We are an international insurance company focusing on specialty products within the overall property/casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance and in specialty liability insurance primarily consisting of contractors’ liability and primary and excess casualty coverages.
Our revenue is primarily comprised of premiums and investment income. We derive our premiums primarily from business written by wholly-owned underwriting management companies which produce, manage and underwrite insurance and reinsurance for us. Our products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
The offshore energy business, formerly included in the “Marine and Energy” businesses of the Insurance Companies and Lloyd’s Operations, is now included in the Insurance Companies’ and Lloyd’s Operations’ “Property Casualty” businesses.
Engineering and construction, European Property and other run-off business, formerly included in the “Other” category of business within the Insurance Companies and Lloyd’s Operations, are now included under “Property Casualty”.
Our construction liability lines decreased 39% due to both a decline in demand resulting from current economic conditions as well as increased competition due to new entrants into the market.
A 39% increase in our D&O insurance lines due to continued expansion of this business.
Improved pricing conditions across the majority of our lines of business, resulting in an overall 4% increase in average renewal rates. Pricing conditions have stabilized after experiencing declines across all of our lines in 2008 and were driven by a flight to quality after the market turmoil at the end of 2008.
In 2009, we decreased our use of quota share reinsurance and expanded our use of excess-of-loss reinsurance. This change in the mix of our reinsurance resulted in an increase in our retention in 2009, which translated into higher net written premiums and net earned premiums in 2009 compared to 2008.
Our actuaries generally calculate the IBNR loss reserves for each line of business by underwriting year for major products principally using two standard actuarial methodologies which are projection or extrapolation techniques: the loss ratio method and the Bornheutter-Ferguson method. The loss ratio method is used to calculate the IBNR for the two most current underwriting years while the Bornheutter-Ferguson method is used to calculate the IBNR for all prior underwriting years, except as otherwise described below. Such methodologies are supplemented in most instances by the loss development method and the frequency/severity method which are used to analyze and better comprehend loss development patterns and trends in the data when making selections and judgments under the loss ratio method and the Bornheutter-Ferguson method. In utilizing these methodologies, each of which is generally applicable to both long tail and short tail lines of business and all of which are described below, to develop our IBNR loss reserves, a key objective of our actuaries is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected more reliably. This process requires the substantial use of informed judgment and is inherently uncertain.
The substantial majority of the property and casualty loss reserves are for the contractors’ liability business, which insures mostly general and artisan contractors. Contractor liability claims are categorized into two claim types: construction defect and other general liability. Other general liability claims typically derive from workplace accidents or from negligence alleged by third parties, and take a long time to report and settle. Construction defect claims involve the discovery of damage to buildings that was caused by latent construction defects. These claims take a very long time to report and to settle compared to other general liability claims. Since construction defect claims report much later than other contractor liability claims, they are analyzed separately in the annual loss reserve study.
We have extensive history in the contractors’ liability business upon which to perform actuarial analyses and we use the key assumption noted above relating to our own historical experience as a reliable indicator of the future for this product. However, there is inherent uncertainty in the loss reserve estimation process for this line of business given both the long-tail nature of the liability claims and the continuing underwriting and coverage changes, claims handling and reserve changes, and legislative changes that have occurred over a several year period. Such factors are judgmentally taken into account in this line of business in specific periods. The underwriting and coverage changes include the migration to a non-admitted business from admitted business in 2003, which allowed us to exclude certain exposures previously permitted (for example, exposure to construction work performed prior to the policy inception), withdrawals from certain contractor classes previously underwritten and expansion into new states beginning in 2005. Claims changes include bringing the claim handling in-house in 1999 and changes in case reserving practices in 2003 and 2006. A California legislative change with respect to reserves and claim frequency for construction defect repairs, became effective July 1, 2002 with a sunset provision effective January 1, 2011. The law provides for an alternative dispute resolution system that attempts to involve all parties to a claim at an early stage. The legislation may impact claim severity, frequency and the length of settlement which may ultimately be different than historical loss development assumptions employed in our loss reserve process.
The commercial middle markets or NAV PAC business consists of general liability, auto liability and property exposures for a variety of commercial middle market businesses, principally hospitality, manufacturing and garages. Commencing in 2007, our actuaries are segmenting and analyzing the components of the loss development for this business among the property, liability and auto exposures which had been previously combined.
The process for establishing the IBNR loss reserves for the marine and professional liability lines of the Lloyd’s Operations, and the assumptions used as part of this process, are similar in nature to the process employed by the Insurance Companies. Other business for the Lloyd’s Operations include European property and inland marine products, each of which is a new line of business where we have limited loss history and rely primarily on assumptions based on our underwriters’ input and industry loss experience.
For the selected alternative expected loss ratios, our actuaries observed the range of ultimate loss ratios recorded for the underwriting years 2002 to 2009 for each major line of business at December 31, 2009.
Such sensitivity analysis was performed in the aggregate for all products in each line of business. The use of aggregate data was considered more stable and reliable compared to a product-by-product analysis. We cannot assure, however, that such use of aggregate data will provide a more accurate range of the actual variations in loss development. The sensitivity analysis uses loss ratios for the 2002 to 2009 underwriting years, which are believed to be more representative compared to years prior to 2002 given our evolving mix of business, product changes and other factors. There can be no assurances, however, that the use of such recent history is more predictive of actual development as compared to employing longer periods of history. In addition, while the net loss reserves include the net loss reserves for asbestos exposures, such amounts were excluded from the sensitivity analysis given the nature of how such reserves are established by the Company. While we believe such net reserves are adequate, we cannot assure that material loss development may not arise in the future from asbestos losses given the complex nature of such exposures.
Used 17.3 million average diluted shares outstanding for the year ended December 31, 2009.
A portion of our premium is estimated for unreported premium, mostly for the marine business written by our U.K. Branch and Lloyd’s Operations. We generally do not experience any significant backlog in processing premiums. Such premium estimates are generally based on submission data received from brokers and agents and recorded when the insurance policy or reinsurance contract is written or bound. The estimates are regularly reviewed and updated taking into account the premium received to date versus the estimate and the age of the estimate. To the extent that the actual premium varies from the estimates, the difference, along with the related loss reserves and underwriting expenses, is recorded in current operations.
Day to day management of our investment portfolio is outsourced to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss based upon a change in market and other factors described above. We believe that subsequent decisions to sell such securities are consistent with the classification of our portfolio as available-for-sale. Investment managers are required to notify management of rating agency downgrades of securities in their portfolios as well as any potential investment valuation issues at the end of each quarter. Investment managers are also required to notify management, and receive approval, prior to the execution of a transaction or series of related transactions that may result in a realized loss above a certain threshold. Additionally, investment managers are required to notify management, and receive approval, prior to the execution of a transaction or series of related transactions that may result in any realized loss up until a certain period beyond the close of a quarterly accounting period.
Accounting for Lloyd’s Results. We record Syndicate 1221’s assets, liabilities, revenues and expenses under U.S. GAAP. At the end of the Lloyd’s three-year period for determining underwriting results for an account year, the syndicate will close the account year by reinsuring outstanding claims on that account year with the participants for the account’s next underwriting year. The amount to close an underwriting year into the next year is referred to as the reinsurance to close (“RITC”). The RITC transaction, recorded in the fourth quarter, does not result in any gain or loss. Additional information regarding our accounting for Lloyd’s results can be found in Note 1, Organization and Summary of Significant Accounting Policies, to our consolidated financial statements, included herein.
The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2009, 2008 and 2007. All earnings per share data is presented on a per diluted share basis.
Cash flow from operations was $103.9 million, $245.3 million and $284.6 million in 2009, 2008 and 2007, respectively. The decline in cash flow from operations in 2009 compared to 2008 was primarily a result of an increase in losses and LAE paid for claims of $82.4 million. Net investment income decreased 1.4% in 2009 to $75.5 million compared to 2008 as a result of lower investment yields partially offset by an increase in invested assets. Net investment income increased 8.3% in 2008 to $76.6 million compared to 2007 as the result of the increase in invested assets partially offset by lower investment yields. The pre-tax investment yield was 3.8%, 4.1% and 4.4% in 2009, 2008 and 2007, respectively.
2009 net income of $63.2 million increased $11.5 million compared to 2008 primarily as a result of a decrease in net other-than-temporary impairment losses recognized in earnings of $25.1 million to $11.9 million in 2009 compared to $37.0 million in 2008. Underwriting profit for 2009 declined by $19.8 million to $19.5 million compared to $39.3 million in 2008. The decline in the underwriting profit was primarily due to the recording of net redundancies of prior year loss reserves of $8.9 million in 2009 versus $50.7 million in 2008, a decline of $41.8 million. In addition, we recorded a $9.3 million offshore energy loss net of reinstatement premiums resulting from a fire at a mobile offshore drilling unit.
The following table sets forth our gross and net written premium and net earned premium by segment and line of business for the periods indicated:
Marine Premiums. The gross written premiums by year, including the line of business’ gross written premiums as a percentage of the total gross written premiums, consisted of the following:
The marine gross written premiums for 2009 decreased 2.7% to $241.4 million compared to 2008 due to declining premium in our cargo, war and P&I businesses due to increased competitive market conditions. The average marine renewal premium rates during 2009 increased approximately 2%. The marine gross written premiums for 2008 increased 9.2% to $248.1 million compared to 2007 reflecting new business partially offset by flattening or declining premium in several classes of business due to increased competitive market conditions. The average marine renewal premium rates during 2008 were flat.
The 2009 property casualty gross written premiums decreased 13.0% to $352.3 million when compared to 2008 reflecting weakening economic conditions that have significantly reduced demand for construction liability, particularly in the western United States, as well as primary excess and surplus insurance. The construction liability line has also seen significant increases in the level of competition from new entrants. Our offshore energy line declined as we wrote very little Gulf of Mexico wind business in 2009 as the terms and conditions were not sufficient and world wide drilling activity slowed. Partially offsetting these declines was an increase in gross written premiums for our commercial umbrella line and our retail umbrella line which was introduced in 2009. Our NavTech and excess casualty lines saw average renewal rate increases of approximately 8% and 2%, respectively, whereas our contractors’ liability and NavPac lines saw average renewal rate decreases of 2% and 4%, respectively. The 2008 property casualty gross written premiums decreased 9.5% to $405.1 million when compared to 2007 reflecting declines across most lines of business due to negative renewal rate changes and the housing market slowdown, which was most pronounced in the construction liability line.
The overall 2009 Lloyd’s marine gross written premiums of $192.0 million were flat compared to 2008. There were increases in most lines of business which were offset by decreases in marine liability and cargo lines. The 2008 increase in Lloyd’s marine gross written premiums of 9.7% compared to 2007 resulted from new business, particularly in the marine liability class. The average renewal premium rate increased approximately 8.9% in 2009 and decreased 5.1% in 2008 from the previous year, respectively.
Our Lloyd’s Operations commenced writing professional liability business during the second quarter of 2005. The 2009 and 2008 Lloyd’s professional liability gross written premiums increased 13.3% and 13.4% to $44.0 million and $38.9 million, respectively, compared to the respective prior year, due to continued expansion and geographic diversification of the book of business. We added a team at Lloyd’s at the end of 2008 to write excess D&O business. In addition, during 2009 we began writing professional liability business from our office in Stockholm, Sweden.
The percentage of total ceded written premiums to total gross written premium in 2009 was 32.9% compared to 39.0% in 2008 and 39.7% in 2007. The Insurance Companies’ and Lloyd’s Operations 2008 ceded written premiums includes $7.2 million and $5.0 million, respectively, of reinstatement premiums related to the losses from Hurricanes Gustav and Ike. Excluding the effect of reinstatement premiums for the 2008 Hurricanes losses, the ratio of ceded written premium to gross written premium was 38.4%. The declines in the ratio of ceded written premiums to gross written premiums in 2009 compared to 2008 was due to the a reduction in the amount of marine and energy quota share reinsurance purchased for both the Insurance Companies and Lloyd’s Operations in 2009 as well as the impact of the $12.2 million of reinstatement premiums recognized in 2008 relating to the 2008 Hurricanes.
Net Earned Premiums Net earned premiums increased 6.1% in 2009 compared to 2008 and increased 7.0% in 2008 compared to 2007. The 2009 and 2008 net earned premium increases reflect the changes in written premiums discussed above. The 2008 net earned premium was reduced by $12.2 million of reinstatement premium as a result of the losses from the 2008 Hurricanes. Excluding the effects of ceded reinstatement premiums as a result of the 2008 Hurricanes, net earned premium increased 4.1% in 2009 compared to 2008 and 9.0% in 2008 compared to 2007.
Net Investment Income Net investment income decreased 1.4% in 2009 to $75.5 million compared to 2008 as a result of lower investment yields partially offset by an increase in invested assets resulting from positive cash flow from operations. Net investment income increased 8.3% in 2008 to $76.6 million compared to 2007 as the result of the increase in invested assets resulting from positive cash flow from operations partially offset by lower investment yields. The pre-tax investment yield was 3.8%, 4.1% and 4.4% in 2009, 2008 and 2007, respectively. See the “Investments” section below for additional information regarding our net investment income.
As part of our regular review of prior reserves, our actuaries may determine, based on their judgment, that certain assumptions made in the reserving process in prior years may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, our actuaries may make corresponding reserve adjustments.
The directors and officers’ liability book of business had $12.4 million of adverse development, which was primarily attributable to the unexpected development of previously reported claims in the 2006 and prior underwriting years. This loss activity was inconsistent with the loss emergence trends that we observed in calendar years 2007 and 2008 and it caused us to increase our ultimate loss projections in the 2006 and prior underwriting years, as well as those in the more current underwriting years.
The Lloyd’s Operations recorded $5.9 million of net favorable development which included: $11.0 million on Marine business concentrated in the liability specie and cargo books due to reported losses being less than our expectations in underwriting years 2004 to 2008 and $2.5 million on offshore energy business due to favorable loss trends in several years, partially offset by $4.7 million of adverse loss development in the professional liability books due to reported loss activity in excess of our expectations in the lawyers liability book of business for losses occurring in 2007 and $3.0 million in the property book due to an extension in the loss development pattern for the 2006 and 2007 underwriting years.
Following is a discussion of relevant factors impacting our 2008 loss reserves:
The Insurance Companies recorded $33.1 million of net prior year savings for property casualty business. This included $31.6 million savings in the contractors liability business, $3.8 million of savings in the offshore energy business, $3.7 million of net prior year savings in the property and aviation run-off business $1.4 million of savings in the commercial umbrella business, $1.0 million of savings in the personal umbrella business, and $0.8 million of savings in the primary E&S business; partially offset by $1.6 million of net adverse development in the middle markets business as a result of an actuarial analysis that indicated that strengthening is required for the automobile coverage due to frequency and severity in excess of our expectations and $7.1 million of strengthening due to greater than expected loss activity in a discontinued liquor liability program and $0.8 million of strengthening in the program business. The favorable development for contractors’ liability, commercial umbrella, personal umbrella and primary E&S were primarily due to reduced claims activity in underwriting years 2003 through 2006. The favorable development for the aviation business was as a result of an actuarial analysis that indicated that the losses are substantially reported and the IBNR loss reserves could be reduced. The adverse development for the liquor liability business was due to a discontinued program and the adverse development on the programs business was due to an active program.
Following is a discussion of relevant factors impacting our 2007 loss reserves:
The increase in net loss reserves in all active lines of business is generally a reflection of the growth in net premium volume over the last three years coupled with a changing mix of business to longer tail lines of business such as the specialty lines of business (construction defect, commercial excess, primary excess), professional liability lines of business and marine liability and transport business in ocean marine. These products, which typically have a longer settlement period compared to the mix of business we have historically written, are becoming larger components of our overall business.
Other Operating Expense. The 7.7% and 11.5% increases in other operating expenses when comparing 2009 to 2008 and comparing 2008 to 2007, respectively, were attributable primarily to employee related expenses resulting from expansion of the business.
We classify our business into two underwriting segments consisting of the Insurance Companies and the Lloyd’s Operations, which are separately managed, and a Corporate segment. Segment data for each of the two underwriting segments include allocations of revenues and expenses of the wholly-owned underwriting management companies and the Parent Company’s operating expenses and related income tax amounts. The Corporate segment consists of the Parent Company’s investment income, interest expense and the related tax effect.
Overall, the net earned premium increased 3.4%, 4.5% and 34.5% in 2009, 2008 and 2007, respectively, reflecting overall increased retention of the business written, higher average renewal rates in 2009 overall business expansion in 2007 and expansion of our professional liability business. These factors were partially offset by a decline in our property casualty business in 2009 as well as overall average renewal rate declines in 2008.
The 2008 underwriting results were favorably impacted by $41.9 million or 9.0 loss ratio points for net prior year savings, which is discussed in the prior year reserve redundancies/deficiencies section. The 2008 pre-tax net loss to the Insurance Companies as the result of losses caused by Hurricanes Gustav and Ike of approximately $16.3 million, including $7.2 million of reinstatement costs, increased the Insurance Companies 2008 combined ratio by 10.1 combined ratio points. The after-tax effect reduced net income by $10.6 million.
Reviews of our Insurance Companies Hurricanes Katrina and Rita exposures during 2007 resulted in a reduction to the Insurance Companies pre-tax income by $1.5 million. Much of this impact was the result of reallocating our net retention for these events between our Insurance Companies and Lloyd’s Operations.
The 2009 and 2008 results included provisions of $10.2 million and $36.4 million, respectively, for declines in the market value of securities which were considered to be other-than-temporary. The after-tax effects of such provisions on the 2009 and 2008 net income were $6.7 million and $23.7 million, respectively.
The Lloyd’s Operations primarily underwrite marine and related lines of business along with professional liability insurance, and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. The European property business, written by the Lloyd’s Operations and the U.K. Branch beginning in 2006, was discontinued in the 2008 second quarter. Our Lloyd’s Operations includes NUAL, a Lloyd’s underwriting agency which manages Syndicate 1221.
The following table sets forth the impact of Hurricanes Gustav and Ike on the Lloyd’s Operations 2008 financial results:
The 2008 underwriting results were favorably impacted by approximately $8.8 million or 4.9 loss ratio points for net prior years’ savings due to favorable loss development trends, primarily in the liability and offshore energy lines in underwriting years 2006 and prior, which is discussed in the prior year reserve redundancies/deficiencies section. The 2007 earnings in the Lloyd’s Operations reflect the continued favorable loss development trends.
The pre-tax yields on the Lloyd’s Operations investments, excluding net realized capital gains and losses, approximated 2.7%, 3.4% and 3.9% for 2009, 2008 and 2007, respectively. Such yields are net of interest credits to certain reinsurers for funds withheld by our Lloyd’s Operations. Generally, the Lloyd’s Operations’ investments have been invested with a relatively short average duration, which is reflected in the yield, in order to meet liquidity needs. The decrease in the Lloyd’s Operations’ net investment income in 2009 was due to lower investment yields. The increase in the Lloyd’s Operations’ net investment income in 2008 and 2007 is reflective of the increased investment portfolio primarily due to positive cash flow from operations. The average duration of the Lloyd’s Operations’ investment portfolio was 1.6 years at December 31, 2009 compared to 1.4 years at December 31, 2008.
The 2009 and 2008 results included provisions of $1.6 million and $0.7 million, respectively, for declines in the market value of securities which were considered to be other-than-temporary. The after-tax effects of such provisions on the 2009 and 2008 net income were $1.2 million and $0.5 million, respectively.
See “Results of Operations and Overview - Income Taxes” for a discussion of the Lloyd’s Operations’ income taxes, included herein.
The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated at December 31, 2009:
The amounts determined are estimates which are subject to a high degree of variation and uncertainty, and are not subject to any specific payment schedule since the timing of these obligations are not set contractually. The amounts in the above table exclude reinsurance recoveries of $807 million. See “Business - Loss Reserves” included herein.
The following tables set forth our cash and investments as of December 31, 2009 and 2008. The table as of December 31, 2009 includes other-than-temporarily impaired (“OTTI”) securities recognized within other comprehensive income (“OCI”).
Invested assets increased in 2009 compared to 2008 primarily due to cash flows from operations as well as unrealized gains in 2009. Invested assets increased in 2008 compared to 2007 primarily due to positive cash flows from operations partially offset by unrealized losses in 2008. The consolidated average investment yield of the portfolio decreased in 2009 to 3.8% from 4.1% due to the general decline in market yields over the period. The portfolio’s duration was 4.2 years and 4.3 years as of December 31, 2009 and 2008, respectively. Since the beginning of 2009, the tax-exempt portion of our investment portfolio has increased by $30.1 million to approximately 34.9% of the fixed maturities investment portfolio at December 31, 2009 compared to approximately 36.8% at December 31, 2008.
All fixed maturities, short-term investments and equity securities are carried at fair value. All prices for our fixed maturities, short-term investments and equity securities valued as Level 1 or Level 2 in the fair value hierarchy, as defined in the Financial Accounts Standards Board Accounting Standards Codification 820 (“ASC 820”), Fair Value Measurements, are received from independent pricing services utilized by one of our outside investment managers whom we employ to assist us with investment accounting services. This manager utilizes a pricing committee which approves the use of one or more independent pricing service vendors. The pricing committee consists of five or more members, one from senior management and one from the accounting group with the remainder from the asset class specialists and client strategists. The pricing source of each security is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager uses supporting documentation received from the independent pricing service vendor detailing the inputs, models and processes used in the independent pricing service vendors’ evaluation process to determine the appropriate fair value hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a Level 3 price.
The following table presents, for each of the fair value hierarchy levels, our fixed maturities, equity securities and short-term investments that are measured at fair value as of December 31, 2009:
There were no significant judgments made in classifying instruments in the fair value hierarchy.
At December 31, 2009, we owned asset-backed securities approximating $0.1 million with subprime mortgage exposures. The securities have an effective maturity of 3.1 years. In addition, we owned residential mortgage obligations approximating $1.5 million classified as Alt-A which is a credit category between prime and subprime. The Alt-A bonds have an effective maturity of 5.6 years. We are receiving principal and/or interest payments on all of these securities and believe such amounts are fully collectible.
The following table sets forth the fifteen largest residential mortgage obligations as of December 31, 2009:
The following table shows the amount and percentage of our fixed maturities and short-term investments at December 31, 2009 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The table includes fixed maturities and short-term investments at fair value, and the total rating is the weighted average quality rating.
The following table sets forth the fifteen largest equity securities holdings as of December 31, 2009:
The following table summarizes all securities in an unrealized loss position at December 31, 2009 and 2008, showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in an unrealized loss position as well as the number of securities:
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies. See Critical Accounting Estimates - Impairment of Invested Assets for additional information on our policies. The residential mortgage obligation’s gross unrealized loss in the above table for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans.
To determine whether the unrealized loss on structured securities is other-than-temporary, we project an expected principal loss under a range of scenarios and utilize the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A breakeven default rate is also calculated. A comparison to the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies these assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, an impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.
The following table shows the composition by NAIC rating and the generally equivalent S&P and Moody’s ratings of the fixed maturity securities in our portfolio with gross unrealized losses at December 31, 2009. Not all of the securities are rated by S&P and/or Moody’s:
At December 31, 2009, the gross unrealized losses in the table directly above are related to fixed maturity securities that are rated investment grade, which is defined by us as a security having an NAIC rating of 1 or 2, an S&P rating of “BBB-” or higher, or a Moody’s rating of “Baa3” or higher. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.
The credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is collateralized by all of the common stock of Navigators Insurance Company and to the extent the aggregate face amount issued under the credit facility exceeds $75 million on account of these fluctuations we are required to post collateral with the lead bank of the consortium, which we have done as of December 31, 2009 in the amount of $8.6 million. We were in compliance with all covenants at December 31, 2009. At December 31, 2009, letters of credit with an aggregate face amount of $81.5 million were issued under the credit facility.
Generally, for excess-of-loss reinsurers we pay monthly or quarterly deposit premiums based on the estimated subject premiums over the contract period (usually one year) which are subsequently adjusted based on actual premiums determined after the expiration of the applicable reinsurance treaty. Paid losses subject to excess-of-loss recoveries are generally billed as they occur and are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30 business days for the Lloyd’s Operations.
We sometimes withhold funds from reinsurers and may apply ceded loss billings against such funds in accordance with the applicable reinsurance agreements.
At December 31, 2009, ceded asbestos paid and unpaid losses recoverable were $8.9 million. We generally experience significant collection delays for a large portion of reinsurance recoverable amounts for asbestos losses given that certain reinsurers are in run-off or otherwise no longer active in the reinsurance business. Such circumstances are considered in our ongoing assessment of such reinsurance recoverables.
In October 2007, the Company’s Board of Directors adopted a stock repurchase program for up to $30 million of our common stock. Purchases were made from time to time at prevailing prices in open market or privately negotiated transactions through the expiration of the program on December 31, 2008. The timing and amount of purchases under the program were dependent on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. In total, we purchased 224,754 shares of our common stock at an aggregate cost of $11.5 million.
In July 2009, we filed a universal shelf registration statement with the Securities and Exchange Commission. This registration statement, which expires in July 2012, allows for the future possible offer and sale by the Company of up to $500 million in the aggregate of various types of securities including common stock, preferred stock, debt securities, depositary shares, warrants, units or preferred. The shelf registration statement enables us to efficiently access the public equity or debt markets in order to meet future capital needs, if necessary. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.
We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. Since the issuance of the senior debt in April 2006, the Parent Company’s cash obligations primarily consist of semi-annual interest payments of $4.0 million. Going forward, the interest payments on our senior debt will be made from one or a combination of funds at the Parent Company or dividends from its subsidiaries. The dividends have historically been paid by Navigators Insurance Company. Based on the December 31, 2009 surplus of Navigators Insurance Company, the approximate maximum amount available for the payment of dividends by Navigators Insurance Company during 2010 without prior regulatory approval was $64.6 million. Dividends of $25.0 million and $20.0 million were paid by Navigators Insurance Company during 2009 and 2008, respectively.
Condensed Parent Company balance sheets as of December 31, 2009 and 2008 are shown in the table below: