A portion of the coverage that physicians purchase under claims-made policies is for an additional death, disability and retirement, or DDR, insurance benefit. This DDR coverage provides coverage to the physician for any prior incidents occurring during the coverage period that are reported after their death, disability or retirement. The loss exposure associated with this product is known as extended reporting period claims. The reserve for extended reporting period claims coverage is recorded during the term of the original claims-made policy, based on the present value of future estimated benefits, including morbidity and mortality assumptions, less the present value of expected future premiums associated with this DDR coverage. The reserves for these claims fluctuate based on the number of physicians who are eligible for this coverage and their age. Any changes in the DDR reserves are reflected as an expense in the period in which we become aware that an adjustment is necessary. At December 31, 2006 and 2005, our recorded DDR reserves were $13.0 million and $15.0 million, respectively, which include a discount related to the present value calculation of approximately $5.5 million and $5.7 million, respectively.
Details regarding the adoption of SFAS No. 123(R) and our equity compensation plans, including the assumptions utilized in estimating the fair value of option awards, are more fully described in Note 16 of the Notes to Consolidated Financial Statements included elsewhere in this report. If different assumptions were used in the option valuation models, share-based compensation expense would differ from that recorded in the current period, and from that which is expected to be recorded in future periods. Pre-tax share-based compensation expense for the year ended December 31, 2006, was approximately $571,000. As of December 31, 2006, the Company had $205,000 of unrecognized compensation costs related to non-vested share-based payment awards that are expected to be recognized over a weighted average period of seven months.
Effective January 1, 2007, we have changed our reinsurance program so that we now retain the first $1 million of loss. The new treaty provides 100% coverage of $1 million in excess of $1 million loss, plus 100% coverage of $4 million in excess of $1 million on any one loss event, both subject to an approximate $2 million loss corridor. A loss corridor is a range of losses for which the reinsurer provides no coverage. The new treaty, which is anticipated to significantly reduce ceded premiums in 2007, provides us with coverage against large losses and multiple claims arising from a single event, as well as excess policy limit coverage. While we anticipate that the 2007 treaty will reduce our ceded premiums as a percentage of direct premiums written, thus resulting in a relative increase in net premiums written and earned, the overall impact on earnings is uncertain as the frequency and severity of losses in future periods is not yet known.
Other assets decreased $13.8 million, or 34.8%, to $25.9 million at December 31, 2006. The decrease is primarily attributable to a decrease in the amount receivable related to pending security transactions of $5.4 million, a decrease in our New Mexico patient compensation fund receivable of $2.1 million as a result of a change in the method of applying cash to these receivables and a decrease in prepaid reinsurance, or ceded unearned premiums, of $6.4 million related to the change in reinsurance placement percentages and terms between 2006 and 2005.
During part of 2005 and 2004, the Company held interest-only certificates that the Company has determined contain an embedded derivative instrument as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” These certificates paid a variable rate of interest that was inversely related to the London Interbank Offered Rate (“LIBOR”).
The Company assesses the likelihood that deferred tax assets will be realized based on the availability of future taxable income in the periods when the deferred tax assets are expected to be deducted in the Company’s tax return. If it is deemed more likely than not that all, or a portion, of the Company’s deferred tax assets will not be realized, then a valuation allowance is established for the portion of the deferred tax assets that are deemed not likely to realized. Following this assessment methodology, the Company maintained a full valuation allowance during all of 2004 and the first half of 2005.
The following tables show the Company’s gross, unrealized in the case of available-for-sale securities, or unrecognized for held-to-maturity securities, investment losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006 and 2005, respectively.
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For the years ended December 31, 2006 and 2005, the Company received one-time call premiums of $371,000 and $283,000, respectively.
Proceeds on the sales of investments in bonds totaled $11.9 million in 2006, $33.0 million in 2005, and $154.9 million in 2004. Gross gains of $0, $358,000 and $7.5 million were realized on the sales of investments in bonds for the years ended 2006, 2005 and 2004, respectively. Gross losses of $133,000, $329,000 and $1.3 million were realized on the sales of investments in bonds for the years ended 2006, 2005 and 2004, respectively.
In 2003 the Company began to exit its workers’ compensation line of business. A number of employees were terminated and others given incentives to remain to manage the run-off of this line through March 2007. Employee separation costs related to these remaining individuals will be recognized prospectively over the future service period. At December 31, 2006, total future employee separation costs are estimated to be approximately $4,000.
Employee share-based compensation expense recognized under SFAS No. 123(R) was not reflected in our results of operations for the years ended December 31, 2005 and 2004 for employee stock option awards as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. However, the Company has historically provided the required pro forma disclosures under SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosures.” The
The Board of Directors of the Company has authorized the Company to purchase shares of its outstanding common stock under two separate plans, the discretionary plan and a Rule 10b5-1 plan. For additional information on share repurchases, see Note 11 of the Notes to Consolidated Financial Statements.