For each open claim, a case reserve is calculated, representing the present value of future benefits expected to be incurred for services subsequent to the valuation date. Each open claim is valued based on the duration and payments since the claim has been opened, the age and sex of the claimant, and the specific benefits of the policy (daily benefit, benefit period, presence of inflation protection, etc.). Continuance tables varying by age, sex and claim type are used to calculate the expected future length of claim given the individual policy’s benefit history and maximum benefit amount. This expected future length of claim along with the salvage-adjusted daily benefit determines the total expected future payments. These payments are discounted at the GAAP valuation rate (6.125% at December 31, 2005 and 2004) to determine the case reserve.
Lapsation and persistency may positively or adversely impact future earnings. Higher persistency generally results in higher renewal premium. However, higher persistency may lead to increased claims in future periods. Additionally, increased lapsation can result in reduced premium collection, accelerated amortization of deferred acquisition cost, and antiselection of higher-risk insureds.
Medical benefits, claims, losses and settlement expenses were $162.2 million for 2005, compared to $176.1 million for 2004, a decrease of 7.9%. The decrease was primarily the result of a smaller volume of business in force partially offset by an increase in claims severity. In addition, the medical loss ratio was 73.4% for 2005, compared to 71.3% for 2004. The loss ratio was impacted in 2005 by increased severity of large claims on certain renewal blocks of business in our Central Reserve subsidiary and unfavorable experience on our partially self-funded small group (Partnership) plan. We expect the 2006 loss ratio in the Medical segment to remain consistent with 2005.
addition, the medical loss ratio was 71.3% for 2004, compared to 74.1% for 2003. The improvement in the loss ratio was due primarily to favorable run-off of prior year claim reserves.
No investment of the Company exceeded 10% of total stockholders’ equity at December 31, 2005. Except for bonds and notes of the U.S. Government or of a non-government agency or authority, no investment of the Company exceeded 10% of total stockholders’ equity at December 31, 2004.
At December 31, 2005, the interest rate on our term loan A balance of $2.0 million was 7.69% per annum and on our $5.3 million term loan B was 8.19% per annum. Both term loans bear interest at floating rates, based on either Prime or LIBOR, plus applicable spreads. Under Prime rate borrowings, the interest rate for term loan A and term loan B will be the Prime interest rate plus 0.50% and 1.0%, respectively. Under Eurodollar borrowings, the interest rate for term loan A and term loan B will be LIBOR plus 3.25% and 3.75%, respectively.
In 2005, we repurchased 703,703 shares of our common stock, or approximately $4.1 million, in open market transactions at an average price per share of $5.82.
Cash and cash equivalents, accrued investment income, premiums receivable, mortgage loans and policy notes - The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair value.
Substantially all of our reinsurance recoverable is due from a single reinsurer, Hannover. At December 31, 2005, Hannover has an “A” rating from the A.M. Best Company. We perform periodic evaluations of this reinsurer’s credit standing.