Other underwriting expenses include a charge of $1.2 million (offset by recoveries of $1.2 million) in 2009, recoveries of $2.7 million in 2008 and charges of $3.5 million (net of $0.7 million in recoveries) in 2007 and $9.4 million in 2006 for guaranty fund assessments levied by the Florida OIR.
During 2009 and 2008, we recorded pre-tax charges of $2.1 million and $13.5 million, respectively, for certain investments that were deemed other-than-temporarily impaired. In 2008, we recorded a valuation allowance of $0.7 million against our deferred tax assets associated with these realized losses on investments. In 2009, the valuation allowance against our deferred tax assets was no longer deemed necessary.
Effective January 1, 2007, First Professionals commuted all assumed reinsurance treaties with PRI under which First Professionals acted as a reinsurer. Under the terms of the commutation agreements, First Professionals paid cash and delivered securities with an aggregate value of $87.7 million to PRI as full settlement of all past and future obligations for policy risks previously reinsured by First Professionals. The corresponding net liabilities related to these agreements carried by First Professionals totaled $103.4 million. We recognized an after-tax gain of $9.7 million as a result of the commutation.
During 2005, we disposed of our TPA operations and recognized a $1.7 million after-tax gain on the sale. During 2006, we disposed of our insurance management operations and ultimately recognized an $11.6 million after tax-gain on the sale. For additional information, see Note 20, Discontinued Operations to the consolidated financial statements included elsewhere herein.
Income from continuing operations and net income increased 5 percent and 6 percent (24 percent and 25 percent, respectively, on a diluted common share basis) for the year ended December 31, 2009 compared to 2008. Our 2009 consolidated results include $0.5 million in income from continuing operations and net income from the operations of Advocate, MD since its acquisition on November 13, 2009. The discussion below also highlights additional factors, including favorable prior year loss development, net realized investment gains and losses and guaranty fund assessments that affect the comparability of our results from period to period. For additional information on our acquisition of Advocate, MD, see Note 3, Acquisition of Advocate, MD to the consolidated financial statements included elsewhere herein.
Net premiums written decreased 10 percent for the year ended December 31, 2009 compared to 2008. The decrease in Florida premium rates over the last few years also largely contributed to a decline in net premiums earned of 9 percent.
The number of professional liability policyholders, excluding policyholders under alternative risk arrangements, increased 31 percent to 18,003 policyholders at December 31, 2009 compared to 13,728 policyholders at December 31, 2008. Excluding the 3,664 policyholders of Advocate, MD, and policyholders under alternative risk arrangements, professional liability policyholders increased 4 percent to 14,339.
During 2008, we launched an initiative to provide management services for alternative risk arrangements and recorded $2.9 million of direct premiums written for the year then ended. Direct premiums written for 2009 totaled $4.8 million with total policyholders related to such business of 282 at December 31, 2009 compared to 174 in 2008.
As a result of the continuation of favorable loss trends, we recognized favorable net loss development related to previously established reserves of $19.0 million for 2009 compared to $17.0 million for 2008.
In November 2009, the Florida OIR at the request of the Florida Insurance Guaranty Association 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. No such assessments were levied in 2008. For additional information, see the discussion below regarding Other Underwriting Expenses. As allowed by Florida law, FPIC’s insurance subsidiaries are entitled to recoup this assessment from their Florida policyholders and intend to make the necessary filings to do so.
During 2009, we recorded net realized investment gains of $2.6 million compared to net realized investment losses of $13.6 million in 2008. Our 2009 investment results include $2.1 million in other-than-temporary impairments on investments compared to $13.5 million during 2008. As of December 31, 2009, we had a total of $744.8 million in cash and investments, of which 89.4 percent were fixed income securities, 1.5 percent were equity securities, 7.9 percent were cash and 1.2 percent were other invested assets. Our fixed income portfolio had an overall average credit quality of AA-, based on the lower of the available credit ratings from Moody’s Investment Services (“Moody’s”) and Standard & Poor’s (“S&P”).
On a trade date basis, we repurchased 1,182,928 shares of our common stock during 2009 at an average price of $33.84 per share and as of December 31, 2009, had remaining authority from our Board of Directors to repurchase 769,874 more shares under our stock repurchase program. Through February 22, 2010, we have repurchased an additional 111,433 shares of our common stock, on a trade date basis, at an average price of $37.77 per share and had remaining authority from our Board of Directors to repurchase an additional 658,441 shares as of that date.
Book value per common share was $41.38 as of December 31, 2009 compared to $33.31 as of December 31, 2008. We received $34.2 million in dividends from our insurance subsidiaries during 2009. The statutory surplus of our insurance subsidiaries as of December 31, 2009 was $262.6 million compared to $242.8 million as of December 31, 2008.
Our discussion and analysis of financial condition, results of operations and liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We generally base our estimates on historical experience or other appropriate assumptions that we believe are reasonable and relevant under the circumstances and evaluate them on an ongoing basis. The results of these estimation processes form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
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. The 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.
IBNR as a component of our total reserves has increased in recent years primarily as a result of higher estimates of LAE, such as legal defense and related costs, driven by the stricter claims philosophy we adopted in 2001, which focuses on the aggressive defense of non-meritorious claims in order to lower overall claims costs. While we believe this approach has been beneficial to our results in total, it has increased our estimates for LAE costs as an individual component. Establishing case reserves for LAE is inherently difficult since the level of costs ultimately necessary to resolve a case tends to increase over time and can vary significantly based on factors such as whether and when a case is taken to trial. Therefore, a substantial portion of total LAE reserves is reflected in our estimates for case reserve development. Additionally, our claims philosophy has contributed to a relatively lower number of cases with an indemnity case reserve, which has also resulted in an increase in IBNR as a component of total reserves.
Tort reform - A number of the states in which we operate, including Florida, Texas, Georgia, Arkansas, and Missouri, have passed various medical malpractice tort reform measures. For instance, beginning in 2003, Florida enacted a series of laws and adopted a series of constitutional amendments that provide for, among other things, a $0.5 million cap on non-economic damages under certain circumstances, certain modifications to bad faith statutes, limitations on fees to plaintiffs’ attorneys, and abolition of joint and several liability in medical malpractice actions. Similarly, Texas has, among other things, placed caps on non-economic damages (a $0.25 million in the aggregate recoverable from all individual defendants and a $0.5 million in the aggregate recoverable from all institutions) and abolished joint and several liability. In general, we believe that these reforms have provided an additional level of stability to the MPL insurance market and have contributed to the decline in frequency of claims since enactment. The Florida cap on non-economic damages has been held, subject to appeal, by one Florida appellate court to be unconstitutional as applied to “straddle cases” in that jurisdiction (cases involving claims made after the effectiveness of the cap for alleged injuries that occurred prior to the effectiveness of the cap) and has been challenged in the Florida appellate court of another jurisdiction. We expect these cases ultimately to be decided by the Florida Supreme Court.
Given the nature of these reforms, the uncertainties surrounding future legislative initiatives and the fact that certain of these reforms are being challenged in certain state courts, we are unable to determine what specific effect these developments have had on our claims experience or to predict what their effect may be in the future. To the extent these reforms have contributed to lower frequency of claims and are not ultimately upheld, the reversal of these reforms may result in a higher frequency and severity of claims in the future.
The primary factors affecting our estimates of ultimate reserves for insurance claims, defense, and other related costs include the following:
The amount of defense costs we will pay for each claim or group of claims;
Given the magnitude of our reserves and the characteristics noted above, even relatively small changes in our estimates for factors such as the number of claims we expect to pay or the amount we expect to ultimately pay for such claims could have a significant impact on our reserves and, correspondingly, our financial position, results of operations and cash flows. This is the case for other key assumptions as well, such as the frequency of reported claims and incidents that will 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 medical professional liability 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.
Losses and LAE for claims related to prior years represent the total net change in estimates charged or credited to earnings in the current year with respect to liabilities established in prior years. Information regarding losses and LAE is accumulated over time and the estimates of the liability are revised accordingly, with the change recognized in the period revisions are made. As noted in the table above, during 2009 our loss and LAE reserve estimates for prior years decreased $19.0 million compared to $17.0 million in 2008. The favorable prior year loss development reflects a decline in expected ultimate losses for years prior to 2009, primarily the 2005 through 2007 accident years, as a result of improved claim trends compared to earlier estimates, including lower incident to claim development, a lower number of claims closed with indemnity payment and relative stability in payment severity.
Loss Reserve development table - The following table sets forth on a calendar year basis, the development of our liability for losses and LAE, net of amounts recoverable under reinsurance arrangements, for the ten-year period preceding the year ended December 31, 2009, and the cumulative amounts paid with respect to such reserves. Development reflects the difference between the amount we previously established as loss reserves and the re-estimated liability as of the end of each succeeding year. Favorable development, or redundancy, means that we now believe we will have to pay less for related claims than we had previously established in reserves and have revised our reserve estimates accordingly. Adverse development, or deficiency, means that we now believe we will have to pay more for related claims and have increased our reserve estimates. The table also provides a reconciliation of our liability net of reinsurance to the gross liability before reinsurance, as it is shown on our consolidated statement of financial position.
As the table below indicates, our reserve estimates can vary over time based on actual results and our assessment of the impact of recent conditions and trends. For example, the cumulative net reserves carried at the end of calendar years 1999 through 2004 have been lower than subsequent payments and re-estimates and have developed upward (i.e., deficiently). In contrast, net reserves at the end of calendar years 2005 through 2008 have decreased from the amounts initially carried and have developed downward (i.e., redundantly). Improvements in recent years have resulted in a redundancy in the cumulative net reserves carried at the end of 2009 as compared to our prior estimates.
Data presented in the table below represents consolidated information of all our insurance subsidiaries commencing from their respective acquisition date. In November 2009, we acquired all of the issued and outstanding stock of Advocate, MD, which then became a wholly owned subsidiary of First Professionals.
For accident years 1999 through 2002, we experienced higher than expected claims trends in Missouri.
For accident years 1999 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 as discussed in Note 8, Liability for Loss and LAE and Note 9, Reinsurance to the notes to the consolidated financial statements presented elsewhere herein.
Accident years 2003 through 2008 have developed favorably overall, in particular accident years 2004 through 2007. We have experienced favorable development on these years because of improved claim results compared to earlier estimates, including lower frequency, a lower number of claims closed with indemnity payment, and stable payment severity. A broad range of factors likely contributed to the improved claim results, including tort reform and the stricter claims philosophy adopted in 2001.
A portion of the coverage that physicians purchase under claims-made policies is for an additional death, disability and retirement (“DD&R”) insurance benefit. Coverage is provided to the physician 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 physicians 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, 2009 and 2008, our carried DD&R reserves were $19.5 million and $21.1 million, respectively, which includes a discount related to the present value calculation of approximately $7.4 million and $9.1 million, respectively. A one percentage point change in our discount rate of 5 percent related to our DD&R reserves as of December 31, 2009 would result in an approximate addition or reduction in our reserve of approximately $1.9 million. Effective January 1, 2007, we commuted our assumed DD&R reserves, which were $54.5 million. For additional information, see Note 9, Reinsurance to the consolidated financial statements presented elsewhere herein.
Effective January 1, 2008, we adopted the accounting guidance on Fair Value Measurements, which provides a framework for measuring fair value under GAAP for financial assets and liabilities. The adoption did not have an impact on our consolidated financial statements. Fair value is defined as 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, including assumptions about risk and the risks inherent in the inputs to the valuation technique. 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.
The fair value hierarchy prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data.
Significant Other Observable Inputs: Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves.
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.
For 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, broker / dealer quotes and issuer spreads. These fixed income securities are classified within Level 2.
Other invested assets - Other invested assets include investments held as part of our deferred compensation plan and an investment in a non-public entity.
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 our 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”) rate at the date of the valuation. Pricing inputs include bid-ask spreads and current market prices for an underlying instrument.
For additional information on our fair value measurements, see Note 4, Fair Value Measurements to the consolidated financial statements included elsewhere herein.
All investments in an unrealized loss position are reviewed at the individual security level to determine whether a credit or interest 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:
The length of time and the extent to which fair value has been less than cost;
The occurrence of a significant economic event that may affect the industry in which an issuer participates, including a change that might adversely impact the investee’s ability to achieve profitability in its operations;
Our intent and ability to hold the investment for a sufficient period to allow for any anticipated recovery in fair value; and
With regards to commercial mortgage-backed securities (“CMBS”), we also evaluate key statistics such as breakeven constant default rates and credit enhancement levels. The breakeven constant default rate indicates the percentage of the pool’s outstanding loans that must default each and every year with 40 percent loss severity (i.e., a recovery rate of 60 percent) for a CMBS class/tranche to experience its first dollar of principal loss. Credit enhancements indicate how much protection, or “cushion,” there is to absorb losses in a particular deal before an actual loss would impact a specific security.
Equity securities are deemed other-than-temporarily impaired based on the severity of the unrealized loss and the time the security has been in an unrealized position. If the impairment is deemed to be other-than-temporary, a loss is recognized in net income for the difference between the fair value and cost basis of the investment and a new cost basis for the investment is established.
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 2007. For additional information concerning our income taxes, see Note 13, Income Taxes to the consolidated financial statements included elsewhere herein.
Awards under our Omnibus Plan in 2007 and prior years consisted only of stock options and restricted stock. During 2008 and 2009, we made grants of contingent stock 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 an adequate number of shares from such award upon vesting to satisfy any tax withholding liability. Awards are generally made annually.
Prior to 2008, we used historical data and projections to estimate expected employee behavior related to stock award exercises and forfeitures. We estimated the fair value of each stock option on the grant date using the Black-Scholes valuation model incorporating the assumptions noted in the following table. 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.
The discount rate used in calculating our pension benefit obligations as of December 31, 2009 and 2008, is 6.0 percent and 5.9 percent, which represents a 0.3 and 0.4 percentage-point decrease, respectively, from our December 31, 2007 rate of 6.3%. The discount rate for our defined benefit plans is based on a yield curve constructed from a portfolio of high quality corporate bonds for which the timing and amount of cash flows approximate the estimated payouts of the plans.
The following table illustrates the sensitivity to a change in the discount rate for our defined benefit plans as of December 31, 2009:
For additional information on our defined benefit plans, see Note 16, Employee Benefit Plans to the consolidated financial statements included elsewhere herein.
Premiums, which are our primary source of revenue, are generally 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.
FPIC pre-acquisition business represents our insurance operations conducted through insurance subsidiaries domiciled in Florida and Missouri. These are the only operations we conducted during 2007and 2008 and these operations exclude the impact of the acquisition of Advocate, MD in November 2009.
Includes $4.8 million and $2.9 million of premiums associated with alternative risk arrangements for the year ended December 31, 2009 and 2008. Management fees for such arrangements are included in other income. No alternative risk arrangements were written in 2007.
During February 2007, our subsidiary, First Professionals, commuted, effective January 1, 2007, all assumed reinsurance treaties with PRI under which First Professionals acted as a reinsurer. In connection with the commutation, First Professionals recognized an after-tax gain of $9.7 million. For additional information on the commutation, see Item 1. Financial Statements, Note 9, Reinsurance. Excluding the impact of the PRI commutation, net premiums written were $182.4 million for the year ended December 31, 2007.
Direct premiums written declined 8 percent for 2009 compared to 2008. Excluding the impact of the Advocate, MD acquisition, direct premiums written declined 10 percent, primarily as the result of lower premium rates in our Florida market, offset to some extent by an increase in professional liability policyholders. Our national and Florida policyholder retention for 2009 were both 95 percent compared to 96 percent national and Florida retention for the comparable period in 2008.
Net premiums written declined 10 percent for 2009 compared to 2008. Excluding the impact of the Advocate, MD acquisition, net premiums written declined 11 percent, primarily as the result of lower premium rates in our Florida market, offset to some extent by an increase in professional liability policyholders.
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 now being reflected in net premiums earned.
Net investment income declined 8 percent for 2009 compared to 2008. Excluding the impact of the Advocate, MD acquisition, net investment income declined 10 percent, primarily as a result of common share repurchases under our stock repurchase program, and a lower yield on cash and cash equivalents partially offset by a slight increase in the average yield on fixed income securities. In addition, we held cash in contemplation of the Advocate, MD acquisition, which was completed November 13, 2009, that would have otherwise been invested in higher yielding securities.
Net losses and LAE declined 8 percent for 2009 compared to 2008. Excluding the impact of the Advocate, MD acquisition, net losses and LAE declined 10 percent. The declines in net losses and LAE are primarily related to the declines in net premiums earned and an increase in the amount of favorable reserve development over the prior year periods. The continuation of favorable claims results as compared to previous estimates resulted in the recognition of $19.0 million of favorable prior year development for 2009, respectively, compared to $17.0 million for 2008. The favorable development recognized in 2009 primarily reflects reductions in our estimates of incident to claim development, payment frequency and payment severity for accident years 2005 through 2007 as compared to previous estimates. Our loss ratio (defined as the ratio of net losses and LAE to net premiums earned) was 58.9 percent for 2009 compared to 57.7 percent for 2008.
Information concerning our loss ratio, underwriting expense ratio and combined ratio is summarized in the table below.
Net premiums written increased 27 percent for 2008 compared to 2007. Net premiums written for 2007 reflects a reduction of $54.5 million in assumed premiums written as a result of the commutation of the PRI reinsurance treaties. Excluding the impact of the PRI commutation, net premiums written declined 11 percent during 2008. The decline in net premiums written is primarily due to the reasons discussed in the preceding paragraph on direct premiums written.
Our TPA operations were comprised of our former wholly owned subsidiary, Employers Mutual, Inc. (“EMI”). On May 9, 2005, EMI’s employee benefits administration business was sold effective April 30, 2005. An after-tax gain of $0.2 million was recognized on the sale. On May 31, 2005, the remaining TPA operations were sold to a private investor. An after-tax gain of $1.5 million was recognized on the sale. During the third quarter of 2009, we recorded an additional gain on the sale of discontinued operations of $0.4 million due to the resolution of a contingency related to certain consolidated tax returns that included EMI (2005 and prior), and the expiration of federal and state statutes of limitations for those tax years.
Net cash flows provided by investing activities was $32.0 million, $26.3 million and $11.6 million for 2009, 2008 and 2007, respectively. The 2007 cash flows from investing activities include the transfer of securities in connection with the PRI commutation. Net cash provided by investing activities increased during 2009 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 $74.6 million, $27.0 million and $15.9 million for 2009, 2008 and 2007. Net cash flows provided by investing activities for 2009 also reflect cash outlays of $44.6 million ($33.6 million in cash paid at closing 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.
As of December 31, 2009 and 2008, we had cash and investments of $744.8 million and $712.7 million, respectively. Included within cash and investments as of December 31, 2009 were cash and cash equivalents of $58.6 million, and equity securities, fixed income securities and short-term investments with fair values of $11.2 million and $665.6 million, respectively. Approximately $75.1 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, 2009, 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.
These debt securities are uncollateralized and bear floating interest equal to the three-month LIBOR plus spreads ranging from 3.85 percent to 4.20 percent (actual interest rates ranged from 4.13 percent to 4.46 percent as of December 31, 2009). The trust-preferred securities also contain features that would allow us the option, under certain conditions, to defer interest payments for up to 20 quarters. The securities have stated maturities of 30 years and mature in May and October 2033. As discussed below, during May and November 2008 we replaced our expiring interest rate collars with separate interest rate swaps to hedge the floating interest rate on our outstanding indebtedness.
We hold collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers not rated or authorized.
Interest on our long-term debt has been calculated considering the effect of our interest rate swaps, which fix the annual interest rate payable on our trust-preferred indebtedness until the termination of the swaps in 2011 and 2013. Thereafter, interest on our long-term debt has been calculated using the implied LIBOR forward rate for variable rate debt.
The acquisition of Advocate, MD includes a contingent consideration arrangement that provides for additional consideration to be paid by FPIC for Advocate, MD based on the attainment of targets with respect to direct written premiums, its combined ratio and underwriting profits. Up to forty percent of the contingent consideration is payable one year from the acquisition date with the remaining balance due two years from the acquisition date. The range of undiscounted amounts we could pay under the contingent consideration agreement is between $0.9 million and $12.0 million. We recognized a liability for the estimated fair value of acquisition-related contingent consideration totaling $7.0 million using a discounted cash flow model assuming probability weighted targets to be achieved over the earn-out period. For additional information, see Note 3, Acquisition of Advocate, MD.