The Company’s loss reserves can generally be categorized into two distinct groups. One group is short-tail classes of business consisting principally of property risks in connection with homes and automobiles. The other group is long-tail casualty classes of business which include primarily commercial general liability and to a much lesser extent, homeowner and automobile liability. For operations writing short-tail coverages our loss reserves were generally geared toward determining an expected loss ratio for current business rather than maintaining a reserve for the outstanding exposure. Estimations of ultimate net loss reserves for long-tail casualty classes of business is a more complex process and depends on a number of factors including class and volume of business involved. Experience in the more recent accident years of long-tail casualty classes of business shows limited statistical credibility in reported net losses because a relatively low proportion of net losses would be reported claims and expenses and even smaller percentage would be net losses paid. Therefore, incurred but not yet reported (“IBNR”) would constitute a relatively high proportion of net losses.
We also produce an estimate of unpaid Adjusting and Other Expense (“A&O”), as a reserve is required under statutory accounting principles even if this expense has been pre-paid or with an unconsolidated affiliate. Although we do not prepay for A&O, the majority of the A&O incurred is with an affiliated company and eliminated under the accounting principles for consolidation. The unpaid A&O is added to unpaid losses & DCCE, resulting in total unpaid losses and LAE.
Annually - Our policy is to select a single point estimate that best reflects our in-house actuarial determination for unpaid losses and LAE. Our independent actuaries, examining the exact same data set, will independently select a point estimate which determines a high point and low point range. Both processes rely on objective and subjective determinations. If our point estimate falls within the range determined from the point estimate of our actuaries, then no adjustments by management would be required. In consideration thereof, management does not have a policy for adjusting the liability for unpaid losses and LAE to an amount that is different than an amount set forth within the range determined by the independent actuaries.
For the year ended December 31, 2009 our actuarial firm determined range of loss and LAE reserves on a net basis range from a low of $53.8 million to a high of $70.6 million, with a best estimate of $61.2 million. The Company’s net loss and LAE reserves are carried at $58.7 million. Management’s point estimate of reserves is 4.0% below our actuary’s best estimate in recognition of the inherent uncertainty in assessing the potential ultimate liabilities given legal developments as well as evolution in its operations.
Prepaid reinsurance premiums increased $4.8 million, or 86.4%, to $10.3 million as of December 31, 2009, compared with $5.5 million as of December 31, 2008. The change is due to our payments and amortization of prepaid reinsurance premiums associated with our homeowners’ book of business. We believe concentrations of credit risk associated with our prepaid reinsurance premiums are not significant.
DPAC increased $1.7 million, or 26.1%, to $8.3 million as of December 31, 2009, compared with $6.6 million as of December 31, 2008. The change is due to increased homeowner’s written and unearned premium, net of decreased commercial general liability premium.
Other assets increased $1.2 million, or 48.5%, to $3.7 million as of December 31, 2009, compared with $2.5 million as of December 31, 2008. Major components of other assets are shown in the following table; the accrued interest income receivable is primarily investment related.
The change in prepaid reinsurance premiums was a $10.2 million increase in 2009, compared with a $4.5 million decrease in 2008. This change is primarily associated with the timing of our reinsurance payments measured against the term of the underlying reinsurance policies.
The Company experienced a decrease in homeowners’ gross premiums written in 2008 primarily because of the effects of state mandated homeowner’s rate reductions and wind mitigation discounts.
Losses and LAE, our most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of our policyholders, including expenses required to settle claims and losses. We revise our estimates based on the results of analysis of estimated future payments to be made. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events.
During 2007 American Vehicle applied for and was granted, by the Florida OIR in 2008, a license to underwrite commercial multi-peril and inland marine lines of business as an admitted carrier. We believe these new lines of authority will bode well with American Vehicle’s existing customers. Operations under American Vehicle’s newly granted lines of authority began in 2009.
Assurance MGA earns commissions and fees for providing policy administration, marketing, accounting and analytical services, and for participating in the negotiation of reinsurance contracts. Assurance MGA generates approximately a 6% commission fee and a $25 per policy fee from its affiliates Federated National and American Vehicle.
Proceeds from sales of debt and equity securities in 2009, 2008 and 2007 were approximately $59.2 million, $150.3 million and $202.2 million, respectively.
Depreciation of property, plant, and equipment was $188,424, $290,417 and $316,525 during 2009, 2008 and 2007, respectively.
No dividends were paid by Federated National or American Vehicle in 2009, 2008 or 2007, and none are anticipated in 2010. Although we believe that amounts required to meet our financial and operating obligations will be available from sources other than dividends from our insurance subsidiaries, there can be no assurance in this regard. Further, there can be no assurance that, if requested, the Florida OIR will allow any dividends in excess of the amount available, to be paid by Federated National and American Vehicle to us, the parent company, in the future. The maximum dividends permitted by state law are not necessarily indicative of an insurer’s actual ability to pay dividends or other distributions to a parent company, which also may be constrained by business and regulatory considerations, such as the impact of dividends on capital surplus, which could affect an insurer’s competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, state insurance laws and regulations require that the statutory capital surplus of an insurance company following any dividend or distribution by it be reasonable in relation to its outstanding liabilities and adequate for its financial needs.
There was no action taken by the Florida OIR in connection with the December 31, 2008 IRIS ratio results. We do not currently believe that the Florida OIR will take any significant action with respect to Federated National or American Vehicle regarding the 2009 IRIS ratios, although there can be no assurance that will be the case.
GAAP differs in some respects from reporting practices prescribed or permitted by the Florida OIR. Federated National's statutory capital and surplus was $21.0 million and $31.5 million as of December 31, 2009 and 2008, respectively. Federated National's statutory net income (loss) was ($12.2) million, ($2.2) million and $15.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. Federated National’s statutory non-admitted assets were approximately $1.7 million and $2.4 million as of December 31, 2009 and 2008, respectively.
In addition to the assessments noted above, the Florida OIR has also issued Information Memorandum OIR -07-02M, titled Information Regarding Emergency Assessment by Citizens Property Insurance Corporation, dated January 11, 2007, to all property and casualty insurers in the state of Florida placing them on notice that an order had been approved for an emergency assessment by Citizens for its High Risk Account. This order requires insurers to begin collecting the emergency assessment for policies issued or renewed on or after July 1, 2007. Similar to the FHCF assessment discussed above, the Citizens emergency assessment will be remitted to the administrator of the assessment as collected and therefore accounted for in a manner such that amounts collected or receivable are not recorded as revenues and amounts due or paid are not expensed.
21st Century (the parent company only) has no long term obligations, guarantees or material contingencies as of December 31, 2009. The following summarizes the major categories of the parent company’s financial statements.
At a hearing held on January 29, 2010, the Court approved the terms and conditions of a Stipulation of Settlement ("Stipulation") between the Company and the plaintiffs in the Class Litigation and the Derivative Litigation. Under the Stipulation of Settlement, the Company agreed to pay $2.4 million to the plaintiffs to settle all claims in the Class Litigation and the Derivative Litigation. The Stipulation of Settlement contains no admission of liability or wrongdoing by the Company or its officers and directors. The Company's insurance carriers agreed to fund the $2.4 million settlement payment. On March 15, 2010, counsel for Plaintiffs acknowledged receipt of $2.4 million in settlement funds paid under the Company’s directors' and officers’ insurance policy.