Effective June 30, 2010, we merged Interlex, a wholly owned subsidiary of Intermed, into Intermed, a wholly owned subsidiary of First Professionals. Prior to the merger, Interlex participated in the intercompany pooling arrangement with our other insurance subsidiaries and prior to 2003 provided legal professional liability insurance in Missouri, Kansas and Florida.
The discussion below highlights factors that affect the comparability of our results from period to period. For additional information on our 2009 acquisition of Advocate, MD, see Note 3, Acquisition of Advocate, MD to the consolidated financial statements included elsewhere herein.
Net premiums written increased 12 percent for the year ended December 31, 2010 compared to 2009 as a result of the acquisition of Advocate, MD. Excluding Advocate, MD, net premiums written decreased 4 percent for 2010 compared to 2009, primarily as the result of a higher level of tail premiums written during 2009, differences in business mix and a 2 percent decline in FPIC pre-acquisition policyholders.
During 2008, we launched an initiative to provide management services for alternative risk arrangements. Direct premiums written for 2010 totaled $5.3 million with 269 policyholders related to such business compared to $4.8 million of direct premiums written and 282 policyholders in 2009.
Net investment income was 10 percent lower in 2010 compared to 2009, primarily as the result of lower average invested assets and a decline in yields on fixed income securities and cash and cash equivalents due to lower prevailing interest rates. Net realized investment gains increased 62 percent to $4.1 million in 2010. As of December 31, 2010, we had a total of $707.1 million in cash and investments, of which 89 percent were fixed income securities, 2 percent were equity securities, 8 percent were cash and 1 percent were other invested assets. Our fixed income portfolio had an overall average credit quality of Aa3, based on the lower of the available credit ratings from Moody's Investment Services (“Moody's”) and Standard & Poor's (“S&P”).
As a result of the continuation of favorable loss trends, we recognized favorable net loss development related to previously established reserves of $23.0 million during 2010 compared to $19.0 million in 2009. Losses and LAE incurred related to the current year increased approximately 8 percent in 2010 primarily as the result of higher net premiums earned resulting from the acquisition of Advocate, MD. Our 2010 loss ratio (defined as the ratio of net losses and LAE to net premiums earned) related to the current year (excluding prior year development) was 71.6 percent compared to 71.0 percent for 2009. Our current year loss ratio has increased in recent years as a result of lower premium rates.
Other underwriting expenses increased 17 percent for 2010 compared to 2009, primarily as the result of the acquisition of Advocate, MD. Excluding the impact of the Advocate, MD acquisition, other underwriting expenses were essentially level. Our underwriting expense ratio (defined as the ratio of other underwriting expenses to net premiums earned) was 28.9 percent for 2010 compared to 26.5 percent for 2009. The higher expense ratio for the year 2010 is primarily the result of a prior rate decrease in our Florida market that was reflected in net premiums earned during 2010, higher commission expenses in relation to net premiums earned as compared to 2009 and the acquisition of Advocate, MD.
Other expenses increased $2.1 million for 2010 compared to 2009 primarily as a result of the acquisition of Advocate, MD. Other expenses includes an adjustment of $2.5 million to the contingent consideration expected to be paid to former shareholders of Advocate, MD as a result of Advocate, MD's expected performance related to the attainment of targets for direct premiums written, combined ratio and underwriting profit under the earnout agreement entered into in connection with the acquisition. Other expenses for 2009 includes transaction costs associated with the acquisition of Advocate, MD of $0.5 million.
statutory surplus of our insurance subsidiaries as of December 31, 2010 was $257.8 million compared to $262.6 million as of December 31, 2009.
In November 2009, at the request of the FIGA, the Florida OIR levied a 0.8 percent assessment ($1.2 million) against our 2008 Florida direct written premiums with respect to the insolvency of property and casualty insurance companies operating in Florida. The assessment is included in our consolidated other underwriting expenses for 2009. No such assessments were levied in 2010. As allowed by Florida law, FPIC's insurance subsidiaries are entitled to recoup this assessment from their Florida policyholders and are doing so.
Our loss and LAE reserves represent management's best estimate, as of the end of the period, of the amounts we expect to pay out in the future on account of all insured events. This liability comprises estimated case reserves on reported claims plus estimates of insured losses and LAE incurred but not yet reported (“IBNR”). Also implicit in our loss and LAE reserves is a provision for case reserve development, which represents an estimate of the aggregate difference between our individually estimated case reserves and the amount for which they will ultimately be settled. This provision, which is included in our total IBNR reserves, comprises the majority of such reserves given our focus on claims-made policy coverage. The following table summarizes our liability for losses and LAE by line of business:
Actuarial techniques and primary factors that impact our reserve estimates - We establish loss and LAE reserves taking into account the results of multiple actuarial techniques applied as well as other assumptions and factors regarding our business. The actuarial techniques we use that are material to our evaluation of loss and LAE reserves include the following:
In considering the potential sensitivity of the factors and assumptions underlying management's best estimate of loss and LAE reserves, it is also important to understand that the MPL sector of the property and casualty insurance industry is characterized by a relatively small number of claims with a large average cost per claim. Our data is presented in the table below:
ultimately close with an indemnity payment versus those that will close without an indemnity payment. Because our aggregate loss and LAE reserves are so large, this also means that virtually any change in the assumptions on which the level of our carried reserves is based could be material to our results of operations and may be material to our financial position. The following table shows how a hypothetical 5 percent increase or decrease in a given variable would impact our net liability for losses and LAE:
Any combination of these changes could have a larger impact on our reserves. As noted in the discussion above, the independent review of our reserves plays a critical role in our overall assessment of the adequacy of our reserves. A typical range of reasonable values for MPL business is considered to be as wide as 15 percent. Based on our historical experience, fluctuations in the variables noted above could hypothetically increase or decrease by approximately 5 percent or more and have a significant impact on our reserves and, correspondingly, our financial position, results of operations and cash flows.
While we believe that our estimates for ultimate projected losses and LAE are reasonable, there can be no assurance that our estimates will not change in the future given the many variables inherent in such estimates and the extended period of time that it can take for claim patterns to emerge.
For accident years 2000 through 2004, we experienced adverse development related to an assumed reinsurance program. This reinsurance program was placed into run-off in 2004 and was commuted effective January 1, 2007.
Accident years 2005 through 2009 have developed favorably overall, in particular accident years 2005 through 2008. We have experienced favorable development on these years as the result of changes in our previous estimates of incident to claim development, payment frequency and / or payment severity for the respective accident years. A broad range of factors likely contributed to the improved claim results, including tort reform and the stricter claims philosophy we implemented in 2001.
A portion of the coverage that insureds purchase under claims-made policies is for an additional death, disability and retirement (“DD&R”) insurance benefit. Coverage is provided to the insured for any prior incidents occurring during the claims-made policy period that are reported after his or her death, disability or retirement. The loss exposure associated with this product is known as extended reporting endorsement claims. The reserve for extended reporting endorsement claims is recorded during the term of the original claims-made policy, based on the present value of future estimated benefits, including assumptions for morbidity, mortality, retirement, interest and inflation, less the present value of expected future premiums associated with this DD&R coverage. The reserves for these claims fluctuate based on the number of insureds who are eligible for this coverage and their age. These liabilities, which possess elements of both loss reserves and pension liabilities, are carried within unearned premiums. Once an endorsement is issued because of a triggering event, a liability is established as part of the reserve for losses and LAE. Any changes in the DD&R reserves are reflected as income or expense in the period in which we become aware that an adjustment is appropriate. At December 31, 2010 and 2009, our carried DD&R reserves were $16.9 million and $19.5 million, respectively, which includes a discount related to the present value calculation of approximately $7.4 million and $7.4 million, respectively. A one percentage point change in our discount rate of 5 percent related to our DD&R reserves as of December 31, 2010 would result in an approximate addition or reduction in our DD&R reserves of approximately $1.9 million.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). We utilize market data or assumptions that we believe market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated or generally unobservable. We have primarily applied the market approach for recurring fair value measurements and endeavor to utilize the most important information available to us. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We then classify fair value balances based on the observability of those inputs.
Significant Unobservable Inputs: Level 3 inputs are unobservable and reflect management's judgments about assumptions that market participants would use in pricing an asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Reclassifications impacting Level 3 financial instruments are reported as transfers in (out) of the Level 3 category as of the beginning of the period in which the transfer occurs. Therefore, gains and losses in income only reflect activity for the period the instrument was classified in Level 3.
Valuation of Investments - We primarily use a single pricing service, Interactive Data Corporation (“IDC”), to value our investments that have an exchange traded price or multiple observable inputs. In situations where IDC does not have multiple observable inputs or the ability to price a given security, we seek to price the security utilizing another pricing service or by obtaining non-binding broker / dealer quotes.
On a quarterly basis, we obtain and review the pricing methodology of our pricing service to ensure that our fair value designations are classified in accordance with the fair value hierarchy. Our pricing service provides a single price per security. We review the results of our pricing service for reasonableness each quarter by comparing market values reported on an individual security basis and on an overall portfolio basis to those obtained from our external investment manager to determine that the market value reported by our pricing service appears reasonable. In addition, an annual SAS 70 report that describes procedures surrounding the compilation and reporting of security prices obtained from our pricing service is provided to us. We may adjust the valuation of securities from the independent pricing service if we
believe a security's price does not fairly represent the market value of the investment. For example, when market observable data is not as readily available or if the security trades in an inactive market, the valuation of financial instruments becomes more subjective and could involve substantial judgment resulting in Level 3 pricing. To date, we have not adjusted any prices supplied by our pricing service.
All securities priced by our pricing service using an exchange traded price are designated by us as Level 1. We designate as Level 2 those securities not actively traded on an exchange for which our pricing service utilizes multiple verifiable observable inputs. For securities that do not have multiple observable inputs (Level 3), we do not rely on a price from our pricing service.
Fixed income securities, available for sale, including short-term investments - reflects securities that trade in less active markets. Fair value is based on valuation methodologies, the significant inputs into which may include, but are not limited to, benchmark yields, reported trades, issuer spreads, two-sided markets, new issue data, bids, offers, collateral performance and reference data. These fixed income securities are classified within Level 2. Credit ratings noted below are based on the lower of the available credit ratings from S&P and Moody's for each investment security.
States, municipalities and political subdivisions include securities issued by state and local governments. General obligation bonds are backed by the full faith and credit of the issuing entity (e.g., government authority) and revenue bonds are backed by a specific revenue stream. Lease revenue bonds are backed by specific lease arrangements, where the principal and interest are generally paid from annual appropriations from the governmental entity that benefits from the facility (e.g., school, prison facility). Pre-refunded bonds are backed by Treasuries and/or Agencies. These 'sub'-sectors (e.g., general obligation, revenue, lease, pre-refunded) can be taxable or tax-advantaged. These securities are diversified throughout the U.S, have an average credit quality of Aa1 and represent approximately 32 percent of our fixed income securities.
Corporate securities include securities issued by various corporate entities across different industries. Both investment grade and non-investment grade securities are included within this category. The average credit quality of investment grade corporate securities is A2 and these securities represent approximately 32 percent of our fixed income securities. The average credit quality of non-investment grade corporate securities is Ba3 and these securities represent approximately 3 percent of our fixed income securities.
Residential mortgage-backed securities include structured securities that are issued based on underlying residential mortgages. Within this category are bonds that are agency or non-agency related. Agency related bonds are from the vintage years 1988 through 2010, have an average credit quality of Aaa and represent approximately 14 percent of our fixed income securities. Non-agency related bonds are from the vintage years 2002 through 2007, have an average credit quality of Baa3 and represent approximately 1 percent of our fixed income securities.
Asset-backed securities include structured securities issued based on underlying assets, primarily automobile loans, credit cards, and home equity lines of credit. These securities have an average credit quality of Aa1 and represent approximately 4 percent of our fixed income securities.
Foreign government securities include securities issued by the Canadian government, a Canadian agency or one of its provinces. These securities are denominated in U.S. dollars, have an average credit quality of Aa1 and represent 1 percent of our fixed income securities.
Common and preferred equity securities that trade in active markets are classified within Level 1, as fair values are based on quoted market prices for identical assets as of the reporting date.
Securities, predominantly mutual funds, held in rabbi trusts maintained by the Company for deferred compensation plans, are included in other invested assets and classified within the valuation hierarchy on the same basis as the Company's actively traded equity securities.
Our derivative instruments, principally interest rate swaps, are valued using models that primarily use market observable inputs and are classified as Level 2, as their fair value is largely based on observable inputs over the life of the swaps in a liquid market. The fair value of the interest rate swaps is calculated by comparing the stream of cash flows on the fixed rate debt versus the stream of cash flows that would arise under the floating rate debt. The floating and fixed rate cash flows are then discounted to the valuation date by using the three-month London Interbank Offered Rate (“LIBOR”) at the date of the valuation. Pricing inputs include bid-ask spreads and current market prices for an underlying instrument.
All investments in an unrealized loss position are reviewed at the individual security level to determine whether a credit or non-credit rate-related impairment is other-than-temporary. For fixed income securities, impairment is considered to be other-than-temporary if we have the intent to sell the security prior to recovery, if it is more likely than not we will be required to sell the security prior to recovery, or if we do not believe the value of the security will recover. Our impairment analysis takes into account factors, both quantitative and qualitative in nature. Among the factors we consider are the following:
We have a process in place to identify fixed income and equity securities that could potentially have a credit impairment that is other-than-temporary. This process involves monitoring market events that could impact an issuer's credit rating, business climate, management changes, litigation and government actions and other similar factors. This process also involves monitoring pricing levels, downgrades by rating agencies, key financial ratios and cash flow projections as indicators of credit issues.
The fair value of our investment holdings is affected by general economic conditions and changes in the financial and credit markets, and we rely on the investment income produced by our investment portfolio to contribute to our profitability. Changes in interest rates and credit quality may result in fluctuations in the income derived from, the valuation of, and in the case of declines in credit quality, payment defaults on our fixed income securities. In addition, deteriorating economic conditions could impact the value of our equity securities resulting in other-than-temporary impairments to such securities. These changes could have a material adverse effect on our financial condition, results of operations or cash flows. Our investment portfolio is also subject to credit and cash flow risk, including risks associated with our investments in asset-backed and mortgage-backed securities. Because our investment portfolio is the largest component of consolidated assets and a multiple of shareholders' equity, adverse changes in economic conditions could result in other-than-temporary impairments that are material to our financial condition, operating results or cash flows. Such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies or municipalities in which we maintain investment holdings. Our fixed income portfolio had an overall average credit quality of Aa3, based on the lower of the available credit ratings from Moody's and S&P.
We estimate and recognize deferred tax assets and liabilities for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We determine deferred tax assets and liabilities separately for each tax-paying component (an individual entity or group of entities that is consolidated for tax purposes) in each tax jurisdiction. Our practice is to recognize interest accrued related to unrecognized tax benefits and any applicable penalties in income tax expense.
A valuation allowance against deferred tax assets is estimated and recorded if it is more likely than not that all or some portion of the benefits related to the deferred tax assets will not be realized. Valuation allowances are based on estimates of taxable income and the period over which deferred tax assets will be recoverable. In the event that actual results differ from our estimates or those estimates are adjusted in future periods, we may need to establish a valuation allowance, which would impact our financial position and results of operations. During 2008, we recorded a valuation allowance of $0.7 million against our deferred tax assets associated with realized losses on investments other-than-temporarily impaired. The valuation allowance was recorded against deferred tax expense. In 2009, the valuation allowance was
deemed no longer necessary as a result of the increase in the fair value of our investment portfolio. No valuation allowance was recorded during 2010. For additional information concerning our income taxes, see Note 13, Income Taxes to the consolidated financial statements included elsewhere herein.
We make an annual assessment of goodwill and intangible assets by reporting unit to determine whether the value of our goodwill and intangible assets is impaired. We use both a market-based approach and an income approach to estimate fair value. Changes to our assumptions could significantly lower our estimates of fair value and result in a determination that goodwill or intangible assets have suffered impairment in value. In November 2009, we completed the acquisition of Advocate, MD. The acquisition resulted in $10.2 million of additional goodwill and the recording of $7.3 million of intangible assets. We completed our annual assessment of goodwill and intangible assets in 2010, 2009 and 2008 and concluded that the value of our goodwill and intangible assets was not impaired. For additional information on goodwill and intangible assets, see Note 7, Goodwill and Intangible Assets to the consolidated financial statements included elsewhere herein.
Awards in 2007 and prior years under our Omnibus Plan for officers and key employees consisted only of stock options and restricted stock. Beginning in 2008, share-based awards have been issued in the form of contingent stock grants with performance-based measures and restricted stock. The contingent stock has a two-year performance period. The final determination of the number of shares to be issued in respect of an award (which can vary between 50 and 150 percent of the number of performance units subject to the award, provided a threshold performance level is achieved) is determined by the Compensation Committee of our Board of Directors. The restricted stock grants are time-based and vest in equal amounts over a three-year period, subject to forfeiture restrictions. Restricted stock becomes unrestricted as the awards vest. Time-vested awards made under the Omnibus Plan generally vest over a three-year period, which represents the requisite service period for such awards. Performance-based awards vest upon meeting the related performance objective. Under the plan, individuals who receive a restricted stock award are permitted to redeem a sufficient number of shares from such award upon vesting to satisfy any tax withholding liability. Awards are generally made annually.
The fair value of restricted stock awards, including performance units, is based on the closing sales price of FPIC common stock on the date of issuance. Stock valuation models require the input of highly subjective assumptions. Expected volatility and dividends were based on historical factors related to our common stock. Expected term represents the estimated weighted-average time between grant and employee exercise. The risk-free rate is based on U.S. Treasury rates appropriate for the expected term.
We recognize as an asset or liability the over-funded or under-funded status of our defined benefit plans based on the difference between the plan's projected benefit obligation and the fair value of plan assets. We also record all unrecognized prior service costs and credits, unrecognized actuarial gains and losses and any unrecognized transition obligations or assets in accumulated other comprehensive income (loss). Such amounts are reclassified into earnings as components of net periodic benefit cost. We measure plan assets and benefit obligations as of the date of our statement of financial position. Effective January 1, 2008, we elected the "two measurement approach" for current year-end measurement calculations. The impact of adopting the measurement date provisions is shown in the table below:
Our assumption for the expected long-term rate of return on plan assets in our pension plans, which impacts net periodic benefit cost, is 6.8 percent for 2010, 2009 and 2008. The assumption for the expected return on plan assets for our defined benefit plans reflects our long-term assessment of forward-looking return expectations by asset class, which is used to develop a weighted-average expected return based on the implementation of our targeted asset allocation in our respective plans. The following table shows the expected versus actual rate of return on plan assets for our defined benefit plans.
Premiums, which are our primary source of revenue, are recognized pro-rata over the respective period of each policy. Premium receivables are recorded net of an estimated allowance for uncollectible amounts. Unearned premiums represent the portion of the premium applicable to the unexpired period of the insurance policy. In the event it is determined that the unearned premium reserve for a book of business will not be sufficient to recover the future expected losses and LAE and acquisition costs, including consideration of related investment income, recognition of a premium deficiency would be required through a write down of deferred policy acquisition costs and a corresponding charge to income. In the event deferred policy acquisition costs are written off entirely, any remaining premium deficiency would be accounted for as a liability with a corresponding charge to income.
As described in Note 2, Significant Accounting Policies to the consolidated financial statements included elsewhere herein, under the heading “New Accounting Pronouncements,” there are accounting pronouncements that have recently been issued but have not yet been implemented by us. Note 2 describes the potential impact that these pronouncements are expected to have on our consolidated financial statements once implemented.
Our business is comprised of our insurance operations through insurance subsidiaries domiciled in Florida, Missouri and Texas. We currently engage only in insurance operations. Financial and selected other data, including professional liability claims data, related to our continuing operations as of December 31 and for the years then ended is summarized in the table below. FPIC pre-acquisition business represents our insurance operations conducted through insurance subsidiaries domiciled in Florida and Missouri and excludes the operations of Advocate, MD.
Consolidated income from continuing operations was $29.6 million for 2010, or $3.03 per diluted common share, a decrease of 12 percent and 1 percent, respectively, compared to $33.6 million for 2009, or $3.05 per diluted common share for 2009. The decline in consolidated income from continuing operations is primarily attributable to lower net investment income, higher losses and LAE incurred, other underwriting expenses and other expenses offset by growth in net premiums earned and an increase in net realized investment gains for the year ended December 31, 2010. For further information, see the discussion below.
Net premiums written increased 12 percent for 2010 compared to 2009, primarily as the result of the acquisition of Advocate, MD. Excluding the impact of the Advocate, MD acquisition, net premiums written declined 4 percent, primarily as the result of a higher level of tail premiums written during 2009, differences in business mix and a 2 percent decline in FPIC pre-acquisition policyholders.
Net losses and LAE incurred related to the current year increased 8 percent in 2010 compared to a decrease of 5 percent in 2009. The increase in loss and LAE incurred during 2010 is the result of higher net premiums earned as a result of the acquisition of Advocate, MD. The continuation of favorable claims results as compared to previous estimates resulted in
Selected professional liability insurance claims data. Net paid losses and LAE excluding assumed reinsurance contracts in run-off increased 14 percent for 2010 compared to 2009 primarily as a result of the acquisition of Advocate, MD and the resolution of two related claims against an insured from accident year 2002. The amount paid in excess of the applicable policy limit and reinsurance was $10 million for each claim. Such amounts had been fully contemplated in previously established loss and LAE reserves. Excluding these payments, net paid losses and LAE for FPIC pre-acquisition business declined 12 percent. The average payment severity of our claims remains within our expectations. For the year ended December 31, 2010, the CWIP ratio was 32 percent and the CWIP ratio, including incidents, was 16 percent, compared to 37 percent and 19 percent, respectively, for the same period in 2009. The CWIP ratios remain within our expectations. Our inventory of open claims and incidents declined 8 percent (7 percent for FPIC pre-acquisition business) in 2010 compared to 2009. It is not unusual for our claims data to fluctuate from period to period. Our claims data remains within our expectations.
Income tax expense was relatively level when compared with the prior period. Our effective tax rate was 35 percent and 32 percent for the years ended December 31, 2010 and December 31, 2009, respectively. The effective tax rate for 2010 reflects the impact of the adjustment to the estimated fair value of contingent consideration associated with the acquisition of Advocate, MD, which is not deductible for income taxes. The effective tax rate for 2009 reflects an adjustment to remove a valuation allowance associated with unrealized losses on investments that was established in 2008. Excluding these items, our effective tax rate was 33 percent for both the years ended December 31, 2010 and December 31, 2009.
Consolidated net income was $34.0 million for 2009, or $3.09 per diluted common share, an increase of 6 percent and 26 percent, respectively, compared to $32.1 million, or $2.46 per diluted common share for 2008. Included in net income for 2009 was a gain from discontinued operations of $0.4 million. Other changes in net income are due to the factors discussed in the paragraph above with regard to consolidated income from continuing operations.
Net premiums earned declined 9 percent for 2009 compared to 2008. Excluding the impact of the Advocate, MD acquisition, net premiums earned declined 11 percent, primarily the result of lower rates in our Florida market and a prior shift in business mix that is reflected in 2009 net premiums earned.
Net realized investment gains for 2009 were $2.6 million and include other-than-temporary impairment charges of $2.1 million related to three non-agency mortgage-backed securities, one commercial mortgage-backed security and two corporate securities. During 2008, net realized investment losses were $13.6 million and included other-than-temporary charges of $13.5 million primarily related to corporate securities that were adversely affected by the challenging economic environment and related financial market turmoil.
Income tax expense decreased 3 percent for 2009 compared to 2008. Our effective tax rate was 31.6 percent for 2009 compared to 33.2 percent for 2008. Income tax expense for 2008 includes a valuation allowance against deferred taxes of $0.7 million associated with realized investments losses. The valuation allowance was recorded against deferred tax expense. In 2009, the valuation allowance was deemed no longer necessary as a result of the increase in the fair value of our investment portfolio. Excluding the valuation allowance, our effective tax rate was 33.0 percent for 2009 compared to 31.8 percent for 2008. The change in our effective tax rate reflects changes in the proportion of our tax-exempt investment income to taxable income.
* We hold collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers not rated or authorized.
Deferred income taxes decreased 17 percent to $21.8 million as of December 31, 2010 from $26.3 million as of December 31, 2009. The decrease in deferred income taxes is primarily the result of our investment portfolio being in a higher net unrealized gain position compared to 2009.
Liquidity is a measure of a company's ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. As a holding company, we possess assets that consist primarily of the stock of our subsidiaries and of other investments. The sources of liquidity available to us for the payment of operating expenses, taxes, debt-related amounts and to fund our share repurchase program include management fees and dividends from our insurance subsidiaries. Management fees from our insurance subsidiaries are based upon agreements in place with First Professionals and APAC, pursuant to which we provide substantially all management and administrative services. In accordance with limitations imposed by state insurance laws, our insurance subsidiaries are permitted, within insurance regulatory guidelines, to pay us dividends of approximately $25.8 million during 2011 without prior regulatory approval. As of December 31, 2010, the holding company held cash and liquid investments of $12 million.
Unexpected changes in operating costs, including new insurance guaranty fund assessments or increased taxes;
Sources of liquidity include cash from operations and routine sales of investments and financing arrangements. As reported in the consolidated statement of cash flows, net cash used in operating activities was $4.1 million for 2010 compared to net cash provided by operating activities of $6.7 million and $21.1 million for 2009 and 2008, respectively. During 2010 and 2009, we received lower aggregate premiums from policyholders than those received during 2008. In addition, during 2010 we resolved two related claims against an insured from accident year 2002. The amount paid in excess of the applicable policy limit and reinsurance was $10 million for each claim. Excluding these payments, net cash provided by operating activities was $15.9 million.
Net cash flows provided by investing activities was $44.7 million, $32.0 million and $26.3 million for 2010, 2009 and 2008, respectively. Net cash provided by investing activities increased during 2010 primarily as a result of transactions involving securities, which are dependent on our cash flows from operating activities and the management of our investment portfolio. Net sales and maturities of fixed income securities, equity securities and short-term investments, were $44.8 million, $74.6 million and $27.0 million for 2010, 2009 and 2008, respectively. Net cash flows provided by investing activities for 2009 also reflect cash outlays of $44.6 million ($35.6 million in cash paid at closing, including a $2.0 million payment related to a non-compete agreement, and the payoff of $9.0 million in senior debt) offset by cash received of $6.0 million associated with the acquisition of Advocate, MD.
Net cash flows used in financing activities was $40.5 million, $38.5 million and $59.1 million for 2010, 2009 and 2008, respectively. A majority of the cash flows associated with financing activities are attributable to our share repurchase program. Share repurchases totaled $42.3 million, $43.0 million, and $68.1 million for 2010, 2009 and 2008, respectively.
As of December 31, 2010 and 2009, we had cash and investments of $707.1 million and $744.8 million, respectively. Included within cash and investments as of December 31, 2010 were cash and cash equivalents of $58.7 million, and equity securities, fixed income securities and short-term investments with fair values of $11.9 million and $627.2 million, respectively. Approximately $63.0 million of our fixed income securities have scheduled maturities during the next 12 months. We believe that our cash and investments as of December 31, 2010, combined with expected cash flows from operating activities and the scheduled maturities of investments, will be sufficient to meet our cash needs for operating purposes for at least the next 12 months.
The following table summarizes our significant contractual obligations and commitments as of December 31, 2010, and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal payments on outstanding borrowings. Additional information regarding these obligations is provided in Note 3, Acquisition of Advocate, MD, Note 8, Liability for Losses and LAE, Note 10, Long-term Debt and Note 19, Commitments and Contingencies to the consolidated financial statements included elsewhere herein.
(1) Derivative financial instruments - During May and November 2008, we entered into four interest rate swaps with SunTrust Banks, Inc. (“SunTrust”) to mitigate our floating rate interest risk on our long-term debt. Each swap contract contains customary representations, warranties and covenants and has a termination date either three or five years from its respective effective date. We are required during the term of each of the swaps to make certain fixed rate payments to SunTrust calculated on the notional amount in exchange for receiving floating payments based on the three-month LIBOR rate for the same amount. The interest rate swaps, during their terms, fix the annual interest rate payable on our trust-preferred indebtedness at 8.14 percent for $20 million of the indebtedness, 7.97 percent for $15 million and 6.94 percent for $10 million. For additional information on our derivative instruments, see Note 11, Derivative Instruments and Hedging