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 2010, cash flow from operations totaled $49.5 million compared to $30.7 million in 2009. This comparative increase in operating cash flow resulted from increases in gross premiums and, to a lesser extent, decreases in losses paid in 2010, as well as the timing of premiums ceded to reinsurers.
The Company’s assets at December 31, 2010 included $45.6 million in short-term and cash equivalent investments which are readily convertible to cash without market penalty and an additional $140.0 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 significant cash outlays that accompany large losses.
Written premiums assumed from other insurers and reinsurers totaled $46.1 million during 2010, an increase of $5.1 million (12%) from 2009. The increase reflects the Company’s launch of a professional liability assumed business. Premium ceded related to the reinsurance assumed business declined from 4% in 2009 to 3% in 2010 reflecting slightly better pricing for the coverage.
Net gains on investments, before taxes, totaled $16.5 million in 2010 compared to net gains on investments of $30.8 million last year. The gains in 2010 are attributable to $8.3 million in fixed maturity and equity security net direct trading gains and $8.2 million in limited partnerships net gains. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company’s share of earnings in these entities represented a return of 12% for 2010 compared to a return of 57% for 2009. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include the results as reported to the Company by the various general partners. Recoveries of $1.6 million on previously impaired available-for-sale securities that were sold in 2010 are included in the fixed maturity and equity security net gains stated above.
Other operating expenses for 2010, before credits for allowances from reinsurers, increased $4.4 million (6%) to $78.8 million. This increase is due primarily to a $3.9 million increase in commission expense. The higher commissions reflect expansion of the Company’s distribution channels to additional non-affiliated agents. Other increases related primarily to investments in the Company’s IT structure in support of existing, new and potential product lines.
Direct premiums written for 2009 totaled $209.1 million, an increase of $26.3 million (14%) from 2008. The increase is primarily attributable to $19.0 million in premiums generated by new product lines and a $6.1 million (30%) increase in the Company's private passenger automobile business. New product premiums are derived from commercial property and business owners’ liability business. Premiums ceded to reinsurers on direct business increased $18.8 million (47%) during 2009 to $58.6 million as the consolidated percentage of premiums ceded to direct premiums written increased to 28.0% for 2009 from 21.8% for 2008. This increase is reflective of expansion of the workers’ compensation component of fleet transportation business, increased use of facultative reinsurance and the Company's expansion into commercial property and business owners’ liability business.
Net gains on investments, before taxes, totaled $30.8 million in 2009 compared to a net loss on investments of $47.7 million in 2008. The gains in 2009 are attributable to $5.2 million in fixed maturity and equity security net direct trading gains and $25.6 million in limited partnerships net gains. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company’s share of earnings in these entities represented a positive return of 57% for 2009 versus a negative return of 43% for 2008. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include the results as reported to the Company by the various general partners. Adjustments attributable to "other-than-temporary impairment" of $2.5 million in recoveries during 2009 increased fixed maturity and equity security net gains as stated above.
The fleet transportation loss ratio for 2009 was impacted by lower current year losses primarily from the independent contractor product. Factors such as fluctuations in premium volume, the levels of self-insured retentions and the Company’s higher net retention under reinsurance treaties in recent years allow for more volatility in losses. The increase in the private passenger automobile loss ratio is due primarily to higher current year losses and also reflects the higher premium volume 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.
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.
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 35.8% in 2009 and 30.9% in 2008. Including the agency operations and corporate expenses, 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 34.2% for 2009 compared with 28.6% for 2008.
The effective federal tax rate on consolidated income for 2009 was 30.3%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
The Company’s significant accounting policies which are material and/or subject to significant degrees of judgment are highlighted below.
Approximately 76% of the Company’s assets are composed of investments at December 31, 2010. Approximately 88% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 12% 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, 2010 are publicly-traded securities, some have been valued by the respective partnerships using their experience and judgment.
Under FASB guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’s equity (accumulated other comprehensive income).
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.
As with any receivable, credit risk exists in the recoverability of reinsurance. This is even more pronounced than in normal receivable situations since recoverable amounts are not generally due until the loss is settled which, in some cases, may be many years after the contract was written. If a reinsurer is unable, in the future, to meet its financial commitments under the terms of the contracts, the Company would be responsible for the reinsurer's portion of the loss. The financial condition of each of the Company’s reinsurers is initially determined upon the execution of a given treaty and only reinsurers with the superior credit ratings available are utilized. However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in the interim period. Reviews of the current financial strength of each reinsurer are made continually and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company’s additional liability. Such charges are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit loss rather than a deficiency associated with the loss reserving process.
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, 2010 and 2009 (dollars in thousands).
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 loss adjustment expense reserve development.
The Company’s methods for determining loss and loss expense reserves are essentially identical for interim and annual reporting.
The Company uses historical analysis of the ratios of allocated loss adjustment expenses paid to losses paid on closed claims to arrive at the expected ultimate incurred loss adjustment expense factors for each of its major products. Once
developed, the factors are applied to the expected ultimate incurred losses, including IBNR, on all open claims. The resulting ultimate incurred allocated loss adjustment expense is then reduced by amounts paid to date on all open claims to arrive at the reserve for allocated loss adjustment expenses to be incurred in the future for the handling of specific claims.
A 10 percentage point increase or decrease in the loss factors actually utilized in the Company’s reserve determination at December 31, 2010 would increase or decrease gross loss reserves by approximately $25.9 million. On a net basis, a 10 percentage point increase in loss ratio would increase net loss reserves by approximately $11.5 million whereas a 10 percentage point decrease would decrease net loss reserves by approximately $13.0 million. Similarly, a 20 percentage point increase would increase gross loss reserves by approximately $51.8 million whereas a decrease would decrease gross loss reserves by approximately $48.1 million. On a net basis, a 20 percentage point increase in loss ratio would increase net loss reserves by approximately $21.2 million whereas a 20 percentage point decrease would decrease net loss reserves by approximately $24.6 million with the lower impact from loss ratio increases attributable to minimum and maximum premium rate factors included in the various reinsurance contracts.
Deferred tax assets at December 31, 2010, include approximately $14.8 million related to loss and loss expense reserves of which, $8.8 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 $2.7 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. Unearned premiums discount and deferred ceding commissions represent $2.3 and $1.3 million of deferred tax assets, respectively. The balance of deferred tax assets, approximately $1.6 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, 2010.
The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments at December 31, 2010.
Borrowings are made under a line of credit with a current expiration of June 23, 2011; however, it is expected that this line of credit will be renewed for a multiple year period prior to maturity.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
In accordance with the Financial Accounting Standard Board’s (“FASB”) other than temporary impairment (“OTTI”) guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or in cases where it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’s equity (accumulated other comprehensive income). 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.
Property and Equipment: Property and equipment is carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method.
Goodwill and Other Intangible Assets: Goodwill is not amortized. It is instead tested for impairment in accordance with FASB guidance, at the reporting-unit level. Goodwill is tested annually (during the fourth quarter) or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment. Intangible assets determined to have indefinite lives are not amortized but instead are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Other acquired intangible assets determined to have finite lives, such as customer relationships and employment agreements, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. In addition, impairment testing is performed on these amortizing intangible assets if impairment indicators are noted.
Reinsurance: Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other insurers have been reported as a reduction of premium earned. Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as reinsurance recoverable assets. Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the reinsurer over prescribed periods. Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date as well as projected loss experience applicable to the various contract periods. Estimates of reinstatement premiums on reinsurance contracts covering catastrophic events are recorded concurrently with the related loss.
Comprehensive Income: The Company records accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities as a separate component of shareholders’ equity. Foreign exchange adjustments are generally not material and the Company has no defined benefit pension plan. A reclassification adjustment to other comprehensive income is made for gains during the period included in net income.
Fair Value Measurements: In January 2010, the FASB issued revised accounting guidance that clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The guidance requires separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, a separate disclosure is required for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements. The guidance also provides additional clarification for both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The Company does not anticipate that the adoption of the guidance, effective January 1, 2011, will have any impact on the consolidated financial position or results of operations.
Pending Accounting Standards: In October 2010, the FASB issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact that the adoption of the guidance, effective January 1, 2012, will have on the consolidated financial statements.
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 average unrealized loss for all fixed maturity securities in a loss position at December 31, 2010 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. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2010.
The Company has invested a total of $24,000 in three limited partnerships, with an aggregate estimated market value of $55,933 at December 31, 2010, that are managed by organizations in which two directors of the Company are executive officers, directors and owners. The Company’s ownership interest in these limited partnerships ranges from 3% to 25%. These limited partnerships added $7,464, $18,591 and ($25,502), net of fees, to investment gains (losses) in 2010, 2009 and 2008, respectively. During 2010, 2009 and 2008, the Company has recorded management fees of $820, $632 and $781, respectively, and performance-based fees of $687, $1,247 and $0, 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 Company utilized the services of a broker-dealer firm of which two directors of the Company are executive officers and owners. This broker-dealer serves as agent for purchases and sales of securities and manages an equity securities portfolio and fixed maturity portfolio with market values of approximately $1,887 and $19,378, respectively, at December 31, 2010. The Company has been informed that commission and management rates charged by this broker-dealer to the Company are commensurate with rates charged to non-affiliated customers for similar investments. Total commissions and net fees earned by the broker-dealer and affiliates on these transactions and for advice and consulting were approximately $155, $173 and $171 during 2010, 2009 and 2008, respectively.
The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $34,338 at December 31, 2010.
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. Loss reserves pertaining to the Company’s property reinsurance business are established largely by the ceding reinsurers although the Company may adjust such reserves if management determines that additional reserves are necessary. Accordingly, the fluctuation in loss developments related to reinsurance assumed will tend to be more pronounced than those experienced on directly produced business which is reserved by Company personnel. In addition, changes in the Company’s net retention under reinsurance treaties will impact developments as more or less business is retained. These trends were considered in the establishment of the Company’s reserves at December 31, 2010 and 2009.
The Company has not changed its original estimate for the loss sustained as a result of the terrorist attacks of September 11, 2001. Therefore, there is no impact on the loss developments shown in the above table except for payments against the original established reserves. The Company has paid $11,800 to date and carries a remaining reserve of $8,200 at December 31, 2010.
The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess of loss and quota share treaties and by facultative placements. Reinsurance treaties with other companies 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 most fleet transportation risks include annual deductibles which must be exceeded before the Company can recover under the terms of the treaty. The Company retains a higher percentage of the direct premium in consideration of these deductible provisions. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.
Net losses and loss expenses incurred for 2010, 2009 and 2008 have been reduced by ceded reinsurance recoveries of approximately $17,581, $22,025, and $53,398, respectively. Ceded reinsurance premiums and loss recoveries for the purchase of catastrophe reinsurance coverage on the Company’s net direct business were not material.
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, 2010, there were 124,099 shares (Class A) and 380,458 shares (Class B) outstanding which are eligible for repurchase by the Company.
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, 2010. Additionally, no options were outstanding or exercised at any time during this period. Accordingly, no compensation cost was charged against income for the Employee Plan for 2010, 2009 and 2008.
The Company's policy is to issue new shares to satisfy share option exercises.
Effective May 4, 2010, the Company issued 17,754 shares of class B restricted stock to the Company’s outside directors. These restricted shares represent the annual retainer compensation for outside directors for the period July 1, 2010 through June 30, 2011 and will vest on May 4, 2011. Vesting will be accelerated only on the condition of death, disability, or change in control of the Company. Each restricted share is valued at $24.78 per share representing a total value of $440. Compensation expense related to the above stock grant is to be recognized over the period in which the directors render the services which will also coincide with the vesting period.
Director compensation cost of $440 and $220 was charged against income for the restricted stock units for 2010 and 2009, respectively.
During 2002 and 2001, the Company offered loans to certain employees for the sole purpose of purchasing the Company's Class B common stock in the open market. Principal and interest totaling $1,414 and $2,054 relating to such loans was outstanding at December 31, 2010 and 2009, respectively. Loans carry interest rates ranging from 4.75% to 6%, payable annually. The underlying securities, with value in excess of the related debt, serve as collateral for these full-recourse loans, which must be repaid no later than 10 years from the date of issue. This loan program was terminated in 2002.
The following table reconciles reportable segment profits to the Company’s consolidated income (loss) before federal income taxes:
One customer of the property and casualty insurance segment, FedEx Ground Systems, Inc (“FedEx Ground”) and certain of its subsidiaries and related entities, represents approximately $20,187, $14,822 and $13,773 of the Company’s consolidated direct and assumed premium written in 2010, 2009 and 2008, respectively. An additional $115,625, $107,724 and $99,589 for 2010, 2009 and 2008, respectively, is placed with the Company by a non-affiliated broker on behalf of independent contractors of this same customer.
Investments in limited partnerships include an aggregate of $55,933 invested in three limited partnerships, New Vernon India Fund, New Vernon Global Opportunity Fund and New Vernon Aegir Fund which are managed by organizations in which three directors of the Company are executive officers, directors and owners.
On October 31, 2008, the Company purchased Transportation Specialty Insurance Agency, Inc., (“TIA”) of Toledo, Ohio for a cash purchase price of $3,500. 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. As part of the purchase, the Company recorded goodwill of $3,152 and intangible assets related to customer relationships and employment agreements of $179 which are included in Other Assets in the consolidated balance sheet. Related to this acquisition, the Company had amortization of intangible assets of $41, $47 and $8 during 2010, 2009 and 2008, respectively.
Net income of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was $12,542, $22,855 and $19,064 for 2010, 2009 and 2008, respectively. Consolidated statutory surplus for these subsidiaries was $366,461 and $356,658 at December 31, 2010 and 2009, respectively, of which $55,935 may be transferred by dividend or loan to the parent company during calendar year 2011 with proper notification to, but without approval from, regulatory authorities. An additional $234,373 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.
Minimum statutory surplus necessary for the insurance subsidiaries to satisfy statutory risk based capital requirements was $74,786 at December 31, 2010.
The Company leases office space and certain computer and related equipment using noncancelable operating leases. Lease expense for 2010, 2009 and 2008 was $1,386, $1,465 and $1,325, respectively. At December 31, 2010, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:
We have evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on Form 10-K with the U.S. Securities and Exchange Commission and no events have occurred during this period which require recognition or disclosure in this document.