The Company’s entire operations are conducted from these facilities. The current facilities are expected to be adequate for the Company’s operations for the foreseeable future.
2 Includes extra dividends of $0, $.65, $1.70, $.55, and $1.65 per share for 2008, 2007, 2006, 2005 and 2004, respectively.
The primary sources of the Company’s liquidity are (1) funds generated from insurance operations including net investment income, (2) proceeds from the sale of investments and (3) proceeds from maturing investments. The Company generally experiences positive cash flow from operations resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the insurance subsidiaries, other than loss and loss expense payments, generally average less than 30% of premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, turn negative as loss settlements on claim reserves established in prior years exceed net premium revenue and receipts of investment income. During 2008, negative cash flow from operations totaled $3.5 million compared to a positive $27.3 million in 2007. This comparative decrease in operating cash flow resulted from increases in loss settlements of $24 million and increases in ceded premiums reflecting changes in reinsurance treaties.
For several years, the Company’s investment philosophy has emphasized the purchase of short-term bonds with maximum quality and liquidity. As interest rates and yield curves have not provided a strong incentive to lengthen maturities in recent years, the Company has continued to maintain its fixed maturity portfolio at very conservative levels. The average contractual life of the Company’s bond and short-term investment portfolio decreased from 3.7 to 3.0 years during 2008. The average duration of the Company’s fixed maturity portfolio is shorter than the contractual maturity average and much shorter than the duration of the Company’s liabilities. The Company also remains an active participant in the equity securities market using capital which is in excess of amounts considered necessary to fund current operations. The long-term horizon for the Company’s equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus. Investments made by the Company’s domestic insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners which are designed to provide protection for both policyholders and shareholders.
The Company’s assets at December 31, 2008 included $58.1 million in short-term and cash equivalent investments which are readily convertible to cash without market penalty and an additional $128.1 million of fixed maturity investments (at par) maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations, are more than sufficient to provide for projected claim payments and operating cost demands. In the event competitive conditions produce inadequate premium rates and the Company chooses to further restrict volume, the liquidity of its investment portfolio would permit management to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. In addition, the Company’s reinsurance program is structured to avoid serious cash drains that accompany large losses.
Premiums ceded to reinsurers on direct business increased $6.8 million (21%) during 2008 to $39.8 million as the consolidated percentage of premiums ceded to direct premiums written increased to 21.8% for 2008 from 18.7% for 2007. This increase is reflective of the Company’s decreased retention under reinsurance treaties effective June, 2007, and June, 2008, covering fleet transportation risks, resulting in a higher percentage of the direct premiums ceded to reinsurers.
After giving effect to changes in unearned premiums, net premiums earned increased 2% to $182.3 million for 2008 from $179.1 million for 2007. Net premiums earned from fleet transportation insurance products increased by $2.7 million (2%). Additionally, net premiums earned from property reinsurance increased by $6.7 million (23%). Net premiums earned from the Company’s private passenger automobile product decreased by $7.2 million (25%).
Pre-tax investment income of $17.1 million reflects a decrease during 2008 compared to 2007 as pre-tax yields were down 12% on average reflecting worldwide lower available rates, principally on short-term investments. After tax investment income decreased by 8% during 2008, compared to the prior year, and is lower than the pre-tax change due to the utilization of municipal bonds at a higher level during 2008.
Direct premiums written for 2007 totaled $176.1 million, a decrease of $8.0 million (4%) from 2006. This decrease is primarily attributable to a decrease in the Company’s private passenger automobile business of $10.4 million (31%), partially offset by an increase in the Company’s fleet transportation business of $1.4 million (1%) The overall net decrease in direct premiums written volume was a result of ongoing rate competition and the resultant loss of business.
Premiums ceded to reinsurers on direct business increased $8.1 million (32.8%) during 2007 to $33.0 million as the consolidated percentage of premiums ceded to direct premiums written increased to 19% for 2007 from 14% for 2006. This increase is reflective of the Company’s decreased retention under reinsurance treaties effective June 2007 covering large fleet transportation risks, resulting in a higher percentage of the direct premiums ceded to reinsurers.
After giving effect to changes in unearned premiums, net premiums earned increased 5% to $179.1 million for 2007 from $169.8 million for 2006. Net premiums earned from all fleet transportation products increased by $1.8 million (2%). Additionally, net premiums earned from non-affiliated property reinsurance increased by $13.4 million (102%). Net premiums earned from the Company’s private passenger automobile decreased by $6.8 million (19%).
Pre-tax investment income of $19.6 million was essentially flat during 2007 compared to 2006 as pre-tax yields were up 4% on average and were largely offset by a 3% decrease in average invested assets. Average invested assets decreased primarily due to the payment of over $25 million in cash dividends to shareholders during the year partially offset by increased cash flow from operations. After tax investment income increased by 7% during 2007, compared to the prior year. The after-tax investment income yield increased by 10% from 2006 reflecting a significantly higher proportion of the Company’s bond portfolio allocated to municipal bonds in 2007.
Losses and loss expenses incurred during 2007 decreased $4.8 million (4%) to $107.8 million. The decrease in losses incurred is due to increased savings on prior accident year losses, primarily from fleet transportation and property
Other operating expenses for 2007, before credits for allowances from reinsurers, increased $9.7 million (19.9%) to $58.4 million. This increase is due primarily to a $5.2 million increase in commission expense related to increased business produced through non-affiliated agents and brokers including commissions relating to higher property reinsurance premium volume. Additionally, 2006 operating expenses were favorably impacted by a recovery of nearly $1 million previously written off related to bankrupt reinsurers. After consideration for these three items, expenses before ceding allowances increased $.6 million, or 1.2% from 2006.
Reinsurance ceded credits were $.8 million (69%) higher in 2007, resulting from changes related to recent reinsurance treaties.
A portion of fleet transportation business is produced by direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Instead, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. are included in operating expenses. In general, commissions paid by the insurance subsidiaries to the parent company exceed related acquisition costs incurred in the production of fleet transportation business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 30.9% during 2007 compared to 26.6% for 2006. Including the agency operations, and after elimination of inter-company commissions, the ratio of other operating expenses to operating revenue (defined as total revenue less gains on investments) was 27.7% for 2007 compared with 24.2% for 2006, reflective of the increase in commission expense, as discussed above.
The effective federal tax rate for consolidated operations for 2007 was 30.8%. This rate is lower than the statutory rate primarily because of tax-exempt investment income.
The Company’s significant accounting policies are discussed in Note A to the consolidated financial statements. The following discussion is provided to highlight areas of the Company’s accounting policies which are material and/or subject to significant degrees of judgment.
Approximately 70% of the Company’s assets are composed of investments at December 31, 2008. Approximately 89% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 11% of investments are composed primarily of minority interests in several limited partnerships. These limited partnerships are engaged in the trading of public and non-public equity securities and debt, hedging transactions, real estate development and venture capital investment. These partnerships, themselves, do not have readily-determinable market values. Rather, the fair values recorded are those provided to the Company by the respective partnerships based on the underlying assets of the partnerships. While the majority of the underlying assets at December 31, 2008 are publicly-traded securities, some have been valued by the respective partnerships using their experience and judgment.
Approximately $4.1 million of fixed maturity investments (.7% of total invested assets) consists of bonds rated as less than investment grade at year end. These investments are primarily composed of shares in two widely diversified high yield bond funds where exposure to default by any single issuer is likely to be limited. These funds carry a Morningstar rating of three and five stars. We have included the investments in these funds in the total of non-investment grade bonds since, under the investment guidelines of the funds, the average bond quality rating could fall below BBB. At December 31, 2008, the market value of these bond funds, as recorded in the financial statements, was 17.6% less than cost.
A discussion of the Company’s reinsurance strategies is presented in Item 1, Business, on page 2.
The Company’s loss and loss expense reserves for each significant product group are shown in the following table for direct and assumed and on a net of reinsurance basis at December 31, 2008 and 2007 (dollars in thousands). Those product groups individually comprising less than three percent of the Company’s total reserves are shown in the aggregate as “All other”.
The Company’s reserves for losses and loss expenses (“reserves”) are determined based on complex estimation processes using historical experience, current economic information and, when necessary, available industry statistics. Reserves are evaluated in three basic categories (1) “case basis”, (2) “incurred but not reported” and (3) “loss adjustment expense” reserves. Case basis reserves are established for specific known loss occurrences at amounts dependent upon various criteria such as type of coverage, severity and the underlying policy limits, as examples. Case basis reserves are generally estimated by experienced claims adjusters using established Company guidelines and are subject to review by claims management. Incurred but not reported reserves, which are established for those losses which have occurred, but have not yet been reported to the Company, are not linked to specific claims but are computed on a “bulk” basis. Common actuarial methods are employed in the establishment of incurred but not reported loss reserves using company historical loss data, consideration of changes in the Company’s business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves, or reserves for the costs associated with the investigation and settlement of a claim, are also bulk reserves representing the Company’s estimate of the costs associated with the claims handling process. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs related to the established loss reserves. Each of these reserve categories contain elements of uncertainty which assure variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established. The reserving process requires management to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of claims. The Company’s claims range from the very routine private passenger automobile “fender bender” to the highly complex and costly third party bodily injury claim involving large tractor-trailer rigs. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided in the Company’s fleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time. Changes to previously established reserve amounts are charged or credited to losses and loss expenses incurred in the accounting periods in which they are determined. Note C to the consolidated financial statements includes additional information relating to loss and LAE reserve development.
The most significant of the three identified market risks relates to prices in the equities market. Though not the largest category of the Company’s invested assets, equity securities have a high potential for short-term price fluctuation. The
The Company’s fixed maturity portfolio totaled $364.3 million at December 31, 2008. Approximately 83% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; 85.6% of the portfolio matures within 5 years; and the average life of the Company’s fixed maturity investments is approximately 3.0 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.
The Company’s loss and loss expense reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, we have included an estimate of when we might expect our direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid in the preceding table. Timing of the collection of the related reinsurance recoverable, estimated to be $160.0 million at December 31, 2008, would approximate that of the above projected direct reserve payout.
The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments at December 31, 2008.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Baldwin & Lyons, Inc. and subsidiaries internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2009 expressed an unqualified opinion thereon.
Investments: Carrying amounts for fixed maturity securities (bonds and notes) represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available. Equity securities (common stocks) are carried at quoted market prices (fair value). Limited partnerships are accounted for using the equity method with the corresponding change in value recorded as a component of net gains or losses on investments. Other investments are carried at either market value or cost, depending on the nature of the investment. All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders’ equity unless a decline in value is determined to be other-than-temporary, in which case, the loss is charged to income. In determining if and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost. For any security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, without subjective evaluation as to possible future recovery. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold. Although the Company has classified fixed maturity investments as available for sale, it has the ability to, and generally does, hold its fixed maturity investments to maturity. Short-term investments are carried at cost which approximates their fair values. Realized gains and losses on disposals of investments are determined by specific identification of cost of investments sold and are included in income.
Share-Based Payments: The Company uses a “Black-Scholes” option pricing model to value options granted to employees and non-employee directors in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment, adopted January 1, 2006 with no material effect. Compensation costs for all share-based awards to employees and non-employee directors are measured based on the grant date fair value of the award and are recognized over the period(s) during which the employee or non-employee director is required to perform service in exchange for the award (the vesting period).
The fair value and the cost or amortized cost of fixed maturity investments, at December 31, 2008, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.
The 2008 net losses from limited partnerships, as shown in the above table, include approximately $37,000 of unrealized losses as reported in the net loss of the various partnerships. Shareholders’ equity includes approximately $8,000, net of deferred federal income taxes, of earnings yet undistributed by limited partnerships as of December 31, 2008.
The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $26,023 at December 31, 2008.
The table above shows that a savings of $17,077 developed during 2008 in the settlement of claims occurring on or before December 31, 2007, with similar savings developed during the prior two calendar years on losses occurring on or before years ended December 31, 2006 and 2005. These savings are the result of the settlement of claims at amounts lower than previously reserved and changes in estimates of losses incurred but not reported as part of the normal reserving process.
Favorable loss development is influenced by the Company’s long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. Reserve savings developed related to retrospectively-rated business resulted in the concurrent recording of return premiums of approximately $662 and $4,738 for the years ended December 31, 2007 and 2006, respectively. Conversely, the deficiency on retrospectively-rated business recorded in 2008 related to approximately $100 of additional premium. As more fully discussed in Note D, the Company increased its per occurrence retention of risk related to transportation liability business during the period 2001 to 2006. The increased net retention per occurrence is reflected in the increasingly favorable developments on other direct business during 2008, 2007 and 2006. These trends were considered in the establishment of the Company’s reserves at December 31, 2008 and 2007.
Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $5,119 and $4,069 at December 31, 2008 and 2007, respectively.
The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess and quota share treaties and by facultative placements. Risks are reinsured with other companies to permit the recovery of a portion of related direct losses. Management determines the amount of net exposure it is willing to accept generally on a product line basis. Certain treaties covering fleet transportation include annual deductibles which must be exceeded before the Company can recover under the terms of the treaty. In these cases, the Company retains a higher percentage of the direct premium in consideration of the deductible provisions. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.
The Company also serves as an assuming reinsurer on treaties with direct writing insurance companies for catastrophic property coverages as well as under retrocessions from certain other reinsurers. The retrocessions include individual risks but are comprised primarily of high layer catastrophe treaties. Accordingly, the occurrence of catastrophic events can have a significant impact on the Company’s operations. In addition, the insurance subsidiaries participate in certain involuntary reinsurance pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer’s portion of premium writings on a state or national level. Historically, the operation of these assigned risk pools have resulted in net losses allocated to the Company although such losses have generally not been material in relation to the Company’s direct and voluntary assumed operations.
Net losses and loss expenses incurred for 2008, 2007 and 2006 include approximately $22,003, $14,638 and $2,623, respectively, relating to property reinsurance from non-affiliated insurance or reinsurance companies, including involuntary residual market pools. The assumed reinsurance losses in 2008 and 2007 reflect an overall increase in the Company’s reinsurance assumed portfolio.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31 are as follows:
The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance is necessary at December 31, 2008. As of December 31, 2008, the Internal Revenue Service had completed examinations and settled all audits through the Company’s 2004 tax year.
Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes. The Company adopted FIN 48 on January 1, 2007 with no adjustment necessary to beginning retained earnings. The total amount of unrecognized tax benefits from uncertain tax positions at January 1, 2007 was $10,301. The tax positions are uncertain as to the timing of deductibility and therefore, if recognized would have no impact on the Company’s effective tax rate.
The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company’s effective tax rate. Amounts accrued for the payment of interest at December 31, 2008 and December 31, 2007 were not material.
Changes in common stock outstanding and additional paid-in capital are as follows:
Shareholders’ equity at December 31, 2008 includes $330,677 representing GAAP shareholder’s equity of insurance subsidiaries, of which $39,803 may be transferred by dividend or loan to the parent company during calendar year 2009 with proper notification to, but without approval from, regulatory authorities. An additional $204,135 of shareholder’s equity of such insurance subsidiaries may be advanced or loaned to the parent company with prior notification to and approval from regulatory authorities.
Details of other operating expenses for the years ended December 31:
The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan (“the Plan”) which covers nearly all employees who have completed one year of service. The Company’s contributions to the Plan for 2008, 2007 and 2006 were $1,183, $1,132, and $1,137, respectively.
In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan), the Company is obligated to repurchase shares issued under the 1981 Plan, at a price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase. No shares have ever been repurchased under the 1981 Plan. At December 31, 2008 there were 124,379 shares (Class A) and 380,833 shares (Class B) outstanding which are eligible for repurchase by the Company.
Under the Director Option Plan (the Director Plan), which is shareholder approved, the Company has reserved 300,000 shares of Class B common stock for the granting of discounted and market value options to non-employee directors. Approximately 167,000 shares of Class B common stock are available for future grants. No options were granted to directors during 2008 and 2007. Additionally, no discounted options were outstanding at December 31, 2008 and 2007. Prior to May, 2005, discounted options were granted to non-employee directors in lieu of cash directors’ fees. During 2006, all market value options were terminated, without compensation to the directors, and all subsequent directors’ fees have been paid in cash. The total intrinsic value of options exercised during 2006 was $484. No options were outstanding or exercised during 2007 or 2008.
The Company has two reportable business segments in its operations: property and casualty insurance and property reinsurance. Previously, the Company had four reportable business segments: fleet trucking, small fleet trucking, private passenger automobile and reinsurance assumed. As of July 1, 2008, the Company completed a restructuring of internal product management whereby divisions, which constituted the previously reported segments other than reinsurance assumed, were eliminated and all functional operations of the Company were vertically integrated. As such, the management of all directly produced property and casualty insurance business is managed as a single segment. Accordingly, the Company has revised its operating segments to reflect the new management structure for all periods presented. Management believes this segment structure better reflects the current operations and future business plan of the Company. Amounts applicable to the historical fleet trucking, small fleet trucking, private passenger automobile segments as well as the all other category, consisting of residual market assignments and discontinued products, for the current and prior periods have been reclassified into the property and casualty insurance segment. The property and casualty insurance segment provides multiple line insurance coverage primarily to fleet transportation companies as well as to independent contractors who contract with fleet transportation companies. In addition, personal automobile products are provided to individuals. The property reinsurance segment, formerly known as reinsurance assumed accepts cessions from other insurance companies as well as retrocessions from selected reinsurance companies, principally reinsuring against catastrophes.
Acceptable collateral may be provided in the form of letters of credit on Company approved banks, Company approved marketable securities or cash. At December 31, 2008, the Company held collateral in the aggregate amount of $214,264.
Investments in limited partnerships include an aggregate of $29,878 invested in three related partnerships, New Vernon India Fund, New Vernon Global Opportunity Fund and New Vernon North American Opportunity Fund.
On October 31, 2008, the Company purchased Transportation Specialty Insurance Agency, Inc., (“TIA”) of Toledo, Ohio for a cash purchase price of $3,500 which includes a post closing purchase price adjustment related to minimum working capital requirements. TIA is a commercial lines specialty insurance agency primarily focusing on the needs of the transportation industry including trucking independent contractors as well as fleet trucking companies. TIA is part of the Company’s property and casualty insurance segment and is not expected to have any material effect on results of operations, liquidity or capital resources. As part of the purchase, the Company recorded goodwill of $3,221 and intangible assets related to customer relationships and employment agreements of $179 with are included in Other Assets in the consolidated balance sheet. During 2008, the Company had amortization of intangible assets of $8. The Company had no goodwill, intangible assets and related amortization prior to 2008.
In September 2006, the Financial Accounting Standards Board issued Statement No. 157, Fair Value Measurements (“SFAS No. 157”), which provides a common definition of fair value and establishes a framework to make the measurement of fair value more consistent and comparable. SFAS No. 157 also requires expanded disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value and (3) the effect of fair value measures on earnings. The Company adopted SFAS 157, effective January 1, 2008 for financial assets and liabilities. The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain nonfinancial assets and liabilities until January 1, 2009. SFAS 157 did not have a significant impact on the Company’s consolidated financial condition or results of operations.
Beginning January 1, 2008, assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
Level inputs, as defined by SFAS No. 157, are as follows:
In December 2007, Financial Accounting Standards Board issued Statement No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and the liabilities assumed in a business combination. SFAS No. 141(R) is effective for annual periods beginning after December 15, 2008 and should be applied prospectively for all business combinations entered into after the date of adoption. SFAS 141(R) is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.