As of February 2, 2010, we leased approximately 13,300 square feet in Columbus, Ohio for our headquarters pursuant to a lease that commenced on January 1, 2009 and expires on December 31, 2015.
Discontinued bond program losses and LAE decreased $2,087,556 to a benefit of $2,189,460 in 2009 compared to a benefit of $101,904 in 2008. The benefit in 2009 resulted from the settlement agreements with Highlands and Harco as described above in “Overview-Discontinued Bond Program.” The benefit in 2008 was primarily attributable to Harco providing sufficient information for us to estimate recoveries on their losses. See “Overview-Discontinued Bond Program” above and “Discontinued Bond Program” in Note 15 to the Consolidated Financial Statements for more information concerning losses and LAE for the discontinued bond program.
Our escrow surety bond business relates to surety bonds issued to the State of Nevada in 2006. The surety bonds were issued in connection with escrow deposits made by purchasers of units of a real estate development in Las Vegas, Nevada. Each surety bond is conditioned upon the real estate developer (the “Developer”) performing its duties concerning the purchase of the units specified in the surety bond. Certain of the purchasers (the “Purchasers”) have contended that they are entitled to rescind their purchase contracts with the Developer and receive a refund of their escrow deposits which are secured by our surety bonds. These Purchasers are currently in legal proceedings with the Developer over the matter (the “Disputed Contracts”). The Company would likely incur a surety bond loss for these Disputed Contracts if each of the following events occur: (1) the Purchasers prevail in their claims against the Developer, (2) the Purchasers receive an award entitling them to a refund of their escrow deposits, (3) the Developer fails to provide such refund to the Purchaser, (4) the state of Nevada determines that the insurer has to pay a claim under the surety bond, (5) we are unsuccessful in enforcing our indemnification agreement with the Developer and (6) the loss payment due is greater than our loss reserves. As of December 31, 2009, our maximum net loss exposure related to the Disputed Contracts was approximately $9.0 million and our net loss and LAE reserves for the escrow surety bond business was approximately $0.4 million. Due to the inherent uncertainties associated with the Disputed Contracts, the Company cannot predict with reasonable certainty the amount, timing or ultimate outcome of this matter. The ultimate outcome of the Disputed Contracts, while not predictable at this time, could have a material adverse effect on the Company’s business, financial condition and/or operating results if our reserves prove to be materially deficient. As discussed above, we currently do not believe that our reserves will be materially deficient.
considerably during 2009 as municipal bond funds saw record positive cash flow in 2009, and considerable liquidity returned as bond traders made markets in more municipal securities, thereby enhancing demand. As a result, municipal bond prices improved as of December 31, 2009 when compared to December 31, 2008, and the gross unrealized loss for our fixed maturity portfolio decreased from $7.8 million at December 31, 2008 to $1.6 million at December 31, 2009. The fair value of our fixed maturity portfolio could also be impacted by credit rating actions and related financial uncertainty associated with insurance companies that guarantee the obligations of some of our bonds. While municipal credits continue to demonstrate relative credit quality stability, market conditions are still somewhat unsettled.
Given our historic cash flows and current financial condition, we believe that the cash flows from operating and investing activities over the next year and our bank line of credit will provide sufficient liquidity for the operations of the Company.
Certain prior year amounts have been reclassified in order to conform to the 2009 presentation. One of the reclassifications included our presentation of deferred policy acquisition costs and deferred ceded commissions in the accompanying consolidated balance sheets. We had previously presented “deferred ceded commissions” as a separate liability line item within the balance sheet. Beginning in the third quarter of 2009, we began presenting “deferred policy acquisition costs,” which was previously an asset line item within the balance sheet, net of deferred ceded commissions. The reason for the change in balance sheet classification was to be more consistent with how other property and casualty insurance companies present their deferred policy acquisition costs as well as to be consistent with how policy acquisition costs are reported within our statements of income, which is net of ceded commissions.
As of December 31, 2009, we had approximately 56 fixed maturity securities and zero equity securities that have been in an unrealized loss position for 12 months or longer. All 56 of the fixed maturity securities are investment grade (rated BBB and Baa or higher by S&P and Moody’s, respectively). All 56 of the fixed maturity securities are current on interest and principal and we believe that it is reasonably likely that all contract terms of each security will be satisfied. We currently do not have the intent to sell these fixed maturity securities and we currently do not believe it is more likely than not that we will be required to sell these fixed maturity securities before their anticipated recovery. The decrease in unrealized loss position for investments as of December 31, 2009 when compared to December 31, 2008 was primarily due to our fixed maturity portfolio as a result of the changes in the interest rate environment and/or current capital market conditions.
Changes in deferred policy acquisition costs for each of the years ended December 31 is summarized as follows:
The Bancinsurance Corporation 1994 Stock Option Plan (the “1994 Stock Option Plan”) provided for the grants of options covering up to an aggregate of 500,000 common shares, with a 100,000 common share maximum for any one participant. Key employees, officers and directors of, and consultants and advisors to, the Company were eligible to participate in the 1994 Stock Option Plan. The 1994 Stock Option Plan is administered by the Compensation Committee, which determined to whom and when options were granted along with the terms and conditions of the options. Under the 1994 Stock Option Plan, options for 96,000 common shares were outstanding at December 31, 2009, expire at various dates from 2010 to 2013 and range in option price per share from $4.063 to $6.00. Of the options for 96,000 common shares outstanding, 14,000 have been granted to our non-employee directors and 82,000 have been granted to employees. All of the options outstanding were granted to employees and directors for compensatory purposes. No new options can be granted under the 1994 Stock Option Plan and the plan remains in effect only with respect to the outstanding options.
Under our WIP product line, we assume, write on a direct basis, and cede certain waste, contract and escrow surety bond business under various reinsurance arrangements as described in Note 1. Under this program, we assumed premiums earned of $4,695,769 and $5,292,338 for the years ended December 31, 2009 and 2008, respectively, and ceded premiums earned of $2,594,267 and $2,438,384 for the years ended December 31, 2009 and 2008, respectively.
The Company validates the prices received from the pricing service by examining their reasonableness. The Company’s review process includes comparing the pricing service’s estimated fair values to the estimated fair values established by our investment custodian (for both equity and fixed maturity securities) and our outside fixed income investment manager (for fixed maturity securities). Our investment custodian utilizes the same pricing service as us, and our outside fixed income investment manager utilizes another nationally recognized pricing service for the municipal bond portfolio and utilizes the same pricing service as us for taxable bonds and closed-end mutual funds. Based on this review, any material differences are investigated and, if we deem prices provided by our pricing service to be materially unreasonable, we would use the estimated fair value established by our investment custodian and/or outside fixed income investment manager, depending on which prices were deemed more reasonable. As of December 31, 2009 and 2008, the Company did not adjust any prices received from its pricing service.