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 net 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, become negative as loss settlements on claim reserves established in prior years exceed current revenues. During 2009, positive cash flow from operations totaled $30.7 million compared to a negative $2.0 million in 2008. This comparative increase in operating cash flow resulted from increases in gross premiums and decreases in losses paid in 2009, as well as the timing of premiums ceded to reinsurers.
Premiums assumed from other insurers and reinsurers totaled $41.0 million during 2009, an increase of $1.9 million (5%) from 2008. The small increase reflects an overall slight decline in exposures and single to low double digit rate increases. Premium ceded related to the reinsurance assumed business declined from 14% in 2008 to 4% in 2009 as reductions in exposures in the Company’s book of United States business resulted in a decline in the need for reinsurance protection.
After giving effect to changes in unearned premiums, net premiums earned remained relatively flat at $181.3 million for 2009 compared to $182.3 million for 2008. Increases in net premiums earned were recorded on the Company’s reinsurance business ($5.1 million or 14.4%) and Private Passenger Automobile business ($1.8 million or 8.2%). The new and commercial property and business owners’ liability business generated $2.8 million in net premium earned. These increases were offset by a $10.7 million (8.6%) decrease in net premium earned on Fleet Transportation products as higher reinsurance ceded reduced level gross premium writings within the Fleet Transportation products, as noted above.
Losses and loss expenses incurred during 2009 decreased $16.4 million (14%) to $99.4 million. The decrease in losses incurred is due primarily to lower current year loss activity from directly-produced business and lower losses from reinsurance, including a $4.0 million drop in hurricane losses from 2008. Partially offsetting these decreases was a $2.5 million increase in losses from the Company’s Private Passenger Automobile product. The 2009 consolidated loss and loss expense ratio was 54.8% compared to 63.5% for 2008. The Company's loss and loss expense ratios for major product lines are summarized in the following table.
in 2009. The Reinsurance loss ratio was lower in 2009 as the result of a lack of 2009 hurricane losses as well as a drop in United States tornado and hail losses experienced compared to 2008.
Other operating expenses for 2009, before credits for allowances from reinsurers, increased $12.7 million (21%) to $74.4 million. This increase is due primarily to a $5.3 million increase in commission expense and a $4.3 million increase in salary and salary-related expenses. The higher commissions reflect expansion of the Company’s distribution channels to include non-affiliated agents and the higher salary expense relates primarily to employees hired in support of both existing and new product lines, including the formation of an in-house actuarial department. Other increases related primarily to investments in the Company’s IT structure in support of existing, new and potential product lines.
As a result of the factors mentioned above, and primarily the change in net gains and losses on investments, the Company experienced net income for 2009 of $44.8 million compared to a net loss of $7.7 million for 2008. Diluted earnings per share income of $3.04 were recorded in 2009 compared to a net loss of $.51 in 2008. Earnings per share from operations, defined as income before gains or losses on investments, were $1.68 compared to $1.55 in 2008.
reflecting increased exposure and, to a lesser extent, higher premium rates. Premium volume from reinsurance will often fluctuate depending on the favorability of pricing for the coverages provided. Further, premium volume for this segment is limited by the Company’s self-imposed limitation to loss from a single catastrophic event.
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 reinsurance increased by $6.7 million (23%). Net premiums earned from the Company's Private Passenger Automobile product decreased by $7.2 million (25%).
Losses and loss expenses incurred during 2008 increased $8.0 million (7%) to $115.8 million. The increase in losses incurred is due to increased current year loss activity, including $5.5 million in losses attributable to hurricanes, and lower savings on prior accident year losses, primarily from reinsurance. Partially offsetting increases in loss and loss expenses was a $5.5 million decrease in losses from the Company’s Private Passenger Automobile product corresponding to the decline in premium volume for that product. The 2008 consolidated loss and loss expense ratio was 63.5% compared to 60.2% for 2007. The Company's loss and loss expense ratios for major product lines are summarized in the following table.
A portion of the Company’s 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 the property and casualty insurance business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 30.9% during 2008, level with the prior year. Including the agency operations, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains (losses) on investments) was 28.6% for 2008 compared with 27.7% for 2007.
As a result of the factors mentioned above, and primarily the change in net gains and losses on investments, the Company experienced a net loss for 2008 of $7.7 million compared to net income of $55.1 million for 2007. Diluted earnings per share were a loss of $(.51) in 2008 compared to income of $3.63 in 2007. Earnings per share from operations, defined as income before gains or losses on investments, were $1.55 compared to $1.91 in 2007.
Approximately 73% of the Company’s assets are composed of investments at December 31, 2009. 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, 2009 are publicly-traded securities, some have been valued by the respective partnerships using their experience and judgment.
In determining if and when an equity security’s decline in market value below cost is other-than-temporary, we first make an objective analysis of each individual equity security where current market value is less than cost. For any equity 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 any subjective evaluation as to possible future recovery. For individual issues where the decline in value is less than 20% but the amount of the decline is considered significant, we will also evaluate the market conditions, trends of earnings, price multiples and other key measures for the securities to determine if it appears that the decline is other-than-temporary. In those instances, the Company also considers its intent and ability to hold equity investments until recovery. For any decline which is considered to be other-than-temporary, we recognize an impairment loss in the current period earnings as an investment loss. Declines which are considered to be temporary are recorded as a reduction in shareholders’ equity, net of related federal income tax credits.
It is important to note that all investments included in the Company’s financial statements are valued at current fair market values. The evaluation process for determination of other-than-temporary decline in value of investments does not change these valuations but, rather, determines when a decline in value will be recognized in the income statement (other-than-temporary decline) as opposed to a charge to shareholders’ equity (temporary decline). Subsequent recoveries in value of investments which have incurred other-than-temporary impairment adjustments are accounted for as unrealized gains until the security is actually disposed of or sold. At December 31, 2009, unrealized gains include $9.4 million of appreciation on investments previously adjusted for other-than-temporary impairment, compared to $9.2 million of impairment write-downs at that date. This evaluation process is subject to risks and uncertainties since it is not always clear what has caused a decline in value of an individual security or since some declines may be associated with general market conditions or economic factors which relate to an industry, in general, but not necessarily to an individual issue. The Company has attempted to minimize many of these uncertainties by adopting a largely objective evaluation process as described above. However, to the extent that certain declines in value are reported as unrealized at December 31, 2009, it is possible that future earnings charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost. At December 31, 2009, the total gross unrealized loss included in the Company’s investment portfolio was approximately $.9 million. No individual issue constituted a material amount of this total. Had this entire amount been considered other-than-temporary at December 31, 2009, investment gains would have decreased by $.04 per share for the year, after tax. There would, however, have been no impact on total shareholders’ equity or book value per share since the decline in value of these securities was already recognized as a reduction to shareholders’ equity at December 31, 2009.
Amounts recoverable under the terms of reinsurance contracts comprise approximately 18% of total Company assets as of December 31, 2009. In order to be able to provide the high limits required by the Company’s Fleet Transportation company insureds, we share a significant amount of the insurance risk of the underlying contracts with various insurance entities through the use of reinsurance contracts. Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis (“quota-share”) while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount (“excess of loss”). Some risks are covered by a combination of quota-share and excess of loss contracts. The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss and loss expense reserves, as described below. Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts recorded as recoverable from reinsurers. Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the Company. Further, the high limits provided by the Company’s insurance policies for Fleet Transportation liability and workers’ compensation, provide more variability in the estimation process than lines of business with lower coverage limits.
The Company’s loss and loss expense reserves for each significant product group are shown in the following table for on both a gross (before consideration of reinsurance) and on a net of reinsurance basis at December 31, 2009 and 2008 (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 Company also uses the loss development factor approach for its long-tail lines of business. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses. A minimum of 20 accident years is used for long-tail workers’ compensation reserve projections. More emphasis is placed on the use of tail factors for the Company’s long-tail lines of business.
Management is aware of the potential for variation from the reserves established at any particular point in time. Redundancies or deficiencies could develop in future valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The Company’s reserve selections are developed to be a “best estimate” of unpaid loss at a point in time and, due to the unique nature of our exposures, particularly in the large Fleet Transportation excess product where insured’s policies of insurance combine large self-insured retentions with high policy limits, ranges of reserve estimates are not established during the reserving process. However, basic assumptions that could potentially impact future volatility of our valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:
The liability method is used in accounting for federal income taxes. Using this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The provision for deferred federal income tax was based on items of income and expense that were reported in different years in the financial
statements and tax returns and were measured at the tax rate in effect in the year the difference originated. Net deferred tax liabilities reported at December 31, 2009 and 2008 consisted of (dollars in thousands):
Deferred tax assets at December 31, 2009, include approximately $15.3 million related to loss and loss expense reserves of which, $8.7 million relates to policy liability discounts required by the Internal Revenue Code which are perpetual in nature and, in the absence of the termination of business, will not reverse to a material degree in the foreseeable future. An additional $3.2 million relates to impairment adjustments made to investments, as required by accounting regulations. The sizable unrealized gains in the Company’s investment portfolios would allow for the recovery of this deferred tax at any time. Deferred ceding commissions represent $1.0 million of deferred tax assets. The balance of deferred tax assets, approximately $2.7 million, consists of various normal operating expense accruals and is not considered to be material. As a result of its analysis, management has determined that no valuation allowance is necessary at December 31, 2009.
The following tables present the estimated effects on the fair value of financial instruments at December 31 due to an instantaneous change in yield rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on current fair value. The analysis presents the sensitivity of the fair value of the Company’s financial instruments to selected changes in market rates and prices. The range of change chosen reflects the Company’s view of changes that the Company believes are reasonably possible over a one-year period. The Company’s selection of the range of values chosen to represent changes in interest rates should not be construed as the Company’s prediction of future market events, but rather an illustration of the impact of such events. The equity portfolio was compared to the S&P 500 index due to its correlation with the vast majority of the Company’s current equity portfolio. The limited partnership portfolio was compared to the S&P 500 and Indian BSE 500 indices due to their significant correlation with the vast majority of our limited partnership portfolio. As previously indicated, several other factors can impact the fair values of fixed maturity investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented below.
The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments at December 31, 2009.
Borrowings are made under a line of credit with a current expiration of June 23, 2011.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2009 and 2008, 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, 2009. 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, 2009, 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 11, 2010 expressed an unqualified opinion thereon.
Realized gains and losses on disposals of investments are determined by specific identification of cost of investments sold and are included in income. 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.
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition. For mortgage-backed and asset-backed securities, cash flow estimates are based on assumptions regarding the underlying collateral including prepayment speeds, vintage, type of underlying asset, geographic concentrations, default rates, recoveries and changes in value. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. Furthermore, unrealized losses caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income. Upon adoption of the FASB OTTI guidance on April 1,
2009, companies were required to record a cumulative-effect adjustment to reclassify, for fixed maturity securities previously impaired but still held, the non-credit component of previously recognized other-than-temporary impairments from retained earnings to accumulated other comprehensive income. Since no previously impaired fixed maturity securities were held by the Company at April 1, 2009, no cumulative effect adjustment was required.
The unrealized net gains or losses (net of applicable tax effect) related to equity securities 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 equity 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, subject to an 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 quantitative criteria defined above.
The Company accounts for foreign and domestic reinsurance using the periodic method. Under the periodic method, premiums from foreign reinsurance are recognized as revenue ratably over the contract term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur.
The enclosed Statement of Changes in Equity Other Than Capital refers to items of other comprehensive income as Change in unrealized gains (losses) on investments and Foreign exchange adjustment. A reclassification adjustment to other comprehensive income is made for Gains during period included in net income.
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 recent financial market turmoil. The largest unrealized loss for any individual issue is approximately 9% of original or adjusted cost and the average unrealized loss for all fixed maturity securities in a loss position at December 31, 2009 is less than 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. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2009.
Short-term investments at December 31, 2009 include $3,600 in foreign time certificates of deposit.
The Company's share of earnings from this limited partnership investment was as follows for the years ended December 31:
Approximately $34.1 million of fixed maturity investments (5.5% of total invested assets) consists of bonds rated as less than investment grade at year end. These investments include a diversified portfolio of over 40 investments including catastrophe bonds.
The table above shows that a savings of $9,584 was developed during 2009 in the settlement of claims occurring on or before December 31, 2008 with comparative developments for the two previous calendar years. The net savings for each year are composed of individual claim savings and deficiencies which, in the aggregate have resulted from the settlement of claims at amounts lower than previously reserved and from changes in estimates of losses incurred but not reported as part of the normal reserving process.
Loss reserves on certain permanent total disability workers’ compensation reserves have been discounted to present value at pre-tax rates not exceeding 3.5%. At December 31, 2009 and 2008, loss reserves have been reduced by approximately $6,656 and $5,342, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable.
Net losses and loss expenses incurred for 2009, 2008 and 2007 have been reduced by ceded reinsurance recoveries of approximately $22,025, $53,398 and $4,981, respectively. The increase in 2009 and 2008 recoveries is a result of the Company having reached its annual aggregate deductible on certain of its reinsurance treaties and from increases in workers’ compensation business which is heavily reinsured. Ceded reinsurance premiums and loss recoveries for catastrophe reinsurance contracts were not material.
Cash flows related to federal income taxes paid, net of refunds received, for 2009, 2008 and 2007 were $6,037, $11,186 and $14,502, respectively.
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, 2009 or 2008. As of December 31, 2009, the Internal Revenue Service had completed examinations and settled all audits through the Company’s 2004 tax year.
The Company follows the FASB guidance on accounting for uncertainty in income taxes for recognizing and measuring uncertain tax positions. The Company’s tax positions are uncertain only 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, 2009, 2008 and 2007 were not material.
Shareholders’ equity at December 31, 2009 includes $373,769 representing GAAP shareholders’ equity of insurance subsidiaries, of which $54,211 may be transferred by dividend or loan to the parent company during calendar year 2010 with proper notification to, but without approval from, regulatory authorities. An additional $233,043 of shareholders’ equity of such insurance subsidiaries could, under existing regulations, be advanced or loaned to the parent company with prior notification to and approval from regulatory authorities.
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 2009, 2008 and 2007 were $1,292, $1,183 and $1,132, 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, 2009, 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 146,000 shares of Class B common stock are available for future grants. No options were granted to directors during the three year period ended December 31, 2009. Additionally, no discounted options were outstanding or
Under the Employee Option Plan (the Employee Plan), which is shareholder approved, the Company has reserved 1,125,000 shares of Class B common stock for the granting of discounted and market value options to employees. Approximately 259,000 shares of Class B common stock are available for future grants. No options were granted to employees during the three year period ended December 31, 2009 and no options remained outstanding for the same three year period. Additionally, there were no option exercises during 2009 or 2008. During 2007, all options were exercised at $20.60 per share. The total intrinsic value of options exercised during 2007 was $722. No compensation cost was charged against income for the Employee Plan for 2009, 2008 and 2007.
Director compensation cost of $220 was charged against income for the restricted stock units for 2009.
One customer of the property and casualty insurance segment, FedEx Ground and certain of its subsidiaries and related entities, represents approximately $14,822, $13,773 and $13,772 of the Company’s consolidated direct and assumed premium written in 2009, 2008 and 2007, respectively. An additional $107,724, $99,589 and $80,080 for 2009, 2008 and 2007, respectively, is placed with the Company by a non-affiliated broker on behalf of independent contractors of this same customer.
The Company writes policies of excess insurance attaching above a self-insured retention ("SIR") and also writes policies that contain large, per-claim deductibles. Those losses and claims that fall within the SIR or deductible limits are obligations of the insured. The Company also writes surety bonds in favor of various regulatory agencies guaranteeing the insureds’ payment of claims within the SIR. Losses and claims under large deductible policies are payable by the Company with reimbursement due the Company from the insureds. The Company requires collateral from its insureds to serve as a source of reimbursement if the Company is obligated to pay claims within the SIR by reason of an insured’s default or if the insured fails to reimburse the Company for deductible amounts paid by the Company.
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, 2009, the Company held collateral in the aggregate amount of $202,316.
The Company has $10,000 outstanding as of December 31, 2009 under the Company’s revolving line of credit at variable interest rates detailed below. The Company has $10,000 remaining unused under the revolving line of credit. The currently outstanding borrowings were used principally for treasury stock repurchases.
Minimum statutory surplus necessary for the insurance subsidiaries to satisfy statutory risk based capital requirements was $68,040 at December 31, 2009.
We have evaluated subsequent events for recognition or disclosure through the time of filing these consolidated financial statements on Form 10-K with the U.S. Securities and Exchange Commission on March 11, 2010. No events have occurred during this period which require disclosure or accrual in this document.