Selected historical consolidated financial and other data as of December 31, 2002, 2003, and 2004 for our predecessor. The historical consolidated financial data as of December 31, 2003, and for each of the two years ended December 31, 2003 have been derived from, and should be read together with, our predecessor’s audited consolidated financial statements and the related notes;
Senior market insurance business. Our senior market insurance business has been a provider in the southeastern United States of individual insurance products tailored to the needs of older individuals. The primary insurance product included in this business is long-term care insurance that we underwrote. For the year ended December 31, 2006, our senior market insurance business produced premiums, commissions and fees, excluding intercompany payments, of $41.5 million, which accounted for 28.7% of our premiums, commissions and fees, excluding intercompany payments, in that period.
Insurance intermediaries are consolidating throughout the United States. This increases the focus on revenue growth by intermediaries, which creates demand for our unique voluntary benefit products.
and actuarial assumptions used to estimate expected future claims experience. These assumptions and other factors include trends in claims severity, frequency and other factors discussed below, the incidence of incurred claims, the extent to which all claims have been reported and internal claims processing changes. The methods of making these estimates and establishing the related reserves are periodically reviewed and updated.
Policy benefit and claim reserves do not represent an exact calculation of our ultimate liability, but instead represent our probability-based estimate of what we expect the ultimate settlement and administration of a claim or group of claims will cost based on our assessment of facts and circumstances then known. Policy benefit reserves represent reserves established for claims not yet incurred. Claim reserves represent liabilities established for claims that have been incurred and have future benefits to be paid as of the balance sheet date. The adequacy of reserves will be impacted by future trends in claims severity, frequency and other factors including:
Renewal premiums: Renewal premiums represent the premiums derived from policies greater than twelve months from the original policy date.
As part of our overall risk and capacity management strategy, we purchase reinsurance for loss protection, to manage individual and aggregate risk exposure and concentration, to free up capital to allow us to write additional business and, in some cases, effect business dispositions. We utilize ceded reinsurance for those product lines where there is exposure on a per risk basis or in the aggregate which exceeds our internal risk retention and concentration management guidelines.
The nature of the life insurance business is that premiums are collected and invested and will be used for the payment of claims when they arise, and policy reserve liabilities are established in anticipation of these future claims. As a result, the change in financial condition directly corresponds to the cash flows and they are discussed here in tandem.
Other assets increased by $0.8 million in 2005, primarily representing a $2.9 million prepaid pension assets, offset by the receipt of a $2.2 million receivable for a securities trade that had not settled as of December 31, 2004.
Other investments are stated at fair value, or the lower of cost or fair value, as appropriate.
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. The Company’s Consolidated Financial Statements as of December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) as of December 31, 2006 was $1,378,882, which consisted of share-based compensation expense related to director and employee stock options and common stock grants.
The Company accounts for value of business acquired in a manner similar to deferred acquisition costs. The interest rates used to amortize deferred acquisition costs were 6.00%, 6.06 % and 6.58 % in 2006, 2005 and 2004, respectively.
The assets of the plan are held in a trust account and are invested in equity securities, debt securities and related instruments, and cash and cash equivalents.
Expected benefit payments are as follows for the years ended December 31:
The Company adopted SFAS 123(R) as of January 1, 2006. Below is the presentation of the Company’s employee and director stock options and common stock grants under the fair value method.
Fourth quarter 2006 expenses include a pretax benefit of $1.0 million related to the discount associated with retiring and replacing the Company's $15 million subordinated note with bank debt.
During November 2003, the Predecessor entered into a contract for IT and document management. Expenses incurred during 2004, 2005, and 2006 were $5.0 million, $6.8 million, and $7.5 million respectively. This ten-year contract is subject to cancellation by the Company at any time after 42 months, with the payment of a termination penalty that is subject to the number of months remaining in the contract. The document management portion of the agreement is variable by transaction volume. Future payments under this contract are as follows:
At December 31, 2006 and 2005, the Company had no significant exposure to unrated or less-than-investment grade bonds.
The acquired business represents closed blocks of life and health insurance business that have been acquired through reinsurance transactions over a period of years.