At December 31, 2012, $86.1 million, or 25% of shareholders’ equity, represented net assets of the Company’s insurance subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. However, management believes that these restrictions pose no material liquidity concerns for the Company. The financial strength and stability of the subsidiaries permit ready access by the parent company to short-term and long-term sources of credit. The Company maintains a $30 million unsecured line of credit and has $10.0 million of drawings outstanding on this line at December 31, 2012, the proceeds of which were used principally for general corporate purposes.
The fleet transportation loss ratio was impacted by factors such as fluctuations in premium volume, the levels of self-insured retentions and the high policy limits which allow for more volatility in losses. The property reinsurance loss ratio was much lower in 2012 due to the lack of any major catastrophic losses to the Company, including a lack of significant impact from Superstorm Sandy late in the year. Losses from large catastrophic events during 2012 totaled just $1.0 million, compared to $66.6 million during 2011, a record year for international catastrophic events.
The Company’s loss and loss expense reserves for each segment are shown in the following table on both a gross (before consideration of reinsurance) and on a net of reinsurance basis at December 31, 2012 and 2011 (dollars in thousands).
Under reasonably possible scenarios, it is conceivable that the Company’s selected loss reserve estimates could be 10%, or more, redundant or deficient. The majority of the Company’s reserves for losses and loss expenses, on either a gross or a net of reinsurance basis, relates to its fleet transportation products. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for the Company’s fleet transportation products for policies subject to certain major reinsurance treaties (approximately $130.6 million, or approximately 34% of carried direct reserves for directly produced property and casualty business). The following table presents the approximate impacts on gross and net loss reserves of both a 10 percentage point and 20 percentage point increase or decrease in the loss factors actually utilized in the Company’s reserve determination at December 31, 2012. The Company’s selection of the range of values presented should not be construed as the Company’s prediction of future events, but rather an illustration of the impact of such events, should they occur:
The Company's fixed maturity portfolio totaled $445.7 million at December 31, 2012. Approximately 63% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; 86% of the portfolio matures within 5 years; and the average contractual maturity of the Company's fixed maturity investments is approximately 3.6 years with an average duration of approximately 2.2 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company's liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, even a 100 to 200 basis point increase in interest rates would not have even a moderate impact on the Company's ability to conduct daily operations or to meet its obligations and would, in fact, result in significantly higher investment income in a relatively short period of time as short term investments and maturing bonds could be reinvested in the higher yielding securities very quickly.
Borrowings are made under a line of credit with a current expiration of September 23, 2014; however, it is expected that this line of credit will be renewed for a multiple year period prior to maturity.
Reserves for Losses and Loss Expenses: The reserves for losses and loss expenses, minor portions of which are discounted, are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year end. These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled. While actual results could differ from such estimates, management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed and as adjustments to these reserves become necessary, such adjustments are reflected in current operations.
Unrealized losses in the Company’s fixed maturity portfolio are generally the result of interest rate fluctuations as well as the disruption of credit markets occasioned by financial market turmoil. The average unrealized loss for all fixed maturity securities in a loss position at December 31, 2012 is approximately 1% of original or adjusted cost. The Company does not intend to sell any fixed maturity securities and it is not more likely than not that the Company will have to sell any fixed maturity security before recovery of its amortized cost basis. For equity securities, the Company has evaluated the near-term prospects of the investment in relation to the severity and duration of the impairment and based on that evaluation the Company has the ability and intent to hold these investments until a recovery of fair value. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2012.
The Company has invested a total of $24,000 in three limited partnerships, with an aggregate estimated value of $39,745 at December 31, 2012, that are managed by organizations in which three directors of the Company are executive officers, directors or owners. The Company’s ownership interest in these limited partnerships ranges from 4% to 14%. These limited partnerships added $2,485, ($18,673) and $7,464, net of fees, to investment gains (losses) in 2012, 2011 and 2010, respectively. During 2012, 2011 and 2010, the Company has recorded management fees of $650, $793 and $820, respectively, and performance-based fees of $0, $0 and $687, respectively, to these organizations for management of these limited partnerships. The Company has been informed that the fee rates applied to its investments in these limited partnerships are the same as, or lower than, the fee rates charged to unaffiliated customers for similar investments.
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, notes receivable, accounts payable and accrued expenses, income taxes payable, short term borrowings and unearned income approximate fair value because of the short term nature of these items. These assets and liabilities are not included in the table below.