9. PENSION PLANS

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 employee's 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 Company's 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.

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 Company's defined benefit plans. ASC 715, Compensation - Retirement Plans ("ASC 715") , requires the aggregation of all overfunded plans separately from all underfunded plans. 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.

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 Company's 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 31^st to determine its benefit obligations, consistent with the date of its Consolidated Balance Sheets. Weighted-average assumptions used to determine pension benefit obligations are as follows:


DECEMBER 31	2010			2009			2008
Discount rate ⁽¹⁾		5.63	%		6.13	%		6.63	%
Cash balance interest crediting rate		4.50	%		4.50	%		5.00	%

(1)	In 2010 and 2009, the discount rate utilized for the non-qualified plans was 5.50% and 6.00%, respectively. The discount rate for 2008 for the non-qualified plan is consistent with the qualified plan.

The decrease in the interest crediting rate in 2009 reflects a change in expectations regarding long-term interest rate levels due to the current economic impact of the financial markets on the GATT rate.

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 are as follows:


FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
Discount rate		6.13	%		6.63	%		6.38	%
Expected return on plan assets		7.00	%		7.50	%		7.75	%
Cash balance interest crediting rate		4.50	%		5.00	%		5.00	%

The expected rate of return was determined by using historical mean returns, adjusted for certain factors believed to have an impact on future returns. Specifically, 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 plan's actual asset allocation at December 31, 2010, resulting in an expected rate of return on plan assets for 2010 of 7.00%. The Company reviews and updates, at least annually, its expected return on plan assets based on changes in the actual assets held by the plan.

Plan Assets

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 Company's 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 2010 and 2009, the plan assets were shifted out of equity securities and into fixed income securities to the current allocation of 74% in fixed income securities and 26% 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 2010 and 2009.


DECEMBER 31	2010 TARGET LEVELS			2010			2009
Fixed Income Securities:
Fixed Maturities		73	%		73	%		56	%
Money Market Funds		2	%		1	%		1	%

Total Fixed Income Securities		75	%		74	%		57	%
Equity Securities:
Domestic		18	%		18	%		31	%
International		7	%		7	%		10	%
THG Common Stock		—			1	%		2	%

Total Equity Securities		25	%		26	%		43	%

Total Assets		100	%		100	%		100	%

Included in total plan assets of $547.8 million at December 31, 2010 were $541.7 million of invested assets carried at fair value and $6.1 million of cash and equivalents. Total plan assets at December 31, 2009 of $424.5 million included $421.0 million of invested assets carried at fair value and $3.5 million of cash and equivalents.

The following table presents for each hierarchy level the Plan's investment assets that are measured at fair value at December 31, 2010 and 2009. (Please refer to Note 6 – Fair Value, for a description of the different levels in the Fair Value Hierarchy).

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

—

Total Equity Securities

144.7

7.2

137.5

—

Total Investments at Fair Value

541.7

10.0

531.7

—


December 31, 2009
*(in millions)*
	Fair Value
	Total		Level 1		Level 2		Level 3
Description
Fixed Income Securities
Fixed Maturities	$	241.2	$	60.9	$	180.3	$	—

Equity Securities:
Domestic		129.9		0.9		129.0		—
International		43.6		0.4		43.2		—
THG Common Stock		6.3		6.3		—		—

Total Equity Securities		179.8		7.6		172.2		—

Total Investments at Fair Value	$	421.0	$	68.5	$	352.5	$	—

Fixed Income Securities

Securities classified as Level 1 at December 31, 2010 and 2009 include actively traded mutual funds that are publicly traded securities which are valued at quoted market prices. Securities classified as Level 1 in 2009 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.

Securities classified as Level 2 at December 31, 2010 include the aforementioned separate investment account. Additionally, included in Level 2 at December 31, 2010 is a custom fund that invests in commingled pools and investment grade fixed income securities. In 2009, Level 2 securities reflected investments in commingled pools that primarily invest in investment grade fixed income securities. These investments are valued using independent pricing models that incorporate observable inputs related to the aggregated underlying investments.

During 2010, the separate investment account was reclassified from Level 1 in 2009 to Level 2 due to the application of new accounting guidance related to the use of daily pricing as a practical expedient for fair value of these investments.

Equity Securities

Level 1 securities primarily consist of 141,462 shares of THG common stock held by the plan. THG common stock is valued through quoted market prices. Securities also classified as Level 1 at December 31, 2010 and 2009 include actively traded mutual funds that primarily invest in equity securities which 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 equities. These pools are valued using independent pricing models that incorporate observable inputs related to the aggregated underlying investments.

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, 2010 and 2009.


DECEMBER 31	Qualified Pension Plans						Non-Qualified Pension Plans
(in millions)
	2010			2009			2010			2009
Accumulated benefit obligation	$	548.0		$	518.4		$	39.1		$	38.2

Change in benefit obligation:
Projected benefit obligation, beginning of year	$	518.4		$	494.1		$	38.2		$	37.9
Service cost – benefits earned during the year		0.1			0.1			—			—
Interest cost		30.4			31.5			2.2			2.4
Actuarial losses		32.0			22.9			2.1			1.2
Benefits paid		(32.9	)		(30.2	)		(3.4	)		(3.3	)

Projected benefit obligation, end of year		548.0			518.4			39.1			38.2

Change in plan assets:
Fair value of plan assets, beginning of year		424.5			338.5			—			—
Actual return on plan assets		56.2			71.0			—			—
Company contribution		100.0			45.2			3.4			3.3
Benefits paid		(32.9	)		(30.2	)		(3.4	)		(3.3	)

Fair value of plan assets, end of year		547.8			424.5			—			—

Funded status of the plans	$	(0.2	)	$	(93.9	)	$	(39.1	)	$	(38.2	)

Components of Net Periodic Pension Cost

The components of net periodic pension cost for pension and other postretirement benefit plans are as follows:


FOR THE YEARS ENDED DECEMBER 31	2010			2009			2008
*(In millions)*
Service cost – benefits earned during the year	$	0.1		$	0.1		$	0.1
Interest cost		32.6			33.9			32.8
Expected return on plan assets		(35.1	)		(25.4	)		(33.8	)
Recognized net actuarial loss		16.8			26.9			2.6
Amortization of transition asset		(1.6	)		(1.6	)		(1.7	)
Amortization of prior service cost		0.1			—			0.1

Net periodic pension cost	$	12.9		$	33.9		$	0.1

The following table reflects the amounts recognized in accumulated other comprehensive income (loss) relating to the Company's defined benefit pension plans as of December 31, 2010 and 2009.


December 31	2010		2009
*(In millions)*
Net actuarial loss	$	134.4	$	138.1
Net prior service cost		0.1		0.2
Net transition asset		—		(1.6	)

	$	134.5	$	136.7

The following table reflects the estimated amount that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in 2011:


Estimated Amortization in 2011 Expense
*(In millions)*
Net actuarial gain	$	15.0
Net prior service cost		0.1

	$	15.1

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 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 Company's qualified defined benefit pension plan is essentially fully funded. In addition, the Company expects to contribute $3.3 million to its non-qualified pension plans to fund 2011 benefit payments. At this time, no additional discretionary contributions are expected to be made to the plans during 2011 and the Company does not expect that any funds will be returned from the plans to the Company during 2011.

Benefit Payments

The Company estimates that benefit payments over the next 10 years will be as follows:


FOR THE YEARS ENDED DECEMBER 31	2011		2012		2013		2014		2015		2016-2020
*(In millions)*
Qualified pension plans	$	37.1	$	38.1	$	38.3	$	39.5	$	40.2	$	204.2
Non-qualified pension plans	$	3.3	$	3.2	$	3.1	$	3.3	$	3.6	$	14.9

The benefit payments are based on the same assumptions used to measure the Company's benefit obligations at the end of 2010. Benefit payments related to the qualified plans 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 employees, whereby the Company matches employee elective 401(k) contributions, up to a maximum percentage of 6% in both 2010 and 2009 and 5% in 2008. The Company's expense for this matching provision was $16.5 million, $14.2 million and $12.0 million for 2010, 2009 and 2008, respectively. In addition to this matching provision, the Company can elect to make an annual contribution to employees' accounts. There was no additional contribution in 2010 and the Company's cost for additional contributions in 2009 and 2008 was $2.0 million and $5.4 million, respectively.