The year ended June 30, 2009 includes a goodwill impairment charge of $68.0 million, a related increase in the tax provision of $15.3 million, and a tax benefit of $5.1 million related to the utilization of federal net operating loss (“NOL”) carryforwards that were previously reserved for through a valuation allowance. The provision for income taxes for the year ended June 30, 2008 includes a charge of $11.4 million related to the expiration of certain federal NOL carryforwards as well as an increase in the valuation allowance of $3.6 million for the deferred tax asset for certain federal NOL carryforwards resulting in a charge totaling $15.0 million. The provision for income taxes for the year ended June 30, 2007 includes an increase in the valuation allowance for the deferred tax asset of $6.9 million as well as $10.0 million related to the expiration of certain federal NOL carryforwards resulting in a charge totaling $16.9 million. The benefit from income taxes for the year ended June 30, 2006 includes a decrease in the valuation allowance for the deferred tax asset of $10.5 million.
Investments in CMOs had a fair value of $41.8 million at June 30, 2010 and represented 22% of our fixed maturity portfolio. At June 30, 2010, 89% of our CMOs were considered investment grade by nationally recognized rating agencies. In addition, 83% of our CMOs were rated AAA and 67% of our CMOs were backed by agencies of the United States government. Of the non-agency backed CMOs, 47% were rated AAA.
Year Ended June 30, 2009 Compared with the Year Ended June 30, 2008
Overall, the combined ratio decreased to 91.3% for the year ended June 30, 2009 from 98.6% for the year ended June 30, 2008.
The holding company has debt service requirements related to the debentures payable. The debentures are interest-only and mature in full in July 2037. Interest is fixed annually through July 2012 at $3.9 million. The debentures pay a fixed rate of 9.277% until July 30, 2012, after which time the rate becomes variable (LIBOR plus 375 basis points).
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries which are all wholly owned. These financial statements have been prepared in conformity with U.S. generally accepted accounting principles. All intercompany accounts and transactions have been eliminated in consolidation.
The fair values of the Company’s investments are determined by management after taking into consideration available sources of data. All of the portfolio valuations classified as Level 1 or Level 2 in the above table are priced exclusively by utilizing the services of independent pricing sources using observable market data. The Level 2 classified security valuations are obtained from a single independent pricing service. There were no
Based on the above categorization, the following table represents the quantitative disclosure for those assets included in category Level 3 during the period presented (in thousands).
The components of net realized gains (losses) on investments, available-for-sale are as follows (in thousands).
Realized gains and losses on sales of securities are computed based on specific identification. The non-credit related portion of OTTI charges is included in other comprehensive income (loss). The amounts of such charges taken for securities still owned were $0.6 million for non-agency backed residential CMOs and $0.3 million for non-agency backed commercial CMOs during the year ended June 30, 2010 and $0.6 million for non-agency backed residential CMOs and $0.6 million for non-agency backed commercial CMOs during the year ended June 30, 2009.
The Company is committed under various lease agreements for office space and equipment. Certain lease agreements contain renewal options and rent escalation clauses. Rental expense for 2010, 2009 and 2008 was $10.9 million, $10.7 million and $12.2 million, respectively. Future minimum lease payments under these agreements follow (in thousands).
The Company had a valuation allowance of $16.9 million and $24.9 million at June 30, 2010 and 2009, respectively, to reduce net deferred tax assets to the amount that is more likely than not to be realized, which included all net deferred tax assets at June 30, 2010 and 2009. The change in the total valuation allowance for the year ended June 30, 2010 was a decrease of $8.0 million. For the year ended June 30, 2010, the change in the valuation allowance primarily included the unrealized change on investments of $3.2 million included in other comprehensive income (loss).
In assessing the realization of deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. The Company is required to assess whether a valuation allowance should be established against the Company’s net deferred tax assets based on the consideration of all available evidence using a more likely than not standard. In making such judgments, significant weight is given to evidence that can be objectively verified. In assessing the Company’s ability to support the realizability of its deferred tax assets, management considered both positive and negative evidence. The Company placed greater weight on historical results than on the Company’s outlook for future profitability and established a deferred tax valuation allowance against all net deferred tax assets at June 30, 2010 and 2009. The deferred tax valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some portion or all of the deferred tax assets will be realized. In the event the deferred tax valuation allowance is adjusted, the Company would record an income tax benefit for the adjustment.