(1) The net loss and loss adjustment expense (LAE) ratio is the net loss and LAE in relation to net premium earned.
In estimating our loss reserves for the personal and commercial auto liability lines of business and the general liability line of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2008 to 2010 and the incurred loss development for accident years prior to 2008. In estimating our loss reserves for the multi-peril lines of business (homeowners, farmowners and commercial) we relied on the incurred Bornhuetter-Ferguson method for the 2010 accident year and the incurred loss development for accident years prior to 2010. For the property lines of business including special property and personal and commercial auto physical damage we relied on the incurred loss development method for all accident years. For the workers’ compensation line of business we relied on an average of the incurred and paid Bornhuetter-Ferguson methods for accident years 2007 to 2010 and the paid loss development method for all prior years.
In 2009, the Company experienced favorable development of $2,336,000 on loss and loss adjustment expense (LAE) reserves for prior accident years. In the personal segment, homeowners had redundant development of $760,000, personal auto experienced redundant development of $853,000 and other personal segment products had redundant development of $8,000. In the commercial segment, commercial multi-peril had redundant development of $660,000 offset by adverse development in workers compensation of $129,000. The development experienced in the workers compensation line was concentrated in accident years 2003, 2005 and 2007. The farm segment experienced redundant development of $63,000 while the marine segment had redundant development of $121,000.
In 2008, the Company experienced favorable development on losses and LAE reserves for prior accident years of $2,722,000. The redundant development included $814,000 related to homeowners, $864,000 related to commercial multi-peril, $336,000 related to workers compensation, $179,000 related to farm, $204,000 relating to general liability while the remaining lines of business had redundant development of $325,000. The favorable development was concentrated in accident years 2005 through 2007 and is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2008.
During 2010, capital expenditures increased $483,000 to $1,746,000. The majority of the Company’s capital expenditures were related to Fremont Complete, the Company’s web based rating platform. The focus has been to add the commercial package product line to the platform. Cash used in financing activities during 2010 amounted to $259,000 and consisted of shares repurchases of $139,000 and dividends to stockholders of $283,000 offset by proceeds from the issuance of stock of $681,000.
As a result of the Company’s acquisition of the stock of the Insurance Company a limitation on the ability to fully utilize the NOL occurred. The amount of annual taxable income that can be offset each year by the NOL carryforward is approximately $400,000. See Note 5 to the consolidated financial statements, included elsewhere in this report, for further information regarding federal income taxes. Such information is incorporated herein by reference.
Realized gains and losses on sales of investments are computed based on a specific identification basis and include write downs on available-for-sale investments considered to have other than temporary declines in fair value.
In October 2010, updated guidance was issued to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance is not expected to have an impact on our financial statements.