In the opinion of our management, the Company’s properties are adequate and suitable for its business as presently conducted and are adequately maintained.
We evaluate our insurance operations by monitoring certain key measures of growth and profitability. In addition to GAAP measures, we utilize certain non-GAAP financial measures that we believe are valuable in managing our business and for providing comparisons to our peers. These non-GAAP measures are underwriting loss, combined ratios, written premiums, and net written premiums to statutory surplus ratio.
In October 2009, our board of directors approved a Share Repurchase Program which authorized the repurchase of up to 5% of our issued and outstanding common stock. The share repurchases made in 2009 of 217,761 shares allowed us to buy back shares at attractive prices, return value to our shareholders, and provide liquidity for our shares in order to implement our stock incentive plan.
The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to statutory surplus. This ratio measures our exposure to pricing errors in our current book of business. The higher the ratio, the greater the impact on surplus should our pricing prove inadequate.
We have presented certain summary results and ratios in such a manner to show the impact of our accounting for our aggregate stop loss reinsurance contract. Our ceded premiums and losses, and GAAP ratios have been significantly impacted by the reversal of the aggregate stop loss contract in 2009, and we have clarified the impact this accounting has had on our underlying results.
We had gross deferred tax assets of $10,206 at December 31, 2009 and $11,110 at December 31, 2008. We are required to establish a valuation reserve for any portion of the deferred tax asset for which we believe it is more likely than not that it will not be realized. At December 31, 2009 and at December 31, 2008, we are carrying a valuation reserve associated with our 2008 realized capital losses of $0 and $1,026, respectively. In the third quarter of 2009, we determined that as a result of improvement in the credit markets, which generated unrealized capital gains in our available for sale debt securities, and our reevaluation of asset allocations in our investment portfolio, it was more likely than not that we would realize our deferred taxes related to capital loss carryforwards; and therefore, we reversed the valuation reserve we had established for these carryforwards due to our current intention to accelerate the reversal of the deferred tax liability associated with these unrealized gains on debt securities via sale of these securities.
The net unfavorable development for 2009 of $1,555 is due to the $4,292 stop loss reversal on ceded losses that impacted all lines of business. Excluding the impact of the stop loss reversal, the net favorable development of $2,737 was primarily attributable to:
Our loss and LAE ratio increased to 72.9% in 2008, compared to 70.1% for the same period in 2007, primarily due to:
Favorable loss development in the fire and allied line of $2,229 resulting from prior years’ claims settling for less than originally estimated. Many of our policies have high property exposures for which reported claims often require an extended amount of time to evaluate the claim due to the complexity in determining the value of the building and contents loss;
This increase is the result of a $1,151 increase in amortization of deferred policy acquisition costs resulting from a 6.0% increase in direct premiums earned and an increase in underwriting and administrative expense of $1,248 primarily from product development costs incurred in 2008 associated with the roll-out of our PennEdge product in early 2009.
Our agribusiness segment incurred $29,654 of losses and LAE for the year ended 2009, as compared to $31,137 of losses and LAE for the year ended 2008. The decrease of $1,483 was primarily the result of:
Commercial auto coverage protects businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists. Commercial automobile policies are only marketed in conjunction with our business owner’s policies. As of December 31, 2009, our commercial business segment had approximately 900 commercial automobile insurance policies in force. Our commercial auto line of business has experienced positive trends in both claim frequency and severity over the past three accident years. However, the loss ratio increased in 2009, compared to 2007 and 2008, primarily as a result of a lower level of favorable prior year development.
On April 1, 2009, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition and presentation of other-than- temporary impairments. This new guidance amends the previously used methodology for determining whether an other-than-temporary impairment exists for fixed maturity securities. Per the Company’s current policy, a fixed maturity security is other-than-temporarily impaired if the present value of the cash flows expected to be collected is less than the amortized cost of the security or where the security’s fair value is below cost and the Company intends to sell or more likely than not will be required to sell the security before recovery of its value. If the fixed maturity security meets either of these two criteria, the other-than-temporary impairment recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its estimated fair value at the impairment measurement date. If the Company does not intend to sell and more likely than not will not be required to sell a fixed maturity security whose fair value has declined below its cost, the amount of the decline below cost due to credit-related other-than-temporary impairments is charged to earnings and the remaining difference is included in other comprehensive income.
In April 2009, the FASB issued guidance on “Recognition and Presentation of Other-Than-Temporary Impairments.” This update amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. For debt securities that have fair values less than their amortized cost, this guidance modifies the prior requirements that to avoid recognizing an other-than-temporary impairment, management must assert that it has both the intent and ability to hold a security for a period of time sufficient to allow for an anticipated recovery in its fair value to its amortized cost basis. Instead, an entity should assess whether the entity (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. An entity must recognize an other-than-temporary impairment if either of these conditions is met. Also, if an entity does not expect to recover the entire amortized cost basis of a security, an other-than-temporary impairment shall be considered to have occurred. If the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment shall be separated into (a) the amount representing the credit loss, which is recognized in earnings, and (b) the amount related to all other factors, which is recognized in other comprehensive income. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. Adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.
The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, borrowings under line of credit, and long-term debt approximates their December 31, 2009 and 2008 carrying values.
Discount rates are selected considering yields available on high quality debt instruments at durations that approximate the timing of the benefit payments for the pension liabilities at the measurement date. The expected rate of return reflects the Company’s long-term expectation of earnings on the assets held in the plan trust, taking into account asset allocations, investment strategy, the views of the asset managers, and the historical performance.
As of December 31, 2009, the estimated fair value of unearned ESOP shares was $5,841.
The following table sets forth the net premiums earned by major lines of business for our core insurance products in the years ended December 31, 2009, 2008 and 2007:
Operating results from PSTS for the years ended December 31, 2009, 2008, and 2007 are as follows: