||||||
Fixed Maturities |
$ | 8.5 | $ | | $ | 8.5 | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity Securities: |
||||||||||||||||
Domestic |
25.5 | | 25.5 | | ||||||||||||
International |
32.4 | | 32.4 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Equity Securities |
57.9 | | 57.9 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Real Estate Funds |
7.7 | | | 7.7 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Investments at Fair Value |
$ | 74.1 | $ | | $ | 66.4 | $ | 7.7 | ||||||||
|
|
|
|
|
|
|
|
Fixed Income and Equity Securities
Securities classified as Level 2 at December 31, 2011 include pooled funds which are valued at the close of business using a third party pricing service. These values are adjusted by the fund manager to reflect outstanding dividends, taxes and investment fees and other expenses to calculate the NAV.
Real Estate Funds
Real estate fund investments classified as Level 3 at December 31, 2011 are valued based upon the values of the net assets of the fund. Although the NAV is calculated daily, transactions also consider cash inflows and outflows of the fund. The price where units are transacted includes the NAV, which is adjusted for investment charges and other estimated acquisition costs such as legal fees, taxes, planning and architect fees, survey and agent fees, among others.
The table below provides a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period from July 1, 2011 through December 31, 2011.
(in millions) |
Real Estate Funds |
|||
Balance at July 1, 2011 |
$ | 7.7 | ||
Actual return on plan assets related to assets still held |
0.2 | |||
Foreign currency translation |
(0.2 | ) | ||
|
|
|||
Balance at end of year |
$ | 7.7 | ||
|
|
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Obligations and Funded Status
The Company recognizes the current net underfunded status of its plans in its Consolidated Balance Sheet. Changes in the funded status of the plans are reflected as components of accumulated other comprehensive loss or income. The components of accumulated other comprehensive loss or income are reflected as either a net actuarial gain or loss, a net prior service cost or a net transition asset. The following table reflects the benefit obligations, fair value of plan assets and funded status of the plans at December 31, 2011 and 2010. U.S. qualified and non-qualified plan amounts represent activity for the calendar year. Chaucer pension plan amounts reflect activity since the date of acquisition of July 1, 2011.
DECEMBER 31 |
U.S. Qualified
Pension Plans |
U.S. Non-Qualified Pension Plans |
Chaucer Pension Plan |
|||||||||||||||||
(in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | |||||||||||||||
Accumulated benefit obligation |
$ | 570.8 | $ | 548.0 | $ | 39.2 | $ | 39.1 | $ | 104.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Change in benefit obligation: |
||||||||||||||||||||
Projected benefit obligation, beginning of year |
$ | 548.0 | $ | 518.4 | $ | 39.1 | $ | 38.2 | $ | | ||||||||||
Benefit obligation acquired July 1, 2011 |
| | | | 99.7 | |||||||||||||||
Employee contributions |
| | | | 0.3 | |||||||||||||||
Service cost benefits earned during the year |
| 0.1 | | | 0.7 | |||||||||||||||
Interest cost |
29.6 | 30.4 | 2.0 | 2.2 | 2.7 | |||||||||||||||
Actuarial losses |
24.5 | 32.0 | 1.2 | 2.1 | 6.4 | |||||||||||||||
Benefits paid |
(31.3 | ) | (32.9 | ) | (3.1 | ) | (3.4 | ) | (1.9 | ) | ||||||||||
Foreign currency translation |
| | | | (3.5 | ) | ||||||||||||||
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Projected benefit obligation, end of year |
570.8 | 548.0 | 39.2 | 39.1 | 104.4 | |||||||||||||||
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Change in plan assets: |
||||||||||||||||||||
Fair value of plan assets, beginning of year |
547.8 | 424.5 | | | | |||||||||||||||
Plan assets acquired July 1, 2011 |
| | | | 82.1 | |||||||||||||||
Actual return on plan assets |
58.2 | 56.2 | | | (4.6 | ) | ||||||||||||||
Company contribution |
| 100.0 | 3.2 | 3.4 | 1.0 | |||||||||||||||
Employee contributions |
| | | | 0.3 | |||||||||||||||
Benefits paid |
(31.3 | ) | (32.9 | ) | (3.2 | ) | (3.4 | ) | (1.9 | ) | ||||||||||
Foreign currency translation |
| | | | (2.6 | ) | ||||||||||||||
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Fair value of plan assets, end of year |
574.7 | 547.8 | | | 74.3 | |||||||||||||||
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Funded status of the plans |
$ | 3.9 | $ | (0.2 | ) | $ | (39.2 | ) | $ | (39.1 | ) | $ | (30.1 | ) | ||||||
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Components of Net Periodic Pension Cost
The components of total net periodic pension cost, including both the U.S. and Chaucer pension plans, are as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Service cost benefits earned during the year |
$ | 0.7 | $ | 0.1 | $ | 0.1 | ||||||
Interest cost |
34.3 | 32.6 | 33.9 | |||||||||
Expected return on plan assets |
(37.1 | ) | (35.1 | ) | (25.4 | ) | ||||||
Recognized net actuarial loss |
15.0 | 16.8 | 26.9 | |||||||||
Amortization of transition asset |
| (1.6 | ) | (1.6 | ) | |||||||
Amortization of prior service cost |
0.1 | 0.1 | | |||||||||
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Net periodic pension cost |
$ | 13.0 | $ | 12.9 | $ | 33.9 | ||||||
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The following table reflects the total amounts recognized in accumulated other comprehensive income relating to both the U.S. defined benefit pension plan and the Chaucer pension plan as of December 31, 2011 and 2010.
DECEMBER 31 |
2011 | 2010 | ||||||
(in millions) | ||||||||
Net actuarial loss |
$ | 135.0 | $ | 134.4 | ||||
Net prior service cost |
0.1 | 0.1 | ||||||
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$ | 135.1 | $ | 134.5 | |||||
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The following table reflects the total estimated amount that will be amortized from accumulated other comprehensive income into net periodic pension cost in 2012:
Estimated Amortization in 2012 |
Expense | |||
(in millions) | ||||
Net actuarial gain |
$ | 12.4 | ||
Net prior service cost |
0.1 | |||
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$ | 12.5 | |||
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The unrecognized net actuarial gains (losses) which exceed 10% of the greater of the projected benefit obligation or the fair value of plan assets are amortized as a component of net periodic pension cost in future years.
Contributions
On January 4, 2010, the Company made a discretionary contribution of $100.0 million to the U.S. qualified defined benefit pension plan. These funds were invested primarily in fixed income investments. With this contribution, and based upon the current estimate of liabilities and certain assumptions regarding investment return and other factors, the Companys U.S. qualified defined benefit pension plan is overfunded by approximately $4 million. In addition, the Company expects to contribute $3.1 million to its U.S. non-qualified pension plans to fund 2012 benefit payments, and $2.9 million to the Chaucer pension plan. At this time, no additional discretionary contributions are expected to be made to the plans during 2012 and the Company does not expect that any funds will be returned from the plans to the Company during 2012.
Benefit Payments
The Company estimates that benefit payments over the next 10 years will be as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2012 | 2013 | 2014 | 2015 | 2016 | 2017-2021 | ||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Qualified pension plans |
$ | 38.4 | $ | 38.6 | $ | 39.6 | $ | 40.2 | $ | 39.9 | $ | 206.3 | ||||||||||||
Non-qualified pension plans |
$ | 3.1 | $ | 3.1 | $ | 3.2 | $ | 3.4 | $ | 3.1 | $ | 14.5 | ||||||||||||
Chaucer pension plan |
$ | 3.8 | $ | 3.9 | $ | 4.0 | $ | 4.2 | $ | 4.3 | $ | 23.9 |
The benefit payments are based on the same assumptions used to measure the Companys benefit obligations at the end of 2011. Benefit payments related to the qualified plans and the Chaucer plan will be made from plan assets, whereas those payments related to the non-qualified plans will be provided for by the Company.
Defined Contribution Plan
In addition to the defined benefit plans, THG provides a defined contribution 401(k) plan for its U.S. employees, whereby the Company matches employee elective 401(k) contributions, up to a maximum percentage of 6% in 2011, 2010, and 2009. The Companys expense for this matching provision was $17.8 million, $16.5 million and $14.2 million for 2011, 2010 and 2009, respectively. In addition to this matching provision, the Company can elect to make an annual contribution to employees accounts. There were no additional contributions in 2011 and 2010. The Companys cost for an additional contribution in 2009 was $2.0 million.
Chaucer also provides a defined contribution plan for its employees which provides for employer provided contributions. The Companys expense for the period from the acquisition date of July 1, 2011 through December 31, 2011 was $2.4 million.
9. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Companys pension plans, the Company also has postretirement medical and death benefits that it provides to certain full-time employees, former agents and retirees and their dependents. Benefits include hospital, major medical and a payment at death up to retirees final annual salary with certain limits. The medical plans have varying co-payments and deductibles, depending on the plan.
Generally, employees who were actively employed on December 31, 1995 became eligible with at least 15 years of service after the age of 40. Effective January 1, 1996, the Company revised these benefits so as to establish limits on future benefit payments to beneficiaries of retired employees and to restrict eligibility to then current employees. In 2009, the Company changed the postretirement medical benefits, only as they relate to current employees who still qualify for participation in the plan under the above formula. For these participants, the plan now provides for only post age 65 benefits. The population of agents receiving postretirement benefits was frozen as of December 31, 2002, when the Company ceased its distribution of proprietary life and annuity products. These plans are unfunded.
The Company applies the guidance in ASC 715 and as such, has recognized the funded status of its postretirement benefit plans in its Consolidated Balance Sheet. Since these plans are unfunded, the amount recognized in the Consolidated Balance Sheet is equal to the accumulated benefit obligation of these plans. The components of accumulated other comprehensive income or loss are reflected as either a net actuarial gain or loss or a net prior service cost. There are no unrecognized transition assets or obligations associated with these plans.
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Obligation and Funded Status
The following table reflects the funded status of these plans:
DECEMBER 31 |
2011 | 2010 | ||||||
(in millions) | ||||||||
Change in benefit obligation: |
||||||||
Accumulated postretirement benefit obligation, beginning of year |
$ | 45.8 | $ | 44.7 | ||||
Service cost |
0.1 | 0.1 | ||||||
Interest cost |
2.4 | 2.7 | ||||||
Net actuarial losses |
0.4 | 0.8 | ||||||
Benefits paid |
(2.7 | ) | (2.5 | ) | ||||
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Accumulated postretirement benefit obligation, end of year |
46.0 | 45.8 | ||||||
Fair value of plan assets, end of year |
| | ||||||
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Funded status of plans |
$ | (46.0 | ) | $ | (45.8 | ) | ||
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Benefit Payments
The Company estimates that benefit payments over the next 10 years will be as follows:
FOR THE YEARS ENDED DECEMBER 31 |
||||
(in millions) | ||||
2012 |
$ | 4.7 | ||
2013 |
4.5 | |||
2014 |
4.2 | |||
2015 |
3.9 | |||
2016 |
3.7 | |||
2017-2021 |
15.9 |
The benefit payments are based on the same assumptions used to measure the Companys benefit obligation at the end of 2011 and reflect benefits attributable to estimated future service.
Components of Net Periodic Postretirement (Benefit) Expense
The components of net periodic postretirement (benefit) expense were as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Service cost |
$ | 0.1 | $ | 0.1 | $ | 0.2 | ||||||
Interest cost |
2.4 | 2.7 | 2.8 | |||||||||
Recognized net actuarial loss |
0.4 | 0.4 | 0.3 | |||||||||
Amortization of prior service cost |
(5.3 | ) | (5.9 | ) | (5.8 | ) | ||||||
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Net periodic postretirement benefit |
$ | (2.4 | ) | $ | (2.7 | ) | $ | (2.5 | ) | |||
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The following table reflects the balances in accumulated other comprehensive income relating to the Companys postretirement benefit plans:
DECEMBER 31 |
2011 | 2010 | ||||||
(in millions) | ||||||||
Net actuarial loss |
$ | 7.7 | $ | 7.7 | ||||
Net prior service cost |
(11.3 | ) | (16.5 | ) | ||||
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$ | (3.6 | ) | $ | (8.8 | ) | |||
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The following table reflects the estimated amortization to be recognized in net periodic benefit cost in 2012:
Estimated Amortization in 2012 |
Expense (Benefit) | |||
(in millions) | ||||
Net actuarial loss |
$ | 0.3 | ||
Net prior service cost |
(3.8 | ) | ||
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|
|||
$ | (3.5 | ) | ||
|
|
Assumptions
ASC 715 requires that employers measure the funded status of their plans as of the date of their year-end statement of financial position. As such, the Company has utilized a measurement date of December 31, 2011 and 2010, to determine its postretirement benefit obligations, consistent with the date of its Consolidated Balance Sheets. Weighted-average discount rate assumptions used to determine postretirement benefit obligations and periodic postretirement costs are as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | ||||||
Postretirement benefit obligations discount rate |
5.00 | % | 5.50 | % | ||||
Postretirement benefit cost discount rate |
5.50 | % | 6.00 | % |
Assumed health care cost trend rates are as follows:
DECEMBER 31 |
2011 | 2010 | ||||||
Health care cost trend rate assumed for next year |
7.50 | % | 8.33 | % | ||||
Rate to which the cost trend is assumed to decline (ultimate trend rate) |
5.00 | % | 5.00 | % | ||||
Year the rate reaches the ultimate trend rate |
2017 | 2015 |
A one-percentage point change in assumed health care cost trend rates in each year would have an immaterial effect on net periodic benefit cost during 2011 and accumulated postretirement benefit obligation at December 31, 2011.
10. STOCK-BASED COMPENSATION PLANS
On May 16, 2006, the shareholders approved the adoption of The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the Plan). Key employees, directors and certain consultants of the Company and its subsidiaries are eligible for awards pursuant to the Plan, which is administered by the Compensation Committee of the Board of Directors (the Committee) of the Company. Under the Plan, awards may be granted in the form of non-qualified or incentive stock options, stock appreciation rights,
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performance awards, restricted stock, unrestricted stock, stock units, or any other award that is convertible into or otherwise based on the Companys stock, subject to certain limits. The Plan authorized the issuance of 3,000,000 new shares that may be used for awards. In addition, shares of stock underlying any award granted and outstanding under the Companys Amended Long-Term Stock Incentive Plan (the 1996 Plan) as of the adoption date of the Plan that are forfeited, cancelled, expire or terminate without the issuance of stock become available for future grants under the Plan. As of December 31, 2011, there were 1,825,096 shares available for grants under the Plan. The Company utilizes shares of stock held in the treasury account for option exercises and other awards granted under both plans.
Compensation cost for the years ended December 31, 2011, 2010, and 2009 totaled $12.2 million, $11.1 million and $11.6 million, respectively. Related tax benefits were $4.3 million, $3.9 million and $4.1 million, respectively.
Stock Options
Under the Plan, options may be granted to eligible employees, directors or consultants at an exercise price equal to the market price of the Companys common stock on the date of grant. Option shares may be exercised subject to the terms prescribed by the Committee at the time of grant. Options granted in 2011, 2010, and 2009 generally vest over 4 years with a 50% vesting rate in the third year and a 50% vesting rate in the final year. Options must be exercised not later than ten years from the date of grant.
Information on the Companys stock option plans is summarized below.
For the years ended December 31 |
2011 | 2010 | 2009 | |||||||||||||||||||||
(in whole shares and dollars) |
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price |
||||||||||||||||||
Outstanding, beginning of year |
2,843,909 | $ | 39.22 | 3,131,142 | $ | 39.16 | 2,998,821 | $ | 41.02 | |||||||||||||||
Granted |
297,000 | 46.47 | 412,250 | 42.72 | 530,000 | 34.13 | ||||||||||||||||||
Exercised |
(120,064 | ) | 32.82 | (326,823 | ) | 36.88 | (87,469 | ) | 35.68 | |||||||||||||||
Forfeited or cancelled |
(49,165 | ) | 41.67 | (247,260 | ) | 44.49 | (126,110 | ) | 45.81 | |||||||||||||||
Expired |
(256,250 | ) | 57.00 | (125,400 | ) | 44.91 | (184,100 | ) | 52.07 | |||||||||||||||
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Outstanding, end of year |
2,715,430 | $ | 38.57 | 2,843,909 | $ | 39.22 | 3,131,142 | $ | 39.16 | |||||||||||||||
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Exercisable, end of year |
1,686,930 | $ | 37.69 | 2,037,159 | $ | 39.74 | 2,398,725 | $ | 39.39 | |||||||||||||||
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Cash received for options exercised for the years ended December 31, 2011, 2010 and 2009 was $3.9 million, $12.1 million and $3.1 million, respectively. The intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $1.8 million, $2.6 million and $0.6 million, respectively.
The excess tax expense realized from options exercised for the year ended December 31, 2011 was $1.5 million. The excess tax expense realized from options exercised for both the years ended December 31, 2010 and 2009 was $0.1 million. The aggregate intrinsic value at December 31, 2011 for shares outstanding and shares exercisable was $4.3 million and $3.9 million, respectively. At December 31, 2011, the weighted average remaining contractual life for shares outstanding and shares exercisable was 4.8 years and 2.9 years, respectively. Additional information about employee options outstanding and exercisable at December 31, 2011 is included in the following table:
Options Outstanding | Options Currently Exercisable |
|||||||||||||||||||
Range of Exercise Prices |
Number | Weighted Average Remaining Contractual Lives |
Weighted Average Exercise Price |
Number | Weighted Average Exercise Price |
|||||||||||||||
$14.94 to $28.88 |
306,044 | 1.57 | 22.19 | 306,044 | 22.19 | |||||||||||||||
$30.29 to $34.19 |
436,000 | 7.09 | 34.11 | 6,000 | 33.14 | |||||||||||||||
$35.00 to $38.16 |
735,150 | 2.61 | 36.53 | 735,150 | 36.53 | |||||||||||||||
$41.05 to $42.26 |
312,057 | 8.00 | 42.15 | 13,557 | 42.13 | |||||||||||||||
$43.15 to $44.05 |
158,850 | 0.01 | 44.04 | 158,850 | 44.04 | |||||||||||||||
$44.62 to $48.46 |
767,329 | 6.67 | 47.08 | 467,329 | 47.45 |
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The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. For all options granted through December 31, 2011, the exercise price equaled the market price on the grant date. Compensation cost related to options is based upon the grant date fair value and expensed on a straight-line basis over the service period for each separately vesting portion of the option as if the option was, in substance, multiple awards.
The weighted average grant date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 was $12.23, $11.48 and $9.51, respectively.
The following significant assumptions were used to determine the fair value for options granted in the years indicated.
2011 |
2010 |
2009 | ||||
Dividend yield |
2.152% | 1.68% to 2.37% | 1.31% to 1.48% | |||
Expected volatility |
31.53%-33.30% | 32.45% to 39.18% | 32.40% to 34.28% | |||
Weighted average expected volatility |
32.42% | 33.50% | 32.72% | |||
Risk-free interest rate |
2.00%-2.35% | 0.87% to 2.70% | 1.54% to 2.24% | |||
Expected term, in years |
4.5 to 5.5 | 2.5 to 5.5 | 4.5 to 5.5 |
The expected dividend yield is based on the Companys dividend payout rate(s), in the year noted. Expected volatility is based on the Companys historical daily stock price volatility. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted represents the period of time that options are expected to be outstanding and is derived using historical exercise, forfeit and cancellation behavior, along with certain other factors expected to differ from historical data.
The fair value of shares that vested during the years ended December 31, 2011, 2010 and 2009 was lower than the value of these shares on their grant date. As of December 31, 2011, the Company had unrecognized compensation expense of $5.5 million related to unvested stock options that is expected to be recognized over a weighted average period of 2.5 years.
Restricted Stock Units
Stock grants may be awarded to eligible employees at a price established by the Committee (which may be zero). Under the Plan, the Company may award shares of restricted stock, restricted stock units, as well as shares of unrestricted stock. Restricted stock grants may vest based upon performance criteria, market criteria or continued employment and be in the form of shares or units. Vesting periods are established by the Committee.
In 2011, 2010 and 2009, the Company granted performance-based restricted share units to certain employees. These share units vest after the achievement of certain corporate goals at a rate of 50% after three years and the remaining 50% after four years of continued employment. The Company also granted restricted stock units to eligible employees that generally vest at a rate of 50% after three years and the remaining 50% after 4 years of continued employment. The following table summarizes information about employee nonvested stock, restricted stock units and performance-based restricted share units.
For the years ended December 31 |
2011 | 2010 | 2009 | |||||||||||||||||||||
Shares | Weighted Average Grant Date Fair Value |
Shares | Weighted Average Grant Date Fair Value |
Shares | Weighted Average Grant Date Fair Value |
|||||||||||||||||||
Time-based restricted stock units: |
||||||||||||||||||||||||
Outstanding, beginning of year |
838,129 | $ | 40.93 | 700,904 | $ | 41.12 | 470,905 | $ | 45.41 | |||||||||||||||
Granted |
198,957 | 42.08 | 367,197 | 42.77 | 304,680 | 34.74 | ||||||||||||||||||
Vested |
(230,613 | ) | 44.40 | (118,730 | ) | 47.92 | (13,169 | ) | 45.21 | |||||||||||||||
Forfeited |
(37,944 | ) | 41.23 | (111,242 | ) | 40.73 | (61,512 | ) | 42.10 | |||||||||||||||
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Outstanding, end of year |
768,529 | $ | 40.17 | 838,129 | $ | 40.93 | 700,904 | $ | 41.12 | |||||||||||||||
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Performance-based restricted stock units: |
||||||||||||||||||||||||
Outstanding, beginning of year |
101,680 | $ | 39.62 | 145,635 | $ | 42.79 | 164,442 | $ | 46.10 | |||||||||||||||
Granted |
42,500 | 46.47 | 41,250 | 42.15 | 47,375 | 34.19 | ||||||||||||||||||
Vested |
(27,059 | ) | 45.21 | (31,558 | ) | 48.46 | (63,432 | ) | 43.65 | |||||||||||||||
Forfeited |
(47,621 | ) | 34.16 | (53,647 | ) | 44.97 | (2,750 | ) | 34.19 | |||||||||||||||
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Outstanding, end of year |
69,500 | $ | 45.37 | 101,680 | $ | 39.62 | 145,635 | $ | 42.79 | |||||||||||||||
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-121-
Time-based restricted stock units granted in 2011 were significantly lower compared to 2010 and 2009 due to a shift in awards granted in 2011 to non-executive officers from time-based restricted stock units to time-based cash awards.
Performance based restricted stock units are based upon the achievement of the performance metric at 100%. These units have the potential to range from 0% to 150% of the shares disclosed, which varies based on grant year and individual participation level. Increases above the 100% target level are reflected as granted in the period in which performance-based stock unit goals are achieved. Decreases below the 100% target level are reflected as forfeited. In 2011, performance-based stock units of 47,375 were included as forfeited due to completion levels of less than the threshold achievement level for shares granted in 2009. The weighted average grant date fair value for these awards was $34.19. In 2010, performance-based stock units of 11,472 were included as forfeited due to completion levels less than 100% for units granted in 2007. The weighted average grant date fair value for these awards was $48.46. Additionally, in 2010, 25,055 performance-based stock units were included as forfeited due to completion levels of less than 100% for units originally granted in 2008. The weighted average grant date fair value for these awards was $45.21.
The intrinsic value, which is equal to the fair value for restricted stock and for restricted stock units that vested during the year ended December 31, 2011, was $10.2 million and the intrinsic value of performance-based restricted stock units that vested during 2011 was $1.3 million. The intrinsic value of restricted stock units and performance-based restricted units that vested during the year ended December 31, 2010 were $5.0 million and $1.3 million, respectively. The intrinsic value of restricted stock units and performance-based restricted units that vested during the year ended December 31, 2009 were $0.5 million and $2.5 million, respectively.
At December 31, 2011, the aggregate intrinsic value of restricted stock and restricted stock units was $26.9 million and the weighted average remaining contractual life was 2.1 years. The aggregate intrinsic value of performance based restricted stock units was $2.4 million and the weighted average remaining contractual life was 2.8 years. As of December 31, 2011, there was $15.2 million of total unrecognized compensation cost related to unvested restricted stock units and performance-based restricted stock units, assuming performance-based restricted stock units are achieved at 100% of the performance metric. The cost is expected to be recognized over a weighted-average period of 2.4 years. Compensation cost associated with restricted stock, restricted stock units and performance-based restricted stock units is generally calculated based upon grant date fair value, which is determined using current market prices.
11. EARNINGS PER SHARE AND SHAREHOLDERS EQUITY TRANSACTIONS
The following table provides weighted average share information used in the calculation of the Companys basic and diluted earnings per share:
DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions, except per share data) | ||||||||||||
Basic shares used in the calculation of earnings per share |
45.2 | 45.6 | 50.6 | |||||||||
Dilutive effect of securities: |
||||||||||||
Employee stock options |
0.2 | 0.3 | 0.2 | |||||||||
Non-vested stock grants |
0.4 | 0.4 | 0.3 | |||||||||
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Diluted shares used in the calculation of earnings per share |
45.8 | 46.3 | 51.1 | |||||||||
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Per share effect of dilutive securities on income from continuing operations |
$ | (0.01 | ) | $ | (0.05 | ) | $ | (0.03 | ) | |||
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Per share effect of dilutive securities on net income |
$ | (0.01 | ) | $ | (0.05 | ) | $ | (0.04 | ) | |||
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Diluted earnings per share during 2011, 2010 and 2009 excludes 1.6 million, 1.4 million and 2.1 million, respectively, of common shares issuable under the Companys stock compensation plans, because their effect would be antidilutive.
During 2011, the Company paid three quarterly dividends of 27.5 cents ($0.275) and one quarterly dividend of 30 cents ($0.30) per share each to its shareholders, totaling $50.9 million.
Since October 2007 and through December 2011, the Companys Board of Directors has authorized aggregate repurchases of the Companys common stock of up to $500 million. As of December 31, 2011, the Company has $135.2 million available for repurchases under these repurchase authorizations. The Company may repurchase its common stock from time to time, in amounts and prices and at such times as deemed appropriate, subject to market conditions and other considerations. The Companys repurchases may be executed using open market purchases, privately negotiated transactions, accelerated repurchase programs or other transactions. The Company is not required to purchase any specific number of shares or to make purchases by any certain date under this program. During 2011, the Company repurchased 0.6 million shares of the Companys common stock through open market purchases at a cost of $21.7 million. On March 30, 2010 and December 8, 2009, the Company entered into accelerated share repurchase agreements for the immediate repurchase of 2.3 million and 2.4 million shares, respectively, of the Companys common stock at a cost of $105.0 million and $105.2 million, respectively. Total repurchases under this program as of December 31, 2011 were 8.6 million shares at a cost of $364.8 million.
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12. DIVIDEND RESTRICTIONS
U.S. Insurance Subsidiaries
The individual law of all states, including New Hampshire and Michigan, where Hanover Insurance and Citizens are domiciled, respectively, restrict the payment of dividends to stockholders by insurers. These laws affect the dividend paying ability of Hanover Insurance and Citizens.
Pursuant to New Hampshires statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of such insurers statutory policyholder surplus as of the preceding December 31. Hanover Insurance declared dividends to its parent totaling $99.0 million, $75.0 million, and $153.7 million in 2011, 2010 and 2009, respectively. Hanover Insurance can pay additional dividends of $58.8 million to its parent without prior approval until April 2012. If no dividends are declared prior to April 2012, the maximum dividend payable without prior approval would increase at that time to $157.8 million.
Pursuant to Michigans statute, the maximum dividends and other distributions that an insurer may pay in any twelve month period, without prior approval of the Michigan Insurance Commissioner, is limited to the greater of 10% of policyholders surplus as of December 31 of the immediately preceding year or the statutory net income less net realized gains, for the immediately preceding calendar year. Citizens declared dividends to its parent, Hanover Insurance, totaling $69.0 million, $70.0 million and $72.0 million in 2011, 2010 and 2009, respectively. Citizens cannot pay a further dividend to its parent without prior approval until December 2012, at which time the maximum dividend payable without prior approval would be $70.2 million.
The statutes in both New Hampshire and Michigan require that prior notice to the respective Insurance Commissioner of any proposed dividend be provided and such Commissioner may, in certain circumstances, prohibit the payment of the proposed dividend.
Chaucer
Dividend payments from Chaucer to its parent are regulated by U.K. law. Dividends from Chaucer are dependent on dividends from its subsidiaries. Annual dividend payments from Chaucer are limited to retained earnings that are not restricted by capital and other requirements for business at Lloyds. Also, Chaucer must provide advance notice to the U.K.s Financial Services Authority (FSA) of certain proposed dividends or other payments from FSA regulated entities. There are currently no plans to repatriate dividends from Chaucer to its parent.
13. SEGMENT INFORMATION
The Companys primary business operations include insurance products and services provided through four operating segments. These operating segments are Commercial Lines, Personal Lines, Chaucer, and Other Property and Casualty. Commercial Lines includes commercial multiple peril, commercial automobile, workers compensation, and other commercial coverages, such as specialty program business, inland marine, surety and other bonds, professional liability and management liability. Personal Lines includes personal automobile, homeowners and other personal coverages. Chaucer includes property, marine and aviation, energy, U.K. motor, and casualty and other coverages (which includes international liability, specialist coverages, and syndicate participations). The Other Property and Casualty segment consists of: Opus Investment Management, Inc., which markets investment management services to institutions, pension funds and other organizations; earnings on holding company assets; and, a voluntary pools business which is in run-off. The separate financial information is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company reports interest expense related to its debt separately from the earnings of its operating segments. The Companys debt consists of senior debentures, junior debentures, subordinated notes, advances under the Companys collateralized borrowing program with the FHLBB, and capital securities.
Management evaluates the results of the aforementioned segments on a pre-tax basis. Segment income (loss) excludes certain items which are included in net income (loss), such as income taxes and net realized investment gains and losses, including gains and losses from certain derivative instruments. Such gains and losses are excluded since they are determined by interest rates, financial markets and the timing of sales. Also, segment income (loss) excludes net gains and losses on disposals of businesses, discontinued operations, costs to acquire businesses, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income (loss) may be significant components in understanding and assessing the Companys financial performance, management believes that the presentation of segment income (loss) enhances an investors understanding of the Companys results of operations by highlighting net income (loss) attributable to the core operations of the business. However, segment income (loss) should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles.
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Summarized below is financial information with respect to the Companys business segments. Activity for 2011 includes results of Chaucer for the period from July 1, 2011 through December 31, 2011.
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Segment revenues: |
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Commercial Lines |
$ | 1,798.9 | $ | 1,522.3 | $ | 1,228.8 | ||||||
Personal Lines |
1,555.9 | 1,583.8 | 1,585.3 | |||||||||
Chaucer |
534.1 | | | |||||||||
Other Property and Casualty |
19.8 | 21.0 | 22.6 | |||||||||
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Total |
3,908.7 | 3,127.1 | 2,836.7 | |||||||||
Intersegment revenues |
(5.2 | ) | (4.6 | ) | (4.0 | ) | ||||||
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Total segment revenues |
3,903.5 | 3,122.5 | 2,832.7 | |||||||||
Net realized investment gains |
28.1 | 29.7 | 1.4 | |||||||||
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Total revenues |
$ | 3,931.6 | $ | 3,152.2 | $ | 2,834.1 | ||||||
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Segment income (loss) before income taxes: |
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Commercial Lines: |
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GAAP underwriting income (loss) |
$ | (121.3 | ) | $ | (20.6 | ) | $ | 60.9 | ||||
Net investment income |
136.5 | 129.9 | 125.6 | |||||||||
Other income |
2.8 | 1.9 | 3.2 | |||||||||
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Commercial Lines segment income |
18.0 | 111.2 | 189.7 | |||||||||
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Personal Lines: |
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GAAP underwriting income (loss) |
(73.0 | ) | 1.6 | (43.6 | ) | |||||||
Net investment income |
92.1 | 102.9 | 109.6 | |||||||||
Other income |
3.6 | 8.5 | 10.4 | |||||||||
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Personal Lines segment income |
22.7 | 113.0 | 76.4 | |||||||||
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Chaucer: |
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GAAP underwriting income |
11.3 | | | |||||||||
Net investment income |
16.9 | | | |||||||||
Other income |
4.1 | | | |||||||||
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Chaucer segment income |
32.3 | | | |||||||||
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Other Property and Casualty: |
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GAAP underwriting income (loss) |
(0.3 | ) | 0.8 | 11.7 | ||||||||
Net investment income |
12.7 | 14.4 | 16.5 | |||||||||
Other net expenses |
(12.9 | ) | (11.7 | ) | (24.2 | ) | ||||||
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Other Property and Casualty segment income (loss) |
(0.5 | ) | 3.5 | 4.0 | ||||||||
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Total |
72.5 | 227.7 | 270.1 | |||||||||
Interest on debt |
(55.0 | ) | (44.3 | ) | (35.1 | ) | ||||||
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Segment income before income taxes |
17.5 | 183.4 | 235.0 | |||||||||
Adjustments to segment income: |
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Net realized investment gains |
28.1 | 29.7 | 1.4 | |||||||||
Net gain (loss) from retirement of debt |
(2.3 | ) | (2.0 | ) | 34.5 | |||||||
Costs related to acquired businesses |
(16.4 | ) | | | ||||||||
Loss on derivative instruments |
(11.3 | ) | | | ||||||||
Net foreign exchange gains |
6.7 | | | |||||||||
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Income before income taxes |
$ | 22.3 | $ | 211.1 | $ | 270.9 | ||||||
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The following table provides identifiable assets for the Companys business segments and discontinued operations:
DECEMBER 31 |
2011 | 2010 | ||||||
(in millions) | Identifiable Assets | |||||||
U.S. Companies |
$ | 8,495.5 | $ | 8,436.3 | ||||
Chaucer |
4,007.7 | | ||||||
Discontinued operations |
121.2 | 133.6 | ||||||
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Total |
$ | 12,624.4 | $ | 8,569.9 | ||||
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The Company reviews the assets of its U.S. Companies collectively and does not allocate them between the Commercial Lines, Personal Lines and Other Property and Casualty segments.
Geographic Concentrations
Prior to the acquisition of Chaucer, the Companys revenues were generated exclusively in the U.S. Revenues attributable to foreign countries are a result of the Chaucer acquisition. The following table presents gross written premium (GWP) based on the location of the risk for the year ended December 31, 2011:
% of Total GWP | ||
United States |
87% | |
United Kingdom |
4 | |
Worldwide and other |
9 | |
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Total |
100% | |
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The worldwide and other category includes insured risks that move across multiple geographic areas, including the U.S. and U.K., due to their mobile nature or insured risks that are fixed in locations that span more than one geographic area, and risks located in a single country outside the U.S. and U.K. These contracts include, for example, marine and aviation, hull, satellite, offshore energy exploration and production risks that can move across multiple geographic areas and assumed risks where the cedant insures risks in two or more geographic zones. These risks may include U.S. and U.K. insured risks.
Long-lived assets located outside the U.S. were not material for the year ended December 31, 2011. The Company does not have revenue from transactions with a single agent or broker amounting to 10 percent or more of its consolidated revenue.
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14. LEASE COMMITMENTS
Rental expenses for operating leases amounted to $21.1 million, $17.2 million and $15.4 million in 2011, 2010 and 2009, respectively. These expenses relate primarily to building leases of the Company. At December 31, 2011, future minimum rental payments under non-cancelable operating leases, were approximately $68.9 million, payable as follows: 2012 - $19.7 million; 2013 - $17.3 million; 2014 - $14.4 million; 2015 - $11.4 million and $6.1 million thereafter. It is expected that in the normal course of business, leases that expire may be renewed or replaced by leases on other property and equipment.
15. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Reinsurance transactions are accounted for in accordance with the provisions of ASC 944.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company determines the appropriate amount of reinsurance based on evaluations of the risks accepted and analyses prepared by consultants and on market conditions (including the availability and pricing of reinsurance). The Company also believes that the terms of its reinsurance contracts are consistent with industry practice in that they contain standard terms with respect to lines of business covered, limit and retention, arbitration and occurrence. The Company believes that its reinsurers are financially sound. This belief is based upon an ongoing review of its reinsurers' financial statements, reported financial strength ratings from rating agencies, reputations in the marketplace, and the analysis and guidance of THG's reinsurance advisors.
As a condition to conduct certain business in various states, the Company is required to participate in residual market mechanisms, facilities and pooling arrangements such as the Michigan Catastrophic Claims Association (MCCA). The Company is subject to concentration of risk with respect to reinsurance ceded to the MCCA. Funding for MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders. The Company ceded to the MCCA premiums earned and losses and LAE incurred of $69.6 million and $122.6 million in 2011, $64.7 million and $135.6 million in 2010, $55.8 million and $97.7 million in 2009, respectively. MCCA, which represented 36.1% of the total reinsurance receivable balance at December 31, 2011, is the Company's only reinsurer representing at least 10% of its reinsurance assets. Reinsurance recoverables related to MCCA were $816.7 million and $752.5 million at December 31, 2011 and 2010, respectively. Because the MCCA is supported by assessments permitted by statute, and there have been no significant uncollectible balances from MCCA identified during the three years ending December 31, 2011, the Company believes that it has no significant exposure to uncollectible reinsurance balances from this entity.
The following table provides the effects of reinsurance. Activity for 2011 includes results of Chaucer from July 1, 2011 to December 31, 2011.
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Property and casualty premiums written: |
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Direct |
$ | 3,830.9 | $ | 3,087.9 | $ | 2,883.8 | ||||||
Assumed (1) |
228.3 | 270.6 | 8.6 | |||||||||
Ceded |
(465.8 | ) | (310.5 | ) | (283.7 | ) | ||||||
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Net premiums written |
$ | 3,593.4 | $ | 3,048.0 | $ | 2,608.7 | ||||||
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Property and casualty premiums earned: |
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Direct |
$ | 3,695.2 | $ | 2,970.6 | $ | 2,824.3 | ||||||
Assumed (1) |
442.6 | 174.8 | 13.8 | |||||||||
Ceded |
(539.2 | ) | (304.4 | ) | (291.7 | ) | ||||||
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Net premiums earned |
$ | 3,598.6 | $ | 2,841.0 | $ | 2,546.4 | ||||||
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Property and casualty losses and LAE: |
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Direct |
$ | 2,723.5 | $ | 2,001.8 | $ | 1,909.1 | ||||||
Assumed (1) (2) |
249.4 | 96.9 | (11.7 | ) | ||||||||
Ceded |
(422.1 | ) | (242.4 | ) | (258.2 | ) | ||||||
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Net losses and LAE |
$ | 2,550.8 | $ | 1,856.3 | $ | 1,639.2 | ||||||
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(1) | Assumed reinsurance activity in 2011 primarily related to our Chaucer segment. In addition, 2011 assumed premiums earned and assumed losses and LAE included $96.0 million and $54.2 million, respectively, related to the 2010 OneBeacon renewal rights transactions. Assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction. |
(2) | The favorable reserve development on assumed reinsurance activity in 2009 primarily related to the Excess and Casualty Reinsurance Association (ECRA) and Massachusetts Commonwealth Automobile Reinsurers (CAR) pools. |
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16. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and LAE. Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred. These types of subsequent adjustments are described as prior year reserve development. Such development can be either favorable or unfavorable to the Companys financial results and may vary by line of business.
The table below provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses as follows:
FOR THE YEARS ENDED DECEMBER 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Gross loss and LAE reserves, beginning of year |
$ | 3,277.7 | $ | 3,153.9 | $ | 3,203.1 | ||||||
Reinsurance recoverable on unpaid losses |
1,115.5 | 1,060.2 | 988.2 | |||||||||
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Net loss and LAE reserves, beginning of period |
2,162.2 | 2,093.7 | 2,214.9 | |||||||||
Net incurred losses and LAE in respect of losses occurring in: |
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Current year |
2,654.1 | 1,967.4 | 1,794.5 | |||||||||
Prior years |
(103.3 | ) | (111.1 | ) | (155.3 | ) | ||||||
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Total incurred losses and LAE |
2,550.8 | 1,856.3 | 1,639.2 | |||||||||
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Net payments of losses and LAE in respect of losses occurring in: |
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Current year |
1,482.4 | 1,078.7 | 971.9 | |||||||||
Prior years |
1,010.3 | 738.6 | 788.5 | |||||||||
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Total payments |
2,492.7 | 1,817.3 | 1,760.4 | |||||||||
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Purchase of Chaucer |
1,631.0 | | | |||||||||
Purchase of Campania |
| 29.5 | | |||||||||
Effect of foreign exchange rate changes |
(22.8 | ) | | | ||||||||
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Net reserve for losses and LAE, end of year |
3,828.5 | 2,162.2 | 2,093.7 | |||||||||
Reinsurance recoverable on unpaid losses |
1,931.8 | 1,115.5 | 1,060.2 | |||||||||
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Gross reserve for losses and LAE, end of year |
$ | 5,760.3 | $ | 3,277.7 | $ | 3,153.9 | ||||||
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As part of an ongoing process, the reserves have been re-estimated for all prior accident years and were decreased by $103.3 million, $111.1 million and $155.3 million in 2011, 2010 and 2009, respectively. For the six months ended December 31, 2011, these amounts include favorable loss and LAE reserve development of $35.5 million for Chaucer. The Chaucer favorable development was primarily the result of lower than expected losses in the energy, property and U.K. motor lines, primarily related to the 2009 and 2010 accident years. For Commercial and Personal Lines, the favorable loss and LAE reserve development during the year ended December 31, 2011 was primarily the result of lower than expected losses in the personal automobile line, primarily related to bodily injury coverage in the 2008 through 2010 accident years, the commercial multiple peril line related to the 2007 through 2010 accident years and lower than expected losses in the 2007 through 2010 accident years in the workers compensation line. In addition, within other commercial lines, unfavorable development in the professional liability and surety business were partially offset by favorable development in the healthcare and other commercial property lines.
The favorable loss and LAE reserve development during the year ended December 31, 2010 is primarily the result of lower than expected losses in the personal automobile line across all coverages, primarily related to the 2009 accident year, and lower than expected losses in the workers compensation line, primarily related to the 2008 and 2009 accident years. In addition, lower than expected losses in the commercial multiple peril line in liability coverages, primarily related to the 2007 through 2009 accident years and in the commercial umbrella line related to the 2007 through 2009 accident years contributed to the favorable development, partially offset by unfavorable development in the surety business, primarily related to the 2009 accident year. The 2010 amount includes $9.8 million of favorable development resulting from a change in the cost factors used for establishing unallocated loss adjustment expense reserves.
The favorable loss and LAE reserve development during the year ended December 31, 2009 is primarily the result of lower than expected losses in the personal automobile line, primarily in the 2005 through 2008 accident years, lower than expected losses in the workers compensation line, primarily in the 2000 through 2008 accident years and lower than expected losses in the commercial multiple peril line, primarily in the 2005 through 2007 accident years. In addition, lower than expected losses in the surety business, lower projected losses in the Companys run-off voluntary pools and lower projected exposures to asbestos and environmental liability for direct written business contributed to the favorable development. Partially offsetting the favorable development was unfavorable non-catastrophe weather-related property loss development, primarily related to the homeowners, commercial property and personal automobile physical damage lines. In 2009, the Company changed its unallocated loss adjustment expense
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reserving methodology from that based on cash payments to that based on unit costs, which resulted in a $20.0 million benefit, of which $16.0 million related to prior years. The Company believes that the methodology based on unit costs is more representative of its future costs of settling existing claims.
Loss and LAE reserves related to asbestos and environmental damage liability, primarily in other commercial lines, were $59.8 million, $63.9 million and $76.8 million as of December 31, 2011, 2010 and 2009, respectively. Ending loss and LAE reserves for all direct business written by the Company related to asbestos and environmental damage liability, included in the reserve for losses and LAE, were $10.0 million, $10.1 million and $11.3 million, net of reinsurance of $18.7 million for 2011 and $19.9 million for both 2010 and 2009. As a result of the Companys historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to the Companys total loss and LAE incurred experience. In addition, the Company has established gross loss and LAE reserves for its run-off voluntary assumed reinsurance pool business with asbestos and environmental damage liability of $31.1 million, $33.9 million and $45.6 million at December 31, 2011, 2010 and 2009, respectively. These reserves relate to pools in which the Company has terminated its participation; however, the Company continues to be subject to claims related to years in which it was a participant. Because of the inherent uncertainty regarding the types of claims in these pools, the Company cannot provide assurance that its reserves will be sufficient.
The Company estimates its ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, assumed reinsurance and pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. The Company believes that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. The asbestos, environmental and toxic tort liability could be revised in the near term if the estimates used in determining the liability are revised, and any such revisions could have a material adverse effect on the Companys results of operations for a particular quarterly or annual period or its financial position.
17. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Durand Litigation
On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from the Companys Cash Balance Plan (the Plan) at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, the Company understated the accrued benefit in the calculation.
The Plaintiff filed an Amended Complaint adding two new named plaintiffs and additional claims on December 11, 2009. In response, the Company filed a Motion to Dismiss on January 30, 2010. In addition to the pending claim challenging the calculation of lump sum distributions, the Amended Complaint includes: (a) a claim that the Plan failed to calculate participants account balances and lump sum payments properly because interest credits were based solely upon the performance of each participants selection from among various hypothetical investment options (as the Plan provided) rather than crediting the greater of that performance or the 30 year Treasury rate; (b) a claim that the 2004 Plan amendment, which changed interest crediting for all participants from the performance of participants investment selections to the 30 year Treasury rate, reduced benefits in violation of the Employee Retirement Income Security Act of 1974 (ERISA) for participants who had account balances as of the amendment date by not continuing to provide them performance-based interest crediting on those balances; and (c) claims for breach of fiduciary duty and ERISA notice requirements arising from the various interest crediting and lump sum distribution matters of which Plaintiffs complain. The District Court granted the Companys Motion to Dismiss the additional claims on statute of limitations grounds by a Memorandum Opinion dated March 31, 2011, leaving the claims substantially as set forth in the original March 12, 2007 complaint. Plaintiffs filed a Motion for Reconsideration of the District Courts decision to dismiss the additional claims. Recently, the District Court denied the Plaintiffs Motion for Reconsideration with respect to the claims set forth in (a) and (b) above; however, the Court did allow the fiduciary duty claims to stand.
At this time, the Company is unable to provide a reasonable estimate of the potential range of ultimate liability if the outcome of the suit is unfavorable. This matter is still
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in the early stages of litigation. The extent to which any of the Plaintiffs multiple theories of liability, some of which are overlapping and others of which are quite complex and novel, are accepted and upheld on appeal will significantly affect the Plans or the Companys potential liability. It is not clear whether a class will be certified or, if certified, how many former or current Plan participants, if any, will be included. The statute of limitations applicable to the alleged class has not yet been finally determined and the extent of potential liability, if any, will depend on this final determination. In addition, assuming for these purposes that the Plaintiffs prevail with respect to claims that benefits accrued or payable under the Plan were understated, then there are numerous possible theories and other variables upon which any revised calculation of benefits as requested under Plaintiffs claims could be based. It is likely that any adverse judgment in this case would be against the Plan. Such a judgment would be expected to create a liability for the Plan, with resulting effects on the Plans assets available to pay benefits. The Companys future required funding of the Plan could also be impacted by such a liability.
Hurricane Katrina Litigation
In August 2007, the State of Louisiana filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including the Company, and asserts a right to benefit payments from insurers on behalf of current and former Louisiana citizens who have applied for and received or will receive funds through Louisianas Road Home program. The case was thereafter removed to the Federal District Court for the Eastern District of Louisiana.
On March 5, 2009, the court issued an Order granting in part and denying in part a Motion to Dismiss filed by Defendants. The court dismissed all claims for bad faith and breach of fiduciary duty and all claims for flood damages under policies with flood exclusions or asserted under Louisianas Valued Policy Law, but rejected the insurers arguments that the purported assignments from individual claimants to the state were barred by anti-assignment provisions in the insurers policies. On April 30, 2009, Defendants filed a Petition for Permission to Appeal to the United States Court of Appeals for the Fifth Circuit (the Fifth Circuit), which was granted. On July 28, 2010, the Fifth Circuit certified the anti-assignment issue to the Louisiana Supreme Court. On May 10, 2011, the Supreme Court of Louisiana issued a decision holding that the anti-assignment provisions were not violative of public policy. The court also indicated, however, that such provisions would only serve to bar post-loss assignments if they clearly and unambiguously expressed that they apply to post-loss assignments. On June 28, 2011, the Fifth Circuit remanded the case to the Federal District Court for further proceedings consistent with the Louisianas Supreme Courts opinion. On September 12, 2011, the State of Louisiana filed a Motion to Remand the case to state court, which was denied by an Order dated October 28, 2011.
At this time, the Company is unable to provide a reasonable estimate of the potential range of ultimate liability. The Company is unable to determine how many policyholders have assigned claims under the Road Home program and, in any case, has no basis to estimate the amount of any differences between what the Company paid with respect to any such claim and the amount that the State of Louisiana may claim should properly have been paid under each policy.
OTHER MATTERS
The Company has been named a defendant in various other legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry or investigation, and its ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. The ultimate resolutions of such proceedings are not expected to have a material effect on its financial position, although they could have a material effect on the results of operations for a particular quarter or annual period.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with the Companys own managed business, and are significant to both the personal and commercial automobile lines of business, the workers compensation line of business, and the homeowners line of business.
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18. STATUTORY FINANCIAL INFORMATION
The Companys U.S. insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis), as codified by the National Association of Insurance Commissioners. Statutory surplus differs from shareholders equity reported in accordance with generally accepted accounting principles primarily because under statutory basis for accounting, policy acquisition costs are expensed when incurred, the recognition of deferred tax assets is based on different recoverability assumptions and postretirement benefit costs are based on different participant assumptions.
The following table provides statutory net income for the year ended December 31 and surplus as of December 31 for the periods indicated:
2011 | 2010 | 2009 | ||||||||||
(in millions) | ||||||||||||
Statutory Net Income (Loss) |
||||||||||||
U.S. Insurance Subsidiaries |
$ | (5.2 | ) | $ | 101.7 | $ | 187.4 | |||||
Statutory Surplus |
||||||||||||
U.S. Insurance Subsidiaries |
$ | 1,582.8 | $ | 1,747.3 | $ | 1,741.6 |
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2011 and 2010 are summarized below.
FOR THE THREE MONTHS ENDED |
||||||||||||||||
(in millions, except per share data) | ||||||||||||||||
2011 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||
Total revenues |
$ | 833.8 | $ | 853.9 | $ | 1,108.0 | $ | 1,135.9 | ||||||||
Income (loss) from continuing operations |
$ | 27.9 | $ | (32.4 | ) | $ | (9.7 | ) | $ | 46.1 | ||||||
Net income (loss) |
$ | 29.3 | $ | (31.8 | ) | $ | (9.7 | ) | $ | 49.3 | ||||||
Income (loss) from continuing operations per share: |
||||||||||||||||
Basic |
$ | 0.62 | $ | (0.71 | ) | $ | (0.21 | ) | $ | 1.03 | ||||||
Diluted (1) |
$ | 0.61 | $ | (0.71 | ) | $ | (0.21 | ) | $ | 1.02 | ||||||
Net income (loss) per share: |
||||||||||||||||
Basic |
$ | 0.65 | $ | (0.70 | ) | $ | (0.21 | ) | $ | 1.10 | ||||||
Diluted (1) |
$ | 0.64 | $ | (0.70 | ) | $ | (0.21 | ) | $ | 1.09 | ||||||
Dividends declared per share |
$ | 0.275 | $ | 0.275 | $ | 0.275 | $ | 0.30 |
(1) Per diluted share amounts in the second and third quarters exclude common stock equivalents, since the impact of these instruments was antidilutive.
FOR THE THREE MONTHS ENDED |
||||||||||||||||
(in millions, except per share data) | ||||||||||||||||
2010 | March 31 | June 30 | Sept. 30 | Dec. 31 | ||||||||||||
Total revenues |
$ | 746.6 | $ | 768.3 | $ | 804.0 | $ | 833.3 | ||||||||
Income from continuing operations |
$ | 42.2 | $ | 2.2 | $ | 51.4 | $ | 57.4 | ||||||||
Net income |
$ | 41.8 | $ | 2.3 | $ | 52.3 | $ | 58.4 | ||||||||
Income from continuing operations per share: |
||||||||||||||||
Basic |
$ | 0.89 | $ | 0.05 | $ | 1.14 | $ | 1.27 | ||||||||
Diluted |
$ | 0.88 | $ | 0.05 | $ | 1.12 | $ | 1.25 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.88 | $ | 0.05 | $ | 1.16 | $ | 1.29 | ||||||||
Diluted |
$ | 0.87 | $ | 0.05 | $ | 1.15 | $ | 1.27 | ||||||||
Dividends declared per share |
$ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 |
Due to the use of weighted average shares outstanding when calculating earnings per common share, the sum of the quarterly per common share data may not equal the per common share data for the year.
20. SUBSEQUENT EVENTS
There were no subsequent events requiring adjustment to the financial statements and no additional disclosures required in the notes to the consolidated financial statements.
ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9ACONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES EVALUATION
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control system must
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reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on our controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this annual report, our disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In conducting our evaluation of the effectiveness of internal control over financial reporting, we excluded the acquisition of Chaucer Holdings plc, which was completed on July 1, 2011, at a cost of approximately $480 million, which represented approximately 5% of our total assets at the acquisition date. The total assets constitute approximately $4.0 billion, or 32% of our consolidated assets at December 31, 2011, and total revenues for the period from the July 1, 2011 closing date until December 31, 2011 of $540.8 million, or 14% of consolidated revenues for the year ended December 31, 2011. We expect to first include Chaucer in our annual assessment for the year ended December 31, 2012, as permitted for recently acquired businesses. Based on our evaluation under the framework in Internal Control Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.
The effectiveness of our internal control over financial reporting as of December 31, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
CHANGES IN INTERNAL CONTROL
Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the internal control over financial reporting, as required by Rule 13a-15(d) of the Exchange Act, to determine whether any changes occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the Chief Executive and Chief Financial Officer concluded that there was no such change during the last quarter of the fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS OF THE REGISTRANT
Except for the portion about executive officers and our Code of Conduct which is set forth below, this information is incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held on May 15, 2012 to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is biographical information concerning our executive officers.
Bryan D. Allen, 44
Senior Vice President, Chief Human Resources Officer
Mr. Allen has been Chief Human Resources Officer of THG since joining the Company in 2006. From 2002 until 2006, Mr. Allen was Managing Director, Head of Human Resources at US Trust. Prior to that, from 1989 until 2002, Mr. Allen held a variety of positions within the human resources organization at Morgan Stanley, last serving as Global Chief of Staff for Human Resources.
Mark R. Desrochers, 43
Senior Vice President President, Personal Lines
Mr. Desrochers has been President, Personal Lines since 2009. From 2006 until 2009, Mr. Desrochers was Vice President, State Management. Prior to joining THG, from 2003 until 2006, Mr. Desrochers held several positions with Liberty Mutual Insurance Company, last serving as Vice President and Product Manager. Previously, Mr. Desrochers worked at Electric Insurance Company and at Applied Insurance Research.
Frederick H. Eppinger, Jr., 53
Director, President and Chief Executive Officer
Mr. Eppinger has been Director, President and Chief Executive Officer of THG since joining the Company in 2003. Before joining the Company, Mr. Eppinger was Executive Vice President of Property and Casualty Field and Service Operations for The Hartford Financial Services Group, Inc. Prior to that, he was Senior Vice President of Strategic Marketing from 2000 to 2001 for ChannelPoint, Inc., a firm that provided business-to-business technology for insurance and financial service companies, and was a senior partner at the international consulting firm of McKinsey & Company. Mr. Eppinger led the insurance practice at McKinsey, where he worked closely with chief executive officers of many leading insurers over a period of 15 years, beginning in 1985. Mr. Eppinger began his career as an accountant with the firm then known as Coopers & Lybrand. He is a director of Centene Corporation, a publicly-traded, multi-line healthcare company. Mr. Eppinger is an employee of THG, and therefore is not an independent director. Mr. Eppingers term of office as a director of THG expires in 2012.
David B. Greenfield, 49
Executive Vice President, Chief Financial Officer and Principal Accounting Officer
Mr. Greenfield has served as Executive Vice President Chief Financial Officer and Principal Accounting Officer since March 2011. Prior to that, from December 2010 to March 2011, he served as Executive Vice President Senior Finance Officer. Prior to joining the Company, Mr. Greenfield served as the Chief Financial Officer of Axis Capital Holdings Limited from 2006 until 2010. From 1984 to 2006, Mr. Greenfield worked for KPMG LLP, where he advanced to partnership serving as KPMGs Global Sector Chair for Insurance and a member of KPMGs Global Financial Services Leadership Team.
J. Kendall Huber, 57
Executive Vice President, General Counsel and Assistant Secretary
Mr. Huber has been General Counsel and Assistant Secretary since joining THG in 2000. Prior to joining THG, Mr. Huber was Executive Vice President, General Counsel and Secretary of Promus Hotel Corporation from 1999 to 2000. Previously, Mr. Huber was Vice President and Deputy General Counsel of Legg Mason, Inc., from 1998 to 1999. He has also served as Vice President and Deputy General Counsel of USF&G Corporation, where he was employed from 1990 to 1998.
Andrew Robinson, 46
Executive Vice President, Corporate Development President, Specialty Insurance
Mr. Robinson has been President, Specialty Insurance since November 2011, Chief Risk Officer since 2010 and has led THGs Corporate Development Department since joining the Company in 2006. From 2009 to 2011, Mr. Robinson was President, Specialty Casualty. Prior to joining the Company, from 1996 until 2006, Mr. Robinson held a variety of positions at Diamond Consultants, last serving as Managing Director, Global Insurance Practice.
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John C. Roche, 48
Senior Vice President President, Business Insurance
Mr. Roche has been President, Business Insurance since 2009. From 2007 to 2009, Mr. Roche served as Vice President, Field Operations and from 2006 to 2007, Mr. Roche was Vice President, Underwriting and Product Management, Commercial Lines. From 1994 to 2006, Mr. Roche served in a variety of leadership positions at St. Paul Travelers Companies, Inc., last serving as Vice President, Commercial Accounts. Previously, Mr. Roche served in a variety of underwriting and management positions at Firemans Fund Insurance Company and Atlantic Mutual Insurance Company.
Robert Stuchbery, 55
President and Chief Executive Officer, Chaucer
Mr. Stuchbery has been Chief Executive Officer of Chaucer since January 2010. Prior to his appointment as CEO, Mr. Stuchbery served as Chaucer's Chief Underwriting Officer from 2005 to 2009, and as Group Underwriting Director from 2000 to 2005. He was Active Underwriter for Syndicate 1096 from 1996 to 2000 and prior to that was Deputy Underwriter of Syndicate 1096 from 1988 to 1996. Before joining Chaucer in 1988, Mr. Stuchbery served in various positions with the U.K. subsidiary of CNA Reinsurance of London Limited from 1976 to 1987. Mr. Stuchbery is a Fellow of the Chartered Insurance Institute and a member of the Lloyds Market Association Board where he currently serves as Deputy Chairman.
Gregory D. Tranter, 55
Executive Vice President, Chief Information Officer and Chief Operations Officer
Mr. Tranter joined the Company in 1998, has been Chief Information Officer since 2000 and Chief Operations Officer since 2007. Prior to joining THG, Mr. Tranter was Vice President, Automation Strategy of Travelers Property and Casualty Company from 1996 to 1998. Mr. Tranter was employed by Aetna Life and Casualty Company from 1983 to 1996.
Marita Zuraitis, 51
Executive Vice President and President of the Property and Casualty Companies
Ms. Zuraitis has been Executive Vice President of the Company and President, Property and Casualty Companies since 2004. Prior to joining THG, Ms. Zuraitis was President and Chief Executive Officer of the commercial lines division of The St. Paul Travelers Companies, Inc. from 1998 to 2004 and previously, Ms. Zuraitis served in various management roles with USF&G Corporation and Aetna Life and Casualty.
Pursuant to section 4.4 of the Companys by-laws, each officer shall hold office until the first meeting of the Board of Directors following the next annual meeting of the shareholders and until his or her respective successor is chosen and qualified unless a shorter period shall have been specified by the terms of his or her election or appointment, or in each case until such officer sooner dies, resigns, is removed or becomes disqualified.
ANNUAL MEETING OF SHAREHOLDERS
The Board of Directors of THG have scheduled the 2012 Annual Meeting of Shareholders for May 15, 2012. The record date for determining the shareholders of the Company entitled to notice of and to vote at such Annual Meeting is March 22, 2012.
CODE OF CONDUCT
Our Code of Conduct is available, free of charge, on our website at www.hanover.com under Corporate GovernanceCompany Policies. The Code of Conduct applies to our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Controller. While we do not expect to grant waivers to our Code of Conduct, any such waivers to our Chief Executive Officer, Chief Financial Officer or Controller will be posted on our website at www.hanover.com, as required by applicable law or New York Stock Exchange requirements. A printed copy of the Code of Conduct will be provided free of charge by contacting the Companys Corporate Secretary at the Companys headquarters, 440 Lincoln Street, Worcester, MA 01653.
ITEM 11EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 2012, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
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ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2011 with respect to compensation plans under which equity securities of the Company are authorized for issuance.
Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (2) |
|||||||||
Equity compensation plans approved by security holders |
3,752,744 | $ | 38.57 | 1,825,096 | ||||||||
Equity compensation plans not approved by security holders |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total |
3,752,744 | $ | 38.57 | 1,825,096 | ||||||||
|
|
|
|
|
|
(1) | Includes 841,562 shares of Common Stock which may be issued upon vesting of outstanding, restricted stock units or performance-based restricted stock units (assuming the maximum award amount) and 195,662 shares receipt of which has been deferred. The weighted-average exercise price does not take these awards into account. |
(2) | The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the Plan), which was adopted on May 16, 2006, authorizes the issuance of 3,000,000 new shares that may be used for awards. In addition, shares of stock underlying any award granted and outstanding under the Companys Amended Long-Term Stock Incentive Plan (the 1996 Plan) as of the adoption date of the Plan that are forfeited, cancelled, expire or terminate after the adoption date without the issuance of stock, become available for future grants under the Plan. |
Additional information related to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 2012, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 2012, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
ITEM 14PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held May 15, 2012, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
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ITEM 15EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A)(1) FINANCIAL STATEMENTS
The consolidated financial statements and accompanying notes thereto are included on pages XX to XXX of this Form 10-K.
(A)(2) FINANCIAL STATEMENT SCHEDULES
Page No. in this Report |
||||
I Summary of InvestmentsOther than Investments in Related Parties |
165 | |||
166 | ||||
169 | ||||
170 | ||||
171 | ||||
VI Supplemental Information Concerning Property and Casualty Insurance Operations |
172 |
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Exhibits filed as part of this Form 10-K are as follows:
2.1 | Stock Purchase Agreement, dated as of August 22, 2005, between The Goldman Sachs Group, Inc., as Buyer, and Registrant, as Seller (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) previously filed as Exhibit 2.1 to the Registrants Current Report on Form 8-K filed with the Commission on August 24, 2005 and incorporated herein by reference (Commission file No. 001-13754). |
2.2 | Stock Purchase Agreement by and between the Registrant and Commonwealth Annuity and Life Insurance Company, dated July 30, 2008 (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K), previously filed as Exhibit 2.1 to the Registrants Current Report on Form 8-K filed with the Commission on August 4, 2008 and incorporated herein by reference. |
2.3 | Implementation Agreement by and among The Hanover Insurance Group, Inc., 440 Tessera Limited and Chaucer Holdings plc, dated April 20, 2011 previously filed as Exhibit 2.1 to the Registrants Current Report on Form 8-K filed with the Commission on April 21, 2011 and incorporated herein by reference. |
3.1 | Certificate of Incorporation of the Registrant previously filed as Exhibit 3.1 to the Registrants Annual Report on Form 10-K filed with the Commission on March 16, 2006 and incorporated herein by reference (Commission file No. 001-13754). |
3.2 | Amended By-Laws of the Registrant, previously filed as Exhibit 3.2 to the Registrants Current Report on Form 8-K filed with the Commission on November 21, 2006 and incorporated herein by reference (Commission file No. 001-13754). |
4.1 | Specimen Certificate of Common Stock previously filed as Exhibit 4 to the Registrants Annual Report on Form 10-K filed with the Commission on March 16, 2006 and incorporated herein by reference (Commission file No. 001-13754). |
4.2 | Form of Indenture relating to the Debentures between the Registrant and State Street Bank & Trust Company, as trustee, previously filed as Exhibit 4.1 to the Registrants Registration Statement on Form S-1 (No. 33-96764) filed with the Commission on September 11, 1995 and incorporated herein by reference. |
4.3 | Form of Global Debenture previously filed as Exhibit 4.2 to the Registrants Annual Report on Form 10-K filed with the Commission on March 16, 2006 and incorporated herein by reference (Commission file No. 001-13754). |
4.4 | Indenture dated February 3, 1997 relating to the Junior Subordinated Debentures of the Registrant previously filed as Exhibit 3 to the Registrants Current Report on Form 8-K filed with the Commission on February 5, 1997 and incorporated herein by reference (Commission file No. 001-13754). |
4.5 | First Supplemental Indenture dated July 30, 2009 amending the indenture dated February 3, 1997 relating to the Junior Subordinated Debentures of the Registrant previously filed as Exhibit 4.5 to the Registrants Annual Report on Form 10-K filed with the Commission on March 1, 2010 and incorporated herein by reference. |
4.6 | Form of Global Security representing $300,000,000 principal amount of Junior Subordinated Debentures of the Registrant previously filed as Exhibit 4.6 to the Registrants Annual Report on Form 10-K filed with the Commission on March 1, 2010 and incorporated herein by reference. |
4.7 | Indenture dated January 21, 2010, between the Registrant and U.S. Bank National Association, as trustee, previously filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 ASR (No. 333-164446) filed with the Commission on January 21, 2010 and incorporated herein by reference. |
4.8 | First Supplemental Indenture and Form of Global Note dated February 23, 2010, related to the Notes of the Registrant, between the Registrant and U.S. Bank National Association, as trustee, previously filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed with the Commission on February 23, 2010 and incorporated herein by reference. |
4.9 | Second Supplemental Indenture dated as of June 17, 2011, between U.S. Bank National Association, as trustee, including the form of Global Note attached as Annex A thereto, supplementing the Indenture dated as of January 21, 2010, previously filed as Exhibit 4.1 to the Registrants Current Report on Form 8-K filed with the Commission on June 17, 2011 and incorporated herein by reference. |
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4.10 | Trust Deed Constituting $50,000,000 Floating Rate Subordinated Notes due 2036 dated September 21, 2006 between Chaucer Holdings plc and Wilmington Trust (Channel Islands), Ltd previously filed as Exhibit 4.2 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 9, 2011 and incorporated herein by reference. |
Management agrees to furnish the Securities and Exchange Commission, upon request, a copy of any other agreements or instruments of the Registrant and its subsidiaries defining the rights of holders of any non-registered debt whose authorized principal amount does not exceed 10% of Registrants total consolidated assets.
+10.1 | State Mutual Life Assurance Company of America Excess Benefit Retirement Plan previously filed as Exhibit 10.5 to the Registrants Registration Statement on Form S-1 (No. 33-91766) filed with the Commission on May 1, 1995 and incorporated herein by reference. |
10.2 | Form of Accident and Health Coinsurance Agreement between The Hanover Insurance Company, as Reinsurer, and First Allmerica Financial Life Insurance Company (the schedules and certain exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on August 4, 2008 and incorporated by reference herein. |
+10.3 | The Hanover Insurance Group, Inc. Amended Long-Term Stock Incentive Plan previously filed as Exhibit 10.23 to the Registrants Annual Report on Form 10-K filed with the Commission on April 1, 2002 and incorporated herein by reference (Commission file No. 001-13754). |
+10.4 | The Hanover Insurance Group, Inc. 2009 Short-Term Incentive Compensation Plan previously filed as Annex 2 to the Registrants Proxy Statement (Commission File No. 001-13754) filed with the Commission on March 27, 2009 and incorporated herein by reference. |
10.5 | Federal Home Loan Bank of Boston Agreement for Advances, Collateral Pledge, and Security Agreement dated September 11, 2009 previously filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on November 4, 2009 and incorporated herein by reference. |
+10.6 | The Hanover Insurance Group Amended and Restated Employment Continuity Plan previously filed as Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 11, 2008 and incorporated herein by reference. |
+10.7 | Form of Non-Qualified Stock Option Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference. |
+10.8 | Form of Incentive Compensation Deferral and Conversion Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.4 to the Registrants Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference. |
+10.9 | Form of Amended and Restated Form of Non-Qualified Stock Option Agreement under The Hanover Insurance Group, Inc. Amended Long-Term Stock Incentive Plan previously filed as Exhibit 10.7 to the Registrants Current Report on Form 8-K filed with the Commission on February 21, 2007 and incorporated herein by reference. |
+10.10 | Description of 2008 Incentive Compensation Deferral and Conversion Program previously filed as Exhibit 10.35 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2008 and incorporated herein by reference. |
+10.11 | The Hanover Insurance Group 2006 Long-Term Incentive Plan previously filed as Exhibit 10.36 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2008 and incorporated herein by reference. |
+10.12 | Description of 2010-2011 Non-Employee Director Compensation previously filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 6, 2010 and incorporated herein by reference. |
+10.13 | Offer Letter, dated August 14, 2003, between the Registrant and Frederick H. Eppinger, Jr., as amended December 10, 2008 previously filed as Exhibit 10.25 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference. |
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+10.14 | The Hanover Insurance Group, Inc. Non-Employee Director Deferral Plan previously filed as Exhibit 10.28 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference. |
+10.15 | Offer Letter dated January 5, 2010 between Steven J. Bensinger and The Hanover Insurance Group, Inc. previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on January 8, 2010 and incorporated herein by reference. |
+10.16 | Restricted Stock Unit Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.31 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference. |
+10.17 | Performance-Based Restricted Stock Unit Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.32 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference. |
+10.18 | Non-Qualified Stock Option Agreement under The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan previously filed as Exhibit 10.33 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference. |
+10.19 | IRC Section 162(m) Deferral Letter for Certain Executive Officers of the Registrant previously filed as Exhibit 10.34 to the Registrants Annual Report on Form 10-K filed with the Commission on February 27, 2009 and incorporated herein by reference. |
+10.20 | Offer Letter dated December 15, 2010 between David Greenfield and the Registrant previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on December 17, 2010 and incorporated herein by reference. |
+10.21 | Separation Letter dated December 29, 2010 between Steven J. Bensinger and the Registrant previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on December 29, 2010 and incorporated herein by reference. |
+10.22 | The Hanover Insurance Group, Inc. Amended and Restated Non-Qualified Retirement Savings Plan, previously filed as Exhibit 10.30 to the Registrants Annual Report on Form 10-K filed with the Commission on February 24, 2011 and incorporated herein by reference. |
+10.23 | Letter Agreement between David Greenfield and the Registrant dated January 20, 2011 regarding his participation in The Hanover Insurance Group Amended and Restated Employment Continuity Plan previously filed as Exhibit 10.31 to the Registrants Annual Report on Form 10-K filed with the Commission on February 24, 2011 and incorporated herein by reference. |
+10.24 | Description of 2010 Executive Short-Term Incentive Compensation Program Awards, 2011 Executive Short-Term Incentive Compensation Program and 2011 Long-Term Incentive Program previously filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on May 9, 2011 and incorporated herein by reference. |
10.25 | Credit Agreement between The Hanover Insurance Group, Inc., the banks and financial institutions listed on the signature pages thereof and Goldman Sachs Bank USA, as administrative agent, dated April 20, 2011 previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on April 21, 2011 and incorporated herein by reference. |
+10.26 | Description of 2011 2012 Non-Employee Director Compensation previously filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 9, 2011 and incorporated herein by reference. |
+10.27 | Service Agreement dated January 20, 2010 by and between Robert Stuchbery and Chaucer Holdings plc previously filed as Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 9, 2011 and incorporated herein by reference. |
+10.28 | Chaucer Pension Scheme, as amended, previously filed as Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 9, 2011 and incorporated herein by reference. |
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10.29 | £90,000,000 Letter of Credit Facility Agreement dated November 29, 2010 between, among others, Chaucer Holdings plc as the account party, Barclays Bank plc, Lloyds TSB Bank plc and The Royal Bank of Scotland plc as mandated lead arrangers and Lloyds TSB Bank plc as bookrunner, facility agent and security agent, as amended by Amendment Letter dated February 28, 2011 previously filed as Exhibit 10.4 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on August 9, 2011 and incorporated herein by reference. |
10.30 | Credit Agreement, dated August 2, 2011, among The Hanover Insurance Group, Inc., as Borrower, Wells Fargo Bank, National Association, as administrative agent, and various other lender parties, previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on August 3, 2011 and incorporated herein by reference. |
+10.31 | Robert Stuchbery Retention Agreement dated August 23, 2011 previously filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on November 8, 2011 and incorporated herein by reference. |
+10.32 | Form of Non-Qualified Stock Option Agreement under the 2006 Long-Term Incentive Plan previously filed as Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on November 8, 2011 and incorporated herein by reference. |
+10.33 | Amendment to Outstanding Stock Options Issued under the Registrants 2006 Long-Term Incentive Plan and Amended Long-Term Stock Incentive Plan previously filed as Exhibit 10.3 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on November 8, 2011 and incorporated herein by reference. |
+10.34 | Trust Deed and Rules of The Chaucer Share Incentive Plan previously filed as Exhibit 10.6 to the Registrants Quarterly Report on Form 10-Q filed with the Commission on November 8, 2011 and incorporated herein by reference. |
10.35 | Standby Letter of Credit Facility Agreement, dated November 28, 2011, among Chaucer Holdings plc, as Account Party (as defined therein), 440 Tessera Limited and certain subsidiaries of the Account Party, as Guarantors (as defined therein), the Lenders (as defined therein) party thereto from time to time, Lloyds TSB Bank plc, Barclays Bank plc and The Royal Bank of Scotland plc as mandated lead arrangers and Lloyds TSB Bank plc as bookrunner, overdraft provider, facility agent of the other Finance Parties (as defined therein) and security agent to the Secured Parties (as defined therein) previously filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Commission on December 1, 2011 and incorporated herein by reference. |
10.36 | Guaranty Agreement, dated November 28, 2011, among The Hanover Insurance Group, Inc. and Lloyds TSB Bank plc, as Facility Agent and Security Agent (each as defined therein) previously filed as Exhibit 10.2 to the Registrants Current Report on Form 8-K filed with the Commission on December 1, 2011 and incorporated herein by reference. |
+10.37 | Description of 2011 Executive Short-Term Incentive Compensation Program Awards, 2012 Executive Short-Term Incentive Compensation Program and 2012 Long-Term Incentive Program previously filed as Item 5.02 to the Registrants Current Report on Form 8-K filed with the Commission on January 26, 2012 and incorporated herein by reference. |
+10.38 | The Hanover Insurance Group Cash Balance Pension Plan, as amended |
+10.39 | The Hanover Insurance Group Retirement Savings Plan, as amended |
+10.40 | Form of Restricted Stock Agreement under the 2006 Long-Term Incentive Plan |
12.1 | Computation of Ratio of Earnings to Fixed Charges |
21 | Subsidiaries of THG |
23 | Consent of Independent Registered Public Accounting Firm |
-138-
24 | Power of Attorney |
31.1 | Certification of the Chief Executive Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Chief Financial Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
99.1 | Internal Revenue Service Ruling dated April 15, 1995 previously filed as Exhibit 99.1 to the Registrants Registration Statement on Form S-1 (No. 33-91766) filed with the Commission on May 1, 1995 and incorporated herein by reference. |
101 | The following materials from The Hanover Insurance Group, Inc.s Annual Report on Form 10-K for the year ended December 31, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009; (ii) Consolidated Balance Sheets at December 31, 2011 and 2010; (iii) Consolidated Statements of Shareholders Equity for the years ended December 31, 2011, 2010 and 2009; (iv) Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2010 and 2009; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009; (vi) related notes to these consolidated financial statements; and (vii) Financial Statement Schedules. |
+ Management contract or compensatory plan or arrangement.
-139-
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE HANOVER INSURANCE GROUP, INC. | ||||
Registrant | ||||
Date: February 28, 2012 | By: | /S/ FREDERICK H. EPPINGER, JR. | ||
Frederick H. Eppinger, Jr., | ||||
President, Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 28, 2012 |
By: | /S/ FREDERICK H. EPPINGER, JR. | ||
Frederick H. Eppinger, Jr., | ||||
President, Chief Executive Officer and Director | ||||
Date: February 28, 2012 |
By: | /S/ DAVID B. GREENFIELD | ||
David B. Greenfield, | ||||
Executive Vice President, Chief Financial Officer | ||||
and Principal Accounting Officer | ||||
Date: February 28, 2012 | By: | * | ||
Michael P. Angelini, | ||||
Chairman of the Board | ||||
Date: February 28, 2012 | By: | * | ||
John J. Brennan, | ||||
Director | ||||
Date: February 28, 2012 | By: | * | ||
P. Kevin Condron, | ||||
Director | ||||
Date: February 28, 2012 | By: | * | ||
Neal F. Finnegan, | ||||
Director | ||||
Date: February 28, 2012 | By: | * | ||
David J. Gallitano, | ||||
Director | ||||
Date: February 28, 2012 | By: | * | ||
Wendell J. Knox, | ||||
Director | ||||
Date: February 28, 2012 | By: | * | ||
Robert J. Murray, | ||||
Director | ||||
Date: February 28, 2012 | By: | * | ||
Joseph R. Ramrath, | ||||
Director | ||||
Date: February 28, 2012 | By: | * | ||
Harriet T. Taggart, | ||||
Director | ||||
Date: February 28, 2012 | *By: | /S/ DAVID B. GREENFIELD | ||
David B. Greenfield, | ||||
Attorney-in-fact |
-140-
THE HANOVER INSURANCE GROUP, INC.
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2011 | ||||||||||||
(in millions) |
||||||||||||
Type of investment |
Cost (1) | Value | Amount at which shown in the balance sheet |
|||||||||
Fixed maturities: |
||||||||||||
Bonds: |
||||||||||||
United States Government and agencies and authorities |
$ | 827.8 | $ | 867.7 | $ | 867.7 | ||||||
States, municipalities and political subdivisions |
963.6 | 1,027.1 | 1,027.1 | |||||||||
Foreign governments |
126.3 | 126.3 | 126.3 | |||||||||
Public utilities |
507.1 | 546.7 | 546.7 | |||||||||
All other corporate bonds |
3,311.9 | 3,445.0 | 3,445.0 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturities |
5,736.7 | 6,012.8 | 6,012.8 | |||||||||
|
|
|
|
|
|
|||||||
Equity securities: |
||||||||||||
Common stocks: |
||||||||||||
Public utilities |
59.6 | 65.1 | 65.1 | |||||||||
Banks, trust and insurance companies |
14.9 | 14.5 | 14.5 | |||||||||
Industrial, miscellaneous and all other |
132.8 | 132.6 | 132.6 | |||||||||
Nonredeemable preferred stocks |
32.6 | 34.2 | 34.2 | |||||||||
|
|
|
|
|
|
|||||||
Total equity securities |
239.9 | 246.4 | 246.4 | |||||||||
|
|
|
|
|
|
|||||||
Mortgage loans on real estate |
4.7 | XXXXX | 4.7 | |||||||||
Real estate |
22.8 | XXXXX | 22.8 | |||||||||
Other long-term investments (2) |
159.8 | XXXXX | 162.7 | |||||||||
Short-term investments |
272.0 | XXXXX | 271.9 | |||||||||
|
|
|
|
|
|
|||||||
Total investments |
$ | 6,435.9 | XXXXX | $ | 6,721.3 | |||||||
|
|
|
|
|
|
(1) | For equity securities, represents original cost, and for fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums and accretion of discounts. |
(2) | The cost of other long-term investments differs from the carrying value due to market value changes in the Companys equity ownership of limited partnership investments. |
-141-
THE HANOVER INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF INCOME
For the Years Ended December 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Revenues |
||||||||||||
Net investment income |
$ | 10.5 | $ | 12.2 | $ | 16.5 | ||||||
Net realized investment gains (losses): |
||||||||||||
Net realized gains from sales and other |
8.7 | 0.6 | 7.7 | |||||||||
Net other-than-temporary impairment losses on investments recognized in earnings |
| (0.3 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Total net realized investment gains |
8.7 | 0.3 | 7.7 | |||||||||
Interest income from loan to subsidiary |
10.5 | | | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
29.7 | 12.5 | 24.2 | |||||||||
|
|
|
|
|
|
|||||||
Expenses |
||||||||||||
Interest expense |
41.3 | 35.7 | 31.8 | |||||||||
Employee benefit related expenses |
6.9 | 6.9 | 16.4 | |||||||||
Gain (loss) from retirement of debt |
2.6 | 2.0 | (34.5 | ) | ||||||||
Loss on derivative instruments |
11.3 | | | |||||||||
Costs related to acquired businesses |
16.4 | | | |||||||||
Other operating expenses |
5.5 | 3.9 | 6.9 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
84.0 | 48.5 | 20.6 | |||||||||
|
|
|
|
|
|
|||||||
Net income (loss) before income taxes and equity in income of unconsolidated subsidiaries |
(54.3 | ) | (36.0 | ) | 3.6 | |||||||
Federal income tax benefit |
31.1 | 25.1 | 7.4 | |||||||||
Equity in income of unconsolidated subsidiaries |
55.1 | 163.8 | 176.5 | |||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
31.9 | 152.9 | 187.5 | |||||||||
Income from discontinued operations (net of income tax benefit (expense) of $2.8, $0.2 and $(1.5) in 2011, 2010 and 2009) |
5.2 | 1.9 | 9.7 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 37.1 | $ | 154.8 | $ | 197.2 | ||||||
|
|
|
|
|
|
The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.
-142-
SCHEDULE II (CONTINUED)
THE HANOVER INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
BALANCE SHEETS
December 31 |
2011 | 2010 | ||||||
(in millions, except per share data) | ||||||||
Assets |
||||||||
Fixed maturitiesat fair value (amortized cost of $189.3 and $372.7) |
$ | 196.9 | $ | 380.6 | ||||
Equity securitiesat fair value (cost of $1.0) |
1.0 | 1.0 | ||||||
Cash and cash equivalents |
8.9 | 66.6 | ||||||
Investment in unconsolidated subsidiaries |
2,642.3 | 2,477.3 | ||||||
Net receivable from subsidiaries |
15.8 | 12.6 | ||||||
Deferred federal income tax asset |
19.2 | | ||||||
Current federal income tax receivable |
18.5 | 4.6 | ||||||
Loan receivable from subsidiary |
310.5 | | ||||||
Other assets |
16.3 | 14.2 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,229.4 | $ | 2,956.9 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Expenses and state taxes payable |
$ | 31.4 | $ | 28.8 | ||||
Deferred federal income tax liability |
| 6.8 | ||||||
Interest payable |
9.6 | 10.9 | ||||||
Debt |
678.6 | 449.9 | ||||||
|
|
|
|
|||||
Total liabilities |
719.6 | 496.4 | ||||||
|
|
|
|
|||||
Shareholders Equity |
||||||||
Preferred stock, par value $0.01 per share, 20.0 million shares authorized, none issued |
| | ||||||
Common stock, par value $0.01 per share, 300.0 million shares authorized, 60.5 million shares issued |
0.6 | 0.6 | ||||||
Additional paid-in capital |
1,784.8 | 1,796.5 | ||||||
Accumulated other comprehensive income |
210.4 | 136.7 | ||||||
Retained earnings |
1,237.1 | 1,246.8 | ||||||
Treasury stock at cost (15.9 million and 15.6 million shares) |
(723.1 | ) | (720.1 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
2,509.8 | 2,460.5 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 3,229.4 | $ | 2,956.9 | ||||
|
|
|
|
The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.
-143-
SCHEDULE II (CONTINUED)
THE HANOVER INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
For the Years Ended December 31 |
2011 | 2010 | 2009 | |||||||||
(in millions) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 37.1 | $ | 154.8 | $ | 197.2 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||||||
Gain on disposal of discontinued operations |
(5.2 | ) | (1.8 | ) | (9.7 | ) | ||||||
Loss (gain) from retirement of debt |
2.6 | 2.0 | (34.5 | ) | ||||||||
Equity in net income of unconsolidated subsidiaries |
(55.1 | ) | (163.8 | ) | (176.5 | ) | ||||||
Net realized investment gains |
(8.7 | ) | (0.3 | ) | (7.7 | ) | ||||||
Loss on derivative instruments |
11.3 | | | |||||||||
Dividends received from (contributions paid to) unconsolidated subsidiaries |
1.6 | (0.6 | ) | (83.7 | ) | |||||||
Deferred federal income tax (benefit) expense |
(3.4 | ) | 104.3 | 5.6 | ||||||||
Change in expenses and taxes payable |
(11.7 | ) | (8.2 | ) | (41.4 | ) | ||||||
Change in net payable from subsidiaries |
(0.5 | ) | 8.7 | 7.1 | ||||||||
Other, net |
2.3 | (0.7 | ) | 2.7 | ||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by operating activities |
(29.7 | ) | 94.4 | (140.9 | ) | |||||||
|
|
|
|
|
|
|||||||
Cash flows from investing activities |
||||||||||||
Proceeds from disposals and maturities of available-for-sale fixed maturities |
436.3 | 177.3 | 469.3 | |||||||||
Purchase of available-for-sale fixed maturities |
(148.7 | ) | (167.4 | ) | (278.4 | ) | ||||||
Purchase of equity securities |
| (1.0 | ) | | ||||||||
Net cash (used for) provided by business acquisitions |
(468.4 | ) | (29.5 | ) | 1.5 | |||||||
Proceeds from sale of FAFLIC |
| | 105.8 | |||||||||
Net cash provided by the sale of AIX Holdings, Inc. to Hanover Insurance |
| | 64.9 | |||||||||
Net cash provided by the sale of assets to Hanover Insurance |
| | 38.9 | |||||||||
Net payments related to swap agreements |
(1.9 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by investing activities |
(182.7 | ) | (20.6 | ) | 402.0 | |||||||
|
|
|
|
|
|
|||||||
Cash flow from financing activities |
||||||||||||
Proceeds from debt borrowings |
296.0 | 198.0 | | |||||||||
Repurchases of debt |
(72.1 | ) | (38.5 | ) | (125.9 | ) | ||||||
Dividends paid to shareholders |
(50.9 | ) | (47.2 | ) | (37.5 | ) | ||||||
Treasury stock purchased at cost |
(21.7 | ) | (134.7 | ) | (148.1 | ) | ||||||
Exercise of options |
3.9 | 12.0 | 3.1 | |||||||||
Other financing activities |
(0.5 | ) | | 0.1 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by (used in) financing activities |
154.7 | (10.4 | ) | (308.3 | ) | |||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
(57.7 | ) | 63.4 | (47.2 | ) | |||||||
Cash and cash equivalents, beginning of year |
66.6 | 3.2 | 50.4 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, end of year |
$ | 8.9 | $ | 66.6 | $ | 3.2 | ||||||
|
|
|
|
|
|
Dividends received from unconsolidated subsidiaries reflect cash payments made to the parent company for dividends. Investment assets of $97.8 million, $69.4 million and $136.1 million were also transferred to the parent company in 2011, 2010 and 2009, respectively, to settle dividend balances.
The condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto.
-144-
THE HANOVER INSURANCE GROUP, INC.
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 2011 | ||||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Segments |
Deferred policy acquisition costs |
Future policy benefits, losses, claims and loss expenses |
Unearned premiums |
Other policy claims and benefits payable |
Premium revenue |
Net investment income |
Benefits, claims, losses and settlement expenses |
Amortization o f deferred policy acquisition costs |
Other operating expenses |
Premiums written |
||||||||||||||||||||||||||||||
Commercial, Personal and Other Property and Casualty |
$ | 362.2 | $ | 3,424.5 | $ | 1,588.9 | $ | 3.0 | $ | 3,092.3 | $ | 241.3 | $ | 2,237.6 | $ | 733.3 | $ | 358.7 | $ | 3,164.6 | ||||||||||||||||||||
Chaucer |
136.2 | 2,332.8 | 703.2 | | 506.3 | 16.9 | 313.2 | 120.7 | 72.7 | 428.8 | ||||||||||||||||||||||||||||||
Interest on Debt |
| | | | | | | | 55.0 | | ||||||||||||||||||||||||||||||
Eliminations |
| | | | | | | | (5.2 | ) | | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 498.4 | $ | 5,757.3 | $ | 2,292.1 | $ | 3.0 | $ | 3,598.6 | $ | 258.2 | $ | 2,550.8 | $ | 854.0 | $ | 481.2 | $ | 3,593.4 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2010 | ||||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Segments |
Deferred policy acquisition costs |
Future policy benefits, losses, claims and loss expenses |
Unearned premiums |
Other policy claims and benefits payable |
Premium revenue |
Net investment income |
Benefits, claims, losses and settlement expenses |
Amortization of deferred policy acquisition costs |
Other operating expenses |
Premiums written |
||||||||||||||||||||||||||||||
Commercial, Personal and Other Property and Casualty |
$ | 345.3 | $ | 3,275.8 | $ | 1,520.3 | $ | 1.9 | $ | 2,841.0 | $ | 247.2 | $ | 1,856.3 | $ | 669.0 | $ | 374.1 | $ | 3,048.0 | ||||||||||||||||||||
Interest on Debt |
| | | | | | | | 44.3 | | ||||||||||||||||||||||||||||||
Eliminations |
| | | | | | | | (4.6 | ) | | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 345.3 | $ | 3,275.8 | $ | 1,520.3 | $ | 1.9 | $ | 2,841.0 | $ | 247.2 | $ | 1,856.3 | $ | 669.0 | $ | 413.8 | $ | 3,048.0 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, 2009 | ||||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Segments |
Deferred policy acquisition costs |
Future policy benefits, losses, claims and loss expenses |
Unearned premiums |
Other policy claims and benefits payable |
Premium revenue |
Net investment income |
Benefits, claims, losses and settlement expenses |
Amortization of deferred policy acquisition costs |
Other operating expenses |
Premiums written |
||||||||||||||||||||||||||||||
Commercial, Personal and Other Property and Casualty |
$ | 286.3 | $ | 3,152.1 | $ | 1,300.5 | $ | 1.8 | $ | 2,546.4 | $ | 251.7 | $ | 1,639.2 | $ | 581.3 | $ | 346.1 | $ | 2,608.7 | ||||||||||||||||||||
Interest on Debt |
| | | | | 0.4 | | | 35.5 | | ||||||||||||||||||||||||||||||
Eliminations |
| | | | | | | | (4.4 | ) | | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 286.3 | $ | 3,152.1 | $ | 1,300.5 | $ | 1.8 | $ | 2,546.4 | $ | 252.1 | $ | 1,639.2 | $ | 581.3 | $ | 377.2 | $ | 2,608.7 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-145-
THE HANOVER INSURANCE GROUP, INC.
REINSURANCE
DECEMBER 31 |
||||||||||||||||||||
(in millions) | ||||||||||||||||||||
Gross amount |
Ceded to other companies |
Assumed from other companies |
Net amount |
Percentage of amount assumed to net |
||||||||||||||||
2011 (1) |
||||||||||||||||||||
Premiums: |
||||||||||||||||||||
Property and casualty insurance |
$ | 3,695.2 | $ | 539.2 | $ | 442.6 | $ | 3,598.6 | 12.30 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2010 (2) |
||||||||||||||||||||
Premiums: |
||||||||||||||||||||
Property and casualty insurance |
$ | 2,970.6 | $ | 304.4 | $ | 174.8 | $ | 2,841.0 | 6.15 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2009 |
||||||||||||||||||||
Premiums: |
||||||||||||||||||||
Property and casualty insurance |
$ | 2,824.3 | $ | 291.7 | $ | 13.8 | $ | 2,546.4 | 0.54 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Activity for 2011 includes results of Chaucer Holdings plc from July 1, 2011 to December 31, 2011. |
(2) | The increase in assumed reinsurance activity in 2010 primarily related to the OneBeacon renewal rights transaction. |
-146-
THE HANOVER INSURANCE GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31 |
||||||||||||||||||||
(in millions) | ||||||||||||||||||||
Additions | ||||||||||||||||||||
Description |
Balance
at beginning of period |
Charged to costs and expenses |
Charged
to other accounts(1) |
Deductions | Balance at end of period |
|||||||||||||||
2011 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 3.6 | $ | 10.1 | $ | | $ | 11.4 | $ | 2.3 | ||||||||||
Allowance for uncollectible reinsurance recoverables |
2.3 | 2.2 | 11.9 | | 16.4 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
$ | 5.9 | $ | 12.3 | $ | 11.9 | $ | 11.4 | $ | 18.7 | |||||||||||
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|
|
|
|
|
|
|
|||||||||||
2010 | ||||||||||||||||||||
Allowance for doubtful accounts |
$ | 3.9 | $ | 7.8 | $ | | $ | 8.1 | $ | 3.6 | ||||||||||
Allowance for uncollectible reinsurance recoverables |
2.5 | | | 0.2 | 2.3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 6.4 | $ | 7.8 | $ | | $ | 8.3 | $ | 5.9 | |||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
2009 | ||||||||||||||||||||
Allowance for doubtful accounts |
$ | 5.0 | $ | 7.4 | $ | | $ | 8.5 | $ | 3.9 | ||||||||||
Allowance for uncollectible reinsurance recoverables |
2.5 | | | | 2.5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 7.5 | $ | 7.4 | $ | | $ | 8.5 | $ | 6.4 | |||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Amount charged to other accounts represents the allowance for uncollectible reinsurance recoverables acquired from Chaucer Holdings plc on July 1, 2011. |
-147-
THE HANOVER INSURANCE GROUP, INC.
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31 |
||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Affiliation with Registrant |
Deferred policy acquisition costs |
Reserves for unpaid claims and claim adjustment expenses (1) |
Discount, if any, deducted from previous column (2) |
Unearned premiums (1) |
Earned premiums |
Net investment income |
||||||||||||||||||
Consolidated Property and Casualty Subsidiaries |
||||||||||||||||||||||||
2011 |
$ | 498.4 | $ | 5,760.3 | $ | | $ | 2,292.1 | $ | 3,598.6 | $ | 258.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
2010 |
$ | 345.3 | $ | 3,277.7 | $ | | $ | 1,520.3 | $ | 2,841.0 | $ | 247.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
2009 |
$ | 286.3 | $ | 3,153.9 | $ | | $ | 1,300.5 | $ | 2,546.4 | $ | 251.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Claims and claim adjustment expenses incurred related to |
Amortization of deferred policy acquisition costs |
Paid claims and claim adjustment expenses |
Premiums written |
|||||||||||||||||
Current year |
Prior years |
|||||||||||||||||||
2011 |
$ | 2,654.1 | $ | (103.3 | ) | $ | 854.0 | $ | 2,492.7 | $ | 3,593.4 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2010 |
$ | 1,967.4 | $ | (111.1 | ) | $ | 669.0 | $ | 1,818.0 | $ | 3,048.0 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2009 |
$ | 1,794.5 | $ | (155.3 | ) | $ | 581.3 | $ | 1,760.4 | $ | 2,608.7 | |||||||||
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|
|
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|
|
(1) | Reserves for unpaid claims and claim adjustment expenses are shown gross of $1,931.8 million, $1,115.5 million and $1,060.2 million of reinsurance recoverable on unpaid losses in 2011, 2010 and 2009, respectively. Unearned premiums are shown gross of prepaid premiums of $234.9 million, $77.0 million and $70.4 million in 2011, 2010 and 2009, respectively. Reserves for unpaid claims and claims adjustment expense also include policyholder dividends. |
(2) | The Company does not use discounting techniques. |
-148-
Exhibit 10.38
THE HANOVER INSURANCE GROUP CASH BALANCE
PENSION PLAN
PART I
(As amended and restated generally effective January 1, 2010)
Part I
THE HANOVER INSURANCE GROUP CASH BALANCE
PENSION PLAN
PART I
TABLE OF CONTENTS
PAGE | ||||||
ARTICLE I NAME, PURPOSE AND EFFECTIVE DATE OF PLAN |
1 | |||||
1.01 |
General Statement. | 1 | ||||
1.02 |
Name of Plan. | 1 | ||||
1.03 |
Purpose. | 2 | ||||
1.04 |
Restated Plan Effective Date. | 2 | ||||
ARTICLE II DEFINITIONS |
2 | |||||
ARTICLE III PARTICIPATION REQUIREMENTS |
21 | |||||
3.01 |
Participation Requirements. | 21 | ||||
3.02 |
Classification Changes. | 22 | ||||
3.03 |
Participant Cooperation, Participant Refusal. | 23 | ||||
ARTICLE IV PARTICIPANT ACCOUNTS |
23 | |||||
4.01 |
Establishment of Accounts. | 23 | ||||
4.02 |
Allocations to Accounts. | 23 | ||||
4.03 |
Adjustments of Accounts. | 23 | ||||
4.04 |
Distributions. | 24 | ||||
ARTICLE V EMPLOYER CONTRIBUTIONS |
24 | |||||
5.01 |
Employer Contributions. | 24 | ||||
5.02 |
Payment of Contributions to Trustee. | 25 | ||||
5.03 |
Receipt of Contributions by Trustee. | 25 | ||||
ARTICLE VI RETIREMENT AND DISABILITY BENEFITS |
25 | |||||
6.01 |
Normal Retirement Benefit. | 25 | ||||
6.02 |
Early Retirement Benefit. | 26 | ||||
6.03 |
Subsidized Early Retirement Benefit. | 27 | ||||
6.04 |
Late Retirement Benefit. | 30 | ||||
6.05 |
Disability Benefit. | 31 | ||||
6.06 |
Distribution of Benefits. | 32 | ||||
6.07 |
Qualified Joint and Survivor Annuity for Married Participants. | 34 | ||||
6.08 |
Supplementary Pension Benefits. | 36 | ||||
6.09 |
Suspension of Retirement Benefits. | 38 | ||||
6.10 |
Rollovers to Other Qualified Plans. | 39 | ||||
ARTICLE VII DEATH BENEFITS |
41 | |||||
7.01 |
Pre-Retirement Death Benefits. | 41 | ||||
7.02 |
Death Benefits for Certain Dependent Spouses (Applicable only to certain Employees entitled to Special Grandfathered Benefits). |
44 | ||||
ARTICLE VIII BENEFITS UPON TERMINATION FROM SERVICE |
46 | |||||
8.01 |
In General. | 46 |
Part I
8.02 |
Termination Benefits. | 46 | ||||
8.03 |
Forfeitures. | 48 | ||||
8.04 |
Resumption of Service. | 48 | ||||
8.05 |
Service with Affiliates. | 48 | ||||
8.06 |
Distribution of Benefits. | 48 | ||||
8.07 |
Cash Out Repayment Option. | 49 | ||||
8.08 |
Early Retirement Election. | 49 | ||||
8.09 |
Amendment to Vesting Schedule. | 49 |
Part I
ARTICLE I
NAME, PURPOSE AND EFFECTIVE DATE OF PLAN
1.01 | General Statement. The Hanover Insurance Group Cash Balance Pension Plan (the Plan) consists of three parts, Part I, Part II and Part III. Part I of the Plan provides a cash balance and pension benefit, which was formerly provided under a plan known as The Allmerica Financial Cash Balance Pension Plan. Part II of the Plan provides a pension benefit, which was formerly provided under a plan known as The Allmerica Financial Agents Pension Plan. Part III of the Plan contains provisions applicable to each of Part I and Part II. |
The provisions of Part III of the Plan shall override any provision of Part I and or Part II of the Plan as provided in Part III of the Plan.
The benefits payable to eligible Participants under Part I of the Plan are governed by the terms and conditions of Part I of the Plan and Part III of the Plan. The definitions of terms as used in this Part I of the Plan are as set forth in Article II, except as otherwise provided in this Article I.
1.02 | Name of Plan. The prior version of this Part I of the Plan, known as The Allmerica Financial Cash Balance Pension Plan, generally effective January 1, 1997 (The Allmerica Cash Balance Plan), was an amendment and restatement of the State Mutual Companies Pension Plan. It was adopted by First Allmerica Financial Life Insurance Company (First Allmerica) and its affiliates, Citizens Insurance Company (Citizens) and The Hanover Insurance Company (Hanover). Effective January 1, 1995, the State Mutual Companies Pension Plan added a cash balance benefit. Effective December 31, 1994, benefit accruals provided under the integrated unit credit benefit formula of the State Mutual Companies Pension Plan were frozen for all Participants, except Participants eligible for certain continuing benefit accruals. Certain other accruals and benefits under this Part I of the Plan were subsequently frozen as provided in this Part I. |
Prior versions of this Part I of the Plan were sponsored by First Allmerica, formerly known as State Mutual Life Assurance Company of America, from January 1, 1941 to December 31, 2007. Effective January 1, 2008, this Part I of the Plan was adopted by Hanover, an Affiliate of First Allmerica, as the sole Employer. Effective January 1, 1992, a prior version of this Part I of the Plan was merged with The Allmerica Financial Agents Pension Plan (formerly known as the State Mutual Agents Pension Plan) (the Agents Pension Plan).
Benefits payable under the Agents Pension Plan are set forth in Part II of the Plan. Parts I and II of the Plan are permissively aggregated for purposes of the qualification and non-discrimination requirements applicable to the Plan under Sections 401 and 410 of the Internal Revenue Code.
Part I - 1
1.03 | Purpose. The Plan has been established for the exclusive benefit of Participants and their Beneficiaries and as far as possible shall be interpreted and administered in a manner consistent with this intent and consistent with the requirements of Section 401 of the Internal Revenue Code. |
Subject to Article IV of Part III of the Plan (Limitations on Benefits) and to Section 10.04 of Part III of the Plan, which relates to the return of Employer contributions under special circumstances, until such time as the Plan has been terminated and all Plan liabilities have been satisfied, under no circumstances shall any assets of the Plan, or any contributions made under the Plan, be used for, or diverted to, purposes other than for the exclusive benefit of the Participants and their Beneficiaries and to defray reasonable expenses incurred in the administration of the Plan.
1.04 | Restated Plan Effective Date. The effective date of this amended and restated Part I of the Plan is January 1, 2010 (except for those provisions of this Part of the Plan which have an alternative effective date). Except to the extent otherwise specifically provided in this Part I of the Plan, (i) the provisions of this amended and restated Part I of the Plan shall apply to a Participant who is in the employ of the Employer on or after January 1, 2010. The rights and benefits of any Participant whose employment with the Employer terminated prior to January 1, 2010 shall be determined in accordance with the provisions of this Part I of the Plan as were in effect at the appropriate time or times prior to January 1, 2010; provided, however, that if the Accrued Benefit of any such Participant has not been completely distributed before January 1, 2010, then such Accrued Benefit shall be accounted for and distributed in accordance with the provisions of this version of Part I of the Plan, but only to the extent that any such provision is not inconsistent with Part III of the Plan and subject to the requirements of applicable law. |
ARTICLE II
DEFINITIONS
All section and article references in this Part I are to section and article references in this Part I, except as otherwise expressly provided.
As used in Parts I, II and III of the Plan, the following words and phrases shall have the meanings set forth in this Part I, unless a different meaning is clearly required by the context or is otherwise provided in Part II and or Part III of the Plan.
2.01 | Accrued Benefit: |
(a) | means, except as provided in (b) below, the sum of (i) the monthly retirement benefit payable as a single life annuity to the Participant beginning on his or her Normal Retirement Date which is the Actuarial Equivalent of the Participants Projected Account Balance, plus (ii) the Participants Grandfathered Benefit, if any. |
(b) | means, with respect to the minimum benefit for Non-Key Employee Participants in a Top Heavy Plan, the sum of such benefits earned by the Participant, which |
Part I - 2
benefits are payable at the Participants Normal Retirement Date and are described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans). |
2.02 | Actuarial Equivalent means a benefit having the same value as the benefit or benefits otherwise payable. Except as otherwise provided in this Section, the present value of any benefit determined under the terms of the Part I of the Plan will be the actuarial equivalent of the no-death benefit life annuity retirement benefit specified in Section 6.01. |
Actuarial Equivalent life annuity settlements of Participant Projected Account Balances or of optional life annuity Top Heavy Plan benefits will be computed utilizing (i) the Code Section 417 Mortality Table and (ii) the Code Section 417 Interest Rate for determining the amount payable to a Participant having an annuity starting date on or after January 1, 2004.
Optional life annuity settlements of Grandfathered Benefits will be computed utilizing the 1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. Adjustment factors used to determine optional forms of Grandfathered Benefits are included in Exhibit A, attached hereto and made a part of Part I of the Plan.
Adjustment factors for optional Grandfathered Benefits not illustrated will be computed on an actuarial basis consistent with that used in computing the factors shown in Exhibit A.
The present value (including, but not limited to, for purposes of Section 7.01(a)(i)(B), Section 7.01(a)(ii)(B) and determining eligibility for cashout distributions under Section 8.02) and the amount of any cash distribution of a Grandfathered Benefit or a benefit for Non-Key Employee Participants in a Top Heavy Plan shall be determined on the basis of (i) the mortality rates specified above and an interest rate of 7% per annum, or (ii) the Code Section 417 Mortality Table and the Code Section 417 Interest Rate (or for determining the amount payable to a Participant having an annuity starting date on and after January 1, 2008, the Code Section 417 Applicable Interest Rate), whichever produces the greater benefit.
The preceding paragraphs shall not apply to the extent they would cause the Plan to fail to satisfy the requirements of Article IV of Part III of the Plan (Limitations on Benefits) or Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).
For purposes of the Part I of the Plan, (a) the Code Section 417 Mortality Table means the applicable mortality table prescribed by the Secretary of the Treasury pursuant to Code section 417(e)(3), as in effect from time to time, provided, however, that notwithstanding the preceding provisions of this paragraph, for distributions commencing on or after December 31, 2002 and prior to January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2001-62 and for purposes of determining the amount payable to a Participant with an annuity starting date on or after
Part I - 3
January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2007-67 or such other Table as may be prescribed by the Secretary of the Treasury pursuant to Code Section 417(e)(3); (b) for periods beginning on and after January 1, 2004, the Code Section 417 Interest Rate means, for the Plan Year which contains the annuity starting date for the distribution, the annual rate of interest on 30-year Treasury securities in effect for the second month immediately preceding the first day of the Plan Year (e.g., November 2009 for the 2010 Plan Year), and (c) for periods beginning on and after January 1, 2008, the Code Section 417 Applicable Interest Rate means, for the Plan Year which contains the annuity starting date for the distribution, the applicable interest rate described by Code section 417(e) after its amendment by the Pension Protection Act of 2006, which rate more specifically shall be the adjusted first, second, and third segment rates applied under rules similar to the rules of Code section 430(h)(2)(C) for the lookback month used to determine the previously applicable interest rate on 30-year Treasury securities (e.g., November 2009 for the 2010 Plan Year) or for such other time as the Secretary of the Treasury may by regulations prescribe. For purposes of determining the Code Section 417 Applicable Interest Rate, the first, second, and third segment rates are the first, second, and third segment rates which would be determined under Code section 430(h)(2)(C) if:
(i) | Code section 430(h)(2)(D) were applied by substituting the average yields for the month described in clause (ii) below for the average yields for the 24-month period described in such Code section, and |
(ii) | Code section 430(h)(2)(G)(i)(II) were applied by substituting Section 417(e)(3)(A)(ii)(II) for Section 412(b)(5)(B)(ii)(II), and |
(iii) | The applicable percentage under Code section 430(h)(2)(G) is treated as being 20% in 2008, 40% in 2009, 60% in 2010, and 80% in 2011. |
2.03 | (a) | Affiliate means any incorporated Career Agent of an Employer and corporation affiliated with the Employer through the action of such corporations board of directors and the Employers Board of Directors. |
(b) | Affiliate also means: |
(i) | Any corporation or corporations which together with the Employer constitute a controlled group of corporations or an affiliated service group, as described in Sections 414 (b) and 414 (m) of the Internal Revenue Code as now enacted or as later amended and in regulations promulgated thereunder; and |
(ii) | Any partnerships or proprietorships under the common control of the Employer. |
2.04 | Age means, except for purposes of determining lump sum cash distributions and optional life annuity benefits, the age of a person at his or her last birthday. Lump sum cash distributions and optional life annuity benefits will be determined on the basis of a persons age nearest birthday. |
Part I - 4
2.05 | Allocation means an amount equal to the percentage of a Participants Eligible Compensation specified below for each of the Plan Years commencing on or after January 1, 1995 and prior to January 1, 2005. |
Plan Year | Percentage | |
1995 |
7% | |
1996 |
7% | |
1997 |
7% | |
1998 |
7% | |
1999 |
7% | |
2000 |
7% | |
2001 |
5% | |
2002 |
3% | |
2003 |
5% | |
2004 |
5.5% |
An Employee will not receive more than one Allocation for any Plan Year with respect to the same Compensation.
2.06 | Annuity Commencement Date means the date as of which a benefit commences under the Plan. |
2.07 | Beneficiary means the person, trust, organization or estate designated to receive Plan benefits payable on or after the death of a Participant. |
2.08 | Compensation means: |
(a) | For purposes of determining a Participants Allocation specified in Section 4.02, the total wages or salary, overtime, bonuses, and any other taxable remuneration paid to an Employee by the Employer during the Plan Year, while the Employee is a Participant, as reported on the Participants W-2 for the Plan Year; provided, however, that Compensation for this purpose shall be determined without reduction for (i) any Code Section 401(k) salary reduction contributions contributed on the Participants behalf for the Plan Year to any defined contribution plan sponsored by the Employer and (ii) the amount of any salary reduction contributions contributed on the Participants behalf for the Plan Year to any Code Section 125 plan sponsored by the Employer. |
Part I - 5
Notwithstanding the above, Compensation for the above purpose shall not include:
(i) | incentive compensation paid to Participants pursuant to the Employers Executive Long Term Performance Unit Plan or pursuant to any similar or successor executive compensation plan; |
(ii) | Employer contributions to a deferred compensation plan or arrangement (other than salary reduction contributions to a Code Section 401(k) or 125 plan, as described above) either for the year of deferral or for the year included in the Participants gross income; |
(iii) | any income which is received by or on behalf of a Participant in connection with the grant, receipt, settlement, exercise, lapse of risk of forfeiture or restriction on transferability, or disposition of any stock option, stock award, stock grant, stock appreciation right or similar right or award granted under any plan, now or hereafter in effect, of the Employer or any successor to the Employer, the Employers parent, any such successors parent, any subsidiaries or affiliates of the Employer, or any stock or securities underlying any such option, award, grant or right; |
(iv) | severance payments paid in a lump sum; |
(v) | Code Section 79 imputed income or long term disability and workers compensation benefit payments; |
(vi) | taxable moving expense allowances or taxable tuition or other educational reimbursements; |
(vii) | for Plan Years commencing after December 31, 1998, compensation paid in the form of commissions; |
(viii) | non-cash taxable benefits provided to executives, including the taxable value of Employer-paid club memberships, chauffeur services and Employer-provided automobiles; and |
(ix) | other taxable amounts received other than cash compensation for services rendered, as determined by the Plan Administrator. |
(b) | For purposes of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and for purposes of Article IV of Part III of the Plan (Limitations on Benefits), the term Compensation means a Participants wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and |
Part I - 6
reimbursements or other expense allowances under a non-accountable plan (as described in Section 1.62-2(c) of the Regulations), and excluding the following: |
(i) | Employer contributions to a plan of deferred compensation which are not includible in the Employees gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; |
(ii) | amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by an Employee becomes freely transferable or is no longer subject to a substantial risk of forfeiture; |
(iii) | amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and |
(iv) | other amounts which receive special tax benefits. |
For Plan Years commencing after December 31, 1997, Compensation for purposes of the Part I of the Plan shall also include Employee elective deferrals under Code Section 402(g)(3), and amounts contributed or deferred by the Employer at the election of the Employee and not includible in the gross income of the Employee, by reason of Code Sections 125, 132(f)(4), 402(e)(3) and 402(h)(1)(B).
Additionally, amounts under Code Section 125 include any amounts not available to a Participant in cash in lieu of group health coverage because the Participant is unable to certify that he or she has other health coverage (deemed Code Section 125 compensation). Such an amount will be treated as an amount under Code Section 125 only if the Employer does not request or collect information regarding the Participants other health coverage as part of the enrollment process for the health plan.
(c) | Notwithstanding (a) and (b) above, for Plan Years beginning on or after January 1, 1994 and prior to January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under Part I of the Plan for any determination period shall not exceed $150,000. This limitation shall be adjusted for inflation by the Secretary under Code Section 401(a)(17)(B) in multiples of $10,000 by applying an inflation adjustment factor and rounding the result down to the next multiple of $10,000 (increases of less than $10,000 are disregarded). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined beginning in such calendar year. |
If Compensation is being determined for a Plan Year that contains fewer than 12 calendar months, then the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12.
Part I - 7
If Compensation for any prior determination period is taken into account in determining a Participants benefits for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual compensation limit in effect for that prior period. For this purpose, in determining benefits in Plan Years beginning on or after January 1, 1989, the annual Compensation limit in effect for determination periods beginning before that date is $200,000. In addition, in determining benefits in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for determination periods beginning before that date is $150,000.
(d) | Notwithstanding (a) and (b) above, the annual Compensation of each Participant taken into account in determining benefit accruals in any Plan Year beginning after December 31, 2001, shall not exceed $200,000. Annual compensation means Compensation during the Plan Year or such other consecutive 12-month period over which Compensation is otherwise determined under the Part I of the Plan (the determination period). For purposes of determining benefit accruals in a Plan Year beginning after December 31, 2001, the annual Compensation for any prior determination period shall be limited to $200,000. |
The $200,000 limit on annual Compensation for determination periods beginning after December 31, 2001 shall be adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to annual Compensation for the determination period that begins with or within such calendar year.
2.09 | Credited Service means and includes all Hours of Service (except excluded Hours described in Subsection 2.23(b), (c), (g) and (h)) completed with the Employer as an eligible Employee on and after the date an Employee becomes a Participant in Part I of the Plan. |
For purposes of the Part I of the Plan, a Participant shall receive a Year of Credited Service for each Plan Year in which he or she completes at least 1,000 Hours of Credited Service; provided that for the Plan Year in which an Employee initially becomes a Participant in Part I of the Plan, such Participant shall receive a Year of Credited Service if he or she completes at least 1,000 Hours of Service in the Plan Year.
A Participant who is absent because of sickness or injury shall receive Credited Service for the period described in Subsections 2.23(b) or (g). Except as provided in Section 6.05, if any such absence continues beyond such period, the Participant shall receive no further Credited Service.
Notwithstanding the rules for determining Credited Service described above:
(i) | Eligible Re-employed Pensioners of First Allmerica, Citizens, Hanover and General Agents of First Allmerica (as each is described in Section 6.09) shall receive no further Credited Service for periods of re-employment following their retirement unless they complete at least 1,000 Hours of Service in a Plan Year. |
Part I - 8
(ii) | If during a Plan Year a Participant is employed by the Employer as a member of an eligible class of Employees and is also employed by an Affiliate, employed as a member of an ineligible class of Employees or employed as a Career Agent or General Agent of First Allmerica, he or she shall receive Credited Service under this Part I of the Plan only for Hours of Service completed while employed as a member of an eligible class of Employees. |
(iii) | For purposes only of determining eligibility for early retirement and eligibility for the Rule of 85 and Rule of 95 subsidized Early Retirement Benefits described in Section 6.02, but not for purposes of computing the amount of benefits payable, Credited Service shall include Hours of Service completed with Craftsman Insurance Company and the Hanover Life Insurance Company, both former affiliates of Hanover, and as a Career Agent or General Agent of First Allmerica. |
2.10 | Determination Date means the date as of which a Participants Accrued Benefit is calculated. |
2.11 | Eligible Compensation means the Compensation taken into account for purposes of determining a Participants Allocation for a Plan Year pursuant to Section 4.02 of the Part I of the Plan. If a Participant is a Participant in Part I of the Plan on the first day of any Plan Year, such Participants Eligible Compensation shall be his or her Compensation for such Plan Year paid while the Participant is employed as a member of an eligible class of Employees. If an Employee becomes a Participant in Part I of the Plan on any day after the first day of a Plan Year, such Participants Eligible Compensation shall be his or her Compensation for such Plan Year paid on and after the date he or she becomes a Participant and while the Participant is employed as a member of an eligible class of Employees. |
2.12 | Eligibility Computation Period means a period of twelve consecutive months commencing on an Employees Employment Commencement Date or, if an Employee does not complete at least 1,000 Hours of Service during such initial period, such Employees Eligibility Computation Period means the Plan Year commencing with the first Plan Year following the Employees Employment Commencement Date and, if necessary, each succeeding Plan Year. |
2.13 | Employee means any employee who is employed by the Employer. |
2.14 | Employer means The Hanover Insurance Company. |
2.15 | Employment Commencement Date means the date on which an Employee first performs an Hour of Service or, in the case of an Employee who has a One-Year Break in Service, the date on which he or she first performs an Hour of Service after such Break. |
2.16 | Fiduciary means any person who (i) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or |
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control respecting management or disposition of its assets; (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so; or (iii) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Plan Administrator. |
2.17 | First Allmerica means First Allmerica Financial Life Insurance Company. |
2.18 | Five Percent Owner means, in the case of a corporation, any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent of the outstanding stock of the Employer or stock possessing more than five percent of the total combined voting power of all stock of the Employer. In the case of an Employer that is not a corporation; Five Percent Owner means any person who owns or under applicable regulations is considered as owning more than five percent of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), and (m) shall be treated as separate employers. |
2.19 | Former Participant means a person who had been an active Participant in Part I or Part II of the Plan (as applicable), but who has ceased to accrue further Credited Service for any reason. |
2.20 | Grandfathered Benefit means either the Basic Grandfathered Benefit or the Special Grandfathered Benefit, as defined below. |
(a) | Basic Grandfathered Benefit means the monthly retirement benefit payable as a single life annuity to an actively employed Participant on his or her Normal Retirement Date, calculated in accordance with the benefit formula set forth in Section 6.01 of Part I of the Plan, as in effect on December 31, 1994. Such benefit shall be calculated based on the Participants Average Monthly Compensation and Credited Service, determined as of December 31, 1994, based on the provisions of Part I of the Plan as in effect on such date. |
(b) | Special Grandfathered Benefit means the monthly retirement benefit payable as a single life annuity to an actively employed Participant on his or her Normal Retirement Date, calculated in accordance with the benefit formula set forth in Section 6.01 of Part I of the Plan, as in effect on December 31, 1994. Such benefit shall be based on the Participants Average Monthly Compensation and Credited Service calculated as of the date of determination, both being determined in accordance with the provisions of Part I of the Plan as in effect on December 31, 1994. The Special Grandfathered Benefit is available only to Participants who were actively employed by the Employer or by an Affiliate and accruing Credited Service on December 31, 1994, whose age on December 31, 1994, when added to two times their Credited Service as of such date (determined in accordance with the provisions of Part I of the Plan as in effect on December 31, 1994), total at least 85. |
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For purposes of this Section actively employed means that the Participant was performing work duties for the Employer or an Affiliate on December 31, 1994 or was then absent by reason of a scheduled day off, paid vacation day, personal day, or sick day or was then absent due to an Employer-approved leave of absence. Additionally, a Participant shall be deemed to have been actively employed on December 31, 1994 if on such date the Participant was then employed by the Employer or by an Affiliate and was then receiving disability benefits under his or her Employers long-term disability benefit plan.
Notwithstanding the above, each Section 401(a)(17) Employees Special Grandfathered Benefit under this Part I of the Plan will be the greater of the Special Grandfathered Benefit determined for the Employee under (i) or (ii) below:
(i) | the Employees Special Grandfathered Benefit, calculated as described above, based on the Employees total Years of Credited Service as of the date of determination; or |
(ii) | the sum of: |
(A) | the Employees Plan Accrued Benefit as of December 31, 1993, frozen in accordance with Section 1.401(a)(4)-13 of the Treasury Regulations, and |
(B) | the Employees Special Grandfathered Benefit determined under the benefit formula applicable for the 1994 Plan Year, as applied to the Employees Years of Credited Service (calculated as of the date of determination in accordance with the provisions of Part I of the Plan as in effect on December 31, 1994) for Plan Years beginning on or after January 1, 1994 and prior to January 1, 2005. |
A Section 401(a)(17) Employee means an Employee whose Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on Compensation for a Year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994, that exceeded $150,000.
Notwithstanding anything in Part I of the Plan to the contrary, if an Employee who is accruing additional Special Grandfathered Benefits ceases to be eligible to accrue further benefits under Part I of the Plan because of termination of employment, retirement, transfer to an ineligible class of Employees, or for any other reason, such Employee shall not be eligible to accrue any additional Special Grandfathered Benefits upon resumption of service as an otherwise eligible Employee of the Employer.
Notwithstanding anything in Part I of the Plan to the contrary, no additional Special Grandfathered Benefits shall accrue for periods after December 31, 2004. Except as provided in the following paragraph, the amount of a Participants
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Special Grandfathered Benefit shall be frozen as of December 31, 2004, with such frozen Special Grandfathered Benefit being calculated based on the Participants Average Monthly Compensation and Credited Service as of the earlier of December 31, 2004 or the date the Participant ceases to be eligible to accrue additional Special Grandfathered Benefits determined in accordance with the provisions of Part I of the Plan as in effect on such date.
If a Participant was eligible to accrue additional Special Grandfathered Benefits as of December 31, 2004 under the provisions of Part I of the Plan in effect on December 31, 2004, the amount of the Participants frozen Special Grandfathered Benefit shall be increased to reflect increases in the cost of living after December 31, 2004 by:
(i) | 5% per annum, compounded annually, for each Plan Year commencing on or after January 1, 2005 and ending on the earlier of (A) the date the Participant commences distribution of his or her Special Grandfathered Benefit or (B) the last day of the month within which the Participant would have completed 35 years of Credited Service (based on the provisions of Part I of the Plan in effect on December 31, 2004) if he or she had remained in continuous employment with the Employer through such date (the Maximum Service Date), and |
(ii) | If the Participant has not commenced receiving distribution of his or her Special Grandfathered Benefit prior to his or her Maximum Service Date, 3% per annum, compounded annually, for each Plan Year commencing after the Participants Maximum Service Date and ending on the date the Participant begins receiving his or her Special Grandfathered Benefit. |
If the Participant commences receiving distribution of his or her Special Grandfathered Benefit as of any date other than the first day of a Plan Year, the cost of living adjustment percentage for such Plan Year shall be determined by multiplying the applicable cost of living adjustment percentage for such year by a fraction the numerator of which is the number of full or partial months from the first day of such Plan Year until the date as of which distribution of the Participants Special Grandfathered Benefit commences and the denominator of which is 12. If a Participant would have completed 35 years of Credited Service on a day other than the last day of the Plan Year, then the cost of living adjustment for such Plan Year shall be determined by multiplying 5% by a fraction the numerator of which is the number of full or partial months from the first day of such Plan Year until the date the Participant would have completed 35 years of Credited Service and the denominator of which is 12. The remaining months of the Plan Year after the Participant would have completed 35 years of Credited Service will be credited with a cost of living adjustment determined by multiplying 3% by a fraction the numerator of which is the remaining full months of such Plan Year and the denominator of which is 12. The foregoing cost of living adjustment provided in this Subsection 2.20(b) shall be applied to each eligible Participants Special Grandfathered Benefit without regard to his or her
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employment status after December 31, 2004. A Participant will not be eligible for this cost of living adjustment if the Participant had ceased accruing additional Special Grandfathered Benefits prior to December 31, 2004 due to the Participants retirement, death or other termination of employment prior to December 31, 2004.
2.21 | Group Annuity Contract means the group annuity contract or contracts issued by the Insurer through which benefits of the Plan are to be funded. |
2.22 | Highly Compensated Employee means any Employee who: |
(a) | was a Five Percent Owner at any time during the Plan Year or the preceding Plan Year; or |
(b) | for the preceding Plan Year: |
(i) | had Compensation from the Employer in excess of $80,000 (as adjusted pursuant to Code Section 414(q)(1)), and |
(ii) | for such preceding Plan Year was in the top-paid group of Employees for such preceding Year. |
For purposes of this Section the top-paid group for a Plan Year is the top 20% of Employees ranked on the basis of Compensation paid during such Year.
In addition to the foregoing, the term Highly Compensated Employee shall also mean any former Employee who separated from service prior to the Plan Year, performs no service for the Employer during the Plan Year, and was an actively employed Highly Compensated Employee in the separation year or any Plan Year ending on or after the date the Employee attained Age 55.
In determining whether an Employee is a Highly Compensated Employee for Plan Years beginning in 1997, the Amendments of Code Section 414(q) stated above are treated as having been in effect for Plan Years beginning in 1996.
For purposes of this Section, Compensation means Compensation determined for purposes of Article IV of Part III of the Plan (Limitations on Benefits) but, for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3) and 402(h)(1)(B).
The determination of who is a Highly Compensated Employee, including the determinations of the numbers and identity of employees in the top-paid group and the Compensation that is considered will be made in accordance with Section 414(q) of the Code and regulations thereunder.
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2.23 | Hour of Service means: |
(a) | Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. For purposes of Part I of the Plan an Employee who is exempt from the requirements of the Fair Labor Standards Act of 1938, as amended, shall be credited with 45 Hours of Service for each complete or partial week he or she would be credited with at least one Hour of Service under this Section 2.23. |
(b) | Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: |
(i) | No more than the number of Hours in one regularly scheduled work year of the Employer shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); |
(ii) | No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable workers compensation, unemployment compensation or disability insurance laws; and |
(iii) | No hours shall be credited under this Subsection (b) for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. |
For purposes of this Subsection (b) a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund or insurer, to which the Employer contributes or pays premium.
(c) | Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties. |
(d) | Special rules for determining Hours of Service under Subsections (b) and (c) for reasons other than the performance of duties. |
In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay, to the extent that such an award or agreement is made with respect to a
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period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows:
(i) | In the case of a payment made or due which is calculated on the basis of units of time (such as hours, days, weeks or months), the number of Hours of Service to be credited for exempt Employees described in Subsection (a) shall be determined as provided in such Subsection. For all other Employees, the Hours of Service to be credited shall be those regularly scheduled hours in such unit of time; provided, however, that when an Employee does not have regularly scheduled hours, such Employee shall be credited with 8 Hours of Service for each workday for which he or she is entitled to be credited with Hours of Service under paragraph (b). |
(ii) | Except as provided in Paragraph (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employees most recent hourly rate of compensation (as determined below) before the period during which no duties are performed. |
(A) | The hourly rate of compensation of Employees paid on an hourly basis shall be the most recent hourly rate of such Employees. |
(B) | In the case of Employees whose compensation is determined on the basis of a fixed rate for specified periods of time (other than hours) such as days, weeks or months, the hourly rate of compensation shall be the Employees most recent rate of compensation for a specified period of time (other than an hour), divided by the number of hours regularly scheduled for the performance of duties during such period of time. The rule described in Paragraph (d)(i) shall also be applied under this subparagraph to Employees without a regular work schedule. |
(C) | In the case of Employees whose compensation is not determined on the basis of a fixed rate for specified periods of time, the Employees hourly rate of compensation shall be the lowest hourly rate of compensation paid to Employees in the same job classification as that of the Employee or, if no Employees in the same job classification have an hourly rate, the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended. |
(iii) | Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such employee would have been credited but for such absence. |
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(e) | Crediting of Hours of Service to computation periods. |
(i) | Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed. |
(ii) | Hours of Service described in Subsection (b) shall be credited as follows: |
(A) | Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as hours, days, weeks or months) shall be credited to the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates. |
(B) | Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established by the Employer, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined. |
(iii) | Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made. |
(f) | For purposes only of determining participation and vesting under Part I of the Plan, Hours of Service shall include periods of service calculated in accordance with the rules set forth in the other Subsections of this Section 2.23: |
(i) | with the Employer in a job or position in which the Employee was not eligible to participate in this Part I of the Plan; or |
(ii) | as a Career Agent or General Agent of First Allmerica; |
(iii) | for periods prior to January 1, 1998, with Citizens, Hanover or as an employee of a General Agent of First Allmerica; |
(iv) | with Financial Profiles, Inc., or Advantage Insurance Network, Affiliates of First Allmerica, including periods of service completed prior to the date it became an Affiliate; or |
(v) | with an Affiliate. |
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(g) | Rules for Non-Paid Leaves of Absence. For purposes of Part I of the Plan, a Participant will also be credited with Hours of Service during any non-paid leave of absence granted by the Employer. Except as provided in Subsection (a) for exempt Employees, the number of Hours of Service to be credited under this Subsection (g) shall be the number of regularly scheduled working hours in each workday during the leave of absence; provided, however, that no more than the number of Hours in one regularly scheduled work year of the Employer will be credited for each non-paid leave of absence. In the case of a non-exempt Employee without a regular work schedule, the number of Hours to be credited shall be based on a 40 hour work week and an 8 hour workday. Hours of Service described in this Subsection (g) shall be credited to the Employee for the computation period or periods during which the leave of absence occurs. |
Notwithstanding the foregoing, for Plan Years beginning after December 31, 1998, all Employees (exempt and non-exempt) shall be credited with 8 Hours of Service for each workday for which they are entitled to be credited with Hours of Service for a non-paid leave of absence pursuant to this Subsection (g).
(h) | Rules for Maternity or Paternity Leaves of Absence. In addition to the foregoing rules and solely for purposes of determining whether a One Year Break in Service for participation and vesting purposes has occurred in a computation period, an individual who is absent for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence. Provided, however, that: |
(i) | Hours shall not be credited under both this paragraph (h) and one of the other paragraphs of this Section 2.23; |
(ii) | no more than 501 Hours shall be credited for each maternity or paternity absence; and |
(iii) | if a maternity or paternity leave extends beyond one Plan Year, the Hours shall be credited to the Plan Year in which the absence begins to the extent necessary to prevent a One Year Break in Service, otherwise such Hours shall be credited to the following Plan Year. |
For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of a birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.
(i) | Other Federal Law. Nothing in this Section 2.23 shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation issued under any such law. |
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2.24 | Insurer means First Allmerica. |
2.25 | Internal Revenue Code or Code means the Internal Revenue Code of 1986, as amended, and any future Internal Revenue Code or similar Internal Revenue laws. |
2.26 | Key Employee. In determining whether the Plan (in the aggregate, including Parts I, II, and III) is top-heavy for Plan Years beginning after December 31, 2001, Key Employee means any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date is: (a) an officer of the Employer (as that term is defined within the meaning of Code Section 416 and the regulations thereunder) having an annual Compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), a (b) Five Percent Owner, or (c) a 1-percent owner of the Employer having an annual Compensation of more than $150,000. In determining whether a Plan is top heavy for Plan Years beginning before January 1, 2002, Key Employee means any Employee or former Employee (including any deceased Employee) who at any time during the 5-year period ending on the determination date, is (i) an officer of the Employer (as that term is defined within the meaning of Code Section 416 and the regulations thereunder) having an annual Compensation that exceeds 50 percent of the dollar limitation under Code Section 415(b)(1)(A), (ii) an owner (or an individual considered an owner under Code Section 318) of one of the ten largest interests in the Employer if such individuals Compensation exceeds 100 percent of the dollar limitation under Code Section 415(c)(1)(A), (ii) a Five Percent Owner, or (iv) a 1-percent owner of the Employer who has an annual Compensation of more than $150,000. |
The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Internal Revenue Code and the Treasury Regulations and other guidance of general applicability issued thereunder. For purposes of determining whether a Participant is a Key Employee, the Participants Compensation means Compensation as defined for purposes of Article IV of Part III of the Plan (Limitations on Benefits), but for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3) and 402(h)(1)(B).
2.27 | Limitation Year means a calendar year. |
2.28 | Non-Highly Compensated Employee means any employee who is not a Highly Compensated Employee. |
2.29 | Non-Key Employee means any Employee who is not a Key Employee. |
2.30 | Normal Retirement Age means Age 65. |
2.31 | Normal Retirement Date means the first day of the month in which the Participants Normal Retirement Age occurs. |
2.32 | One Year Break in Service means any Plan Year, or for purposes of Article III, Eligibility Computation Period, during which the Employee has not completed more than 500 Hours of Service. |
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2.33 | Participant means any eligible Employee who participates in the Plan as provided in Article III of Part I of the Plan and or Article III of Part II of the Plan as applicable; and who has not for any reason become ineligible to participate further in the Plan. |
2.34 | Plan Administrator means the Benefits Committee, which shall have fiduciary responsibility for the interpretation and administration of the Plan as provided in Article VII of Part III of the Plan (Plan Fiduciary Responsibilities). Members of the Benefits Committee shall be appointed as provided in Section 8.01 of Part III of the Plan. |
2.35 | Plan Sponsor means the Employer. |
2.36 | Plan Year means a calendar year. |
2.37 | Plan Year Allocation Date means for any Plan Year the date each Participants Account shall be credited with an Allocation for the Plan Year. Such date shall be the March 1 following the Plan Year with respect to which the Allocation is made. |
Notwithstanding the foregoing, for Plan Years beginning after December 31, 1997 the Plan Year Allocation Date means the first business day of March following the Plan Year with respect to which the Allocation is made.
2.38 | Projected Account Balance means: |
(a) | With respect to a Participant who has attained his or her Normal Retirement Date on the Determination Date, the Participants Account Balance as of such Determination Date; and |
(b) | With respect to a Participant who has not attained his or her Normal Retirement Date as of the Determination Date, the projected value of the Participants Account Balance as of his or her Normal Retirement Date determined as if (i) the Participant has a separation from service on the Determination Date, and (ii) the Participants Account Balance is credited with earnings on a daily basis based upon an annual effective rate equal to the Code Section 417 Interest Rate (as defined in Section 2.02) from the Determination Date through the Participants Normal Retirement Date. Notwithstanding anything in Part I of the Plan to the contrary, in determining a Participants Projected Account Balance, the Code Section 417 Interest Rate in effect for the Plan Year that contains the Determination Date shall be assumed to remain the same for all future Plan Years. |
2.39 | Qualified Domestic Relations Order means any judgment, decree or order (including approval of a property settlement agreement) which: |
(a) | relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a Participant; |
(b) | is made pursuant to a state domestic relations law (including a community property law); |
Part I - 19
(c) | constitutes a qualified domestic relations order within the meaning of Section 414(p) of the Code; and |
(d) | is entered on or after January 1, 1985. |
Effective April 6, 2007, a domestic relations order that otherwise satisfies the requirements for a qualified domestic relations order (QDRO) will not fail to be a QDRO: (i) solely because the order is issued after, or revises, another domestic relations order or QDRO; or (ii) solely because of the time at which the order is issued, including issuance after the annuity starting date or after the Participants death.
2.40 | Qualified Joint and Survivor Annuity means an immediate annuity for the life of the Participant, with a survivor annuity for the life of the Participants spouse which is not less than one-half, nor greater than, the amount of the annuity payable during the joint lives of the Participant and the Participants spouse. The Qualified Joint and Survivor Annuity (i) for the purposes of Part I of the Plan will be the Actuarial Equivalent of the Plans no-death benefit life annuity normal form of benefit; and (ii) for the purposes of Part II of the Plan will be the Actuarial Equivalent of the Plans normal form of benefit. |
2.41 | Top Heavy Plan means for any Plan Year beginning after December 31, 1983 that any of the following conditions exists: |
(i) | If the top heavy ratio (as defined in Article II of Part III of the Plan) for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans. |
(ii) | If this Plan is a part of a required aggregation group and part of a permissive aggregation group and the top heavy ratio for the group of plans exceeds 60 percent. |
(iii) | If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent. |
See Article II of Part III of the Plan for requirements and additional definitions applicable to Top Heavy Plans.
2.42 | Top Heavy Plan Year means that, for a particular Plan Year commencing after December 31, 1983, the Plan is a Top Heavy Plan. |
2.43 | Trustee means the bank, trust company or person(s) who shall be constituted the original trustee or trustees for the Plan and Trust created therefor, and also any such successor trustee or trustees. The duties and responsibilities of the Trustee are set forth in the Trust Indenture in the form annexed hereto. |
2.44 | Year of Service means, any Plan Year during which an Employee completes at least 1,000 Hours of Service; provided, however, that for purposes of determining Plan entry under Article III of Part I of the Plan, Year of Service means an Eligibility Computation |
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Period during which an Employee completes at least 1,000 Hours of Service; provided, further however, that for purposes of determining Plan entry under Article III of Part II of the Plan, Year of Service shall mean any twelve consecutive month period during which he completes 1,000 Hours of Service computed from the date an Employee first performs an Hour of Service, or any anniversary thereof (or again performs an Hour of Service upon re-employment following a termination resulting in a One Year Break in Service). |
ARTICLE III
PARTICIPATION REQUIREMENTS
3.01 | Participation Requirements. |
(a) | Employee Participation. Individuals who were Participants in Part I of the Plan on December 31, 2009 shall continue to be Participants in Part I of the Plan on January 1, 2010. |
Notwithstanding anything in Part I of the Plan to the contrary, for periods commencing on and after January 1, 2005, (i) no Employee who had not previously been a Participant in Part I of the Plan shall become a Participant in Part I of the Plan, and (ii) a Former Participant who is re-employed as an Employee shall be reinstated as an active Participant in Part I of the Plan but only for purposes of increasing Plan vesting on his or her frozen Accrued Benefit and for purposes of determining eligibility for early retirement under Section 6.02.
For Plan Years that commenced prior to January 1, 2005, an Employee became eligible to be a Participant on the first day of the calendar month coincident with or next following completion of one Year of Service, provided he or she was then an eligible Employee.
Eligible Employees who were actively employed and who were Participants in The Allmerica Financial Cash Balance Pension Plan as adopted by Citizens Insurance Company of America or in The Allmerica Financial Cash Balance Pension Plan as adopted by The Hanover Insurance Company, each of which were merged with and into this Part I of the Plan, became Participants in this Part I of the Plan on January 1, 1998.
Notwithstanding the foregoing: (i) an Employee who was formerly employed by Financial Profiles, Inc. shall not become eligible to become a Participant in this Part I of the Plan until January 1, 1999; and (ii) an Employee who was formerly employed by Advantage Insurance Network shall not become eligible to become a Participant in this Part I of the Plan until August 1, 1999.
Notwithstanding the foregoing, the following persons shall not be eligible to become or remain active Participants in Part I of the Plan:
(i) | Employees who are or were eligible to participate in The Allmerica Financial Agents Retirement Plan; |
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(ii) | Retirees of First Allmerica or retirees of General Agents of First Allmerica who are receiving retirement benefits under this Part I of the Plan whose current period of post-retirement re-employment with First Allmerica, Citizens or Hanover began prior to January 1, 1988; |
(iii) | Retirees of Citizens or Hanover who are receiving retirement benefits under this Part I of the Plan whose current period of post-retirement re-employment with First Allmerica, Citizens or Hanover began prior to January 1, 1993; |
(iv) | Leased Employees, within the meaning of Code Sections 414(n) and (o); |
(v) | A contractors employee, i.e., a person working for a company providing goods or services (including temporary employee services) to the Employer or to an Affiliate whom the Employer does not regard to be its common law employee, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employers common law employee; or |
(vi) | An independent contractor, i.e., a person who is classified by the Employer as an independent contractor, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employers common law employee. |
(b) | Reeligibility of Former Participants. A Former Participant, who again becomes eligible to participate in Part I of the Plan, will become a Participant in Part I of the Plan on the date of his or her recommencement of service with the Employer. Any other former Employee who again becomes eligible will become a Participant on the entry date determined under the rules set forth in Subsection (a). |
3.02 | Classification Changes. In the event of a change in job classification, such that an Employee, although still in the employment of the Employer, no longer is an eligible Employee, he or she shall receive no further Credited Service under Part I of the Plan, and the Participants Accrued Benefit on the date he or she becomes ineligible shall continue to vest, become payable or be forfeited, as the case may be, in the same manner and to the same extent as if the Employee had remained an eligible Participant. |
For periods commencing prior to January 1, 2005, in the event a Participant becomes ineligible to accrue further Credited Service because he or she is no longer a member of an eligible class of Employees, but has not terminated his or her employment with an Employer, such Participant shall again be eligible to accrue further Credited Service immediately upon his or her return to an eligible class of Employees.
In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall participate immediately if such Employee has satisfied the minimum service requirements of Part I of the Plan, and would have previously become a Participant had he or she been in the eligible class.
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3.03 | Participant Cooperation, Participant Refusal. Each Employee who is eligible shall become a Participant on the entry date specified in Subsection 3.01(a) unless he or she notifies the Plan Administrator in writing prior to such entry date that he or she does not wish to be a Participant under this Part I of the Plan. Any such election not to participate in this Part I of the Plan shall be irrevocable. In order to waive participation in this Part I of the Plan, an Employee must agree to irrevocably waive his or her right to become a Participant in any other qualified retirement plan sponsored by the Employer. Each eligible Employee who becomes a Participant hereunder thereby agrees to be bound by all of the terms and conditions of this Part I of the Plan. Each eligible Employee, by becoming a Participant in this Part I of the Plan, agrees to cooperate fully with the Insurer, including completion and signing of such forms as are required by the Insurer under the Group Annuity Contract. |
ARTICLE IV
PARTICIPANT ACCOUNTS
4.01 | Establishment of Accounts. For Plan Years commencing on or after January 1, 1995, a memorandum Account shall be established under Part I of the Plan for each Participant. Such Account shall be credited with Allocations in accordance with Section 4.02 and shall be adjusted in accordance with Section 4.03 and for any distributions in accordance with Section 4.04. The resultant value determined at any time, after the operation of Sections 4.02, 4.03 and 4.04, shall be the Participants Account Balance. The memorandum Account is part of a mechanism for computing benefits under Part I of the Plan. Accordingly, there need be no relationship between Participants Account Balances and the amount or nature of Plan assets. |
4.02 | Allocations to Accounts. For each Plan Year commencing on or after January 1, 1995 and prior to January 1, 2005 during which a Participant completes a Year of Credited Service and, regardless of the number of Hours of Service credited to the Participant, for any such Plan Year during which a Participant dies or first retires, such Participants Account shall be credited with an Allocation for such Plan Year as of the Plan Year Allocation Date. Allocations under the Plan are part of the mechanism for computing benefits under the Plan and do not relate to actual contributions to the Plan. |
Notwithstanding anything in the Plan to the contrary, no Allocations shall be credited to Participants for Plan Years beginning on or after January 1, 2005; provided, however, (i) that Allocations shall be credited to eligible Participants for the 2004 Plan Year as of the 2004 Plan Year Allocation Date and (ii) memorandum Accounts shall continue to be credited with investment experience credits after December 31, 2004, as provided in Section 4.03 of Part I of the Plan.
4.03 | Adjustments of Accounts. |
(a) | Adjustment for Earnings for Plan Years beginning on and after January 1, 2004. For each Plan Year beginning on or after January 1, 2004, each Participants Account shall be credited with earnings on a daily basis based upon an annual effective rate equal to the Code Section 417 Interest Rate in effect for such Plan Year. |
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(b) | Adjustment for Investment Experience for Plan Years beginning on or after January 1, 1995 and before January 1, 2004. For each Plan Year beginning on or after January 1, 1995 and before January 1, 2004, Participants in Part I of the Plan shall make investment experience elections with respect to their respective Account Balances from among choices prescribed by the Plan Administrator. The specific investment choices and the time and manner of making elections may be changed from time to time. Each Participants Account Balance shall be adjusted to reflect investment experience in the same manner as if the Account Balance were actually invested pursuant to the Participants elections and as if each Allocation were actually a contribution made to the Plan on the relevant Plan Year Allocation Date. |
4.04 | Distributions. The Account Balance shall be decreased for any non-annuity distributions paid to the Participant or his or her Beneficiary. In the event a benefit becomes payable as an annuity in accordance with Article VI or as a survivor annuity in accordance with Article VII, the Account Balance shall be decreased by the Actuarial Equivalent of such annuity as of the Annuity Commencement Date. |
ARTICLE V
EMPLOYER CONTRIBUTIONS
5.01 | Employer Contributions. |
(a) | Employer Contributions for Plan Years beginning after December 31, 1997. The Employer shall contribute for each Plan Year during which Part I of the Plan is in effect that amount, if any, which the enrolled actuary for the Plan determines is necessary to fund the Plan under the actuarial cost method in effect for the Plan. No contributions will be required of or permitted by Employees. |
(b) | Employer Contributions for Plan Years beginning prior to January 1, 1998. Each Employer shall contribute for each Plan Year during which the Plan is in effect that amount, if any, which the enrolled actuary for the Plan determines is necessary to fund Part I of the Plan under the actuarial costs method in effect for Part I of the Plan. No contributions will be required of or permitted by Employees. |
Except as provided below, contributions paid by each Employer and earnings thereon will be used only to fund Plan costs and benefits for its Employees and will not be used to fund Plan costs and benefits for any other Employees. Notwithstanding the foregoing:
(i) | Plan contributions paid by First Allmerica and General Agents of First Allmerica and earnings thereon will be used to fund Plan costs and benefits of both First Allmerica and such General Agents. |
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(ii) | Plan contributions paid by First Allmerica and General Agents of First Allmerica and earnings thereon will also be used to fund costs and benefits of The Allmerica Financial Agents Pension Plan (Part II of the Plan), which plan was merged with this Part I of the Plan on January 1, 1992. |
5.02 | Payment of Contributions to Trustee. The Employer shall make payment of all contributions directly to the Trustee to be held, managed and invested in one or more Group Annuity Contracts and in other investments permitted under the Trust, but subject to Section 5.03. |
5.03 | Receipt of Contributions by Trustee. The Trustee shall accept and hold under the Trust such contributions of money, or other property approved by the Employer for acceptance by the Trustee, on behalf of the Employer and its Employees and Beneficiaries as it may receive from time to time from the Employer, other than cash it is instructed to remit to the Insurer for deposit with the Insurer. However, the Employer may pay contributions directly to the Insurer and such payment shall be deemed a contribution to the Trust to the same extent as if payment had been made to the Trustee. All such contributions shall be accompanied by written instructions from the Plan Administrator or its designee accounting for the manner in which they are to be credited. |
ARTICLE VI
RETIREMENT AND DISABILITY BENEFITS
6.01 | Normal Retirement Benefit. Subject to Section 6.07, each Participant who retires on his or her Normal Retirement Date (and each Former Participant with a vested benefit deferred to his or her Normal Retirement Date) shall be entitled to receive a monthly life annuity commencing on such Date and terminating on the last regular payment date prior to his or her death, which monthly benefit shall equal the Participants Accrued Benefit (or, in case of each Former Participant with a vested benefit, the Former Participants vested Accrued Benefit). |
Notwithstanding the foregoing, the Grandfathered Benefit (if any) of each Participant shall not be less than the largest periodic Grandfathered Benefit that would have been payable to the Participant upon separation from service at or prior to Normal Retirement Age under Part I of the Plan. For purposes of comparing periodic benefits in the same form commencing prior to and at Normal Retirement Age, the greater benefit is determined by converting the benefit payable prior to Normal Retirement Age into the same form of annuity benefit payable at Normal Retirement Age and comparing the amount of such annuity payments.
Notwithstanding the foregoing, Non-Key Employees who are Participants in a Top Heavy shall be entitled to the minimum benefit described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) if such benefit is greater than the benefit provided by this Section 6.01.
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Each actively employed Participants Accrued Benefit shall become 100% vested and nonforfeitable when the Participant attains his or her Normal Retirement Age. An actively employed Participant may terminate employment with the Employer and retire on his or her Normal Retirement Date. Upon such date the Participant shall be entitled to receive, or to begin to receive, his or her Normal Retirement Benefit.
The Plan Administrator shall notify the Trustee (and Insurer, if appropriate) as and when the Normal Retirement Age and Normal Retirement Date of each Participant shall occur and shall also advise the Trustee (and Insurer, if appropriate) as to the manner in which retirement benefits are to be distributed to a Participant, subject to the provisions of this Article. Upon receipt of such notification and subject to the other provisions of this Article, the Trustee or Insurer shall take such action as may be necessary in order to commence payment of the Participants Normal Retirement Benefit.
6.02 | Early Retirement Benefit. Any actively employed Participant who has completed at least fifteen Years of Service (or, if earlier, who has completed at least fifteen Years of Credited Service, with Years of Credited Service completed before 1995 being determined in accordance with the terms of Part I of the Plan as in effect on December 31, 1994) may elect to retire on the first day of any month following attainment of Age 55, in which event he or she shall receive, subject to Section 6.07 in the case of a married Participant, a monthly life annuity commencing on the date of his or her early retirement and terminating on the last regular payment date prior to his or her death. Each early retirees monthly life annuity will be equal to the Actuarial Equivalent of the early retirees Accrued Benefit, except that the portion of the Accrued Benefit attributable to the Participants Grandfathered Benefit, if any, shall equal the early retirees Grandfathered Benefit multiplied by the appropriate percentage. |
Retirement Age |
Percentage of Monthly Grandfathered Benefit* | |
65 | 100 | |
64 | 93 1/3 | |
63 | 86 2/3 | |
62 | 80 | |
61 | 73 1/3 | |
60 | 66 2/3 | |
59 | 63 1/3 | |
58 | 60 | |
57 | 56 2/3 | |
56 | 53 1/3 | |
55 | 50 | |
* If benefit payments commence in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined by straight line interpolation. |
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Provided, however, that an actively employed Participant (i) who is entitled to a Special Grandfathered Benefit, (ii) who has been continuously employed as a member of an eligible class of Employees from January 1, 1995 until the date of his or her early retirement, and (iii) whose combined Age and Years of Credited Service as of the date of determination (calculated in accordance with the provisions of Part I of the Plan in effect on December 31, 1994) total at least 85 (the Rule of 85) shall be entitled to receive a Special Grandfathered Benefit determined without the above actuarial reduction.
Provided, however, that an actively employed Participant (i) who is entitled to a Grandfathered Benefit, (ii) who has attained Age 62, and (iii) whose combined Age and Years of Credited Service as of the date of determination (calculated in accordance with the provisions of Part I of the Plan in effect on December 31, 1994) total at least 95 (the Rule of 95) shall be entitled to receive a Grandfathered Benefit determined without the above actuarial reduction.
For purposes of determining eligibility for the Rule of 85 and Rule of 95 subsidized early retirement benefits, but not for purpose of computing actual benefit amounts, Years of Credited Service shall include Hours of Service completed as a Career Agent or General Agent of First Allmerica.
If a Participant terminates employment after having completed at least fifteen Years of Service, he or she may elect to retire on the first day of any month following his or her 55th birthday and prior to his or her Normal Retirement Date. If any such Former Participant elects to retire early, he or she shall be entitled to receive a monthly retirement benefit equal to a percentage of the monthly benefit to which the Participant would have been entitled on his or her Normal Retirement Date. Such percentage shall be obtained by applying the appropriate percentage set forth in the table above to the monthly benefit payable on the Former Participants Normal Retirement Date.
Notwithstanding the foregoing, if this Plan is a Top Heavy Plan, and if greater than the benefit described above, each Non-Key Employee who elects early retirement shall be entitled to receive a monthly early retirement benefit equal to the appropriate percentage above of his or her Accrued Benefit described in Section 2.01(b).
6.03 | Subsidized Early Retirement Benefit. Any eligible Participant who elected an immediate early retirement benefit to commence between March 1, 2003 and May 1, 2004 shall be entitled to an increased retirement benefit, computed as described below, to commence on the date of his or her actual retirement. |
(a) | Eligible Participants. Only Participants in Part I of the Plan who are actively employed by First Allmerica on February 1, 2003 (or are then on an Employer-approved paid leave of absence, which paid leave commenced no earlier than December 18, 2002) shall be eligible for the subsidized early retirement benefit described in this Section 6.03. In addition, in order to be eligible for such benefits, a Participant must have retired between March 1, 2003 and May 1, 2004 and met the following requirements: |
(i) | The Participant must be eligible for a Special Grandfathered Benefit (as described in Section 2.20(b) of Part I of the Plan) on the date of his or her early retirement. |
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(ii) | The Participant must have been continuously employed as a member of an eligible class of Employees from January 1, 1995 until the date of his or her retirement. |
(iii) | The Participant must not have attained Age 65 on the date of his or her retirement. |
(iv) | The Participant must not be eligible for the Rule of 85 subsidized early retirement benefit (as described in Section 6.02 of Part I of the Plan) on the date of his or her retirement. |
(v) | The Participants job or position with First Allmerica must have been or will be eliminated by May 1, 2003 as a result of the reorganization of the Allmerica Financial Services Division of First Allmerica. |
(vi) | The Participant must be actively at work on the last business day preceding the date of his or her early retirement or then be on vacation, be on an Employer-approved paid leave of absence or be absent due to sickness or injury. |
(vii) | The Participant must execute an appropriate release satisfactory to First Allmerica releasing the company (and its subsidiaries and affiliates and its and their officers, directors and employees) from all liability arising out of or relating to his or her employment with First Allmerica or with any of its predecessors, subsidiaries or affiliates. |
(b) | Qualified Early Retirement Benefit. Those eligible Participants as described in Section (a) who retired between March 1, 2003 and May 1, 2004 shall be entitled to a subsidized early retirement benefit, to be computed as follows: |
(i) | Subsidized Plan Early Retirement Benefit. Those eligible Participants electing early retirement under Part I of the Plan shall be entitled to an increased retirement benefit commencing on their date of actual retirement, to be computed as follows: |
The Participants early retirement benefit shall be computed as provided in Section 6.02 of Part I of the Plan, except as provided below:
Any eligible Participant may elect to retire on the first day of any month between March 1, 2003 and May 1, 2004, in which event he or she shall receive, subject to Section 6.07 of Part I of the Plan in the case of a married Participant, a monthly life annuity commencing on the date of his or her early retirement and terminating on the last regular payment date prior to his or her death. An eligible Participant may also choose one of
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the distribution options set forth in Section 6.06 of Part I of the Plan, with spousal consent if the Participant is married. In the case of a Participant who chooses a monthly life annuity, such benefit will be equal to the sum of (A) and (B) below:
(A) | A monthly life annuity benefit that is the Actuarial Equivalent (as described in Section 2.02 of Part I of the Plan) of the Participants Account Balance (as described in Section 4.01 of Part I of the Plan), plus |
(B) | A monthly life annuity benefit which is equal to a percentage of the Participants Special Grandfathered Benefit, accrued to the date of actual retirement, based on the Participants Age, Average Monthly Compensation and Credited Service (such Average Monthly Compensation and Credited Service being calculated in accordance with the provisions of Part I of the Plan in effect on December 31, 1994), each determined as of the date of the Participants early retirement. Such percentage shall be equal to the appropriate percentage determined from the Schedule below of the Special Grandfathered Benefit that would have been payable had the Participants date of initial eligibility for the Rule of 85 subsidized early retirement benefit (as described in Section 6.02 of Part I of the Plan) been his or her Normal Retirement Date, based on the assumption that his or her continuous employment had continued until such date, but with the actual benefit being based on the Participants Special Grandfathered Benefit actually accrued as of the date of early retirement. |
Retirement Age* |
Percentage of Special Monthly Grand-Fathered Benefit** | |
55 | 1.0000 | |
54 | 0.9333 | |
53 | 0.8667 | |
52 | 0.8000 | |
51 | 0.7333 | |
50 | 0.6667 | |
49 | 0.6333 | |
48 | 0.6000 | |
47 | 0.5667 | |
46 | 0.5333 | |
45 | 0.500 | |
* This Schedule assumes the Participant would have been eligible for the Rule of 85 subsidized early retirement benefit at Age 55. If a Participant would have been eligible for the Rule of 85 at a date later than Age 55, the |
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appropriate percentage shall be determined by the Plan actuary using the same assumptions used in constructing the above Schedule. | ||
** If a benefit commences in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined by straight line interpretation. | ||
Example. Assume an eligible Participant will attain Age 52 on January 1, 2004 and will have completed 32 Years of Credited Service on such date. Assume further that as of such date the Participant has accrued a Special Grandfathered Benefit, payable as a single life annuity, of $1,000 per month. Thus, the Participant will initially be eligible for the Rule of 85 subsidized early retirement benefit on January 1, 2007, the date the Participant will attain Age 55. Under the terms of Section 6.03, the Participant may elect to retire on January 1, 2004 and begin to receive an immediate early retirement benefit. If a single life annuity benefit is chosen, such life annuity benefit will be equal to $800 per month ($1,000 x 0.8000 = $800). |
(ii) | Cost-of-Living (COL) Adjustments. Notwithstanding anything in Section 6.08 of Part I of the Plan to the contrary, Participants (and the Beneficiaries of Participants) who elect to retire pursuant to this Section 6.03 shall be eligible to receive COL benefits, subject to the other rules and requirements set forth in Section 6.08 of Part I of the Plan. Notwithstanding anything in Section 6.08 of Part I of the Plan to the contrary, the early retirement monthly annuity benefits described in this Section 6.03 shall be a part of a Participants basic plan benefit and shall be included in determining any COL adjustment to which the Participant may become entitled pursuant to Section 6.08 of Part I of the Plan. |
6.04 | Late Retirement Benefit. If a Participant shall continue in active service beyond his or her Normal Retirement Date, he or she shall continue to participate under Part I of the Plan and Trust. For Employees in ERISA Section 203(a)(3)(B) service (as described in Subsection 6.09(a) of Part I of the Plan), who continue in active employment beyond their Normal Retirement Date, retirement benefits shall be suspended, as provided in Section 6.09 of Part I of the Plan. Except as provided in Section 6.07 of Part I of the Plan in the case of a married Participant, the monthly retirement benefit payable to a Participant retiring on a late retirement date shall be a monthly life annuity commencing on the date of his or her late retirement and terminating on the last regular payment date prior to his or her death. Each late retirees monthly life annuity will be equal to the late retirees Accrued Benefit; provided that the portion of the Accrued Benefit attributable to the Participants Grandfathered Benefit, if any, shall equal the Participants Basic Grandfathered Benefit, if any, or the Participants Special Grandfathered Benefit if any. |
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Notwithstanding the foregoing, if this Plan is a Top Heavy Plan, if greater than the benefit described above, each Non-Key Employee who elects late retirement shall be entitled to receive a monthly late retirement benefit equal to his or her Accrued Benefit described in Section 2.01(b).
Notwithstanding the above, monthly annuity benefits shall commence no later than a Participants required beginning date (as defined in Article III of Part III of the Plan). If a Participant has not retired by his or her required beginning date, monthly retirement benefits shall commence on such date and shall be computed as described in the preceding paragraph, with benefits based on the assumption that the Participants required beginning date was the date of late retirement.
Notwithstanding the foregoing, if late retirement benefits commence after Age 70 1/2, to the extent required under Code Section 401(a)(9)(C) and regulations thereunder, a Participants Accrued Benefit shall be actuarially increased to take into account the period after Age 70 1/2 in which the Participant was not receiving any benefits under the Plan, including any period during which the Employee is in Section 203(a)(3)(B) service, as described in Subsection 6.09(a) of Part I of the Plan.
6.05 | Disability Benefit. Notwithstanding anything in Part I of the Plan to the contrary, if a Participant becomes Totally Disabled while employed by the Employer as an active Participant in Part I of the Plan, such Participant shall have a 100% vested and nonforfeitable right to his or her Accrued Benefit, regardless of his or her length of service. |
In addition, if a Participant in Part I of the Plan who is eligible for a Special Grandfathered Benefit was Totally Disabled on December 31, 1994 and before January 1, 2005, becomes Totally Disabled while employed by the Employer as an active Participant in Part I of the Plan, it shall be assumed for purposes of this Part I of the Plan that his or her employment continues from the date of the commencement of his or her total disability to the earliest of his or her Normal Retirement Date, death, termination of employment or date that he or she is no longer Totally Disabled. Prior to January 1, 2005 and while an eligible Employee is Totally Disabled, it shall be assumed for purposes of calculating the Participants Special Grandfathered Benefit that the Employee continues to earn monthly one-twelfth of the Compensation paid to the Participant during the 12 complete months prior to the month in which he or she ceased active service because of his or her having become Totally Disabled.
For purposes of Part I of the Plan Totally Disabled means the inability to perform the duties of any occupation for which the Employee is or becomes reasonably fitted by education, training or experience; provided, however, in the case of an Employee receiving disability benefits under a long term disability plan sponsored by the Employer, until benefits have been paid under such policy for 24 months, such Employee will be considered Totally Disabled if he or she is unable to perform the duties of his or her occupation and is not working at any other occupation.
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6.06 | Distribution of Benefits. The Plan Administrator shall direct the Trustee (or Insurer, if applicable) to commence payment of benefits provided under this Article VI of Part I of the Plan (or provided to a Former Participant pursuant to Article IX of Part I of the Plan). Plan benefits will be paid only on death, termination of service, Plan termination or retirement. |
Except as otherwise provided in Section 6.07 of Part I of the Plan, the requirements of this Section shall apply to any distribution of a Participants interest and will take precedence over any inconsistent provisions of this Part I of the Plan.
All distributions required under the Plan shall be determined and made in accordance with the Regulations under Code Section 401(a)(9), including, to the extent applicable, the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed Regulations.
Except as provided below and in Section 6.07, a Participants retirement benefit shall be payable as a life annuity for the life of the Participant with no further benefits payable after the last regular payment date prior to his or her death.
At any time prior to actual retirement, a Participant, with spousal consent if the Participant is married, may elect to receive his or her retirement benefit under one or more of the following settlement options; provided, however, that a Participant may not elect to have the balance of his or her Account, described in Section 4.01, distributed under more than one annuity option, or his or her Grandfathered Benefit distributed under more than one annuity option.
(i) | An annuity for the joint lives of the Participant and his or her spouse with 50% or 66 2/3% (whichever is specified when this option is elected) of such amount payable as an annuity for life to the survivor. No further benefits are payable after the death of both the Participant and his or her spouse. |
(ii) | An annuity for the life of the Participant and upon his or her death 100%, 66 2/3%, or 50% (whichever is specified when this option is elected) of the annuity amount will be continued to his or her spouse as his or her contingent annuitant. No further annuity benefits are payable after the death of both the Participant and his or her spouse. |
(iii) | An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant. |
(iv) | An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant and his or her spouse. |
(v) | Notwithstanding anything in Part I of the Plan to the contrary, a single lump sum payment in an amount equal to the Participants vested Account Balance on the Determination Date: provided, however, that except as provided in (vi) below, this form of payment shall not be available with respect to the portion of the Participants vested Accrued Benefit attributable to the |
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Participants Grandfathered Benefit, if any. In the event a Participant elects to have his or her vested Account Balance on the Determination Date payable in a lump sum, the portion of his or her Accrued Benefit attributable to his or her Grandfathered Benefit, if any, shall be paid in accordance with the otherwise applicable provisions of this Article VI of Part I of the Plan. |
(vi) | If the present value of a Participants vested Grandfathered Benefit, if any, does not exceed $5,000 ($3,500 for Plan Years beginning prior to January 1, 1998), a single sum payment in an amount equal to such present value. If the present value of a Participants vested Grandfathered Benefit exceeds $5,000 ($3,500 for Plan Years beginning prior to January 1, 1998), only annuity options (i) through (iv) above shall be available with respect to such vested Grandfathered Benefit. |
All optional forms of benefits shall be the Actuarial Equivalent (as of the date selected) of the normal retirement benefit described in Section 6.01 of Part I of the Plan or 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans), if applicable. Any spousal consent shall satisfy the requirements of Section 6.07.
Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the later of the close of the Plan Year in which:
(i) | the Participant attains Normal Retirement Age; or |
(ii) | the Participant terminates service with the Employer. |
Notwithstanding the foregoing, the failure of a Participant and spouse (or where either the Participant or the spouse has died, the survivor) to consent to a distribution when a benefit is immediately distributable (as described below) shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section 6.06 of Part I of the Plan (and provisions of Article III of Part III of the Plan). In no event will benefits begin to be distributed prior to the later of Age 62 or Normal Retirement Age without the consent of the Participant. The consent of the Participants spouse will also be required for any such distribution unless the benefit is paid in the form of a Qualified Joint and Survivor Annuity. Any spousal consent shall satisfy the requirements of Section 6.07, and no involuntary cash-outs shall be made in any amount on or after March 28, 2005.
If the Accrued Benefit is immediately distributable, the Participant and the Participants spouse (or where either the Participant or the spouse has died, the survivor) must consent to any distribution of such Accrued Benefit. The consent of the Participant and the Participants spouse shall be obtained in writing within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. The annuity starting date is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and the Participants spouse of the right to defer any distribution until the Participants Accrued Benefit is no longer immediately distributable. Such notification
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shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code, and shall be provided no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date.
Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the Accrued Benefit is immediately distributable. Neither the consent of the Participant nor the Participants spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code.
An Accrued Benefit is immediately distributable if any part of the Accrued Benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or Age 62.
Notwithstanding the above the entire interest of a Participant or a Beneficiary must be distributed in accordance with the minimum required distribution rules set forth in Article III of Part III of the Plan.
6.07 | Qualified Joint and Survivor Annuity for Married Participants. |
(a) | General Rules. Notwithstanding anything in this Article to the contrary, unless a married Participants Accrued Benefit has been paid in a lump sum pursuant to Section 6.06 above, such Participants retirement benefit will be payable to the Participant and his or her spouse in the form of a Qualified Joint and Survivor Annuity, with the survivor to receive 100% of the benefit which had been payable during their joint lives, unless an optional form of benefit is selected pursuant to a qualified election within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. In the case of an unmarried Participant, unless the Participant elects an optional form of benefit the Participants retirement benefit will be paid in the form of a no-death benefit life annuity. |
(b) | Definitions. |
(i) | Qualified election: A waiver of a Qualified Joint and Survivor Annuity. Any waiver of a Qualified Joint and Survivor Annuity shall not be effective unless: (A) the Participants spouse consents in writing to the election; (B) the election designates a specific Beneficiary, including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent); (C) the spouses consent acknowledges the effect of the election; and (D) the spouses consent is witnessed by a Plan representative or notary public. Additionally, a Participants waiver of the Qualified Joint and Survivor Annuity will not be effective unless the election designates a form of |
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benefit payment which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of a Plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed a qualified election. |
Any consent by a spouse obtained under this Subsection (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by such spouse must acknowledge that the spouse has the right to limit consent to a specific Beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Subsection (c) below.
(ii) | Spouse (surviving spouse): the opposite-gender person, if any, to whom the Participant is lawfully married at the date of his death or at his annuity starting date, whichever is earlier, provided that a former spouse will be treated as the spouse or surviving spouse to the extent provided under a Qualified Domestic Relations Order. |
(iii) | Annuity starting date: The first day of the first period for which an amount is paid as an annuity or under any other form. |
(c) | Notice Requirement. |
(i) | In the case of a Qualified Joint and Survivor Annuity as described in Subsection (a), the Plan Administrator shall provide each Participant no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date a written explanation of: (A) the terms and conditions of a Qualified Joint and Survivor Annuity; (B) the Participants right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (C) the rights of a Participants spouse; (D) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (E) the relative values of the various optional forms of benefit under the Plan. Notices given to Participants pursuant to Code Section 411(a)(11) in Plan Years beginning after December 31, 2006 shall include a description of how much larger benefits will be if the commencement of distributions is deferred. |
(ii) | A Participant may commence receiving a distribution in a form other than a Qualified Joint and Survivor Annuity less than 30 days after receipt of |
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the written explanation described in the preceding paragraph provided: (A) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) a form of distribution other than a Qualified Joint and Survivor Annuity; (B) the Participant is permitted to revoke any affirmative distribution election at least until the Distribution Commencement Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant; and (C) the Distribution Commencement Date is after the date the written explanation was provided to the Participant. For distributions on or after December 31, 1996, the Distribution Commencement Date may be a date prior to the date the written explanation is provided to the Participant if the distribution does not commence until at least 30 days after such written explanation is provided, subject to the waiver of the 30-day period. For the purposes of this paragraph, the Distribution Commencement Date is the date a Participant commences distributions from the Plan. If a Participant commences distribution with respect to a portion of his/her Account Balance, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date is the first day of the first period for which annuity payments are made. |
(d) | Applicability. The provisions of this Section 6.07 shall apply to any Participant who is credited with at least one Hour of Service with the Employer on or after January 1, 1976. In addition, any living Participant or Former Participant not receiving benefits under Part I of the Plan on August 23, 1984 who would otherwise not receive the benefits prescribed by this Section 6.07 shall be given the opportunity to elect to have the provisions of this Section apply provided such Participant or Former Participant was credited with at least one Hour of Service under this Part I of the Plan or a predecessor plan on or after September 2, 1974. |
The opportunity to elect a Qualified Joint and Survivor retirement option must be afforded to the appropriate Participants or Former Participants during the period commencing on August 23, 1984 and ending on the dates benefits would otherwise commence to such person.
6.08 | Supplementary Pension Benefits. Effective July 1, 1986, and on each July 1 thereafter, the amount of monthly retirement benefits payable to eligible retirees (as described below) or their Beneficiaries shall be increased by a percentage determined in accordance with the following formula: |
Percentage Increase = .8 (M - .07) x 100
For Plan Years beginning after December 31, 2008, for purposes of the above formula, M equals the annual coupon return on December 31, 2009 and on each December 31 thereafter of the Barclays Capital U.S. Government/Credit 5-10 Year Index, or its successor.
Part I - 36
For Plan Years beginning after December 31, 1997 and prior to January 1, 2009, for purposes of the above formula, M equaled the earnings rate for the prior Plan Year on assets representing retired life reserves for retirees of First Allmerica, Citizens and Hanover. Additionally, retired life reserve assets of the Agents Pension Plan (Part II of the Plan) and retired life reserve assets attributable to retirees of General Agents of First Allmerica and retirees of Beacon Insurance Company of America (Beacon), formerly an affiliate of Hanover, shall be aggregated and combined with the retired life reserve assets of this Part I of the Plan.
For Plan Years beginning prior to January 1, 1998, for purposes of the above formula, M equaled the earnings rate for the prior Plan Year on assets representing retired life reserves for retirees of each Employer. The formula shall be applied separately and retired life reserves shall be determined separately for each Employer; provided, however, (i) that for retirees of First Allmerica and its General Agents who have adopted this Part I of the Plan, retired life reserve assets shall be aggregated and combined with the retired life reserve assets of The First Allmerica Agents Pension Plan (Part II of the Plan) and (ii) for Plan Years beginning after December 31, 1992, the retired life reserve assets of Beacon shall be combined with the retired life reserve assets of Hanover.
For the Plan Years for which M depended on the returns of designated retired life reserve assets, the earnings rate on retired life reserve assets was to be determined by an actuary, using the investment year block method of crediting interest that First Allmerica used to credit interest on its Experience Rated group annuity contracts that were in force on an active basis. The resulting earnings rate(s) should neither be associated with nor construed as the investment yield (all or in part) of the pension fund.
For each Plan Year for which M depended on the returns of designated retired life reserve assets, the retired life reserve assets for newly qualified retirees to be added to the total retired life assets outstanding was to be determined using a 7% interest rate and the 1971 GAM mortality table.
The determination of M and of the overall earning rate(s) shall be final and conclusively binding for all persons.
The effective date for the payment of supplemental pension benefits paid as a result of this Section shall be each July 1, commencing with July 1, 1986. Those eligible to receive supplemental pension benefits as a result of this Section shall be those retirees of First Allmerica, Citizens, Hanover and General Agents of First Allmerica (and their Beneficiaries) who were receiving basic retirement benefits under Part I of the Plan on the July 1 increase effective date, had been retired for at least 18 months on such increase effective date, and:
(i) | had elected an immediate early retirement benefit pursuant to Section 6.02 (or its successor, if any) |
Part I - 37
(ii) | had terminated employment after having met the eligibility requirements for early retirement specified in Section 6.02 (or its successor, if any) and elected to defer receipt of retirement benefits: or |
(iii) | had retired on or after their Normal Retirement Age after having completed at least 15 years of Credited Service. |
The Beneficiaries of any retiree meeting the above requirements shall be entitled to receive a supplemental pension benefit under this Section if the Beneficiaries were receiving survivor benefits under Part I of the Plan on the July 1 increase effective date.
A supplemental pension benefit determined under this Section shall be added to and become a part of the recipients basic benefit under Part I of the Plan and shall be payable during such period and under such option as the basic benefit under Part I of the Plan is being paid.
6.09 | Suspension of Retirement Benefits. |
(a) | Suspension of Benefits. Except as provided below, Normal, Early or Late Retirement Benefits will be suspended for each calendar month during which an Employee or Eligible Re-employed Pensioner (a Pensioner) completes more than 80 Hours of Service as described in Subsection 2.23(a) and (b) with an Employer in a job or position in which the Employee or Pensioner is eligible to participate in Part I of the Plan (hereinafter Section 203(a)(3)(B) service). |
For purposes of this Section 6.09 of Part I of the Plan, an Eligible Re-employed Pensioner means (i) a retiree of First Allmerica or a retiree of a General Agent of First Allmerica who is re-employed by First Allmerica, Citizens or Hanover on or after January 1, 1988 or (ii) a retiree of Citizens or Hanover who is re-employed by First Allmerica, Citizens or Hanover on or after January 1, 1993 and (iii) for Plan Years beginning after December 31, 1988, who had not attained Age 70; provided, that (i) benefits will not be suspended during the calendar month a Pensioner first retires from the Employer, regardless of the number of Hours of Service completed by the Pensioner during such month, and (ii) this Section shall not apply to the Top-Heavy Plan minimum benefits to which any Non-Key Employee may be entitled under the top-heavy rules of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).
(b) | Amount Suspended. The benefit suspended shall be equal to the portion of the Employees or Pensioners monthly annuity benefit derived from Employer contributions, including any temporary early retirement supplement. |
(c) | Resumption of payment. If retirement benefit payments have been suspended, payments shall resume no later than the first day of the third calendar month after the calendar month in which the Employee or Pensioner ceases to be employed in ERISA Section 203(a)(3)(B) service. The initial payment upon resumption shall include the payment scheduled to occur in the calendar month when payments resume and any amounts withheld during the period between the cessation of ERISA Section 203(a)(3)(B) service and the resumption of payments. |
Part I - 38
Provided, that there shall be an offset from any payments to be resumed for the amount of any retirement benefits that had been paid but which should have been withheld under the suspension rules of this Section 6.09. In no event may the offset exceed in any one month more than 25 percent of the amount that would otherwise be payable under Part I of the Plan (excluding the first payment made after resumption which may be offset without limitation). The amount to be resumed shall be the greater of the benefit amount suspended or a benefit computed as described in Sections 6.01 or 6.02 or 6.04, as appropriate, but based on the pensioners Age (and any joint or contingent annuitants Age), Credited Service and Compensation on the date of resumption.
(d) | Notification. Notwithstanding anything in Part I of the Plan to the contrary, effective January 1, 2007, no retirement benefits (Early, Normal or Late) shall be withheld by the Plan unless the Employee or Pensioner is notified by personal delivery or first class mail during the first calendar month in which the Plan withholds payments that his or her benefits are suspended. |
(e) | Such notifications shall contain a description of the specific reasons why benefit payments are being suspended, a description of the plan provisions relating to the suspension of payments, a copy of such provisions, and a statement to the effect that applicable Department of Labor regulations may be found in Section 2530.203-3 of the Labor Regulations. |
In addition, the notice shall inform the Employee or Pensioner of the Plans procedures for affording a review of the suspension of benefits. Requests for such reviews may be considered in accordance with the claims procedure adopted by the Plan, as described in Article VIII of Part III of the Plan.
6.10 | Rollovers to Other Qualified Plans. |
(a) | Notwithstanding any provision of Part I of the Plan to the contrary that would otherwise limit a distributees election under this Article or under Articles VII and VIII of Part III of the Plan, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. |
(b) | Definitions. |
(i) | Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) |
Part I - 39
of the distributee and the distributees designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any other distribution(s) that is reasonably expected to total less than $200 during a year. A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to (i) an individual retirement account or annuity described in Section 408(a) or (b) of the Internal Revenue Code; (ii) for taxable years beginning after December 31, 2001 and before January 1, 2007, to a qualified trust which is part of a defined contribution plan that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible; or (iii) for taxable years beginning after December 31, 2006, to a qualified trust or to an annuity contract described in Section 403(b) of the Internal Revenue Code, if such trust or contract provides for separate accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible. |
(ii) | Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, a Roth IRA as pursuant to in Section 408A(e) of the Code, an annuity contract described in Section 403(b) of the Code, an annuity plan described in Section 403(a) of the Code, a qualified plan described in Section 401(a) of the Code, that accepts the distributees eligible rollover distribution or an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. |
(iii) | Distributee: A distributee includes an Employee or former Employee. In addition, the Employees or former Employees surviving spouse and the Employees surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. |
(iv) | Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. |
Part I - 40
(c) | For distributions after June 9, 2009, a non-spouse Beneficiary who is a designated beneficiary under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (direct rollover), may roll over all or any portion of his or her distribution to an individual retirement account the Beneficiary establishes for purposes of receiving the distribution. In order to do a direct rollover of the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution. |
Although a non-spouse Beneficiary may roll over directly a distribution as provided above, any distribution made prior to January 1, 2010 is not subject to the direct rollover requirements of Code
Section 401(a)(31) (including Code Section 401(a)(31)(B), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c)). If a non-spouse Beneficiary receives a distribution from
the Plan, the distribution is not eligible for a
60-day rollover.
If the Participants named Beneficiary is a trust, the Plan may make a direct rollover to an individual retirement account on behalf of the trust, provided the trust satisfies the requirements to be a designated beneficiary within the meaning of Code Section 401(a)(9)(E).
A non-spouse Beneficiary may not roll over an amount which is a required minimum distribution, as determined under applicable Treasury Regulations and other Internal Revenue Service guidance. If the Participant dies before his or her required beginning date and the non-spouse Beneficiary rolls over to an IRA the maximum amount eligible for rollover, the Beneficiary may elect to use either the 5-year rule or the life expectancy rule, pursuant to Treasury Regulation Section 1.401(a)(9)-3, A-4(c), in determining the required minimum distributions from the IRA that receives the non-spouse Beneficiarys distribution.
ARTICLE VII
DEATH BENEFITS
7.01 | Pre-Retirement Death Benefits. |
(a) | General Rules. The provisions of this Section shall apply to any Participant or Former Participant provided that such Participant or Former Participant completes at least one Hour of Service on or after January 1, 1995. |
(i) | If a married Participant who has satisfied the eligibility requirements for an early retirement benefit or normal retirement benefit dies (regardless of whether the Participant is still working for the Employer) before beginning to receive such benefits, then the Participants surviving spouse will receive a monthly retirement benefit equal to the sum of: |
(A) | the portion of the Accrued Benefit attributable to the Participants Grandfathered Benefit, if any, that would have been payable if the Participant had retired on the day before his or her death after having elected an immediate Qualified Joint and Survivor Annuity Option with a 50% continuation of monthly benefits to be payable to the survivor; and |
Part I - 41
(B) | the Actuarial Equivalent annuity (payable on the Participants death) of the portion of the vested Accrued Benefit attributable to the Participants Projected Account Balance. |
The amount of such benefit shall be payable monthly for the life of the spouse, with the first payment payable as of the date of the Participants death, unless the spouse requests a later commencement date (consistent with the provisions of the Part I of the Plan).
(ii) | If a fully or partially vested married Participant dies on or before attaining eligibility for early retirement, the Participants surviving spouse will receive a monthly retirement benefit equal to the sum of (A) and (B) below. |
(A) | The portion of the Accrued Benefit attributable to the Participants Grandfathered Benefit, if any, which would be payable if the Participant had: |
(1) | separated from service on the date of death; |
(2) | survived to Age 55 (if younger than Age 55 on the date of death); |
(3) | retired at Age 55 (or retired on the day before his or her death, if older than Age 55 at the date of death) after having elected an immediate Qualified Joint and Survivor Annuity Option with a 50% continuation of monthly benefits to be payable to the survivor; and |
(4) | died on the day after retirement. |
(B) | the Actuarial Equivalent annuity (payable when the Participant would have attained age 55) of the portion of the vested Accrued Benefit attributable to the Participants Projected Account Balance. |
A surviving spouse entitled to benefits under this paragraph (ii) will begin to receive payments on the first day of the month following the date the Participant would have attained Age 55 (or on the first day of the month following the date of death, if the Participant was Age 55 or older on the date of his or her death), unless the spouse requests an earlier or later commencement date (consistent with the provisions of Part I of the Plan).
Part I - 42
For purposes of this paragraph (ii), the earliest retirement age is the earliest date on which, under Part I of the Plan, the Participant could elect to receive retirement benefits attributable to his or her Grandfathered Benefit.
The surviving spouse of a Participant who is entitled to receive a pre-retirement death benefit as described in paragraph (a)(i) or (a)(ii) above, may, in lieu of receiving such benefit, elect to receive the portion of such death benefit which is the Participants Account Balance on the Determination Date in a single sum amount. Such single sum benefit shall be distributed as soon as practicable after the date of the Participants death (or at any later date, as elected by the surviving spouse, consistent with the provisions of Part I of the Plan) and shall be in an amount equal to the Account Balance as of the Determination Date. Alternatively, the surviving spouse may elect to have the Actuarial Equivalent of the pre-retirement death benefit (or the Actuarial Equivalent of the Grandfathered Benefit, if the Account Balance is to be paid as a single sum) payable commencing as of the date of the Participants death (or at any later date as elected by the surviving spouse, consistent with the provisions of Part I of the Plan) in any of the other optional forms of payment available under Section 6.06 of Part I of the Plan. In the event that a surviving spouse elects to have the portion of his or her benefit attributable to the Participants Account Balance payable in a lump sum in accordance with this paragraph, the balance of the death benefit otherwise payable under Part I of the Plan in accordance with paragraph (a)(i) or (a)(ii) above, shall consist solely of that portion of such death benefit that is attributable to the Participants Grandfathered Benefit, if any.
Any surviving spouse described in the preceding paragraph who elects to receive the Participants Account Balance in a single sum payment may also elect to receive the present value of the Participants Grandfathered Benefit, if any, in a single sum amount; provided, however, that this option with respect to a Grandfathered Benefit shall only be available to a surviving spouse if the present value of the Grandfathered Benefit does not exceed $5,000 ($3,500 for Plan Years beginning prior to January 1, 1998). Any such single sum benefit shall be distributed as soon as practicable after the date of the Participants death.
If a Participant, on or after the earlier of the first day of the Plan Year in which he or she attains age 35 or the date of his or her separation from service and prior to his or her death, elects to waive the pre-retirement death benefit which is attributable to the Participants Projected Account Balance and the participants spouse consents to the waiver in accordance with Section 6.07(b)(i) (as if the pre-retirement death benefit waiver was a waiver of a Qualified Joint and Survivor Annuity), the Participant may designate a Beneficiary other than his or her spouse to receive the portion of the Participants pre-retirement death benefit which is attributable to the Participants Projected Account Balance.
Part I - 43
Any such designation shall be in writing on a form provided by or satisfactory to the Plan Administrator, and such designation may include primary and contingent Beneficiaries. Such benefit shall be paid in the form of a lump sum as soon as practicable after the death of the Participant and shall equal the Participants Account Balance at the Determination Date. In the event that a portion of a Participants benefit under the Plan is payable to a non-spouse Beneficiary in accordance with this paragraph, the remaining portion of the death benefit attributable to such Participant shall be paid to the Participants surviving spouse in accordance with paragraphs (a)(i) and (a)(ii) above, as applicable. Before a Participant is permitted to waive the pre-retirement death benefit which is attributable to the Participants Account Balance, the Plan Administrator shall provide each Participant a written explanation with respect to the pre-retirement death benefit comparable to that described in Section 6.07(c)(i).
(b) | Unmarried Participants. If any unmarried Participant dies in any of the circumstances described in paragraphs (a)(i) or (a)(ii) above with respect to married Participants, the Beneficiary (designated in accordance with the rules described in (a) above) of such Participant shall receive a death benefit in a single sum as soon as practicable after the date of the Participants death. The amount of such death benefit shall be equal to the Participants Account Balance at the Determination Date. There shall be no death benefit payable with respect to the Grandfathered Benefits of any such Participant. |
7.02 | Death Benefits for Certain Dependent Spouses (Applicable only to certain Employees entitled to Special Grandfathered Benefits). |
(a) | Eligibility. The spouse of a deceased Employee (including the spouse of any such deceased Employee who had become and continuously remained Totally Disabled [as described in Section 6.05] until death) shall be entitled to a monthly income as set forth in Subsection (b) hereof, provided: |
(i) | The spouse was married to, living with and was a dependent of the Employee for at least the three year period immediately preceding the death of the Employee. For purposes of this Section 7.02 dependency shall be assumed only if the average earned income of the spouse during such three year period was less than the average earned income of the Employee during the same three year period; |
(ii) | The Employee had attained Age 50 prior to the date of death; |
(iii) | The Employee was an employee of First Allmerica or a General Agent of First Allmerica prior to January 1, 1976 and had not thereafter retired or attained Age 65 and since December 31, 1975 was continuously employed with the Employer until the date of his or her death; |
Part I - 44
(iv) | The Employee was eligible to accrue additional Special Grandfathered Benefits (as described in Subsection 2.20(b)) on December 31, 2004 (or on the date of his or her death, if earlier); and |
(v) | The Employee was not a Highly Compensated Employee on the date of his or her death. |
Whether or not a spouse qualifies as a dependent spouse shall be determined by the Plan Administrator, whose determination shall be conclusive and binding on all persons. If an Employee or spouse is totally disabled (as described in Section 6.05), the average earned income of the disabled person shall be determined as of the date the Total Disability commenced. The term earned income for a year means a persons Compensation as defined in Section 2.08(b) paid during the year plus the sum of (i) any salary reduction contributions allocated during the year on the persons behalf to any tax sheltered annuity qualified under Section 403(b) of the Code or to any defined contribution plan qualified under Section 401(k) of the Code maintained by the persons employer and (ii) the amount of any salary reduction contributions contributed on the persons behalf during the year to any Code Section 125 plan maintained by the persons employer.
(b) | Amount of Benefit. The benefit to spouses qualifying under Subsection (a) shall be a monthly income commencing as of the date of the death of the Employee, in an amount equal to (i) less (ii) below: |
(i) | the applicable percentage below of the Special Grandfathered Benefit which the Employee would have received at his or her Normal Retirement Date had the Employee lived and remained a Participant in Part I of the Plan until such date and had the Participant continued to earn monthly one-twelfth of the Compensation paid to the Participant during the 12 complete months prior to the month in which occurred the date of his or her death. |
Number of Completed Years Over Employees Age 49 at Date of Employees Death |
Percentage of Grandfathered Retirement Benefit* | |||||
1 |
10% | |||||
2 |
20% | |||||
3 |
30% | |||||
4 |
40% | |||||
5 and over |
50%; less |
Part I - 45
* If death occurs in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined based on straight line interpolation. |
(ii) | the amount of any benefits provided to the surviving spouse pursuant to Section 7.01 attributable to the Employees Special Grandfathered Benefit. |
ARTICLE VIII
BENEFITS UPON TERMINATION FROM SERVICE
8.01 | In General. In the event that a Participant shall terminate from service with the Employer for any reason other than death, Normal, Early or Late Retirement, the interests and rights of such Participant shall be limited to those contained in this Article. |
8.02 | Termination Benefits. Upon any separation from service described in Section 8.01, a Participant shall be entitled to a benefit under Part I of the Plan, payable at his or her Normal Retirement Date, equal to the vesting percentage specified below of the Participants Accrued Benefit. The automatic form of benefit shall be a Qualified Joint and Survivor Annuity, with the survivor to receive 100% of the benefit which had been payable during their joint lives, if the Participant is married at the time of commencement of benefits, or a single life annuity if the Participant is not married at the time of commencement. With spousal consent, the Participant may elect to have his or her benefit paid in any of the optional forms described in Section 6.06. The amount of any annuity attributable to a Participants vested Account Balance shall be the Actuarial Equivalent of such vested Account Balance. |
Vesting Percentages
(a) | With respect to the portion of the Accrued Benefit attributable to such Participants Grandfathered Benefit, if any: |
Completed Years of Service |
Nonforfeitable Percentage | |
Less than 5 |
0 | |
5 or more |
100 |
(b) | With respect to the portion of the Accrued Benefit attributable to such Participants Projected Account Balance: |
Completed Years of Service |
Nonforfeitable Percentage | |
Less than 2 |
0 | |
2 |
25 | |
3 |
50 | |
4 |
75 | |
5 or more |
100 |
Part I - 46
Notwithstanding the above, if the Plan is a Top Heavy Plan, then the Plan shall meet the following vesting requirements for such Plan Year and for all subsequent Plan Years, even if the Plan is not a Top Heavy Plan for such subsequent Plan Years.
Completed Years of Service |
Nonforfeitable Percentage | |
Less than 2 |
0 | |
2 |
25 | |
3 |
50 | |
4 |
75 | |
5 or more |
100 |
Notwithstanding anything in Part I of the Plan to the contrary, effective on August 17, 2006, for those Participants employed by the Employer on or after such date, such Participants shall be 25% vested in their Account Balance, as defined in Section 4.01, upon completion of two (2) Years of Service and 100% vested in their Accrued Benefit, as described in Section 2.01, upon completion of three (3) Years of Service.
For purposes of this Article, Years of Service means Plan Years during which an Employee was credited with at least 1,000 Hours of Service.
Notwithstanding the foregoing, a Participant who is entitled to a deferred Normal Retirement Benefit may elect to receive his or her vested Account Balance on the Determination Date in a single lump sum. In addition, if a Participant makes an election described in the immediately preceding sentence and if the present value of the portion of the vested Accrued Benefit attributable to such Participants vested Grandfathered Benefit does not exceed $3,500 ($5,000 for Plan Years beginning on and after January 1, 1998), the Participant may elect to receive such portion of his or her vested Accrued Benefit attributable to the Grandfathered Benefit in a lump sum. Any such Participant may elect to receive either such lump sum at any time after separation from service and, in the case of a single lump sum distribution of his or her vested Account Balance, must receive such benefit no later than the time at which benefits attributable to the Participants Grandfathered Benefit, if any, commences. Any such election shall be subject to spousal consent in the case of a married Participant. Any spousal consent must satisfy the requirement of Section 6.07. In the event a Participant elects to have his or her vested Account Balance paid in a lump sum, the portion of such Participants vested Accrued Benefit attributable to his or her Grandfathered Benefit, if any, shall be paid in accordance with the otherwise applicable provisions of Section 6.06 (and of Article III of Part III of the Plan).
Notwithstanding anything in Part I of the Plan to the contrary, an actively employed Participants Accrued Benefit shall become 100% vested and non-forfeitable upon the
Part I - 47
earliest of (i) the date of such Participants death; (ii) the date such a Participant becomes Totally Disabled (within the meaning of Section 6.05 of Part I of the Plan); or (iii) the date such a Participant attains his or her Normal Retirement Age.
Any distributions under this Article shall be subject to the requirements of Sections 6.06 and 6.07, including the requirement that a Participant shall be eligible to receive any form of distribution provided for under Section 6.06 of Part I of the Plan at such time as he or she is eligible to receive his or her vested Account Balance in a lump sum.
8.03 | Forfeitures. The non-vested portion of a Participants Accrued Benefit shall be treated as a forfeiture when the Participant or his or her spouse (or surviving spouse) receives a distribution of the present value of his or her vested Accrued Benefit, pursuant to Section 8.02 of Part I of the Plan and the Participants service attributable to such distribution shall be disregarded as provided for in Section 8.07 of Part I of the Plan. For purposes of this Section, if the present value of a Participants vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit. |
In the case of a partially vested terminated Participant who does not receive a distribution pursuant to the above paragraph, the value of the nonvested portion of his Accrued Benefit shall be treated as a forfeiture at the end of the Plan Year in which the Participant incurs a One Year Break in Service until the Participant has completed one Year of Service after he has been re-employed.
Forfeitures will be used to reduce (i) Employer contributions for the Plan Year following the Plan Year in which the forfeiture occurs; and or (ii) the Employers costs under the Plan.
8.04 | Resumption of Service. A Participant who terminates his or her participation in Part I of the Plan and who subsequently resumes service with the Employer will again become a Participant on the entry date determined in accordance with Section 3.01(b) of Part I of the Plan. |
8.05 | Service with Affiliates. As provided in Section 2.23, in determining a Participants vesting percentage, Hours of Service completed with an Affiliate or as a Career Agent or General Agent of First Allmerica shall be deemed to be Hours of Service completed with the Employer. |
8.06 | Distribution of Benefits. On the Former Participants Normal Retirement Date, benefits to which he or she is entitled pursuant to this Article shall be distributed in accordance with Article VI. |
If a Former Participant entitled to a deferred benefit pursuant to this Article VIII dies prior to his or her Normal Retirement Date, the death benefit, if any, to which he or she is entitled shall be as is specified in Article VII.
Part I - 48
8.07 | Cash Out Repayment Option. |
(a) | Notwithstanding anything in this Article or in Section 2.01 to the contrary, unless a repayment has been made in accordance with Subsection (b) below, in determining a partially vested Employees Grandfathered Benefit (or, in the case of a Top Heavy Plan, the minimum benefit for Non-Key Employees described in Subsection 2.01(b)) after a resumption of participation, periods of service with respect to which the Employee received a distribution of the present value of his or her vested Accrued Benefit shall be disregarded. |
(b) | In the case of the distribution of the present value of a partially vested Employees vested Accrued Benefit in accordance with Section 8.02, the Employees Accrued Benefit described in Subsections 2.01(a) and (b) (including all optional forms of benefits and subsidies relating to such benefits) shall be restored if the Employee repays the amount distributed plus interest, if applicable, compounded annually from the date of distribution at the rate of 5 percent. In determining the amount of any required repayment, interest shall be charged on the portion of any distribution attributable to a Participants Grandfathered Benefit, if any or, in the case of a Top Heavy Plan, on the portion of any distribution that is a minimum benefit for Non-Key Employees described in Subsection 2.01(b). No interest shall be payable with respect to the portion of a Participants distribution attributable to his or her Account Balance. Such repayment must be made by the Employee before the earlier of five years after the first date on which the Employee is subsequently reemployed by the Employer, or the date the Employee incurs five consecutive One Year Breaks in Service following the date of distribution. |
If an Employee is deemed to receive a distribution pursuant to this Article, and the Employee resumes employment covered under this Plan before the date the Participant incurs 5 consecutive One-Year Breaks in Service, upon the reemployment of such Employee, the Employer-derived Accrued Benefit will be restored to the amount of such Accrued Benefit on the date of the deemed distribution.
8.08 | Early Retirement Election. Any Participant who terminates service after having completed at least fifteen Years of Service may elect to retire on the first day of any month following his or her 55th birthday, as described in Section 6.02. |
8.09 | Amendment to Vesting Schedule. If the Vesting Schedule of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of a Participants nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least 3 Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have their nonforfeitable percentage computed under the Plan without regard to such amendment or change. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: |
(i) | 60 days after the amendment is adopted; |
Part I - 49
(ii) | 60 days after the amendment becomes effective; or |
(iii) | 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. |
Part I - 50
EXHIBIT A ADJUSTMENT FACTORS FOR OPTIONAL GRANDFATHERED BENEFITS
Factors for ages not illustrated on the following tables will be computed on an actuarial basis consistent with that used to compute the factors shown.
Part I - 51
JOINT AND SURVIVOR OPTION PERCENTAGES
(Applicable only if the Participants age, nearest birthday, on the date monthly income commences is 65).
Age Nearest Birthday of Joint Annuitant on the Date Monthly Income Commences to the Participant |
Percentage of the Adjusted Grandfathered Retirement Annuity Payments which are to be Continued to the Surviving Joint Annuitant |
|||||||||||
100% |
66 2/3% |
50% |
||||||||||
50 |
80.3 | % | 87.1 | % | 90.9 | % | ||||||
51 |
80.7 | 87.5 | 91.3 | |||||||||
52 |
81.1 | 87.9 | 91.8 | |||||||||
53 |
81.5 | 88.4 | 92.2 | |||||||||
54 |
82.0 | 88.8 | 92.7 | |||||||||
55 |
82.4 | 89.3 | 93.2 | |||||||||
56 |
82.9 | 89.8 | 93.8 | |||||||||
57 |
83.3 | 90.3 | 94.3 | |||||||||
58 |
83.8 | 90.9 | 94.9 | |||||||||
59 |
84.3 | 91.4 | 95.5 | |||||||||
60 |
84.8 | 92.0 | 96.1 | |||||||||
61 |
85.3 | 92.7 | 96.8 | |||||||||
62 |
85.9 | 93.3 | 97.5 | |||||||||
63 |
86.4 | 94.0 | 98.3 | |||||||||
64 |
86.9 | 94.7 | 99.1 | |||||||||
65 |
87.5 | 95.4 | 100.0 | |||||||||
66 |
88.0 | 96.2 | 100.0 | |||||||||
67 |
88.6 | 97.0 | 101.9 | |||||||||
68 |
89.1 | 97.9 | 102.9 | |||||||||
69 |
89.6 | 98.7 | 104.0 | |||||||||
70 |
90.2 | 99.6 | 105.1 | |||||||||
|
1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 |
| ||||||||||
Life Ann/Opt. |
Part I - 52
CONTINGENT ANNUITANT OPTION PERCENTAGES
(Applicable only if the Participants age, nearest birthday, on the date monthly income commences is 65).
Age Nearest Birthday of Contingent Annuitant on the Date Monthly Income Commences to the Participant |
Percentage of the Adjusted Grandfathered Retirement Annuity Payments which are to be Continued to the Surviving Contingent Annuitant |
|||||||||||
100% |
66 2/3% |
50% |
||||||||||
50 |
80.3 | % | 85.9 | % | 89.0 | % | ||||||
51 |
80.7 | 86.2 | 89.3 | |||||||||
52 |
81.1 | 86.5 | 89.6 | |||||||||
53 |
81.5 | 86.9 | 89.8 | |||||||||
54 |
82.0 | 87.2 | 90.1 | |||||||||
55 |
82.4 | 87.5 | 90.4 | |||||||||
56 |
82.9 | 87.9 | 90.6 | |||||||||
57 |
83.3 | 88.2 | 90.9 | |||||||||
58 |
83.8 | 88.6 | 91.2 | |||||||||
59 |
84.3 | 89.0 | 91.5 | |||||||||
60 |
84.8 | 89.3 | 91.8 | |||||||||
61 |
85.3 | 89.7 | 92.1 | |||||||||
62 |
85.9 | 90.1 | 92.4 | |||||||||
63 |
86.4 | 90.5 | 92.7 | |||||||||
64 |
86.9 | 90.9 | 93.0 | |||||||||
65 |
87.5 | 91.3 | 93.3 | |||||||||
66 |
88.0 | 91.7 | 93.6 | |||||||||
67 |
88.6 | 92.1 | 93.9 | |||||||||
68 |
89.1 | 92.5 | 94.2 | |||||||||
69 |
89.6 | 92.9 | 94.5 | |||||||||
70 |
90.2 | 93.2 | 94.8 | |||||||||
|
1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. |
| ||||||||||
Life Ann/Opt. |
Part I - 53
ANNUITY OPTION ADJUSTMENT PERCENTAGES
Percentages to be applied to the monthly benefit which would be payable to the Participant on his or her Retirement Date if no Optional Form of Annuity were in effect to determine the monthly income benefit commencing on the Participants Retirement Date if one of the following options is in effect.
Age Nearest Birthday on the Date Monthly Income Commences Benefit |
Annuity Option for Grandfathered |
|||||||||||||||||
5C&C | 10C&C | 15C&C | 20C&C | |||||||||||||||
50 |
99.8 | % | 99.2 | % | 98.3 | % | 97.2 | % | ||||||||||
51 |
99.8 | 99.1 | 98.1 | 96.9 | ||||||||||||||
52 |
99.7 | 99.0 | 97.9 | 96.6 | ||||||||||||||
53 |
99.7 | 98.9 | 97.7 | 96.3 | ||||||||||||||
54 |
99.7 | 98.8 | 97.5 | 96.0 | ||||||||||||||
55 |
99.6 | 98.6 | 97.3 | 95.6 | ||||||||||||||
56 |
99.6 | 98.5 | 97.0 | 95.2 | ||||||||||||||
57 |
99.6 | 98.4 | 96.8 | 94.8 | ||||||||||||||
58 |
99.5 | 98.3 | 96.5 | 94.3 | ||||||||||||||
59 |
99.5 | 98.1 | 96.2 | 93.8 | ||||||||||||||
60 |
99.4 | 98.0 | 95.9 | 93.3 | ||||||||||||||
61 |
99.4 | 97.8 | 95.5 | 92.7 | ||||||||||||||
62 |
99.3 | 97.6 | 95.0 | 92.0 | ||||||||||||||
63 |
99.3 | 97.3 | 94.5 | 91.2 | ||||||||||||||
64 |
99.2 | 97.1 | 94.0 | 90.4 | ||||||||||||||
65 |
99.1 | 96.7 | 93.3 | 89.5 | ||||||||||||||
66 |
99.0 | 96.4 | 92.6 | 88.5 | ||||||||||||||
67 |
98.9 | 95.9 | 91.8 | 87.4 | ||||||||||||||
68 |
98.8 | 95.4 | 91.0 | 86.2 | ||||||||||||||
69 |
98.6 | 94.9 | 90.0 | 84.9 | ||||||||||||||
70 |
98.4 | 94.3 | 89.0 | 83.5 | ||||||||||||||
1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. | ||||||||||||||||||
Life Ann/Opt. |
Part I - 54
THE HANOVER INSURANCE GROUP CASH BALANCE
PENSION PLAN
PART II
(As amended and restated generally effective January 1, 2010)
Part II
THE HANOVER INSURANCE GROUP CASH BALANCE
PENSION PLAN
PART II
TABLE OF CONTENTS
PAGE | ||||||
ARTICLE I NAME, PURPOSE AND EFFECTIVE DATE OF PLAN |
1 | |||||
1.01 |
General Statement. | 1 | ||||
1.02 |
Name of Plan. | 1 | ||||
1.03 |
Purpose. | 1 | ||||
1.04 |
Restated Plan Effective Date. | 2 | ||||
ARTICLE II DEFINITIONS |
2 | |||||
ARTICLE III PARTICIPATION REQUIREMENTS |
14 | |||||
3.01 |
Participation Requirements. | 14 | ||||
3.02 |
Classification Changes. | 14 | ||||
3.03 |
Participant Cooperation. | 14 | ||||
ARTICLE IV EMPLOYER CONTRIBUTIONS |
15 | |||||
4.01 |
Employer Contributions. | 15 | ||||
4.02 |
Plan Contributions to Trustees. | 15 | ||||
4.03 |
Receipt of Contributions by Trustee. | 15 | ||||
ARTICLE V RETIREMENT AND DISABILITY BENEFITS |
15 | |||||
5.01 |
Normal Retirement Benefit. | 15 | ||||
5.02 |
Early Retirement Benefit. | 16 | ||||
5.03 |
Late Retirement Benefit. | 17 | ||||
5.04 |
Disability Benefit. | 18 | ||||
5.05 |
Distribution of Benefits. | 18 | ||||
5.06 |
Qualified Joint and Survivor Annuity for Married Participants. | 20 | ||||
5.07 |
Supplementary Pension Benefits. | 23 | ||||
5.08 |
Rollovers to Other Qualified Plans. | 24 | ||||
ARTICLE VI DEATH BENEFITS |
27 | |||||
6.01 |
Pre-Retirement Spouse Benefit for Married Participants. | 27 | ||||
6.02 |
Minimum Death Benefit. | 28 | ||||
ARTICLE VII BENEFITS UPON TERMINATION FROM SERVICE |
29 | |||||
7.01 |
In General. | 29 | ||||
7.02 |
Options on Termination of Participation. | 29 | ||||
7.03 |
Forfeitures. | 31 | ||||
7.04 |
Resumption of Service. | 31 | ||||
7.05 |
Distribution of Benefits. | 31 | ||||
7.06 |
Cash Out Repayment Option. | 31 | ||||
7.07 |
Early Retirement Election. | 32 | ||||
7.08 |
Amendment to Vesting Schedule. | 32 |
Part II
ARTICLE I
NAME, PURPOSE AND EFFECTIVE DATE OF PLAN
1.01 | General Statement. The Hanover Insurance Group Cash Balance Pension Plan (the Plan) consists of three parts, Part I, Part II and Part III. Part I of the Plan provides a cash balance and pension benefit, which was formerly provided under a plan known as The Allmerica Financial Cash Balance Pension Plan. Part II of the Plan provides a pension benefit, which was formerly provided under a plan known as The Allmerica Financial Agents Pension Plan. Part III of the Plan contains provisions applicable to each of Part I and Part II. |
The provisions of Part III of the Plan shall override any provision of Part II of the Plan as provided in Part III of the Plan.
The benefits payable to eligible Participants under Part II of the Plan are governed by the terms and conditions of Part II of the Plan and Part III of the Plan. Terms used in this Part II of the Plan are defined in Part I of the Plan, except as otherwise specifically provided in this Part II of the Plan.
1.02 | Name of Plan. The prior version of this Part II of the Plan, known as The Allmerica Financial Agents Pension Plan, was generally effective January 1, 1999 (except for those provisions of the Plan which had an alternative effective date). The effective date of the prior version of this Part II of the Plan (the Prior Agents Plan) was January 1, 1971. Effective January 1, 1992, the Prior Agents Plan was merged with and became a part of The Allmerica Financial Cash Balance Pension Plan, formerly known as The State Mutual Companies Pension Plan. Thus, the Prior Agents Pension Plan became Part II of The Hanover Insurance Group Cash Balance Pension Plan. On December 31, 2007, First Allmerica did not employ any person who was eligible to participate or was actively participating in The Allmerica Financial Agents Pension Plan. Effective January 1, 2008, First Allmerica transferred sponsorship of, and the liabilities and obligations associated with, The Hanover Insurance Group Cash Balance Plan (including The Allmerica Financial Agents Pension Plan) to Hanover, and Hanover agreed to assume sponsorship of, and the liabilities and obligations associated with, The Hanover Insurance Group Cash Balance Pension Plan as of such date. |
1.03 | Purpose. This Part II of the Plan has been established for the exclusive benefit of Participants and their Beneficiaries and as far as possible shall be interpreted and administered in a manner consistent with this intent and consistent with the requirements of Section 401 of the Internal Revenue Code. |
Subject to Article IV of Part III of the Plan (Limitations on Benefits) and to Section 10.04 of Part III of the Plan, which relates to the return of Employer contributions under special circumstances, until such time as the Plan has been terminated and all Plan liabilities have been satisfied, under no circumstances shall any assets of the Plan, or any contributions made under the Plan, be used for, or diverted to, purposes other than for the exclusive benefit of the Participants and their Beneficiaries and to defray reasonable expenses incurred in the administration of the Plan.
Part II -1
1.04 | Restated Plan Effective Date. The effective date of this amended and restated Part II of the Plan is January 1, 2010 (except for those provisions of this Part of the Plan which have an expressly stated alternative effective date). Except to the extent otherwise specifically provided in this Part II of the Plan, (i) the terms and conditions of this amended and restated Part II of the Plan shall apply only to those eligible Employees actively employed by the Employer (or to those eligible Career Agents with a Career Agent Contract in force) on or after January 1, 2010. The rights and benefits of any Participant whose employment with the Employer terminated (or whose Career Agent Contract terminated) prior to January 1, 2010 shall be determined in accordance with the provisions of this Part II of the Plan as were in effect during the appropriate time or times prior to January 1, 2010; provided, however, that if the Accrued Benefit of any such Participant has not been completely distributed before January 1, 2010, then such Accrued Benefit shall be accounted for and distributed in accordance with the provisions of this version of Part II of the Plan, but only to the extent that any such provision is not inconsistent with Part III of the Plan and subject to the requirements of applicable law and as otherwise specifically provided herein. |
ARTICLE II
DEFINITIONS
All section and article references in this Part II are to section and article references in this Part II, except as otherwise expressly provided.
Except to the extent a word or phrase is specifically defined in this Part II of the Plan, the words and phrases used in this Part II of the Plan shall have the meanings set forth in Part I of the Plan, unless a different meaning is clearly required by the context or is otherwise provided in Part III of the Plan.
2.01 | Accrued Benefit: |
(a) | means, except as provided in (c) or (d) below, the sum of a Participants frozen Grandfathered Benefit (accrued during Years of Credited Service completed prior to January 1, 1999) and the defined benefit credited to eligible Participants in accordance with Section 5.01 attributable to Years of Credited Service completed by the Participant after December 31, 1998. |
(b) | No Employee contributions shall be required or permitted for Plan Years beginning after December 31, 1988. The portion of a Participants Accrued Benefit derived from required Employee contributions made on or after January 1, 1971 and prior to January 1, 1989 will be determined in accordance with the rules set forth below: |
(i) | STEP ONE - Determine the total amount of such contributions made by a Participant as a condition of participation in Part II of the Plan; |
Part II -2
(ii) | STEP TWO - Add to the amount in Step One interest required by the terms of Part II of the Plan to be credited to such contributions up to the Plans ERISA compliance date; |
(iii) | STEP THREE - Add to the sum of the amounts determined in Steps One and Two interest compounded annually at the rate of 5% from the Plans ERISA compliance date or the date the Participant began participation in Part II of the Plan, whichever is later, to the end of the last Plan Year beginning before January 1, 1988 or the Participants Normal Retirement Date, whichever is earlier. |
(iv) | STEP FOUR - Add to the sum of the amounts determined in Steps One, Two and Three interest compounded annually - |
(A) | at the rate of 120 percent of the Federal mid-term rate (as in effect under Section 1274 of the Code for the first month of the Plan Year) from the beginning of the first Plan Year beginning after December 31, 1987, and ending with the date on which the determination is being made, and |
(B) | at the interest rate which would be used under Part II of the Plan under Section 417(e)(3) of the Code (as of the determination date) for the period beginning with the determination date and ending on the date on which the Employee attains his Normal Retirement Date. |
Notwithstanding the foregoing, for Plan Years beginning after December 31, 1998, the interest rate credited in Step (iv)(A) shall not be less than 5%.
(v) | STEP FIVE - The amount in Step 4 will be converted into the normal form of benefit using the interest rate that would be used under Part II of the Plan under Code Section 417(e)(3). |
The portion of a Participants Accrued Benefit derived from Employee contributions made prior to January 1, 1971 shall be equal to the total amount of such contributions made by a Participant, plus interest credited thereon. For Plan Years beginning prior to January 1, 1999, interest on such contributions shall be credited at the rate or rates in effect for each Plan Year under the terms of Part II of the Plan as in effect on December 31, 1998. For Plan Years beginning after December 31, 1998, interest on such contributions shall be credited as provided in STEPS FOUR and FIVE above.
Part II - 3
The portion of the Accrued Benefit described in Subsection (a) derived from Employer contributions as of any date is equal to such total Accrued Benefit less the portion derived from Employee contributions.
At all times the portion of a Participants Accrued Benefit attributable to mandatory Employee contributions shall be 100% vested and nonforfeitable.
(c) | means, with respect to the minimum benefit for Non-Key Employee Participants in a Top Heavy Plan, the sum of such benefits earned by the Participant, which benefits are payable at the Participants Normal Retirement Date and are described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans). |
(d) | (i) | Notwithstanding anything in Subsections (a), (b) or (c) to the contrary, unless a repayment has been made in accordance with the rules set forth in subparagraph (ii) below, in determining the portion of an Employees Accrued Benefit derived from Employer Contributions upon a resumption of participation, periods of service with respect to which the Employee received a distribution of the present value of his vested Accrued Benefit shall be disregarded. |
(ii) | In the case of an election of Option 2 described in Section 7.02 or in the case of an involuntary cash-out of the present value of an Employees Accrued Benefit in accordance with such Section, the Employees Accrued Benefit described in Subsections 2.01(a), (b) and (c) (including all optional forms of benefits and subsidies relating to such benefits) shall be restored if the Employee repays the amount distributed plus interest, compounded annually from the date of distribution at the rate of 5 percent. Such repayment must be made by the Employee before the earlier of five years after the first date on which the Employee is subsequently reemployed by the Employer, or the date the Employee incurs five consecutive One Year Breaks in Service following the date of distribution; provided, however, that there shall be no right of repayment if the Employee was 100% vested on the date of his termination of participation. |
Notwithstanding anything in Part II of the Plan to the contrary, for Plan Years beginning before Section 411 of the Code is applicable hereto, the Participants Accrued Benefit shall be the greater of that provided by Part II of the Plan, or 1/2 of the benefit which would have accrued had the provisions of this Section 2.01 been in effect. In the event the Accrued Benefit as of the effective date of Code Section 411 is less than that provided hereunder, such difference shall be accrued in accordance with this Section.
Part II - 4
2.02 | Actuarial Equivalent means a benefit having the same value as the benefit or benefits otherwise payable. Except as otherwise provided in this Section, the present value of any benefit determined under the terms of Part II of the Plan will be the actuarial equivalent of the no-death benefit life annuity retirement benefit specified in Section 5.01. |
Actuarial Equivalent life annuity settlements of optional life annuity Top Heavy Plan benefits will be computed utilizing (i) the Code Section 417 Mortality Table and (ii) the Code Section 417 Interest Rate for determining the amount payable to a Participant having an annuity starting date on or after January 1, 2004.
Optional life annuity benefits will be computed on the basis of the 1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. Adjustment factors used to determine optional forms of life annuity benefits are included in Exhibit A, attached hereto and made a part of Part II of the Plan. Adjustment factors for optional life annuity benefits not illustrated will be computed on an actuarial basis consistent with that used in computing the factors shown in Exhibit A.
The present value of any Plan benefit and the amount of any cash distribution shall be determined on the basis of (i) the mortality rates specified above and an interest rate of 7% per annum or (ii) the Code Section 417 Mortality Table and the Code Section 417 Interest Rate (or for determining the amount payable to a Participant having an annuity starting date on and after January 1, 2008, the Code Section 417 Applicable Interest Rate), whichever produces the greater benefit.
The preceding paragraphs shall not apply to the extent they would cause the Plan to fail to satisfy the requirements of Article IV of Part III of the Plan (Limitations on Benefits) or Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans).
For purposes of Part II of the Plan,
(a) | the Code Section 417 Mortality Table means the applicable mortality table prescribed by the Secretary of the Treasury pursuant to Code Section 417(e)(3), as in effect from time to time, provided, however, that notwithstanding the preceding provisions of this paragraph, for distributions commencing on or after December 31, 2002 and prior to January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2001-62 and for purposes of determining the amount payable to a Participant with an annuity starting date on or after January 1, 2008, the Code Section 417 Mortality Table means the Table set forth in Revenue Ruling 2007-67 or such other Table as may be prescribed by the Secretary of the Treasury pursuant to Code Section 417(e)(3); |
(b) | for periods beginning on and after January 1, 2004, the Code Section 417 Interest Rate means, for the Plan Year which contains the annuity starting date for the distribution, the annual rate of interest on a 30-year Treasury securities in effect for the second month immediately preceding the first day of the Plan Year (e.g., November 2009 for the 2010 Plan Year), and |
Part II - 5
(c) | for periods beginning on and after January 1, 2008, the Code Section 417 Applicable Interest Rate means, for the Plan Year which contains the annuity starting date for the distribution, the applicable interest rate described by Code section 417(e) after its amendment by the Pension Protection Act of 2006, which rate more specifically shall be the adjusted first, second, and third segment rates applied under rules similar to the rules of Code Section 430(h)(2)(C) for the lookback month used to determine the previously applicable interest rate on 30-year Treasury securities (e.g., November 2009 for the 2010 Plan Year) or for such other time as the Secretary of the Treasury may by regulations prescribe. |
(d) | For purposes of determining the Code Section 417 Applicable Interest Rate, the first, second, and third segment rates are the first, second, and third segment rates which would be determined under Code Section 430(h)(2)(C) if: |
(i) | Code Section 430(h)(2)(D) were applied by substituting the average yields for the month described in clause (ii) below for the average yields for the 24-month period described in such Code section, and |
(ii) | Code Section 430(h)(2)(G)(i)(II) were applied by substituting Section 417(e)(3)(A)(ii)(II) for Section 412(b)(5)(B)(ii)(II), and |
(iii) | The applicable percentage under Code section 430(h)(2)(G) is treated as being 20% in 2008, 40% in 2009, 60% in 2010, and 80% in 2011. |
2.03 | Compensation means: |
(a) | For purposes of determining a Participants Normal Retirement Benefit specified in Section 5.01 of Part II of the Plan, a Participants total calendar year compensation paid (or deferred pursuant to an unfunded, non-qualified deferred payment arrangement) on and after the date he becomes a Participant and while he remains in an eligible class of Employees for (i) and (ii) below: |
(i) | services performed in connection with the sale and service of products of First Allmerica Financial Life Insurance Company. |
(ii) | services performed in connection with the sale and service of products of Allmerica Financial Life Insurance and Annuity Company. |
Compensation shall also mean and include:
(iii) | commissions paid to the Participant by Allmerica Investments, Inc., and |
Part II - 6
(iv) | compensation which is not currently includable in the Participants gross income by reason of the application of Sections 125, 402(e)(3) or 132(f)(4) of the Code. |
Notwithstanding the foregoing, for purposes of Subsection (a) renewal commissions received which are attributable to business sold prior to the date the Employee became a Career Agent or General Agent of the Employer shall be excluded.
(b) | For purposes of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and or for purposes of Article IV of Part III of the Plan (Limitations on Benefits), the term Compensation means a Participants earned income, wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c) of the Treasury Regulations), and excluding the following: |
(i) | Employer contributions to a plan of deferred compensation which are not includible in the Employees gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the employee, or any distributions from a plan of deferred compensation; |
(ii) | Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; |
(iii) | Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and |
(iv) | Other amounts which received special tax benefits. |
For Plan Years commencing after December 31, 1997, Compensation for purposes of Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and Article IV of Part III of the Plan (Limitations on Benefits) shall also include Employee elective deferrals under Code Section 402(g)(3), amounts contributed or deferred by the Employer at the election of the Employee and not includable in the gross income of the Employee by reason of Code Section 125, and elective amounts that are not includable in the gross income of the Employee by reason of Code Section 132(f)(4).
Part II - 7
(c) | Notwithstanding (a) and (b) above, for Plan Years beginning on or after January 1, 1994 and prior to January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under Part II of the Plan for any determination period shall not exceed $150,000. This limitation shall be adjusted for inflation by the Secretary under Code Section 401(a)(17)(B) in multiples of $10,000 by applying an inflation adjustment factor and rounding the result down to the next multiple of $10,000 (increases of less than $10,000 are disregarded). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined beginning in such calendar year. If Compensation is being determined over a period of time that contains fewer than 12 calendar months, then the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. |
If Compensation for any prior determination period is taken into account in determining a Participants benefits for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual Compensation limit in effect for that prior period. For this purpose, in determining benefits in Plan Years beginning on or after January 1, 1989, the annual compensation limit in effect for determination periods beginning before that date is $200,000. In addition, in determining benefits in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for determination periods beginning before that date is $150,000.
(d) | Notwithstanding the foregoing and (a) and (b) above, the annual Compensation of each Participant taken into account in determining benefit accruals in any Plan Year beginning after December 31, 2001, shall not exceed $200,000. Annual compensation means Compensation during the Plan Year or such other consecutive 12-month period over which Compensation is otherwise determined under Part II of the Plan (the determination period). For purposes of determining benefit accruals in a Plan Year beginning after December 31, 2001, the annual Compensation for any prior determination period shall be limited to $200,000. |
The $200,000 limit on annual Compensation for determination periods beginning after December 31, 2001 shall be adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to annual Compensation for the determination period that begins with or within such calendar year.
2.04 | Career Agent Contract means that form of contract between a life insurance agent and the Employer whereby the agent agrees to sell insurance and annuity policies on a full-time basis. |
Part II - 8
2.05 | Credited Interest means interest utilized in determining the minimum death benefit specified in Section 6.02 of Part II of the Plan. Such interest shall be at the rate determined in accordance with the Group Annuity Contract, but not less than 3% per annum compounded annually from the January 1st next following the date such contributions were made to the first day of the month as of which the Credited Interest is being determined for periods prior to January 1, 1976, plus 5% per annum compounded annually for periods beginning on or after January 1, 1976 and prior to January 1, 1988, plus the greater of (i) 5% per annum compounded annually or (ii) the interest rate which would be credited under Part II of the Plan under Step (iv)(A) of Subsection 2.01(b) for periods beginning on or after January 1, 1988. |
2.06 | Credited Service |
(a) | Except as provided in Subsection (c) and except for Hours excluded under Subsections 2.12(b), (c), (g) and (h), Credited Service shall mean and include all Hours of Service completed with the Employer on and after the date the Employee becomes a Participant in Part II of the Plan, completed while the Participant remains in an eligible class of Employees. |
(b) | A Participant shall receive a year of Credited Service for each Plan Year in which he is credited with 1,000 or more Hours of Service with the Employer. |
Additionally, for Plan Years beginning after 1998, a Participant shall receive a Year of Credited Service for the Plan Year he retires or dies and a Former Participant shall receive a Year of Credited Service for the Year he again becomes a Participant upon a rehire, in each case regardless of the number of Hours of Service completed in such Year. In no event will a Participant receive more than one Year of Credited Service for any one Plan Year.
(c) | Notwithstanding anything in this Section to the contrary, Credited Service shall not include periods of service with respect to which any Employee has received a distribution described in Section 2.01(d) unless a repayment has been made pursuant to the rules set forth in paragraph (ii) of such Section. |
(d) | For purposes only of determining a Participants eligibility for the Disability Benefit specified in Section 5.03 of Part II of the Plan, the following periods of service shall be counted: |
(i) | periods of prior service with an Affiliate during which he was a participant in a qualified pension or profit sharing plan sponsored by the Affiliate; |
(ii) | periods of prior service with the Employer in a position in which he was not eligible to participate in this Plan during which he was a participant in another qualified pension or profit sharing plan sponsored by the Employer; and |
Part II - 9
(iii) | the number of full years and completed months during which a General Agent or former General Agent made contributions under Part II of his General Agents Contract. |
2.07 | Employee means any General Agent or life insurance agent who is a common-law employee of the Company or any life insurance agent who holds a Career Agents Contract with the Employer. |
2.08 | Employee Contributions means contributions made by a Participant prior to January 1, 1989 as a condition of participation in Part II of the Plan. |
2.09 | Employer means First Allmerica; provided that on and after January 1, 2008 the term Employer shall also mean the Plan Sponsor. |
2.10 | General Agent means an agent of the Company whose relationship is determined by a General Agents Agreement wherein the General Agent is required to devote his full-time business activities in the hiring, supervision and management of life insurance agents who sell, administer and service the policies and contracts of the Employer. |
2.11 | Grandfathered Benefit means the frozen monthly retirement benefit payable as a single life annuity to a Participant on his Normal Retirement Date, calculated in accordance with the benefit formulas set forth in Sections 5.01 and, if applicable, 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) as in effect on December 31, 1998. Such benefit shall be calculated based on the Participants Average Compensation, Final Average Compensation, Credited Service, and the amount of benefit offset as determined by applying Section 5.06, each determined as of December 31, 1998, based on the provisions of Part II of the Plan in effect on such date. |
2.12 | Hour of Service means: |
(a) | Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. For purposes of Part II of the Plan a Career Agent shall be credited with 45 Hours of Service for each complete or partial week his Career Agents Contract remains in force and a General Agent or life insurance agent who is a common-law employee shall be credited with 45 Hours of Service for each complete or partial week he performs duties for the Employer. |
(b) | Each hour for which the Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: |
(i) | Except in the case of a Participant who is eligible for the Disability Benefit specified in Section 5.04, no more than 1,000 Hours shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); |
Part II - 10
(ii) | No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable workers compensation, unemployment compensation or disability insurance laws; and |
(iii) | No hours shall be credited under this Subsection (b) for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. |
For purposes of this Subsection (b) a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund or insurer, to which the Employer contributes or pays premiums.
(c) | Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties. |
(d) | Special rules for determining Hours of Service under Subsections (b) and (c) for reasons other than the performance of duties. In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay, to the extent that such an award or agreement is made with respect to a period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows: |
(i) | In the case of a payment made or due which is calculated on the basis of units of time (such as hours, days, weeks or months), the number of Hours of Service to be credited shall be determined as provided in Subsection (a). |
(ii) | Except as provided in Paragraph (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employees most recent hourly rate of compensation (as determined below) before the period during which no duties are performed. |
(A) | In the case of General Agents, the hourly rate of compensation shall be the Employees most recent rate of semi-monthly compensation divided by 80. |
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(B) | In the case of life insurance agents, the hourly rate of compensation shall be the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended. |
(iii) | Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such Employee would have been credited but for such absence. |
(e) | Crediting of Hours of Service to computation periods. |
(i) | Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed. |
(ii) | Hours of Service described in Subsection (b) shall be credited as follows: |
(A) | Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as hours, days, weeks or months) shall be credited to the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates. |
(B) | Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established by the Employer, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined. |
(iii) | Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made. |
(f) | For purposes of Article III (Participation Requirements), determining eligibility for early retirement (Section 5.02) and Article VII (Benefits upon Termination from Service), Hours of Service shall also include Hours of Service determined in accordance with the rules set forth in this Section 2.12 and which would not have been excluded if such Service had been performed with the Employer, completed prior or subsequent to the Employees commencement of service with the Employer, completed with an Affiliate, as a General Agent or with the Employer in a position in which he was not eligible to participate in this Plan. |
Part II - 12
(g) | Rules for Maternity or Paternity Leaves of Absence. In addition to the foregoing rules and solely for purposes of determining whether a One Year Break in Service for participation and vesting purposes has occurred in a computation period, an individual who is absent for maternity or paternity reasons, shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence. Provided, however, that: |
(i) | Hours shall not be credited under both this Subsection (g) and one of the other Subsections of this Section 2.12; |
(ii) | no more than 501 hours shall be credited for each maternity or paternity absence; and |
(iii) | if a maternity or paternity leave extends beyond one Plan Year, the Hours shall be credited to the Plan Year in which the absence begins to the extent necessary to prevent a One Year Break in Service, otherwise such Hours shall be credited to the following Plan Year. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of a birth of a child of the individual, (iii) by reason of the placement of a child with the individual, in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement. |
(h) | Other Federal Law. Nothing in this Section 2.12 shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation issued under any such law. |
2.13 | Normal Retirement Age means the later of: |
(a) | the 65th birthday of the Employee; or |
(b) | the fifth anniversary of the time the Participant commenced participation in Part II of the Plan. |
For purposes of the foregoing, the participation commencement date is the first day of the Plan Year in which the Participant commenced participation in Part II of the Plan.
2.14 | Normal Retirement Date shall mean the first day of the month next following the Participants Normal Retirement Age. |
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2.15 | (a) | One Year Break in Service means, except for purposes of Article III (Participation Requirements), any Plan Year during which the Employee has not completed more than 500 Hours of Service. |
(b) | For purposes of Article III, One Year Break in Service means a twelve consecutive month period, computed with reference to the date the Employees employment commenced, during which the Employee does not complete more than 500 Hours of Service. |
ARTICLE III
PARTICIPATION REQUIREMENTS
3.01 | Participation Requirements. |
(a) | Employee Participation. Individuals who were Participants in Part II of the Plan on December 31, 2009 shall continue as a Participant in this Part II of the Plan on January 1, 2010. On and after January 1, 1983 no additional Employees shall be eligible to become Participants in Part II of the Plan. |
(b) | Notwithstanding the rules set forth in Subsection (a), a Former Participant who again becomes eligible to participate in Part II of the Plan will become a Participant on the date of his recommencement of service with the Employer. |
(c) | Notwithstanding anything in Part II of the Plan to the contrary, for periods commencing on and after January 1, 2003, a Former Participant who is re-employed as an Employee shall be reinstated as an active Plan Participant only for purposes of increasing Plan vesting on his or her frozen Accrued Benefit and for purposes of determining eligibility for early retirement under Section 5.02. |
3.02 | Classification Changes. In the event of a change in job classification, such that an Employee, although still in the employment of the Employer, no longer is an eligible Employee, he shall receive no further Credited Service under Part II of the Plan, and the Participants Accrued Benefit on the date he becomes ineligible shall continue to vest, become payable or be forfeited, as the case may be, in the same manner and to the same extent as if the Employee had remained a Participant. |
For periods commencing prior to January 1, 2003, in the event a Participant becomes ineligible to accrue further Credited Service because he is no longer a member of an eligible class of Employees, but has not terminated his employment with the Employer, such Employee shall again be eligible to accrue further Credited Service immediately upon his return to an eligible class of Employees.
3.03 | Participant Cooperation. Each eligible Employee who becomes a Participant thereby agrees to be bound by all of the terms and conditions of this Plan. Each eligible |
Part II - 14
Employee, by becoming a Participant, agrees to cooperate fully with the Insurer, including completion and signing of such forms as are required by the Insurer under the Group Annuity Contract. |
ARTICLE IV
EMPLOYER CONTRIBUTIONS
4.01 | Employer Contributions. Each Employer shall pay to the Trustee for each Plan Year such amount which, when combined with required Employee Contributions, shall be necessary in the opinion of the Plans enrolled actuary to provide the benefits of Part II of the Plan. |
4.02 | Plan Contributions to Trustees. The Employer shall make payment of all contributions directly to the Trustee to be held, managed and invested in one or more Group Annuity Contracts and in other investments permitted under the Trust, but subject to Section 4.03. |
4.03 | Receipt of Contributions by Trustee. The Trustee shall accept and hold under the Trust Indenture such contributions of money, or other property approved for acceptance by the Trustee, on behalf of the Employer and its Employees and Beneficiaries, as it may receive from time to time, other than cash it is instructed to remit to the Insurer for deposit with the Insurer. However, the payor may pay contributions directly to the Insurer and such payment shall be deemed a contribution to the Trust to the same extent as if payment had been made to the Trustee. All such contributions shall be accompanied by written instructions from the Plan Administrator accounting for the manner in which they are to be credited. |
Notwithstanding the foregoing, for periods commencing on and after January 1, 1992, Plan contributions will also be used to fund costs and provide benefits under the merged State Mutual Companies Pension Plan, which plan was merged with The Allmerica Financial Agents Pension Plan on such date.
ARTICLE V
RETIREMENT AND DISABILITY BENEFITS
5.01 | Normal Retirement Benefit. (Applicable to all Employees who are active Participants on or after January 1, 1999). |
Except as provided in Sections 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) and Section 5.06 of Part II of the Plan, each Participant who retires on his Normal Retirement Date shall be entitled to receive a monthly retirement income, commencing on his Normal Retirement Date and terminating on the last regular payment date prior to his death, which monthly retirement income will be equal to the sum of (a) and, if applicable, (b) below:
(a) | The Participants Grandfathered Benefit; and |
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(b) | For those Participants whose Participant Number is listed on Exhibit B, attached hereto and made a part hereof, an amount equal to 1/12 of the Participants Post-1998 Annual Accrued Benefit. |
For purposes of Part II of the Plan, a Participants Post-1998 Annual Accrued Benefit shall be equal to the Participants total Compensation paid during all Years of Credited Service completed after December 31, 1998 multiplied by the Participants individual accrual percentage. Each eligible Participants accrual percentage is set forth in Exhibit B.
5.02 | Early Retirement Benefit. |
An actively employed Participant in Part II of the Plan who has completed at least 15 Years of Service may retire on the first day of any month after his 55th birthday, in which event, except as provided in Section 5.06, he shall receive a monthly retirement benefit equal to the appropriate percentage set forth below of his Accrued Benefit.
Notwithstanding the above, if the Plan is top heavy and the minimum benefit for Non-Key Employees described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) is to be provided to the Participant, the Participants early retirement benefit shall be equal to the appropriate percentage set forth below of the Participants Accrued Benefit (as described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans)) earned as of the date of his early retirement.
In the event of early retirement, benefits shall be determined as of the date of retirement and shall be equal to the following percentage of the benefit payable at Age 65:
Retirement Age* |
Percentage of Monthly Accrued Benefit | |
65 |
100% | |
64 |
97 | |
63 |
94 | |
62 |
91 | |
61 |
88 | |
60 |
85 | |
59 |
82 | |
58 |
79 | |
57 |
76 | |
56 |
73 | |
55 |
70 | |
54 |
67 | |
53 |
64 | |
52 |
61 | |
51 |
58 | |
50 |
55 |
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* If benefit payments commence in a month other than the month in which the Participant attains the specified Age, the percentage shall be determined by straight line interpolation. |
If a Participant terminates his employment (or terminates his Career Agent Contract) after having completed at least 15 Years of Service, he may elect to retire at any time after the first day of the month next following his 55th birthday and prior to his Normal Retirement Date and receive a retirement benefit based on his Credited Service as of the date of termination. The benefit to be provided to any such terminee shall be equal to the appropriate percentage set forth above of his Accrued Benefit.
Notwithstanding anything in this Section to the contrary, any Participant who was actively employed on June 30, 1977 may elect early retirement on the earlier of (i) and (ii) below, in which event, except as provided in Section 5.06, he shall receive a monthly retirement benefit equal to the appropriate percentage set forth above of his Accrued Benefit.
(i) | the first day of the month following attainment of Age 50, and completion of at least 20 Years of Service; and |
(ii) | the first day of any month following attainment of Age 55 and completion of at least 15 Years of Service. |
5.03 | Late Retirement Benefit. |
With the consent of the Employer, a Participant may elect to have his retirement benefit deferred to a late retirement date which may be the first day of any month after his Normal Retirement Date; provided, however, that Employer consent shall not be required for Employees protected beyond their Normal Retirement Date under the Age Discrimination in Employment Act of 1967, as amended or under applicable state law. Except as provided in Section 5.06, the monthly benefit payable to the Participant on his late retirement date shall be equal to the sum of (a) and (b) below:
(a) | The Participants Grandfathered Benefit, which benefit will be actuarially increased; and |
(b) | For those Participants whose Participant Number is listed on Exhibit B, attached hereto and made a part hereof, an amount equal to 1/12 the Participants Post-1998 Annual Accrued Benefit, which benefit will be actuarially increased. |
For purposes of Part II of the Plan, a Participants Post-1998 Annual Accrued Benefit shall be equal to the Participants total Compensation paid during all Years of Credited Service completed after December 31, 1998, including Years of Credited Service completed after the Participants Normal Retirement Date, multiplied by the Participants individual accrual percentage. Each eligible Participants accrual percentage is set forth in Exhibit B. Actuarial increases will be determined as provided in Exhibit A, attached hereto and made a part hereof.
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Notwithstanding the above, if the Plan is top heavy and the minimum benefit for Non-Key Employees described in Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans) is to be provided to the Participant, the Participants late retirement benefit shall be determined in accordance with Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans), with top-heavy minimum benefits being computed for each Year of Service completed until the Participants Late Retirement Date, which resulting benefit shall be actuarially increased.
5.04 | Disability Benefit. |
If a Participant becomes Totally Disabled while employed as a General Agent or while his Career Agent Contract remains in force and if such total disability commenced after the Participant had completed at least five Years of Credited Service, it shall be assumed for purposes of this Plan that his employment or contractual relationship continued unchanged from the date of the commencement of his total disability to the earliest of his Normal Retirement Date, death, termination of employment (or, in the case of an Agent, termination of his Career Agent Contract) or the date that he is no longer Totally Disabled. While an Employee is Totally Disabled it shall be assumed for purposes of this Section that the Employee continued to earn annually an amount determined by dividing by three the Compensation paid to the Participant during the 36 months prior to the month in which he became Totally Disabled.
For purposes of this Part II of the Plan Totally Disabled means the inability to perform the duties of any occupation for which the Employee is reasonably fitted by training, education or experience; provided, however, that during the first 30 months of any disability an Employee will be considered Totally Disabled if he is unable to perform the duties of his occupation and is not working at any other occupation unless such occupation constitutes rehabilitative employment approved by the Plan Administrator.
5.05 | Distribution of Benefits. The Plan Administrator shall direct the Insurer to commence payment of benefits provided under this Article V (or provided to a Former Participant pursuant to Article VII of Part II of the Plan). Plan benefits will be paid only on death, disability, termination of employment, Plan termination or retirement. |
Except as otherwise provided in Section 5.06 of Part II of the Plan, the requirements of this Section shall apply to any distribution of a Participants interest and will take precedence over any inconsistent provisions of this Part II of the Plan.
All distributions required under the Plan shall be determined and made in accordance with the Regulations under Code Section 401(a)(9), including, to the extent applicable, the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed Regulations.
Part II - 18
Except as provided below and in Section 5.06, a Participants retirement benefit shall be payable as a life annuity for the life of the Participant with no further benefits payable after the last regular payment date prior to his death.
At any time prior to actual retirement a Participant, with spousal consent if the Participant is married, may elect to receive his retirement benefit under one or more of the following settlement options:
(a) | An annuity for the joint lives of the Participant and his spouse with 50% or 66 2/3% (whichever is specified when this option is elected) of such amount payable as an annuity for life to the survivor. No further benefits are payable after the death of both the Participant and his spouse. |
(b) | An annuity for the life of the Participant and upon his death 100%, 66 2/3%, or 50% (whichever is specified when this option is elected) of the annuity amount will be continued to his spouse as his contingent annuitant. No further annuity benefits are payable after the death of both the Participant and his spouse. |
(c) | An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant. |
(d) | An annuity for the life of the Participant with guaranteed installment payments for a period certain not longer than the life expectancy of the Participant and his spouse. |
(e) | A lump sum amount equal to the present value of the portion of the Participants Accrued Benefit described in Section 2.01(b) attributable to required Employee Contributions. Additionally, the Participant shall be entitled to receive a monthly annuity benefit equal to the portion of his Accrued Benefit described in Section 2.01(a) attributable to Employer Contributions. The Participant may elect to receive such monthly annuity benefit under one or more of the options described in (a) through (d) above, subject to spousal consent if the Participant is married. |
All optional forms of benefits shall be the Actuarial Equivalent (as of the date selected) of the normal retirement benefits described in Section 5.01 of Part II of the Plan or Section 2.03 of Part III of the Plan (Minimum Benefit for Top Heavy Plans). Any spousal consent shall satisfy the requirements of Section 5.06.
Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the later of the close of the Plan Year in which:
(i) | the Participant attains Normal Retirement Age; or |
(ii) | the Participant terminates service with the Employer. |
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Notwithstanding the foregoing, the failure of a Participant and spouse (or where either the Participant or the spouse has died, the survivor) to consent to a distribution when a benefit is immediately distributable (as described below) shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section 5.05 (and provisions of Article III of Part III of the Plan). In no event will benefits begin to be distributed prior to the later of Age 62 or Normal Retirement Age without the consent of the Participant. The consent of the Participants spouse will also be required for any such distribution unless the benefit is paid in the form of a Qualified Joint and Survivor Annuity.
If the Accrued Benefit is immediately distributable, the Participant and the Participants spouse (or where either the Participant or the spouse has died, the survivor) must consent to any distribution of such Accrued Benefit. The consent of the Participant and the Participants spouse shall be obtained in writing within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. The annuity starting date is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and the Participants spouse of the right to defer any distribution until the Participants Accrued Benefit is no longer immediately distributable. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under Part II of the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code, and shall be provided no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date.
Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the Accrued Benefit is immediately distributable. Neither the consent of the Participant nor the Participants spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code.
An Accrued Benefit is immediately distributable if any part of the Accrued Benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or Age 62.
Notwithstanding the above, the distribution of the entire interest of a Participant or a Beneficiary must not violate the minimum required distribution rules set forth in Article III of Part III of the Plan.
5.06 | Qualified Joint and Survivor Annuity for Married Participants. |
(a) | General Rules. Notwithstanding anything in this Article to the contrary, unless a married Participants Accrued Benefit has been paid in a lump sum pursuant to Section 5.05 above, such Participants retirement benefit will be payable to the Participant and his spouse in the form of a Qualified Joint and Survivor Annuity, with the survivor to receive 100% of the benefit which had been payable during |
Part II - 20
their joint lives, unless an optional form of benefit is selected pursuant to a qualified election within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. In the case of an unmarried Participant, unless the Participant elects an optional form of benefit the Participants retirement benefit will be paid in the form of a no-death benefit life annuity. |
(b) | Definitions. |
(i) | Qualified election: A waiver of a Qualified Joint and Survivor Annuity. Any waiver of a Qualified Joint and Survivor Annuity shall not be effective unless: (A) the Participants spouse consents in writing to the election; (B) the election designates a specific Beneficiary, including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent); (C) the spouses consent acknowledges the effect of the election; and (D) the spouses consent is witnessed by a Plan representative or notary public. Additionally, a Participants waiver of the Qualified Joint and Survivor Annuity will not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of a Plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed a qualified election. |
Any consent by a spouse obtained under this provision (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by such spouse must acknowledge that the spouse has the right to limit consent to a specific Beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Subsection (c) below.
(ii) | Spouse (surviving spouse): the opposite-gender person, if any, to whom the Participant is lawfully married at the date of his death or at his annuity starting date, whichever is earlier, provided that a former spouse will be treated as the spouse or surviving spouse to the extent provided under a Qualified Domestic Relations Order. |
Part II - 21
(iii) | Annuity starting date: The first day of the first period for which an amount is paid as an annuity or under any other form. |
(c) | Notice Requirement. |
(i) | In the case of a Qualified Joint and Survivor Annuity as described in Subsection (a), the Plan Administrator shall provide each Participant no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date a written explanation of: (A) the terms and conditions of a Qualified Joint and Survivor Annuity; (B) the Participants right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (C) the rights of a Participants spouse; (D) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (E) the relative values of the various optional forms of benefit under Part II of the Plan. Notices given to Participants pursuant to Code Section 411(a)(11) in Plan Years beginning after December 31, 2006 shall include a description of how much larger benefits will be if the commencement of distributions is deferred. |
(ii) | A Participant may commence receiving a distribution in a form other than a Qualified Joint and Survivor Annuity less than 30 days after receipt of the written explanation described in the preceding paragraph provided: (1) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) a form of distribution other than a Qualified Joint and Survivor Annuity; (2) the Participant is permitted to revoke any affirmative distribution election at least until the Distribution Commencement Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant; and (3) the Distribution Commencement Date is after the date the written explanation was provided to the Participant. For distributions on or after December 31, 1996, the Distribution Commencement Date may be a date prior to the date the written explanation is provided to the Participant if the distribution does not commence until at least 30 days after such written explanation is provided, subject to the waiver of the 30-day period. For the purposes of this paragraph, the Distribution Commencement Date is the date a Participant commences distributions from Part II of the Plan. If a Participant commences distribution with respect to a portion of his/her Accrued Benefit, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date is the first day of the first period for which annuity payments are made. |
Part II - 22
(d) | Applicability. The provisions of this Section 5.06 shall apply to any Participant who is credited with at least one Hour of Service with the Employer on or after January 1, 1976. In addition, any living Participant or Former Participant not receiving Plan benefits on August 23, 1984 who would otherwise not receive the benefits prescribed by this Section 5.06 shall be given the opportunity to elect to have the provisions of this Section apply provided such Participant or Former Participant was credited with at least one Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974. |
The opportunity to elect a Qualified Joint and Survivor retirement option must be afforded to the appropriate Participants or Former Participants during the period commencing on August 23, 1984 and ending on the dates benefits would otherwise commence to such person.
5.07 | Supplementary Pension Benefits. |
Effective July 1, 1986, and on each July 1 thereafter, the amount of monthly retirement benefits payable to eligible retirees (as described below) or their Beneficiaries shall be increased by a percentage determined in accordance with the following formula:
Percentage Increase = .8 (M - .07) x 100
For Plan Years beginning after December 31, 2008, for purposes of the above formula, M equals the annual coupon return on December 31, 2009 and on each December 31 thereafter of the Barclays Capital U.S. Government/Credit 5-10 Year Index, or its successor.
For Plan Years beginning before January 1, 2009, for purposes of the above formula, M equals the earnings rate for the prior Plan Year on assets representing retired life reserves for retirees under this Plan and retirees under The Allmerica Financial Cash Balance Pension Plan as adopted by First Allmerica (now known as The Hanover Insurance Company Cash Balance Pension Plan), certain of First Allmericas General Agents, retirees of The Hanover Insurance Company (Hanover) and retirees of Citizens Insurance Company of America, both Affiliates of First Allmerica. Additionally, in determining M, retired life reserve assets attributable to retirees of Beacon Insurance Company of America, formerly an Affiliate of Hanover, shall be aggregated and combined with the retired life reserve assets of this Plan.
For the Plan Years for which M depended on the returns of designated retired life reserve assets, the earnings rate on retired life reserve assets was to be determined by an actuary, using the investment year block method of crediting interest that First Allmerica used to credit interest on its Experience Rated group annuity contracts that are in force on an active basis. The resulting earnings rate(s) should neither be associated with nor construed as the investment yield (all or in part) of the pension fund.
For each Plan Year for which M depended on the returns of designated retired life reserve assets, the retired life reserve assets for newly qualified retirees to be added to the total retired life assets outstanding was to be determined using a 7% interest rate and the 1971 GAM mortality table.
Part II - 23
The determination of M and of the overall earnings rate(s) shall be final and conclusively binding for all persons.
The effective date for the payment of supplemental pension benefits paid as a result of this Section shall be each July 1, commencing with July 1, 1986. Those eligible to receive supplemental pension benefits as a result of this Section shall be those Plan retirees and their Beneficiaries who were receiving basic Plan retirement benefits on the July 1 increase effective date, had been retired for at least 18 months on such increase effective date, and:
(A) | were actively employed Plan Participants who had elected an immediate early retirement benefit pursuant to Section 5.02 (or its successor, if any): |
(B) | had terminated employment after having met the eligibility requirements for early retirement specified in Section 5.02 (or its successor, if any) and elected to defer receipt of retirement benefits; or |
(C) | had retired on or after their Normal Retirement Age after having completed at least 15 Years of Service. |
The Beneficiaries of any retiree meeting the above requirements shall be entitled to receive a supplemental pension benefit under this Section if the Beneficiaries were receiving Plan survivor benefits on the July 1 increase effective date.
A supplemental pension benefit determined under this Section shall be added to and become a part of the recipients basic Plan benefit and shall be payable during such period and under such option as the basic Plan benefit is being paid.
5.08 | Rollovers to Other Qualified Plans. |
(a) | Notwithstanding any provision of Part II of the Plan to the contrary that would otherwise limit a distributees election under this Article or under Articles VI and VII, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. |
(b) | Definitions. |
(i) | Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic |
Part II - 24
payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributees designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any other distribution(s) that is reasonably expected to total less than $200 during a year. A portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to (i) an individual retirement account or annuity described in Section 408(a) or (b) of the Internal Revenue Code; (ii) for taxable years beginning after December 31, 2001 and before January 1, 2007, to a qualified trust which is part of a defined contribution plan that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible; or (iii) for taxable years beginning after December 31, 2006, to a qualified trust or to an annuity contract described in Section 403(b) of the Internal Revenue Code, if such trust or contract provides for separate accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible. |
(ii) | Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, a Roth IRA as pursuant to in Section 408A(e) of the Code, an annuity plan described in Section 403(a) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified Plan described in Section 401(a) of the Code, that accepts the distributees eligible rollover distribution or an eligible plan under Section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this plan. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. |
(iii) | Distributee: A distributee includes an Employee or former Employee. In addition, the Employees or former Employees surviving spouse and the Employees surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. |
Part II - 25
(iv) | Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. For distributions after June 9, 2009, a non-spouse Beneficiary who is a designated beneficiary under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (direct rollover), may roll over all or any portion of his or her distribution to an individual retirement account the Beneficiary establishes for purposes of receiving the distribution. In order to be able to do a direct rollover of the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution. |
(v) | For distributions after June 9, 2009, a non-spouse Beneficiary who is a designated beneficiary under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (direct rollover), may roll over all or any portion of his or her distribution to an individual retirement account the Beneficiary establishes for purposes of receiving the distribution. In order to do a direct rollover of the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution. |
Although a non-spouse Beneficiary may roll over directly a distribution as provided in Subsection (b)(iv) above, any distribution made prior to January 1, 2010 is not subject to the direct rollover requirements of Code Section 401(a)(31) (including Code Section 401(a)(31)(B)), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c)). If a non-spouse Beneficiary receives a distribution from the Plan, the distribution is not eligible for a 60-day rollover.
If the Participants named Beneficiary is a trust, the Plan may make a direct rollover to an individual retirement account on behalf of the trust, provided the trust satisfies the requirements to be a designated beneficiary within the meaning of Code Section 401(a)(9)(E).
A non-spouse Beneficiary may not roll over an amount which is a required minimum distribution, as determined under applicable Treasury regulations and other Internal Revenue Service guidance. If the Participant dies before his or her required beginning date and the non-spouse Beneficiary rolls over to an IRA the maximum amount eligible for rollover, the Beneficiary may elect to use either the 5-year rule or the life expectancy rule, pursuant to Treasury Regulation Section 1.401(a)(9)-3, A-4(c), in determining the required minimum distributions from the IRA that receives the non-spouse Beneficiarys distribution.
Part II - 26
ARTICLE VI
DEATH BENEFITS
6.01 | Pre-Retirement Spouse Benefit for Married Participants. |
(a) | General Rules. The provisions of this Section shall apply to any Participant or Former Participant described in Subsection (b). |
(i) | If an eligible married Participant: |
(A) | dies after attaining eligibility for early retirement but before actually retiring; |
(B) | dies on or after his Normal Retirement Age while still working for the Employer; or |
(C) | separates from service on or after his Normal Retirement Age (or after attaining the age necessary for early retirement) and after satisfying the eligibility requirements for the payment of benefits under Part II of the Plan and thereafter dies before beginning to receive such benefits; |
then the Participants surviving spouse will receive a monthly retirement benefit equal to the benefit that would have been payable if the Participant had retired on the day before his death after having elected an immediate Qualified Joint and Survivor Annuity option with a 50% continuation of monthly benefits to be payable to the survivor. The amount of such 50% continuation shall be payable monthly for the life of such spouse, with the first payment payable as of the date of the Participants death, unless the spouse requests a later commencement date (consistent with the provisions of Part II of the Plan).
(ii) | If a fully or partially vested eligible married Participant dies on or before the earliest retirement age, the Participants surviving spouse will receive the same benefit that would be payable if the Participant had: |
(A) | separated from service on the date of death; |
(B) | survived to the earliest retirement age; |
(C) | retired at the earliest retirement age after having elected an immediate Qualified Joint and Survivor Annuity option with a 50% continuation of monthly benefits to be payable to the survivor; and |
(D) | died on the day after the earliest retirement age. |
Part II - 27
A surviving spouse entitled to benefits under this paragraph (ii) will begin to receive payments at the earliest retirement age unless the spouse requests an earlier or later commencement date (consistent with the provisions of Part II of the Plan).
For purposes of this paragraph (ii) the earliest retirement age is the earliest date on which, under Part II of the Plan, the Participant could elect to receive retirement benefits.
In the case of a partially vested Participant, benefits under this paragraph (ii) will be based on the Participants vested Accrued Benefit computed on the date of his death.
(b) | Applicability. The provisions of paragraph (a)(i) shall apply to all Participants or Former Participants who were credited with an Hour of Service on or after January 1, 1976 who meet the eligibility requirements described in such paragraph and thereafter die before actually retiring. The provisions of Paragraph (a)(ii) shall apply to any Participant who is credited with at least one Hour of Service on or after August 23, 1984 and to any Participant or Former Participant living on August 23, 1984 not receiving Plan benefits on such date who was credited with at least one Hour of Service on or after January 1, 1976 and who had at least 10 years of vesting service when he separated from service. |
6.02 | Minimum Death Benefit. If no optional form of retirement benefit has been elected by a Participant pursuant to Section 5.05 of Part II of the Plan, a death benefit, as described below, shall be payable. If the death benefit is payable as a result of the Participants death, any such death benefit shall be payable to the Participants Beneficiary or, if no Beneficiary survives the Participant, to the executors or administrators of the Participants estate. If the Participant was survived by his spouse and (i) if the joint and survivor benefit described in Section 5.06 of Part II of the Plan was in effect on the date of the spouses death, or (ii) the pre-retirement spouse benefit described in Section 6.01 of Part II of the Plan was being paid to the spouse, any such death benefit shall be payable to the Participants Beneficiary, or if such Beneficiary does not survive the spouse, to the executors or administrators of the spouses estate. |
The amount of this minimum death benefit will be equal to the Participants unrefunded required Contributions with Credited Interest to the first day of the month in which the earlier of the Participants death or retirement occurred reduced by (i), (ii) and (iii) below:
(i) | the amount of monthly retirement payments which had been paid to the Participant; |
(ii) | the amount of monthly payments which had been paid to the Participant and his spouse, if the joint and survivor benefit described in Section 5.08 was being paid; and |
Part II - 28
(iii) | the amount of retirement benefits which had been paid to the spouse, if the pre-retirement spouse benefit described in Section 6.01 was being paid. |
ARTICLE VII
BENEFITS UPON TERMINATION FROM SERVICE
7.01 | In General. In the event that an Employee shall terminate service (or, in the case of a Career Agent, the agent terminates his Career Agents Contract) for any reason other than death, his becoming totally disabled (as described in Section 5.04), Normal, Early or Late Retirement, the interests and rights of such Participant shall be limited to those contained in this Article. |
7.02 | Options on Termination of Participation. Upon any termination of service described in Section 7.01, a Participant shall have the right, subject to any required spousal consent, to elect either Option 1 or Option 2 described below. |
For purposes of determining the Actuarial Equivalent present value of benefits, values shall be calculated using the interest rate(s) specified in Section 2.02.
Any distributions made pursuant to this Article shall be subject to the requirements of Sections 5.05 and 5.06 of Part II of the Plan (and Article III of Part III of the Plan).
Option 1 - Deferred Benefit - Under this Option the Participant will receive a monthly retirement benefit commencing on his Normal Retirement Date equal to the sum of (a) and, if applicable, (b) below:
(a) | 1/12 of the annual deferred benefit described in Section 2.01(b), which deferred benefit is attributable to required Employee contributions. |
(b) | In addition, if as of his date of termination of participation the Employee has completed at least the minimum Years of Service required for vesting, he will receive commencing on his Normal Retirement Date, an additional monthly retirement benefit equal to (i) or (ii) below, whichever is applicable: |
(i) | the portion of the Accrued Benefit described in Section 2.01(a) derived from Employer Contributions, multiplied by the appropriate percentage in Subparagraph (iii) below. |
(ii) | in the case of a Non-Key Employee Participant in a Top Heavy Plan, if greater than (i) above, the Accrued Benefit described in Section 2.01(c), multiplied by the appropriate percentage in Subparagraph (iii) below. |
(iii) | Completed Years of Service | Nonforfeitable Percentage | ||
Less than 5 |
0% | |||
5 or more |
100% |
Part II - 29
Notwithstanding the above, if the Plan is a Top Heavy Plan for any Plan Year beginning after December 31, 1983, then the Plan shall meet the following vesting requirements for such Plan Year and for all subsequent Plan Years, even if the Plan is not a Top Heavy Plan for such subsequent Plan Years.
Completed Years of Service |
Nonforfeitable Percentage | |
Less than 2 |
0% | |
2 |
20 | |
3 |
40 | |
4 |
60 | |
5 or more |
100 |
Notwithstanding anything in Part II of the Plan to the contrary, the portion of an Employees Accrued Benefit derived from Employer Contributions shall be 100% vested upon completion of three (3) Years of Service.
Option 2 - Cash Option - Under this option, except as provided in Section 5.08, the Participant will receive an amount equal to (a) below plus, if applicable, a deferred benefit as described in (b) below:
(a) | an amount equal to the present value of the portion of the Participants Accrued Benefit described in Section 2.01(b) attributable to required Employee Contributions, and |
(b) | In addition, if the Employee is fully or partially vested in the portion of his Accrued Benefit derived from Employer Contributions, as determined from the appropriate table above on the date of his termination of participation, he will receive, commencing on his Normal Retirement Date, a monthly retirement benefit determined in accordance with Subsection (b) of Option 1. |
Option 1 will be deemed to have been elected by an Employee unless he elects Option 2 within 90 days of his termination of participation in this Plan.
For purposes of this Article VII, Years of Service means Plan Years during which an Employee completed at least 1,000 Hours of Service; provided, however, for purposes of this Article service shall not be deemed to be interrupted or employment terminated because employment is transferred to a position or job with the Employer in which he is no longer eligible to participate in this Plan, or because the Employee becomes a General Agent who is not a common-law employee of the Company, but service shall be deemed terminated if the Employee terminates from the Employer or as a General Agent.
Notwithstanding anything in of Part II of the Plan to the contrary, a Participants Normal Retirement Benefit shall become 100% vested and nonforfeitable upon the attainment of his Normal Retirement Age.
Part II - 30
Notwithstanding anything in Part II of the Plan to the contrary, (i) a Participant who was actively employed on December 31, 2002 (or an agent whose Career Agents Contract had not been terminated prior to such date), and (ii) all Former Participants who had not incurred five consecutive One Year Breaks in Service as of December 31, 2002, shall have a fully vested and non-forfeitable interest in any Accrued Benefit that had not been distributed to the Participant or Former Participant prior to December 31, 2002.
7.03 | Forfeitures. The non-vested portion of a Participants Accrued Benefit shall be treated as a forfeiture when the Participant or his or her spouse (or surviving spouse) receives a distribution of the present value of his or her vested Accrued Benefit attributable to Employer and Employee Contributions pursuant to Section 7.02 and the Participants service attributable to such distribution shall be disregarded as provided for in Section 7.06. For purposes of this Section, if the present value of a Participants vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit. |
In the case of a partially vested terminated Participant who does not receive a distribution pursuant to the above paragraph, the value of the nonvested portion of his Accrued Benefit shall be treated as a forfeiture at the end of the Plan Year in which the Participant incurs a One Year Break in Service until the Participant has completed one Year of Service after he has been re-employed.
Forfeitures will be used to reduce (i) Employer contributions for the Plan Year following the Plan Year in which the forfeiture occurs; and or (ii) the Employers costs under the Plan.
7.04 | Resumption of Service. A Participant who terminates his or her participation in Part II of the Plan and who subsequently resumes service with the Employer will again become a Participant, if eligible, on the date of his or her recommencement of such service. |
7.05 | Distribution of Benefits. On the Former Participants Normal Retirement Date, benefits to which he or she is entitled pursuant to this Article shall be distributed in accordance with Article V. |
If a Former Participant entitled to a deferred benefit pursuant to this Article VII dies prior to his or her Normal Retirement Date, the death benefit, if any, to which he is entitled shall be as is specified in Article VI.
7.06 | Cash Out Repayment Option. |
(a) | Notwithstanding anything in this Article to the contrary, unless a repayment has been made in accordance with Subsection (b) below, in determining the portion of an Employees Accrued Benefit derived from Employer contributions (or, in the case of a Top Heavy Plan, the minimum benefit for Non-Key Employees described in Subsection 2.01(c)) after a resumption of participation, periods of service with respect to which the Employee received a distribution of the present value of his vested Accrued Benefit shall be disregarded. |
Part II - 31
(b) | In the case of the distribution of the present value of a partially vested Employees vested Accrued Benefit in accordance with Section 7.02, the Employees Accrued Benefit described in Sections 2.01(a) and (b) (including all optional forms of benefits and subsidies relating to such benefits) shall be restored if the Employee repays the amount distributed plus interest, compounded annually from the date of distribution at the rate of 5 percent. Such repayment must be made by the Employee before the earlier of five years after the first date on which the Employee is subsequently reemployed by the Employer, or the date the Employee incurs five consecutive One Year Breaks in Service following the date of distribution. |
If an Employee is deemed to receive a distribution pursuant to this Article, and the Employee resumes employment covered under this Plan before the date on which the Employee could no longer repay his distribution under the preceding paragraph, upon the reemployment of such Employee, the Employer-derived Accrued Benefit will be restored to the amount of such Accrued Benefit on the date of the deemed distribution.
7.07 | Early Retirement Election. Any Participant who terminates service after having completed at least fifteen Years of Service may elect to retire on the first day of any month following his 55th birthday. Any Participant who was actively employed on June 30, 1977 who terminates service after having completed at least twenty Years of Service may elect to retire on the first day of any month following his 50th birthday. |
7.08 | Amendment to Vesting Schedule. If the Vesting Schedule of Part II of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of a Participants nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least 3 Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have their nonforfeitable percentage computed under Part II of the Plan without regard to such amendment or change. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: |
(1) | 60 days after the amendment is adopted; |
(2) | 60 days after the amendment becomes effective; or |
(3) | 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. |
Part II - 32
EXHIBIT A
ADJUSTMENT FACTORS FOR OPTIONAL AND LATE RETIREMENT BENEFITS
Factors for ages not illustrated on the following tables will be computed on an actuarial basis consistent with that used to compute the factors shown.
JOINT AND SURVIVOR OPTION PERCENTAGES
(Applicable only if the Participants age, nearest birthday, on the date monthly income commences is 65).
Age Nearest Birthday of Joint Annuitant on the Date Monthly Income Commences to the Participant |
Percentage of the Adjusted
Retirement Annuity Payments which are to be Continued to the Surviving Joint Annuitant |
|||||||||
100% |
66 2/3% |
50% |
||||||||
50 |
80.3% | 87.1 | % | 90.9 | % | |||||
51 |
80.7 | 87.5 | 91.3 | |||||||
52 |
81.1 | 87.9 | 91.8 | |||||||
53 |
81.5 | 88.4 | 92.2 | |||||||
54 |
82.0 | 88.8 | 92.7 | |||||||
55 |
82.4 | 89.3 | 93.2 | |||||||
56 |
82.9 | 89.8 | 93.8 | |||||||
57 |
83.3 | 90.3 | 94.3 | |||||||
58 |
83.8 | 90.9 | 94.9 | |||||||
59 |
84.3 | 91.4 | 95.5 | |||||||
60 |
84.8 | 92.0 | 96.1 | |||||||
61 |
85.3 | 92.7 | 96.8 | |||||||
62 |
85.9 | 93.3 | 97.5 | |||||||
63 |
86.4 | 94.0 | 98.3 | |||||||
64 |
86.9 | 94.7 | 99.1 | |||||||
65 |
87.5 | 95.4 | 100.0 | |||||||
66 |
88.0 | 96.2 | 100.0 | |||||||
67 |
88.6 | 97.0 | 101.9 | |||||||
68 |
89.1 | 97.9 | 102.9 | |||||||
69 |
89.6 | 98.7 | 104.0 | |||||||
70 |
90.2 | 99.6 | 105.1 | |||||||
1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum. |
Part II - 33
CONTINGENT ANNUITANT OPTION PERCENTAGES
(Applicable only if the Participants age, nearest birthday, on the date monthly income commences is 65).
Age Nearest Birthday of Contingent Annuitant on the Date Monthly Income Commences to the Participant |
Percentage of the Adjusted Retirement Annuity Payments which are to be Continued to the Surviving Contingent Annuitant |
|||||||||||
100% | 66 2/3% | 50% | ||||||||||
50 |
80.3 | % | 85.9 | % | 89.0 | %~ | ||||||
51 |
80.7 | 86.2 | 89.3 | |||||||||
52 |
81.1 | 86.5 | 89.6 | |||||||||
53 |
81.5 | 86.9 | 89.8 | |||||||||
54 |
82.0 | 87.2 | 90.1 | |||||||||
55 |
82.4 | 87.5 | 90.4 | |||||||||
56 |
82.9 | 87.9 | 90.6 | |||||||||
57 |
83.3 | 88.2 | 90.9 | |||||||||
58 |
83.8 | 88.6 | 91.2 | |||||||||
59 |
84.3 | 89.0 | 91.5 | |||||||||
60 |
84.8 | 89.3 | 91.8 | |||||||||
61 |
85.3 | 89.7 | 92.1 | |||||||||
62 |
85.9 | 90.1 | 92.4 | |||||||||
63 |
86.4 | 90.5 | 92.7 | |||||||||
64 |
86.9 | 90.9 | 93.0 | |||||||||
65 |
87.5 | 91.3 | 93.3 | |||||||||
66 |
88.0 | 91.7 | 93.6 | |||||||||
67 |
88.6 | 92.1 | 93.9 | |||||||||
68 |
89.1 | 92.5 | 94.2 | |||||||||
69 |
89.6 | 92.9 | 94.5 | |||||||||
70 |
90.2 | 93.2 | 94.8 | |||||||||
|
1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum.
Life Ann/Opt. |
|
Part II - 34
ANNUITY OPTION ADJUSTMENT PERCENTAGES
Percentages to be applied to the monthly benefit which would be payable to the Participant on his Retirement Date if no Optional Form of Annuity were in effect to determine the monthly income benefit commencing on the Participants Retirement Date if one of the following options is in effect.
Age nearest birthday on the date monthly income commences |
Annuity Option | |||||||||||||||
5C&C |
10C&C |
15C&C |
20C&C |
|||||||||||||
50 |
99.8 | % | 99.2 | % | 98.3 | % | 97.2 | % | ||||||||
51 |
99.8 | 99.1 | 98.1 | 96.9 | ||||||||||||
52 |
99.7 | 99.0 | 97.9 | 96.6 | ||||||||||||
53 |
99.7 | 98.9 | 97.7 | 96.3 | ||||||||||||
54 |
99.7 | 98.8 | 97.5 | 96.0 | ||||||||||||
55 |
99.6 | 98.6 | 97.3 | 95.6 | ||||||||||||
56 |
99.6 | 98.5 | 97.0 | 95.2 | ||||||||||||
57 |
99.6 | 98.4 | 96.8 | 94.8 | ||||||||||||
58 |
99.5 | 98.3 | 96.5 | 94.3 | ||||||||||||
59 |
99.5 | 98.1 | 96.2 | 93.8 | ||||||||||||
60 |
99.4 | 98.0 | 95.9 | 93.3 | ||||||||||||
61 |
99.4 | 97.8 | 95.5 | 92.7 | ||||||||||||
62 |
99.3 | 97.6 | 95.0 | 92.0 | ||||||||||||
63 |
99.3 | 97.3 | 94.5 | 91.2 | ||||||||||||
64 |
99.2 | 97.1 | 94.0 | 90.4 | ||||||||||||
65 |
99.1 | 96.7 | 93.3 | 89.5 | ||||||||||||
66 |
99.0 | 96.4 | 92.6 | 88.5 | ||||||||||||
67 |
98.9 | 95.9 | 91.8 | 87.4 | ||||||||||||
68 |
98.8 | 95.4 | 91.0 | 86.2 | ||||||||||||
69 |
98.6 | 94.9 | 90.0 | 84.9 | ||||||||||||
70 |
98.4 | 94.3 | 89.0 | 83.5 | ||||||||||||
|
1983 Group Annuity Table with Projection H, with mortality rates based on calendar year of birth of 1930 and interest at the rate of 7% per annum.
Life Ann/Opt. |
|
Part II - 35
LATE RETIREMENT PERCENTAGES
(Applicable only if the Participants age, nearest birthday, on the date his or her Normal Retirement Date is 65).
The following percentages are applied to retirement benefits determined in accordance with Part II of the Plan prior to any actuarial increase with respect to a Participant whose date of retirement is subsequent to his or her Normal Retirement Date, to determine actuarially increased retirement benefits commencing on his or her Late Retirement Date. If benefits commence in a month other than the month in which the Participant attains the specified age, the percentage shall be determined by straight line interpolation. Percentages for Late Retirement Dates and ages not illustrated will be computed on an actuarial basis consistent with that used to compute the factors shown.
Number of Years Late Retirement Date Succeeds Normal Retirement Date |
Actuarial Increase Percentage | |
1 |
111.3% | |
2 |
124.3% | |
3 |
139.2% | |
4 |
156.6% | |
5 |
176.8% | |
6 |
200.4% | |
7 |
228.3% | |
8 |
261.5% | |
9 |
301.1% | |
10 |
348.8% |
The actuarial basis increase percentages beyond ten years after Normal Retirement Date shall be determined based on the 1951 Group Annuity Table with 2/3 of Projection C, with mortality rates based on calendar year of birth of 1910 and interest at a rate of 6% per annum (male rate).
Notwithstanding the foregoing, if late retirement benefits commence after Age 70 1/2, a Participants Accrued Benefit shall be actuarially increased to take into account the period after Age 70 1/2 in which the Participant was not receiving any benefits under Part II of the Plan. Any such actuarial increase shall be the greater of (i) the actuarial increase determined in accordance with the rules described above or (ii) such actuarial increase as shall be required under Code Section 401(a)(9)(C) and rules and regulations promulgated thereunder.
Part II - 36
Exhibit B
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Part II - 37
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Part II - 38
THE HANOVER INSURANCE GROUP CASH BALANCE
PENSION PLAN
PART III
(As amended and restated generally effective January 1, 2010)
Part III
THE HANOVER INSURANCE GROUP CASH BALANCE
PENSION PLAN
PART III
TABLE OF CONTENTS
PAGE | ||||||
ARTICLE I PURPOSE AND EFFECTIVE DATE OF PLAN |
1 | |||||
1.01 |
General Statement. | 1 | ||||
1.02 |
Effective Date. | 1 | ||||
ARTICLE II PROVISIONS APPLICABLE TO TOP HEAVY PLANS |
1 | |||||
2.01 |
Top Heavy Plan Requirements. | 1 | ||||
2.02 |
Determination of Top Heavy Status. | 2 | ||||
2.03 |
Minimum Benefit Requirements for Top Heavy Plans. | 4 | ||||
ARTICLE III MINIMUM DISTRIBUTION REQUIREMENTS |
6 | |||||
3.01 |
General Rules. | 6 | ||||
3.02 |
Time and Manner of Distribution. | 8 | ||||
3.03 |
Determination of Amount to be Distributed Each Year. | 9 | ||||
3.04 |
Requirements for Annuity Distributions That Commence During Participants Lifetime. | 12 | ||||
3.05 |
Requirements for Minimum Distributions Where Participant Dies Before Date Distributions Begin. | 13 | ||||
3.06 |
Definitions. | 14 | ||||
ARTICLE IV LIMITATIONS ON BENEFITS |
16 | |||||
4.01 |
General Limitations. | 16 | ||||
4.02 |
Additional General Limitations. | 16 | ||||
4.03 |
Limitation Year beginning after December 31, 1986. | 17 | ||||
4.04 |
Limitation Year beginning after December 31, 1994. | 17 | ||||
4.05 |
Definitions. | 17 | ||||
4.06 |
Final Section 415 Regulations. | 24 | ||||
ARTICLE V PRE-TERMINATION BENEFIT RESTRICTIONS |
26 | |||||
5.01 |
In General. | 26 | ||||
5.02 |
Exceptions. | 27 | ||||
5.03 |
Included Benefits. | 27 | ||||
ARTICLE VI BENEFIT RESTRICTIONS |
27 | |||||
6.01 |
Effective Date and Application of Section. | 27 | ||||
6.02 |
Funding-Based Limitation on Shutdown Benefits and Other Unpredictable Contingent Event Benefits. | 27 | ||||
6.03 |
Limitations on Plan Amendments Increasing Liability for Benefits. | 28 | ||||
6.04 |
Limitations on Accelerated Benefit Distributions. | 29 | ||||
6.05 |
Limitation on Benefit Accruals for Plans With Severe Funding Shortfalls. | 30 | ||||
6.06 |
Rules Relating to Contributions Required to Avoid Benefit Limitations. | 31 | ||||
6.07 |
Presumed Underfunding for Purposes of Benefit Limitations. | 32 | ||||
6.08 |
Treatment of Plan as of Close of Prohibited or Cessation Period. | 33 | ||||
6.09 |
Definitions. | 33 |
Part III
ARTICLE VII PLAN FIDUCIARY RESPONSIBILITIES |
34 | |||||
7.01 |
Plan Fiduciaries. | 34 | ||||
7.02 |
General Fiduciary Duties. | 35 | ||||
7.03 |
Duties of the Trustee(s). | 35 | ||||
7.04 |
Powers and Duties of the Plan Administrator. | 35 | ||||
7.05 |
Designation of Fiduciaries. | 37 | ||||
7.06 |
Delegation of Duties by a Fiduciary. | 37 | ||||
ARTICLE VIII BENEFITS COMMITTEE |
38 | |||||
8.01 |
Appointment of Benefits Committee. | 38 | ||||
8.02 |
Benefits Committee to Act by Majority Vote, etc. | 38 | ||||
8.03 |
Records and Reports of the Benefits Committee. | 38 | ||||
8.04 |
Costs and Expenses of Administration. | 38 | ||||
8.05 |
Indemnification of the Plan Administrator and Assistants. | 38 | ||||
ARTICLE IX CLAIMS PROCEDURE |
39 | |||||
9.01 |
Claims Fiduciary. | 39 | ||||
9.02 |
Claims for Benefits. | 39 | ||||
9.03 |
Duty to Keep Plan Administrator Informed of Current Address. | 39 | ||||
9.04 |
Failure to Claim Benefits. | 39 | ||||
9.05 |
Notice of Denial of Claim. | 39 | ||||
9.06 |
Request for Review of Denial of Claim. | 40 | ||||
9.07 |
Decision on Review of Denial of Claim. | 40 | ||||
9.08 |
Disability Claims. | 40 | ||||
ARTICLE X AMENDMENT AND TERMINATION |
40 | |||||
10.01 |
Amendment of Plan. | 40 | ||||
10.02 |
Employer May Discontinue Plan. | 41 | ||||
10.03 |
Distribution of Benefits Upon Plan Termination. | 43 | ||||
10.04 |
Return of Employer Contributions Under Special Circumstances. | 43 | ||||
ARTICLE XI MISCELLANEOUS |
43 | |||||
11.01 |
Protection of Employee Interest. | 43 | ||||
11.02 |
USERRA Compliance. | 43 | ||||
11.03 |
Meaning of Words Used in Plan. | 44 | ||||
11.04 |
Plan Does Not Create or Modify Employment Rights. | 44 | ||||
11.05 |
Massachusetts Law Controls. | 44 | ||||
11.06 |
Payments to come from Plan Assets. | 45 | ||||
11.07 |
Receipt and Release for Payments. | 45 | ||||
11.08 |
Mandatory Withholding on Eligible Rollover Distributions. | 45 | ||||
11.09 |
Payment under Qualified Domestic Relations Orders. | 45 | ||||
11.10 |
Electronic Communications. | 45 |
Part III
ARTICLE I
PURPOSE AND EFFECTIVE DATE OF PLAN
1.01 General Statement. The Hanover Insurance Group Cash Balance Pension Plan (the Plan) consists of three parts, Part I, Part II and Part III. Part I of the Plan provides a cash balance and pension benefit, which was formerly provided under a plan known as The Allmerica Financial Cash Balance Pension Plan. Part II of the Plan provides a pension benefit, which was formerly provided under a plan known as The Allmerica Financial Agents Pension Plan. Part III of the Plan contains provisions applicable to each of Part I and Part II.
The provisions of Part III of the Plan shall override any provision of Part I and or Part II of the Plan as provided in Part III of the Plan.
The words and phrases used in this Part III of the Plan shall have the meanings set forth in Part I of the Plan, unless a different meaning is clearly required by the context or is otherwise provided in Part III of the Plan.
1.02 Effective Date. The effective date of Part III of the Plan is January 1, 2010 (except for those provisions of this Part of the Plan which have an expressly stated alternative effective date).
ARTICLE II
PROVISIONS APPLICABLE TO TOP HEAVY PLANS
2.01 | Top Heavy Plan Requirements. |
(a) | For any Top Heavy Plan Year, the Plan shall provide the following: |
(i) | the minimum vesting requirements for Top Heavy Plans set forth in Section 8.02 of Part I of the Plan and Section 7.02 of Part II of the Plan; and |
(ii) | the minimum benefit accruals for Non-Key Employees set forth in Section 2.03 below. |
(b) | Once the Plan has become a Top Heavy Plan, the top heavy vesting requirements described in 8.02 of Part I of the Plan and Section 7.02 of Part II of the Plan shall be applicable to all subsequent Plan Years, regardless of whether such years are Top Heavy Plan Years. |
(c) | If the Plan is or becomes a Top Heavy Plan, the provisions of this Article II will supersede any conflicting provision in the Plan. |
(d) | In determining Top Heavy Plan vesting, the Top Heavy vesting schedule set forth in 8.02 of Part I of the Plan and in Section 7.02 of Part II of the Plan applies to all benefits within the meaning of Code Section 411(a)(7), including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became top-heavy. Further, no reduction in vested benefits may occur in the |
Part III 1
event the Plans status as top heavy changes for any Plan Year. However, this Section does not apply to the Accrued Benefits of any Employee who does not have an Hour of Service after the Plan has initially become top-heavy and such Employees Accrued Benefits attributable to Employer contributions will be determined without regard to this Section. |
2.02 | Determination of Top Heavy Status. |
(a) | This Plan shall be a Top Heavy Plan for any Plan Year commencing after December 31, 1983 if any of the following conditions exists: |
(i) | If the top heavy ratio for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans. |
(ii) | If this Plan is a part of a required aggregation group of plans (but not part of a permissive aggregation group) and the top heavy ratio for the group of plans exceeds 60 percent. |
(iii) | If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent. |
(b) | The Plan top heavy ratio shall be determined as follows: |
(i) | If the Employer maintains one or more defined benefit plans and the employer has not maintained any defined contribution plan (including any simplified employee pension, as defined in section 408(k) of the Internal Revenue Code) which during the 5-year period ending on the determination date(s) has or has had account balances, the top-heavy ratio for this plan alone or for the required or permissive aggregation group as appropriate is a fraction, the numerator of which is the sum of the present value of Accrued Benefits of all Key Employees as of the determination date(s) (including any part of any Accrued Benefit distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability), and the denominator of which is the sum of the present value of Accrued Benefits (including any part of any Accrued Benefits distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability), determined in accordance with section 416 of the Internal Revenue Code and the regulations thereunder. |
(ii) | If the Employer maintains one or more defined benefit plans and the employer maintains or has maintained one or more defined contribution plans (including any simplified employee pension) which during the 5- |
Part III 2
year period ending on the determination date(s) has or has had any account balances, the top-heavy ratio for any required or permissive aggregation group as appropriate is a fraction, the numerator of which is the sum of the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees, determined in accordance with (i) above, and the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees as of the determination date(s), and the denominator of which is the sum of the present value of accrued benefits under the defined benefit plan or plans for all participants, determined in accordance with (i) above, and the account balances under the aggregated defined contribution plan or plans for all participants as of the determination date(s), all determined in accordance with section 416 of the Internal Revenue Code and the regulations thereunder. The account balances under a defined contribution in both the numerator and denominator of the top heavy ratio are increased for any distribution of an account balance made in the 1-year period ending on the determination date (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability). |
(iii) | For purposes of (i) and (ii) above, the value of account balances and the present value of Accrued Benefits will be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the determination date, except as provided in Code Section 416 and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any employer maintaining the Plan at any time during the 1-year period ending on the determination date will be disregarded. The calculation of the top-heavy ratio and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the regulations thereunder. Deductible employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans, the value of account balances and Accrued Benefits will be calculated with reference to the determination dates that fall within the same calendar year. |
The Accrued Benefit of a Participant other than a Key Employee shall be determined under (A) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section Code 411(b)(1)(C).
(c) | Permissive aggregation group: The required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410. |
Part III 3
(d) | Required aggregation group: (i) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated), and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Code Sections 401(a)(4) or 410. |
(e) | Determination date: The last day of the preceding Plan Year. |
(f) | Valuation Date: The last day of each Plan Year, as of which Accrued Benefits are valued for purposes of calculating the top heavy ratio. |
(g) | Present value: Present value shall be based on the interest and mortality rates specified in the definition of Actuarial Equivalent. |
2.03 | Minimum Benefit Requirements for Top Heavy Plans. |
(a) | Minimum Benefit Requirements for Top Heavy Plans. |
Notwithstanding any other provision in this Plan except Subsections (b) and (c) below, for any Plan Year in which this Plan is a Top Heavy Plan, each Participant who is not a Key Employee and has completed at least 1,000 Hours of Service will accrue a benefit (to be provided solely by Employer contributions and expressed as a life annuity commencing at Normal Retirement Age) of not less than 2% of the Participants highest average Compensation for the five consecutive years in which such Non-Key Employee had the highest Compensation (as defined for purposes of Article III of Part III of the Plan). The aggregate Compensation for the years during such five-year period in which the Participant was credited with a Year of Service will be divided by the number of such years in order to determine average annual Compensation.
Provided, however, that no additional benefit accruals shall be provided pursuant to this Section to the extent that the total accruals on behalf of the Participant attributable to Employer contributions will provide a benefit expressed as a life annuity commencing at Normal Retirement Age that equals or exceeds 20% of the Participants average Compensation for the five consecutive years in which the Participant had the highest Compensation (as defined for purposes of Article III of Part III of the Plan). All accruals of Employer-derived benefits, whether or not attributable to years for which the Plan is Top Heavy, may be used in computing whether the minimum 20% accrual requirements of this paragraph are satisfied.
The minimum accrual above applies even though under other Plan provisions the Participant would not otherwise be entitled to receive an accrual, or would have received a lesser accrual for the Plan Year because (i) the Non-Key Employee fails to make mandatory contributions to the Plan, (ii) the Non-Key Employees Compensation is less than a stated amount, (iii) the Non-Key Employee is not employed on the last day of the accrual computation period, or (iv) the Plan is integrated with Social Security.
Part III 4
The Compensation required to be taken into account under this Section is Compensation as defined for purposes of Article III of Part III of the Plan that is not in excess of the applicable dollar limitation imposed by Code Section 401(a)(17). However, Compensation received by a Non-Key Employee for Plan Years beginning after the close of the last year in which the Plan was a Top Heavy Plan shall be disregarded. The minimum accrual determined under this Section shall be determined without regard to any Social Security contribution.
The top-heavy minimum benefit is a life annuity benefit (with no ancillary benefits) commencing at Normal Retirement Age. If the benefit commences at a date other than Normal Retirement Age, the Employee must receive at least an amount that is the Actuarial Equivalent of the minimum single life annuity benefit commencing at Normal Retirement Age.
Notwithstanding the foregoing, for Plan Years beginning after December 31, 2001, for purposes of satisfying the minimum benefit requirements of Code Section 416(c)(1) and the Plan, in determining Years of Service with the Employer, any service with the Employer shall be disregarded to the extent that such service occurs during a Plan Year when the Plan benefits (within the meaning of Code Section 410(b)) no Key Employee or former Key Employee.
(b) | Notwithstanding anything herein to the contrary, in any Plan Year in which a Non-Key Employee participates in both a defined benefit plan and a defined contribution plan included in a Required or Permissive Aggregation Group of Top Heavy Plans, the Employer is not required to provide the Non-Key Employee with both the full and separate minimum benefit and the full and separate minimum contribution. Therefore, if the Employer maintains such a defined benefit and defined contribution plan, the top-heavy minimum benefits shall be provided as follows: |
(i) | If a Non-Key Employee is a participant in any such Top Heavy defined contribution plan, the minimum benefit described in Subsection (a) above shall not be provided to each such Non-Key Employee who receives at least the full Top Heavy minimum contribution provided in such defined contribution plan for Non-Key Employee participants. |
(ii) | If a Non-Key Employee is not a Participant in any such Top Heavy defined contribution plan, the minimum and extra minimum benefits, if applicable, described in Subsection (a) shall be provided to each such Non-Key Employee meeting the requirements of Section 2.03(a) above. |
Notwithstanding any provision herein to the contrary, no minimum benefit will be required (or the minimum benefit will be reduced, as the case may be) for a Participant under this Plan for any Plan Year if the Employer maintains another qualified defined benefit plan under which a minimum benefit is being accrued in whole or in part for the Participant in accordance with Code Section 416(c).
Part III 5
(c) | The minimum accrued benefit described in this Section (to the extent required to be nonforfeitable under Code Section 416(b)) may not be forfeited under Code Sections 411(a)(3)(B) or 411(a)(3)(D). |
ARTICLE III
MINIMUM DISTRIBUTION REQUIREMENTS
3.01 | General Rules. |
(a) | Effective date. The provisions of this Article will apply with respect to distributions under the Plan made for calendar years beginning on or after January 1, 2006. With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2002 and prior to the effective date of the application of the Treasury Regulations under Code Section 401(a)(9) that were finalized on June 15, 2004, the Plan will use the 1987 proposed regulations. |
(b) | Requirements of Treasury Regulations incorporated. All distributions required under this Article shall be determined and made in accordance with Code Section 401(a)(9), including the incidental death benefit requirement in Code Section 401(a)(9)(G), and the Treasury Regulations thereunder. |
(c) | Precedence. Subject to the joint and survivor annuity requirements of the Plan, the requirements of this Article will take precedence over any inconsistent provisions of the Plan. |
(d) | TEFRA Section 242(b)(2) elections. |
(i) | Notwithstanding the other provisions of this Article and the Plan, other than the spouses right of consent afforded under the Plan, distributions may be made on behalf of any Participant, including a five percent (5%) owner, who has made a designation in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and in accordance with all of the following requirements (regardless of when such distribution commences): |
(1) | The distribution by the Plan is one which would not have disqualified such plan under Code Section 401(a)(9) as in effect prior to amendment by the Deficit Reduction Act of 1984. |
(2) | The distribution is in accordance with a method of distribution designated by the Participant whose interest in the plan is being distributed or, if the Participant is deceased, by a beneficiary of such Participant. |
Part III 6
(3) | Such designation was in writing, was signed by the Participant or beneficiary, and was made before January 1, 1984. |
(4) | The Participant had accrued a benefit under the Plan as of December 31, 1983. |
(5) | The method of distribution designated by the Participant or the beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Participants death, the beneficiaries of the Participant listed in order of priority. |
(ii) | A distribution upon death will not be covered by the transitional rule of this Subsection unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Participant. |
(iii) | For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Participant, or the beneficiary, to whom such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in (i)(1) and (i)(5) of this Subsection. |
(iv) | If a designation is revoked, any subsequent distribution must satisfy the requirements of Code Section 401(a)(9) and the Treasury Regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the Plan must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Code Section 401(a)(9) and the regulations thereunder, but for the Section 242(b)(2) election. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). |
(v) | In the case in which an amount is transferred or rolled over from one plan to another plan, the rules in Treasury Regulation Section 1.401(a)(9)-8, Q&A-14 and Q&A-15, shall apply. |
Part III 7
(e) | Limits on distribution periods. To the extent otherwise permitted under the terms of the Plan, as of the first Distribution Calendar Year, distributions to a Participant, if not made in a single sum, may only be made over one of the following periods: |
(i) | The life of the Participant; |
(ii) | The joint lives of the Participant and a Designated Beneficiary; |
(iii) | A period certain not extending beyond the Life Expectancy of the Participant; or |
(iv) | A period certain not extending beyond the joint life and last survivor expectancy of the Participant and a Designated Beneficiary. |
3.02 | Time and Manner of Distribution. |
(a) | Required Beginning Date. The Participants entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participants Required Beginning Date. |
(b) | Death of Participant before distributions begin. If the Participant dies before distributions begin, the Participants entire interest will be distributed, or begin to be distributed, no later than as follows: |
(i) | Life Expectancy rule, spouse is beneficiary. If the Participants surviving spouse is the Participants sole Designated Beneficiary, then, except as provided in Section 3.08, distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 1/2, if later. |
(ii) | Life Expectancy rule, spouse is not beneficiary. If the Participants surviving spouse is not the Participants sole Designated Beneficiary, then, except as provided in Section 3.08, distributions to the Designated Beneficiary will begin by December 31st of the calendar year immediately following the calendar year in which the Participant died. |
(iii) | No Designated Beneficiary, 5-year rule. If there is no Designated Beneficiary as of September 30 of the year following the year of the Participants death, the Participants entire interest will be distributed by December 31st of the calendar year containing the fifth anniversary of the Participants death. |
(iv) | Surviving spouse dies before distributions begin. If the Participants surviving spouse is the Participants sole Designated Beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 3.02(b), other than Section 3.02(b)(i), will apply as if the surviving spouse were the Participant. |
Part III 8
For purposes of this Section 3.02(b), distributions are considered to begin on the Participants Required Beginning Date (or, if Section 3.02(b)(iv) applies, the date distributions are required to begin to the surviving spouse under Section 3.02(a)). If annuity payments irrevocably commence to the Participant before the Participants Required Beginning Date (or to the Participants surviving spouse before the date distributions are required to begin to the surviving spouse under Section 3.02(b)(i)), the date distributions are considered to begin is the date distributions actually commence.
(c) | Form of distribution. Unless the Participants interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, distributions will be made in accordance with Sections 3.03, 3.04 and 3.05 as of the first Distribution Calendar Year. If the Participants interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Code Section 401(a)(9) and the Treasury Regulations thereunder. Any part of the Participants interest which is in the form of an individual account described in Code Section 414(k) will be distributed in a manner satisfying the requirements of Code Section 401(a)(9) and the Treasury Regulations thereunder applicable to individual accounts. |
3.03 | Determination of Amount to be Distributed Each Year. |
(a) | General annuity requirements. A Participant who is required to begin payments as a result of attaining his or her Required Beginning Date, whose interest has not been distributed in the form of an annuity purchased from an insurance company or in a single sum before such date, may receive such payments in the form of annuity payments under the Plan. Payments under such annuity must satisfy the following requirements: |
(i) | The annuity distributions will be paid in periodic payments made at intervals not longer than one year; |
(ii) | The distribution period will be over a life (or lives) or over a period certain not longer than the period described in Section 3.04 or 3.05; |
(iii) | Once payments have begun over a period certain, the period certain will not be changed, even if the period certain is shorter than the maximum period permitted, unless otherwise elected in Section 3.08(d); |
(iv) | Payments will either be non-increasing or increase only to the extent permitted by one or more of the following conditions: |
(1) | By an annual percentage increase that does not exceed the annual percentage increase in an Eligible Cost-of-Living Index for a 12-month period ending in the year during which the increase occurs or the prior year; |
Part III 9
(2) | By a percentage increase that occurs at specified times (e.g., at specified ages) and does not exceed the cumulative total of annual percentage increases in an Eligible Cost-of-Living Index since the annuity starting date, or if later, the date of the most recent percentage increase. In cases providing such a cumulative increase, an actuarial increase may not be provided to reflect the fact that increases were not provided in the interim years; |
(3) | To the extent of the reduction in the amount of the Participants payments to provide for a survivor benefit upon death, but only if the beneficiary whose life was being used to determine the distribution period described in Section 3.04 dies or is no longer the Participants beneficiary pursuant to a qualified domestic relations order within the meaning of Code Section 414(p); |
(4) | To allow a beneficiary to convert the survivor portion of a joint and survivor annuity into a single sum distribution upon the Participants death; |
(5) | To pay increased benefits that result from a Plan amendment or other increase in the Participants accrued benefit under the Plan; |
(6) | By a constant percentage, applied not less frequently than annually, at a rate that is less than 5 percent per year; |
(7) | To provide a final payment upon the death of the Participant that does not exceed the excess of the actuarial present value of the Participants accrued benefit (within the meaning of Code Section 411(a)(7)) calculated as of the annuity starting date using the applicable interest rate and the applicable mortality table under Code Section 417(e) (or, if greater, the total amount of employee contributions) over the total of payments before the death of the Participant; or |
(8) | As a result of dividend or other payments that result from Actuarial Gains, provided: |
(I) | Actuarial Gain is measured not less frequently than annually; |
(II) | The resulting dividend or other payments are either paid no later than the year following the year for which the actuarial experience is measured or paid in the same form as the payment of the annuity over the remaining period of the annuity (beginning no later than the year following the year for which the actuarial experience is measured); |
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(III) | The Actuarial Gain taken into account is limited to actuarial gain from investment experience; |
(IV) | The assumed interest rate used to calculate such Actuarial Gains is not less than 3 percent; and |
(V) | The annuity payments are not also being increased by a constant percentage as described in Section 3.03(a)(iv)(6) above. |
(b) | Amount required to be distributed by Required Beginning Date. |
(i) | In the case of a Participant whose interest in the Plan is being distributed as an annuity pursuant to Section 3.03(a), the amount that must be distributed on or before the Participants Required Beginning Date (or, if the Participant dies before distributions begin, the date distributions are required to begin under Section 3.02(b)(i) or 3.02(b)(ii)) is the payment that is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Payment intervals are the periods for which payments are received, e.g., bi-monthly, monthly, semi-annually, or annually. All of the Participants benefit accruals as of the last day of the first Distribution Calendar Year will be included in the calculation of the amount of the annuity payments for payment intervals ending on or after the Participants Required Beginning Date. |
(ii) | In the case of a single sum distribution of a Participants entire accrued benefit during a Distribution Calendar Year, the amount that is the required minimum distribution for the Distribution Calendar Year (and thus not eligible for rollover under Code Section 402(c)) is determined under this Section 3.03(b)(ii). The portion of the single sum distribution that is a required minimum distribution is determined by treating the single sum distribution as a distribution from an individual account Plan and treating the amount of the single sum distribution as the Participants account balance as of the end of the relevant valuation calendar year. If the single sum distribution is being made in the calendar year containing the Required Beginning Date and the required minimum distribution for the Participants first Distribution Calendar Year has not been distributed, the portion of the single sum distribution that represents the required minimum distribution for the Participants first and second Distribution Calendar Years is not eligible for rollover. |
(c) | Additional accruals after first Distribution Calendar Year. Any additional benefits accruing to the Participant in a calendar year after the first Distribution |
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Calendar Year will be distributed beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues. Notwithstanding the preceding, the Plan will not fail to satisfy the requirements of this Section 3.03(c) and Code Section 401(a)(9) merely because there is an administrative delay in the commencement of the distribution of the additional benefits accrued in a calendar year, provided that the actual payment of such amount commences as soon as practicable. However, payment must commence no later than the end of the first calendar year following the calendar year in which the additional benefit accrues, and the total amount paid during such first calendar year must be no less than the total amount that was required to be paid during that year under this Section 3.03(c). |
(d) | Death after distributions begin. If a Participant dies after distribution of the Participants interest begins in the form of an annuity meeting the requirements of this Article, then the remaining portion of the Participants interest will continue to be distributed over the remaining period over which distributions commenced. |
3.04 | Requirements for Annuity Distributions That Commence During Participants Lifetime. |
(a) | Joint life annuities where the beneficiary is the Participants spouse. If distributions commence under a distribution option that is in the form of a joint and survivor annuity for the joint lives of the Participant and the Participants spouse, the minimum distribution incidental benefit requirement will not be satisfied as of the date distributions commence unless, under the distribution option, the periodic annuity payment payable to the survivor does not at any time on and after the Participants Required Beginning Date exceed the annuity payable to the Participant. In the case of an annuity that provides for increasing payments, the requirement of this Section 3.04(a) will not be violated merely because benefit payments to the beneficiary increase, provided the increase is determined in the same manner for the Participant and the beneficiary. If the form of distribution combines a joint and survivor annuity for the joint lives of the Participant and the Participants spouse and a period certain annuity, the preceding requirements will apply to annuity payments to be made to the Designated Beneficiary after the expiration of the period certain. |
(b) | Joint life annuities where the beneficiary is not the Participants spouse. If distributions commence under a distribution option that is in the form of a joint and survivor annuity for the joint lives of the Participant and a beneficiary other than the Participants spouse, the minimum distribution incidental benefit requirement will not be satisfied as of the date distributions commence unless under the distribution option, the annuity payments to be made on and after the Participants Required Beginning Date will satisfy the conditions of this Section 3.04(b). The periodic annuity payment payable to the survivor must not at any time on and after the Participants Required Beginning Date exceed the applicable percentage of the annuity payment payable to the Participant using the table set forth in Q&A-2(c)(2) of section 1.401(a)(9)-6 of the Treasury regulations. The applicable percentage is based on the adjusted Participant/beneficiary age |
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difference. The adjusted Participant/beneficiary age difference is determined by first calculating the excess of the age of the Participant over the age of the beneficiary based on their ages on their birthdays in a calendar year. If the Participant is younger than age 70, the age difference determined in the previous sentence is reduced by the number of years that the Participant is younger than age 70 on the Participants birthday in the calendar year that contains the annuity starting date. In the case of an annuity that provides for increasing payments, the requirement of this Section 3.04(b) will not be violated merely because benefit payments to the beneficiary increase, provided the increase is determined in the same manner for the Participant and the beneficiary. If the form of distribution combines a joint and survivor annuity for the joint lives of the Participant and a non-spouse beneficiary and a period certain annuity, the preceding requirements will apply to annuity payments to be made to the Designated Beneficiary after the expiration of the period certain. |
(c) | Period certain annuities. Unless the Participants spouse is the sole Designated Beneficiary and the form of distribution is a period certain and no life annuity, the period certain for an annuity distribution commencing during the Participants lifetime may not exceed the applicable distribution period for the Participant under the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations for the calendar year that contains the annuity starting date. If the annuity starting date precedes the year in which the Participant reaches age 70, the applicable distribution period for the Participant is the distribution period for age 70 under the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury Regulations plus the excess of 70 over the age of the Participant as of the Participants birthday in the year that contains the annuity starting date. If the Participants spouse is the Participants sole Designated Beneficiary and the form of distribution is a period certain and no life annuity, the period certain may not exceed the longer of the Participants applicable distribution period, as determined under this Section 3.04(c), or the joint life and last survivor expectancy of the Participant and the Participants spouse as determined under the Joint and Last Survivor Table set forth in section 1.401(a)(9)-9 of the Treasury regulations, using the Participants and spouses attained ages as of the Participants and spouses birthdays in the calendar year that contains the annuity starting date. |
3.05 | Requirements for Minimum Distributions Where Participant Dies Before Date Distributions Begin. |
(a) | Participant survived by Designated Beneficiary. Except as provided in Section 3.08, if the Participant dies before the date distribution of his or her interest begins and there is a Designated Beneficiary, the Participants entire interest will be distributed, beginning no later than the time described in Section 3.02(b)(i) or Section 3.02(b)(ii), over the life of the Designated Beneficiary or over a period certain not exceeding: |
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(i) | Unless the annuity starting date is before the first Distribution Calendar Year, the Life Expectancy of the Designated Beneficiary determined using the beneficiarys age as of the beneficiarys birthday in the calendar year immediately following the calendar year of the Participants death; or |
(ii) | If the annuity starting date is before the first Distribution Calendar Year, the Life Expectancy of the Designated Beneficiary determined using the beneficiarys age as of the beneficiarys birthday in the calendar year that contains the annuity starting date. |
(b) | No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no Designated Beneficiary as of September 30 of the year following the year of the Participants death, distribution of the Participants entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participants death. |
(c) | Death of surviving spouse before distributions to surviving spouse begin. If the Participant dies before the date distribution of his or her interest begins, the Participants surviving spouse is the Participants sole Designated Beneficiary, and the surviving spouse dies before distributions to the surviving spouse begin, this Section 3.05 will apply as if the surviving spouse were the Participant, except that the time by which distributions must begin will be determined without regard to Section 3.02(b)(i). |
3.06 | Definitions. |
(a) | Actuarial Gain. Actuarial Gain means the difference between an amount determined using the actuarial assumptions (i.e., investment return, mortality, expense, and other similar assumptions) used to calculate the initial payments before adjustment for any increases and the amount determined under the actual experience with respect to those factors. Actuarial Gain also includes differences between the amount determined using actuarial assumptions when an annuity was purchased or commenced and such amount determined using actuarial assumptions used in calculating payments at the time the Actuarial Gain is determined. |
(b) | Designated Beneficiary. Designated Beneficiary means the individual who is designated as the beneficiary under the Plan and is the Designated Beneficiary under Code Section 401(a)(9) and section 1.401(a)(9)-4, Q&A-1, of the Treasury Regulations. |
(c) | Distribution Calendar Year. Distribution Calendar Year means a calendar year for which a minimum distribution is required. For distributions beginning before the Participants death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year that contains the Participants Required Beginning Date. For distributions beginning after the Participants death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin pursuant to Section 3.02(b). |
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(d) | Eligible Cost-of-Living Index. An Eligible Cost-of-Living Index means an index described below: |
(i) | A consumer price index that is based on prices of all items (or all items excluding food and energy) and issued by the Bureau of Labor Statistics, including an index for a specific population (such as urban consumers or urban wage earners and clerical workers) and an index for a geographic area or areas (such as a given metropolitan area or state); or |
(ii) | A percentage adjustment based on a cost-of-living index described in Section (a) above, or a fixed percentage, if less. In any year when the cost-of-living index is lower than the fixed percentage, the fixed percentage may be treated as an increase in an Eligible Cost-of-Living Index, provided it does not exceed the sum of: |
(1) | The cost-of-living index for that year, and |
(2) | The accumulated excess of the annual cost-of-living index from each prior year over the fixed annual percentage used in that year (reduced by any amount previously utilized under this Section 3.06(d)(ii)). |
(e) | Life Expectancy. Life Expectancy means the life expectancy as computed by use of the Single Life Table in section 1.401(a)(9)-9 of the Treasury Regulations. |
(f) | Required Beginning Date. Except as otherwise provided in the Plan, the Required Beginning Date means the April 1st of the calendar year following the later of the calendar year in which the Participant attains age 70 1/2, or the calendar year in which the Participant retires, except that benefit distributions to a 5-percent owner must commence by April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2. Once distributions have begun to a 5-percent owner under this Article II, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent Plan Year. |
5-percent owner means a Participant who is a 5-percent owner as defined in Code Section 416 at any time during the Plan Year ending with or within the calendar year in which such owner attains age 70 1/2. Once required minimum distributions have begun to a 5-percent owner, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year.
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ARTICLE IV
LIMITATIONS ON BENEFITS
The limitations of Sections 4.01 through 4.05 shall be subject to those of Section 4.06 which shall apply in Limitation Years beginning on or after July 1, 2007, except as otherwise provided therein.
4.01 General Limitations. This Section applies regardless of whether any Participant is or has ever been a participant in another qualified plan maintained by the Employer. If any Participant is or has ever been a participant in another qualified plan, or a welfare benefit fund (as defined in Code Section 419(e)), an individual medical account (as defined in Code Section 415(l)(2), or a simplified employee pension (as defined in Code Section 408(k)) maintained by the Employer, which provides an Annual Addition as defined in Section 4.05(a), Section 4.02 is also applicable to that Participants benefits.
(a) | The Annual Benefit otherwise payable to a Participant at any time will not exceed the Maximum Permissible Benefit. If the benefit the Participant would otherwise accrue in a Limitation Year would produce an Annual Benefit in excess of the Maximum Permissible Benefit, the benefit must be limited (or the rate of accrual reduced) so that the Annual Benefit does not exceed the Maximum Permissible Benefit. |
(b) | If a Participant has made voluntary employee contributions, or mandatory employee contributions as defined in Code Section 411(c)(2)(C) under the terms of this Plan, the amount of such contributions is treated as an Annual Addition to a qualified defined contribution plan, for purposes of Sections 4.01(a) and 4.01(b) of this Article. |
4.02 Additional General Limitations. This Section applies if any Participant is also a participant, or has ever participated in another plan maintained by the Employer, including a qualified plan, a welfare benefit fund maintained by the Employer (as defined in Code Section 419(e)) under which amounts attributable to post-retirement medical benefits are allocated to separate accounts of Key Employees (as defined in Code Section 419(A)(d)(3), an individual medical account, or a simplified employee pension that provides an annual addition as described in Section 4.05(a).
(a) | If a Participant is, or has ever been, a participant covered under more than one defined benefit plan maintained by the Employer, the sum of the Participants Annual Benefits from all such plans may not exceed the Maximum Permissible Benefit. If a Participant is or has ever been a participant in more than one defined benefit Plan maintained by an Employer, the rate of accrual in this Plan will be reduced so that the total Annual Benefits payable at any time under such plans will not exceed the Maximum Permissible Benefit. |
(b) | For Limitation Years beginning before January 1, 2000, if the Employer maintains, or ever maintained, one or more qualified defined contribution plans covering any Participant in this Plan, a welfare benefit fund (as defined in Code |
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Section 419(e)), an individual medical account (as defined in Code Section 415(l)(2)), or a simplified employee pension(as defined in Code Section 408(k)), the sum of the Participants Defined Contribution Fraction and Defined Benefit Fraction (the Combined Limit) will not exceed 1.0 in any Limitation Year. In the event that a Participants Combined Limit would otherwise be exceeded for a Limitation Year, shall be reduced, to the extent necessary, such that such accrual plus the Annual Additions credited to any such Participants account for the Limitation Year under the defined contribution plan, welfare benefit fund, individual medical account or simplified employee pension will not exceed the Combined Limit. |
4.03 Limitation Year beginning after December 31, 1986. In the case of an individual who was a participant in one or more defined benefit plans of the Employer as of the first day of the first Limitation Year beginning after December 31, 1986, the application of the limitations of this Article shall not cause the Maximum Permissible Benefit for such individual under all such defined benefit plans to be less than the individuals current Accrued Benefit. The preceding sentence applies only if all such defined benefit plans met the requirements of Code Section 415 for all Limitation Years beginning before January 1, 1987.
4.04 Limitation Year beginning after December 31, 1994. In the case of an individual who was a participant in one or more defined benefit plans of the Employer as of the first day of the first Limitation Year beginning after December 31, 1994, the application of the limitations of this Article shall not cause the Maximum Permissible Amount for such individual under all such defined benefit plans to be less than the individuals Retirement Protection Act of 1994 (RPA 94) old law benefit. The preceding sentence applies only if all such defined benefit plans met the requirements of Code Section 415 on December 7, 1994.
4.05 Definitions.
(a) | Annual Additions. The sum of the following amounts credited to a Participants account for the Limitation Year: |
(i) | Employer contributions; |
(ii) | Employee contributions; |
(iii) | Allocations under a simplified employee pension; |
(iv) | Forfeitures; and |
(v) | Amounts allocated after March 31, 1984, to an individual medical account that is part of a pension or annuity plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in Section 419A(d)(3), under a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer, are treated as Annual Additions to a defined contribution plan. |
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(b) | Annual Benefit. A retirement benefit under the Plan which is payable annually in the form of a straight life annuity. A benefit which is payable in a form other than a straight life annuity must be adjusted to an actuarially equivalent straight life annuity before applying the limitations of this Article. In the case of a GATT Benefit (which for this purpose is any benefit unless it is paid in the form of a non-decreasing annuity payable over a period not less than the life of the Participant) or a Non-GATT Benefit (which for this purpose is any benefit other than a GATT Benefit), the actuarial equivalent straight life annuity commencing as of the benefit commencement date of such GATT Benefit or Non-GATT Benefit is the greater of (i) the equivalent annual life annuity determined by using the interest rate and mortality table in Section 2.02 in Part I of the Plan (the definition of the term Actuarial Equivalent) for the purposes of Part I of the Plan and Section 2.02 in Part II of the Plan (the definition of the term Actuarial Equivalent) for the purposes of Part II of the Plan; and (ii) the equivalent annual life annuity determined by using the combination of (A) a 5% interest rate in the case of a Non-GATT Benefit or the Code Section 417 Interest Rate in the case of a GATT Benefit; and (B) the Code Section 417 Mortality Table. The portion of the actuarial equivalent straight life annuity attributable to the GATT Benefit is the GATT percentage and the portion of the actuarial equivalent straight life annuity attributable to the Non-GATT Benefit is the Non-GATT Percentage. The Annual Benefit does not include any benefits attributable to Employee contributions or rollover contributions, or the assets transferred from a qualified plan that was not maintained by the Employer. No actuarial adjustment to the benefit is required for (i) the value of a Qualified Joint and Survivor Annuity, (ii) the value of benefits that are not directly related to retirement benefits (such as the qualified disability benefit, pre-retirement death benefits, and post-retirement medical benefits), and (iii) the value of post-retirement cost-of-living increases made in accordance with Code Section 415(d) and Treasury Regulation Section 1.415(c)(2)(iii). |
(c) | Defined Benefit Dollar Limitation. $90,000. Effective on January 1 of each year, the $90,000 limitation above will be automatically adjusted by multiplying such limit by the cost of living adjustment factor prescribed by the Secretary of the Treasury under Code Section 415(d) in such manner as the Secretary shall prescribe. The new limitation will apply to Limitation Years ending within the calendar year of the date of the adjustment. |
Notwithstanding the foregoing, effective for Limitation Years ending after December 31, 2001, the Defined Benefit Dollar Limitation is $160,000, as adjusted effective January 1 of each year under Section 415(d) of the Code in such manner as the Secretary shall prescribe, and payable in the form of a straight life annuity. A limitation as adjusted under Code Section 415(d) will apply to Limitation Years ending with or within the calendar year for which the adjustment applies.
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(d) | Defined Benefit Fraction. A fraction, the numerator of which is the sum of the Participants Projected Annual Benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Code Section 415(b)(1)(A) and (d) or 140 percent of the Highest Average Compensation, including any adjustments under Code Section 415(b)(5), both in accordance with paragraph (h) below. |
Notwithstanding the above, if the Participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 for all Limitation Years beginning before January 1, 1987.
Notwithstanding the foregoing, for Limitation Years beginning before January 1, 2000, for any Top Heavy Plan Year, 100 percent shall be substituted for 125 percent unless an extra minimum benefit or contribution is credited pursuant to Section 2.03(b) of Part III of the Plan. However, for any such Plan Year in which this Plan is a super top heavy plan, 100 percent shall be substituted for 125 percent in any event.
(e) | Defined Contribution Fraction. A fraction, the numerator of which is the sum of the Annual Additions to the Participants account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years, (including the Annual Additions attributable to the Participants nondeductible employee contributions to this and all other defined benefit plans (whether or not terminated) maintained by the Employer, and the Annual Additions attributable to all welfare benefit funds (as defined in Code Section 419(e)), individual medical accounts (as defined in Code Section 415(l)(2)), or simplified employee pensions (as defined in Code Section 408(k)), maintained by the Employer, and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). |
The maximum aggregate amount in any Limitation Year is the lesser of (1) 125 percent of the dollar limitation under Code Section 415(c)(1)(A) after adjustment under Section 415(d), or (2) 35 percent of the Participants Compensation for such year.
If the Employee was a participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans
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maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this plan. Under the adjustment, an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 times (ii) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plans made after May 6, 1986, but using the Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987.
The annual addition for any Limitation Year beginning before January 1, 1987 shall not be recomputed to treat all employee contributions as Annual Additions.
Notwithstanding the foregoing, for Limitation Years beginning before January 1, 2000, for any Top Heavy Plan Year, 100 percent shall be substituted for 125 percent unless an extra minimum allocation is made pursuant to Section 2.03(b) of Part III of the Plan. However, for any such Plan Year in which this Plan is a super top heavy plan, 100 percent shall be substituted for 125 percent in any event.
(f) | Employer. For purposes of this Article, Employer shall mean the employer that adopt this Plan and all members of a controlled group of corporations (as defined in Code Section 414(b) as modified by Code Section 415(h), all trades or businesses under common control (as defined in Code Section 414(c) as modified by code Section 415(h), or all members of an affiliated service group (as defined in Code Section 414(m) of which the adopting Employer is a part, and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). |
(g) | Highest Average Compensation. The average Compensation for the three consecutive years of service with the Employer that produces the highest average. A year of service with the Employer is the 12-consecutive month period defined in Section 2.44 of Part I of the Plan (the definition of the term, Year of Service). |
In the case of a Participant who has separated from service, the Participants Highest Average Compensation will be automatically adjusted by multiplying such compensation by the cost of living adjustment factor prescribed by the Secretary of the Treasury under Code Section 415(d) in such manner as the Secretary shall prescribe. The adjusted compensation amount will apply to Limitation Years ending within the calendar year of the date of the adjustment.
(h) | Maximum Permissible Benefit. |
(i) | The lesser of the Defined Benefit Dollar Limitation or 100 percent of the Participants Highest Average Compensation. |
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(ii) | If the Participant has less than 10 years of participation in the Plan, the Defined Benefit Dollar Limitation is reduced by one-tenth for each year of participation (or part thereof) less than ten. |
(iii) | If the Participant has less than ten years of service with the Employer, the Compensation limitation is reduced by one-tenth for each Year of Service (or part thereof) less than ten. The adjustments of this paragraph (iii) shall be applied in the denominator of the Defined Benefit Fraction based upon Years of Service. For purposes of computing the Defined Benefit Fraction only, Years of Service shall include future years of service occurring before the Participants Normal Retirement Age. Such future years of service shall include the year that contains the date the Participant reaches Normal Retirement Age, only if it can be reasonably anticipated that the Participant will receive a Year of Service for such year, or the year in which the Participant terminates employment, if earlier. |
(iv) | If the Annual Benefit of the Participant commences before the Participants Social Security Retirement Age, but on or after Age 62, the Defined Benefit Dollar Limitation as reduced above, if necessary, shall be determined as follows: |
(A) | If a Participants Social Security Retirement Age is 65, the Dollar Limitation for benefits commencing on or after Age 62 is determined by reducing the Defined Benefit Dollar Limitation by 5/9 of one percent for each month by which benefits commence before the month in which the Participant attains Age 65. |
(B) | If a Participants Social Security Retirement Age is greater than 65, the Dollar Limitation for benefits commencing on or after Age 62 is determined by reducing the Defined Benefit Dollar Limitation by 5/9 of one percent for each of the first 36 months and 5/12 of one percent for each of the additional months (up to 24 months) by which benefits commence before the month of the Participants Social Security Retirement Age. |
(v) | If the Annual Benefit of a Participant commences prior to Age 62, the Defined Benefit Dollar Limitation shall be the actuarial equivalent of an Annual Benefit beginning at Age 62, as determined above, reduced for each month by which benefits commence before the month in which the Participant attains Age 62. The reduced dollar limitation is the sum of the Non-GATT Limitation and the GATT Limitation. For purposes of the immediately preceding sentence, the Non-GATT Limitation is the product of the Non-GATT Percentage and the lesser of the equivalent early retirement dollar amount computed as described in Section 6.02 of Part I of the Plan (Early Retirement Benefit) or in Section 5.02 of Part II of the Plan (Early Retirement Benefit) and the amount computed using an interest rate of 5% and the Code Section 417 Mortality Table in Section |
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2.02 in Part I of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part II of the Plan); and the GATT Limitation is the product of the GATT Percentage (as described in Section 4.05(b) of Part III of the Plan) and the lesser of the equivalent early retirement dollar amount computed as in described in Section 6.02 of Part I of the Plan (Early Retirement Benefit) or in Section 5.02 of Part II of the Plan (Early Retirement Benefit) and the amount computed using an interest rate of 5% and the Code Section 417 Mortality Table (as described in Section 2.02 in Part I of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part II of the Plan); and the GATT Limitation is the product of the GATT Percentage (as described in Section 4.05(b) of Part III of the Plan) and the lesser of the equivalent early retirement dollar amount computed as described in Section 6.02 of Part I of the Plan (Early Retirement Benefit) or in Section 5.02 of Part II of the Plan (Early Retirement Benefit) and the amount computed using the Code Section 417 Interest Rate and the Code Section 417 Mortality Table. Any decrease in the Defined Benefit Dollar Limitation determined in accordance with this Paragraph (iv) shall not reflect the mortality decrement to the extent that benefits will not be forfeited upon the death of the Participant. |
(vi) | If the Annual Benefit of a Participant commences after the Participants Social Security Retirement Age, the Defined Benefit Dollar Limitation as reduced in (ii) above, if necessary, shall be adjusted so that it is the actuarial equivalent of an annual benefit of such Dollar Limitation beginning at the Participants Social Security Retirement Age. The increased dollar limitation is the lesser of the equivalent dollar amount computed using the interest rate and mortality table used for actuarial equivalence set forth in Part I of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part II of the Plan) and the amount computed using an interest rate of 5 percent and the Code Section 417 Mortality Table (as described in Part I of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part I of the Plan) or Section 2.02 in Part II of the Plan (the definition of the term Actuarial Equivalent for the purposes of Part II of the Plan). |
(i) | Projected Annual Benefit. The Annual Benefit, as defined in Section 4.05(b) of this Article, to which the Participant would be entitled under the terms of the Plan assuming: |
(i) | the Participant will continue employment until Normal Retirement Age under the Plan (or current Age, if later); and |
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(ii) | the Participants Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. |
(j) | RPA 94 Old Law Benefit. The Participants Accrued Benefit under the terms of the plan as of December 31, 1996, (the RPA 94 freeze date), for the annuity starting date and optional form and taking into account the limitations of Code Section 415, as in effect on December 7, 1994, including the participation requirements under Code Section 415(b)(5). In determining the amount of a Participants RPA 94 old law benefit, the following shall be disregarded; |
(i) | any Plan amendment increasing benefits adopted after the RPA 94 freeze date; and |
(ii) | any cost of living adjustments that become effective after such date. |
A Participants RPA 94 old law benefit is not increased after the RPA 94 freeze date, but if the limitations of Code Section 415, as in effect on December 7, 1994, are less than the limitations that were applied to determine the Participants RPA 94 old law benefit on the RPA 94 freeze date, then the Participants RPA 94 old law benefit will be reduced in accordance with such reduced limitation. If, at any date after the RPA 94 freeze date, the Participants total plan benefit, before the application of Code Section 415, is less than the Participants RPA 94 old law benefit, the RPA 94 old law benefit will be reduced to the Participants total plan benefit.
(k) | Social Security Retirement Age. Age 65 in the case of a Participant attaining Age 62 before January 1, 2000 (i.e., born before January 1, 1938), Age 66 for a Participant attaining age 62 after December 31, 1999, and before January 1, 2017 (i.e., born after December 31, 1937, but before January 1, 1955), and Age 67 for a participant attaining Age 62 after December 31, 2016 (i.e., born after December 31, 1954). |
(l) | TRA 86 Accrued Benefit. A Participants Accrued Benefit under the Plan, determined as if the Participant had separated from service as of the close of the last Limitation Year beginning before January 1, 1987, when expressed as an annual benefit within the meaning of Code Section 415(b)(2). In determining the amount of a Participants TRA 86 Accrued Benefit, the following shall be disregarded: |
(i) | any change in the terms and conditions of the Plan after May 5, 1986; and |
(ii) | any cost of living adjustments occurring after May 5, 1986. |
(m) | Year of Participation. The Participant shall be credited with a year of participation (computed to fractional parts of a year) for each accrual computation period for which the following conditions are met: (i) The Participant is credited with at least the number of Hours of Service for benefit accrual purposes, required |
Part III 23
under the terms of the Plan in order to accrue a benefit for the accrual computation period, and (ii) the Participant is included as a Participant under the eligibility provisions of the plan for at least one day of the accrual computation period. If these two conditions are met, the portion of a year of participation credited to the Participant shall equal the amount of benefit accrual service credited to the Participant for such accrual computation period. |
4.06 | Final Section 415 Regulations.Effective Date. The limitations of this Section shall apply in Limitation Years beginning on or after July 1, 2007, except as otherwise provided herein. |
(b) | Grandfather Provision. The application of the provisions of this Section shall not cause the maximum permissible benefit for any Participant to be less than the Participants accrued benefit under all the defined benefit plans of the employer or a predecessor employer as of the end of the last Limitation Year beginning before July 1, 2007 under provisions of the plans that were both adopted and in effect before April 5, 2007. The preceding sentence applies only if the provisions of such defined benefit plans that were both adopted and in effect before April 5, 2007 satisfied the applicable requirements of statutory provisions, regulations, and other published guidance relating to Code Section 415 in effect as of the end of the last Limitation Year beginning before July 1, 2007, as described in Section 1.415(a)-1(g)(4) of the Treasury Regulations. |
(c) | Incorporation by Reference. Notwithstanding anything contained in the Plan to the contrary, the limitations, adjustments, and other requirements prescribed in the Plan shall comply with the provisions of Code Section 415 and the final regulations promulgated thereunder, the terms of which are specifically incorporated herein by reference as of the first Limitation Year beginning on or after July 1, 2007, except where an earlier effective date is otherwise provided in the final regulations or in this Section. However, where the final regulations permit the Plan to specify an alternative option to a default option set forth in the regulations, and the alternative option was available under statutory provisions, regulations, and other published guidance relating to Code Section 415 as in effect prior to April 5, 2007, and the Plan provisions in effect as of April 5, 2007 incorporated the alternative option, said alternative option shall remain in effect as a plan provision for Limitation Years beginning on or after July 1, 2007. |
(d) | High Three-Year Average Compensation. For purposes of the Plans provisions reflecting Code Section 415(b)(3) (i.e., limiting the annual benefit payable to no more than 100% of the Participants average annual compensation), a Participants average compensation shall be the average compensation for the three consecutive years of service, during which the Employee had the greatest aggregate compensation from the Employer, except that a Participants compensation for a year of service shall not include compensation in excess of the limitation under Code Section 401(a)(17) that is in effect for the calendar year in which such year of service begins. If the Participant has less than three consecutive years of service, compensation shall be averaged over the |
Part III 24
Participants longest consecutive period of service, including fractions of years, but not less than one year. In the case of a Participant who is rehired by the Employer after a severance of employment, the Participants high three-year average compensation shall be calculated by excluding all years for which the Participant performs no services for and receives no compensation from the Employer (the break period), and by treating the years immediately preceding and following the break period as consecutive. |
(e) | Adjustment to dollar limit after date of severance. In the case of a Participant who has had a severance from employment with the Employer, the Defined Benefit Dollar Limitation applicable to the Participant in any Limitation Year beginning after the date of severance shall be automatically adjusted under Code Section 415(d). |
(f) | Compensation paid after severance from employment. For Limitation Years beginning on or after July 1, 2007 compensation for a Limitation Year, within the meaning of Code Section 415(c)(3), shall also include the following types of compensation paid by the later of 2 1/2 months after a Participants severance from employment with the employer maintaining the plan or the end of the Limitation Year that includes the date of the Participants severance from employment with the employer maintaining the plan. Any other payment of compensation paid after severance of employment that is not described in the following types of compensation is not considered compensation within the meaning of Code Section 415(c)(3), even if payment is made within the time period specified above. |
(i) | Regular pay after severance from employment. Compensation shall include regular pay after severance of employment if: |
(1) | The payment is regular compensation for services during the Participants regular working hours, or compensation for services outside the Participants regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments; and |
(2) | The payment would have been paid to the Participant prior to a severance from employment if the Participant had continued in employment with the employer. |
(ii) | Leave cashouts and deferred compensation. Leave cashouts and deferred compensation shall be included in compensation, if those amounts would have been included in the definition of compensation if they were paid prior to the Participants severance from employment with the Employer maintaining the Plan, and the amounts are either: |
(1) | Payment for unused accrued bona fide sick, vacation, or other leave, but only if the Participant would have been able to use the leave if employment had continued; or |
Part III 25
(2) | Received pursuant to a nonqualified unfunded deferred compensation plan, but only if the payment would have been paid to the if the Participant had continued in employment with the employer and only to the extent that the payment is includible in the Participants gross income. |
(iii) | Salary continuation payments for military service Participants. Compensation does not include payments to an individual who does not currently perform services for the employer by reason of qualified military service (as that term is used in Code Section 414(u)(1)) to the extent those payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the employer rather than entering qualified military service. Notwithstanding the foregoing, for Plan Years beginning after December 31, 2008, a differential wage payment, as defined by Code Section 3401(h)(2), shall be treated as compensation, for purposes of Code Section 415(c)(3) and Treasury Regulation Section 1.415(c)-2, as provided Section 11.02 of Part III of the Plan. |
(iv) | Salary continuation payments for disabled Participants. Compensation does not include compensation paid to a Participant who is permanently and totally disabled (as defined in Code Section 22(e)(3)) if the Participant is not a highly compensated employee (as defined in Code Section 414(q)) immediately before becoming disabled, or to all Participants if the Plan provides for the continuation of compensation on behalf of all Participants who are permanently and totally disabled for a fixed or determinable period. |
(g) | Administrative delay. Compensation for a Limitation Year shall not include amounts earned but not paid during the Limitation Year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next Limitation Year, the amounts are included on a uniform and consistent basis with respect to all similarly situation Participants, and no compensation is included in more than one Limitation Year. |
(h) | Option to apply compensation provisions early. The rules in Sections 4.6(g) shall apply for Limitation Years beginning on or after July 1, 2007. |
ARTICLE V
PRE-TERMINATION BENEFIT RESTRICTIONS
5.01 In General. In the event of Plan termination, the benefit of any Highly Compensated Employee is limited to a benefit that is nondiscriminatory under Code Section 401(a)(4).
Part III 26
Benefits distributed to any of the 25 most Highly Compensated Employees shall be restricted such that the annual payments shall be no greater than an amount equal to the payment that would be made on behalf of the Employee under a single life annuity that is the Actuarial Equivalent of the sum of the Employees Accrued Benefit and the Employees other benefits under the Plan.
5.02 Exceptions. Section 5.01 shall not apply if: (i) after payment of the benefit to an Employee described in the preceding Section, the value of Plan assets equals or exceeds 110% of the value of current liabilities, as defined in Code Section 412(l)(7); or (ii) the value of the benefits for an Employee described above is less than 1% of the value of current liabilities.
5.03 Included Benefits. For purposes of this Article, benefits include any periodic income, any withdrawal values payable to a living Employee, and any death benefits not provided for by insurance on the Employees life.
ARTICLE V I
BENEFIT RESTRICTIONS
6.01 | Effective Date and Application of Section. |
(i) | Effective Date. The provisions of this Section apply to Plan Years beginning after December 31, 2007. |
(ii) | Notwithstanding anything in this Section to the contrary, the provisions of Code Section 436 and the Regulations thereunder are incorporated herein by reference. |
(iii) | For Plans that have a valuation date other than the first day of the Plan Year, the provisions of Code Section 436 and this Article will be applied in accordance with Regulations. |
6.02 | Funding-Based Limitation on Shutdown Benefits and Other Unpredictable Contingent Event Benefits. |
(i) | In general. If a Participant is entitled to an unpredictable contingent event benefit payable with respect to any event occurring during any Plan Year, then such benefit may not be provided if the adjusted funding target attainment percentage for such Plan Year (A) is less than sixty percent (60%) or, (B) would be less than sixty percent (60%) percent taking into account such occurrence. |
(ii) | Exemption. Paragraph (i) shall cease to apply with respect to any Plan Year, effective as of the first day of the Plan Year, upon payment by the Employer of a contribution (in addition to any minimum required contribution under Code Section 430) equal to: |
(A) | in the case of 5.02(i)(A) above, the amount of the increase in the funding target of the Plan (under Code Section 430) for the Plan Year attributable to the occurrence referred to in paragraph (i), and |
Part III 27
(B) | in the case of 5.02(i)(B) above, the amount sufficient to result in an adjusted funding target attainment percentage of sixty percent (60%). |
(iii) | Unpredictable contingent event benefit. For purposes of this subsection, the term unpredictable contingent event benefit means any benefit payable solely by reason of: |
(A) | a plant shutdown (or similar event, as determined by the Secretary of the Treasury), or |
(B) | an event other than the attainment of any age, performance of any service, receipt or derivation of any compensation, or occurrence of death or disability. |
6.03 | Limitations on Plan Amendments Increasing Liability for Benefits. |
(i) | In general. No amendment which has the effect of increasing liabilities of the Plan by reason of increases in benefits, establishment of new benefits, changing the rate of benefit accrual, or changing the rate at which benefits become nonforfeitable may take effect during any Plan Year if the adjusted funding target attainment percentage for such Plan Year is: |
(A) | less than eighty percent (80%), or |
(B) | would be less than eighty percent (80%) taking into account such amendment. |
(ii) | Exemption. Paragraph 5.03(i) above shall cease to apply with respect to any Plan Year, effective as of the first day of the Plan Year (or if later, the effective date of the amendment), upon payment by the Employer of a contribution (in addition to any minimum required contribution under Code Section 430) equal to - |
(A) | in the case of paragraph 5.03(i)(A) above, the amount of the increase in the funding target of the Plan (under Code Section 430) for the Plan Year attributable to the amendment, and |
(B) | in the case of paragraph 5.03(i)(B) above, the amount sufficient to result in an adjusted funding target attainment percentage of eighty percent (80%). |
(iii) | Exception for certain benefit increases. Paragraph (i) shall not apply to any amendment which provides for an increase in benefits under a formula |
Part III 28
which is not based on a Participants compensation, but only if the rate of such increase is not in excess of the contemporaneous rate of increase in average wages of Participants covered by the amendment. |
6.04 | Limitations on Accelerated Benefit Distributions. |
(i) | Funding percentage less than sixty percent (60%). If the Plans adjusted funding target attainment percentage for a Plan Year is less than sixty percent (60%), then the Plan may not pay any prohibited payment after the valuation date for the Plan Year. |
(ii) | Bankruptcy. During any period in which the Employer is a debtor in a case under title 11, United States Code, or similar Federal or State law, the Plan may not pay any prohibited payment. The preceding sentence shall not apply on or after the date on which the enrolled actuary of the Plan certifies that the adjusted funding target attainment percentage of the Plan is not less than one-hundred percent (100%). |
(iii) | Limited payment if percentage at least sixty percent (60%) but less than eighty percent (80%) percent. |
(A) | In general. If the Plans adjusted funding target attainment percentage for a Plan Year is sixty percent (60%) or greater but less than eighty percent (80%), then the Plan may not pay any prohibited payment after the valuation date for the Plan Year to the extent the amount of the payment exceeds the lesser of: |
(1) | fifty (50) percent of the amount of the payment which could be made without regard to this subsection, or |
(2) | the present value (determined under guidance prescribed by the Pension Benefit Guaranty Corporation, using the interest and mortality assumptions under Code Section 417(e)) of the maximum guarantee with respect to the participant under ERISA Section 4022. |
(B) | One-time application. |
(1) | In general. Only 1 prohibited payment meeting the requirements of subparagraph (A) may be made with respect to any Participant during any period of consecutive Plan Years to which the limitations under either paragraph (i) or (ii) or this paragraph applies. |
(2) | Treatment of beneficiaries. For purposes of this subparagraph, a Participant and any Beneficiary (including an alternate payee, as defined in Code Section 414(p)(8)) shall be treated as one Participant. If the Accrued Benefit |
Part III 29
of a Participant is allocated to such an alternate payee and one or more other persons, the amount under subparagraph (A) shall be allocated among such persons in the same manner as the Accrued Benefit is allocated unless the qualified domestic relations order (as defined in Code Section 414(p)(1)(A)) provides otherwise. |
(iv) | Exception. This subsection shall not apply for any Plan Year if the terms of the Plan (as in effect for the period beginning on September 1, 2005, and ending with such Plan Year) provide for no benefit accruals with respect to any Participant during such period. |
(v) | Prohibited payment. For purpose of this subsection, the term prohibited payment means: |
(A) | any payment, in excess of the monthly amount paid under a single life annuity (plus any Social Security supplements described in the last sentence of Code Section 411(a)(9)), to a Participant or Beneficiary whose Annuity Starting Date occurs during any period a limitation under paragraph (i) or (ii) is in effect, |
(B) | any payment for the purchase of an irrevocable commitment from an insurer to pay benefits, and |
(C) | any other payment specified by the Secretary by Regulations. |
Such term shall not include the payment of a benefit which under Code Section 411(a)(11) may be immediately distributed without the consent of the Participant.
6.05 | Limitation on Benefit Accruals for Plans With Severe Funding Shortfalls. |
(i) | In general. If the Plans adjusted funding target attainment percentage for a Plan Year is less than sixty percent (60%), benefit accruals under the Plan shall cease as of the valuation date for the Plan Year. |
(ii) | Exemption. Paragraph (i) shall cease to apply with respect to any Plan Year, effective as of the first day of the Plan Year, upon payment by the Employer of a contribution (in addition to any minimum required contribution under Code Section 430) equal to the amount sufficient to result in an adjusted funding target attainment percentage of sixty percent (60%). |
(iii) | Temporary modification of limitation. In the case of the first Plan Year beginning during the period beginning on October 1, 2008, and ending on September 30, 2009, the provisions of Section 6.05(i) above shall be applied by substituting the Plans adjusted funding target attainment percentage for the preceding Plan Year for such percentage for such Plan Year, but only if the adjusted funding target attainment percentage for the preceding year is greater. |
Part III 30
6.06 | Rules Relating to Contributions Required to Avoid Benefit Limitations. |
(i) | Security may be provided. |
(A) | In general. For purposes of this section, the adjusted funding target attainment percentage shall be determined by treating as an asset of the Plan any security provided by the Employer in a form meeting the requirements of subparagraph (B). |
(B) | Form of security. The security required under subparagraph (A) shall consist of: |
(1) | a bond issued by a corporate surety company that is an acceptable surety for purposes of ERISA Section 412; |
(2) | cash, or United States obligations which mature in three (3) years or less, held in escrow by a bank or similar financial institution; or |
(3) | such other form of security as is satisfactory to the Secretary and the parties involved. |
(C) | Enforcement. Any security provided under subparagraph (A) may be perfected and enforced at any time after the earlier of: |
(1) | the date on which the Plan terminates; |
(2) | if there is a failure to make a payment of the minimum required contribution for any Plan Year beginning after the security is provided, the due date for the payment under Code Section 430(j); or |
(3) | if the adjusted funding target attainment percentage is less than sixty percent (60%) for a consecutive period of 7 years, the valuation date for the last year in the period. |
(D) | Release of security. The security shall be released (and any amounts thereunder shall be refunded together with any interest accrued thereon) at such time as the Secretary may prescribe in Regulations, including Regulations for partial releases of the security by reason of increases in the adjusted funding target attainment percentage. |
(ii) | Prefunding balance or funding standard carryover balance may not be used. No prefunding balance under Code Section 430(f) or funding |
Part III 31
standard carryover balance may be used under Sections 6.02, 6.03, or 6.05 to satisfy any payment an Employer may make under any such subsection to avoid or terminate the application of any limitation under such subsection. |
(iii) | Deemed reduction of funding balances: |
(A) | In general. In any case in which a benefit limitation under Sections 6.02, 6.03, 6.04, or 6.05 would (but for this subparagraph and determined without regard to Sections 6.02(ii), 6.03(ii), or 6.05(ii)) apply to such Plan for the Plan Year, the Employer shall be treated for purposes of this title as having made an election under Code Section 430(f) to reduce the prefunding balance or funding standard carryover balance by such amount as is necessary for such benefit limitation to not apply to the Plan for such Plan Year. |
(B) | Exception for insufficient funding balances. Subparagraph (A) shall not apply with respect to a benefit limitation for any Plan Year if the application of subparagraph (A) would not result in the benefit limitation not applying for such Plan Year. |
6.07 | Presumed Underfunding for Purposes of Benefit Limitations. |
(i) | Presumption of continued underfunding. In any case in which a benefit limitation under Sections 6.02, 6.03, 6.04, or 6.05 has been applied to a Plan with respect to the Plan Year preceding the current Plan Year, the adjusted funding target attainment percentage of the Plan for the current Plan Year shall be presumed to be equal to the adjusted funding target attainment percentage of the Plan for the preceding Plan Year until the enrolled actuary of the Plan certifies the actual adjusted funding target attainment percentage of the Plan for the current Plan Year. |
(ii) | Presumption of underfunding after 10th month. In any case in which no certification of the adjusted funding target attainment percentage for the current Plan Year is made with respect to the Plan before the first day of the 10th month of such year, for purposes of Sections 6.02, 6.03, 6.04, and 6.05, such first day shall be deemed, for purposes of such subsection, to be the valuation date of the Plan for the current Plan Year and the Plans adjusted funding target attainment percentage shall be conclusively presumed to be less than sixty percent (60%) as of such first day. |
(iii) | Presumption of underfunding after 4th month for nearly underfunded plans. In any case in which: |
(A) | a benefit limitation under Sections 6.02, 6.03, 6.04, or 6.05 did not apply to a Plan with respect to the Plan Year preceding the current Plan Year, but the adjusted funding target attainment percentage |
Part III 32
of the Plan for such preceding Plan Year was not more than ten (10) percentage points greater than the percentage which would have caused such subsection to apply to the Plan with respect to such preceding Plan Year, and |
(B) | as of the first day of the 4th month of the current Plan Year, the enrolled actuary of the Plan has not certified the actual adjusted funding target attainment percentage of the Plan for the current Plan Year, until the enrolled actuary so certifies, such first day shall be deemed, for purposes of such subsection, to be the valuation date of the Plan for the current Plan Year and the adjusted funding target attainment percentage of the Plan as of such first day shall, for purposes of such subsection, be presumed to be equal to ten (10) percentage points less than the adjusted funding target attainment percentage of the Plan for such preceding Plan Year. |
6.08 | Treatment of Plan as of Close of Prohibited or Cessation Period. The following provisions apply for purposes of applying this Section. |
(i) | Operation of Plan after period. Payments will resume effective as of the day following the close of the period for which any limitation of payment of benefits under Section 6.04 applies. If a limitation on benefit accruals under Section 6.05 applies to the Plan as of a Section 436 measurement date, but that limit no longer applies to the Plan as of a later Section 436 measurement date, then that limitation shall not apply to benefit accruals that are based on service on or after that later Section 436 measurement date, except to the extent that the Plan does then not provide for such benefit accruals or provides that benefit accruals will not resume when the limitation ceases to apply. A Section 436 measurement date is the date that is used to determine when the limitations of Code Sections 436(d) and 436(e) apply or cease to apply. |
(ii) | Treatment of affected benefits. Nothing in this subsection shall be construed as affecting the Plans treatment of benefits which would have been paid or accrued but for this Section. |
6.09 | Definitions. |
(i) | The term funding target attainment percentage has the same meaning given such term by Code Section 430(d)(2), except as otherwise provided herein. However, in the case of Plan Years beginning in 2008, the funding target attainment percentage for the preceding Plan Year may be determined using such methods of estimation as the Secretary may provide. |
Part III 33
(ii) | The term adjusted funding target attainment percentage means the funding target attainment percentage which is determined under paragraph (i) by increasing each of the amounts under subparagraphs (A) and (B) of Code Section 430(d)(2) by the aggregate amount of purchases of annuities for employees other than highly compensated employees (as defined in Code Section 414(q)) which were made by the Plan during the preceding two (2) Plan Years. |
(iii) | Application to plans which are fully funded without regard to reductions for funding balances. |
(A) | In general. In the case of a Plan for any Plan Year, if the funding target attainment percentage is one-hundred percent (100%) or more (determined without regard to this paragraph and without regard to the reduction in the value of assets under Code Section 430(f)(4)(A)), the funding target attainment percentage for purposes of paragraphs (i) and (ii) shall be determined without regard to such reduction. |
(B) | Transition rule. Subparagraph (A) shall be applied to Plan Years beginning after 2007 and before 2011 by substituting for one-hundred percent (100%) the applicable percentage determined in accordance with the following table: |
In the case of a Plan Year beginning in calendar year: | The applicable percentage is: | |
2008 |
92% | |
2009 |
94% | |
2010 |
96% |
(C) | Subparagraph (B) shall not apply with respect to any Plan Year after 2008 unless the funding target attainment percentage (determined without regard to this paragraph) of the Plan for each preceding Plan Year after 2007 was not less than the applicable percentage with respect to such preceding Plan Year determined under subparagraph (B). |
ARTICLE VII
PLAN FIDUCIARY RESPONSIBILITIES
7.01 | Plan Fiduciaries. The Plan Fiduciaries shall be: |
(i) | the Trustee(s) of the Plan; |
(ii) | the Plan Administrator; and |
Part III 34
(iii) | such other person or persons as may be designated by the Plan Administrator as a fiduciary in accordance with the provisions of this Article. |
7.02 General Fiduciary Duties. Each Plan Fiduciary shall discharge his or her duties solely in the interest of the Participants and their Beneficiaries and act:
(i) | for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan; |
(ii) | with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; |
(iii) | by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, if the Fiduciary has the responsibility to invest plan assets; and |
(iv) | in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions only Title I of ERISA. |
Each Plan Fiduciary shall perform the duties specifically assigned to him or her. No Plan Fiduciary shall have any responsibility for the performance or non-performance of any duties not specifically allocated to him or her.
7.03 Duties of the Trustee(s). The specific responsibilities and duties of the Trustee(s) are set forth in the Trust Indenture among the Plan Sponsor, the Plan Administrator, and the Trustee(s). In general the Trustee(s) shall:
(i) | invest Plan assets, subject to directions from the Plan Administrator or from any duly appointed investment manager; |
(ii) | maintain adequate records of receipts, disbursements, and other transactions involving the Plan; and |
(iii) | prepare such reports, statements, tax returns and other forms as may be required under the Trust Indenture or applicable laws and regulations. |
7.04 Powers and Duties of the Plan Administrator. The Plan Administrator is the Benefits Committee. The Plan Administrator shall have the power, discretionary authority, and duty to interpret the provisions of the Plan and to make all decisions and take all actions that shall be necessary or proper in order to carry out the provisions of the Plan. Without limiting the generality of the foregoing, the Plan Administrator shall:
(i) | monitor compliance with the provisions of ERISA and other applicable laws with respect to the Plan; |
Part III 35
(ii) | establish an investment policy and funding method consistent with objectives of the Plan and with the requirements of applicable laws and regulations; |
(iii) | invest Plan assets except to the extent that the Plan Administrator has delegated such investment duties to an investment manager; |
(iv) | evaluate from time to time investment policy and the performance of any investment manager or investment advisor appointed by it; |
(v) | be solely responsible to, and shall, interpret and construe the Plan and resolve any ambiguities therein, with any such interpretations or constrictions to be conclusively binding and final, to the extent permitted by applicable law, upon all persons interested or claiming under the Plan; |
(vi) | determine, in its sole discretion, all questions concerning the eligibility of any person to participate in the Plan, the right to and the amount of any benefit payable under the Plan to or on behalf of an individual and the date on which any individual ceases to be a Participant, with any such determination to be conclusively binding and final, to the extent permitted by applicable law, upon all persons interested or claiming an interest in the Plan; |
(vii) | establish guidelines as required for the orderly and uniform administration of the Plan; |
(viii) | exercise overall control of the operation and administration of the Plan in matters not allocated to some other Fiduciary by the terms of this Plan. |
(ix) | administer the Plan on a day-to-day basis in accordance with the provisions of this Plan and all other pertinent documents; |
(x) | retain and maintain Plan records, including Participant census data, participation dates, compensation records, and such other records necessary or desirable for proper Plan administration; |
(xi) | prepare and arrange for delivery to Participants of such summaries, descriptions, announcements and reports as are required to be given to participants under applicable laws and regulations; |
(xii) | file with the U.S. Department of Labor, the Internal Revenue Service and other regulatory agencies on a timely basis all required reports, forms and other documents; |
Part III 36
(xiii) | prepare and furnish to the Trustee(s) sufficient records and data to enable the Trustee(s) to properly perform its obligations under the Trust Indenture; and |
(xiv) | to take appropriate actions required to correct any errors made in determining the eligibility of any employee for benefits under the Plan or the amount of benefits payable under the Plan, including as part of correcting any error made in computing the benefits of any Participant or Beneficiary, making equitable adjustments (an increase or decrease) in the amount of any future benefits payable under the Plan and including the recovery of any overpayment of benefits paid from the Plan as provided in Treasury Regulation Section 1.401(a)-13(c)(2)(iii). |
The Plan Administrator may appoint or employ such advisers or assistants as the Plan Administrator deems necessary and may delegate to any one or more of its members any responsibility it may have under the Plan or designate any other person or persons to carry out any responsibility it may have under the Plan.
Notwithstanding any provisions elsewhere to the contrary, the Plan Administrator shall have total discretion to fulfill the above responsibilities as the Plan Administrator sees fit on a uniform and consistent basis and as the Plan Administrator believes a prudent person acting in a like capacity and familiar with such matters would do.
7.05 Designation of Fiduciaries. The Plan Administrator shall have the authority to appoint and remove Trustee(s) in accordance with the Trust Indenture. The Plan Administrator may appoint and remove an investment manager and delegate to said investment manager power to manage, acquire or dispose of any assets of the Plan.
While there is an investment manager, the Plan Administrator shall have no obligation under this Plan with regard to the performance or non-performance of the duties delegated to the investment manager.
The Plan Administrator shall appoint all other Fiduciaries of this Plan. In making its appointment or delegation of authority, the Plan Administrator may designate all of the responsibilities to one person or it may allocate the responsibilities, on a continuing basis or on an ad hoc basis, to one or more individuals either jointly or severally. No individual named a Fiduciary shall have any responsibility for the performance or non-performance of any responsibilities or duties not allocated to him or her.
The appointing authority of a Fiduciary shall periodically, but not less frequently than annually, review the performance of each Fiduciary appointed in order to carry out the general fiduciary duties specified in Section 7.02 and, where appropriate, in its sole discretion, take or recommend remedial action.
7.06 Delegation of Duties by a Fiduciary. Except as provided in this Plan or in the appointment as a Fiduciary, no Fiduciary may delegate his or her or her fiduciary responsibilities. If authorized by the appointing authority, a Fiduciary may appoint such agents as may be deemed necessary and delegate to such agents any non-fiduciary powers or duties,
Part III 37
whether ministerial or discretionary. No Fiduciary or agent of a Fiduciary who is a full-time employee of the Employer will receive any compensation from the Plan for his or her or her services, but the Employer or the Plan shall pay all expenses that such employee reasonably incurs in the discharge of his or her duties.
ARTICLE VIII
BENEFITS COMMITTEE
8.01 Appointment of Benefits Committee. The Benefits Committee (the Benefits Committee) shall consist of three or more members appointed from time to time by the President of the Employer (the President), who shall also designate one of the members as chairperson. Each member of the Benefits Committee and its chairperson shall serve at the pleasure of the appointing authority.
8.02 Benefits Committee to Act by Majority Vote, etc. The Benefits Committee shall act by majority vote of all members. All actions, determinations, interpretations and decisions of the Benefits Committee with respect to any matter within its jurisdiction will be conclusive and binding on all persons. Any person may rely conclusively upon any action if certified by the Benefits Committee.
Notwithstanding the above, a member of the Benefits Committee who is also a Participant shall not vote or act upon any matter relating solely or primarily to himself or herself.
8.03 Records and Reports of the Benefits Committee. The Benefits Committee shall keep a record of all of its proceedings and acts, and shall keep such books of account, records and other data as may be necessary for the proper administration of the Plan and file or deliver to Participants and their Beneficiaries whatever reports are required by any regulatory authority.
8.04 Costs and Expenses of Administration. Notwithstanding any provisions of the Plan to the contrary, all clerical, legal and other expenses of the Plan and the Trust, including Trustees fees, shall be paid by the Plan, except to the extent the Employer elects to pay such amounts; provided, however, that if the Employer pays such amounts it shall be reimbursed by the Trust for such amounts unless the Employer elects not to be so reimbursed.
8.05 Indemnification of the Plan Administrator and Assistants. The Employer shall indemnify and defend, to the extent permitted under the By-Laws of the Employer, any Employee or former Employee (i) who serves or has served as a member of the Benefits Committee, (ii) who has been appointed to assist the Benefits Committee in administering the Plan, or (iii) to whom the Benefits Committee has delegated any of its duties or responsibilities against any liabilities, damages, costs and expenses (including attorneys fees and amounts paid in settlement of any claims approved by the Employer) occasioned by any act or omission to act in connection with the Plan, if such act or omission to act is in good faith and without gross negligence; provided that such Employee or former Employee is not otherwise indemnified or saved harmless under any liability insurance or other indemnification arrangement.
Part III 38
ARTICLE IX
CLAIMS PROCEDURE
9.01 Claims Fiduciary. The Plan Administrator will act as Claims Fiduciary, except to the extent that the Plan Administrator has delegated the function to some other person or persons, committee or entity.
Notwithstanding anything in the Plan to the contrary, the Claims Fiduciary shall have total and complete discretion to fulfill its fiduciary responsibilities as it sees fit on a uniform and consistent basis and as it believes a prudent person acting in a like capacity and familiar with such matters would do.
9.02 Claims for Benefits. Claims for benefits under the Plan may be filed with the Plan Administrator on forms supplied by the Employer. For the purpose of this procedure, claim means a request for a Plan benefit by a Participant or a Beneficiary of a Participant. If the basis of the claim includes documentation not a part of the records of the Plan or of the Employer, all such documentation must be included with the claim.
9.03 Duty to Keep Plan Administrator Informed of Current Address. Each Participant and Beneficiary must file with the Plan Administrator from time to time his or her post office address and each change thereof. Any communication, statement or notice addressed to a Participant or Beneficiary at his or her last post office address filed with the Plan Administrator, or if no address is filed with the Plan Administrator, then at his or her last post office address as shown on the Employers records, will be binding on the Participant and Beneficiary for all purposes of the Plan. Neither the Plan Administrator nor the Employer shall be required to search for or locate a Participant or Beneficiary.
9.04 Failure to Claim Benefits. If the Plan Administrator notifies a Participant or Beneficiary by registered or certified mail at his or her last known address that he or she is entitled to a distribution and also notifies him or her of the provision of this Section, and the Participant or Beneficiary fails to claim his or her benefits under the Plan, the Plan Administrator shall make reasonable efforts to locate such Participant or Beneficiary. If the Participant or Beneficiary fails to claim his or her benefits under the Plan or fails to make his or her or her current address known to the Plan Administrator within three years after such notification, the Plan Administrator, at the end of such three-year period, shall direct that benefits which would have been payable to such Participant or Beneficiary shall be forfeited. In the event that the Participant or Beneficiary is subsequently located, the benefits which were forfeited shall be reinstated, and such reinstatement shall be taken into account in determining the Employer contribution for the Plan Year of the reinstatement.
9.05 Notice of Denial of Claim. If a claim is wholly or partially denied, the Plan Administrator shall notify the claimant of the denial of the claim within a reasonable period of time. Such notice of denial (i) shall be in writing, (ii) shall be written in a manner calculated to be understood by the claimant, and (iii) shall contain (A) the specific reason or reasons for denial of the claim, (B) a specific reference to the pertinent Plan provisions upon which the denial is based, (C) a description of any additional material or information necessary for the claimant to perfect the claim, along with an explanation why such material or information is necessary, and
Part III 39
(D) an explanation of the Plans claim review procedure. Unless special circumstances require an extension of time for processing the claim, the Plan Administrator shall notify the claimant of the claim denial no later than 90 days after the Plan Administrators receipt of the claim. If such an extension is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. The extension notice shall indicate the special circumstances requiring the extension of time and the date by which the Plan Administrator expects to render the final decision, which date will not be later than 180 days after the Plan Administrators receipt of the claim.
9.06 Request for Review of Denial of Claim. Within 120 days of the receipt by the claimant of the written notice of the denial of the claim, or such later time as shall be deemed reasonable in the sole discretion of the Plan Administrator, taking into account the nature of the benefit subject to the claim and any other attendant circumstances, or if the claim has not been granted within a reasonable period of time, the claimant may file a written request with the Plan Administrator to conduct a full and fair review of the denial of the claimants claim for benefits. In connection with the claimants appeal of the denial of his or her benefit, the claimant may review pertinent documents and may submit issues and comments in writing.
9.07 Decision on Review of Denial of Claim. The Plan Administrator shall deliver to the claimant a written decision on the claim promptly, but not later than 60 days, after the receipt of the claimants request for review, except that if there are special circumstances which require an extension of time for processing, the aforesaid 60-day period may be extended to 120 days. Such decision shall (i) be written in a manner calculated to be understood by the claimant, (ii) include specific reasons for the decision, and (iii) contain specific references to the pertinent Plan provisions upon which the decision is based.
9.08 Disability Claims. Notwithstanding anything in this Article IX of Part III of the Plan to the contrary, when a claim under this Article is made in connection with a benefit payable under Section 6.05 of Part I (as a result of a qualifying Participants total disability) or is made in connection with a benefit payable under Section 5.04 of Part II (as a result of a qualifying Participants Total Disability), solely for purposes of processing such a claim (i) all references in Sections 9.05 and 9.07 of this Part III to 90 days and 60 days are deemed to have been replaced with 45 days, (ii) the reference to 180 days in Section 9.05 of this Part III is deemed to have been replaced with 75 days, (iii) the reference to 120 days in Section 9.07 of this Part III is deemed to have been replaced with 90 days, (iv) a second, maximum 30 day extension of time will be allowed only under Section 9.05 of this Part III in the case of a claim within this Section, but only if the other requirements for an extension of time to respond described in Section 9.05 of this Part III are satisfied with respect to this second extension, and (v) the claimant will be allowed at least 45 days within which to provide any needed additional information sought in connection with any extension under Sections 9.05 and 9.08 of this Part III.
ARTICLE X
AMENDMENT AND TERMINATION
10.01 Amendment of Plan. The right is reserved to the Employer to amend the Plan at any time and from time to time and all parties or any person claiming any interest hereunder shall be
Part III 40
bound thereby; except no person having an already vested interest in the Plan shall be deprived of any interest already existing nor have such interest adversely affected. No such amendment shall have the effect of vesting in the Employer any right, title or interest to any assets of the Plan. The decision of the Employer shall be binding upon the Participants and all other persons and parties interested as to whether or not any amendment does deprive a Participant or any other person or adversely affects such interest. No amendment to the Plan (including a change in the actuarial basis for determining optional or early retirement benefits) shall decrease a Participants Accrued Benefit or eliminate an optional form of distribution. Notwithstanding the preceding sentence, a Participants Accrued Benefit may be reduced to the extent permitted under Code Section 412(c)(8). For purposes of this paragraph, a Plan amendment which has the effect of (i) eliminating or reducing an early retirement benefit or a retirement-type subsidy, or (ii) eliminating an optional form of benefit with respect to benefits attributable to service before the amendment shall be treated as reducing accrued benefits. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a Participant who satisfies (either before or after the amendment) the pre-amendment conditions for the subsidy. In general, a retirement-type subsidy is a subsidy that continues after retirement, but does not include a qualified disability benefit, a medical benefit, or a social security supplement that does not continue after retirement age. Furthermore, no amendment to the Plan shall have the effect of decreasing a Participants vested interest determined without regard to such amendment as of the later of the date such amendment is adopted, or becomes effective. Participants shall be notified of any Plan amendments.
In the case of any merger, consolidation with or transfer of assets or liabilities by the Employer to another Plan, each Participant in the Plan on the date of the transaction shall have a benefit in the surviving Plan (determined as if such Plan were terminated immediately after the transaction) at least equal to the benefit to which he or she would have been entitled to receive immediately prior to the transaction if the Plan had been terminated. However, this provision shall not be construed to be a termination or discontinuance of the Plan or to be a guarantee of a specific level of benefits from this Plan.
Notwithstanding the foregoing, a transfer of amounts from this Plan or its related trust to a nonqualified foreign trust as described in Revenue Ruling 2008-40 shall be treated as a distribution from the Plan.
10.02 Employer May Discontinue Plan. The Employer reserves the right at any time to reduce its annual payments, to partially terminate its Plan or to terminate its Plan in its entirety.
In the event of the liquidation of the Employer or the bona fide sale of the controlling interest thereof, the Employer or its successors or assigns shall not be obligated to continue the Plan.
Upon termination of the Employers Plan or upon a partial termination of the Plan, each affected Participant shall have a 100% vested and non-forfeitable right to his or her Accrued Benefit to the extent then funded.
In the event of termination or partial termination of the Employers Plan, the assets of the Plan then available to provide benefits shall be applied in accordance with ERISA Section 4044
Part III 41
and Rules and Regulations promulgated thereunder, in accordance with the following order of priority; provided, however, that no benefits being provided to former Participants or their Beneficiaries by the Insurer shall be canceled.
(a) | First, to provide that portion of each affected Participants Accrued Benefit which is derived from any mandatory Employee contributions. |
(b) | Second, to provide, in the case of retirement income benefits of each affected Participant or Beneficiary: |
(i) | Annuity benefits which were in pay status for at least the three-year period ending on the date of Plan termination; and |
(ii) | Annuity benefits which would have been in pay status during the three-year period ending on the date of Plan termination, had a Participant eligible to retire at the beginning of such three-year period retired on the date of Plan termination. |
The level of benefits allocated to this priority class shall be determined on the basis of the Plans provisions which were in effect at any time during the five-year period ending on the date of Plan termination under which the annuity benefits would be the least. Additionally, the level of such benefits is limited to the lowest level which was, or could have been, in pay status during the three- year period ending on the date of Plan termination (but, in the case of a benefit which would have been in pay status, the amount of the benefit, but not the entitlement to the benefit, shall be determined using the age, service and other relevant factors for computing the benefit under the Plan with respect to the Participant as of the date of Plan termination).
(c) | Third, to provide all other benefits guaranteed to affected Participants under Title IV of ERISA and Rules and Regulations promulgated thereunder (determined as if the insurance limits provided under the Act for benefits payable to one person with respect to more than one Participant or from more than one terminated Plan and the insurance limits on benefits payable to a substantial owner all were not applicable). |
(d) | Fourth, to provide all other non-forfeitable benefits accrued by affected Participants under the Plan. |
(e) | Fifth, to provide all other benefits accrued by affected Participants under the Plan. |
(f) | Any residual assets of the Plan remaining after distribution in accordance with this Article shall be distributed to the Employer provided that all liabilities of the Plan to Participants and their Beneficiaries have been satisfied. |
Notwithstanding anything in this Section to the contrary, in the event of a partial termination of the Plan, this Section shall be applicable only to those Participants and their Beneficiaries affected by the partial termination.
Part III 42
10.03 Distribution of Benefits Upon Plan Termination. Subject to Article IV (Pre-Termination Benefit Restrictions) and upon approval of the Pension Benefit Guaranty Corporation (PBGC), when required, upon a termination or partial termination of the Plan, benefits shall be distributed to affected Participants in any manner which the Plan Administrator deems to be in the best interests of the Participants which is acceptable under applicable PBGC and Internal Revenue Service laws, Rules and Regulations. Any such distribution may include a lump sum payment, deferment of the distribution or the distribution of an annuity contract without life insurance, immediate or deferred, which by its terms may not be sold, assigned discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any party other than the issuer thereof. Spousal consent shall be required for distributions made on account of Plan termination. In no event shall the payment of benefits be deferred beyond the Participants Normal Retirement Date.
10.04 Return of Employer Contributions Under Special Circumstances.
Notwithstanding any provisions of this Plan to the contrary:
(a) | Any monies or other Plan assets attributable to any contributions made by the Employer to the Plan because of a mistake of fact must be returned to the Employer within one year after the date of contribution. |
(b) | Any monies or other Plan assets attributable to any contribution made by the Employer which is conditional on the deductibility of such contribution must be refunded to the Employer, to the extent the deduction is disallowed, within one year after the date of such disallowance. |
ARTICLE XI
MISCELLANEOUS
11.01 Protection of Employee Interest. No Participant or Beneficiary shall have the right to assign, pledge, alienate or convey any right, benefit or payment to which he or she shall be entitled in accordance with the provisions of the Plan, and any such attempted assignment, pledge, alienation or conveyance shall be null and void and of no effect. To the extent permitted by law, none of the benefits, payments, proceeds or rights herein created and provided for shall in any way be subject to any debts, contracts or engagements of any Participant or Beneficiary, as herein before described, nor to any suits, actions or other judicial process to levy upon or attach the same for the payment thereof; provided, however, that this provision does not preclude the Plan Administrator from complying with the terms of a Qualified Domestic Relations Order.
11.02 USERRA Compliance. Notwithstanding any provisions of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with the rules and requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) and Code Section 414(u).
(a) | Differential Wage Payments. For Plan Years beginning after December 31, 2008, (i) an individual receiving a differential wage payment (as defined by Code Section 3401(h)(2)), shall be treated as an employee of the employer making the payment, (ii) the differential wage payment shall be treated as compensation, the |
Part III 43
the differential wage payment shall be treated as compensation, for purposes of Code Section 415(c)(3) and Treasury Regulation Section 1.415(c)-2 (e.g., for purposes of Code Section 415, top-heavy provisions of Code Section 416, determination of highly compensated employees under Code Section 414(q), and applying the 5% gateway requirement under the Code Section 401(a)(4) regulations), and (iii) the Plan shall not be treated as failing to meet the requirements of any provision described in Code Section 414(u)(1)(C) by reason of any contribution or benefit which is based on the differential wage payment. Subparagraph (iii) in the foregoing sentence shall apply only if all employees of the Employer performing service in the uniformed services described in Code Section 3401(h)(2)(A) are entitled to receive differential wage payments (as defined in Code Section 3401(h)(2)) on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the employer, to make contributions based on the payments on reasonably equivalent terms (taking into account Code Sections 410(b)(3), (4), and (5)). |
(b) | Death Benefits Under USERRA. Effective for deaths occurring on or after January 1, 2007, in the case of a Participant who dies while performing qualified military service as defined in Code Section 414(u), the survivors of the Participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the Plan had the Participant resumed and then terminated employment on account of death. Moreover, the Plan will credit the Participants qualified military service as service for vesting purposes, as though the Participant had resumed employment under USSERRA immediately prior to the Participants death. Moreover, the Plan will credit the Participants qualified military service as service for vesting purposes, as though the Participant had resumed employment under USSERRA immediately prior to the Participants death. |
11.03 Meaning of Words Used in Plan. Wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine or neuter gender in all cases where they would so apply. Wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply.
Titles used herein are for general information only and this Plan is not to be construed by reference thereto.
11.04 Plan Does Not Create or Modify Employment Rights. The Plan shall not be construed as creating or modifying any contract of employment between the Employer and any Participant. All Employees shall be subject to discharge to the same extent that they would have been if the Plan had never been adopted.
11.05 Massachusetts Law Controls. This Plan shall be governed by the laws of the Commonwealth of Massachusetts to the extent that they are not pre-empted by the laws of the United States of America.
Part III 44
11.06 Payments to come from Plan Assets. All benefits and amounts payable under the Plan shall be paid or provided for solely from the assets of the Plan, and neither the Employer nor the Plan Administrator assumes any liability or responsibility therefor.
11.07 Receipt and Release for Payments. Any payment to any Participant, his or her legal representative, Beneficiary, or to any guardian, custodian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Employer and the Insurer, any of whom may require such Participant, legal representative, Beneficiary, guardian, custodian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Employer or Insurer.
11.08 Mandatory Withholding on Eligible Rollover Distributions. Except as provided in Code Section 3405 and in rules and regulations promulgated thereunder, the Employer is required to withhold 20% on any portion of an eligible rollover distribution not paid directly to an eligible retirement plan.
11.09 Payment under Qualified Domestic Relations Orders. Notwithstanding any provisions of the Plan to the contrary, if there is entered any Qualified Domestic Relations Order that affects the payment of benefits hereunder, such benefits shall be paid in accordance with the applicable requirements of such Order, provided that such Order (i) does not require the Plan to provide any type or form of benefits, or any option that is not otherwise provided hereunder, (ii) does not require the Plan to provide increased benefits, and (iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a Qualified Domestic Relations Order.
The Plan Administrator shall establish reasonable procedures to determine whether an order or other decree is a Qualified Domestic Relations Order and to administer distributions under such orders.
To the extent required or permitted by any such Order, at any time on or after the date the Plan Administrator has determined that the Order is a Qualified Domestic Relations Order, the alternate payee shall have the right to request the Plan Administrator to commence distribution of benefits under the Plan (including any single sum cash-out that would be available if the Participant were the payee and entitled to a benefit payment on account of termination from service) regardless of whether the Participant is otherwise entitled to a distribution at such time under the Plan.
11.10 Electronic Communications. Effective for Plan Years beginning on or after January 1, 2007, any electronic communications made by the Plan to Participants in regards to eligible rollover distribution tax notices, Participant consents to distributions, and tax withholding notices shall comply with the requirements contained in Treasury Regulation Section 1.401(a)-21, in addition to all otherwise applicable requirements relating to the specific communication.
[Remainder of the page intentionally left blank]
Part III 45
EXECUTED this 28th day of January, 2011
The Hanover Insurance Company | ||
By: | /s/ Lorna Stearns | |
Name: Lorna Stearns | ||
Title: Vice President |
Part III 46
THE HANOVER INSURANCE GROUP
CASH BALANCE PENSION PLAN
FIRST AMENDMENT
This First Amendment is executed by The Hanover Insurance Company, a New Hampshire corporation (the Company).
WHEREAS, the Company sponsors The Hanover Insurance Group Cash Balance Pension Plan (the Plan) and amended and restated the Plan generally effective January 1, 2010; and
WHEREAS, the Company has the authority to amend the Plan pursuant to Section 10.01 of Part III of the Plan; and
WHEREAS, the Company desires to further amend the Plan.
NOW, THEREFORE, the Plan is amended effective for Plan Years beginning on or after January 1, 2010, except as otherwise indicated, as follows:
1. The reference to Article IX in the first sentence of Section 6.06 of Part I of the Plan is changed from Article IX to Article VIII.
2. Section 6.09(b) of Part I of the Plan is deleted in its entirety and the following new Section 6.09(b) is inserted in lieu thereof:
The benefit suspended shall be equal to the portion of the Employees or Pensioners monthly annuity benefit derived from Employer contributions, including any temporary early retirement supplement; provided, however, that earnings credits provided under Section 4.03(a) of Part I of the Plan shall not be suspended by operation of this Section 6.09 of Part I of the Plan.
3. The last sentence of Section 11.02 of Part III of the Plan is deleted as duplicative of the immediately preceding sentence.
This First Amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this Amendment and, except as hereby amended; the Plan shall remain in full force and effect.
IN WITNESS WHEREOF, this First Amendment has been executed this 21st day of December, 2011.
THE HANOVER INSURANCE COMPANY | ||
By: | ||
Authorized Representative |
Exhibit 10.39
THE HANOVER INSURANCE GROUP
RETIREMENT SAVINGS PLAN
Amended and restated generally effective January 1, 2010
TABLE OF CONTENTS
THE HANOVER INSURANCE GROUP
RETIREMENT SAVINGS PLAN
ARTICLE I |
NAME, PURPOSE AND EFFECTIVE DATE OF PLAN AND RESTATED PLAN | 1 | ||||
ARTICLE II |
DEFINITIONS | 1 | ||||
ARTICLE III |
ELIGIBILITY AND PARTICIPATION | 21 | ||||
ARTICLE IV |
EMPLOYER CONTRIBUTIONS AND FORFEITURES | 23 | ||||
ARTICLE V |
EMPLOYEE CONTRIBUTIONS AND ROLLOVER CONTRIBUTIONS | 29 | ||||
ARTICLE VI |
PROVISIONS APPLICABLE TO TOP HEAVY PLANS | 35 | ||||
ARTICLE VII |
LIMITATIONS ON ALLOCATIONS | 38 | ||||
ARTICLE VIII |
PARTICIPANT ACCOUNTS AND VALUATION OF ASSETS | 43 | ||||
ARTICLE IX |
401(k) ALLOCATION LIMITATIONS | 44 | ||||
ARTICLE X |
401(m) ALLOCATION LIMITATIONS | 51 | ||||
ARTICLE XI |
IN-SERVICE WITHDRAWALS | 55 | ||||
ARTICLE XII |
PLAN LOANS | 58 | ||||
ARTICLE XIII |
RETIREMENT, TERMINATION AND DEATH BENEFITS | 60 | ||||
ARTICLE XIV |
PLAN FIDUCIARY RESPONSIBILITIES | 74 | ||||
ARTICLE XV |
BENEFITS COMMITTEE | 78 | ||||
ARTICLE XVI |
INVESTMENT OF THE TRUST FUND | 79 | ||||
ARTICLE XVII |
CLAIMS PROCEDURE | 83 | ||||
ARTICLE XVIII |
AMENDMENT AND TERMINATION | 84 | ||||
ARTICLE XIX |
MISCELLANEOUS | 86 |
THE HANOVER INSURANCE GROUP
RETIREMENT SAVINGS PLAN
ARTICLE I
NAME, PURPOSE AND EFFECTIVE DATE OF PLAN AND RESTATED PLAN
1.01 | Name of Plan. The name of the Plan is The Hanover Insurance Group Retirement Savings Plan. Prior to January 1, 2005, the Plan was known as The Allmerica Financial Employees 401(k) Matched Savings Plan. Effective January 1, 2005, the Plan became known as The Allmerica Financial Retirement Savings Plan. Effective December 1, 2005, the Plan became known as The Hanover Insurance Group Retirement Savings Plan. |
1.02 | Purpose. This Plan has been established for the exclusive benefit of the Plan Participants and their Beneficiaries and as far as possible shall be administered in a manner consistent with this intent and consistent with the requirements of Section 401 of the Code. |
Subject to Section 15.04 and 18.05, under no circumstances shall any contributions made to the Plan be used for, or be diverted to, purposes other than for the exclusive benefit of Plan Participants or their Beneficiaries.
1.03 | Plan and Plan Restatement Effective Date. The effective date of this Plan was November 22, 1961. The effective date of this amended and restated Plan is January 1, 2010 (except for those provisions of the Plan which have an alternative effective date). Except to the extent otherwise specifically provided herein, the provisions of the amended and restated Plan as set forth herein shall apply to a Participant who is in the employ of the Employer on or after January 1, 2010. The rights and benefits of any Participant whose employment with the Employer terminated prior to January 1, 2010, shall be determined in accordance with the provisions of the Plan as in effect from time to time prior to January 1, 2010, provided, however, that if the Account balance of any such Participant has not been completely distributed before January 1, 2010, then such Account balance shall be invested, accounted for and distributed in accordance with the provisions of the Plan as set forth in this document except as otherwise required by applicable law or as otherwise specifically provided herein. |
ARTICLE II
DEFINITIONS
The terms defined in this Article shall have the meanings stated herein unless the context clearly indicates otherwise.
2.01 | Accrued Benefit shall mean the sum of the balances in a Participants 401(k) Account, Match Contribution Account, Non-Elective Employer Contribution Account, Regular Account, Rollover Account, Tax Deductible Contribution Account and Voluntary Contribution Account. |
2.02 | Account shall mean an account established and maintained pursuant to Section 8.01 for each Participant, when appropriate, to account for the Participants Accrued Benefit. |
2.03 (a) | Affiliate shall mean any corporation affiliated with the Employer through the action of such corporations board of directors and the Employers Board of Directors. |
(b) | Affiliate shall also mean any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). |
2.04 | Affirmative Election shall mean an election by an Eligible Participant to (a) have Salary Reduction Contributions made at the percentage of Compensation specified in his or her Salary Reduction Agreement, or (b) not have Salary Reduction Contributions made on his or her behalf. |
2.05 | Age shall mean the age of a person at his or her last birthday. |
2.06 | Annuity Starting Date shall mean the first day of the first period for which the Plan pays an amount as an annuity. In the case of a payment not in an annuity form, Annuity Starting Date shall mean the first day of the first period for which the benefit form is paid. |
2.07 | Automatic Contributions shall mean the Salary Reduction Contributions that result from the operation of this Section 5.05(c) of the Plan. |
2.08 | Automatic Contribution Arrangement shall mean the arrangement set forth in Section 5.05 of the Plan pursuant to which, in the absence of an Affirmative Election, an Employee, who is eligible to participate in the Plan is treated as having elected to direct the Employer to reduce his or her Compensation in order that the Employer may make Salary Reduction Contributions to the Plan on behalf of the Participant equal to a uniform percentage of Compensation. |
2.09 | Beneficiary shall mean the person, trust, organization or estate designated to receive Plan benefits payable on or after the death of a Participant. |
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2.10 | Catch-up Contributions shall mean Salary Reduction Contributions made to the Plan that are in excess of an otherwise applicable Plan limit and that are made by Participants who are Age 50 or over by the end of their taxable years. An otherwise applicable Plan limit is a limit in the Plan that applies to Salary Reduction Contributions without regard to Catch-up Contributions, such as the limits on Annual Additions, the dollar limitation on Salary Reduction Contributions under Code Section 402(g) (not counting Catch-up Contributions) and the limit imposed by the Actual Deferral Percentage (ADP) test under Code Section 401(k)(3). Catch-up Contributions for a Participant for a taxable year may not exceed the dollar limit on Catch-up Contributions under Code Section 414(v)(2)(B)(i) for the taxable year. The dollar limit on Catch-up Contributions under Code Section 414(v)(2)(B)(i) is $1,000 for taxable years beginning in 2002, increasing by $1,000 for each year thereafter up to $5,000 for taxable years beginning in 2006 and later years. After 2006, the $5,000 limit will be adjusted by the Secretary of the Treasury for cost-of-living increases under Code Section 414(v)(2)(C). |
Catch-up Contributions are not subject to the limits on Annual Additions, are not counted in the ADP test and are not counted in determining the minimum top-heavy allocation under Code Section 416 (but Catch-up Contributions made in prior years are counted in determining whether the Plan is top-heavy).
2.11 | Compensation shall mean: |
(a) | For purposes of Articles IX and X, for purposes of determining a Participants Salary Reduction Contributions pursuant to Section 3.01(b), 5.04, and 5.05 and for purposes of determining an Eligible Employees Match Contribution under Section 4.02 and Non-Elective Employer Contribution pursuant to Section 4.03, Compensation shall mean the total wages or salary, overtime, bonuses, and any other taxable remuneration paid to an Employee by the Employer during the Plan Year, while the Employee is a Participant, as reported on the Participants W-2 for the Plan Year. Provided, however, that Compensation for this purpose shall be determined without reduction for (i) any Salary Reduction Contributions contributed to the Plan on the Participants behalf for the Plan Year and (ii) any other amount which is contributed or deferred by the Employer at the election of a Participant which is not includible in the gross income of the Participant by reason of Code Section 125, 132(f)(4), 402(e)(3), 402(h), or 403(b). |
Notwithstanding the above, for purposes of determining a Participants Salary Reduction Contributions pursuant to Section 3.01(b), 5.04, and 5.05 and for purposes of determining an Eligible Employees Match Contribution under Section 4.02 and Non-Elective Employer Contribution pursuant to Section 4.03, Compensation shall not include:
(i) | incentive compensation paid to Participants pursuant to the Employers Executive Long Term Performance Unit Plan or pursuant to any similar or successor executive incentive compensation plan; |
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(ii) | Employer contributions to a deferred compensation plan or arrangement (other than (i) Salary Reduction Contributions contributed to the Plan on the Participants behalf for the Plan Year; and (ii) any other amount which is contributed or deferred by the Employer at the election of a Participant which is not includible in the gross income of the Participant by reason of Code Section 125, 132(f)(4), 402(e)(3), 402(h), or 403(b)) either for the year of deferral or for the year included in the Participants gross income; |
(iii) | any income which is received by or on behalf of a Participant in connection with the grant, receipt, settlement, exercise, lapse of risk of forfeiture or restriction on transferability, or disposition of any stock option, stock award, stock grant, stock appreciation right or similar right or award granted under any plan, now or hereafter in effect, of the Employer or any successor to the Employer, the Employers parent, any such successors parent, any subsidiaries or affiliates of the Employer, or any stock or securities underlying any such option, award, grant or right; |
(iv) | severance payments paid in a lump sum, provided that for Plan Years beginning on and after January 1, 2008 such excluded severance payments shall not include any payment of regular compensation for services during the Participants regular working hours, or compensation for services outside the Participants regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, if the payment would have been paid to the Participant prior to a severance from employment, if the Participant had continued in employment with the Employer and if the payment is made by the later of 2 1/2 months after the Participants severance from employment or by the end of the Plan Year in which the Participants severance from employment occurs; |
(v) | Code Section 79 imputed income; long term disability and workers compensation benefit payments; |
(vi) | taxable moving expense allowances or taxable tuition or other educational reimbursements; |
(vii) | for Plan Years commencing after December 31, 1998, compensation paid in the form of commissions; |
(viii) | non-cash taxable benefits provided to executives, including the taxable value of Employer-paid club memberships, chauffeur services and Employer-provided automobiles; and |
(ix) | other taxable amounts received other than cash compensation for services rendered, as determined by the Plan Administrator. |
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(b) | For purposes of Section 4.04 (Minimum Employer Contributions for Top Heavy Plans) and for purposes of Article VII (Limitations on Allocations) the term Compensation means a Participants wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c) of the Regulations)), and excluding the following: |
(i) | Employer contributions to a plan of deferred compensation which are not includible in the Employees gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; |
(ii) | Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee becomes freely transferable or is no longer subject to a substantial risk of forfeiture; |
(iii) | Amounts realized for the sale, exchange or other disposition of stock acquired under a qualified stock option; and |
(iv) | Other amounts which received special tax benefits. |
Notwithstanding the foregoing, Compensation for purposes of the Plan shall also include Employee elective deferrals under Code Section 402(g)(3) and amounts contributed or deferred by the Employer at the election of the Employee and not includible in the gross income of the Employee, by reason of Code Sections 125, 132(f)(4), 402(e)(3), 402(h), and 403(b).
Additionally, amounts under Code Section 125 include any amounts not available to a Participant in cash in lieu of group health coverage because the Participant is unable to certify that he has other health coverage (deemed Code Section 125 compensation). Such an amount will be treated as an amount under Code Section 125 only if the Employer does not request or collect information regarding the Participants other health coverage as part of the enrollment process for the health plan.
For purposes of applying the limitations of Article VII, Compensation for a Limitation Year is the Compensation actually paid or includible in gross income during such Year.
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(c) | Notwithstanding (a) and (b) above, for any Plan Year beginning after December 31, 2001, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $200,000, as adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. |
Notwithstanding (a) and (b) above, for the Plan Years beginning on or after January 1, 1994 and before January 1, 2002, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $150,000. This limitation shall be adjusted for inflation by the Secretary under Code Section 401(a)(17)(B) in multiples of $10,000 by applying an inflation adjustment factor and rounding the result down to the next multiple of $10,000 (increases of less than $10,000 are disregarded).
The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined beginning in such calendar year.
If Compensation is being determined for a Plan Year that contains fewer than 12 calendar months, then the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12.
For purposes of applying the limitations of Article VII with respect to Limitation Years beginning on and after July 1, 2007, the following provisions shall be applicable.
(i) | Compensation paid after severance from employment. Compensation actually paid or includible in gross income during a Limitation Year shall be adjusted, as set forth herein, for the following types of compensation paid after a Participants severance from employment with the Employer (or any Affiliate). However, amounts described in Paragraphs A. and B. below shall only be included in Compensation for such Limitation Year to the extent such amounts are paid by the later of 2 1/2 months after severance from employment or by the end of the Limitation Year that includes the date of such severance from employment. Any other payment of compensation paid after severance of employment that is not described in the following types of compensation shall not be considered Compensation for such Limitation Year, even if payment is made within the time period specified above. |
A. | Regular Pay. Compensation shall include regular pay after severance of employment if: (1) The payment is regular compensation for services during the Participants regular working hours, or compensation for services outside the Participants regular working hours (such as overtime or shift |
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differential), commissions, bonuses, or other similar payments; and (2) The payment would have been paid to the Participant prior to a severance from employment if the Participant had continued in employment with the Employer. |
B. | Leave Cashouts And Deferred Compensation. Leave cashouts shall be included in Compensation if those amounts would have been included in the definition of Compensation if they were paid prior to the Participants severance from employment, and the amounts are payment for unused accrued bona fide sick, vacation, or other leave, but only if the Participant would have been able to use the leave if employment had continued. In addition, deferred compensation shall be included in Compensation if the compensation would have been included in the definition of Compensation if it had been paid prior to the Participants severance from employment, and the compensation is received pursuant to a nonqualified unfunded deferred compensation plan, but only if the payment would have been paid at the same time if the Participant had continued in employment with the Employer and only to the extent that the payment is includible in the Participants gross income. |
C. | Salary Continuation Payments for Military Service Participants. Compensation shall not include payments to an individual who does not currently perform services for the Employer by reason of qualified military service (as that term is used in Code Section 414(u)(l)) to the extent those payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the Employer rather than entering qualified military service. |
D. | Salary Continuation Payments for Disabled Participants. Compensation does not include compensation paid to a Participant who is permanently and totally disabled (as defined in Code Section 22(e)(3)). |
(ii) | Compensation for a Limitation Year but not paid during the Limitation Year. Compensation for a Limitation Year shall not include amounts earned but not paid during the Limitation Year solely because of the timing of pay periods and pay dates. |
(iii) | Inclusion of Certain Nonqualified Deferred Compensation Amounts. Compensation for a Limitation Year shall include amounts that are includible in the gross income of a Participant under the rules of Code Section 409A or because the amounts are constructively received by the Participant. |
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(d) | For Plan Years beginning on and after January 1, 2008, notwithstanding paragraphs (a), (b) and (c) above, |
(i) | USERRA. For purposes of Employee and Employer make-up contributions, Compensation during the period of military service shall be deemed to be the Compensation the Employee would have received during such period if the Employee were not in qualified military service, based on the rate of pay the Employee would have received from the Employer but for the absence due to military leave. If the Compensation the Employee would have received during the leave is not reasonably certain, Compensation will be equal to the Employees average Compensation from the Employer during the twelve (12) month period immediately preceding the military leave or, if shorter, the Employees actual period of employment with the Employer. |
(ii) | Differential Wage Payments. For years beginning after December 31, 2008, (i) an individual receiving a differential wage payment, as defined by Code Section 3401(h)(2), shall be treated as an Employee of the Employer making the payment, (ii) the differential wage payment shall be treated as Compensation, and (iii) the Plan shall not be treated as failing to meet the requirements of any provision described in Code Section 414(u)(1)(C) by reason of any contribution or benefit which is based on the differential wage payment. Subparagraph (iii) of the foregoing sentence shall apply only if all Employees of the Employer performing service in the uniformed services described in Code Section 3401(h)(2)(A) are entitled to receive differential wage payments (as defined in Code Section 3401(h)(2)) on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the Employer, to make contributions based on the payments on reasonably equivalent terms (taking into account Code Sections 410(b)(3), (4), and (5)). |
2.12 | Eligible Employee shall mean an Employee who has satisfied the requirements to participate in this Plan as set forth in Section 3.01. |
2.13 | Eligible Participant shall mean an Eligible Employee subject to the Automatic Contribution Arrangement as provided for in Section 5.05(b) of the Plan. |
2.14 | Eligibility Computation Period shall mean, for Plan Years commencing prior to January 1, 2005, a period of twelve consecutive months commencing on an Employees Employment Commencement Date or, if an Employee does not complete at least 1,000 Hours of Service during such initial period, such Employees Eligibility Computation Period shall mean the Plan Year commencing with the first Plan Year following the Employees Employment Commencement Date and, if necessary, each succeeding Plan Year. |
2.15 | Employee shall mean any individual who is employed by the Employer. |
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2.16 | Employer shall mean The Hanover Insurance Company; provided that, prior to January 1, 2008 Employer shall mean First Allmerica Financial Life Insurance Company. |
2.17 | Employment Commencement Date shall mean the date on which an Employee first performs an Hour of Service or, in the case of an Employee who has a One Year Break in Service, the date on which he or she first performs an Hour of Service after such Break. |
2.18 | Fiduciary shall mean any person who (i) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets; (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so; or (iii) has any discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee and the Plan Administrator. |
2.19 | First Allmerica shall mean First Allmerica Financial Life Insurance Company. |
2.20 | Five Percent Owner shall mean, in the case of a corporation, any person who owns (or is considered as owning within the meaning of Code Section 416(i)) more than five percent of the outstanding stock of the Employer or stock possessing more than five percent of the total combined voting power of all stock of the Employer. In the case of an Employer that is not a corporation, Five Percent Owner shall mean any person who owns or under applicable regulations is considered as owning more than five percent of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), and (m) shall be treated as separate employers. |
2.21 | Former Participant shall mean a person on whose behalf an Account is maintained, who was an Eligible Employee but who is not entitled to accrue a benefit under this Plan because he or she has ceased to be eligible to participate in the Plan for any reason. |
2.22 | 401(k) Account shall mean the account established and maintained for each Participant who has directed the Employer to make Salary Reduction Contributions to the Trust on his or her behalf or for whom the Employer has made 401(k) Employer Contributions to the Trust on his or her behalf, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto. |
2.23 | 401(k) Employer Contribution shall mean a 401(k) contribution made by the Employer to the Trust for Plan Years prior to 1995 pursuant to Section 4.01 of the Plan as in effect prior to 1995. |
2.24 | Highly Compensated Employee shall mean any Employee who: |
(a) | was a Five Percent Owner at any time during the Plan Year or the preceding Plan Year; or |
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(b) | for the preceding Plan Year: |
(i) | had Compensation from the Employer in excess of $80,000 (as adjusted pursuant to Code Section 414(q)(1)); and |
(ii) | for such preceding Year was in the top-paid group of Employees for such preceding Year. |
For purposes of this Section the top-paid group for a Plan Year is the top 20% of Employees ranked on the basis of Compensation paid during such Year.
In addition to the foregoing, the term Highly Compensated Employee shall also mean any former Employee who separated from service prior to the Plan Year, performs no service for the Employer during the Plan Year, and was an actively employed Highly Compensated Employee in the separation year or any Plan Year ending on or after the date the Employee attained Age 55.
For purposes of this Section Compensation means Compensation determined for purposes of Article VII (Limitations on Allocations), but, for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3), and 402(h)(1)(B).
The determination of who is a Highly Compensated Employee, including the determinations of the numbers and identity of Employees in the top-paid group and the Compensation that is considered will be made in accordance with Section 414(q) of the Code and regulations thereunder.
2.25 | Hour of Service shall mean: |
(a) | Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer. For purposes of the Plan an Employee who is exempt from the requirements of the Fair Labor Standards Act of 1938, as amended, shall be credited with 45 Hours of Service for each complete or partial week he or she would be credited with at least one Hour of Service under this Section 2.25. |
(b) | Each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: |
(i) | No more than 1000 hours shall be credited to an Employee under this Subsection (b) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); |
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(ii) | No hours shall be credited under this Subsection (b) for any payments made or due under a plan maintained solely for the purpose of complying with any applicable workers compensation, unemployment compensation or disability insurance laws; and |
(iii) | No hours shall be credited under this Subsection (b) for a payment, which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. |
For purposes of this Subsection (b) a payment shall be deemed to be made by or due from an Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly, through, among others, a trust fund or insurer, to which the Employer contributes or pays premiums.
(c) | Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be both credited under Subsections (a) or (b), as the case may be, and under this Subsection. No more than 501 Hours shall be credited under this Subsection for a period of time during which an Employee did not or would not have performed duties. |
(d) | Special rules for determining Hours of Service under Subsection (b) or (c) for reasons other than the performance of duties. |
In the case of a payment which is made or due which results in the crediting of Hours of Service under Subsection (b) or in the case of an award or agreement for back pay, to the extent that such an award or agreement is made with respect to a period during which an Employee performs no duties, the number of Hours of Service to be credited shall be determined as follows:
(i) | In the case of a payment made or due which is calculated on the basis of units of time (such as hours, days, weeks or months), the number of Hours of Service to be credited for exempt Employees described in Subsection (a) shall be determined as provided in such Subsection. For all other Employees, the Hours of Service to be credited shall be those regularly scheduled hours in such unit of time; provided, however, that when a non-exempt Employee does not have regularly scheduled hours, such Employee shall be credited with 8 Hours of Service for each workday for which he or she is entitled to be credited with Hours of Service under paragraph (b). |
(ii) | Except as provided in Paragraph (d)(iii), in the case of a payment made or due which is not calculated on the basis of units of time, the number of Hours of Service to be credited shall be equal to the amount of the payment divided by the Employees most recent hourly rate of compensation (as determined below) before the period during which no duties are performed. |
A. | The hourly rate of compensation of Employees paid on an hourly basis shall be the most recent hourly rate of such Employees. |
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B. | In the case of Employees whose compensation is determined on the basis of a fixed rate for specified periods of time (other than hours) such as days, weeks or months, the hourly rate of compensation shall be the Employees most recent rate of compensation for a specified period of time (other than an hour), divided by the number of hours regularly scheduled for the performance of duties during such period of time. The rule described in Subsection (d)(i) shall also be applied under this paragraph to Employees without a regular work schedule. |
C. | In the case of Employees whose compensation is not determined on the basis of a fixed rate for specified periods of time, the Employees hourly rate of compensation shall be the lowest hourly rate of compensation paid to Employees in the same job classification as that of the Employee or, if no Employees in the same job classification have an hourly rate, the minimum wage as established from time to time under Section 6(a)(1) of the Fair Labor Standards Act of 1938, as amended. |
(iii) | Rule against double credit. An Employee shall not be credited on account of a period during which no duties are performed with more hours than such Employee would have been credited but for such absence. |
(e) | Crediting of Hours of Service to computation periods. |
(i) | Hours of Service described in Subsection (a) shall be credited to the Employee for the computation period or periods in which the duties are performed. |
(ii) | Hours of Service described in Subsection (b) shall be credited as follows: |
A. | Hours of Service credited to an Employee on account of a payment which is calculated on the basis of units of time (such as hours, days, weeks or months) shall be credited to the computation period or periods in which the period during which no duties are performed occurs, beginning with the first unit of time to which the payment relates. |
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B. | Hours of Service credited to an Employee by reason of a payment which is not calculated on the basis of units of time shall be credited to the computation period in which the period during which no duties are performed occurs, or if the period during which no duties are performed extends beyond one computation period, such Hours of Service shall be allocated between not more than the first two computation periods in accordance with reasonable rules established by the Employer, which rules shall be consistently applied with respect to all Employees within the same job classification, reasonably defined. |
(iii) | Hours of Service described in Subsection (c) shall be credited to the computation period or periods to which the award or agreement for back pay pertains, rather than to the computation period in which the award, agreement or payment is made. |
(f) | For purposes of the Plan, Hours of Service shall also include Hours of Service determined in accordance with the rules set forth in this Section 2.25: |
(i) | with the Employer in a position in which he or she was not eligible to participate in this Plan; or |
(ii) | as a Career Agent or General Agent of First Allmerica; or |
(iii) | for periods prior to January 1, 1998, with Citizens, Hanover, or as an employee of a General Agent of First Allmerica; or |
(iv) | with Financial Profiles, Inc., or Advantage Insurance Network, Affiliates of First Allmerica, including periods of service completed prior to the date each became an Affiliate; or |
(v) | for periods prior to January 1, 2008 with First Allmerica; or |
(vi) | with an Affiliate. |
(g) | Rules for Non-Paid Leaves of Absence. For purposes of the Plan, a Participant will also be credited with Hours of Service during any non-paid leave of absence granted by the Employer. Except as provided in Subsection (a) for exempt Employees, the number of Hours of Service to be credited under this Subsection (g) shall be the number of regularly scheduled working hours in each workday during the leave of absence; provided, however, that no more than the number of Hours in one regularly scheduled work year of the Employer will be credited for each non-paid leave of absence. In the case of a non-exempt Employee without a regular work schedule, the number of Hours to be credited shall be based on a 40-hour workweek and an 8-hour workday. Hours of Service described in this Subsection (g) shall be credited to the Employee for the computation period or periods during which the leave of absence occurs. |
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Notwithstanding the foregoing, for Plan Years beginning after December 31, 1998, all Employees (exempt and non-exempt) shall be credited with 8 Hours of Service for each workday for which they are entitled to be credited with Hours of Service for a non-paid leave of absence pursuant to this Subsection (g).
(h) | Rules for Maternity or Paternity Leaves of Absence. In addition to the foregoing rules, solely for purposes of determining whether a One Year Break in Service has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such Hours cannot be determined, 8 Hours of Service per day of such absence. Provided, however, that: |
(i) | Hours shall not be credited under both this Paragraph (h) and one of the other Paragraphs of this Section 2.25; |
(ii) | no more than 501 Hours shall be credited for each maternity or paternity absence; and |
(iii) | if a maternity or paternity leave extends beyond one Plan Year, the Hours shall be credited to the Plan Year in which the absence begins to the extent necessary to prevent a One Year Break in service, otherwise such Hours shall be credited to the following Plan Year. |
For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the individual, (ii) by reason of a birth of a child of the individual, (iii) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.
(i) | Other Federal Law. Nothing in this Section 2.25 shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States or any rule or regulation issued under any such law. |
2.26 | Internal Revenue Code or Code shall mean the Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection to the Code, includes reference to any comparable or succeeding provisions of any legislation which amends, supplements or replaces any such section or subsection, and also includes reference to any regulation issued pursuant to or with respect to such section or subsection. |
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2.27 | Key Employee. In determining whether the Plan is top-heavy for Plan Years beginning after December 31, 2001, Key Employee shall mean any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date is an officer of the Employer having an annual Compensation greater than $130,000 (as adjusted under Section 416(i)(l) of the Code for Plan Years beginning after December 31, 2002), a Five Percent Owner, or a 1-percent owner of the Employer having an annual Compensation of more than $150,000. In determining whether a Plan is top heavy for Plan Years beginning before January 1, 2002, Key Employee shall mean any Employee or former Employee (including any deceased Employee) who at any time during the 5-year period ending on the determination date, is an officer of the employer having an annual Compensation that exceeds 50 percent of the dollar limitation under Code Section 415(b)(l)(A), an owner (or considered an owner under Code Section 318) of one of the ten largest interests in the Employer if such individuals Compensation exceeds 100 percent of the dollar limitation under Code Section 415(c)(l)(A), a Five Percent Owner or a 1-percent owner of the Employer who has an annual Compensation of more than $150,000. |
The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Internal Revenue Code and the regulations thereunder. For purposes of determining whether a Participant is a Key Employee, the Participants Compensation means Compensation as defined for purposes of Article VII, but for Plan Years beginning before January 1, 1998, without regard to Code Sections 125, 402(e)(3), and 402(h)(1)(B).
2.28 | Limitation Year shall mean a calendar year. The Limitation Year may only be changed by a Plan amendment. If the Plan is terminated effective as of a date other than the last day of the Plans Limitation Year, then the Plan shall be treated as if the Plan had been amended to change its Limitation Year and, in any such case, the Defined Contribution Dollar Limitation shall be prorated as prescribed by Treasury Regulation Section 1.415(j)-1(d)(3). |
2.29 | Match Contribution shall mean the contribution made by the Employer to the Trust pursuant to Section 4.02 of the Plan. |
2.30 | Match Contribution Account shall mean the account established for each Participant for whom the Employer has allocated Match Contributions to the Trust and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto. |
2.31 | Non-Elective Employer Contributions shall mean Employer contributions that are made by the Employer pursuant to Section 4.03 of the Plan. |
2.32 | Non-Elective Employer Contribution Account shall mean the account established for each Employee for whom the Employer has made a Non-Elective Employer Contribution to the Trust and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto. |
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2.33 | Non-Highly Compensated Employee shall mean any Employee who is not a Highly Compensated Employee. |
2.34 | Non-Key Employee shall mean any Employee who is not a Key Employee. |
2.35 | Normal Retirement Age shall mean the date on which the Participant attains Age 65. |
2.36 | One Year Break in Service shall mean any vesting computation period during which an Employee does not complete more than 500 Hours of Service. Provided, however, for Plan Years commencing prior to January 1, 2005, for purposes of Article III, One Year Break in Service shall mean an Eligibility Computation Period during which an Employee does not complete more than 500 Hours of Service. |
2.37 | Participant shall mean an Eligible Employee and, where the context requires, a Former Participant. |
2.38 | Permissible Withdrawal shall mean a withdrawal by an Eligible Participant who is enrolled in the Automatic Contribution Account prior to January 1, 2011 pursuant to Section 5.05(e) of this Plan which meets the following rules: |
(a) | Election and Timing of Election. The withdrawal is made pursuant to an election by an Eligible Participant and such election is made no later than 90 days after the date of the first Automatic Contribution with respect to the Eligible Participant under the Automatic Contribution Arrangement. The effective date of any such election shall not be after the earlier of (i) the pay date for the second pay period that begins after the date the election is made; and (ii) the first pay date that occurs at least 30 days after the election is made |
(b) | Amount of Withdrawal. The amount of such withdrawal shall be equal to the amount of the Automatic Contributions made through the effective date of the Participants election (described in (a) above), adjusted for allocable gains and losses to the date of such withdrawal. |
2.39 | Plan Administrator shall mean the Benefits Committee, which shall have fiduciary responsibility for the interpretation and administration of the Plan, as provided for in Article XIV. Members of the Benefits Committee shall be appointed as provided for in Section 15.01 hereof. |
2.40 | Plan Year shall mean a calendar year. |
2.41 | Qualified Automatic Contribution Arrangement (QACA) shall mean a qualified automatic contribution arrangement that meets the requirements of Code Section 401(k)(13)(B). Effective for Plan Years beginning on or after January 1, 2009, this Plan is intended to satisfy the requirements of Code Section 401(k)(13)(B) including but not limited to, the automatic enrollment and contribution provisions and the applicable notice requirements of Section 5.05 and the required Employer contributions of the Match Contribution made by the Employer to the Trust pursuant to Section 4.02 of the Plan. Further, this Plan is intended to be an eligible automatic contribution arrangement that satisfies the provisions of Code Section 414(w)(3) with respect to Eligible Participants who are enrolled in the Automatic Contribution Arrangement prior to January 1, 2011. |
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2.42 | Qualified Default Investment Alternative shall mean an investment alternative available to Participants and Beneficiaries that satisfies the requirements of ERISA Section 404(c)(5) and the applicable Department of Labor regulations thereunder and shall be subject to the following rules: |
(a) | No Employer Securities. The Qualified Default Investment Alternative does not hold or permit the acquisition of Employer securities, except as permitted by Department of Labor Regulation Section 2550.404c-5(e)(1)(ii); |
(b) | Transfer Permitted. The Qualified Default Investment Alternative permits a Participant or Beneficiary to transfer, in whole or in part, his or her investment from the Qualified Default Investment Alternative to any other investment alternative available under the Plan, pursuant to the rules of Department of Labor Regulation Section 2550.404c-5(c)(5); |
(c) | Management. The Qualified Default Investment Alternative is: |
(1) | Managed by: (A) an investment manager, within the meaning of ERISA Section 3(38); (B) a Plan trustee that meets the requirements of ERISA Section 3(38)(A), (B) and (C); or (C) the Sponsor Employer who is a named fiduciary within the meaning of ERISA Section 402(a)(2); |
(2) | An investment company registered under the Investment Company Act of 1940; or |
(3) | An investment product or fund described in Department of Labor Regulation Section 2550.404c5(e)(4)(iv) or (v); and |
(d) | Types of Permitted Investments. The Qualified Default Investment Alternative must be an investment product or fund described in Department of Labor Regulation Section 2550.404c5(e)(4). |
2.43 | Qualified Domestic Relations Order shall mean any judgment, decree or order (including approval of a property settlement agreement) which: |
(i) | relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a Participant; |
(ii) | is made pursuant to a state domestic relations law (including a community property law); |
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(iii) | constitutes a qualified domestic relations order within the meaning of Section 414(p) of the Code; and |
(iv) | is entered on or after January 1, 1985. |
Effective April 6, 2007, a domestic relations order that otherwise satisfies the requirements for a qualified domestic relations order (QDRO) will not fail to be a QDRO: (i) solely because the order is issued after, or revises, another domestic relations order or QDRO; or (ii) solely because of the time at which the order is issued, including issuance after the annuity starting date or after the Participants death.
2.44 | Qualified Early Retirement Age shall mean the later of: |
(i) | Age 55; or |
(ii) | the date on which the Participant begins participation. |
2.45 | Qualified Joint and Survivor Annuity shall mean an annuity for the life of the Participant, with a survivor annuity for the life of his or her spouse in an amount equal to 50% of the amount of the annuity payable during the joint lives of the Participant and his or her spouse, and which is the amount of benefit which can be purchased by the Participants Accrued Benefit. |
2.46 | Regular Account shall mean the account established and maintained for each Participant for whom the Employer has allocated Regular Employer Contributions to the Trust, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto. |
2.47 | Regular Employer Contribution shall mean a Regular Contribution made by the Employer to the Trust for years prior to 1995 pursuant to Section 4.01 of the Plan as in effect prior to 1995. |
2.48 | Rollover Account shall mean the account established and maintained for each Participant who has made a Rollover Contribution to the Trust or whose accrued benefit from another qualified plan has been transferred to this Trust in accordance with Section 5.03 of the Plan, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto. |
2.49 | Rollover Contribution shall mean a contribution made to the Trust pursuant to Section 5.03 of the Plan. |
2.50 | Salary Reduction Agreement shall mean an agreement between the Employer and an Eligible Employee as set forth in Sections 3.01(b) and 5.04 pursuant to which the Eligible Employee authorizes the Employer to withhold a specified percentage of his or her Compensation (otherwise payable in cash) for deposit to the Plan on behalf of such Employee. |
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2.51 | Salary Reduction Contribution shall mean a pre-tax contribution made by the Employer on behalf of an Eligible Employee pursuant to a Salary Reduction Agreement and or an Automatic Contribution made by the Employer on behalf of an Eligible Participant pursuant to the Automatic Contribution Arrangement provisions of Section 5.05 of the Plan. |
2.52 | Suspense Account shall mean the account established by the Trustee for maintaining contributions and forfeitures which have not yet been allocated to Participants. |
2.53 | Tax Deductible Contribution Account shall mean the account established and maintained for each Participant who has made a Tax Deductible Voluntary Contribution to the Trust, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto. |
2.54 | Tax Deductible Voluntary Contribution shall mean a contribution made to the Trust for years before 1987 and pursuant to Section 5.02 of the Plan as in effect prior to 1995. |
2.55 | Top Heavy Plan shall mean for any Plan Year beginning after December 31, 1983 that any of the following conditions exists: |
(i) | If the top heavy ratio (as defined in Article VI) for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans. |
(ii) | If this Plan is a part of a required aggregation group of plans (but not part of a permissive aggregation group) and the top heavy ratio for the group of plans exceeds 60 percent. |
(iii) | If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent. |
See Article VI for requirements and additional definitions applicable to Top Heavy Plans.
For Plan Years beginning on and after January 1, 2009, the Match Contribution provided for in Section 4.02 may also be used to satisfy the minimum contribution requirement for a Top-Heavy Plan, provided no other contribution is made to the Plan for that Plan Year. Further, notwithstanding anything in the Plan to the contrary, in any Plan Year beginning on and after January 1, 2009 in which Employer contributions to the Plan consist solely of the Match Contribution provided for in Section 4.02, then such Plan will not be treated as a Top Heavy Plan and will be exempt from the top heavy requirements of Code Section 416. Furthermore, if the Plan (but for the prior sentence) would be treated as a Top Heavy Plan because the Plan is a member of an aggregation group which is a top heavy group, then the contributions under the Plan may be taken into account in determining whether any other plan in the aggregation group meets the top heavy requirements of Code Section 416.
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2.56 | Top Heavy Plan Year shall mean that, for a particular Plan Year, the Plan is a Top Heavy Plan. |
2.57 | Totally and Permanently Disabled shall mean the inability of a Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. |
In determining the nature, extent and duration of any Participants disability, the Plan Administrator may select a physician to examine the Participant. The final determination of the nature, extent and duration of such disability shall be made solely by the Plan Administrator upon the basis of such evidence as he or she deems necessary and acting in accordance with uniform principles consistently applied.
2.58 | Trustee shall mean the bank or trust company or person or persons who shall be constituted the original trustee or trustees for the Plan and Trust created therefor, and also any and each successor trustee or trustees. |
2.59 | Trust Fund shall mean, include and consist of any payments made to the Trustee by the Employer under the Plan and Trust Indenture, or the investments thereof, together with all income and gains of every nature thereon which shall be added to the principal thereof by the Trustee, less all losses thereon and all payments therefrom. |
2.60 | Trust Indenture or Trust shall mean the Trust Indenture between the Employer and the Trustee in the form annexed hereto, and any and all amendments thereof or thereto. |
2.61 | USERRA shall mean the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended. Notwithstanding any provision of the Plan to the contrary, contributions, benefits, Plan loan repayment, suspensions and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u). |
2.62 | Valuation Date shall mean each day as of which the value of the Trust Fund shall be calculated. The Plan Administrator reserves the right to change the frequency of Valuation Dates; provided, however, that in no event shall Valuation Dates occur less frequently than once each calendar quarter. |
2.63 | Voluntary After-Tax Contributions shall mean a contribution made to the Trust for years prior to 1995 pursuant to Section 5.01 of the Plan as in effect prior to 1995. |
2.64 | Voluntary Contribution Account shall mean the account established and maintained for each Participant who has made a Voluntary After-Tax Contribution to the Trust, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto. |
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2.65 | Year of Service shall mean, for purposes of determining vesting under Article XIII, the twelve consecutive month period, commencing on the first day an Employee completes an Hour of Service and in which the Employee completes at least 1,000 Hours of Service. Thereafter, for purposes of determining vesting under Article XIII, the determination of a Year of Service will commence on the anniversary of the first day the Employee completed an Hour of Service and the twelve consecutive month period that follows, provided the Employee completes at least 1,000 Hours of Service during such period. |
Provided, however, for purposes of determining Plan entry under Article III for Plan Years commencing prior to January 1, 2005, Year of Service means an Eligibility Computation Period during which an Employee completes at least 1,000 Hours of Service.
In computing a Year of Service for purposes of the Plan, each twelve-month period shall be considered as completed as of the close of business on the last working day, which occurs within such period, provided that the Employee had completed at least 1,000 Hours of Service during the period ending on such date.
Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Internal Revenue Code.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.01 | (a) | In General. Employees who are employed by the Employer on January 1, 2010 and who were eligible to participate in this Plan on December 31, 2009 shall be Participants in this Plan on January 1, 2010. |
For Plan Years beginning on and after January 1, 2005, an Employee shall be eligible to participate in this Plan upon completion of one Hour of Service, provided the Employee is then employed in an eligible class of Employees. For Plan Years beginning prior to January 1, 2005, an Employee shall be eligible to participate in this Plan on the first day of the calendar month coincident with or following the completion of one Year of Service, provided the Employee is then employed in an eligible class of Employees.
For Plan Years beginning on or after January 1, 2005, an Employee shall be eligible to receive Match Contributions upon completion of one Hour of Service, provided the Employee is then employed in an eligible class of Employees. For Plan Years beginning prior to January 1, 2005, an Employee shall be eligible to receive Match Contributions effective on the first day of the calendar month coincident with or following completion of one Year of Service, provided the Employee is then employed in an eligible class of Employees.
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Notwithstanding the foregoing, the following Employees shall not be eligible to become or remain active Participants hereunder:
(i) | All Employees holding a General Agents Contract with the Employer or with an Affiliate; |
(ii) | All Employees holding a Career Agents or Annuity Specialists Contract with the Employer or with an Affiliate; |
(iii) | Leased Employees within the meaning of Code Sections 414(n) and (o); |
(iv) | A contractors employee, i.e., a person working for a company providing goods or services (including temporary employee services) to the Employer or to an Affiliate whom the Employer does not regard to be its common law employee, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employers common law Employee; or |
(v) | An independent contractor, i.e., a person who is classified by the Employer as an independent contractor, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual is actually the Employers common law Employee. |
Special rules for certain persons who were employed by One Beacon Insurance Group, LTD. or any business entity affiliated with One Beacon Insurance Group, LTD. immediately before being employed by the Employer are stated in Appendix A attached hereto.
Special rules for certain persons who were employed by (i) Campania Holding Company, Inc. or its direct or indirect subsidiaries; (ii) Benchmark Professional Insurance Services, Inc. or its direct or indirect subsidiaries; or (iii) Insurance Company of the West or its direct or indirect subsidiaries, immediately before being employed by the Employer are stated in Appendix B attached hereto.
Special rules for certain persons who were employed by (i) Professionals Direct, Inc. or its direct or indirect subsidiaries; (ii) Verlan Holdings, Inc. or its direct or indirect subsidiaries; or (iii) AIX Holdings, Inc. or its direct or indirect subsidiaries, immediately before being employed by the Employer are stated in Appendix C attached hereto.
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(b) | Employee Participation. On or after the date an Employee first becomes eligible to participate in the Plan, the Employee may direct the Employer to reduce his or her Compensation in order that the Employer may make Salary Reduction Contributions to the Plan, including Catch-up Contributions, on the Employees behalf in accordance with Section 5.04; provided that for Plan Years beginning on January 1, 2009 and thereafter, any Eligible Participant shall be subject to the automatic enrollment and contribution provisions of Section 5.05. |
3.02 | Classification Changes. In the event of a change in job classification, such that an Employee, although still in the employment of the Employer, no longer is an Eligible Employee, all contributions to be allocated on his or her behalf shall cease and any amount credited to the Employees Accounts on the date the Employee shall become ineligible shall continue to vest, become payable or be forfeited, as the case may be, in the same manner and to the same extent as if the Employee had remained a Participant. |
If a Participants Salary Reduction Agreement is terminated because he or she is no longer a member of an eligible class of Employees, but the Participant has not terminated his or her employment, such Employee shall again be eligible to enter into a new Salary Reduction Agreement immediately upon his or her return to an eligible class of Employees. If such Participant terminates his or her employment with the Employer, he or she shall again be eligible to enter into a Salary Reduction Agreement immediately upon his or her recommencement of service as an Eligible Employee.
In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall be eligible to participate immediately.
3.03 | Participant Cooperation. Each eligible Employee who becomes a Participant hereunder thereby agrees to be bound by all of the terms and conditions of this Plan and Trust. |
ARTICLE IV
EMPLOYER CONTRIBUTIONS AND FORFEITURES
4.01 | Salary Reduction Contributions. The Employer shall make Salary Reduction Contributions to the Plan and Trust, including Catch-up Contributions described in Code Section 414(v), to the extent and in the manner specified in Sections 3.01(b), 5.04, and 5.05. |
Salary Reduction Contributions, including Catch-up Contributions described in Code Section 414(v), shall be allocated to a Participants 401(k) Account as soon as administratively feasible after the earliest date on which such contributions can reasonably be segregated from the Employers general assets but in no event later than the 15th business day of the month following the month in which the Salary Reduction Contributions would have otherwise been payable to the Participant.
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4.02 | Match Contributions. |
(a) | For Plan Years beginning on or after January 1, 2009, for each pay period during a Plan Year that a Salary Reduction Contribution is made to the Plan on behalf of a Participant, the Employer shall make a Match Contribution to the Plan on behalf of the Participant equal to 100% of such Salary Reduction Contributions that do not exceed 6% of the Participants Compensation for such pay period; provided that no such Match Contribution shall be made with respect to any part or all of any such Salary Reduction Contribution that, when added to other such Salary Reduction Contributions made to the Plan on behalf of the Participant during the Plan Year, would cause the applicable dollar amount under Code Section 402(g)(1)(B) to be exceeded for such Plan Year unless the Salary Reduction Contribution may be treated as a Catch-up Contribution that does not exceed the limitation under Code Section 402(g)(1)(C). All such Match Contributions shall be made to the Match Contribution Account established for the Participant as soon after each such pay period as practicable. |
For Plan Years beginning on or after January 1, 2005 and before January 1, 2009, unless otherwise voted by the Board of Directors of the Employer, for each pay period that an eligible Salary Reduction Contribution is made by a Participant to the Trust, not to exceed the Code Section 402(g)(1)(B) limitation and not including Catch-up Contributions, the Employer shall make a Match Contribution to the Trust on the Participants behalf equal to 100% of the first 5% of the Participants Salary Reduction Contributions, not including Catch-up Contributions, made during the pay period. Such Match Contribution shall be made to the Match Contribution Account established for the Participant.
The Employer shall contribute Match Contributions to the Trust Fund as soon as practicable following the end of each pay period. Such Match Contributions shall be made in cash and shall be allocated to the Match Contribution Account of each Participant. Such Match Contributions shall be invested per the directions of Participants in accordance with Section 16.02.
For Plan Years beginning on and after January 1, 2009, within 30 days following the end of each Plan Year, if required, the Employer shall make a true-up Match Contribution to the Match Contribution Account of each Participant employed by the Employer during the Plan Year, such that the total amount of Match Contributions for each Participant for the Plan Year shall be equal to 100% of the Participants Salary Reduction Contributions that do not exceed 6% of the Participants Compensation for such Plan Year (and not merely 100% of the Participants Salary Reduction Contributions that do not exceed 6% of the Participants Compensation for each pay period during the Plan Year); provided that no such Match Contribution shall be made with respect to any part or all of any such Salary Reduction Contributions that would cause the applicable dollar amount under Code Section 402(g)(1)(B) to be exceeded for such Plan Year unless the Salary Reduction Contribution can be treated as a Catch-up Contribution that does not exceed the limitation under Code Section 402(g)(1)(C).
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For Plan Years beginning on or after January 1, 2005 and before January 1, 2009, within 30 days following the end of each Plan Year, if required, the Employer shall make a true-up Match Contribution to the Match Contribution Account of each Participant employed by the Employer on the last day of the Plan Year, such that the Match Contribution for such eligible Participant for the Plan Year shall be 100% of the eligible Employer Match Contribution percentage of each such Participants Salary Reduction Contributions made during the entire Plan Year, not including Catch-up Contributions, not merely 100% of the eligible Employer Match Contribution percentage of the Participants Salary Reduction Contributions, not including Catch-up Contributions, made each pay period during the Plan Year.
(b) | For Plan Years beginning on or after January 1, 2009, (i) the Match Contributions made pursuant to Section 4.02(a) shall be subject to the withdrawal restrictions set forth in Code Section 401(k)(2)(B) and Treasury Regulation Section 1.401(k)-1(d); and (ii) pursuant to Code Section 401(k)(2)(B) and Treasury Regulations Section 1.401(k)-1(d), such contributions (and earnings thereon) shall not be distributable earlier than severance from employment, death, disability, an event described in Code Section 401(k)(10), or the attainment of age 59 1/2 and shall not be eligible for distribution for reasons of financial hardship. |
4.03 | Non-Elective Employer Contributions. |
(a) | For Plan Years beginning on or after January 1, 2010, the Board of Directors of the Employer may, in its discretion, determine to make a Non-Elective Employer Contribution to the Plan on behalf of the Employer for each Eligible Employee who is employed by the Employer on the last day of such Plan Year in an amount equal to a uniform percentage of each such Employees Compensation. Any such contribution shall be made in cash to the Non-Elective Employer Contribution Account established for each such Eligible Employee. |
For Plan Years beginning on or after January 1, 2008 and before January 1, 2010, Eligible Employees who are employed by the Employer on the last day of the Plan Year will receive an Employer paid contribution in an amount equal to 2% of the Employees Compensation, unless otherwise voted by the Board of Directors of the Employer.
For Plan Years beginning on or after January 1, 2005 and before January 1, 2008, unless otherwise voted by the Board of Directors of the Employer, Eligible Employees who are employed by the Employer on the last day of the Plan Year will receive an Employer paid contribution, whether or not the Employee has elected to participate in the Plan, equal to 3% of eligible Plan Compensation.
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The contribution shall be made in cash. Such contribution shall be made to the Non-Elective Employer Contribution Account to be established for each such Employee and shall be invested per the direction of the Participant in accordance with Section 16.02 of the Plan.
(b) | Notwithstanding anything in the Plan to the contrary, for the 2006 Plan Year only, and subject to compliance with applicable Code discrimination laws, rules and regulations, all Employees, other than First Allmerica Operating Committee Members, employed by the Employer on December 31, 2006, shall receive an extra Employer paid contribution of $500, whether or not the Employee has elected to participate in the Plan. |
Provided, however that Employees who voluntarily terminated between January 1, 2007 and March 5, 2007, or Employees who were terminated between such dates for cause, are not eligible for the extra company paid $500 award.
The contribution and extra contribution shall be made in cash. Such contribution and extra contribution shall be made to the Non-Elective Employer Contribution Account established for each eligible Employee and shall be invested per the direction of the Participant in accordance with Section 16.02 of the Plan.
(c) | Notwithstanding any other provision in the Plan to the contrary, for the 2010 Plan Year only, and subject to compliance with applicable Code discrimination laws, rules and regulations, each Participant who was an Employee on December 31, 2009, has been continuously employed from December 31, 2009 through March 1, 2010 and who earned Compensation during the Plan Year ended December 31, 2009, shall receive an Employer paid contribution of $500, whether or not such Employee has elected to make Salary Reduction Contributions to the Plan during such continuous period of employment. This Employer contribution shall be made in cash to the Non-Elective Employer Contribution Account established for any such eligible Employee as soon after March 1, 2010 as is practicable and shall be invested per the direction of the Participant in accordance with Section 16.02 of the Plan. |
4.04 | Minimum Employer Contribution for Top Heavy Plan Years. |
(a) | Minimum Allocation for Non-Key Employees. Notwithstanding anything in the Plan to the contrary except (b) through (e) below, for any Top Heavy Plan Year Employer Contributions allocated to the Accounts of each Non-Key Employee Participant shall be equal to at least three percent of such Non-Key Employees Compensation (as defined for purposes of Article VII as limited by Section 401(a)(17) of the Code) for the Plan Year. However, should the Employer Contributions allocated to the Accounts of each Key Employee for such Top Heavy Plan Year be less than three percent of each Key Employees Compensation, the Employer Contribution allocated to the Accounts of each |
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Non-Key Employee shall be equal to the largest percentage allocated to Accounts of a Key Employee. The preceding sentence shall not apply if this Plan is required to be included in an aggregation group (as described in Section 416 of the Internal Revenue Code) if such plan enables a defined benefit plan required to be included in such group to meet the requirements of Code Section 401(a)(4) or 410. For purposes of determining the percentage of Employer Contributions allocated to the Accounts of Key Employees, Salary Reduction Contributions made on their behalf shall be counted and be considered to be Employer Contributions. However, in determining whether a minimum Employer Contribution has been made to a Non-Key Employees Accounts, Salary Reduction Contributions made on his or her behalf shall be excluded and not considered. |
(b) | For purposes of the minimum allocations set forth above, the percentage allocated to the Accounts of any Key Employee shall be equal to the ratio of the sum of the Employer Contributions allocated on behalf of such Key Employee divided by the Employees Compensation for the Plan Year (as defined for purposes of Article VII), not in excess of the applicable Compensation dollar limitation imposed by Code Section 401(a)(17). |
(c) | For any Top Heavy Plan Year, the minimum allocations set forth above shall be allocated to the Accounts of all Non-Key Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Non-Key Employee Participants who have failed to complete a Year of Service. |
(d) | Notwithstanding anything herein to the contrary, in any Plan Year in which a Non-Key Employee is a Participant in both this Plan and a defined benefit pension plan included in a Required or Permissive Group of Top Heavy Plans, the Employer shall not be required to provide a Non-Key Employee with both the full separate minimum defined benefit plan benefit and the full separate minimum defined Contribution plan allocation described in this Section. Therefore, if the Employer maintains such a defined benefit and defined contribution plan, the top-heavy minimum benefits shall be provided as follows: |
(i) | If a Non-Key Employee is a participant in such defined benefit plan but is not a Participant in this defined contribution plan, the minimum benefits provided for Non-Key Employees in the defined benefit plan shall be provided to the Employee if the defined benefit plan is a Top Heavy Plan and the minimum contributions described in this Section 4.04 shall not be provided. |
(ii) | If a Non-Key Employee is a participant in such defined benefit plan and is also a Participant in this defined contribution plan, the minimum benefits for Non-Key Employee participants in Top Heavy Plans provided in the defined benefit plan shall not be applicable to any such Non-Key Employee who receives the full maximum contribution described in the preceding sentence. |
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Notwithstanding anything herein to the contrary, no minimum contribution will be required under this Plan (or the minimum contribution under this Plan will be reduced, as the case may be) for any Plan Year if the Employer maintains another qualified defined contribution plan under which a minimum contribution is being made for such year for the Participant in accordance with Section 416 of the Internal Revenue Code.
(e) | The minimum allocation required under this Section 4.04 (to the extent required to be nonforfeitable under Section 416(b) of the Code) may not be forfeited under Code Sections 411(a)(3)(B) or 411(a)(3)(D). |
4.05 | Contributions under USERRA. For Plan Years beginning on and after January 1, 2008, the Employer shall also make Match Contributions, Top-Heavy minimum contributions and any other Employer contribution for the benefit of Participants who are covered by USERRA. Match Contributions under USERRA shall be made in the Plan Year for which the Participant exercises his or her right to make-up elective deferrals contributions (Salary Reduction Contributions) for prior years. Top-Heavy minimum contributions and other Employer contributions for USERRA protected service shall be made during the Plan Year in which the individual returns to employment with the Employer. Employer contributions required under USERRA are not increased or decreased with respect to Plan investment earnings for the period to which such contributions relate. The Employers contribution for any Plan Year shall be subject to the limitations on allocations contained in Article VII. |
4.06 | Application of Forfeitures. Amounts forfeited during a Plan Year shall be used to reduce Match Contributions for that Plan Year and each succeeding Plan Year, if necessary. |
4.07 | Limitations upon Employer Contributions. In no event shall the Employer contribution for any Plan Year exceed the maximum allowable under Sections 404 and 415 of the Internal Revenue Code or any similar or subsequent provision. |
4.08 | Payment of Contributions to Trustee. The Employer shall make payment of all contributions, including Participant contributions, which shall be remitted to the Employer by payroll deduction or otherwise, directly to the Trustee in accordance with this Article IV but subject to Section 4.09. |
4.09 | Receipt of Contributions by Trustee. The Trustee shall accept and hold under the Trust such contributions of money, or other property approved by the Employer for acceptance by the Trustee, on behalf of the Employer and Participants as it may receive from time to time from the Employer. All such contributions shall be accompanied by written instructions from the Employer accounting for the manner in which they are to be credited and specifying the appropriate Participant Account to which they are to be allocated. |
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ARTICLE V
EMPLOYEE CONTRIBUTIONS AND ROLLOVER CONTRIBUTIONS
5.01 | Voluntary After-Tax Contributions. For Plan Years beginning prior to January 1, 1995, a Participant could contribute Voluntary After-Tax Contributions to the Plan and Trust in each Plan Year during which he or she was a Plan Participant in amounts as determined under the Plan in effect prior to 1995. |
The Plan shall separately account for: (i) pre-1987 Voluntary After-Tax Contributions; (ii) investment income attributable to pre-1987 Voluntary After-Tax Contributions; and (iii) post-1986 Voluntary After-Tax Contributions and income attributable to such contributions.
5.02 | Tax Deductible Voluntary Contributions. The Plan Administrator will not accept Tax Deductible Voluntary Contributions made for years after 1986. Such contributions made for years prior to that date will be maintained in a separate account which will be nonforfeitable at all times, and which shall include gains and losses in accordance with Section 8.02. |
5.03 | Rollover Contributions. With the consent of the Plan Administrator, the Trustee may accept funds transferred from other pension, profit sharing or stock bonus plans qualified under Section 401(a) of the Internal Revenue Code or Rollover Contributions, provided that the plan from which such funds are transferred permits the transfer to be made. |
In the event of a transfer or Rollover Contribution to this Plan, the Plan Administrator shall maintain a 100% vested and nonforfeitable account for the amount transferred and its share of the Trust Funds accretions or losses, to be known as the Participants Rollover Account. Transferred and Rollover Contributions shall be separately accounted for.
Rollover Contribution means any rollover contribution described in Code Sections 402(c)(4), 403(a)(4), 403(b)(8), 408(d)(3) or 457(e)(16).
An Employee who makes a contribution to the Plan described in this Section shall become a Plan Participant on the date the Trustee accepts the contribution. However, no Employer Contributions will be made on behalf of such Employee, nor will the Employee be eligible to direct the Employer to make Salary Reduction Contributions on his or her behalf, until the Employee satisfies the Plan eligibility requirements for such contributions set forth in Article III.
Notwithstanding the above, for Plan Years beginning January 1, 1999 and thereafter, the Trustee shall no longer accept funds transferred from plans qualified under 401(a) of the Internal Revenue Code unless the transferor plan is maintained by the Employer or by an Affiliate. Notwithstanding the foregoing, for Plan Years beginning on and after January 1, 2011, the Trustee shall not accept funds transferred from any such plan, which would otherwise provide for a life annuity form of payment to the Participant. Rollover Contributions to the Plan shall continue to be allowed in accordance with this Section 5.03.
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5.04 | Salary Reduction Contributions. |
(a) | An Employee who is eligible to participate in the Plan may execute a Salary Reduction Agreement to reduce his or her Compensation in order to make Salary Reduction Contributions to the Plan, including Catch-up Contributions. The Salary Reduction Agreement shall be made in a form approved by the Plan Administrator (including, if applicable, by means of telephone, computer, or other paperless media). The Compensation of any Eligible Employee electing salary reduction shall be reduced by the whole percentage requested by the Employee; provided, however, that the Plan Administrator shall identify the maximum whole percentage on an annual basis. Any Salary Reduction Agreement shall become effective as soon as administratively feasible after the Employee elects to have his or her salary reduced. For Plan Years beginning on or after January 1, 2006, except for occasional, bona fide administrative considerations, Salary Reduction Contributions made pursuant to a Salary Reduction Agreement cannot precede the earlier of (1) the performance of services relating to the contribution and (2) when the compensation that is subject to the election would be currently available to the Participant in the absence of an election to defer. |
A Participant may elect at any time to change or discontinue his or her Salary Reduction Agreement. Unless otherwise agreed to by the Plan Administrator, the election shall become effective as soon as administratively feasible after the Employee elects such change or discontinuance.
(b) | Make-up Elective Deferrals under USERRA. Effective for Plan Years beginning on and after January 1, 2008, a Participant who has the right to make-up elective deferrals (Salary Reduction Contributions) under USERRA shall be permitted to increase his or her elective deferral with respect to a make-up year without regard to any provision limiting contributions for such Plan Year. Make-up contributions shall be limited to the maximum amount permitted under the Plan and the statutory limitations applicable with respect to the make-up year. Employee-related make-up contributions must be made within the time period beginning on the date of reemployment and continuing for the lesser of five (5) years or three (3) times the period of military service. |
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For Plan Years beginning prior to January 1, 2009, Make-up Salary Reduction Contributions made by reason of an Eligible Employees qualified military service under Code section 414(u) shall not be taken into account for any year when calculating an employees Actual Deferral Percentage (under Section 9.01(a)) as provided for in Treasury Regulation section 1.401(k)-2(a)(5)(v) and Match Contributions thereon shall not be taken into account for any year when calculating an employees Average Contribution Percentage (under Section 10.01(a)) as provided for in Treasury Regulation section 1.401(m)-2(a)(5)(vi).
5.05 | Qualified Automatic Contribution Arrangement (QACA). |
(a) | Effective Date of the QACA. Effective for Plan Years beginning on or after January 1, 2009, the provisions of this Section 5.05 of the Plan shall apply to each Participant subject to the QACA and the Employer will provide the Match Contribution specified in Section 4.02 of the Plan. This Section 5.05 of the Plan supersedes any State (or Commonwealth) law that would directly or indirectly prohibit or restrict the inclusion of an automatic contribution arrangement in the Plan, pursuant to ERISA Section 514(e)(1) and Department of Labor Regulation Section 2550.404c5(f). |
(b) | Participants Subject to the QACA. The following Eligible Employees shall be Eligible Participants subject to the Automatic Contribution Arrangement: |
(i) | Each Employee who becomes eligible to participate in the Plan on and after January 1, 2009 and is eligible to make a Salary Reduction Contribution. |
(ii) | Each Employee who became eligible to participate in the Plan prior to January 1, 2009 and who is eligible to participate in the Plan on January 1, 2009, except any such Participant who had in effect a Salary Reduction Agreement on such date (regardless of the amount of the Salary Reduction Contribution affirmatively elected under the agreement). |
(c) | Automatic Contribution Arrangement. |
(i) | Automatic Contributions. Except as provided in Section 5.05(d) of the Plan, an Eligible Participant will be treated as having elected to direct the Employer to reduce his or her Compensation in order that the Employer may make Salary Reduction Contributions to the Plan equal to the following uniform percentages of Compensation: |
A. | Initial Period. An Eligible Participant will be treated as having elected to have the Employer make Salary Reduction Contributions to the Plan in an amount equal to 3% of his or her Compensation during the initial period. For this purpose, the initial period begins when the Employee is first subject to the Automatic Contributions default election under this Section 5.05(c)(i) and ends on the last day of the following Plan Year. |
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B. | Subsequent Plan Years. For the three Plan Years immediately following the initial period, an Eligible Participant will be treated as having elected to have the Employer make Salary Reduction Contributions to the Plan in the amounts equal to 4%, 5% and 6% respectively, of his or her Compensation. For all Plan Years thereafter, an Eligible Participant will be treated as having elected to have the Employer make Salary Reduction Contributions to the Plan in the amounts equal to 6% of his or her Compensation. |
C. | Treatment of Rehires. The default percentages of Compensation stated above for the purposes of the Automatic Contributions are based on the date the initial period begins, regardless of whether the Employee continues to be eligible to make Salary Reduction Contributions under the Plan after that date. Thus, the applicable percentage is generally determined based on the number of years since an Automatic Contribution was first made on behalf of an Eligible Participant. However, if Automatic Contributions are not made on behalf of an Eligible Participant for an entire Plan Year (e.g., due to termination of employment), such Eligible Participant shall be treated as having a new initial period for determining the default percentage of Compensation stated above (if Automatic Contributions are to recommence with respect to the Eligible Participant), regardless of what minimum percentage would otherwise apply to that Eligible Participant. |
(ii) | Effective Date of Automatic Contributions. The effective date of the first Automatic Contribution provided for in paragraph (i) above, will be as soon after an Eligible Participant becomes subject to the QACA as is practicable, consistent with (a) applicable law, and (b) the objective of affording the Eligible Participant a reasonable period of time after receipt of the notice to make an Affirmative Election (and, an investment election). However, in no event will the Automatic Contribution be effective later than the earlier of (a) the pay date for the second payroll period that begins after the date the QACA safe harbor notice (described in Section 5.05(f) of the Plan) is provided to the Eligible Participant, or (b) the first pay date that occurs at least 30 days after the QACA safe harbor notice is provided to the Eligible Participant. |
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(d) | Rules Related to Automatic Contributions. |
(i) | Affirmative Election to Override Automatic Contributions. An Eligible Participant will have a reasonable period of time after receipt of the notice to make an Affirmative Election (and, an investment election). The Automatic Contributions provided for in Section 5.05(c) of the Plan shall cease with respect to an Eligible Participant as soon as administratively feasible after the Eligible Participant makes an Affirmative Election. An Eligible Participants Affirmative Election will not expire, but will remain in force until changed by the Eligible Participant. An Eligible Participant need not execute a subsequent or new Affirmative Election in order to have the prior or old Affirmative Election apply to override the Automatic Contributions provided for in Section 5.05(c) of the Plan in any subsequent Plan Year. Any subsequent change to an Eligible Participants Affirmative Election will be made in accordance with Section 5.04 of the Plan relating to a Participants right to elect at any time to change or discontinue his or her Salary Reduction Agreement. |
(ii) | Applying Statutory Limits to Automatic Contributions. The Automatic Contributions provided for in Section 5.05(c) of the Plan shall be limited each Plan Year so as not to exceed the limits of Code Sections 401(a)(17), 402(g)(1), or 415. |
(iii) | No Automatic Contributions during Hardship Suspension. No Automatic Contributions provided in Section 5.05(c) of the Plan shall apply during the six-month period of suspension, under Section 11.02 of the Plan, of a Participants right to make Salary Reduction Contributions to the Plan following a distribution for financial hardship. |
(e) | Permissible Withdrawals. |
(i) | Withdrawal Election. An Eligible Participant who is enrolled in the Automatic Contribution Arrangement prior to January 1, 2011 may elect to make a Permissible Withdrawal of the Automatic Contributions that are made to the Plan on his or her behalf. |
(ii) | Forfeiture of Match Contribution. Notwithstanding the vesting provisions of this Plan, any amounts attributable to Match Contributions allocated to the Match Contribution Account of an Eligible Participant with respect to Automatic Contributions that have been withdrawn pursuant to this Section 5.05(e) shall be forfeited. In the event that Match Contributions would otherwise be allocated to the Eligible Participants Match Contribution Account with respect to Automatic Contributions that have been so withdrawn, the Employer shall not contribute such Match Contributions to the Plan. |
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(f) | Default Investment. If an Eligible Participant does not direct the investment of the assets in his or her Account, including the Automatic Contributions and Match Contributions related thereto, then such assets will be invested in a Qualified Default Investment Alternative as provided for in Section 16.03 of the Plan. |
(g) | Notice Requirements for QACA Safe Harbor. The notice requirement is satisfied if each Eligible Participant is given an annual notice of the his or her rights and obligations under the Plan and the notice provided satisfies the content requirement and the timing requirement as follows: |
(i) | The notice shall be sufficiently accurate and comprehensive to inform the Eligible Participant of the Eligible Participants rights and obligations under the Plan and written in a manner calculated to be understood by the average Eligible Participant. The notice shall accurately describe: (1) the Match Contribution formula stated in Section 4.02 of the Plan; (2) any other contributions under the Plan and the conditions under which such contributions are made; (3) the type and amount of Compensation that may be deferred under the Plan; (4) how to make cash or deferred elections, including any administrative requirements that apply to such elections; (5) the periods available under the Plan for making cash or deferred elections; (6) withdrawal and vesting provisions applicable to contributions under the Plan; and (7) information that makes it easy to obtain additional information about the Plan; provided that the notice requirement with respect to the information described in items (2), (3), and (4) may be satisfied by cross-reference to the applicable sections of the Plans summary plan description. In addition, the notice shall accurately describe: (1) the Automatic Contributions that will be made on behalf of the Eligible Participant in the absence of an Affirmative Election; (2) the Eligible Participants right to elect not to have the Automatic Contributions made on his or her behalf (or to elect to have Salary Reduction Contributions made in a percentage of Compensation different than that which is provided for in Section 5.05(c) of the Plan, at the percentage of Compensation specified in his or her Salary Reduction Agreement); (3) how contributions made under the Automatic Contribution Arrangement will be invested in the absence of any investment election by the Eligible Participant; and (4) with respect to Eligible Participants who are enrolled in the Automatic Contribution Account prior to January 1, 2011, the Eligible Participants right to make a Permissible Withdrawal of the Automatic Contributions made on his or her behalf and the procedures for doing so. After receipt of the notice described in this paragraph, any Eligible Participant to whom the Automatic Contribution Arrangement relates must have a reasonable period of time before the first Automatic Contribution is made to exercise the rights set forth within the notice including, but not limited to, executing an Affirmative Election to override the Automatic Contributions provided for in Section 5.05(c) of the Plan. |
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(ii) | If the notice is provided to Eligible Participants within a reasonable period before the beginning of each Plan Year (or in the Plan Year an Employee becomes eligible, within a reasonable period before the Employee becomes eligible), the Plan shall satisfy the notice requirements. Notwithstanding the foregoing general rule, a notice shall be deemed to have been provided in timely manner if the notice is provided to each Employee who is eligible to participate in the Plan for the Plan Year at least thirty (30) days but no more than ninety (90) days before the beginning of the Plan Year. If an Employee does not receive the notice because he or she only becomes eligible to participate in the Plan after the ninetieth day before the beginning of the Plan Year, the requirement to give the notice will be satisfied if the notice is provided not more than ninety (90) days before the Employee becomes eligible to participate in the Plan, but in no event later than the date the Employee becomes eligible to participate in the Plan. |
(iii) | Each Eligible Participant may make or modify a deferral election during the thirty (30) day period immediately following receipt of the notice described above, as provided for in Section 5.04 of the Plan. |
(iv) | The Plan may provide the notice in writing or by electronic means. If provided electronically, the notice must be no less understandable than a written paper document and at the time of delivery of the electronic notice, the Employee is advised that he or she may request to receive the notice in writing at no additional charge. |
ARTICLE VI
PROVISIONS APPLICABLE TO TOP HEAVY PLANS
6.01 | In general. For any Top Heavy Plan Year, the Plan shall provide the minimum contribution for Non-Key Employees described in Section 4.04. |
If the Plan is or becomes a Top Heavy Plan, the provisions of this Article will supersede any conflicting provisions in the Plan.
6.02 | Determination of Top Heavy Status. |
(a) | This Plan shall be a Top Heavy Plan for any Plan Year commencing after December 31, 1983 if any of the following conditions exists: |
(i) | If the top heavy ratio for this Plan exceeds 60 percent and this Plan is not part of any required aggregation group or permissive aggregation group of plans. |
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(ii) | If this Plan is a part of a required aggregation group of plans but not part of a permissive aggregation group and the top heavy ratio for the group of plans exceeds 60 percent. |
(iii) | If this Plan is a part of a required aggregation group and part of a permissive aggregation group of plans and the top heavy ratio for the permissive aggregation group exceeds 60 percent. |
(b) | The Plan top heavy ratio shall be determined as follows: |
(i) | Defined Contribution Plans Only: If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan, as defined in Section 408(k) of the Code) and the Employer has not maintained any defined benefit plan which during the 1-year period (5-year period in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002) ending on the determination date(s) has or has had accrued benefits, the top-heavy ratio for this Plan alone or for the required or permissive aggregation group, as appropriate, is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the determination date(s) (including any part of any account balance distributed in the 1-year period ending on the determination date(s) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability and in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 1-year period ending on the determination date(s)) (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability and in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002), both computed in accordance with Section 416 of the Code and the Regulations thereunder. Both the numerator and denominator of the top-heavy ratio are increased to reflect any contribution not actually made as of the determination date, but which is required to be taken into account on that date under Section 416 of the Code and the Regulations thereunder. |
(ii) | Defined Contribution and Defined Benefit Plans: If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more defined benefit plans which during the 1-year |
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period (5-year period in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002) ending on the determination date(s) has or has had any accrued benefits, the top-heavy ratio for any required or permissive aggregation group, as appropriate, is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (i) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the determination date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with (i) above, and the present value of accrued benefits under the defined benefit plan or plans for all Participants as of the determination date(s), all determined in accordance with Section 416 of the Code and the Regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the top-heavy ratio are increased for any distribution of an accrued benefit made in the 1-year period ending on the determination date (5-year period ending on the determination date in the case of a distribution made for a reason other than severance from employment, death or disability and in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002). |
(iii) | Determination of Values of Account Balances and Accrued Benefits: For purposes of (i) and (ii) above the value of Account balances and the present value of Accrued Benefits will be determined as of the most recent valuation date that falls within or ends with the 12-month period ending on the determination date, except as provided in Section 416 of the Code and the Regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was Key Employee in a prior year, or (2) who has not had at least one Hour of Service with the Employer at any time during the 1-year period (five-year period in determining whether the Plan is Top Heavy for Plan Years beginning before January 1, 2002) ending on the determination date will be disregarded. The calculation of the top-heavy ratio and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code and the Regulations thereunder. Tax Deductible Voluntary Employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the determination dates that fall within the same calendar year. |
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The Accrued Benefit of a Participant other than a Key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer; or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(l)(C) of the Code.
(c) | Permissive aggregation group: The required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Section 401(a)(4) and 410 of the Internal Revenue Code. |
(d) | Required aggregation group: (i) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated), and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Section 401(a)(4) or 410 of the Internal Revenue Code. |
(e) | Determination date: The last day of the preceding Plan Year. |
(f) | Present Value: Present value shall be based on the 1971 Group Annuity Table, unprojected for post-retirement mortality, with no assumption for pre-retirement withdrawal and interest at the rate of 5% per annum. |
ARTICLE VII
LIMITATIONS ON ALLOCATIONS
(See Sections 7.12-7.16 for definitions applicable to this Article VII).
7.01 | If the Participant does not participate in, and has never participated in another qualified plan, a welfare benefit fund (as defined in Section 419(e) of the Code), an individual medical account (as defined in Section 415(l)(2) of the Code) or a simplified employee pension (as defined in Section 408(k) of the Code), maintained by the Employer, the amount of Annual Additions which may be credited to the Participants Accounts for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participants Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. |
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7.02 | Prior to determining the Participants actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount for a Participant on the basis of a reasonable estimation of the Participants annual Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. |
7.03 | As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participants actual Compensation for the Limitation Year. |
7.04 | Excess Annual Additions. Notwithstanding any provision of the Plan to the contrary, if the Annual Additions (within the meaning of Code Section 415) are exceeded for any Participant, then the Plan may only correct such excess in accordance with the Employee Plans Compliance Resolution System (EPCRS) as set forth in Revenue Procedure 2008-50 or any superseding guidance, including, but not limited to, the preamble of the Final Treasury Regulations under Code Section 415. |
7.05 (a) | Aggregation and Disaggregation of Plans. Sections 7.06 through 7.11 apply if, in addition to this Plan, the Participant is covered under another qualified defined contribution plan, a welfare benefit fund, an individual medical account or a simplified employee pension maintained by the Employer during any Limitation Year. The term Employer for this purpose means the Employer that adopts this Plan and all members of a controlled group or an affiliated service group that includes the Employer (within the meaning of Code Sections 414(b), (c), (m) or (o)), except that for purposes of this Section, the determination shall be made by applying Code Section 415(h), and shall take into account tax-exempt organizations under Treasury Regulation Section 1.414(c)-5, as modified by Treasury Regulation Section 1.415(a)-1(f)(1). For purposes of this Section: |
(i) | A former Employer is a predecessor employer with respect to a Participant in a plan maintained by an Employer if the Employer maintains a plan under which the Participant had accrued a benefit while performing services for the former Employer, but only if that benefit is provided under the plan maintained by the Employer. For this purpose, the formerly affiliated plan rules in Treasury Regulation Section 1.415(f)-1(b)(2) apply as if the Employer and predecessor Employer constituted a single employer under the rules described in Treasury Regulation Section 1.415(a)-1(f)(1) and (2) immediately prior to the cessation of affiliation (and as if they constituted two, unrelated employers under the rules described in Treasury Regulation Section 1.415(a)-1(f)(1) and (2) immediately after the cessation of affiliation) and cessation of affiliation was the event that gives rise to the predecessor employer relationship, such as a transfer of benefits or plan sponsorship. |
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(ii) | With respect to an Employer of a Participant, a former entity that antedates the Employer is a predecessor employer with respect to the Participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity. |
(b) | Break-Up of an Affiliate Employer or an Affiliated Service Group. For purposes of aggregating plans for Code Section 415, a formerly affiliated plan of an employer is taken into account for purposes of applying the Code Section 415 limitations to the Employer, but the formerly affiliated plan is treated as if it had terminated immediately prior to the cessation of affiliation. For purposes of this paragraph, a formerly affiliated plan of an Employer is a plan that, immediately prior to the cessation of affiliation, was actually maintained by one or more of the entities that constitute the employer (as determined under the employer affiliation rules described in Treasury Regulation Section 1.415(a)-1(f)(1) and (2)), and immediately after the cessation of affiliation, is not actually maintained by any of the entities that constitute the employer (as determined under the employer affiliation rules described in Treasury Regulation Section 1.415(a)-1(f)(1) and (2)). For purposes of this paragraph, a cessation of affiliation means the event that causes an entity to no longer be aggregated with one or more other entities as a single employer under the employer affiliation rules described in Treasury Regulation Section 1.415(a)-1(f)(1) and (2) (such as the sale of a subsidiary outside a controlled group), or that causes a plan to not actually be maintained by any of the entities that constitute the employer under the employer affiliation rules of Treasury Regulation Section 1.415(a)-1(f)(1) and (2) (such as a transfer of plan sponsorship outside of a controlled group). |
(c) | Midyear Aggregation. Two or more defined contribution plans that are not required to be aggregated pursuant to Code Section 415(f) and the Regulations thereunder as of the first day of a Limitation Year do not fail to satisfy the requirements of Code Section 415 with respect to a Participant for the Limitation Year merely because they are aggregated later in that Limitation Year, provided that no Annual Additions are credited to the Participants Account after the date on which the plans are required to be aggregated. |
7.06 | The Annual Additions which may be credited to a Participants Accounts under this Plan for any such Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participants Account under the other plans, welfare benefit funds, individual medical accounts and simplified employee pensions for the same Limitation Year. If the Annual Additions with respect to the Participant under other defined contribution plans, welfare benefit funds, individual medical accounts and simplified employee pensions maintained by the Employer are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participants Accounts under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under all such plans and funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the |
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Participant under such other defined contribution plans, welfare benefit funds, individual medical accounts and simplified employee pensions in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participants Accounts under this Plan for the Limitation Year. |
7.07 | Prior to determining the Participants actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount in the manner described in Section 7.02. |
7.08 | As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for the Limitation Year will be determined on the basis of the Participants actual Compensation for the Limitation Year. |
7.09 | If, pursuant to Section 7.08, or as a result of the allocation of forfeitures, a Participants Annual Additions under this Plan and such other plans would result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a simplified employee pension will be deemed to have been allocated first, followed by Annual Additions to a welfare benefit fund or individual medical account, regardless of the actual allocation date. |
7.10 | If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: |
(i) | the total Excess Amount allocated as of such date, times |
(ii) | the ratio of (A) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (B) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this and all the other qualified defined contribution plans. |
7.11 | Any Excess Amount attributed to this Plan will be disposed of in the manner described in Section 7.04. |
(Sections 7.12 - 7.16 are definitions used in this Article VII).
7.12 | Annual Additions. The sum of the following amounts credited to a Participants Accounts for the Limitation Year. |
(i) | Employer contributions (including Salary Reduction Contributions); |
(ii) | Employee contributions; |
(iii) | forfeitures; and |
(iv) | allocations under a simplified employee pension. |
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Employee and Employer make-up contributions under USERRA received during the current Limitation Year shall be treated as Annual Additions with respect to the Limitation Year to which the make-up contributions are attributable.
For this purpose, any Excess Amount applied under Section 7.11 in the Limitation Year to reduce Employer contributions will be considered Annual Additions for such Limitation Year.
Amounts allocated after March 31, 1984, to an individual medical account, as defined in Section 415(l)(2) of the Internal Revenue Code, which is part of a defined benefit pension plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in Section 419(A)(d)(3) of the Code, or under a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer, are treated as Annual Additions to a defined contribution plan.
Restorative Payments. Annual Additions shall not include restorative payments. A restorative payment is a payment made to restore losses to a Plan resulting from actions by a fiduciary for which there is reasonable risk of liability for breach of a fiduciary duty under ERISA or under other applicable federal or state law, where Participants who are similarly situated are treated similarly with respect to the payments. Generally, payments are restorative payments only if the payments are made in order to restore some or all of the Plans losses due to an action (or a failure to act) that creates a reasonable risk of liability for such a breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the Plan). This includes payments to a plan made pursuant to a Department of Labor order, the Department of Labors Voluntary Fiduciary Correction Program, or a court-approved settlement, to restore losses to a qualified defined contribution plan on account of the breach of fiduciary duty (other than a breach of fiduciary duty arising from failure to remit contributions to the Plan). Payments made to the Plan to make up for losses due merely to market fluctuations and other payments that are not made on account of a reasonable risk of liability for breach of a fiduciary duty under ERISA are not restorative payments and generally constitute contributions that are considered Annual Additions.
Other Amounts. Annual Additions shall not include: (1) The direct transfer of a benefit or employee contributions from a qualified plan to this Plan; (2) Rollover contributions (as described in Code Section 401(a)(31), 402(c)(1), 403(a)(4), 403(b)(8), 408(d)(3), and 457(e)(16)); (3) Repayments of loans made to a Participant from the Plan; (4) Catch-up Contributions as defined in Plan Section 2.10; and (5) Repayments of amounts described in Code Section 411(a)(7)(B) (in accordance with Code Section 411(a)(7)(C)) and Code Section 411(a)(3)(D), as well as Employer restorations of benefits that are required pursuant to such repayments, as provide for in Plan Section 13.11.
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7.13 | Defined Contribution Dollar Limitation. $40,000 as adjusted under Code Section 415(d). |
7.14 | Employer. For purposes of this Article, Employer shall mean the Employer that adopts this Plan and all members of a controlled group of corporations (as defined in Section 414(b) of the Code as modified by Section 415(h)), all trades or business under common control (as defined in Code Section 414(c) as modified by Section 415(h) of the Code), or all members of an affiliated service group (as defined in Code Section 414(m) of the Code) of which the Employer is a part, and any other entity required to be aggregated with the Employer pursuant to regulations promulgated under Code Section 414(o). |
7.15 | Excess Amount. The excess of the Participants Annual Additions for the Limitation Year over the Maximum Permissible Amount. |
7.16 | Maximum Permissible Amount. The maximum Annual Addition that may be contributed or allocated to a Participants Accounts under the Plan for any Limitation Year shall not exceed the lesser of: |
(i) | the Defined Contribution Dollar Limitation; or |
(ii) | 100 percent of the Participants Compensation for the Limitation Year. |
The Compensation limitation referred to in (ii) shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition under Section 415(c)(1) or 419A(d)(2) of the Code.
If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the maximum permissible amount will not exceed the Defined Contribution Dollar Limitation multiplied by the following fraction:
Number of months in the short Limitation Year
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ARTICLE VIII
PARTICIPANT ACCOUNTS AND VALUATION OF ASSETS
8.01 | Participant Accounts. The Trustee shall establish and maintain a 401(k) Account, Match Contribution Account, Non-Elective Employer Contribution Account, Regular Account, Rollover Account, Tax Deductible Contribution Account and Voluntary Contribution Account for each Participant, when appropriate, to account for the Participants Accrued Benefit. All contributions by or on behalf of a Participant shall be deposited to the appropriate Account. |
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The Plan Administrator shall instruct the Trustee to credit all appropriate amounts to each Participants Accounts. The Plan Administrator shall keep records, which shall include the Account balances of each Participant.
8.02 | Valuation of Trust Fund. As of each Valuation Date the Trustee shall determine (or cause to be determined) the net worth of the assets of the Trust Fund and report such value to the Plan Administrator in writing. In determining such net worth, the Trustee shall evaluate the assets of the Trust Fund at their fair market value as of such Valuation Date. In making any such valuation of the Trust Fund, the Trustee shall not include any contributions made by the Employer, which have not been allocated to Participant Accounts prior to such Valuation Date. |
ARTICLE IX
401(k) ALLOCATION LIMITATIONS
9.01 | Definitions. For purposes of this Article, the following definitions shall be used: |
(a) | Actual Deferral Percentage or ADP means the ratio (expressed as a percentage) of Salary Reduction Contributions, other than Catch-up Contributions, made on behalf of an Eligible Participant to that Participants Compensation for the Plan Year. Two Actual Deferral Percentages shall be calculated and used, one including and the second excluding any Salary Reduction Contributions that are included in the Contribution Percentage of the Participant as defined in Plan Section 10.01(b). The Plan Administrator may include 100% vested and non-forfeitable Match Contributions made for the Participant for the Plan Year in the above described numerator, if such inclusion is made on a uniform nondiscriminatory basis for all Participants; however, Match Contributions that are included in the Actual Deferral Percentage of the Participant may not be included in the numerator of the Contribution Percentage of the Participant as defined in Section 10.01(b). To be considered as contributed for a given Plan Year for purposes of inclusion in a given Actual Deferral Percentage, Contributions must be made by the end of the 12-month period immediately following the Plan Year to which the contribution relates. |
For Plan Years beginning on or after January 1, 2006, if one or more other plans allowing contributions under Code Section 401(k) are considered with this Plan as one for purposes of Code Section 401(a)(4) or 410(b), the Actual Deferral Percentages for all Eligible Employees under all such plans shall be determined as if this Plan and all such other plans were one; provided that for Plan Years beginning on and after January 1, 2006 the requirements of Treasury Regulation section 1.401(k)-1(b)(4)(iii)(B) are met.
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If any Highly Compensated Employee is an Eligible Employee in one or more other plans maintained by the same employer, which allow contributions under Code Section 401(k), the Actual Deferral Percentage for that Employee shall be determined as if this Plan and all such other plans were one; if such plans have different plan years, all contributions that are made under all such plans during the plan year being tested shall be aggregated, without regard to the plan years of the other plans. However, for Plan Years beginning before January 1, 2006, if the plans have different Plan Years, then all such cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. For Plan Years beginning on or after January 1, 2006, notwithstanding the foregoing, certain plans shall be separate if mandatorily disaggregated under the regulations of Code Section 401(k).
(b) | Average Actual Deferral Percentage means the average (expressed as a percentage) of the Actual Deferral Percentages of a group. |
(c) | Excess 401(k) Contributions means with respect to any Plan Year, the excess of: (i) the aggregate amount of Employer contributions actually taken into account in computing the Actual Deferral Percentages of Highly Compensated Employees for such Plan Year, over (ii) the maximum amount of such contributions permitted by the Actual Deferral Percentage Test (determined by hypothetically reducing the numerators of Highly Compensated Employees in order of their Actual Deferral Percentages beginning with the highest of such percentages). |
(d) | Excess Elective Deferrals means those Salary Reduction Contributions of a Participant that either (1) are made during the Participants taxable year and exceed the dollar limitation under Code Section 402(g) (including, if applicable, the dollar limitation on Catch-up Contributions defined in Code Section 414(v)) for such year; or (2) are made during a calendar year and exceed the dollar limitation under Code Section 402(g) (including, if applicable, the dollar limitation on Catch-up Contributions defined in Code Section 414(v)) for the Participants taxable year beginning in such calendar year, counting only Salary Reduction Contributions made under this Plan and any other 401(k) qualified retirement plan, contract or arrangement maintained by the Employer. |
9.02 | Average Actual Deferral Percentage Tests. |
(a) | For Plan Years beginning on or after January 1, 2009, the Plan will be treated as meeting the actual deferral percentage test set forth in Code Section 401(k)(3)(A)(ii) in each Plan Year with respect to which the Qualified Automatic Contribution Arrangement provisions of this Plan remain in effect. |
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(b) | For Plan Years beginning before January 1, 2009, the Average Actual Deferral Percentage for Highly Compensated Employees for each Plan Year compared to the Average Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year must satisfy one of the following tests: |
(i) | The Average Actual Deferral Percentage for Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or |
(ii) | The Average Actual Deferral Percentage for Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year multiplied by 2, provided that the Average Actual Deferral Percentage for Eligible Employees who are Highly Compensated Employees does not exceed the Average Actual Deferral Percentage for Non-Highly Compensated Employees for the Plan Year by more than two (2) percentage points. |
A Participant is a Highly Compensated Employee for a particular Plan Year if he or she meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-Highly Compensated Employee for a particular Plan Year if he or she does not meet the definition of a Highly Compensated Employee in effect for that Plan Year.
For Plan Years beginning on or after January 1, 1999, all eligible Non-Highly Compensated Employees who have not met the age and service requirements of Code Section 410(a)(1)(A), may be disregarded in performing the Average Actual Deferral Percentage Tests as provided in Code Section 401(k)(3)(F) and the Regulations thereunder.
9.03 | Refund of Excess 401(k) Contributions. For Plan Years beginning before January 1, 2009, notwithstanding any other provision of this Plan except Section 9.05, Excess 401(k) Contributions, as adjusted for gain or loss, including for the Plan Year ended December 31, 2007, an adjustment for income for the period between the end of the Plan Year and the date of the distribution (the gap period), shall be distributed no later than the last day of each Plan Year to Participants to whose Accounts such Excess 401(k) Contributions were allocated for the preceding Plan Year. The Plan Administrator has the discretion to determine and allocate income using any of the methods set forth below: |
(a) | Reasonable method of allocating income. The Plan Administrator may use any reasonable method for computing the income allocable to Excess 401(k) Contributions, provided that the method does not violate Code section 401(a)(4), is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income to Participants Accounts. A Plan will not fail to use a reasonable method for computing the income allocable to Excess 401(k) Contributions merely because the income allocable to Excess 401(k) Contributions is determined on a date that is no more than seven (7) days before the distribution. |
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(b) | Alternative method of allocating income. The Plan Administrator may allocate income to Excess 401(k) Contributions for the Plan Year by multiplying the income for the Plan Year allocable to the Salary Reduction Contributions and other amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) including contributions made for the Plan Year, by a fraction, the numerator of which is the Excess 401(k) Contributions for the Participant for the Plan Year, and the denominator of which is the sum of the: |
(i) | Account balance attributable to Salary Reduction Contributions and other amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) as of the beginning of the Plan Year, and |
(ii) | Any additional amount of such contributions made for the Plan Year. |
(c) | Safe harbor method of allocating gap period income. The Plan Administrator may use the safe harbor method in this paragraph to determine income on excess contributions for the gap period. Under this safe harbor method, income on Excess 401(k) Contributions for the gap period is equal to ten percent (10%) of the income allocable to Excess 401(k) Contributions for the Plan Year that would be determined under paragraph (b) above, multiplied by the number of calendar months that have elapsed since the end of the Plan Year. For purposes of calculating the number of calendar months that have elapsed under the safe harbor method, a corrective distribution that is made on or before the fifteenth (15th) day of a month is treated as made on the last day of the preceding month and a distribution made after the fifteenth day of a month is treated as made on the last day of the month. |
(d) | Alternative method for allocating Plan Year and gap period income. The Plan Administrator may determine the income for the aggregate of the Plan Year and the gap period, by applying the alternative method provided by paragraph (b) above to this aggregate period. This is accomplished by (1) substituting the income for the Plan Year and the gap period, for the income for the Plan Year, and (2) substituting the amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) for the Plan Year and the gap period, for the amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02) for the Plan Year in determining the fraction that is multiplied by that income. |
Excess 401(k) Contributions are allocated to the Highly Compensated Employees with the largest dollar amounts of Employer contributions taken into account in calculating the Actual Deferral Percentage test for the year in which the excess arose, beginning
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with the Highly Compensated Employee with the largest dollar amount of such Employer contributions and continuing in descending order until all the Excess 401(k) Contributions have been allocated. For purposes of the preceding sentence, the largest amount is determined after distribution of any Excess 401(k) Contributions.
The Plan Administrator shall make every effort to make all required distributions and forfeitures within 2 1/2 months of the end of the affected Plan Year; however, in no event shall such distributions be made later than the end of the following Plan Year. Distributions and forfeitures made later than 2 1/2 months after the end of the affected Plan Year will be subject to tax under Code Section 4979.
All forfeitures arising under this Section shall be applied as specified in Section 4.06 of the Plan and treated as arising in the Plan Year after that in which the Excess 401(k) Contributions were made; however, no forfeitures arising under this Section shall be allocated to the Account of any affected Highly Compensated Employee.
Excess 401(k) Contributions shall be treated as Annual Additions under the Plan.
For a period of four 12-month periods beginning from the given Plan Year, or such other period as the Secretary of the Treasury may designate, the Employer shall maintain records showing what contributions and Compensation were used to satisfy this Section and Section 9.02.
9.04 | Accounting for Excess 401(k) Contributions. For Plan Years beginning before January 1, 2009, Excess 401(k) Contributions allocated to a Participant shall be distributed from the Participants 401(k) Account and Match Contribution Account (if applicable) in proportion to the Participants Salary Reduction Contributions and Employer Match Contributions (to the extent used in the Actual Deferral Percentage Test) for the Plan Year. |
9.05 | Special Contributions. This section shall be effective for Plan Years beginning on and after January 1, 2006 and before January 1, 2009. |
(a) | Correction by Employer Contribution. Notwithstanding any other provisions of this Plan except Section 9.09, in lieu of distributing Excess 401(k) Contributions as provided in Section 9.03, the Employer may make 401(k) Employer Contributions on behalf of Non-Highly Compensated Employees that are sufficient to satisfy either of the Average Actual Deferral Percentage Tests. If a failed Average Actual Deferral Percentage Test is to be corrected by making such contributions, then any such corrective contribution made on behalf of any Non-Highly Compensated Employees shall not exceed the targeted contribution limits set forth below, or in the case of a corrective contribution that is a Qualified Matching Contribution, the targeted contribution limit of Section 10.05. |
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(b) | Targeted Contribution Limit. Qualified Nonelective Contributions (as defined in Treasury Regulation section 1.401(k)-6) cannot be taken into account in determining the actual deferral ratio (ADR) for a Plan Year for a Non- Highly Compensated Employee (NHCE) to the extent such contributions exceed the product of that NHCEs Code Section 414(s) compensation and the greater of five percent (5%) or two (2) times the Plans representative contribution rate. Any Qualified Nonelective Contribution taken into account under an Average Contribution Percentage Test under Treasury Regulation Section 1.40l(m)-2(a)(6) (including the determination of the representative contribution rate for purposes of Treasury Regulation section 1.401(m)-2(a)(6)(v)(B)), is not permitted to be taken into account for purposes of this Section (including the determination of the representative contribution rate under this Section). For purposes of this Section: |
(i) | The Plans representative contribution rate is the lowest applicable contribution rate of any eligible NHCE among a group of eligible NHCEs that consists of half of all eligible NHCEs for the Plan Year (or, if greater, the lowest applicable contribution rate of any eligible NHCE who is in the group of all eligible NHCEs for the Plan Year and who is employed by the Employer on the last day of the Plan Year), and |
(ii) | The applicable contribution rate for an eligible NHCE is the sum of the Qualified Matching Contributions (as defined in Treasury Regulation section 1.401(k)-6) taken into account in determining the ADR for the eligible NHCE for the Plan Year and the Qualified Nonelective Contributions made for the eligible NHCE for the Plan Year, divided by the eligible NHCEs Code Section 414(s) compensation for the same period. |
Qualified Matching Contributions may only be used to calculate an ADR to the extent that such Qualified Matching Contributions are matching contributions that are not precluded from being taken into account under the Average Contribution Percentage Test for the Plan Year under the rules of Treasury Regulation section 1.401(m)-2(a)(5)(ii) and as set forth in Section 10.02 of this Plan.
(c) | Limitation on QNECs and QMACs. Qualified Nonelective Contributions (as defined in Treasury Regulation section 1.401(k)-6) and Qualified Matching Contributions (as defined in Treasury Regulation section 1.401(k)-6) cannot be taken into account to determine an Actual Deferral Percentage to the extent such contributions are taken into account for purposes of satisfying any other Average Actual Deferral Percentage Test, any Average Contribution Percentage Test, or the requirements of Treasury Regulation section 1.401(k)-3, 1.401(m)-3, or 1.401(k)-4. |
9.06 | Maximum Salary Reduction Contributions. No Employee shall be permitted to have Salary Reduction Contributions made under this Plan, other than Catch-up Contributions, during any calendar year in excess of $7,000 (or such other amount as is designated by the Secretary of the Treasury as the limit under Code Section 402(g). |
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9.07 | Participant Claims. Participants under other plans described in Code Sections 401(k), 408(k) or 403(b) may submit a claim to the Plan Administrator specifying the amount of their Excess Elective Deferral. Such claim shall: (i) be in writing; (ii) be submitted no later than March 1 of the year after the Excess Elective Deferral was made; and (iii) state that such amount, when added to amounts deferred under other plans described in Code Sections 401(k), 408(k) or 403(b), exceeds $7,000 (or such other amount as the Secretary of the Treasury may designate). |
9.08 | Distribution of Excess Elective Deferrals. This section shall be effective for Plan Years beginning on and after January 1, 2006. Notwithstanding any other provision of this Plan, Excess Elective Deferrals adjusted for allocable income (gain or loss), including an adjustment for income for the period between the end of the Plan Year and the date of the distribution (the gap period) shall be distributed to the affected Participant no later than the April 15 following the calendar year in which such Excess Elective Deferrals were made. Notwithstanding the forgoing, for Plan Years beginning after December 31, 2007, the requirement that Excess Elective Deferrals be adjusted for allocable income (gain or loss) during gap period income pursuant to Code Section 402(g)(2)(A)(ii) shall no longer apply. |
For the purpose of this section, income shall be determined and allocated in accordance with the provisions of Section 9.03 of this Plan, except that such section shall be applied (i) by substituting the term Excess Elective Deferrals for Excess 401(k) Contributions therein, (ii) by ignoring references to and other amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests (set forth in Section 9.02), (iii) by substituting Excess Elective Deferrals for the taxable year for the amounts taken into account under the Average Actual Deferral Percentage Tests for the Plan Year and (iv) by ignoring the reference to the Alternative method for allocating Plan Year and gap period income.
No distribution of an Excess Elective Deferral shall be made unless the correcting distribution is made after the date on which the Plan received the Excess Elective Deferral and both the Participant and the Plan designates the distribution as a distribution of an Excess Elective Deferral.
Notwithstanding any provision of this Plan to the contrary, any Match Contributions plus earnings that are attributable to any Excess Elective Deferrals that have been refunded shall be forfeited. All such forfeitures shall be treated as arising in the Plan Year after that in which the refunded Excess Deferrals were made and shall be used to reduce future Employer Match Contributions.
9.09 | Operation in Accordance With Regulations. The determination and treatment of Actual Deferral Percentages and Excess 401(k) Contributions, and the operation of the Average Actual Deferral Percentage Test shall be in accordance with such additional requirements as may be prescribed by the Secretary of the Treasury. |
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ARTICLE X
401(m) ALLOCATION LIMITATIONS
For Plan Years beginning on or after January 1, 2009, the Plan will be treated as meeting the actual contribution percentage test set forth in Code Section 401(m)(2) in each Plan Year with respect to which the Qualified Automatic Contribution Arrangement provisions of this Plan remain in effect. The following provisions of this Article shall apply with respect to Plan Years prior to January 1, 2009 unless otherwise noted.
10.01 | Definitions. For purposes of this Article, the following Definitions shall be used: |
(a) | Average Contribution Percentage means the average (expressed as a percentage) of the Contribution Percentages of a group. |
(b) | Contribution Percentage means the ratio (expressed as a percentage) of: the Employer Match and Voluntary After Tax Contributions made on behalf of the Participant to the Participants Compensation for the Plan Year. For Plan Years beginning on and after January 1, 2006, Salary Reduction Contributions (other than Catch-up Contributions) made on behalf of Participants who are Non-Highly Compensated Employees which could be used to satisfy the Code Section 401(k)(3) limits (set forth in Section 9.02(b) hereof) but are not necessary to be taken into account in order to satisfy such limits, may instead be included in the above described numerator, to the extent permitted by Treasury Regulation Section 1.401(m)-2(a)(6). To be considered as contributed for a given Plan Year for purposes of inclusion in a given Average Contribution Percentage, Contributions must be made by the end of the 12-month period immediately following the Plan Year to which the contribution relates. The Plan Administrator may not include Employer Match Contributions in the numerator to the extent such contributions are included in the Actual Deferral Percentage of the Participant, as defined in Section 9.01(a), and may not include Salary Reduction Contributions unless Section 9.02 can be satisfied by both including and excluding such Salary Reduction Contributions. |
For Plan Years beginning on or after January 1, 2006, if one or more other Plans allowing contributions under Code Section 401(k), voluntary after tax contributions or employer match contributions are considered with this Plan as one for purposes of Code Section 401(a)(4) or 410(b), the Contribution Percentages for all Eligible Employees under all such plans shall be determined as if this Plan and all such others were one; provided that for Plan Years beginning on and after January 1, 2006 the requirements of Treasury Regulation section 1.401(m)-1(b)(4)(iii)(B) are met.
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If any Highly Compensated Employee is an eligible to participate in one or more other plans maintained by the same employer, which allow contributions under Code Section 401(k), voluntary after tax contributions or employer match contributions, the Contribution Percentage for that Employee shall be determined as if this Plan and all such other plans were one; if such plans have different plan years, all contributions that are made under all such plans during the plan year being tested shall be aggregated, without regard to the plan years of the other plans. However, for Plan Years beginning before January 1, 2006, if the plans have different plan years, then all such plans having plan years ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be separate if mandatorily disaggregated under the regulations of Code Section 401(m).
For Plan Years beginning January 1, 1999 and thereafter, all eligible Non- Highly Compensated Employees who have not met the age and service requirements of section 410(a)(1)(A), may be disregarded in performing the Average Contribution Percentage Tests as provided in Code Section 401(m)(5)(C).
Notwithstanding the foregoing, in determining a Participants Contribution Percentage Employer Match Contributions shall not include Match Contributions forfeited because they were attributable to Excess 401(k) Contributions or to Excess Elective Deferrals.
(c) | Excess 401(m) Contributions means with respect to any Plan Year, the excess of: (1) the aggregate Contribution Percentage amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year; over (2) the maximum Contribution Percentage amounts permitted by the Average Contribution Percentage test (determined by hypothetically reducing the numerators of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such Percentages). |
10.02 | Average Contribution Percentage Tests. The Average Contribution Percentage for Highly Compensated Employees for each Plan Year compared to the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year must satisfy one of the following tests: |
(i) | The Average Contribution Percentage for Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or |
(ii) | The Average Contribution Percentage for Eligible Employees who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year multiplied |
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by 2, provided that the Average Contribution Percentage for Eligible Employees who are Highly Compensated Employees does not exceed the Average Contribution Percentage for Non-Highly Compensated Employees for the Plan Year by more than two (2) percentage points. |
10.03 | Refund and Forfeiture of Excess 401(m) Contributions. For Plan Years beginning on or after January 1, 2006, notwithstanding any other provision of this Plan except Sections 10.05 and 10.06, Excess 401(m) Contributions adjusted for allocable income (gain or loss), including an adjustment for income for the period between the end of the Plan Year and the date of the distribution (the gap period) shall be distributed to affected Highly Compensated Employees. Notwithstanding the forgoing, for Plan Years beginning after December 31, 2007, the requirement that Excess 401(m) Contributions be adjusted for gap period income shall no longer apply. |
For the purpose of this section, income shall be determined and allocated in accordance with the provisions of Section 9.03 of this Plan, except that such section shall be applied (i) by substituting the term Excess 401(m) Contributions for Excess 401(k) Contributions therein, and (ii) by substituting amounts taken into account for the purposes of the Average Contribution Percentage Tests for amounts taken into account for the purposes of the Average Actual Deferral Percentage Tests.
The Plan Administrator shall make every effort to refund all Excess 401(m) Contributions within 2 1/2 months of the end of the affected Plan Year; however, in no event shall Excess 401(m) Contributions be refunded later than the end of the following Plan Year. Distributions made later than 2 1/2 months after the end of the affected Plan Year will be subject to tax under Code Section 4979.
Notwithstanding any provision of this Plan to the contrary, any Match Contributions plus earnings that are attributable to any Excess 401(m) Contributions that have been refunded shall be forfeited. All such forfeitures shall be treated as arising in the Plan Year after that in which the refunded Excess 401(m) Contributions were made and shall be used to reduce future Employer Match Contributions.
For a period of four 12-month periods beginning from the given Plan Year, or such other period as the Secretary of the Treasury may designate, the Employer shall maintain records showing what contributions and compensation were used to satisfy this Section and Section 10.02.
10.04 | Accounting for Excess 401(m) Contributions. Excess 401(m) Contributions allocated to a Participant shall be forfeited, if forfeitable or distributed on a pro-rata basis from the Participants Voluntary After Tax Contribution Account, 401(k) Account and Match Contribution Account. |
10.05 | Special 401(k) Employer Contributions. For Plan Years beginning on and after January 1, 2006: |
(a) | Correction by Employer Contribution. Notwithstanding any other provisions of this Plan except Section 10.07, in lieu of refunding Excess 401(m) Contributions as provided in Section 10.03, the Employer may make 401(k) Employer Contributions on behalf of Non-Highly Compensated Employees |
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that are sufficient to satisfy the Average Contribution Percentage test. If a failed Average Contribution Percentage Test is to be corrected by making such contributions, then any such corrective contribution made on behalf of any Non-Highly Compensated Employees shall not exceed the targeted contribution limits set forth below. |
(b) | Targeted Matching Contribution Limit. A Match Contribution with respect to a Salary Reduction Contribution for a Plan Year is not taken into account under the Actual Contribution Percentage Test for a NHCE to the extent it exceeds the greatest of: |
(i) | five percent (5%) of the NHCEs Code Section 414(s) compensation for the Plan Year; |
(ii) | the NHCEs Salary Reduction Contributions for the Plan Year; and |
(iii) | the product of two (2) times the Plans representative matching rate and the NHCEs Salary Reduction Contributions for the Plan Year. |
For purposes of this Section, the Plans representative matching rate is the lowest matching rate for any eligible NHCE among a group of NHCEs that consists of half of all eligible NHCEs in the Plan for the Plan Year who make Salary Reduction Contributions for the Plan Year (or, if greater, the lowest matching rate for all eligible NHCEs in the Plan who are employed by the Employer on the last day of the Plan Year and who make Salary Reduction Contributions for the Plan Year).
For purposes of this Section, the matching rate for an Employee generally is the matching contributions made for such Employee divided by the Employees Salary Reduction Contributions for the Plan Year. If the matching rate is not the same for all levels of Salary Reduction Contributions for an Employee, then the Employees matching rate is determined assuming that an Employees Salary Reduction Contributions are equal to six percent (6%) of Code Section 414(s) compensation.
(c) | Targeted QNEC limit. Qualified Nonelective Contributions (as defined in Treasury Regulation section 1.40l(k)-6) cannot be taken into account under the Actual Contribution Percentage Test for a Plan Year for a NHCE to the extent such contributions exceed the product of that NHCEs Code Section 414(s) compensation and the greater of five percent (5%) or two (2) times the Plans representative contribution rate. Any Qualified Nonelective Contribution taken into account under an Actual Deferral Percentage Test under Treasury Regulation section 1.401(k)-2(a)(6) (including the determination of the representative contribution rate for purposes of Treasury Regulation section 1.401(k)-2(a)(6)(iv)(B)) is not permitted to be taken into account for purposes of this Section (including the determination of the representative contribution rate for purposes of subsection (i) below). For purposes of this Section: |
(i) | The Plans representative contribution rate is the lowest applicable contribution rate of any eligible NHCE among a group of eligible NHCEs that consists of half of all eligible NHCEs for the Plan Year (or, if greater, the lowest applicable contribution rate of any eligible NHCE who is in the group of all eligible NHCEs for the Plan Year and who is employed by the Employer on the last day of the Plan Year), and |
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(ii) | The applicable contribution rate for an eligible NHCE is the sum of the matching contributions (as defined in Treasury Regulation section 1.401 (m)-l(a)(2)) taken into account in determining the actual contribution ratio for the eligible NHCE for the Plan Year and the Qualified Nonelective Contributions made for that NHCE for the Plan Year, divided by that NHCEs Code section 414(s) compensation for the Plan Year. |
10.06 | Order of Determinations. The determination of Excess 401(m) Contributions shall be made after first determining Excess Elective Deferrals, and then determining Excess 401(k) Contributions. |
10.07 | Operation in Accordance With Regulations. The determination and treatment of Contribution Percentages and Excess 401(m) Contributions, and the operation of the Average Contribution Percentage Test shall be in accordance with such additional requirements as may be prescribed by the Secretary of the Treasury. |
ARTICLE XI
IN-SERVICE WITHDRAWALS
11.01 | Withdrawals from Tax Deductible Contribution or Voluntary Contribution Accounts. A Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of amounts in his or her Tax Deductible Contribution Account or Voluntary Contribution Account. |
11.02 | Withdrawals from Match Contribution, 401(k) and Non-Elective Employer Contribution Accounts. At any time after a Participant attains Age 59 1/2 or is Totally and Permanently Disabled, a Participant shall have the right to request the Plan Administrator for a withdrawal in cash of amounts from the vested portion of his or her Match Contribution or 401(k) Account. During the period beginning January 1, 2004 and ending April 27, 2010 and on and after the date of the compliance letter issued by the Internal Revenue Service in response to the voluntary correction compliance submission (filed by the Plan Sponsor October 29, 2010) that approves the amendment adding this sentence to the Plan, a Participant who has attained age 591/2 or is Totally and Permanently Disabled may also withdraw any part or all of the vested portion of his or her Non-Elective Employer Contribution Account. For Plan Years |
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beginning after 1988, a Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of Salary Reduction Contributions, with earnings accrued thereon as of December 31, 1988 for financial hardship. For Plan Years beginning after 1991, financial hardship distributions may be increased by 401(k) Employer Contributions plus earnings thereon, as of December 31, 1988. |
During the period beginning on November 10, 2008 and ending May 26, 2010, a Participant shall have the right to request the Plan Administrator for a financial hardship withdrawal in cash which may be funded as provided for above and with amounts from the vested portion of the Participants Match Contribution and Non-Elective Employer Contribution Accounts; provided that in the case of the Participants Match Contribution Account, any such withdrawal shall be limited to amounts from the portion of the Participants Match Contribution Account which is attributable to Match Contributions credited to the Participants Match Contribution Account for the Plan Years ending December 31, 2005, 2006, 2007, and 2008 as adjusted for earnings and losses.
The Plan Administrator shall determine whether an event constitutes a financial hardship. Such determination shall be based upon non-discriminatory rules and procedures, which shall be conclusive and binding upon all persons.
The processing of applications and any distributions of amounts under this Section shall be made as soon as administratively feasible. The amount of a distribution based upon financial hardship, less any income and penalty taxes, cannot exceed the amount required to meet the immediate financial need created by the hardship and not reasonably available from other resources of the Participant.
In determining whether a hardship distribution is permissible the following special rules shall apply:
(i) | The following are the only financial needs considered immediate and heavy: deductible medical expenses (whether incurred or necessary to obtain medical care)(within the meaning of Section 213(d) of the Code) of the Employee, the Employees spouse, children, or dependents (within the meaning of Code Section 152); the purchase (excluding mortgage payments) of a principal residence for the Employee; payment of tuition, related educational fees, and room and board expenses for the next twelve months of post-secondary education for the Employee, the Employees spouse, children or dependents; or the need to prevent the eviction of the Employee from, or a foreclosure on the mortgage of, the Employees principal residence. |
(ii) | A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Employee only if: |
A. | The Employee has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the Employer; |
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B. | All plans maintained by the Employer provide that the Employees Salary Reduction Contributions (and any other Employee contributions) will be suspended for six months (twelve months for hardship distributions made prior to January 1, 2002) after the receipt of the hardship distribution; provided that in the case of an Eligible Participant, Automatic Contributions shall resume at the end of such suspension period subject to the provisions of Section 5.05 of the Plan; |
C. | The distribution, less any income and penalty taxes, is not in excess of the amount of an immediate and heavy financial need; and |
D. | In addition for hardship distributions made before 2002, all plans maintained by the Employer provide that the Employee may not make Salary Reduction Contributions for the Employees taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Section 402(g)(1) of the Code for such taxable year less the amount of such Salary Reduction Contributions for the taxable year of the hardship distribution. |
11.03 | Withdrawals from Regular or Rollover Accounts. Once a Participant has participated in the Plan for two years, at any time thereafter the Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of amounts allocated to his or her Rollover Account. For Plan Years beginning January 1, 1999, and thereafter, the Participant may request a withdrawal of cash amounts allocated to his or her Rollover Account immediately upon the Trustees receipt of such Rollover Contribution. Once a Participants Regular Account is 100% vested the Participant shall have the right at any time to request the Plan Administrator for a withdrawal in cash of amounts allocated to such Account; provided, however, that unless the Participant is over Age 59 1/2 or is Permanently and Totally Disabled, the amount subject to withdrawal shall not include amounts attributable to contributions made to the Regular Account during the two-year period preceding the date of payment. |
11.04 | Rules for In-Service Withdrawals. The Plan Administrator may impose a dollar minimum for partial withdrawals. If the amount in the Participants appropriate Account is less than the minimum, the Plan Administrator shall pay the Participant the entire amount then in the Participants Account from which the withdrawal is to be made if a withdrawal of the entire amount is otherwise permissible under the rules set forth in this Article. If the entire amount cannot be paid under such rules, whatever amount is permissible shall be paid. |
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In the case of a withdrawal from a Rollover Account described in Section 13.03, if necessary to comply with the joint and survivor rules of Code Sections 401(a)(11) and 417, the Plan Administrator shall require the consent of any Participants spouse before making any in-service withdrawal. Any such consent shall satisfy the requirements of Section 13.08.
Any amount to be withdrawn shall be payable as of the Valuation Date coincident with or next following the date which is 15 days following receipt of the written request by the Plan Administrator.
ARTICLE XII
PLAN LOANS
12.01 | General Rules. Upon the application of any Participant, Beneficiary or, for Plan Years beginning prior to January 1, 1999, an alternate payee entitled to Plan benefits pursuant to a Qualified Domestic Relations Order, the Plan Administrator may enter into a loan agreement with such person and authorize the Trustee to make a loan pursuant thereto. The amount of any such loan and the provisions for its repayment shall be in accordance with such non-discriminatory rules and procedures as are adopted by the Plan Administrator and uniformly applied to all borrowers. Such written procedures shall be part of this Plan document. |
Applications for loans will be made to the Plan Administrator using forms provided by the Plan Administrator. Loan applications meeting the requirements of this Article will be granted and all borrowers must execute a promissory note meeting the requirements of this Article.
Plan loans shall be granted on a uniform nondiscriminatory basis, so that they are available to all borrowers on a reasonably equivalent basis and are not made available to highly compensated Employees or officers of the Employer in an amount greater than the amount made available to other Employees. Loans will be made available to Former Participants to the extent required by regulations issued by the Department of Labor under Section 408(b) of ERISA and to other Former Participants as is needed to satisfy Code Section 401(a)(4) and the Regulations promulgated thereunder. Such loans shall be adequately secured, shall bear a reasonable rate of interest and shall provide for periodic repayment over a reasonable period of time, all in accordance with the Plan Administrators rules and procedures for Plan loans.
To the extent required under Code Sections 401(a)(11) and 417 and the Regulations promulgated thereunder, a Participant must obtain the consent of his or her spouse, if any, within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) before the time the Participants Accrued Benefit is used as security for a Plan loan. A new consent is required if the Accrued Benefit is used for any increase in the amount of security. The consent shall comply with the requirements of Section 417 of the Internal Revenue Code, but shall be deemed to meet any requirements contained in such section relating to the consent of any subsequent spouse.
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Tax Deductible Voluntary Contributions, plus earnings thereon, may not be used as security for Plan loans.
The Plan Administrator may not require a minimum loan amount greater than $1,000.
No loan shall be made to the extent such loan when added to the outstanding balance of all other loans to the borrower would exceed one-half ( 1/2) of the present value of the nonforfeitable Accrued Benefit of the borrower under the Plan (but not more than $50,000 reduced by the difference between the highest outstanding balance during the previous 365 days and the current outstanding balance).
For purposes of calculating the above limitations, all loans and accrued benefits from all plans of the Employer and other members of a group of employers described in Code Sections 414(b), (c) and (m) are aggregated.
The Plan Administrator shall determine a reasonable rate of interest for each loan by identifying the rate(s) charged for similar and equivalent commercial loans by institutions in the business of making loans. No loan shall be granted to any borrower or other person who already has a total of two loans or more outstanding under this Plan or any other plan maintained by the Employer (or five loans outstanding for Plan Years beginning before January 1, 1996) or who is in default on any loan.
The Plan Administrator may direct the Trustee to deduct from a Participants Accounts under the Plan a reasonable fee (as determined by the Committee) to offset the cost of processing and administering the loan.
12.02 | Loan Repayments. The borrower shall repay any loan in accordance with the loan agreement. Loans shall provide for periodic repayment, with payment to be no less frequent than quarterly over a period not to exceed five (5) years; provided, however, that loans used to acquire any dwelling unit which, within a reasonable time, is to be used (determined at the time the loan is made) as a principal residence of a Participant, may provide for periodic repayment, with payment to be no less frequent than quarterly over a reasonable period of time that exceeds five (5) years. |
In the event the loan is not repaid within the time period prescribed, the Plan Administrator shall direct the Trustee to deduct the total amount due and payable, plus interest thereon, from distributable amounts in the borrowers Accounts. If distributable amounts in the borrowers Accounts are not sufficient to repay such amount, the Plan Administrator shall enforce the terms of any agreement providing additional security for the loan and shall pursue such other remedies available at law to collect the indebtedness.
In the event of a loan default, attachment of the borrowers Accrued Benefit will not occur until a distributable event occurs in the Plan. Default shall occur upon the earlier of any uncured failure to make payments in accordance with the promissory note or the death of the borrower.
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Loan repayments will be suspended under this Plan as permitted under 414(u)(4) of the Internal Revenue Code.
ARTICLE XIII
RETIREMENT, TERMINATION AND DEATH BENEFITS
13.01 | Retirement or Termination from Service. The Accrued Benefit of each Employee who was hired prior to December 2, 1986 and who became a Participant in the Plan on or prior to January 1, 1989, shall be 100% vested and nonforfeitable at all times. The Regular Account of Employees who are hired on or after December 2, 1986 and who become Participants after December 31, 1988 shall vest according to the following schedule: |
Completed Years of Service |
Vested Percentage |
|||
Less Than 2 |
0 | |||
2 |
25 | |||
3 |
50 | |||
4 |
75 | |||
5 |
100 |
The Match Contribution and Non-Elective Employer Contribution Accounts of each Employee who was hired after December 1, 1986 shall be 50% vested and nonforfeitable after the completion of one Year of Service and 100% vested and nonforfeitable after the completion of two Years of Service. Provided, however, that the Match Contribution and Non-Elective Employer Contribution Accounts of such Employees shall be 100% vested and nonforfeitable at all times for such Employees who completed at least one Hour of Service on or before December 31, 2004.
Any amendment to the above schedule shall comply with the requirements of Section 19.03 of the Plan.
Notwithstanding the foregoing, each actively employed Participants Accrued Benefit shall become 100% vested and nonforfeitable when the Participant attains his or her Normal Retirement Age, dies, or becomes Totally and Permanently Disabled.
The Salary Reduction Contributions, Employer Match Contributions contributed to the Plan for Plan Years commencing prior to January 1, 2005, 401(k) Employer Contributions, Tax Deductible Contributions and Voluntary After-Tax Contributions of all Participants, plus earnings thereon, shall be 100% vested and nonforfeitable at all times.
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Upon a Participants attainment of his or her Normal Retirement Age or termination of employment, the Participant shall be entitled to a benefit that can be provided by the value of his or her vested Accrued Benefit in accordance with the further provisions of this Article.
The Plan Administrator shall notify the Trustee when the Normal Retirement Age or termination of employment of each Participant shall occur and shall also advise the Trustee as to the manner in which retirement or termination benefits are to be distributed to a Participant, subject to the provisions of this Article. Upon receipt of such notification and subject to the other provisions of this Article, the Trustee shall take such action as may be necessary in order to distribute the Participants vested Accrued Benefit.
For Plan Years beginning on or after January 1, 2006, a Participant whose employment status changes from that of a common law employee to that of a leased employee within the meaning of Code Section 414(n) shall not be considered to have a severance from employment for the purposes of this section and this Article of the Plan (unless the safe harbor plan requirements described in Code Section 414(n)(5) are met).
13.02 | Late Retirement Benefits. If a Participant shall continue in active employment following his or her Normal Retirement Age, he or she shall continue to participate under the Plan and Trust. Except as provided in Section 13.06, upon actual retirement such Participant shall be entitled to a benefit that can be provided by the value of his or her Accrued Benefit. Late Retirement benefits shall be distributed in accordance with the further provisions of this Article. |
13.03 | Death Benefits. If a Participant or Former Participant shall die prior to the commencement of any benefits otherwise provided under this Article XIII, except as provided below, his or her Beneficiary shall be entitled to a lump sum death benefit equal to the amount credited to the Participants Account as of the date the Plan Administrator receives due proof of the Participants death. In lieu of receiving benefits in a lump sum, a Beneficiary may elect to receive benefits under any option described in Section 13.06; provided that effective January 1, 2011, in lieu of receiving a lump sum death benefit, and except with respect to amounts held in a Rollover Account as described below in this Section, the Beneficiary of a Participant may only elect to receive benefits under the installment payment option described in Section 13.06. |
Notwithstanding anything in the Plan to the contrary, if a Participant or Former Participant is married on the date of his or her death, Plan pre-retirement death benefits will be paid to the Participants or Former Participants then spouse unless such spouse has consented to payment to another Beneficiary, as provided in Section 13.08.
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Notwithstanding the first paragraph, if a Rollover Account is being maintained for a married Participant who dies prior to the commencement of Plan benefits and if any portion of the amount in the Rollover Account is attributable to amounts transferred directly (or indirectly from another transferee Plan) to this Plan from a defined benefit pension plan, from a money purchase pension plan or from a stock bonus or profit sharing plan which would otherwise provide for a life annuity form of payment to the Participant, the amount in the Rollover Account will be used to purchase a life annuity for the Participants spouse unless the Participant has requested that the Rollover Account be distributed in a different form or be paid to another Beneficiary. Any such request must be made during the election period, which shall begin on the first day of the Plan Year in which the Participant attains Age 35 and shall end on the date of the Participants death. If a Participant severs employment prior to the first day of the Plan Year in which Age 35 is attained, with respect to the value of the Rollover Account as of the date of separation, the election period shall begin on the date of separation. Any such request must be consented to by the Participants spouse. To be effective, the spousal consent must meet the requirements of Section 13.08. Any annuity provided with a portion of Participants Rollover Account in accordance with this paragraph shall be payable for the life of the Participants spouse and shall commence on the date the Participant would have attained Age 55 or, if the Participant was over Age 55 on the date of his or her death, such life annuity shall commence immediately. For Plan Years beginning January 1, 1998 and thereafter, at the request of the spouse, such Rollover Account may be used to purchase a life annuity or may be taken in another form allowed under the Plan at an earlier or later commencement date.
If a Participant shall die subsequent to the commencement of any benefit otherwise provided under this Article XIII, the death benefit, if any, shall be determined in accordance with the benefit option in effect for the Participant.
The Plan Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the Accounts of a deceased Participant or a deceased Former Participant, as the Administrator deems necessary. The Administrators determination of death and of the right of any person to receive payment shall be conclusive and binding on all persons.
13.04 | Death Benefits Under USERRA. Effective for deaths occurring on or after January 1, 2007, in the case of a Participant who dies while performing qualified military service as defined in Code Section 414(u), the survivors of the Participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the Plan had the Participant resumed and then terminated employment on account of death. |
13.05 | Designation of Beneficiary. Each Participant shall designate his or her Beneficiary on a form provided by the Plan Administrator, and such designation may include primary and contingent beneficiaries; provided, however, that if a Participant or Former Participant is married on the date of his or her death, the Participants then spouse shall be the Participants Beneficiary unless such spouse consented to the designation of another Beneficiary in accordance with Section 13.08. If a Participant does not designate a Beneficiary and is not married at the date of his or her death, the estate of |
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the Participant shall be deemed to be the designated Beneficiary. For Plan Years beginning on and after January 1, 2008, if a Participant completes or has completed a Beneficiary designation in which the Participant designates his or her spouse as the Beneficiary, and the Participant and the Participants spouse are legally divorced subsequent to the date of such designation, then the designation of such spouse as a Beneficiary hereunder will be deemed null and void unless the Participant, subsequent to the legal divorce, reaffirms the designation by completing a new Beneficiary designation form. |
Effective for distributions made after June 9, 2009, a designated Beneficiary will also include a non-spouse designated Beneficiary. For this purpose, a non-spouse Designated Beneficiary means a Designated Beneficiary other than (i) a surviving spouse (as defined in section 13.08) or (ii) a spouse or former spouse who is an Alternate Payee under a Qualified Domestic Relations Order.
13.06 | Distribution of Benefits. The Plan Administrator shall direct the Trustee to make payment of any benefits provided under this Article XIII upon the event giving rise to distribution of such benefit, or within 60 days thereafter. |
All distributions required under the Plan shall be determined and made in accordance with Code Section 401(a)(9) and Regulations issued thereunder.
Unless the Participant elects otherwise, distribution of benefits will begin no later than the 60th day after the latest of the close of the Plan Year in which:
(i) | the Participant attains Age 65; |
(ii) | occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan; or, |
(iii) | the Participant terminates service with the Employer. |
Notwithstanding the foregoing, the failure of a Participant and spouse to consent to a distribution when a benefit is immediately distributable, within the meaning of Section 13.12 of the Plan, shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section of the Plan. Except as provided in this Article, in no event will benefits begin to be distributed prior to the later of Age 62 or Normal Retirement Age without the consent of the Participant.
Except as provided below and in Sections 13.03, 13.07, 13.11 and 13.12, if benefits become payable to a Participant as a result of termination of employment or retirement, the Participants vested Accrued Benefit shall be distributed by the Trustee in such manner as the Participant shall direct, in accordance with one or more of the options listed below. Provided, however, that a married Participant may not elect an option involving a life contingency without the consent of his or her spouse. To be effective, the spousal consent must meet the requirements of Section 13.08
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Notwithstanding the foregoing, if on the date of severance from employment of a married Participant prior to the attainment of his or her Qualified Early Retirement Age a Rollover Account as described in Section 13.03 is being maintained for the Participant, such Account will remain in force until the Former Participant attains Age 55 when, if the Former Participant is then married, the value of such Rollover Account will be used to purchase a Qualified Joint and Survivor Annuity for the benefit of the Former Participant and his or her then spouse. At any time prior to the date of purchase, the Former Participant may request that his or her Rollover Account be distributed under one or more of the options listed below; provided, however, that if the Former Participant is married on the date of the request, the Former Participants then spouse must consent thereto. To be effective, the spousal consent must meet the requirements of Section 13.08. If a Former Participant who was married on the date of his or her severance from employment is not married at Age 55, at Age 55 the Former Participants Rollover Account (as described in Section 13.03) shall be distributed by the Trustee in such manner as the Former Participant shall direct, in accordance with one or more of the options listed below. If a Former Participant entitled to a deferred benefit pursuant to this paragraph dies prior to Age 55 and prior to commencement of Plan benefits, his or her Beneficiary shall be entitled to a death benefit pursuant to Section 13.03.
Prior to January 1, 2011, if a Qualified Joint and Survivor Annuity is not required under the above rules or pursuant to Section 13.07, a Participants Accrued Benefit shall be distributed by the Trustee in such manner as the Participant shall elect, in accordance with one or more of the following methods of distribution, which may be paid in cash or in kind, or a combination of them:
(i) | One lump sum payment. |
(ii) | An annuity for the life of the Participant. |
(iii) | An annuity for the joint lives of the Participant and his or her spouse with 50%, 66 2/3%, 75% or 100% (whichever is specified when this option is elected) of such amount payable as an annuity for life to the survivor. No further benefits are payable after the death of both the Participant and his or her spouse. |
(iv) | An annuity for the life of the Participant with installment payments for a period certain not longer than the life expectancy of the Participant. |
(v) | Installment payments for a period certain not longer than the life expectancy of the Participant and his or her spouse. |
On and after January 1, 2011, the portion of the Participants Accrued Benefit that is attributable to a Rollover Account as described in Section 13.03 shall be distributed by the Trustee in such manner as the Participant shall elect, in accordance with one or more of the above-described methods of distribution, which may be paid in cash or in kind, or a combination of them; provided that an in-kind distribution shall only be
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available with respect to an annuity contract that is purchased by the Trustee at the time of distribution or shares of common stock of The Hanover Insurance Group that are held in the Participants Account at the time of distribution as represented by the Participants investment in The Employer Stock Fund (defined in Section 16.02 of the Plan).
On and after January 1, 2011, the portion of the Participants Accrued Benefit that is not attributable to a Rollover Account as described in Section 13.03 shall be distributed by the Trustee in such manner as the Participant shall elect, in accordance with one or more of the following methods of distribution, which may be paid in cash or in kind, or a combination of them; provided that an in-kind distribution shall only be available with respect to shares of common stock of The Hanover Insurance Group. Inc. that are held in the Participants Account at the time of distribution as represented by the Participants investment in The Employer Stock Fund (defined in Section 16.02 of the Plan):
(i) | One lump sum payment. |
(ii) | Installment payments for a period certain not longer than the life expectancy of the Participant and his or her spouse. |
All optional forms of benefits shall be actuarially equivalent.
Notwithstanding anything in the Plan to the contrary, any annuity policy which is distributed by the Trustee shall provide by its terms that the same shall not be sold, transferred, assigned, discounted, pledged or encumbered in any way except to or through the insurer, and then only in accordance with a right conferred under the terms of the annuity policy.
Notwithstanding anything in the Plan to the contrary, the entire interest of a Participant must be distributed or begin to be distributed no later than the Participants Required Beginning Date.
The Required Beginning Date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age 70 1/2; provided, however, that a Participant, who is not a Five Percent Owner and who does not retire by the end of the calendar year in which such Participant reaches age 70 1/2, may elect to defer their Required Beginning Date to the first day of April of the calendar year following the calendar year in which the Participant retires. If, after the date of such election, a Participant becomes a Five Percent Owner, the Required Beginning Date is the first day of April following the later of: (i) the calendar year in which the Participant attains age 70 1/2; or (ii) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a Five Percent Owner, or the calendar year in which the Participant retires.
13.07 | Automatic Joint and Survivor Annuity. Notwithstanding anything in Section 13.06 to the contrary, if a Rollover Account as described in Section 13.03 is being maintained for a married Participant and if Plan benefits become payable to such Participant on or |
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after the Participants Qualified Early Retirement Age, such Rollover Account will be used to purchase a Qualified Joint and Survivor Annuity unless the Participant has elected otherwise. To be effective, any election out of a Qualified Joint and Survivor Annuity must be consented to by the Participants spouse at the time Plan benefits become payable. Any election (by a Participant on whose behalf a Rollover Account as described in Section 13.03 is maintained) out of a Qualified Joint and Survivor Annuity must be in writing and may be made during the election period, which shall be the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. |
13.08 | Participant Elections and Spousal Consents. Married Participants may choose a Beneficiary other than their spouse or, in the case of a Rollover Account described in Section 13.03, may choose a form of retirement benefit other than a Qualified Joint and Survivor Annuity. Any Beneficiary designation shall be in accordance with the requirements of Section 13.05. Any election (by a Participant on whose behalf a Rollover Account as described in Section 13.03 is maintained) out of a Qualified Joint and Survivor Annuity must be in writing and may be made during the election period, which shall be the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. To be effective, any designation of a Beneficiary who is not the spouse of the Participant on the date of the Participants death or any such election out of the Qualified Joint and Survivor Annuity must be consented to by Participants spouse. For purposes of this Section the term spouse means the lawful spouse of the Participant on the date of the Participants death or on the date Plan benefits commence, whichever is applicable; provided that a former spouse will be treated in the same manner as a spouse to the extent provided under a Qualified Domestic Relations Order as described in Code Section 414(p). |
To be effective, spousal consent must be in writing on a form furnished by or satisfactory to the Plan Administrator and witnessed by a Plan representative or notary public. Provided, however, spousal consent shall not be required under such circumstances as may be prescribed by the Plan Administrator in accordance with Rules and Regulations promulgated by the Secretary and the Treasury. Any spousal consent will be valid only with respect to the spouse who signs the consent. Additionally, a revocation of an election out of a Qualified Joint and Survivor Annuity may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited.
13.09 | Distribution to a Minor Participant or Beneficiary. In the event a distribution is to be made to a minor, then the Plan Administrator may, in the Administrators sole discretion, direct that such distribution be paid to the legal guardian of the minor, or if none, to a parent of such minor or a responsible adult with whom the minor maintains his or her residence, or to the custodian for such minor under the Uniform Gift to Minors Act, if such is permitted by the laws of the state in which said minor resides. Such a payment to the legal guardian or parent of a minor or to such a custodian shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. |
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13.10 | Location of Participant or Beneficiary Unknown. In the event that all, or any portion, of the distribution payable to a Participant or his or her Beneficiary hereunder shall, at the expiration of five years after it shall become payable, remain unpaid solely by reason of the inability of the Plan Administrator, after sending a registered letter, return receipt requested, to the payees last known address, and after reasonable effort, to ascertain the whereabouts of such Participant or his or her Beneficiary, the amount so distributable shall be forfeited and allocated in accordance with the terms of this Plan. In the event a Participant or Beneficiary is located subsequent to his or her benefit being forfeited, such benefit shall be restored. |
13.11 | Small Balances; Forfeitures; Restoration of Benefits Upon Reemployment. If a Participant terminates from employment and the present value of the Participants vested Accrued Benefit does not exceed (or at the time of any prior distribution did not exceed) $3,500 ($5,000 for periods between January 1, 1998 and March 27, 2005), except as provided in Section 13.14, for distributions made prior to March 28, 2005, the Participant will receive a lump sum distribution of the present value of the entire vested portion of such Accrued Benefit and the non-vested portion will be forfeited and applied to reduce Employer Match Contributions. Provided, however, if a Rollover Account described in Section 13.03 is being maintained for a Participant, no such distribution may be made to the Participant after Age 55 unless the Participant (and the spouse of the Participant) consents in writing to such distribution. For purposes of this paragraph, for terminations occurring at any time (including terminations occurring on or after March 28, 2005), if the value of the Participants vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit. |
If a Participant terminates from employment and the present value of the Participants vested Accrued Benefit exceeds $3,500 ($5,000 for periods between January 1, 1998 and March 27, 2005), or any dollar amount if the distribution would otherwise be made on or after March 28, 2005, the Participants vested Accrued Benefit shall be deferred to the earliest of the Participants death, Total and Permanent Disability or attainment of Normal Retirement Age, at which time such vested benefit shall be payable in accordance with Sections 13.06 and 13.13. Notwithstanding the foregoing, such a Participant may elect to have payments commence at any time after termination in accordance with Section 13.06. Partial distributions of vested benefits will not be permitted except in accordance with Section 13.06. The non-vested portion of the Participants Accrued Benefit shall be forfeited when the Participant incurs five consecutive One Year Breaks in Service or, if earlier, when the Participant or his or her spouse (or surviving spouse) receives a distribution of his or her vested Accrued Benefit.
Notwithstanding the above, the $5,000 amount shall apply to any Participant with a vested Accrued Benefit on or after January 1, 1998 and before March 27, 2005; including those Participants whose vested Accrued Benefit exceeded the prior cash-out amount under the Plan. Further, in determining whether the vested Accrued Benefit exceeds $5,000 for distributions made in accordance with this Section on or after October 17, 2000, the look-back rule shall not apply, except in the case of periodic distributions already in effect.
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Except as provided below, the non-vested portion of the Accrued Benefit of any terminated Participant will be used to reduce Employer Match Contributions for the Plan Year in which the forfeiture occurs and for subsequent Plan Years, if necessary. A Participant who severs employment and who subsequently resumes employment with the Employer will again become a Participant on the entry date determined in accordance with Plan Section 3.01.
If a Former Participant is subsequently reemployed, the following rules shall also be applicable:
(i) | If any Former Participant shall be reemployed by the Employer before incurring five consecutive One Year Breaks in Service, and such Former Participant had received a distribution of his or her vested Accrued Benefit prior to his or her reemployment, his or her forfeited Account balance shall be reinstated if he or she repays the full amount attributable to Employer Contributions which was distributed to him or her, not including, at the Participants option, amounts attributable to any Salary Reduction Contributions. Such repayment must be made by the Former Participant before the date on which the individual incurs five consecutive One Year Breaks in Service following the date of distribution. A Participant who was deemed to have received a distribution of his or her vested amount shall be deemed to have repaid such amount as of the first date on which he or she again becomes a Participant. In the event the Former Participant does repay the full amount distributed to him or her, the forfeited portion of the Participants Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the date of distribution. |
(ii) | Restorations of forfeitures will be made as of the date that the Plan Administrator is notified that the Trustee has received the required repayment. Any forfeiture amount that must be restored to a Participants Account will be taken from any forfeitures that have not yet been applied and, if the amount of forfeitures available for this purpose is insufficient, the Employer will make a timely supplemental contribution of an amount sufficient to enable the Trustee to restore the forfeiture amount to the Participants Account. |
(iii) | If a Former Participant resumes service after incurring five consecutive One Year Breaks in Service, forfeited amounts will not be restored under any circumstances. |
If a Former Participant resumes service before incurring five consecutive One Year Breaks in Service, both the pre-break and post-break service will count in vesting both any restored pre-break and post-break employer-derived Account balance.
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13.12 | Restrictions on Immediate Distributions |
(a) | If the value of a Participants vested Accrued Benefit derived from Employer and Employee contributions exceeds (or at the time of any prior distribution exceeded) $3,500 ($5,000 for Plan Years beginning January 1, 1998 and thereafter) and the Accrued Benefit is immediately distributable, the Participant and the Participants spouse (or where either the Participant or the spouse has died, the survivor) must consent to any distribution of such Accrued Benefit. Notwithstanding the above, in determining whether such consent is necessary, the $5,000 amount shall apply to any Participant with an Accrued Benefit on or after January 1, 1998 and before March 28, 2005, including those Participants whose Accrued Benefit exceeded the prior cash-out amount under the Plan. Further, in determining whether such consent is necessary for distributions on or after October 17, 2000, the look-back rule shall not apply, except in the case of periodic distributions already in effect. |
Except as provided below, the consent of the Participant and the Participants spouse shall be obtained in writing within the 90-day period (180-day period for Plan Years beginning January 1, 2007 and thereafter) ending on the annuity starting date. The annuity starting date is the first day of the first period for which an amount is paid as an annuity or any other form. The Plan Administrator shall notify the Participant and/or the Participants spouse of the right to defer any distribution until the Participants Accrued Benefit is no longer immediately distributable and, effective for Plan Years beginning after December 31, 2006, the consequences of failing to defer receipt of the distribution. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Code Section 417(a)(3), if applicable, and shall be provided no less than 30 days and no more than 90 days (180 days for Plan Years beginning January 1, 2007 and thereafter) prior to the annuity starting date.
However, distribution may commence less than 30 days after the notice described in the preceding sentence is given, provided the distribution is not one to which Code Section 417 applies, the Participant is clearly informed of his or her right to take 30 days after receiving the notice to decide whether or not to elect a distribution (and, if applicable, a particular distribution option), and the Participant, after receiving the notice, affirmatively elects to receive the distribution prior to the expiration of the 30-day minimum period.
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For Plan Years beginning January 1, 1998, and thereafter, if a distribution is one to which Code Sections 411(a)(11)(A) and 417 applies, a Participant may commence receiving a distribution in a form other than a Qualified Joint and Survivor Annuity less than 30 days after receipt of the written explanation described in the preceding paragraph provided: (1) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) a form of distribution other than a Qualified Joint and Survivor Annuity; (2) the Participant is permitted to revoke any affirmative distribution election at least until the Distribution Commencement Date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant; and (3) the Distribution Commencement Date is after the date the written explanation was provided to the Participant. For distributions on or after December 31, 1996, the Distribution Commencement Date may be a date prior to the date the written explanation is provided to the Participant if the distribution does not commence until at least 30 days after such written explanation is provided, subject to the waiver of the 30-day period. For the purposes of this paragraph, the Distribution Commencement Date is the date a Participant commences distributions from the Plan. If a Participant commences distribution with respect to a portion of his/her Account Balance, a separate Distribution Commencement Date applies to any subsequent distribution. If distribution is made in the form of an annuity, the Distribution Commencement Date is the first day of the first period for which annuity payments are made.
Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the Accrued Benefit is immediately distributable. Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant, only the Participant need consent to the distribution of an Accrued Benefit that is immediately distributable. The consent of the Participant or the Participants spouse shall not be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415. In addition, upon termination of this Plan if the Plan does not offer an annuity option (purchased from a commercial provider) and if the Employer or any entity within the same controlled group as the Employer does not maintain another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)), the Participants Accrued Benefit may, without the Participants consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) then the Participants Accrued Benefit will be transferred, without the Participants consent, to the other plan if the Participant does not consent to an immediate distribution.
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An Accrued Benefit is immediately distributable if any part of the Accrued Benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or age 62.
13.13 | Rollovers to Other Qualified Plans. |
(a) | Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributees election under this Article, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. |
(b) | Definitions. |
(i) | Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributees designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); any hardship distribution described in Code Section 401(k)(2)(B)(i)(iv) received after December 31, 1998; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and any other distribution(s) that is reasonably expected to total less than $200 during a year. For Plan Years beginning on and after January 1, 2008, a portion of a distribution shall not fail to be an Eligible Rollover Distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, effective January 1, 2007, such portion may be transferred only to an individual retirement account or individual retirement annuity described in Code section 408(a) or Code Section 408(b), or to a qualified plan described in Code Section 401(a) or Code Section 403(a), or to an annuity contract described in Code Section 403(b), which plan or contract agrees to separately account for amounts so transferred, including separate accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible. Effective January 1, 2008, such portion may also be transferred to a Roth IRA, provided that for amounts transferred in 2008 or in 2009, the same income and tax filing restrictions that apply to a rollover from a traditional IRA to a Roth IRA are complied with by the distributee. |
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(ii) | Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified Plan described in Code Section 401(a), that accepts the distributees eligible rollover distribution. Effective for Plan Years beginning on and after January 1, 2006, eligible Retirement Plan also means an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b), which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan. For Eligible Rollover Distributions made after December 31, 2007, an Eligible Retirement Plan shall also include a Roth individual retirement account as described in Section 408A of the Code, provided that for Eligible Rollover Distributions made in 2008 or in 2009, the same income and tax filing status restrictions that apply to a rollover from a traditional IRA into a Roth IRA, will also apply to rollovers to a Roth IRA. |
(iii) | Distributee: A distributee includes an Employee or former Employee. In addition, the Employees or former Employees surviving spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. |
(iv) | Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. |
(c) | For distributions after June 9, 2009, a non-spouse Beneficiary who is a designated beneficiary under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (direct rollover), may roll over all or any portion of his or her distribution to an individual retirement account the Beneficiary establishes for purposes of receiving the distribution. In order to be able to roll over the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution. |
Although a non-spouse Beneficiary may roll over directly a distribution as provided in above, any distribution made prior to January 1, 2010 is not subject to the direct rollover requirements of Code 401(a)(31) (including Code Section 401(a)(31)(B), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c)). If a non-spouse Beneficiary receives a distribution from the Plan, the distribution is not eligible for a 60-day rollover.
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If the Participants named Beneficiary is a trust, the Plan may make a direct rollover to an individual retirement account on behalf of the trust, provided the trust satisfies the requirements to be a designated beneficiary within the meaning of Code Section 401(a)(9)(E).
A non-spouse Beneficiary may not roll over an amount which is a required minimum distribution, as determined under applicable Treasury Regulations and other Internal Revenue Service guidance. If the Participant dies before his or her required beginning date and the non-spouse Beneficiary rolls over to an IRA the maximum amount eligible for rollover, the Beneficiary may elect to use either the 5-year rule or the life expectancy rule, pursuant to Treasury Regulation Section 1.401(a)(9)-3, A-4(c), in determining the required minimum distributions from the IRA that receives the non-spouse Beneficiarys distribution.
13.14 | Payment under Qualified Domestic Relations Orders. Notwithstanding any provisions of the Plan to the contrary, if there is entered any Qualified Domestic Relations Order that affects the payment of benefits hereunder, such benefits shall be paid in accordance with the applicable requirements of such Order, provided that such Order (i) does not require the Plan to provide any type or form of benefits, or any option, that is not otherwise provided hereunder, (ii) does not require the Plan to provide increased benefits, and (iii) does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a Qualified Domestic Relations Order. |
To the extent required or permitted by any such Order, at any time on or after the date the Plan Administrator has determined that the Order is a Qualified Domestic Relations Order, the alternate payee shall have the right to request the Plan Administrator to commence distribution of benefits under the Plan regardless of whether the Participant is otherwise entitled to a distribution at such time under the Plan. Except as specifically provided in a Qualified Domestic Relations Order, amounts distributed under this section shall be taken pro rata from the investment options in which each of the Participants Accounts is invested. The Plan Administrator shall establish reasonable procedures to determine whether an order or other decree is a Qualified Domestic Relations Order, and to administer distributions under such orders.
13.15 | Notwithstanding anything in the Plan to the contrary, effective January 1, 2002, for purposes of computing the value of involuntary distributions of vested Accrued Benefits of $5,000 or less, the value of a Participants nonforfeitable Account balances shall be determined without regard to that portion of the Account balances that are attributable to Rollover Contributions (and earnings allocable thereto) within the meaning of Code Sections 402(c)(4), 403(a)(4), 403(b)(8), 408(d)(3) and 457(e)(16). If the value of the Participants nonforfeitable Account balances as so determined is $5,000 or less, for distributions made prior to March 28, 2005, the Plan shall distribute the Participants entire vested Account balances as soon as administratively feasible. |
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13.16 | USERRA. For years beginning after December 31, 2008, the following rules shall apply: |
(a) | Severance from Employment. An individual shall be treated as having been severed from employment for purposes of Code Section 401(k)(2)(B)(i)(I) during any period the individual is performing service in the uniformed services described in Code Section 3401(h)(2)(A). If an individual performing such service in the uniformed services elects to receive a distribution by reason of severance from employment, the individual may not make a Salary Reduction Contribution or other Employee contribution during the 6-month period beginning on the date of the distribution. |
(b) | Qualified Reservist Distribution under USERRA. A Participant who is ordered or called to active duty may take a Qualified Reservist Distribution if the following are satisfied: |
(1) | the distribution consists solely of elective deferrals (Salary Reduction Contributions); |
(2) | the Participant was ordered or called to active duty for a period in excess of one hundred and seventy nine (179) days or for an indefinite period; and |
(3) | the distribution from the Plan is made during the period which begins on the date of such order or call and ends at the close of the active duty period. |
The ten percent (10%) early withdrawal penalty tax will not apply to a qualified reservist distribution, which meets the requirements stated above.
ARTICLE XIV
PLAN FIDUCIARY RESPONSIBILITIES
14.01 | Plan Fiduciaries. The Plan Fiduciaries shall be: |
(i) | the Trustee(s) of the Plan; |
(ii) | the Plan Administrator; and |
(iii) | such other person or persons as may be designated by the Plan Administrator in accordance with the provisions of this Article XIV. |
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14.02 | General Fiduciary Duties. Each Plan Fiduciary shall discharge his or her duties solely in the interest of the Participants and their Beneficiaries and act: |
(i) | for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan; |
(ii) | with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; |
(iii) | by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so, if the Fiduciary has the responsibility to invest plan assets; and |
(iv) | in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with the provisions of current laws and regulations. |
Each Plan Fiduciary shall perform the duties specifically assigned to him or her. No Plan Fiduciary shall have any responsibility for the performance or non-performance of any duties not specifically allocated to him or her.
14.03 | Duties of the Trustee(s). The specific responsibilities and duties of the Trustee(s) are set forth in the Trust Indenture between the Employer and the Trustee(s). In general the Trustee(s) shall: |
(i) | invest Plan assets, subject to directions from the Plan Administrator or from any duly appointed investment manager; |
(ii) | maintain adequate records of receipts, disbursements, and other transactions involving the Plan; and |
(iii) | prepare such reports, statements, tax returns and other forms as may be required under the Trust Indenture or applicable laws and regulations. |
14.04 | Powers and Duties of the Plan Administrator. The Plan Administrator is the Benefits Committee. The Plan Administrator shall have the power, discretionary authority, and duty to interpret the provisions of the Plan and to make all decisions and take all actions that shall be necessary or proper in order to carry out the provisions of the Plan. Without limiting the generality of the foregoing, the Plan Administrator shall: |
(i) | monitor compliance with the provisions of ERISA and other applicable laws with respect to the Plan; |
(ii) | establish an investment policy and funding method consistent with objectives of the Plan and with the requirements of applicable laws and regulations; |
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(iii) | invest Plan assets except to the extent that the Plan Administrator has delegated such investment duties to an investment manager; |
(iv) | evaluate from time to time investment policy and the performance of any investment manager or investment advisor appointed by it; |
(v) | interpret and construe the Plan in order to resolve any ambiguities therein; |
(vi) | determine all questions concerning the eligibility of any person to participate in the Plan, the right to and the amount of any benefit payable under the Plan to or on behalf of an individual and the date on which any individual ceases to be a Participant, with any such determination to be conclusively binding and final, to the extent permitted by applicable law, upon all persons interested or claiming an interest in the Plan; |
(vii) | establish guidelines as required for the orderly and uniform administration of the Plan; |
(viii) | exercise overall control of the operation and administration of the Plan in matters not allocated to some other Fiduciary by the terms of this Plan; |
(ix) | administer the Plan on a day-to-day basis in accordance with the provisions of this Plan and all other pertinent documents; |
(x) | retain and maintain Plan records, including Participant census data, participation dates, compensation records, and such other records necessary or desirable for proper Plan administration; |
(xi) | prepare and arrange for delivery to Participants of such summaries, descriptions, announcements and reports as are required to be given to Participants under applicable laws and regulations; |
(xii) | file with the U.S. Department of Labor, the Internal Revenue Service and other regulatory agencies on a timely basis all required reports, forms and other documents; |
(xiii) | prepare and furnish to the Trustee(s) sufficient records and data to enable the Trustee(s) to properly perform its obligations under the Trust Indenture; and |
(xiv) | to take appropriate actions required to correct any errors made in determining the eligibility of any Employee for benefits under the Plan or the amount of benefits payable under the Plan and in correcting any error made in computing the benefits of any Participant or Beneficiary, the Plan Administrator may make equitable adjustments (an increase or decrease) in the amount of any future benefits payable under the Plan, including the recovery of any overpayment of benefits paid from the Plan as provided in Treasury Regulation Section 1.401(a)-13(c)(2)(iii). |
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The Plan Administrator may appoint or employ such advisers or assistants as the Plan Administrator deems necessary and may delegate to any one or more of its members any responsibility it may have under the Plan or designate any other person or persons to carry out any responsibility it may have under the Plan.
Notwithstanding any provisions elsewhere to the contrary, the Plan Administrator shall have total discretion to fulfill the above responsibilities as the Plan Administrator sees fit on a uniform and consistent basis and as the Plan Administrator believes a prudent person acting in a like capacity and familiar with such matters would do.
14.05 | Designation of Fiduciaries. The Plan Administrator shall have the authority to appoint and remove Trustee(s) in accordance with the Trust Indenture. The Plan Administrator may appoint and remove an investment manager and delegate to said investment manager power to manage, acquire or dispose of any assets of the Plan. |
While there is an investment manager, the Plan Administrator shall have no obligation under this Plan with regard to the performance or non-performance of the duties delegated to the investment manager.
The Plan Administrator shall appoint all other Fiduciaries of this Plan. In making its appointment or delegation of authority, the Plan Administrator may designate all of the responsibilities to one person or it may allocate the responsibilities, on a continuing basis or on an ad hoc basis, to one or more individuals either jointly or severally. No individual named a Fiduciary shall have any responsibility for the performance or non-performance of any responsibilities or duties not allocated to him or her.
The appointing authority of a Fiduciary shall periodically, but not less frequently than annually, review the performance of each fiduciary appointed in order to carry out the general fiduciary duties specified in Section 14.02 and, where appropriate, take or recommend remedial action.
14.06 | Delegation of Duties by a Fiduciary. Except as provided in this Plan or in the appointment as a Fiduciary, no Plan Fiduciary may delegate his or her fiduciary responsibilities. If authorized by the appointing authority, a Fiduciary may appoint such agents as may be deemed necessary and delegate to such agents any non-fiduciary powers or duties, whether ministerial or discretionary. No Fiduciary or agent of a Fiduciary who is a full-time employee of the Employer will receive any compensation from the Plan for his or her services, but the Employer or the Plan shall pay all expenses that such employee reasonably incurs in the discharge of his or her duties. |
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ARTICLE XV
BENEFITS COMMITTEE
15.01 | Appointment of Benefits Committee. The Benefits Committee shall consist of three or more members appointed from time to time by the president of the Employer (the President), who shall also designate one of the members as chairman. Each member of the Benefits Committee and its chairman shall serve at the pleasure of the President. |
15.02 | Benefits Committee to Act by Majority Vote, etc. The Benefits Committee shall act by majority vote of all members. All actions, determinations, interpretations and decisions of the Benefits Committee with respect to any matter within their jurisdiction will be conclusive and binding on all persons. Any person may rely conclusively upon any action if certified by the Benefits Committee. |
Notwithstanding the above, a member of the Benefits Committee who is also a Participant shall not vote or act upon any matter relating solely or primarily to him or herself.
15.03 | Records and Reports of the Benefits Committee. The Benefits Committee shall keep a record of all of its proceedings and acts, and shall keep such books of account, records and other data as may be necessary for the proper administration of the Plan and file or deliver to Participants and their Beneficiaries whatever reports are required by any regulatory authority. |
15.04 | Costs and Expenses of Administration. Notwithstanding any provisions of the Plan to the contrary (but subject to the provisions of Section 12.01), all clerical, legal and other expenses of the Plan and the Trust, including Trustees fees, shall be paid by the Plan, except to the extent the Employer elects to pay such amounts; provided, however, that if the Employer pays such amounts it shall be reimbursed by the Trust for such amounts unless the Employers elects not to be so reimbursed. |
15.05 | Indemnification of the Plan Administrator and Assistants. The Employer shall indemnify and defend to the extent permitted under the By-Laws of the Employer any Employee or former Employee (i) who serves or has served as a member of the Benefits Committee, (ii) who has been appointed to assist the Benefits Committee in administering the Plan, or (iii) to whom the Benefits Committee has delegated any of its duties or responsibilities against any liabilities, damages, costs and expenses (including attorneys fees and amounts paid in settlement of any claims approved by the Employer) occasioned by any act or omission to act in connection with the Plan, if such act or omission to act is in good faith and without gross negligence; provided that such Employee or former Employee is not otherwise indemnified or saved harmless under any liability insurance or other indemnification arrangement. |
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ARTICLE XVI
INVESTMENT OF THE TRUST FUND
16.01 | In General. Subject to the direction of the Plan Administrator or any duly appointed investment manager in accordance with Section 14.05, the Trustee shall receive all contributions to the Trust and shall hold, invest and control the whole or any part of the assets in accordance with the provisions of the annexed Trust Indenture. |
16.02 | Investment of the Trust Fund. In order to provide retirement and other benefits for Plan Participants and their Beneficiaries, the Trustee shall invest Plan assets in one or more permissible investments specified in the Trust Indenture (Permissible Investments) and in such collective investment trusts or group trusts that may be established for the primary objective of investing in securities issued by The Hanover Insurance Group, Inc., which investments shall be considered as investments in qualifying employer securities as defined in Section 407(d) of the Employee Retirement Income Security Act of 1974, as amended. Except as otherwise provided in this Section, such Permissible Investments shall include The Hanover Insurance Group Company Stock Fund, a group trust established for the purposes of investing in the common stock of The Hanover Insurance Group. Inc. (The Employer Stock Fund). Notwithstanding anything else in the Plan to the contrary, after the close of trading on November 2, 2009, the Trustee shall not invest any Plan assets to acquire an interest in The Employer Stock Fund for or on behalf of a Participant. Notwithstanding anything else in the Plan to the contrary, effective after the close of trading on December 30, 2011, the Employer Stock Fund shall automatically stop being offered as a Permissible Investment under the Plan and shall he liquidated. |
All collective investment trusts and group trusts shall also conform to the terms of the Plan.
This Plan is intended to comply with the requirements of Section 404(c) of ERISA. Each Participant is responsible and has sole discretion to give directions to the Trustee in such form as the Trustee may require concerning the investment of his or her Accrued Benefit in one or more of the Permissible Investments, which directions must be followed by the Trustee, subject to the restriction contained above restricting investments in The Employer Stock Fund. The designation by a Participant of the allocation of his Accrued Benefit among the Permissible Investments may be made from time to time, with such frequency and in accordance with such procedures as are established and set forth in the Trust Indenture and applied in a uniform nondiscriminatory manner provided, however, that notwithstanding the foregoing, effective at the close of trading on November 2, 2009, a Participant shall not designate an increase to the allocation of his Accrued Benefit in The Employer Stock Fund as that allocation existed at the close of trading on November 2, 2009. Any such procedure shall he communicated to the Participants and designed with the intention of permitting the Participants to exercise control over the assets in their respective accounts within the meaning of Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.
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Notwithstanding anything else in the Plan to the contrary, if and to the extent a Participant has assets invested in The Employer Stock Fund as of the close of trading on November 2, 2009, such Participant shall be provided an opportunity before the close of trading on December 30, 2011 to give directions to the Trustee to transfer such assets out of the Employer Stock Fund and into another Permissible Investment. Notwithstanding anything in the Plan to the contrary, if and to the extent that (i) a Participant fails to designate an allocation of his Accrued Benefit, in whole or in part, (ii) a Participants attempted allocation into The Employer Stock Fund is disregarded under this Section, or (iii) a Participant has any assets invested in The Employer Stock Fund as of the close of business on December 30, 2011, the Trustee shall allocate and invest such assets in the default investment fund which has been selected by the Plan Administrator; provided that for Plan Years beginning on or after January 1, 2009, the provisions of Section 5.05(f) of the Plan shall apply with respect to a default investment fund selected by the Plan Administrator. Otherwise, the Trustee shall allocate and invest the assets of the Trust in accordance with the Participants selections as provided in this Section, subject to the restriction on investments in The Employer Stock Fund. All voting rights with respect to a Participants investment in The Employer Stock Fund shall be the responsibility of that Participant, and the Trustee shall receive direction from the Participant for such voting rights.
Neither the Plan Administrator, the Trustee, the Employer nor any other person shall be under any duty to question any investment, voting or other direction of the Participant or make any suggestions to the Participant in connection therewith, and the Trustee shall comply as promptly as practicable with directions given by the Participant hereunder, except, notwithstanding anything in the Plan to the contrary, and effective at the close of trading on November 2, 2009, directions to invest in The Employer Stock Fund. All such directions may be of continuing nature or otherwise and may be revoked by the Participant at any time in such form as the Trustee may require. Neither the Plan Administrator, the Trustee, the Employer nor any other person shall be responsible or liable for any costs losses or expenses which may arise or result from or be related to the compliance or refusal or failure to comply with any directions from the Participant. The Trustee may refuse to comply with any direction from the Participant in the event the Trustee, in its sole or absolute discretion, deems such direction improper by virtue of applicable law or regulations or as may be necessary or appropriate, in the sole discretion of the Trustee, to prevent future investments by the Participant in The Employer Stock Fund, effective at the close of trading on November 2, 2009. For purposes of this Section, all references to Participant shall include all Beneficiaries of Participants who are deceased and any Alternate Payees under a Qualified Domestic Relations Order, as provided for in Section 19.01.
16.03 | Default Investment. |
(a) | General Rules. |
(i) | Qualified Default Investment Alternative. If a Participant or Beneficiary has the opportunity to direct the investment of the assets in his or her Account (but does not direct the investment of such assets), then such assets in his or her Account will be invested in a Qualified Default Investment Alternative. |
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(ii) | Transfer from Qualified Default Investment Alternative. Any Participant or Beneficiary on whose behalf assets are invested in a Qualified Default Investment Alternative may transfer, in whole or in part, such assets to any other investment alternative available under the Plan with a frequency consistent with that afforded to a Participant or Beneficiary who elected to invest in the Qualified Default Investment Alternative, but not less frequently than once within any 3-month period. |
(iii) | No Fees during First 90 Days. Any Participants or Beneficiarys election to make such transfer from the Qualified Default Investment Alternative, or a Permissible Withdrawal (by any Eligible Participant who is enrolled in the Automatic Contribution Arrangement prior to January 1, 2011), or other first investment in a Qualified Default Investment Alternative on behalf of a Participant or Beneficiary, will not be subject to any restrictions, fees or expenses (including surrender charges, liquidation or exchange fees, redemption fees and similar expenses charged in connection with the liquidation of, or transfer from, the investment), except as permitted in Department of Labor Regulation Section 2550.404c5(c)(5)(ii)(B). |
(iv) | Limited Fees after First 90 Days. Following the end of the 90-day period described in paragraph (iii), any transfer described in paragraph (ii) above or Permissible Withdrawal (by any Eligible Participant who is enrolled in the Automatic Contribution Arrangement prior to January 1, 2011), shall not be subject to any restrictions, fees or expenses not otherwise applicable to a Participant or Beneficiary who elected to invest in that Qualified Default Investment Alternative. |
(v) | Materials Must Be Provided. A Plan fiduciary shall provide to a Participant or Beneficiary the materials set forth in Department of Labor Regulation Section 2550.404c-1(b)(2)(i)(B)(1)(viii) and (ix) and Department of Labor Regulation Section 404c-1(b)(2)(i)(B)(2) relating to a Participants or Beneficiarys investment in a Qualified Default Investment Alternative. |
(b) | Notice Requirements. The following provisions apply to the notice required by a Qualified Default Investment Alternative: |
(i) | Manner. Such notice will be written in a manner calculated to be understood by the average Plan Participant. |
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(ii) | Content. Such notice will contain the following: |
A. | A description of the circumstances under which assets in the individual account of a Participant or Beneficiary may be invested on behalf of the Participant or Beneficiary in a Qualified Default Investment Alternative; and, if applicable, an explanation of the circumstances under which Automatic Contributions will be made on behalf of a Participant, the percentage of Compensation that such Automatic Contributions represent, and the right of the Participant to elect not to have such made on the Participants behalf (or to elect to have Salary Reduction Contributions made at a different percentage); |
B. | An explanation of the right of Participants and Beneficiaries to direct the investment of assets in their individual accounts; |
C. | A description of the Qualified Default Investment Alternative, including a description of the investment objectives, risk and return characteristics (if applicable), and fees and expenses attendant to the Qualified Default Investment Alternative; |
D. | A description of the right of the Participants and Beneficiaries on whose behalf assets are invested in a Qualified Default Investment Alternative to direct the investment of those assets to any other investment alternative under the Plan, including a description of any applicable restrictions, fees or expenses in connection with such transfer; and |
E. | An explanation of where the Participants and Beneficiaries can obtain investment information concerning the other investment alternatives available under the Plan. |
(iii) | Timing. The Participant or Beneficiary on whose behalf an investment in a Qualified Default Investment Alternative may be made must be furnished such notice during the following periods: (1) At least 30 days in advance of the Participants eligibility to participate in the Plan, or at least 30 days in advance of the date of any first investment in a Qualified Default Investment Alternative on behalf of a Participant or Beneficiary; and (2) Within a reasonable period of time of at least 30 days in advance of each subsequent Plan Year. |
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ARTICLE XVII
CLAIMS PROCEDURE
17.01 | Claims Fiduciary. The Plan Administrator will act as Claims Fiduciary except to the extent that the Plan Administrator has delegated the function to some other person or persons, committee or entity. |
Notwithstanding any provision elsewhere to be contrary, the Claims Fiduciaries shall have total discretion to fulfill their fiduciary duties as they see fit on a uniform and consistent basis as they believe a prudent person acting in a like capacity and familiar with such matters would do.
17.02 | Claims for Benefits. Claims for benefits under the Plan may be filed with the Plan Administrator on forms supplied by the Employer. For the purpose of this procedure, claim means a request for a Plan benefit by a Participant or a Beneficiary of a Participant. If the basis of the claim includes documentation not a part of the records of the Plan or of the Employer, all such documentation must be included with the claim. |
17.03 | Notice of Denial of Claim. If a claim is wholly or partially denied, the Plan Administrator shall notify the claimant of the denial of the claim within a reasonable period of time. Such notice of denial (i) shall be in writing, (ii) shall be written in a manner calculated to be understood by the claimant, and (iii) shall contain (A) the specific reason or reasons for denial of the claim, (B) a specific reference to the pertinent Plan provisions upon which the denial is based, (C) a description of any additional material or information necessary for the claimant to perfect the claim, along with an explanation why such material or information is necessary, and (D) an explanation of the Plans claim review procedure. Unless special circumstances require an extension of time for processing the claim, the Plan Administrator shall notify the claimant of the claim denial no later than 90 days after receipt of the claim. If such an extension is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. The extension notice shall indicate the special circumstances requiring the extension of time and the date by which the Plan Administrator expects to render the final decision. |
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17.04 | Request for Review of Denial of Claim. Within 120 days of the receipt of the claimant of the written notice of the denial of the claim, or such later time as shall be deemed reasonable taking into account the nature of the benefit subject to the claim and any other attendant circumstances or if the claim has not been granted within a reasonable period of time, the claimant may file a written request with the Plan Administrator to conduct a full and fair review of the denial of the claimants claim for benefits. In connection with the claimants appeal of the denial of his or her benefit, the claimant may review pertinent documents and may submit issues and comments in writing. |
17.05 | Decision on Review of Denial of Claim. The Plan Administrator shall deliver to the claimant a written decision on the claim promptly, but not later than 60 days, after the receipt of the claimants request for review, except that if there are special circumstances, which require an extension of time for processing, the aforesaid 60-day period may be extended to 120 days. Such decision shall (i) be written in a manner calculated to be understood by the claimant, (ii) include specific reasons for the decision, and (iii) contain specific references to the pertinent Plan provisions upon which the decision is based. |
ARTICLE XVIII
AMENDMENT AND TERMINATION
18.01 | Employer May Amend Plan. The Plan may be modified or amended in whole or in part by the action of the Board of Directors of the Employer at any time or times, and retroactively if it is deemed advisable by the Directors to conform the Plan to conditions which must be met to qualify the Plan or the Trust Indenture for tax benefits available under the applicable provisions of the Internal Revenue Code as it exists at any such time or times; provided, however, that no such modifications or amendment shall make it possible for any part of the Trust Fund to be used for purposes other than the exclusive benefit of the Participants or their Beneficiaries. |
Notwithstanding the above paragraph, an amendment to the Plan may not decrease a Participants Accrued Benefit, and may not reduce or eliminate a benefit, right or feature of this Plan that is protected under Code Section 411(d)(6) (except as provided for by the Code or the Treasury Regulations issued thereunder) determined immediately prior to the date of adoption, or if later, the effective date of the amendment. Should any early retirement benefit or other optional retirement benefits be changed by amendment to this Plan, all benefits accrued prior to the date of such amendment shall not be reduced.
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18.02 | Employer May Discontinue Plan. The Employer reserves the right at any time to partially terminate the Plan or to terminate the Plan in its entirety. Any such termination or partial termination of such Plan shall become effective immediately upon receipt by the Trustee of a copy of the vote or resolutions of the Directors of the Employer terminating its Plan, certified as true and correct by the clerk or secretary of the Employer. For Plan Years beginning on or after January 1, 2007, a partial plan termination shall be deemed to have occurred based on the facts and circumstances in existence at the time as required by Section 1.411(d)-2(b)(1) of the Treasury Regulations and Revenue Ruling 2007-43. |
In the event of termination of the Plan there shall be a 100% vesting and nonforfeitability of all rights and benefits under this Trust and Plan irrespective of the length of participation under the Plan. However, the Trust shall remain in existence, and all of the provisions of the Trust shall remain in force, which are necessary in the sole opinion of the Trustees other than the provisions relating to Employer and Employee contributions. All of the assets on hand on the date specified in such resolution shall be held, administered and distributed by the Trustees in the manner provided in the Plan, except that a Participant shall have a 100% vested and nonforfeitable interest in his or her Accounts, subject to Section 18.05.
Subject to Section 18.05, any other remaining assets of the Trust Fund shall also be vested in Participants on a pro rata basis based on their respective Accrued Benefit in relation to the aggregate of the Accrued Benefits of all Participants. In the event of a partial termination of Plan, this section will only apply to those Participants who are affected by such partial termination of Plan. In the event that the Board of Directors of the Employer shall decide to terminate completely the Plan and Trust, they shall be terminated as of a date to be specified in certified copies of its resolution to be delivered to the Trustees. Upon termination of the Plan and Trust, after payment of all expenses and proportional adjustment of Participants Accounts to reflect such expenses, fund profits or losses and reallocations to the date of termination, each Participant shall be entitled to receive in cash any amounts then credited to his or her Participants Accounts.
18.03 | Discontinuance of Contributions. In the event that the Employer shall completely discontinue its contributions, each Participant or Beneficiary of a Participant affected shall be fully vested in any values credited to his or her Participants Accounts. All of the assets on hand on the date contributions are discontinued shall be held, administered and distributed by the Trustees in the manner provided in the Plan. |
18.04 | Merger and Consolidation of Plan, Transfer of Plan Assets or Liabilities. In the case of any merger, consolidation with or transfer of assets or liabilities by the Employer to another plan, each Participant in the Plan on the date of the transaction shall have a benefit in the surviving plan (determined as if such plan were terminated immediately after the transaction) at least equal to the benefit to which he or she would have been entitled to receive immediately prior to the transaction if the plan had then terminated. |
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18.05 | Return of Employer Contributions Under Special Circumstances. Notwithstanding any provisions of this Plan to the contrary: |
(a) | Any monies or other Plan assets held in Trust by the Trustee attributable to any contributions made to this Plan by the Employer because of a mistake of fact may be returned to the Employer within one year after the date of contribution. |
(b) | Any monies or other Plan assets held in Trust by the Trustee attributable to any contribution made by the Employer which is conditional on the initial qualification of the Plan, as amended, under the Internal Revenue Code may be refunded to the Employer; provided that: |
(i) | the Plan amendment is submitted to the Internal Revenue Service for qualification within one year from the date the amendment is adopted, and |
(ii) | Such contribution that was made conditioned upon Plan requalification is returned to the Employer within one year after the date the Plans requalification is denied. |
(c) | Any monies or other Plan assets held in Trust by the Trustee attributable to any contribution made by the Employer which is conditional on the deductibility of such contribution may be refunded to the Employer, to the extent the deduction is disallowed under Section 404 of the Code, within one year after the date of such disallowance. |
ARTICLE XIX
MISCELLANEOUS
19.01 | Protection of Employee Interest. No Participant, Beneficiary or other person, including alternate payees entitled to benefits pursuant to a Qualified Domestic Relations Order, shall have the right to assign, pledge, alienate or convey any right, benefit or payment to which he or she shall be entitled in accordance with the provisions of the Plan, and any such attempted assignment, pledge, alienation or conveyance shall be null and void and of no effect. To the extent permitted by law, none of the benefits, payments, proceeds or rights herein created and provided for shall in any way be subject to any debts, contracts or engagements of any Participant, Beneficiary, alternate payee or other person entitled to benefits hereunder, nor to any suits, actions or other judicial process to levy upon or attach the same for the payment thereof. Provided, however, that this provision does not preclude the Plan Administrator from complying with the terms of a Qualified Domestic Relations Order. |
If any Participant shall attempt to alienate or assign his or her interest provided by the Plan, the Plan Administrator shall take such steps as it deems necessary to preserve such interest for the benefit of the Participant or his or her Beneficiary.
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Notwithstanding anything in this Section or Plan to the contrary, the Plan Administrator (i) shall comply with the terms of any Qualified Domestic Relations Order, as described in Section 414(p) of the Internal Revenue Code entered on or after January 1, 1985, and (ii) shall comply with the terms of any domestic relations order entered before January 1, 1985 if the Administrator is paying benefits pursuant to such order on such date.
19.02 | USERRA Compliance. For Plan Years beginning on or after January 1, 2006, notwithstanding any provisions of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with the rules and requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994 and Section 414(u) of the Code. |
19.03 | Amendment to Vesting Schedule. No amendment to the Plan vesting schedule shall deprive a Participant of his or her nonforfeitable rights to benefits accrued to the date of the amendment. Further, if the vesting schedule of the Plan is amended, or the Plan is amended in any way that directly or indirectly affects the computation of a Participants nonforfeitable percentage, each Participant with at least 3 Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment, to have his or her nonforfeitable percentage computed under the Plan without regard to such amendment. The period during which the election may be made shall commence with the date the amendment is adopted and shall end on the latest of: |
(i) | 60 days after the amendment is adopted; |
(ii) | 60 days after the amendment becomes effective; or |
(iii) | 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. |
19.04 | Meaning of Words Used in Plan. Wherever any words are used herein in the masculine gender, they shall be construed as though they were also used in the feminine or neuter gender in all cases where they would so apply. Wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. |
Titles used herein are for general information only and this Plan is not to be construed by reference thereto.
19.05 | Plan Does Not Create Nor Modify Employment Rights. The Plan and Trust shall not be construed as creating or modifying any contracts of employment between the Employer and any Participant. All Employees of the Employer shall be subject to discharge to the same extent that they would have been if the Plan and Trust had never been adopted. |
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19.06 | Massachusetts Law Controls. This Plan shall be governed by the laws of the Commonwealth of Massachusetts to the extent that they are not pre-empted by the laws of the United States of America. |
19.07 | Payments to Come from Trust Fund. All benefits and amounts payable under the Plan or Trust Indenture shall be paid or provided for solely from the Trust Fund, and neither the Employer nor the Plan Administrator assumes any liability or responsibility therefor. |
19.08 | Receipt and Release for Payments. Any payment to any Participant, his or her legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Plan and Trust, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, any of whom may require such Participant, legal representative, Beneficiary, guardian, custodian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. |
19.09 | Electronic Communications. Effective for Plan Years beginning on or after January 1, 2007, any electronic communications made by the Plan to Participants in regards to eligible rollover distribution tax notices, Participant consents to distributions, and tax withholding notices shall comply with the requirements contained in Treasury Regulation Section 1.401(a)-21, in addition to all otherwise applicable requirements relating to the specific communication. |
19.10 | Plan Interpretation. If, due to errors in drafting, any Plan provision does not accurately reflect its intended meaning, as demonstrated by consistent interpretations or other evidence of intent, or as determined by the Plan Administrator in its sole and exclusive judgment, the provision shall be considered ambiguous and shall be interpreted by all Plan fiduciaries in a fashion consistent with its intent, as determined by the Employer in its sole discretion. The Employer shall amend the Plan retroactively to cure any such ambiguity. This section may not be invoked by any person to require the Plan to be interpreted in a manner that is inconsistent with its interpretation by Plan fiduciaries. |
EXECUTED, this 21st day of December, 2011.
The Hanover Insurance Company | ||
By: | /s/ Lorna Stearns | |
Lorna D. Stearns, Vice President |
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APPENDIX A
Special provisions applicable to Employees formerly employed by One Beacon Insurance Group, LTD. or a business entity affiliated with One Beacon Insurance Group, LTD.
Notwithstanding anything elsewhere in the Plan to the contrary, the following special rules shall apply to each person (i) who became employed by the Employer on or after December 3, 2009, in connection with the transactions contemplated by the Renewal Rights and Asset Purchase Agreement dated December 3, 2009 by and among The Hanover Insurance Company, The Hanover Insurance Group, Inc., One Beacon Insurance Group, LTD. and certain business entities affiliated with One Beacon Insurance Group, LTD. and (ii) who was employed by One Beacon Insurance Group, LTD. or a business entity affiliated with One Beacon Insurance Group, LTD. immediately before being employed by the Employer:
1. | For the purposes of vesting, each such person shall be given a past service credit under the Plan for his or her period of employment with One Beacon Insurance Group, LTD. or any business entity affiliated with One Beacon Insurance Group, LTD. from his most recent date of hire as shown on records furnished to the Employer to and including the date on which such person became employed by the Employer to the same extent as though such period were a period of employment with the Employer. |
2. | Any compensation paid to any such person by One Beacon Insurance Group, LTD. or a business entity affiliated with One Beacon Insurance Group, LTD. prior to the date on which such person became employed by the Employer shall NOT be taken into account for the purposes of this Plan. |
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APPENDIX B
Special provisions applicable to Employees formerly employed by (i) Campania Holding Company, Inc. or its direct or indirect subsidiaries (Campania); (ii) Benchmark Professional Insurance Services, Inc. or its direct or indirect subsidiaries (Benchmark); or (iii) Insurance Company of the West or its direct or indirect subsidiaries (ICW).
Notwithstanding anything elsewhere in the Plan to the contrary, the following special rules shall apply to each person who became employed by the Employer:
| On or about January 15, 2010, in connection with the transactions contemplated by the Stock Purchase Agreement by and among The Hanover Insurance Group, Inc., Richard J. OGorman, Katherine Dimitrakopoulos and Benchmark Professional Insurance Services, Inc. dated January 15, 2010, and who was employed by Benchmark immediately before being employed by the Employer; |
| On about March 31, 2010, in connection with the transactions contemplated by the Stock Purchase Agreement by and among The Hanover Insurance Group, Inc., Iona LLC, Campania Holding Company, Inc. and the Principal Members of Iona, LLC, dated January 15, 2010, and who was employed by Campania immediately before being employed by the Employer; or |
| On or after July 8, 2010, in connection with the transactions contemplated by Surety Business Transition Agreement by and among Insurance Company of the West, certain of its insurance company subsidiaries and The Hanover Insurance Company dated July 8, 2010, and who was employed by ICW immediately before being employed by the Employer. |
1. | For the purposes of vesting, each such person shall be given a past service credit under the Plan for his or her period of employment with, as applicable, Campania, Benchmark or ICW, that immediately preceded his or her employment with the Employer, from his or her most recent date of hire as shown on records furnished to the Employer to and including the date on which such person became employed by the Employer to the same extent as though such period were a period of employment with the Employer. |
2. | Any compensation paid to any such person by, as applicable, Campania, Benchmark or ICW prior to the date on which such person became employed by the Employer shall NOT be taken into account for the purposes of this Plan. |
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APPENDIX C
Special provisions applicable to Employees formerly employed by (i) Professionals Direct, Inc. or its direct or indirect subsidiaries (PDI); (ii) Verlan Holdings, Inc. or its direct or indirect subsidiaries (Verlan); or (iii) AIX Holdings, Inc. or its direct or indirect subsidiaries (AIX).
(a) | PDI |
Pursuant to a certain Agreement and Plan of Merger by and among Professionals Direct, Inc., Hanover Acquisition Corp. and The Hanover Insurance Group, Inc. dated June 25, 2007, on September 14, 2007 (the PDI Closing Date), an Affiliate of the Employer acquired Professionals Direct, Inc. and its subsidiaries. Employees of PDI who continued to be employed by PDI after the PDI Closing Date (PDI Closing Hires) remained employees of PDI (now an Affiliate of Employer) on a separate PDI payroll up to and through December 31, 2007 (the PDI Transition Period) when their employment was transferred from PDI to the Employer.
(1) | Notwithstanding anything elsewhere in the Plan to the contrary, the following special rules shall apply to PDI Closing Hires: |
(i) | PDI Closing Hires shall be eligible to participate in the Plan, subject to its provisions, effective as of the PDI Closing Date and to the same extent that such employees would otherwise have been eligible to participate in the Plan had such PDI Closing Hires commenced employment with the Employer on the PDI Closing Date. |
(ii) | For the purposes of vesting, each such person shall be given a past service credit under the Plan for his or her period of employment with PDI that immediately preceded his or her employment with the Employer, from his or her most recent date of hire as shown on records furnished to the Employer to and including the date on which such person became employed by the Employer (or if terminated during the PDI Transition Period, until the date of termination) to the same extent as though such period were a period of employment with the Employer. |
(iii) | Any compensation paid to any such person by PDI prior to the PDI Closing Date shall NOT be taken into account for the purposes of this Plan. |
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(b) | Verlan |
(1) | Notwithstanding anything elsewhere in the Plan to the contrary, the following special rules shall apply to each person who became employed by the Employer effective on or about March 14, 2008, in connection with the transactions contemplated by the Agreement and Plan of Merger by and among The Hanover Insurance Group, Inc., Northdale Acquisition Corp. and Verlan Holdings, Inc. dated January 10, 2008, and who was employed by Verlan immediately before being employed by the Employer; |
(i) | For the purposes of vesting, each such person shall be given a past service credit under the Plan for his or her period of employment with Verlan that immediately preceded his or her employment with the Employer, from his or her most recent date of hire as shown on records furnished to the Employer to and including the date on which such person became employed by the Employer to the same extent as though such period were a period of employment with the Employer. |
(ii) | Any compensation paid to any such person by Verlan prior to the date on which such person became employed by the Employer shall NOT be taken into account for the purposes of this Plan. |
(c) | AIX |
Pursuant to a certain Stock Purchase Agreement by and among AIX Holdings, Inc., certain of its shareholders and The Hanover Insurance Group, Inc. dated August 5, 2008, on November 28, 2008 (the AIX Closing Date), an Affiliate of the Employer acquired AIX Holdings, Inc. and its subsidiaries. Employees of AIX who continued to be employed by AIX after the AIX Closing Date (AIX Closing Hires) remained employees of AIX (now an Affiliate of Employer) on a separate AIX payroll up to and through December 31, 2009 (the AIX Transition Period) when the employment of these employees was transferred from AIX to the Employer. Additionally, those employees hired by AIX during the AIX Transition Period (AIX Transition Hires) also remained employees of AIX on a separate AIX payroll until the expiration of the AIX Transition Period when such employees were transferred from AIX to the Employer.
(1) | Notwithstanding anything elsewhere in the Plan to the contrary, the following special rules shall apply to AIX Closing Hires and AIX Transition Hires: |
(i) | AIX Closing Hires shall be eligible to participate in the Plan, subject to its provisions, effective as of the AIX Closing Date and to the same extent that such employees would otherwise have been eligible to participate in the Plan had such AIX Closing Hires commenced employment with the Employer on the AIX Closing Date. |
(ii) | AIX Transition Hires shall be eligible to participate in the Plan, subject to its provisions, effective as of as their date of hire by AIX and to the same extent that such employees would otherwise have been eligible to participate in the Plan had such AIX Transition Hires commenced employment with the Employer on their date of hire with AIX. |
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(iii) | For the purposes of vesting, each such person shall be given a past service credit under the Plan for his or her period of employment with AIX that immediately preceded his or her employment with the Employer, from his or her most recent date of hire as shown on records furnished to the Employer to and including the date on which such person became employed by the Employer (or if terminated during the AIX Transition Period, until the date of termination) to the same extent as though such period were a period of employment with the Employer. |
(iv) | Any compensation paid to any such person by AIX prior to the AIX Closing Date shall NOT be taken into account for the purposes of this Plan. |
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THE HANOVER INSURANCE GROUP
RETIREMENT SAVINGS PLAN
AMENDMENT
To the Restatement Generally Effective January 1, 2010
THIS AMENDMENT is executed by The Hanover Insurance Company, a New Hampshire corporation (the Company).
WHEREAS, the most recent restatement of The Hanover Insurance Group Retirement Savings Plan (the Plan) is effective January 1, 2010; and
WHEREAS, the Company has reserved the right to amend the Plan any time under Section 18.01 of the Plan; and
WHEREAS, the Company desires to amend the Plan to, among other things, add a Roth feature to the Plan effective January 1, 2011.
NOW, THEREFORE, the Plan is amended effective as of January 1, 2011 except as otherwise specified, as follows:
Insert the following new paragraph at the end of Section 1.03 of the Plan:
Notwithstanding any other provision of this Plan to the contrary, the Effective Date of the provisions of this Plan that relate to Roth Elective Deferrals is January 1, 2011.
Delete the definition of the term Accrued Benefit in Article II of the Plan in its entirety and insert the following new definition in lieu thereof:
Accrued Benefit shall mean the sum of the balances in a Participants 401(k) Account, Roth Elective Deferral Account, Match Contribution Account, Non-Elective Employer Contribution Account, Regular Account, Rollover Account, Tax Deductible Contribution Account and Voluntary Contribution Account.
Delete the definition of the term Automatic Contributions in Article II of the Plan in its entirety and insert the following new definition in lieu thereof:
Automatic Contributions shall mean the Pre-tax Elective Deferrals that result from the operation of this Section 5.05(c) of the Plan.
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Delete the definition of the term Automatic Contribution Arrangement in Article II of the Plan in its entirety and insert the following new definition in lieu thereof:
Automatic Contribution Arrangement shall mean the arrangement set forth in Section 5.05 of the Plan pursuant to which, in the absence of an Affirmative Election, an Employee, who is eligible to participate in the Plan is treated as having elected to direct the Employer to reduce his or her Compensation in order that the Employer may make Pre-tax Elective Deferrals to the Plan on behalf of the Participant equal to a uniform percentage of Compensation.
Delete subparagraph (i) in the second paragraph of Section 2.11(a) of the Plan in its entirety and insert the following new definition in lieu thereof:
(i) | incentive compensation paid to Participants pursuant to the Employers Executive Long Term Performance Unit Plan or pursuant to any similar or successor cash or equity long-term incentive compensation plan; |
Delete the last sentence of the first paragraph of Section 2.11(b) of the Plan in its entirety and insert the following new definition in lieu thereof:
Notwithstanding the foregoing, Compensation for purposes of the Plan shall also include Employee elective deferrals under Code Section 402(g)(3), Roth Elective Deferrals and any amounts contributed or deferred by the Employer at the election of the Employee and not includible in the gross income of the Employee, by reason of Code Sections 125, 132(f)(4), 402(e)(3), 402(h), and 403(b).
Delete paragraph (d)(ii) of Section 2.11 of the Plan in its entirety and insert the following new definition in lieu thereof:
(ii) | Differential Wage Payments. For years beginning after December 31, 2008, (i) an individual receiving a differential wage payment, as defined by Code Section 3401(h)(2), shall be treated as an Employee of the Employer making the payment, (ii) the differential wage payment shall be treated as Compensation for the purposes of Code Section 415(c)(3) and Treasury Regulation section 1.415(c)-2 (e.g., for the purposes of Code Section 415, top-heavy provisions of Code Section 416, determination of highly compensated employees under Code Section 414(q)), and (iii) the Plan shall not be treated as failing to meet the requirements of any provision described in Code Section 414(u)(1)(C) by reason of any contribution or benefit which is based on the differential wage payment. Subparagraph (iii) of the foregoing sentence shall apply only if all Employees of the Employer performing service in the uniformed services described in Code Section 3401(h)(2)(A) are entitled to receive differential wage payments (as defined in Code Section 3401(h)(2)) on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the Employer, to make contributions based on the payments on reasonably equivalent terms (taking into account Code Sections 410(b)(3), (4), and (5)). |
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Delete the definition of the term Employee in Article II of the Plan in its entirety and insert the following new definition in lieu thereof:
Employee shall mean any person reported on the payroll records of the Employer as an Employee who is deemed by the Employer to be a common law Employee. However, the term Employee will not include any individual who is not reported on the payroll records of the Employer or an affiliated Employer as a common law Employee. If such person is later determined by the Employer or by a court or governmental agency to be or to have been an Employee, he or she will only be eligible for participation prospectively and may participate in the Plan as of the next entry date following such determination and after the satisfaction of all other eligibility requirements
Delete definition of the term 401(k) Account in Article II of the Plan in its entirety and insert the following new definition in lieu thereof:
401(k) Account shall mean the account established and maintained for each Participant who has directed the Employer to make Pre-tax Elective Deferral Contributions to the Trust on his or her behalf or for whom the Employer has made 401(k) Employer Contributions to the Trust on his or her behalf, and all earnings and appreciation thereon, less any withdrawals therefrom and any losses and expenses charged thereto.
Insert the following new definitions in Article II of the Plan:
Pre-tax Elective Deferral shall mean a Salary Reduction Contribution that is not includible in the gross income of the Eligible Employee on whose behalf the contribution is made at the time that the deferral is made.
Roth Elective Deferral shall mean a Salary Reduction Contribution that has been irrevocably designated as Roth Elective Deferral by the Participant in his or her Salary Reduction Agreement and that is includible in the Participants gross income for tax purposes at the time the deferral is made pursuant to Code Section 402A and any applicable guidance or regulations issued thereunder. Roth Elective Deferrals may be treated as Catch-Up Contributions. Roth Elective Deferrals shall be maintained in a separate account for each Participant who has directed the Employer to make a Roth Elective Deferral to the Trust.
Roth Elective Deferral Account shall mean the separate account established and maintained for each Participant who has directed the Employer to make a Roth Elective Deferrals to the Trust on his or her behalf to record the contribution and withdrawal of a Participants Roth Elective Deferrals and other adjustments as required by the Plan. No contributions other than designated Roth Elective Deferrals and direct rollover contributions described in Code Section 402A(c)(3) may be allocated to a Roth Elective Deferral Account.
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Delete definition of the term Salary Reduction Agreement in Article II of the Plan in its entirety and insert the following new definition in lieu thereof:
Salary Reduction Agreement shall mean an agreement between the Employer and an Eligible Employee as set forth in Sections 3.01(b) and 5.04 of the Plan pursuant to which the Eligible Employee authorizes the Employer to withhold a specified percentage of his or her Compensation (otherwise payable in cash) for deposit to the Plan on behalf of such Employee.
Delete definition of the term Salary Reduction Contribution in Article II of the Plan in its entirety and insert the following new definition in lieu thereof:
Salary Reduction Contribution shall mean the Pre-tax Elective Deferrals and or Roth Elective Deferrals made by the Employer to the Trust on behalf of an Eligible Employee pursuant to a Salary Reduction Agreement and in accordance with Section 5.04 of the Plan and or an Automatic Contribution made by the Employer on behalf of an Eligible Participant pursuant to the Automatic Contribution Arrangement provisions of Section 5.05 of the Plan.
With respect to any Plan Year the total amount of a Participants Salary Reduction Contributions is the sum of all employer contributions made on behalf of such Participant pursuant to a deferral under any qualified cash or deferred arrangement as described in Code Section 401(k), any Simplified Employee Pension Plan with a cash or deferred arrangement as described in Code Section 408(k)(6), any SIMPLE IRA Plan described in Code Section 408(p), any plan as described under Code Section 501(c)(18), and any Employer contributions made on behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a Salary Deferral Agreement.
Pre-tax Elective Deferrals or Roth Elective Deferrals shall not include any deferrals properly distributed as Excess Annual Additions.
Delete the second paragraph of Section 4.01 of the Plan in its entirety and insert the following new paragraph in lieu thereof:
Salary Reduction Contributions, including Catch-up Contributions described in Code Section 414(v), shall be allocated, as applicable, to a Participants 401(k) Account and or Roth Elective Deferral Account as soon as administratively feasible after being withheld from the Participants Compensation at the earliest date on which such contributions can reasonably be segregated from the Employers general assets but no later than by the 15th business day of the month following the month in which the Salary Reduction Contributions would have otherwise been payable to the Participant.
Delete section 4.04(b) of the Plan in its entirety and insert the following new paragraph in lieu thereof:
(b) | For purposes of the minimum allocations set forth above, the percentage allocated to the Accounts of any Key Employee shall be equal to the ratio of the sum of the Employer Contributions allocated on behalf of such Key Employee divided by the Employees Compensation for the Plan Year (as defined for purposes of Article VII), not in excess of the applicable compensation dollar limitation imposed by Code Section 401(a)(17). |
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Insert the following new paragraph at the end of Section 5.03 of the Plan:
Effective on and after January 1, 2011 the Plan shall accept a direct rollover from another Roth Elective Deferral Account under a retirement plan as described in Code Section 402A(e)(1) in accordance with such uniform administrative procedures as the Plan Administrator shall establish. Notwithstanding the foregoing sentence, an in-plan Roth rollover shall not be permitted under this Plan. Any rollover of designated Roth contributions, as defined in Subsection 6.01(e), shall be subject to the requirements of Code Section 402(c). To the extent the Plan accepts Rollover Contributions of designated Roth contributions, the Plan will separately account for such contributions, including separate accounting for the portion of the Rollover Contribution that is includible in gross income and the portion that is not includible in gross income, if applicable. If the Plan accepts a direct rollover of designated Roth contributions, the Trustee and the Plan Administrator shall be entitled to rely on a statement from the distributing plans administrator identifying (i) the Eligible Employees basis in the rolled over amounts and (ii) the date on which the Eligible Employees 5-taxable-year period of participation (as required under Code Section 402A(d)(2) for a qualified distribution of designated Roth contributions) started under the distributing plan. If the 5-taxable-year period of participation under the distributing plan would end sooner than the Eligible Employees 5-taxable-year period of participation under the Plan, the 5-taxable-year period of participation applicable under the distributing plan shall continue to apply with respect to the Rollover Contribution.
Delete Section 5.04(a) of the Plan in its entirety and insert the following two paragraphs in lieu thereof:
(a) | An Employee who is eligible to participate in the Plan may enter into a Salary Reduction Agreement with the Employer authorizing the Employer to withhold a portion of such Participants Compensation in order to make Salary Reduction Contributions to the Plan, including Catch-up Contributions. The Salary Reduction Agreement shall be made in a form approved by the Plan Administrator (including, if applicable, by means of telephone, computer, or other paperless media). The Compensation of any Eligible Employee electing to make a Salary Reduction Contribution shall be reduced by the whole percentage requested by the Employee; provided, however, that the Plan Administrator shall identify the maximum whole percentage on an annual basis. Any Salary Reduction Agreement shall become effective as soon as administratively feasible after the Employee elects to have his or her Compensation reduced. For Plan Years beginning on or after January 1, 2006, except for occasional, bona fide administrative considerations, Salary Reduction Contributions made pursuant to a Salary Reduction Agreement cannot precede the earlier of (1) the performance of services relating to the contribution and (2) when the compensation that is subject to the election would be currently available to the Participant in the absence of an election to defer. |
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Any such Salary Reduction Contribution shall be credited to the Participants 401(k) Account or Roth Elective Deferral account, whichever is applicable. A Participant may terminate deferrals at any time. A Participant may elect at any time to change or discontinue his or her Salary Reduction Agreement upon notice in accordance with uniform and nondiscriminatory procedures as the Plan Administrator shall adopt and communicate to the Participants. Any such election will be effective as soon as practicable following the receipt of the notification by the Plan Administrator or its delegate in accordance with uniform and nondiscriminatory procedures established and communicated to the Participants. The Plan Administrator may amend or terminate said agreement on notice to the affected Participant, if required to maintain the qualified status of the Plan.
Delete the second paragraph of Section 5.04(b) of the Plan in its entirety and insert the following new paragraph in lieu thereof:
(b) | For Plan Years beginning prior to January 1, 2009, make-up Salary Reduction Contributions made by reason of an Eligible Employees qualified military service under Code section 414(u) shall not be taken into account for any year when calculating an employees Actual Deferral Percentage (under Section 9.01(a)) as provided for in Treasury Regulation section 1.401(k)-2(a)(5)(v) and Match Contributions thereon shall not be taken into account for any year when calculating an employees Average Contribution Percentage (under Section 10.01(a)) as provided for in Treasury Regulation section 1.401(m)-2(a)(5)(vi). |
Delete Section 5.05(c)(i) of the Plan in its entirety and insert the following new section in lieu thereof:
(i) | Automatic Contributions. Except as provided in Section 5.05(d) of the Plan, an Eligible Participant will be treated as having elected to direct the Employer to reduce his or her Compensation in order that the Employer may make Pre-tax Elective Deferrals to the Plan equal to the following uniform percentages of Compensation: |
A. | Initial Period. An Eligible Participant will be treated as having elected to have the Employer make Pre-tax Elective Deferrals to the Plan in an amount equal to 3% of his or her Compensation during the initial period. For this purpose, the initial period begins when the Employee is first subject to the Automatic Contributions default election under this Section 5.05(c)(i) and ends on the last day of the following Plan Year. |
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B. | Subsequent Plan Years. For the three Plan Years immediately following the initial period, an Eligible Participant will be treated as having elected to have the Employer make Pre-tax Elective Deferrals to the Plan in the amounts equal to 4%, 5% and 6% respectively, of his or her Compensation. For all Plan Years thereafter, an Eligible Participant will be treated as having elected to have the Employer make Pre-tax Elective Deferrals to the Plan in the amounts equal to 6% of his or her Compensation. |
C. | Treatment of Rehires. The default percentages of Compensation stated above for the purposes of the Automatic Contributions are based on the date the initial period begins, regardless of whether the Employee continues to be eligible to make Pre-tax Elective Deferrals under the Plan after that date. Thus, the applicable percentage is generally determined based on the number of years since an Automatic Contribution was first made on behalf of an Eligible Participant. However, if Automatic Contributions are not made on behalf of an Eligible Participant for an entire Plan Year (e.g., due to termination of employment), such Eligible Participant shall be treated as having a new initial period for determining the default percentage of Compensation stated above (if Automatic Contributions are to recommence with respect to the Eligible Participant), regardless of what minimum percentage would otherwise apply to that Eligible Participant. |
Delete the first sentence of Section 7.12 of the Plan in its entirety and insert the following new sentence in lieu thereof:
The sum of the following amounts credited to a Participants Accounts for the Limitation Year except as otherwise provided below:
(i) | Employer contributions; |
(ii) | Employee contributions; |
(iii) | forfeitures; and |
(iv) | allocations under a simplified employee pension. |
Delete the last paragraph of Section 7.12 of the Plan in its entirety and insert the following new paragraph in lieu thereof:
Other Amounts. Annual Additions shall not include: (1) The direct transfer of a benefit or employee contributions from a qualified plan to this Plan; (2) Rollover contributions (as described in Code Section 401(a)(31), 402(c)(1), 403(a)(4), 403(b)(8), 408(d)(3), and 457(e)(16)); (3) Repayments of loans made to a Participant from the Plan; (4) Catch-up Contributions; and (5) Repayments of amounts described in Code Section 411(a)(7)(B) (in accordance with Code Section 411(a)(7)(C)) and Code Section 411(a)(3)(D), as well as Employer restorations of benefits that are required pursuant to such repayments, as provide for in Plan Section 13.11.
100
Delete the first paragraph of Section 8.01 of the Plan in its entirety and insert the following new paragraph in lieu thereof:
The Plan Administrator or its agent shall establish a separate recordkeeping account for each Participant showing the fair market value of his or her Plan benefits. Each Participants account may be separated for recordkeeping purposes into the following sub-accounts: 401(k) Account, Roth Elective Deferral Account, Match Contribution Account, Non-Elective Employer Contribution Account, Regular Account, Rollover Account, Tax Deductible Contribution Account and Voluntary Contribution Account and such other accounts as the Plan Administrator shall deem appropriate for each Participant to account for the Participants Accrued Benefit. All contributions by or on behalf of a Participant shall be deposited to the appropriate Account.
Add the following new sentence at the end of Section 9.01(d) of the Plan:
Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participants taxable year. Distribution of Excess Elective Deferrals for a year shall be made first from the Participants 401(k) Account to the extent that Pre-tax Elective Deferrals were made for the year.
Add the following new paragraph after the first paragraph of Section 9.08 of the Plan:
The Plan Administrator may adopt a uniform written administrative policy that permits a Participant (including a Highly Compensated Employee) who has made Salary Reduction Contributions for a year where such contributions include both pre-tax Elective Deferrals and Roth Elective Deferrals to elect whether the Excess Elective Deferrals, are to be attributed to Pre-tax Elective Deferrals or Roth Elective Deferrals or a combination of the two. In the event that no such administrative policy is adopted, Excess Elective Deferrals will be first attributed to Pre-tax Elective Deferrals, and if such pre-tax contributions are not in an amount sufficient to make full correction, will then be attributed to Roth Elective Deferrals.
Delete the title and first sentence of Section 11.02 of the Plan in their entirety and insert the following new title and new first sentence in lieu thereof:
11.02 Withdrawals from Match Contribution, 401(k) Account, Roth Elective Deferral Account, and Non-Elective Employer Contribution Accounts. At any time after a Participant attains Age 59 1/2 or is Totally and Permanently Disabled, a Participant shall have the right to request the Plan Administrator for a withdrawal in cash of amounts from the vested portion of his or her Match Contribution, 401(k) Account, or Roth Elective Deferral Account.
101
Delete the sentence in the first paragraph of Section 11.02 of the Plan beginning For Plan Years beginning after 1988 in its entirety and insert the following new sentence in lieu thereof:
For Plan Years beginning after 1988, an Employee shall have the right at any time to request the Plan Administrator for a withdrawal in cash of Salary Reduction Contributions, with earnings accrued thereon as of December 31, 1988 for financial hardship.
Delete the paragraph in Section 11.02 of the Plan beginning The processing of applications and any distributions of amounts under this Section and insert the following new paragraph in lieu thereof:
The processing of applications and any distributions of amounts under this Section shall be made as soon as administratively feasible. The amount of a distribution based upon financial hardship, less any income and penalty taxes, cannot exceed the amount required to meet the immediate financial need created by the hardship and not reasonably available from other resources of the Employee.
Delete the paragraph in Section 11.02 of the Plan beginning In determining whether a hardship distribution is permissible the following special rules shall apply and insert the following new paragraph in lieu thereof:
In determining whether a hardship distribution is permissible the following special rules shall apply:
(i) | The following are the only financial needs considered immediate and heavy: |
A. | Expenses incurred or necessary for medical care that would be deductible under Code Section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income) of the Employee, his or her spouse, children and other dependents; |
B. | The cost directly related to the purchase (excluding mortgage payments) of the principal residence of the Employee; |
C. | Payment of tuition and related educational expenses (including but not limited to expenses associated with room and board) for up to the next twelve (12) months of post-secondary education for the Employee, his or her spouse, children or other dependents as defined in Code Section 152, without regard to Code Sections 152(b)(1), (b)(2) and (d)(1)(B); |
102
D. | The need to prevent eviction of the Employee, from, or a foreclosure on the mortgage of, the Employees principal residence; |
E. | Effective for the Plan Years commencing on and after January 1, 2012, payments for burial or funeral expenses for the Employees deceased parent, spouse, child or dependent as defined in Code Section 152 without regard to Code Section 152(d)(1)(B); or |
F. | Effective for the Plan Years commencing on and after January 1, 2012, expenses for the repair of damage to the Employees principal residence that would qualify for the casualty deduction under Code Section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income). |
(ii) | A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the Employee only if: |
A. | The Employee has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the Employer; |
B. | All plans maintained by the Employer provide that the Employees Salary Reduction Contributions (and any other Employee contributions) will be suspended for six months (twelve months for hardship distributions made prior to January 1, 2002) after the receipt of the hardship distribution; provided that in the case of any Employee who has made an Affirmative Election, Salary Reduction Contributions, if any, under such an election shall resume at the end of such suspension period and provided further that in the case of an Eligible Participant who has not made an Affirmative Election, Automatic Contributions shall resume at the end of such suspension period subject to the provisions of Section 5.05 of the Plan. |
C. | The distribution, less any income and penalty taxes, is not in excess of the amount of an immediate and heavy financial need; and |
D. | In addition for hardship distributions made before 2002, all plans maintained by the Employer provide that the Employee may not make Salary Reduction Contributions for the Employees taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Section 402(g)(1) of the Code for such taxable year less the amount of such Salary Reduction Contributions for the taxable year of the hardship distribution. |
103
Delete the first sentence of Section 11.04 of the Plan in its entirety and insert the following new sentence in lieu thereof:
The Plan Administrator may impose a dollar minimum for partial withdrawals and may implement on a uniform and nondiscriminatory basis, an ordering rule for in-service withdrawals from a Participants Account.
Delete the fifth paragraph of Section 12.01 of the Plan in its entirety and insert the following new paragraph in lieu thereof:
If the Plan Administrator approves a request for a loan, funds shall be withdrawn from the recordkeeping sub-accounts, including Roth Elective Deferrals, in the order specified in the loan policy provided that Tax Deductible Voluntary Contributions, plus earnings thereon, may not be used as security for Plan loans.
Add the following new sentence at the end of Section 13.04 of the Plan:
Moreover, the Plan will credit the Participants qualified military service as service for vesting purposes, as though the Participant had resumed employment under USERRA immediately prior to the Participants death.
Add the following new paragraph at the end of Section 13.06 of the Plan:
Notwithstanding any provisions of this Plan relating to required minimum distributions under Code section 401(a)(9), a Participant or Beneficiary who would have been required to receive required minimum distributions for 2009 but for the enactment of section 401(a)(9)(H) of the Code (2009 RMDs), and who would have satisfied that requirement by receiving distributions that are equal to the 2009 RMDs will not receive those distributions for 2009 unless the Participant or Beneficiary chooses to receive such distributions. Participants and Beneficiaries described in the preceding sentence will be given the opportunity to elect to receive the distributions described in the preceding sentence.
Insert the following new sentence immediately after the first sentence of the definition of the term, eligible rollover distribution as set forth in Section 13.13 of the Plan:
An eligible rollover distribution also does not include: any corrective distributions of Excess Elective Deferrals or Roth Elective Deferrals under Code Section 402(g), and the income attributable thereto.
104
Delete the definition of the term, Direct Rollover as set forth in Section 13.13 of the Plan in its entirety and insert the following new definition in lieu thereof:
Direct Rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. A Direct Rollover of a distribution from a Roth Elective Deferral Account under this Plan will be made to another Roth Elective Deferral Account under an applicable retirement plan described in Code Section 402A(e)(1) or to a Roth IRA described in Code Section 408A, and only to the extent the rollover is permitted under the rules of Code Section 402(c).
Notwithstanding the provisions of this Plan relating to required minimum distributions under Code Section 401(a)(9), and solely for purposes of applying the direct rollover provisions of the Plan, 2009 RMDs (as defined in section 13.06 of the Plan), but only if paid with an additional amount that is an eligible rollover distribution without regard to IRC §401(a)(9)(H), will be treated as eligible rollover distributions.
Delete the first two paragraphs of Section 13.13(c) of the Plan in their entirety and insert the following new paragraphs in lieu thereof:
For distributions after June 9, 2009, a non-spouse Beneficiary who is a designated beneficiary under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (direct rollover), may roll over all or any portion of his or her distribution to an individual retirement account or a individual retirement annuity as defined in Code Section 408(a) and 408(b) or Roth IRA as defined in Code Section 408A. In order to be able to roll over the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution.
Although a non-spouse Beneficiary may roll over directly a distribution as provided above, any distribution made prior to January 1, 2010 is not subject to the direct rollover requirements of Code 401(a)(31) (including Code Section 401(a)(31)(B), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c)). If a non-spouse Beneficiary receives a distribution from the Plan, the distribution is not eligible for a 60-day rollover.
Delete the last sentence of the first paragraph of Section 18.02 of the Plan in its entirety and insert the following new sentence in lieu thereof:
For Plan Years beginning on or after January 1, 2007, a partial plan termination shall be deemed to have occurred based on the facts and circumstances in existence at the time as required by Section 1.411(d)-2(b)(1) of the Treasury Regulations and Revenue Ruling 2007-43 and upon any such partial termination, the rights of all affected employees to the amounts credited to their accounts shall be non-forfeitable.
This Amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this Amendment and, except as hereby amended; the Plan shall remain in full force and effect.
105
IN WITNESS WHEREOF, this Amendment has been executed this 21st day of December, 2011.
THE HANOVER INSURANCE COMPANY | ||
By: | /s/ Lorna Stearns | |
Lorna D. Stearns, Vice President |
106
Exhibit 10.40
THE HANOVER INSURANCE GROUP, INC.
2006 LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
This Restricted Stock Agreement (the Agreement) is made as of <GRANT DATE> (the Grant Date) by and between The Hanover Insurance Group, Inc., a Delaware corporation (the Company), and <PARTICIPANT NAME> (the Participant or you). Capitalized terms used without definition herein shall have the meanings set forth in The Hanover Insurance Group, Inc. 2006 Long-Term Incentive Plan (the Plan).
P R E A M B L E
WHEREAS, pursuant to the terms of the Plan and this Agreement, the Administrator has agreed to grant to the Participant <NUMBER OF SHARES>shares of Stock (the Restricted Shares).
WHEREAS, the Restricted Shares will be subject to forfeiture, restrictions on sale and transfer and other terms and conditions as set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants and promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Transfer of Restricted Shares.
(a) The Company will transfer to an account or accounts designated by it in the name of the Participant, the Restricted Shares, provided the Participant has delivered to the Company a fully executed copy of this Agreement.
(b) Except as otherwise specifically provided in this Agreement, Participant shall not sell, assign, transfer or otherwise dispose of, and shall not pledge or hypothecate, any of the Restricted Shares.
2. Vesting and Companys Right to a Return of the Restricted Shares.
(a) Vesting. The Restricted Shares shall be one hundred percent (100%) vested and shall no longer be subject to forfeiture and the restrictions set forth in Section 1(b) on the second anniversary of the Grant Date, provided that the Participant remains an Employee with the Company or one of its subsidiaries or affiliates (the Company and its subsidiaries and affiliates hereinafter referred to as THG) through such date (the Vesting Period).
(b) Involuntary Termination/Voluntary Termination. If, prior to the expiration of the Vesting Period, the Participants Employment with THG is terminated, with or without Cause (other than under the circumstances described below in this Section 2), or the Participant voluntarily terminates his/her Employment with THG, any non-vested Restricted Shares shall be automatically cancelled and forfeited and shall be returned to the Company for no consideration.
(c) Disability. Subject to the remainder of this Section 2(c), if the Participant is placed in a long term disability status (as such term is defined in the Companys Long-Term Disability Program, as in effect at such time)(LTD Status), and provided Participant remains in LTD Status through such date, the Restricted Shares shall continue to vest in accordance with this Agreement until the first anniversary of the date Participant was placed in LTD Status (the LTD Extension Period). At the expiration of the LTD Extension Period (i) a pro-rated portion of the Restricted Shares shall automatically vest, and (ii) the remaining unvested Restricted Shares shall be automatically cancelled and forfeited and be returned to the Company for no consideration. For purposes of this subsection, the pro-ration of the Restricted Shares that vest on the expiration of the LTD Extension Period, shall be determined by dividing the number of days since the Grant Date by 731 and applying this percentage to the Restricted Shares. Any fractional share shall be rounded up such that only whole shares are issued.
If, prior to the expiration of the LTD Extension Period, Participant is removed from LTD Status and immediately thereafter returns to active Employment with THG, Participant shall be treated (for the purposes of this Agreement) as if he/she were never placed in LTD Status and remained an active Employee of THG, shall be given credit toward vesting for the period Participant was in LTD Status and this Agreement shall remain in full force and effect in accordance with its terms.
(d) Death. If Participant dies (i) a pro-rated portion of the Restricted Shares shall automatically vest, and (ii) the remaining unvested Restricted Shares shall be automatically cancelled and forfeited and be returned to the Company for no consideration. For purposes of this subsection, the pro-ration of the Restricted Shares that vest upon Participants death shall be determined by dividing the number of days that the Participant was an active Employee since the Grant Date by 731 and applying this percentage to the Restricted Shares. Any fractional share shall be rounded up such that only whole shares are issued.
(e) Covered Transaction/Change in Control. In the event of a Covered Transaction (other than a Change in Control, whether or not it is a Covered Transaction), the Restricted Shares shall be fully governed by the applicable provisions of Section 7(a) of the Plan. Notwithstanding the terms of the Plan, in the event of a Change in Control (whether or not it is a Covered Transaction), the following rules shall apply:
(i) Except as provided below in Section 2(e)(ii), in the event of a Change in Control the Participant shall automatically vest in 100% of the Restricted Shares.
(ii) Notwithstanding Section 2(e)(i), no acceleration of vesting shall occur with respect to the Restricted Shares if the Administrator reasonably determines in good faith prior to the occurrence of a Change in Control that this Award of Restricted Shares shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an Alternative Award), by Participants employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Award must:
(1) be based on stock which is traded, or will be traded upon consummation of the Change in Control, on an established securities market;
(2) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under this Award, including, but not limited to, an identical or better vesting schedule;
(3) have substantially equivalent economic value to this Award (determined at the time of the Change in Control); and
(4) have terms and conditions which provide that in the event that the Participants employment is involuntarily terminated (other than for Cause) or Participant terminates employment for Good Reason (as defined below) prior to the second anniversary of the Change in Control, the Participant shall automatically vest in 100% of the Alternative Award and any conditions on a Participants rights under, or any restrictions on transfer or exercisability applicable to, the vested portion of such Alternative Award shall be waived or shall lapse.
For this purpose, Good Reason shall mean the occurrence of one or more of the events listed below following a Change in Control:
(x) to the extent you are Participant (as that term is defined in the CIC Plan) in the Companys Amended and Restated Employment Continuity Plan or its successor plan (the CIC Plan), the occurrence of any of the events enumerated under the definition of Good Reason applicable to Participants Tier level as set forth in the CIC Plan; or
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(y) if you are not a Participant in the CIC Plan, the occurrence of any of the following (A) a reduction in your rate of annual base salary as in effect immediately prior to such Change in Control; (B) a reduction in your annual short-term incentive compensation plan target award (but excluding the conversion of any cash incentive arrangement into an equity incentive arrangement of commensurate value or vice versa) from that which was in effect immediately prior to such Change in Control; or (C) any requirement that you relocate to an office more than 35 miles from the facility where you were located immediately prior to the Change in Control.
(iii) In the event a Participant believes that a Good Reason event has been triggered, the Participant must give the Company written notice within 30 days of the occurrence of such triggering event and a proposed termination date which shall be not sooner than 60 days nor later than 90 days after the date of such notice. Such notice shall specify the Participants basis for determining that Good Reason has been triggered. The Company shall have the right to cure a purported Good Reason within 30 days of receipt of said notice
(iv) Notwithstanding Sections 2(e)(i) and 2(e)(ii) above, the Administrator may elect, in its sole discretion, exercised prior to the effective date of the Change in Control, to accelerate all, or a greater percentage of the Restricted Shares, than is otherwise required pursuant to the terms of this Section 2.
(v) Upon vesting under Section 2(e) or upon a termination as provided herein, any remaining unvested Restricted Shares, if any, shall be automatically cancelled and forfeited and returned to the Company for no consideration.
(f) Violation of the Agreement. In the event Participant violates the terms of this Agreement, including, without limitation Section 1(b) and 5, the Restricted Shares shall be cancelled and forfeited and be returned to the Company for no consideration.
3. Stock Power. The Company may require Participant to execute and deliver to the Company a stock power in blank with respect to non-vested Restricted Shares. The Company shall have the right, in its sole discretion, to exercise such stock power in the event that the Company becomes entitled to the non-vested Restricted Shares pursuant to the terms of this Agreement. Notwithstanding the foregoing, the Participant shall have dividend and voting rights with respect to the non-vested Restricted Shares.
4. Notices. Notices hereunder shall be in writing and, if to the Company, shall be delivered personally to the Human Resources Department or such other party as designated by the Company or mailed to its principal office and, if to the Participant, shall be delivered personally or mailed to the Participant at his or her address on the records of the Company.
5. Non-Hire/Solicitation/Confidentiality. As a condition of Participants eligibility to receive the Restricted Shares and regardless of whether such Restricted Shares vest, Participant agrees that he or she will (i) not, directly or indirectly, during the term of your employment with THG, and for a period of one year thereafter, hire, solicit, entice away or in any way interfere with THGs relationship with, any of its officers or employees, or in any way attempt to do so or participate with, assist or encourage a third party to do so, and (ii) neither disclose any of THGs confidential and proprietary information to any third party, nor use such information for any purpose other than for the benefit of THG and in accordance with THG policy. The terms of this Section 5 shall survive the expiration or earlier termination of this Agreement.
6. Damages/Specific Performance.
(a) The Participant hereby acknowledges and agrees that in the event of any breach of Section 5 of this Agreement, the Company would be irreparably harmed and could not be made whole by monetary damages. The Participant accordingly agrees to waive the defense in any action for
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injunctive relief or specific performance that a remedy at law would be adequate and that the Company, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to an injunction or to compel specific performance of Section 5.
(b) In addition to any other remedy to which the Company may be entitled at law or in equity (including the remedy provided in the preceding paragraph), the Participant hereby acknowledges and agrees that in the event of any breach of Section 5 of this Agreement, Participant shall be required to refund to the Company the value received by Participant upon vesting of the Restricted Shares; provided, however, that the Company makes any such claim, in writing, against Participant alleging a violation of Section 5 not later than two years following your termination of employment with the Company.
7. Successors. The provisions of this Agreement will benefit and will be binding upon the permitted assigns, successors in interest, personal representatives, estates, heirs and legatees of each of the parties hereto.
8. Interpretation. The terms of the Restricted Shares are as set forth in this Agreement and in the Plan. The Plan is incorporated into this Agreement by reference, which means that this Agreement is limited by and subject to the express terms and provisions of the Plan. In the event of a conflict between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control.
9. Governing Law. This Agreement shall be construed and applied (except as to matters governed by the Delaware General Corporation Law, as to which Delaware law shall apply) in accordance with the laws of the Commonwealth of Massachusetts.
10. Facsimile or Electronic Signature. The parties may execute this Agreement by means of a facsimile or electronic signature.
11. Entire Agreement; Counterparts. This Agreement and the Plan contains the entire understanding between the parties concerning the subject contained in this Agreement. Except for the Agreement and the Plan, there are no representations, agreements, arrangements, or understandings, oral or written, between or among the parties hereto, relating to the subject matter of this Agreement, that are not fully expressed herein. This Agreement may be signed in one or more counterparts, all of which shall be considered one and the same agreement.
12. Further Assurances. Each party to this Agreement agrees to perform all further acts and to execute and deliver all further documents as may be reasonably necessary to carry out the intent of this Agreement.
13. Severability. In the event that any of the provisions, or portions thereof, of this Agreement are held to be unenforceable or invalid by any court of competent jurisdiction, the validity and enforceability of the remaining provisions, or portions thereof, will not be affected, and such unenforceable provisions shall be automatically replaced by a provision as similar in terms as may be valid and enforceable.
14. Construction. Whenever used in this Agreement, the singular number will include the plural, and the plural number will include the singular, and the masculine or neuter gender shall include the masculine, feminine, or neuter gender. The headings of the Sections of this Agreement have been inserted for purposes of convenience and shall not be used for interpretive purposes. The Administrator shall have full discretion to interpret and administer this Agreement. Any actions or decisions by the Administrator in connection with this Agreement shall be conclusive and binding upon the Participant.
15. No Effect on Employment. Nothing contained in this Agreement shall be construed to limit or restrict the right of THG to terminate the Participants employment at any time, with or without cause, or to increase or decrease the Participants compensation from the rate of compensation in existence at the time this Agreement is executed.
16. Taxes. If at the time the Restricted Shares vests, the Company determines that under applicable law and regulations it could be liable for the withholding of any federal, state or local tax, Participant shall remit to the
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Company any amounts determined by the Company to be required to be withheld or the Company may, at its option, withhold from such Restricted Shares a sufficient number of shares to satisfy the minimum federal, state and local tax withholding due, if any, and remit the balance of the Shares to the Participant.
The Company makes no representations to Participant with respect to the tax treatment of any amount paid or payable pursuant to this Award. While this Award is intended to be interpreted and operated to the extent possible so that any such amounts shall be exempt from the requirements of Section 409A of the Internal Revenue Code (Section 409A), in no event shall the Company be liable to Participant for or with respect to any taxes, penalties and/or interest which may be imposed upon any such amounts pursuant to Section 409A or any other federal or state tax law. To the extent that any such amount should be subject to Section 409A (or any other federal or state tax law), the Participant shall bear the entire risk of any such taxes, penalties and or interest.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the Grant Date.
THE HANOVER INSURANCE GROUP, INC. | ||
By: |
| |
Name: Bryan D. Allen | ||
Title: Senior Vice President & Chief Human Resources Officer | ||
| ||
<PARTICIPANT NAME> |
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Exhibit 12.1
The Hanover Insurance Group, Inc
Computation of Ratio of Earnings to Fixed Charges
(in millions, except ratios)
Including realized gains and losses
Fiscal Years Ended | ||||||||||||||||||||
December 31, 2011 |
December 31, 2010 |
December 31, 2009 |
December 31, 2008 |
December 31, 2007 |
||||||||||||||||
Earnings before income taxes, minority interest, extraordinary items and cumulative effect of accounting changes |
22.3 | 211.1 | 270.9 | 164.4 | 341.5 | |||||||||||||||
Fixed charges: |
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Interest expense |
55.0 | 44.3 | 35.5 | 41.0 | 40.7 | |||||||||||||||
Interest portion of rental expense |
7.0 | 5.7 | 5.1 | 5.6 | 5.7 | |||||||||||||||
Total fixed charges |
62.0 | 50.0 | 40.6 | 46.6 | 46.4 | |||||||||||||||
Earnings before income taxes, minority interest, extraordinary items, cumulative effect of accounting changes and fixed charges |
84.3 | 261.1 | 311.5 | 211.0 | 387.9 | |||||||||||||||
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Ratio of earnings to fixed charges |
1.360 | 5.222 | 7.672 | 4.528 | 8.360 | |||||||||||||||
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Exhibit 21
Direct and Indirect Subsidiaries of the Registrant
I. The Hanover Insurance Group, Inc. (Delaware)
A. | Opus Investment Management, Inc. (Massachusetts) |
a. | The Hanover Insurance Company (New Hampshire) |
1. | Citizens Insurance Company of America (Michigan) |
(i) | Citizens Management Inc. (Delaware) |
2. | Allmerica Financial Benefit Insurance Company (Michigan) |
3. | Allmerica Plus Insurance Agency, Inc. (Massachusetts) |
4. | The Hanover American Insurance Company (New Hampshire) |
5. | Hanover Texas Insurance Management Company, Inc. (Texas) |
6. | Citizens Insurance Company of Ohio (Ohio) |
7. | Citizens Insurance Company of the Midwest (Indiana) |
8. | The Hanover New Jersey Insurance Company (New Hampshire) |
9. | Massachusetts Bay Insurance Company (New Hampshire) |
10. | Allmerica Financial Alliance Insurance Company (New Hampshire) |
11. | Professionals Direct, Inc. (Michigan) |
(i) | Professionals Direct Insurance Company (Michigan) |
(ii) | Professionals Direct Insurance Services, Inc. (Michigan) |
(iii) | Professionals Direct Finance, Inc. (Michigan) |
(iv) | Professionals Direct Statutory Trust II (Delaware) |
12. | Verlan Fire Insurance Company (New Hampshire) |
13. | The Hanover National Insurance Company (New Hampshire) |
14. | AIX Holdings, Inc. (Delaware) |
(i) | Nova American Group, Inc. (New York) |
1. | Nova Insurance Group, Inc. (Delaware) |
a. | Professional Underwriters Agency, Inc. (Florida) |
2. | Nova Casualty Company (New York) |
a. | AIX Specialty Insurance Company (Delaware) |
3. | Nova Alternative Risk, LLC (New York) |
4. | AIX Group Trust (Delaware) |
(ii) | AIX, Inc. (Delaware) |
1. | AIX Insurance Services of California, Inc. (California) |
15. | 440 Lincoln Street Holding Company, LLC (Massachusetts) |
16. | Campmed Casualty & Indemnity Company, Inc. of Maryland (New Hampshire) |
17. | Health Facilities Insurance Corporation Ltd. (Bermuda) |
18. | CitySquare II Investment Company LLC (Massachusetts) |
(i) | One Mercantile Place LLC (Massachusetts) |
b. | Citizens Insurance Company of Illinois (Illinois) |
c. | CitySquare II Development Co. LLC. (Massachusetts) |
B. | VeraVest Investments, Inc. (Massachusetts) |
C. | Verlan Holdings, Inc. (Maryland) |
a. | Hanover Specialty Insurance Brokers, Inc. (Virginia) |
D. | Benchmark Professional Insurance Services, Inc. (Illinois) |
E. | Campania Holding Company, Inc. (Virginia) |
a. | Campania Management Company, Inc. (Virginia) |
b. | Campania Shared Services Company, Inc. (Virginia) |
c. | Campania Insurance Agency, Inc. (Virginia) |
F. | Educators Insurance Agency, Inc. (Massachusetts) |
G. | 440 Tessera Limited (United Kingdom) |
a. | Chaucer Holdings PLC (United Kingdom) |
1. | ALIT Insurance Holdings Limited (United Kingdom) |
(i) | Aberdeen Underwriting Advisers Limited (United Kingdom) |
(ii) | ALIT Underwriting Limited (United Kingdom) |
1. | ALIT (No. 1) Limited (United Kingdom) |
2. | ALIT (No. 2) Limited (United Kingdom) |
3. | ALIT (No. 3) Limited (United Kingdom) |
4. | ALIT (No. 4) Limited (United Kingdom) |
5. | ALIT (No. 5) Limited (United Kingdom) |
2. | Chaucer Corporate Capital (No. 2) Limited (United Kingdom) |
3. | Chaucer Corporate Capital (No. 3) Limited (United Kingdom) |
4. | Chaucer Corporate Capital Limited (United Kingdom) |
5. | Chaucer Freeholds Limited (United Kingdom) |
6. | Hayward Brick Stuchbery Holdings Limited (United Kingdom) |
(i) | CH 1997 Limited (United Kingdom) |
1. | Chaucer Consortium Underwriting Limited (United Kingdom) |
2. | Chaucer Dedicated Limited (United Kingdom) |
3. | Chaucer Underwriting A/S (Denmark) |
4. | INSURANCE4CARGOSERVICES LIMITED (United Kingdom) |
5. | Chaucer Syndicates Limited (United Kingdom) |
a) | Chaucer GmbH (Germany) |
b) | Chaucer Insurance Services Limited (United Kingdom) |
c) | Chaucer Latin America SA (Argentina) |
d) | Chaucer Singapore Pte. Limited (Singapore) |
e) | Chaucer Syndicate Services Limited (United Kingdom) |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-164446) and Form S-8 (No. 333-24929, No. 333-31397, No. 333-134394 and No. 333-134395) of The Hanover Insurance Group, Inc. of our report dated February 27, 2012 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 27, 2012 relating to the financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP |
Boston, Massachusetts |
February 27, 2012 |
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Frederick H. Eppinger, Jr., J. Kendall Huber, and David B. Greenfield, each of them singly, our true and lawful attorneys, with full power in each of them, to sign for and in each of our names and in any and all capacities, the Form 10-K of The Hanover Insurance Group, Inc. (the Company) and any other filings made on behalf of said Company pursuant to the requirements of the Securities Exchange Act of 1934, and to file the same with all exhibits and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and each of them, acting alone, full power and authority to do and perform each and every act and thing requisite or necessary to be done, hereby ratifying and confirming all that said attorneys or any of them may lawfully do or cause to be done by virtue hereof. Witness our hands and common seal on the date set forth below.
Signature | Title | Date | ||
/s/ Frederick H. Eppinger, Jr. |
February 28, 2012 | |||
Frederick H. Eppinger, Jr. |
President, Chief Executive Officer and Director |
|||
/s/ David B. Greenfield |
February 28, 2012 | |||
David B. Greenfield |
Executive Vice President, Chief Financial Officer, and Principal Accounting Officer |
|||
/s/ Michael P. Angelini |
January 15, 2012 | |||
Michael P. Angelini |
Chairman of the Board | |||
/s/ John J. Brennan |
January 30, 2012 | |||
John J. Brennan |
Director | |||
/s/ P. Kevin Condron |
January 30, 2012 | |||
P. Kevin Condron |
Director | |||
/s/ Neal F. Finnegan |
January 19, 2012 | |||
Neal F. Finnegan |
Director | |||
/s/ David J. Gallitano |
January 15, 2012 | |||
David J. Gallitano |
Director | |||
/s/ Wendell J. Knox |
January 29, 2012 | |||
Wendell J. Knox |
Director | |||
/s/ Robert J. Murray |
January 30, 2012 | |||
Robert J. Murray |
Director | |||
/s/ Joseph R. Ramrath |
January 30, 2012 | |||
Joseph R. Ramrath |
Director | |||
/s/ Harriett T. Taggart |
January 30, 2012 | |||
Harriett T. Taggart |
Director |
Exhibit 31.1
CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Frederick H. Eppinger, Jr., certify that:
1. | I have reviewed this annual report on Form 10-K of The Hanover Insurance Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 28, 2012
/s/ Frederick H. Eppinger, Jr. |
Frederick H. Eppinger, Jr. President, Chief Executive Officer and Director |
Exhibit 31.2
CERTIFICATION AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David B. Greenfield, certify that:
1. | I have reviewed this annual report on Form 10-K of The Hanover Insurance Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 28, 2012
/s/ David B. Greenfield |
David B. Greenfield Executive Vice President, |
Chief Financial Officer, and Principal Accounting Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President, Chief Executive Officer and Director of The Hanover Insurance Group, Inc. (the Company), does hereby certify that to the undersigneds knowledge:
1) | the Companys Annual Report on Form 10-K for the period ended December 31, 2011 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2) | the information contained in the Companys Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Frederick H. Eppinger, Jr. |
Frederick H. Eppinger, Jr. |
President, Chief Executive Officer and Director |
Dated: February 28, 2012
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Executive Vice President, Chief Financial Officer, and Principal Accounting Officer of The Hanover Insurance Group, Inc. (the Company), does hereby certify that to the undersigneds knowledge:
1) | the Companys Annual Report on Form 10-K for the period ended December 31, 2011 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2) | the information contained in the Companys Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ David B. Greenfield |
David B. Greenfield |
Executive Vice President, |
Chief Financial Officer, and Principal Accounting Officer |
Dated: February 28, 2012
Fair Value (Tables)
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Dec. 31, 2011
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Fair Value [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Of Financial Instruments |
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Fair Value Of Assets On A Recurring Basis |
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Fair Value On Recurring Basis Using Significant Unobservable Inputs (Level 3) |
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Schedule Of Gains And Losses Due To Change In Fair Value Level 3 Assets |
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Reinsurance (Narrative) (Details) (USD $)
In Millions, unless otherwise specified |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
|
Reinsurance Premiums for Insurance Companies, by Product Segment [Line Items] | |||
Reinsurance recoverable | $ 2,262.2 | $ 1,254.2 | |
Property and casualty premiums earned, Ceded | 539.2 | 304.4 | 291.7 |
Property and casualty losses and LAE, Ceded | 422.1 | 242.4 | 258.2 |
MCCA [Member]
|
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Reinsurance Premiums for Insurance Companies, by Product Segment [Line Items] | |||
Percentage of reinsurance receivable represented by segment | 36.10% | ||
Percentage of reinsurance assets represented by segment, minimum | 10.00% | ||
Reinsurance recoverable | 816.7 | 752.5 | |
Property and casualty premiums earned, Ceded | 69.6 | 64.7 | 55.8 |
Property and casualty losses and LAE, Ceded | $ 122.6 | $ 135.6 | $ 97.7 |
Acquisitions And Discontinued Operations (Allocation Of Purchase Price) (Details)
In Millions, unless otherwise specified |
6 Months Ended | ||||
---|---|---|---|---|---|
Jun. 30, 2011
USD ($)
|
Dec. 31, 2011
USD ($)
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Jul. 14, 2011
USD ($)
|
Jul. 14, 2011
GBP (£)
|
Jun. 30, 2011
Chaucer [Member]
USD ($)
|
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Business Acquisition [Line Items] | |||||
Cash | $ 756.1 | ||||
Premiums and accounts receivable, net | 469.5 | ||||
Investments | 1,630.8 | ||||
Reinsurance recoverables, net | 569.8 | ||||
Deferred acquisition costs | 170.6 | ||||
Deferred income taxes | 52.4 | ||||
Other assets | 18.1 | ||||
Loss and loss adjustment expense reserves | (2,300.6) | ||||
Unearned premiums | (857.3) | ||||
Debt | (63.3) | ||||
Other liabilities | (64.0) | ||||
Net tangible assets | 382.1 | ||||
Goodwill | 6.9 | 6.9 | |||
Intangible assets | 87.7 | ||||
Transaction costs | 11.7 | ||||
Additional hedge-related adjustment based upon July 14, 2011 settlement | 4.9 | 11.3 | |||
Total purchase price, excluding transaction costs | 481.6 | ||||
Total purchase price | $ 493.3 | $ 481.6 | £ 296.9 | $ 476.7 |
Liabilities For Outstanding Claims, Losses And Loss Adjustment Expenses (Tables)
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12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2011
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Liabilities For Outstanding Claims, Losses And Loss Adjustment Expenses [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Liability For Unpaid Losses And Loss Adjustment Expenses |
|
Schedule IV Reinsurance (Details) (Property And Casualty Insurance [Member], USD $)
In Millions, unless otherwise specified |
12 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
|||||||
Property And Casualty Insurance [Member]
|
|||||||||
Reinsurance Premiums for Insurance Companies, by Product Segment [Line Items] | |||||||||
Gross amount | $ 3,695.2 | [1] | $ 2,970.6 | [2] | $ 2,824.3 | ||||
Ceded to other companies | 539.2 | [1] | 304.4 | [2] | 291.7 | ||||
Assumed from other companies | 442.6 | [1] | 174.8 | [2] | 13.8 | ||||
Net amount | $ 3,598.6 | [1] | $ 2,841.0 | [2] | $ 2,546.4 | ||||
Percentage of amount assumed to net | 12.30% | [1] | 6.15% | [2] | 0.54% | ||||
|
Acquisitions And Discontinued Operations (Identification And Valuation Of Intangible Assets) (Details) (USD $)
In Millions, unless otherwise specified |
6 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Dec. 31, 2011
|
|
Intangible asset, fair value | $ 87.7 | |
Goodwill | 6.9 | 6.9 |
Total goodwill and intangibles | 94.6 | |
Estimated useful life | Indefinite | |
Other intangibles, Amortization Method | Straight line | |
Lloyd's Syndicate Capacity [Member]
|
||
Intangible asset, fair value | 78.7 | |
Estimated useful life | Indefinite | |
Other Intangibles [Member]
|
||
Intangible asset, fair value | $ 9.0 | |
Maximum [Member] | Other Intangibles [Member]
|
||
Intangible asset, Estimated Useful Life | 5 | |
Minimum [Member] | Other Intangibles [Member]
|
||
Intangible asset, Estimated Useful Life | 2 |
Income Taxes (Components Of Deferred Tax Assets And Liabilities) (Details) (USD $)
In Millions, unless otherwise specified |
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
Dec. 31, 2008
|
---|---|---|---|---|
Loss, LAE and unearned premium reserves, net | $ 178.9 | $ 170.1 | ||
Tax credit carryforwards | 112.2 | 111.1 | ||
Loss carryforwards | 79.8 | 69.2 | ||
Employee benefit plans | 45.6 | 38.3 | ||
Untaxed Lloyds underwriting losses | 18.6 | |||
Investments, net | 9.3 | 21.5 | ||
Other | 63.0 | 61.0 | ||
Deferred tax assets, gross | 507.4 | 471.2 | ||
Less: Valuation allowance | 35.9 | 91.5 | 195.6 | 348.2 |
Deferred tax assets, total | 471.5 | 379.7 | ||
Deferred policy acquisition costs | 123.7 | 120.9 | ||
Software capitalization | 29.9 | 28.3 | ||
Other | 57.9 | 53.1 | ||
Deferred tax liabilities, total | 211.5 | 202.3 | ||
Net deferred tax asset | 260.0 | 177.4 | ||
The Hanover Insurance Group, Inc [Member]
|
||||
Net deferred tax asset | $ 19.2 |
Segment Information (Tables)
|
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2011
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Segment Information [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Information With Respect To Business Segments |
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Financial Information With Respect To Business Segments And Discontinued Operations Related To Identifiable Assets |
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Gross Written Premium By Geographical Location |
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Valuation And Qualifying Accounts
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2011
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Valuation And Qualifying Accounts [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Valuation And Qualifying Accounts | SCHEDULE V THE HANOVER INSURANCE GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS
|
Income Taxes (Details Of Income Tax Difference From The Statutory Rate) (Details) (USD $)
In Millions, unless otherwise specified |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
|
Income Taxes [Abstract] | |||
Expected income tax expense | $ 7.8 | $ 73.9 | $ 94.8 |
Tax difference related to investment disposals and maturities | (9.7) | (3.2) | |
Change in valuation allowance | (7.5) | (57.1) | (6.9) |
Nondeductible expenses | 4.7 | 0.5 | 0.7 |
Expired capital loss carryforward | 47.4 | ||
Tax-exempt interest | (2.0) | (2.2) | (3.1) |
Effect of foreign operations | (1.5) | ||
Dividend received deduction | (1.1) | (0.8) | (0.8) |
Tax credits | (0.2) | (0.4) | (1.5) |
Prior years' federal income tax settlement | (1.7) | (0.3) | |
Other, net | (0.1) | (0.2) | 0.2 |
Total income tax expense (benefit) | $ (9.6) | $ 57.9 | $ 83.1 |
Effective tax rate | (43.00%) | 27.40% | 30.70% |
Quarterly Results Of Operations (Schedule Of Quarterly Financial Information) (Details) (USD $)
In Millions, except Per Share data, unless otherwise specified |
3 Months Ended | 12 Months Ended | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2011
|
Sep. 30, 2011
|
Jun. 30, 2011
|
Mar. 31, 2011
|
Dec. 31, 2010
|
Sep. 30, 2010
|
Jun. 30, 2010
|
Mar. 31, 2010
|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
|||||||
Total revenues | $ 1,135.9 | $ 1,108.0 | $ 853.9 | $ 833.8 | $ 833.3 | $ 804.0 | $ 768.3 | $ 746.6 | $ 3,931.6 | $ 3,152.2 | $ 2,834.1 | ||||||
Income (loss) from continuing operations | 46.1 | (9.7) | (32.4) | 27.9 | 57.4 | 51.4 | 2.2 | 42.2 | 31.9 | 153.2 | 187.8 | ||||||
Net income | 49.3 | (9.7) | (31.8) | 29.3 | 58.4 | 52.3 | 2.3 | 41.8 | 37.1 | 154.8 | 197.2 | ||||||
Income (loss) from continuing operations per share, Basic | $ 1.03 | $ (0.21) | $ (0.71) | $ 0.62 | $ 1.27 | $ 1.14 | $ 0.05 | $ 0.89 | $ 0.71 | $ 3.36 | $ 3.71 | ||||||
Income (loss) from continuing operations per share, Diluted | $ 1.02 | [1] | $ (0.21) | [1] | $ (0.71) | [1] | $ 0.61 | [1] | $ 1.25 | $ 1.12 | $ 0.05 | $ 0.88 | $ 0.70 | $ 3.31 | $ 3.68 | ||
Net income (loss) per share, Basic | $ 1.10 | $ (0.21) | $ (0.70) | $ 0.65 | $ 1.29 | $ 1.16 | $ 0.05 | $ 0.88 | $ 0.82 | $ 3.39 | $ 3.90 | ||||||
Net income (loss) per share, Diluted | $ 1.09 | [1] | $ (0.21) | [1] | $ (0.70) | [1] | $ 0.64 | [1] | $ 1.27 | $ 1.15 | $ 0.05 | $ 0.87 | $ 0.81 | $ 3.34 | $ 3.86 | ||
Dividends declared per share | $ 0.30 | $ 0.275 | $ 0.275 | $ 0.275 | $ 0.25 | $ 0.25 | $ 0.25 | $ 0.25 | |||||||||
The Hanover Insurance Group, Inc [Member]
|
|||||||||||||||||
Total revenues | 29.7 | 12.5 | 24.2 | ||||||||||||||
Income (loss) from continuing operations | 31.9 | 152.9 | 187.5 | ||||||||||||||
Net income | $ 37.1 | $ 154.8 | $ 197.2 | ||||||||||||||
|
Debt And Credit Arrangements (Schedule Of Long-Term Debt) (Details) (USD $)
In Millions, unless otherwise specified |
Dec. 31, 2011
|
Dec. 31, 2010
|
---|---|---|
Debt Instrument [Line Items] | ||
Total principal debt | $ 917.8 | $ 607.3 |
Unamortized fair value adjustment | (2.9) | (0.5) |
Unamortized debt issuance cost | (3.0) | (0.9) |
Long-term debt | 911.1 | 605.9 |
The Hanover Insurance Group, Inc [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 678.6 | 449.9 |
Senior Debentures (Unsecured) Maturing March 1, 2020 [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 200.0 | 200.0 |
Senior Debentures (Unsecured) Maturing June 15, 2021 [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 300.0 | |
Senior Debentures (Unsecured) Maturing October 15, 2025 [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 121.6 | 121.6 |
Junior Debentures [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 59.7 | 129.2 |
Subordinated Note Maturing November 16, 2034 [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 15.6 | |
Subordinated Note Maturing September 21, 2036 [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 50.0 | |
FHLBB Borrowings [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 163.9 | 134.5 |
Capital Securities [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | 7.0 | 18.0 |
Surplus Notes [Member]
|
||
Debt Instrument [Line Items] | ||
Long-term debt | $ 4.0 |
Pension Plans (Summary Of Amounts Recognized In Accumulated Other Comprehensive Income (Loss)) (Details) (Pension Benefits [Member], USD $)
In Millions, unless otherwise specified |
Dec. 31, 2011
|
Dec. 31, 2010
|
---|---|---|
Pension Benefits [Member]
|
||
Defined Benefit Plan Disclosure [Line Items] | ||
Net actuarial loss | $ 135.0 | $ 134.4 |
Net prior service cost | 0.1 | 0.1 |
Amount recognized in Accumulated Other Comprehensive (Income) Loss | $ 135.1 | $ 134.5 |
Investments (Narrative) (Details)
In Millions, unless otherwise specified |
12 Months Ended | 12 Months Ended | 12 Months Ended | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2011
USD ($)
years
|
Dec. 31, 2010
USD ($)
|
Jul. 14, 2011
GBP (£)
|
Jun. 14, 2010
USD ($)
|
Dec. 31, 2009
USD ($)
|
Dec. 31, 2011
Treasury Lock Forward Agreement [Member]
USD ($)
|
Dec. 31, 2011
Security Lending Program [Member]
USD ($)
|
Dec. 31, 2010
Security Lending Program [Member]
USD ($)
|
Dec. 31, 2011
United States Government And Government Agencies And Authorities [Member]
USD ($)
|
Dec. 31, 2010
United States Government And Government Agencies And Authorities [Member]
USD ($)
|
Dec. 31, 2011
Collateralized Borrowings And Other Arrangements [Member]
USD ($)
|
Dec. 31, 2010
Collateralized Borrowings And Other Arrangements [Member]
USD ($)
|
Dec. 31, 2011
FHLBB Borrowings [Member]
USD ($)
|
Dec. 31, 2010
FHLBB Borrowings [Member]
USD ($)
|
Dec. 31, 2011
City Square Project [Member]
USD ($)
|
Dec. 31, 2011
Minimum [Member]
USD ($)
|
Dec. 31, 2011
Maximum [Member]
USD ($)
|
Dec. 31, 2011
Federal Home Loan Mortgage Corp. [Member]
USD ($)
|
Dec. 31, 2010
Federal Home Loan Mortgage Corp. [Member]
USD ($)
|
|
Gain (Loss) on Investments [Line Items] | |||||||||||||||||||
Net unrealized gains on impaired securities | $ 25.1 | $ 36.1 | |||||||||||||||||
Fair value of the loaned securities, description | The fair value of the loaned securities is monitored on a daily basis, and the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. | ||||||||||||||||||
Securities on loan, fair value | 24.1 | 65.2 | 103.5 | 87.3 | 212.9 | 169.8 | 205.7 | 162.7 | |||||||||||
Fixed maturities deposit, amortized cost | 97.0 | 84.1 | |||||||||||||||||
Restricted assets, cash and cash equivalents | 94 | ||||||||||||||||||
Restricted assets, fixed maturities | 372 | ||||||||||||||||||
Concentration of Investment in a Single Investee, Maximum | 10.00% | ||||||||||||||||||
Equity investment, fair value | 455.0 | 439.1 | |||||||||||||||||
Amount of land purchased for development, in acres | 11 | ||||||||||||||||||
Land purchased for development, value | 5 | ||||||||||||||||||
Office building, square foot | 200,000 | ||||||||||||||||||
Term of lease agreement, in years | 17 | ||||||||||||||||||
Lease acquisition, legal, architectural and associated costs | 8.3 | 12.4 | |||||||||||||||||
Estimated development costs | 65 | 70 | |||||||||||||||||
Contractual investment commitments | 64.4 | 46.8 | |||||||||||||||||
Contractual obligations to purchase tax credits | 23.6 | ||||||||||||||||||
Loss on derivative | 11.3 | ||||||||||||||||||
Notional amount of foreign currency contract | 297.9 | ||||||||||||||||||
Derivative instruments, gain recognized in income | 6.1 | ||||||||||||||||||
Cash flow hedge loss reclassified into expense | 0.2 | ||||||||||||||||||
Unrealized losses arising during period, Pre-Tax | 1.9 | ||||||||||||||||||
Net appreciation on other invested assets | 1.9 | 1.8 | 1.3 | ||||||||||||||||
Net depreciation on fixed maturity derivative instruments | 1.2 | ||||||||||||||||||
Overseas deposits | $ 135.1 |
Segment Information (Financial Information With Respect To Business Segments And Discontinued Operations Related To Identifiable Assets) (Details) (USD $)
In Millions, unless otherwise specified |
Dec. 31, 2011
|
Dec. 31, 2010
|
---|---|---|
Segment Reporting Information [Line Items] | ||
Discontinued operations | $ 121.2 | $ 133.6 |
Total | 12,624.4 | 8,569.9 |
U.S. Companies [Member]
|
||
Segment Reporting Information [Line Items] | ||
Identifiable assets | 8,495.5 | 8,436.3 |
Chaucer [Member]
|
||
Segment Reporting Information [Line Items] | ||
Identifiable assets | $ 4,007.7 |
Income Taxes (Components Of Income Before Income Taxes) (Details) (USD $)
In Millions, unless otherwise specified |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
|
Income Taxes [Abstract] | |||
Income before income taxes, U.S. | $ (12.0) | $ 211.1 | $ 270.9 |
Income before income taxes, Non-U.S. | 34.3 | ||
Income before income taxes | $ 22.3 | $ 211.1 | $ 270.9 |
Pension Plans (Summary Of Assets Measured At Fair Value On A Recurring Basis Using Significant Unobservable Inputs) (Details) (USD $)
In Millions, unless otherwise specified |
12 Months Ended | ||||
---|---|---|---|---|---|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
Dec. 31, 2011
Real Estate Funds [Member]
|
Jun. 30, 2011
Real Estate Funds [Member]
|
|
Defined Benefit Plan Disclosure [Line Items] | |||||
Balance at beginning of year | $ 98.9 | $ 67.5 | $ 62.6 | $ 7.7 | |
Actual return on plan assets related to assets still held | 0.2 | ||||
Foreign currency translation | (0.2) | ||||
Balance at end of year | $ 98.9 | $ 67.5 | $ 62.6 | $ 7.7 | $ 7.7 |
Pension Plans (Summary Of Benefit Obligations, Fair Value Of Plan Assets And Funded Status Of The Plans) (Details) (USD $)
In Millions, unless otherwise specified |
0 Months Ended | 12 Months Ended | ||||
---|---|---|---|---|---|---|
Jan. 04, 2010
|
Dec. 31, 2011
U.S. Qualified Pension Plans [Member]
|
Dec. 31, 2010
U.S. Qualified Pension Plans [Member]
|
Dec. 31, 2011
U.S. Non-Qualified Pension Plans [Member]
|
Dec. 31, 2010
U.S. Non-Qualified Pension Plans [Member]
|
Dec. 31, 2011
Chaucer Pension Scheme [Member]
|
|
Defined Benefit Plan Disclosure [Line Items] | ||||||
Accumulated benefit obligation | $ 570.8 | $ 548.0 | $ 39.2 | $ 39.1 | $ 104.4 | |
Projected benefit obligation, beginning of year | 548.0 | 518.4 | 39.1 | 38.2 | ||
Benefit obligation acquired July 1, 2011 | 99.7 | |||||
Employee contributions | 0.3 | |||||
Service cost - benefits earned during the year | 0.1 | 0.7 | ||||
Interest cost | 29.6 | 30.4 | 2.0 | 2.2 | 2.7 | |
Net actuarial losses | 24.5 | 32.0 | 1.2 | 2.1 | 6.4 | |
Benefits paid | (31.3) | (32.9) | (3.1) | (3.4) | (1.9) | |
Foreign currency translation | (3.5) | |||||
Projected benefit obligation, end of year | 570.8 | 548.0 | 39.2 | 39.1 | 104.4 | |
Fair value of plan assets, beginning of year | 547.8 | 424.5 | ||||
Plan assets acquired July 1, 2011 | 82.1 | |||||
Actual return on plan assets | 58.2 | 56.2 | (4.6) | |||
Company contribution | 100.0 | 100.0 | 3.2 | 3.4 | 1.0 | |
Foreign currency translation | (2.6) | |||||
Fair value of plan assets, end of year | 574.7 | 547.8 | 74.3 | |||
Funded status of the plans | $ 3.9 | $ (0.2) | $ (39.2) | $ (39.1) | $ (30.1) |
Income Taxes (Components Of Income Tax Expense) (Details) (USD $)
In Millions, unless otherwise specified |
12 Months Ended | ||
---|---|---|---|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
|
Current income taxes, U.S. | $ (0.6) | $ 5.7 | $ 51.2 |
Current income taxes, Non-U.S. | |||
Current income taxes, Subtotal | (0.6) | 5.7 | 51.2 |
Deferred income taxes, U.S. | (19.8) | 52.2 | 31.9 |
Deferred income taxes, Non-U.S. | 10.8 | ||
Deferred income taxes, Subtotal | (9.0) | 52.2 | 31.9 |
Total income tax expense (benefit) | (9.6) | 57.9 | 83.1 |
The Hanover Insurance Group, Inc [Member]
|
|||
Current income taxes, U.S. | 31.1 | 25.1 | 7.4 |
Deferred income taxes, U.S. | $ (3.4) | $ 104.3 | $ 5.6 |
Commitments And Contingencies
|
12 Months Ended |
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Dec. 31, 2011
|
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Commitments And Contingencies [Abstract] | |
Commitments And Contingencies | 17. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS Durand Litigation On March 12, 2007, a putative class action suit captioned Jennifer A. Durand v. The Hanover Insurance Group, Inc., The Allmerica Financial Cash Balance Pension Plan was filed in the United States District Court for the Western District of Kentucky. The named plaintiff, a former employee who received a lump sum distribution from the Company's Cash Balance Plan (the "Plan") at or about the time of her termination, claims that she and others similarly situated did not receive the appropriate lump sum distribution because in computing the lump sum, the Company understated the accrued benefit in the calculation. The Plaintiff filed an Amended Complaint adding two new named plaintiffs and additional claims on December 11, 2009. In response, the Company filed a Motion to Dismiss on January 30, 2010. In addition to the pending claim challenging the calculation of lump sum distributions, the Amended Complaint includes: (a) a claim that the Plan failed to calculate participants' account balances and lump sum payments properly because interest credits were based solely upon the performance of each participant's selection from among various hypothetical investment options (as the Plan provided) rather than crediting the greater of that performance or the 30 year Treasury rate; (b) a claim that the 2004 Plan amendment, which changed interest crediting for all participants from the performance of participant's investment selections to the 30 year Treasury rate, reduced benefits in violation of the Employee Retirement Income Security Act of 1974 ("ERISA") for participants who had account balances as of the amendment date by not continuing to provide them performance-based interest crediting on those balances; and (c) claims for breach of fiduciary duty and ERISA notice requirements arising from the various interest crediting and lump sum distribution matters of which Plaintiffs complain. The District Court granted the Company's Motion to Dismiss the additional claims on statute of limitations grounds by a Memorandum Opinion dated March 31, 2011, leaving the claims substantially as set forth in the original March 12, 2007 complaint. Plaintiffs filed a Motion for Reconsideration of the District Court's decision to dismiss the additional claims. Recently, the District Court denied the Plaintiff's Motion for Reconsideration with respect to the claims set forth in (a) and (b) above; however, the Court did allow the fiduciary duty claims to stand. At this time, the Company is unable to provide a reasonable estimate of the potential range of ultimate liability if the outcome of the suit is unfavorable. This matter is still in the early stages of litigation. The extent to which any of the Plaintiffs' multiple theories of liability, some of which are overlapping and others of which are quite complex and novel, are accepted and upheld on appeal will significantly affect the Plan's or the Company's potential liability. It is not clear whether a class will be certified or, if certified, how many former or current Plan participants, if any, will be included. The statute of limitations applicable to the alleged class has not yet been finally determined and the extent of potential liability, if any, will depend on this final determination. In addition, assuming for these purposes that the Plaintiffs prevail with respect to claims that benefits accrued or payable under the Plan were understated, then there are numerous possible theories and other variables upon which any revised calculation of benefits as requested under Plaintiffs' claims could be based. It is likely that any adverse judgment in this case would be against the Plan. Such a judgment would be expected to create a liability for the Plan, with resulting effects on the Plan's assets available to pay benefits. The Company's future required funding of the Plan could also be impacted by such a liability.
Hurricane Katrina Litigation In August 2007, the State of Louisiana filed a putative class action in the Civil District Court for the Parish of Orleans, State of Louisiana, entitled State of Louisiana, individually and on behalf of State of Louisiana, Division of Administration, Office of Community Development ex rel The Honorable Charles C. Foti, Jr., The Attorney General For the State of Louisiana, individually and as a class action on behalf of all recipients of funds as well as all eligible and/or future recipients of funds through The Road Home Program v. AAA Insurance, et al., No. 07-8970. The complaint named as defendants over 200 foreign and domestic insurance carriers, including the Company, and asserts a right to benefit payments from insurers on behalf of current and former Louisiana citizens who have applied for and received or will receive funds through Louisiana's "Road Home" program. The case was thereafter removed to the Federal District Court for the Eastern District of Louisiana. On March 5, 2009, the court issued an Order granting in part and denying in part a Motion to Dismiss filed by Defendants. The court dismissed all claims for bad faith and breach of fiduciary duty and all claims for flood damages under policies with flood exclusions or asserted under Louisiana's Valued Policy Law, but rejected the insurers' arguments that the purported assignments from individual claimants to the state were barred by anti-assignment provisions in the insurers' policies. On April 30, 2009, Defendants filed a Petition for Permission to Appeal to the United States Court of Appeals for the Fifth Circuit (the "Fifth Circuit"), which was granted. On July 28, 2010, the Fifth Circuit certified the anti-assignment issue to the Louisiana Supreme Court. On May 10, 2011, the Supreme Court of Louisiana issued a decision holding that the anti-assignment provisions were not violative of public policy. The court also indicated, however, that such provisions would only serve to bar post-loss assignments if they clearly and unambiguously expressed that they apply to post-loss assignments. On June 28, 2011, the Fifth Circuit remanded the case to the Federal District Court for further proceedings consistent with the Louisiana's Supreme Court's opinion. On September 12, 2011, the State of Louisiana filed a Motion to Remand the case to state court, which was denied by an Order dated October 28, 2011. At this time, the Company is unable to provide a reasonable estimate of the potential range of ultimate liability. The Company is unable to determine how many policyholders have assigned claims under the Road Home program and, in any case, has no basis to estimate the amount of any differences between what the Company paid with respect to any such claim and the amount that the State of Louisiana may claim should properly have been paid under each policy. OTHER MATTERS The Company has been named a defendant in various other legal proceedings arising in the normal course of business. In addition, the Company is involved, from time to time, in examinations, investigations and proceedings by governmental and self-regulatory agencies. The potential outcome of any such action or regulatory proceedings in which the Company has been named a defendant or the subject of an inquiry or investigation, and its ultimate liability, if any, from such action or regulatory proceedings, is difficult to predict at this time. The ultimate resolutions of such proceedings are not expected to have a material effect on its financial position, although they could have a material effect on the results of operations for a particular quarter or annual period. RESIDUAL MARKETS The Company is required to participate in residual markets in various states, which generally pertain to high risk insureds, disrupted markets or lines of business or geographic areas where rates are regarded as excessive. The results of the residual markets are not subject to the predictability associated with the Company's own managed business, and are significant to both the personal and commercial automobile lines of business, the workers' compensation line of business, and the homeowners line of business. |
Quarterly Results Of Operations (Tables)
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Dec. 31, 2011
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Quarterly Results Of Operations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Quarterly Financial Information |
(1) Per diluted share amounts in the second and third quarters exclude common stock equivalents, since the impact of these instruments was antidilutive.
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Pension Plans (Tables)
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Dec. 31, 2011
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Pension Benefits [Member]
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Defined Benefit Plan Disclosure [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary Of Benefit Obligations, Fair Value Of Plan Assets And Funded Status Of The Plans |
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Summary Of Net Periodic Pension Cost |
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Summary Of Amounts Recognized In Accumulated Other Comprehensive Income (Loss) |
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Summary Of Estimated Amount Amortized From Accumulated Other Comprehensive Income (Loss) Into Net Periodic Pension Cost |
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Summary Of Estimated Benefit Payments |
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U.S. Defined Benefit Plans [Member]
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Defined Benefit Plan Disclosure [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary Of Weighted-Average Assumptions Used To Determine Pension Benefit Obligations |
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Summary Of Weighted-Average Assumptions Used To Determine Net Periodic Pension Costs |
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Summary Of Target Allocations And Invested Asset Allocations |
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Summary Of Plan Assets Investment Measured At Fair Value |
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Chaucer Pension Scheme [Member]
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Defined Benefit Plan Disclosure [Line Items] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary Of Weighted-Average Assumptions Used To Determine Pension Benefit Obligations |
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Summary Of Weighted-Average Assumptions Used To Determine Net Periodic Pension Costs |
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Summary Of Target Allocations And Invested Asset Allocations |
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Summary Of Plan Assets Investment Measured At Fair Value |
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Summary Of Assets Measured At Fair Value On A Recurring Basis Using Significant Unobservable Inputs |
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Income Taxes (Valuation Allowance Amounts in Narrative) (Details) (USD $)
In Millions, unless otherwise specified |
12 Months Ended | 24 Months Ended | 12 Months Ended | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2011
|
Dec. 31, 2010
|
Dec. 31, 2009
|
Dec. 31, 2011
Valuation Allowance, Unrealized Appreciation [Member]
|
Dec. 31, 2010
Valuation Allowance, Capital Loss Carryforwards Realized due to Unrealized Gains [Member]
|
Dec. 31, 2009
Valuation Allowance, Capital Loss Carryforwards Realized due to Unrealized Gains [Member]
|
Dec. 31, 2010
Valuation Allowance, Capital Loss Carryforwards Realized due to Unrealized Gains [Member]
|
Dec. 31, 2011
Valuation Allowance, Capital Loss Carryforwards Realized due to Unrealized Gains [Member]
|
Dec. 31, 2011
Valuation Allowance, Portion Utilized before Expiration [Member]
|
Dec. 31, 2010
Valuation Allowance, Portion Utilized before Expiration [Member]
|
Dec. 31, 2011
Valuation Allowance, Capital Loss Carryforwards Realized due to Net Realized Gain [Member]
|
Dec. 31, 2010
Valuation Allowance, Capital Loss Carryforwards Realized due to Net Realized Gain [Member]
|
Dec. 31, 2010
Valuation Allowance, Portion of Loss Cannot be Utilized [Member]
|
Dec. 31, 2009
Valuation Allowance, Reversal [Member]
|
Dec. 31, 2011
Valuation Allowance, Other [Member]
|
Dec. 31, 2010
Valuation Allowance, Other [Member]
|
Dec. 31, 2009
Valuation Allowance, Other [Member]
|
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Increase in income from continuing operations due to valuation allowance decrease | $ 0.2 | $ 3.2 | $ 6.0 | $ 0.9 | |||||||||||||
Increase in accumulated other comprehensive income due to valuation allowance decrease | 28.8 | 91.4 | 28.4 | ||||||||||||||
Decrease in income from discontinued operations due to valuation allowance increase | 1.1 | ||||||||||||||||
Valuation allowance at start of period | 91.5 | 195.6 | 348.2 | (29.0) | |||||||||||||
Valuation allowance, deferred tax asset, reduction (increase) in amount | 55.6 | 104.1 | 152.6 | 21.9 | 66.2 | 34.4 | 100.6 | (2.6) | 47.4 | 7.5 | 9.7 | (20.3) | 118.4 | (0.2) | 1.1 | (0.2) | |
Valuation allowance at end of period | $ 35.9 | $ 91.5 | $ 195.6 | $ (29.0) |
Other Postretirement Benefit Plans (Estimated Amortization To Be Recognized In Net Periodic Benefit Cost) (Details) (Postretirement Benefits [Member], USD $)
In Millions, unless otherwise specified |
12 Months Ended |
---|---|
Dec. 31, 2011
|
|
Postretirement Benefits [Member]
|
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Defined Benefit Plan Disclosure [Line Items] | |
Net actuarial loss | $ (0.3) |
Net prior service cost | (3.8) |
Estimated amount amortized from accumulated other comprehensive income (loss) | $ (3.5) |
Investments (Tables)
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2011
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Investments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost And Fair Value Of Available-For-Sale Fixed Maturities And Cost And Fair Value Of Equity Securities |
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Maturities Of Available-For-Sale Debt Securities |
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Unrealized Gains And Losses On Available-For-Sale And Other Securities |
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Fixed Maturities And Equity Securities In An Unrealized Loss Position |
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Acquisitions And Discontinued Operations (Narrative) (Details)
In Millions, except Per Share data, unless otherwise specified |
1 Months Ended | 12 Months Ended | 12 Months Ended | 12 Months Ended | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 17, 2011
USD ($)
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Dec. 31, 2011
USD ($)
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Dec. 31, 2010
USD ($)
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Dec. 31, 2009
USD ($)
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Dec. 31, 2011
GBP (£)
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Jul. 14, 2011
USD ($)
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Jul. 14, 2011
GBP (£)
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Jun. 30, 2011
Acquisition [Member]
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Dec. 31, 2011
Discontinued FAFLIC And Variable Life Insurance And Annuity Business [Member]
USD ($)
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Dec. 31, 2010
Discontinued FAFLIC And Variable Life Insurance And Annuity Business [Member]
USD ($)
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Dec. 31, 2009
Discontinued FAFLIC And Variable Life Insurance And Annuity Business [Member]
USD ($)
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Dec. 30, 2005
Discontinued FAFLIC And Variable Life Insurance And Annuity Business [Member]
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Dec. 31, 2009
Discontinued Accident And Health Insurance Business [Member]
USD ($)
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Dec. 31, 2011
Discontinued Accident And Health Insurance Business [Member]
USD ($)
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Dec. 31, 2010
Discontinued Accident And Health Insurance Business [Member]
USD ($)
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Dec. 31, 2011
Campania Holding Company, Inc. [Member]
USD ($)
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Mar. 31, 2010
Campania Holding Company, Inc. [Member]
USD ($)
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Dec. 03, 2009
OneBeacon Insurance Group, LTD. [Member]
USD ($)
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Dec. 31, 2011
Loan Notes [Member]
USD ($)
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Business Acquisition [Line Items] | |||||||||||||||||||
Per share amount received by shareholders, pence | £ 0.533 | ||||||||||||||||||
Business acquisition, purchase price, settlement loss | $ 11.3 | ||||||||||||||||||
Proceeds from issuance of senior unsecured notes | 300 | ||||||||||||||||||
Business acquisition, cost of acquired entity, cash paid | 455.0 | 287.4 | 24.0 | ||||||||||||||||
Business combination, consideration transferred | 23 | ||||||||||||||||||
Business acquisition, additional contingent consideration, at fair value | 4.7 | 11.0 | |||||||||||||||||
Gain (loss) on foreign exchange | 6.4 | ||||||||||||||||||
Current exchange rate between GBP and US dollars | 1.55 | 1.57 | 1.6053 | ||||||||||||||||
Percentage of variable business of discontinued operations sold | 100.00% | ||||||||||||||||||
Total gross liability related to guarantees | 3.8 | ||||||||||||||||||
Gain (loss) from discontinued business, net of taxes | 5.2 | 1.8 | 12.0 | 4.0 | 1.8 | 12.0 | 2.6 | ||||||||||||
Assets of discontinued operations | 121.2 | 133.6 | 70.4 | 59.3 | |||||||||||||||
Liabilities of discontinued operations | 129.3 | 129.4 | 52.1 | 53.2 | |||||||||||||||
Foreign currency transaction gain | 0.7 | 0.3 | |||||||||||||||||
Prior years' federal income tax settlement | $ (1.7) | $ (0.3) |
Lease Commitments (Details) (USD $)
In Millions, unless otherwise specified |
12 Months Ended | ||
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Dec. 31, 2011
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Dec. 31, 2010
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Dec. 31, 2009
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Lease Commitments [Abstract] | |||
Rental expenses for operating leases | $ 21.1 | $ 17.2 | $ 15.4 |
Future minimum rental payments | 68.9 | ||
Future minimum rental payments, 2012 | 19.7 | ||
Future minimum rental payments, 2013 | 17.3 | ||
Future minimum rental payments, 2014 | 14.4 | ||
Future minimum rental payments, 2015 | 11.4 | ||
Future minimum rental payments, thereafter | $ 6.1 |
Reinsurance (Tables)
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Dec. 31, 2011
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Reinsurance [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Effects Of Reinsurance |
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Summary Of Significant Accounting Policies
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12 Months Ended |
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Dec. 31, 2011
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Summary Of Significant Accounting Policies [Abstract] | |
Summary Of Significant Accounting Policies | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Basis of Presentation and Principles of Consolidation The consolidated financial statements of The Hanover Insurance Group, Inc. ("THG" or the "Company"), include the accounts of The Hanover Insurance Company ("Hanover Insurance") and Citizens Insurance Company of America ("Citizens"), THG's principal U.S. domiciled property and casualty companies; and certain other insurance and non-insurance subsidiaries. In addition, effective July 1, 2011, the Company acquired Chaucer Holdings plc ("Chaucer"), a specialist underwriting group which operates through the Society and Corporation of Lloyd's ("Lloyd's) (See Note 2 – "Acquisitions and Discontinued Operations". The consolidated financial statements include Chaucer's results for the period from July 1, 2011 through December 31, 2011. These legal entities conduct their operations through several business segments as discussed in Note 13 – "Segment Information". Additionally, the consolidated financial statements include the Company's discontinued operations, consisting of the Company's former life insurance businesses and its accident and health business. All intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of the Company's management these financial statements reflect all adjustments, consisting of normal recurring items necessary for a fair presentation of the financial position and results of operations. The acquisition of Chaucer on July 1, 2011, which has added meaningful business volumes to THG's second half of fiscal year 2011 results, has affected the comparability of the consolidated financial statements. B. Valuation of Investments In accordance with the provisions of ASC 320, Investments – Debt and Equity Securities ("ASC 320"), the Company is required to classify its investments into one of three categories: held-to-maturity, available-for-sale or trading. The Company determines the appropriate classification of fixed maturity and equity securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Fixed maturities and equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of taxes, reported in accumulated other comprehensive income, a separate component of shareholders' equity. The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in net investment income. Fixed maturities that are delinquent are placed on non-accrual status, and thereafter interest income is recognized only when cash payments are received. Realized investment gains and losses are reported as a component of revenues based upon specific identification of the investment assets sold. When an other-than-temporary decline in value of a specific investment is deemed to have occurred, and a charge to earnings is required, the Company recognizes a realized investment loss. The Company reviews investments in an unrealized loss position to identify other-than-temporary declines in value. On April 1, 2009, the Company adopted accounting guidance which modified the assessment of other-than-temporary impairments ("OTTI") on debt securities, as well as the method of recording and reporting other-than-temporary impairments. When it is determined that a decline in value of an equity security is other-than-temporary, the Company reduces the cost basis of the security to fair value with a corresponding charge to earnings. When an other-than-temporary decline in value of a debt security is deemed to have occurred, the Company must assess whether it intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis. If the debt security meets either of these two criteria, an other-than-temporary impairment is recognized in earnings equal to the entire difference between the security's amortized cost basis and its fair value at the impairment measurement date. If the Company does not intend to sell the debt security and it is not more likely than not the Company will be required to sell the security before recovery of its amortized cost basis, the credit loss portion of an other-than-temporary impairment is recorded through earnings while the portion attributable to all other factors is recorded separately as a component of other comprehensive income. The amount of the other-than-temporary impairment that relates to credit is estimated by comparing the amortized cost of the fixed maturity security with the net present value of the fixed maturity security's projected future cash flows, discounted at the effective interest rate implicit in the investment prior to impairment. The non-credit portion of the impairment is equal to the difference between the fair value and the net present value of the fixed maturity security at the impairment measurement date. Once an OTTI has been recognized, the new amortized cost basis of the security is equal to the previous amortized cost less the amount of OTTI recognized in earnings. Prior to the adoption of this guidance on April 1, 2009, an other-than-temporary impairment recognized in earnings for fixed maturity securities was equal to the difference between amortized cost and fair value at the time of impairment. For equity method investments, an impairment is recognized when evidence demonstrates that an other-than-temporary loss in value has occurred, including the absence of the ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment. C. Financial Instruments In the normal course of business, the Company may enter into transactions involving various types of financial instruments, including debt, investments such as fixed maturities, mortgage loans and equity securities, investment and loan commitments, swap contracts, option contracts, forward contracts and futures contracts. These instruments involve credit risk and could also be subject to risk of loss due to interest rate and foreign currency fluctuation. The Company evaluates and monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses. D. Other Investments Other investments consist primarily of overseas deposits, which are investments maintained in overseas funds and managed exclusively by Lloyd's. These funds are required in order to protect policyholders in overseas markets and enable the Company to operate in those markets. Overseas deposits are carried at fair value. Realized and unrealized gains and losses on overseas deposits, including the impact of foreign currency movements, are reflected in the income statement in the period the gain or loss was generated. Also included in other investments are investments in limited partnerships, which are accounted for by the equity method of accounting or at cost. E. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, amounts due from banks and highly liquid debt instruments purchased with an original maturity of three months or less. F. Deferred Policy Acquisition Costs Acquisition costs consist of commissions, underwriting costs and other costs, which vary with, and are primarily related to, the production of premiums. Acquisition costs are deferred and amortized over the terms of the insurance policies. Deferred acquisition costs ("DAC") for each line of business are reviewed to determine if it is recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed at the time of determination. Although recoverability of DAC is not assured, the Company believes it is more likely than not that all of these costs will be recovered. The amount of DAC considered recoverable, however, could be reduced in the near term if the estimates of total revenues discussed above are reduced or permanently impaired as a result of a disposition of a line of business. The amount of amortization of DAC could be revised in the near term if any of the estimates discussed above are revised. G. Reinsurance Recoverables The Company shares certain insurance risks it has underwritten, through the use of reinsurance contracts, with various insurance entities. Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944, Financial Services – Insurance ("ASC 944"), have been met. As a result, when the Company experiences loss or claims events that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business or an aggregate amount associated with a particular accident year. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, or an incurred but not reported loss. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business and the balance is disclosed separately in the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled. Allowances are established for amounts deemed uncollectible and reinsurance recoverables are recorded net of these allowances. The Company evaluates the financial condition of its reinsurers and monitors concentration risk to minimize its exposure to significant credit losses from individual reinsurers.
H. Property, Equipment and Capitalized Software Property, equipment, leasehold improvements and capitalized software are stated at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line or accelerated method over the estimated useful lives of the related assets, which generally range from 3 to 30 years. The estimated useful life for capitalized software is generally 3 to 5 years. Amortization of leasehold improvements is provided using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements. The Company tests for the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of long-lived assets exceed the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets. When an impairment loss occurs, the Company reduces the carrying value of the asset to fair value. Fair values are estimated using discounted cash flow analysis. I. Goodwill and Intangible Assets In accordance with the provisions of ASC 350, Intangibles- Goodwill and Other, the Company carries its goodwill at amortized cost, net of impairments. Increases to goodwill are generated through acquisition and represent the excess of the cost of an acquisition over the fair value of net assets acquired, including any intangibles acquired. Goodwill is no longer amortized but rather, is reviewed for impairment. The Company recorded $6.9 million in goodwill related to the acquisition of Chaucer. Additionally, acquisitions can also produce intangible assets, which have either a definite or indefinite life. Intangible assets with definite lives are amortized over that life, whereas those intangible assets determined to have an indefinite life are reviewed at least annually for impairment. The Company tests for the recoverability of goodwill and intangible assets with indefinite lives annually or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company recognizes impairment losses only to the extent that the carrying amounts of reporting units with goodwill exceed the fair value. The amount of the impairment loss that is recognized is determined based upon the excess of the carrying value of goodwill compared to the implied fair value of the goodwill, as determined with respect to all assets and liabilities of the reporting unit. The Company has performed its annual review of goodwill and intangible assets with indefinite lives for impairment in the fourth quarters of 2011 and 2010 with no impairments recognized. J. Liabilities for Losses, LAE, and Unearned Premiums Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE") are estimates of payments to be made on property and casualty contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments for our property and casualty business are reflected in current operations. Estimated amounts of salvage and subrogation on unpaid property and casualty losses are deducted from the liability for unpaid claims. Premiums for direct and assumed business are reported as earned on a pro-rata basis over the contract period. The unexpired portion of these premiums is recorded as unearned premiums. All losses, LAE and unearned premium liabilities are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that these liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised. K. Debt The Company's debt includes senior debentures, junior debentures, subordinated notes, trust preferred capital securities, and advances under the Company's collateralized borrowing program with the Federal Home Loan Bank of Boston ("FHLBB"). The senior debentures and subordinated notes are carried at principal amount borrowed, net of unamortized discounts. The junior subordinated debentures and borrowings under the FHLBB program are carried at principal amount borrowed. Debt also includes liabilities connected to trust preferred capital securities, related to outstanding securities issued by AIX Holdings, Inc. ("AIX") and Professionals Direct, Inc. ("PDI"). Cash distributions on such trust preferred stock are accounted for as interest expense. (See Note 6 – "Debt and Credit Arrangements").
L. Premium, Premium Receivable, Fee Revenue and Related Expenses Insurance premiums written are generally recorded at the policy inception and are primarily earned on a pro rata basis over the terms of the policies for all products. Premiums written include estimates, primarily in the Chaucer segment, that are derived from multiple sources which include the historical experience of the underlying business, similar businesses and available industry information. These estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. Unearned premium reserves represent the portion of premiums written that relates to the unexpired terms of the underlying in-force insurance policies and reinsurance contracts. Premium receivables reflect the unpaid balance of premium written as of the balance sheet date. Premium receivables are generally short-term in nature and are reported net of allowance for estimated uncollectible premium accounts. The Company reviews its receivables for collectibility at the balance sheet date. The allowance for uncollectible accounts was not material as of December 31, 2011 and 2010. Ceded premiums are charged to income over the applicable term of the various reinsurance contracts with third party reinsurers. Reinsurance reinstatement premiums, when required, are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Losses and related expenses are matched with premiums, resulting in their recognition over the lives of the contracts. This matching is accomplished through estimated and unpaid losses and amortization of deferred policy acquisition costs. M. Income Taxes The Company is subject to the tax laws and regulations of the U.S. and foreign countries in which it operates. The Company files a consolidated U.S. federal income tax return that includes the holding company and its U.S. subsidiaries. Generally, taxes are accrued at the U.S. rate of 35% for income from the U.S. operations. The Company's primary non-U.S. jurisdiction is the U.K. with a current tax rate of 26%. However, THG accrues taxes on certain non-U.S. income which is subject to U.S. tax as a result of being owned by a U.S. shareholder at the U.S. rate. Foreign tax credits, where available, are utilized to offset U.S. tax as permitted. Certain non-U.S. income is not subject to U.S. tax until repatriated. Foreign taxes on this non-U.S. income are accrued at the local foreign rate and do not have an accrual for U.S. deferred taxes as these earnings are intended to be permanently reinvested overseas. The Company's accounting for income taxes represents its best estimate of various events and transactions. Deferred income taxes are generally recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by ASC 740, Income Taxes ("ASC 740"). These temporary differences are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. These differences result primarily from insurance reserves, deferred policy acquisition costs, tax credit carryforwards, loss carryforwards, and employee benefit plans. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. Consideration is given to all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. Valuation allowances are established if, based on available information, it is determined that it is more likely than not that all or some portion of the deferred tax assets will not be realized. Changes in valuation allowances are generally reflected in income tax expense or as an adjustment to other comprehensive income (loss) depending on the nature of the item for which the valuation allowance is being recorded. N. Stock-Based Compensation The Company recognizes the fair value of compensation costs for all share-based payments, including employee stock options, in the financial statements. Unvested awards are generally expensed on a straight line basis, by tranche, over the vesting period of the award. The Company's stock-based compensation plans are discussed further in Note 10 – "Stock-Based Compensation Plans". O. Earnings Per Share Earnings per share ("EPS") for the years ended December 31, 2011, 2010 and 2009 is based on a weighted average of the number of shares outstanding during each year. Basic and diluted EPS is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period. The weighted average shares outstanding used to calculate basic EPS differ from the weighted average shares outstanding used in the calculation of diluted EPS due to the effect of dilutive employee stock options, nonvested stock grants and other contingently issuable shares. If the effect of such items is antidilutive, the weighted average shares outstanding used to calculate diluted EPS equal those used to calculate basic EPS. Options to purchase shares of common stock whose exercise prices are greater than the average market price of the common shares are not included in the computation of diluted earnings per share because the effect would be antidilutive.
P. Foreign Currency The Company's reporting currency is the U.S. dollar. The functional currencies of the Company's foreign operations are the U.K. Pounds Sterling ("GBP"), U.S. dollar, and Canadian dollar. Assets and liabilities of foreign operations are translated into the U.S. dollar using the exchange rates in effect at the balance sheet date. Revenues and expenses of foreign operations are translated using the average exchange rate for the period. Gains or losses from translating the financial statements of foreign operations are recorded in cumulative translation adjustment, as a separate component of accumulated other comprehensive income. Gains and losses arising from transactions denominated in a foreign currency, other than the Company's functional currencies, are included in net income (loss), except for the Company's foreign currency denominated available-for-sale investments. The Company's foreign currency denominated available-for-sale investments' change in exchange rates between the local currency and the functional currency at each balance sheet date represents an unrealized appreciation or depreciation in value of these securities, and is included as a component of accumulated other comprehensive income. The Company manages its exposure to foreign currency risk primarily by matching assets and liabilities denominated in the same currency. To the extent that assets and liabilities in foreign currencies are not matched, the Company is exposed to foreign currency risk. For functional currencies, the related exchange rate fluctuations are reflected in other comprehensive income (loss). The Company translated Chaucer's balance sheet from GBP to U.S. dollars using the December 31, 2011 conversion rate of 1.55. The Company recognized approximately $0.7 million in foreign currency transaction gains in the Statement of Income during the period from July 1, 2011 to December 31, 2011. Q. New Accounting Pronouncements Recently Implemented Standards In December 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") Update No. 2010-29 (Topic 805) Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). This update provides clarity on the presentation of comparable pro forma financial statements for business combinations. Revenues and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Additionally, this update requires the disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The disclosure guidance provided in this ASC update is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company implemented this guidance as of January 1, 2011. Implementing this guidance did not have an effect on the Company's financial position or results of operations upon adoption; however, the disclosure requirements were applied to the Company's acquisition of Chaucer. See Note 2 – "Acquisitions and Discontinued Operations" for pro forma results of operations of THG and Chaucer. In December 2010, the FASB issued ASC Update No. 2010-28 (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). This update modifies Step 1 of the goodwill impairment test for companies with zero or negative carrying amounts to require Step 2 of the goodwill impairment test to be performed if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This ASC update was effective for annual and interim periods beginning after December 15, 2010. The Company implemented this guidance as of January 1, 2011. The effect of implementing this guidance was not material to the Company's financial position or results of operations. In July 2010, the FASB issued ASC Update No. 2010-20 (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This ASC update is applicable for financing receivables recognized on a company's balance sheet that have a contractual right to receive payment either on demand or on fixed or determinable dates. This update enhances the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses, at disaggregated levels. The disclosure guidance provided in the update relating to those required as of the end of the reporting period was effective for interim and annual reporting periods ending on or after December 15, 2010. The effect of implementing the guidance was not significant to the Company's financial statement disclosures. The disclosure guidance related to activity that occurs during the reporting period is effective for interim and annual reporting periods beginning on or after December 15, 2010. The implementation of the disclosure guidance related to activity was not significant to the Company's financial statement disclosures. In January 2010, the FASB issued ASC Update No. 2010-06 (Topic 820) – Improving Disclosures about Fair Value Measurements. This update amends ASC 820 and requires new and clarified disclosures for fair value measurements. The guidance requires that transfers in and out of Levels 1 and 2 be disclosed separately, including a description of the reasons for such transfers. Additionally, the reconciliation of fair value measurements of Level 3 assets should separately disclose information about purchases, sales, issuance and settlements in a gross, rather than net disclosure presentation. The guidance further clarifies that fair value disclosures should be separately presented for each class of assets and liabilities and disclosures should be provided for valuation techniques and inputs for both recurring and non-recurring fair value measurements related to Level 2 and Level 3 categories. The disclosure guidance provided in the update was effective for reporting periods beginning after December 15, 2009. The Company implemented this guidance effective January 1, 2010. Implementing this guidance did not have an effect on the Company's financial position or results of operations. In December 2009, the FASB issued ASC Update No. 2009-17, Consolidation (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities which codified Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R). This guidance amends FASB Interpretation No. 46R, Consolidation of Variable Interest Entities an interpretation of ARB No. 51 to require an analysis to determine whether a company has a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has a) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The statement requires an ongoing assessment of whether a company is the primary beneficiary of a variable interest entity when the holders of the entity, as a group, lose power, through voting or similar rights, to direct the actions that most significantly affect the entity's economic performance. This statement also enhances disclosures about a company's involvement in variable interest entities. This ASC update was effective as of the beginning of the first annual reporting period that began after November 15, 2009. The Company implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Company's financial position or results of operations. In December 2009, the FASB issued ASC Update No. 2009-16 Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets which codified Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140. This guidance revises FASB Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Extinguishment of Liabilities a replacement of FASB Statement 125 and requires additional disclosures about transfers of financial assets, including securitization transactions, and any continuing exposure to the risks related to transferred financial assets. It also eliminates the concept of a "qualifying special-purpose entity", changes the requirements for derecognizing financial assets, and enhances disclosure requirements. This ASC update was effective prospectively, for annual periods beginning after November 15, 2009, and interim and annual periods thereafter. The Company implemented this guidance as of January 1, 2010. The effect of implementing this guidance was not material to the Company's financial position or results of operations. As of April 1, 2009, the Company adopted guidance included in ASC 320, which modifies the assessment of OTTI for fixed maturity securities, as well as the method of recording and reporting OTTI. Under the new guidance, if a company intends to sell or more likely than not will be required to sell a fixed maturity security before recovery of its amortized cost basis, the amortized cost of the security is reduced to its fair value, with a corresponding charge to earnings. If a company does not intend to sell the fixed maturity security, or more likely than not will not be required to sell it, the company is required to separate the other-than-temporary impairment into the portion which represents the credit loss and the amount related to all other factors. The amount of the estimated loss attributable to credit is recognized in earnings and the amount related to non-credit factors is recognized in accumulated other comprehensive income, net of applicable taxes. A cumulative effect adjustment was recognized by the Company upon adoption of this guidance to reclassify the non-credit component of previously recognized impairments from retained earnings to accumulated other comprehensive income. The Company increased the amortized cost basis of these fixed maturity securities and recorded a cumulative effect adjustment of $33.3 million as an increase to retained earnings and reduction to accumulated other comprehensive income for the year ended December 31, 2009. (See further disclosure in Note 4 – "Investment Income and Gains and Losses"). Recently Issued Standards In September 2011, the FASB issued ASC Update No. 2011-08 (Topic 350) Testing Goodwill for Impairment. This ASC update allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The update provides that an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The update further improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the update improves the examples of events and circumstances that should be considered by an entity that has a reporting unit with a zero or negative carrying amount in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. This ASC update is effective for annual and interim periods beginning after December 15, 2011, with early adoption permitted. The Company does not expect the adoption of this ASC to have a material impact on its financial position or results of operations.
In June 2011, the FASB issued ASC Update No. 2011-05 (Topic 220) Presentation of Comprehensive Income ("ASC Update No. 2011-05"). This ASC update requires companies to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. In addition, an entity is required to present on the face of the financial statements reclassification adjustments from other comprehensive income to net income. This ASC update should be applied retrospectively and except for the provisions related to reclassification adjustment, is effective for interim and annual periods beginning after December 15, 2011. In December 2011, the FASB issued ASC Update 2011-12 (Topic 220) Comprehensive Income which deferred the implementation date of the reclassification adjustment guidance in ASC Update No. 2011-05. The Company expects that the implementation of the guidance related to financial statement presentation will not have a significant impact to its current financial statement presentation. The Company is evaluating the impact of presenting the reclassification adjustment to its Consolidated Statements of Income and Comprehensive Income. In May 2011, the FASB issued ASC Update No. 2011-04 (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASC update results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards ("IFRS"). The new guidance includes changes to how and when the valuation premise of highest and best use applies, clarification on the application of blockage factors and other premiums and discounts, as well as new and revised disclosure requirements. This ASC update is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of this ASC to have a material impact on its financial position or results of operations. In October 2010, the FASB issued ASC Update No. 2010-26 (Topic 944), Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force). This ASC update provides clarity in defining which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, commonly known as deferred acquisition costs. Additionally, this update specifies that only costs associated with the successful acquisition of a policy or contract may be deferred, whereas industry practice historically included costs relating to unsuccessful contract acquisition. This ASC is effective for fiscal years beginning after December 15, 2011. Retrospective application to all prior periods upon the date of adoption is also permitted. The Company has elected to apply this guidance retrospectively. Management anticipates that the implementation of this ASC would result in an after-tax reduction to our stockholders' equity as of January 1, 2012 of approximately $26 million, or approximately 1%. The adoption of this guidance is not expected to have a material impact on our results of operations on either a historical or prospective basis. R. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. S. Discontinued Operations Significant Accounting Policy Discussion The following accounting policies relate only to the Company's discontinued operations, which are in run-off. Please refer to the above captions for policies related to assets and liabilities that were held by both the Company's ongoing business and the discontinued business. Reinsurance accounting is followed for ceded transactions when the risk transfer provisions of ASC 944 have been met. As a result, when the Company experiences loss or claims events, or unfavorable mortality or morbidity experience that are subject to a reinsurance contract, reinsurance recoverables are recorded. The amount of the reinsurance recoverable can vary based on the terms of the reinsurance contract, the size of the individual loss or claim, or the aggregate amount of all losses or claims in a particular line or book of business. The valuation of losses or claims recoverable depends on whether the underlying loss or claim is a reported loss or claim, an incurred but not reported loss or a future policy benefit. For reported losses and claims, the Company values reinsurance recoverables at the time the underlying loss or claim is recognized, in accordance with contract terms. For incurred but not reported losses and future policy benefits, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve and future policy benefit estimates. The reinsurance recoverables are based on what the Company believes are reasonable estimates. However, the ultimate amount of the reinsurance recoverable is not known until all losses and claims are settled. Liabilities for outstanding claims, losses and LAE are estimates of payments to be made on health insurance contracts for reported losses and LAE and estimates of losses and LAE incurred but not reported. These liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. These estimates are continually reviewed and adjusted as necessary; adjustments are reflected in discontinued operations. Although the adequacy of these amounts cannot be assured, the Company believes that it is more likely than not that policy liabilities and accruals will be sufficient to meet future obligations of policies in force. The amount of liabilities and accruals, however, could be revised in the near-term if the estimates discussed above are revised.
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Commitments And Contingencies (Details)
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Dec. 31, 2011
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Commitments And Contingencies [Abstract] | |
Treasury rate, years | 30 |
Number of defendants | 200 |