The following table sets forth selected consolidated financial information for the periods ended and as of the dates indicated. We derived the data as of December 31, 2006, 2005, 2004, 2003 and 2002, and for each of the five years in the period ended December 31, 2006, from our consolidated financial statements. These financial statements were audited by Deloitte & Touche LLP, an independent registered public accounting firm, through 2005, and by Beard Miller Company LLP in 2006.
We have prepared the selected historical consolidated financial data, other than the statutory data, in conformity with GAAP. We have derived the statutory data from the annual statements of our insurance subsidiary, Proformance, filed with the NJDOBI prepared in accordance with statutory accounting practices, which vary in certain respects from GAAP. You should read this selected consolidated financial data together with our consolidated financial statements and the related notes and the section of this Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The primary driver for a significant portion of our growth from 2002 through 2003 was an agreement entered into on December 18, 2001 with OCIC, and OCNJ, to become a replacement carrier pursuant to which OCNJ would transfer to Proformance the obligation to offer renewals for all of OCNJ’s New Jersey private passenger automobile business effective March 18, 2002. Primarily as a result of this transaction our direct written premiums, net written premiums and net earned premiums increased from $49.8 million, $25.5 million and $25.4 million, respectively, for the year ended December 31, 2001, to $163.2 million, $147.0 million and $143.2 million, respectively, for the year ended December 31, 2003. In addition total assets, losses and loss adjustment expense reserves, as well as total stockholders’ equity, increased from $78.3 million, $56.7 million and $(4.0) million, respectively as of December 31, 2001 to $266.7 million, $134.2 million and $49.8 million, respectively as of December 31, 2003.
We recorded replacement carrier revenue related to the OCIC agreement referred to above in the amount of $21.7 million and $12.7 million for the years ended December 31, 2002 and 2003, respectively which contributed to increasing total stockholders’ equity from $(4.0) million as of December 31, 2002 to $49.8 million for the year ended December 31, 2003.
On October 21, 2003 and December 8, 2003, respectively, we entered into two additional replacement carrier agreements with Sentry Insurance and Met P&C, whereby we agreed to become the replacement carrier for the personal lines business of each entity in New Jersey. We received $0.9 million and have received an additional $2.6 million in 2004 and $0 in 2005 from Sentry Insurance, $2.8 million of which has been recorded as deferred revenue as of December 31, 2003 and $0.7 million recorded as replacement carrier revenue for the year ended December 31, 2003. We received $20.1 million ($9.5 million recorded as deferred revenue as of December 31, 2003, $0.6 million recorded as replacement carrier revenue from a related party for the year ended December 31, 2003, and $10.0 million in the form of a capital contribution) from Met P&C in 2004 and $0 in 2005. In
connection with these transactions we recorded $0 million of replacement carrier transaction revenue for the year ended December 31, 2005 as we continued the process of fulfilling our obligations under the terms of each of these respective contracts.
In connection with the financial reporting as of and for the year ended December 31, 2001, certain adjustments were made to reduce net income and stockholders’ equity as of January 1, 2001 by $1.0 million.
In 2006, we made significant progress toward carrying out the business strategies we have set out for National Atlantic as a public company. We continued to capture an increasingly larger share of our Partner Agents’ existing customer base and to diversify our business portfolio of automobile, homeowners and commercial lines policies. Our plan for future growth relates to capturing an increasingly larger share of our Partner Agents business and cross-selling our automobile, homeowners and business insurance products to their existing customers. We also plan to capture more of our Partner Agents’ existing customers by reaching out to additional demographics not currently suited to our HPP packaged product. Our new mono-line automobile product, salesmarked BlueStar Car Insurance, is scheduled to launch in early 2007 and will be targeted to our Partner Agents’ customers who do not require the broader coverage of our HPP product.
Proformance applies the modification factor to each tier to produce a consistent loss ratio across all tiers. Proformance does not segregate its loss reserves by tier, but rather by line of business. Since the actual distribution of risk may vary from the distribution of risk Proformance assumed in developing the modification factors, Proformance cannot be certain that an underwriting profit will be produced collectively or in any tier.
During the prior four years, much of our premium growth and capitalization growth have resulted from our replacement carrier transactions. For the year ended December 31, 2006, we derived no revenue from replacement carrier transactions, compared to $0 and $18.0 million for the years ended December 31, 2005 and for the year ended December 31, 2004, respectively. This constituted 0% of our total revenue for the year ended December 31, 2006 and 0% and 8.6%, respectively, of our total revenue in the prior years.
For the years ended December 31, 2006, 2005 and 2004, the Company paid $0.6 million, $0.2 million, $0, respectively, in connection with fees paid in consideration of the acquisition of policy renewal rights. Our strategy includes entering into additional replacement carrier transactions as opportunities arise. However, due to improvements in the New Jersey insurance market during 2005, it is not likely that we will enter into replacement carrier transactions which have as significant an impact on the Company’s operations or are comparable in size to those entered into prior to 2005.
In our replacement carrier transactions, we agreed to offer replacement coverage to the subject policyholders at their next nominal policy renewal date. The policyholders are under no obligation to accept our replacement coverage offer. Policyholders who accept our replacement insurance coverage become policyholders of Proformance and enjoy the standard benefits of being a Proformance policyholder. For example, these policyholders enjoy the limitation we provide on our ability to increase annual premiums. We cannot increase the annual premiums paid by these policyholders by more than fifteen percent for three years, unless there is an event causing a change in rating characteristics, such as an auto accident. Those policyholders choosing not to accept the Proformance replacement insurance coverage due to rate or coverage disparities or individual consumer choice must seek replacement coverage with another carrier. Once the Proformance replacement offer has been rejected by a policyholder, Proformance has no further obligation to that policyholder.
Upon the Closing, Proformance was required to pay to Hanover a one-time fee of $450,000, and within 30 days of the closing, $100,000 was due to reimburse Hanover for its expenses associated with this transaction. In addition, the Company will make two annual payments equal to 5% of the written premium on renewed business for the preceding twelve months, calculated at the 12 month and 24 month anniversaries, payable to Hanover within 30 days of such anniversary dates.
With respect to our replacement carrier transaction for the 2004 year with OCIC and OCNJ, on February 22, 2005 Proformance notified OCNJ that OCNJ owed Proformance $7,762,000 for the 2004 year in connection with the requirement that a premium-to-surplus ratio of 2.5 to 1 be maintained on the OCNJ renewal business. Pursuant to our agreement, OCNJ had until May 15, 2005 to make payment to us. Subsequent to the notification provided to OCIC and OCNJ, we had several discussions with OCIC relating to certain components to the underlying calculation which supports the amount owed to Proformance for the 2004 year. As part of these discussions, OCIC had requested additional supporting documentation and raised issues with respect to approximately $2,000,000 of loss adjustment expense, approximately $800,000 of commission expense, and approximately $600,000 of NJAIRE assessments, or a total of $3,412,000, allocated to OCNJ. We recorded $4,350,000 (the difference between the $7,762,000 we notified OCNJ they owed us, and the $3,412,000 as outlined above) as replacement carrier revenue from related party in our consolidated statement of income for the year ended December 31, 2004 with respect to the OCIC replacement carrier transaction. We recorded $4,350,000 because it was management’s best estimate of the amount for which we believed collectability was reasonably assured based on several factors. First, the calculation to determine the amount owed by OCIC to us is complex and certain elements of the calculation are significantly dependent on management’s estimates and judgment and thus more susceptible to challenge by OCIC. We also note our experience in the past in negotiating these issues with OCIC. For example, in 2003 we notified OCNJ that OCNJ owed Proformance approximately $10,100,000 for 2003. After negotiations we ultimately received $6,820,000. Accordingly, because of the nature of the calculation, the inherent subjectivity in establishing certain estimates upon which the calculation is based, and our experience from 2003, management’s best estimate of the amount for 2004 for which we believed collectability from OCIC was reasonably assured was $4,350,000. On June 27, 2005, we received $3,654,000 from OCIC in settlement of the amounts due to Proformance, which differs from the $4,350,000 we had recorded as a receivable due from OCIC as outlined above. The difference of $696,000 between the receivable we had recorded ($4,350,000) due from OCIC and the actual settlement payment received from OCIC ($3,654,000) came as a result of a dispute between the Company and OCIC regarding $292,000 of NJAIRE assessments and approximately $404,000 of commission expenses included
Approval of the extension of the options granted during 1995 and the grant of new stock options to the estate of Mr. Campion was received at the Company’s Annual Meeting of Shareholders on September 19, 2005. The fair market value of the Company’s stock on September 19, 2005 was $11.47; therefore, the Company recognized $749,802 as compensation expense related to the extension of options in its consolidated statement of income for the year ended December 31, 2005. The Company also recognized $1,937,198 as compensation expense related to the grant of new options in its consolidated statement of income for the year ended December 31, 2005.
On March 21, 2006, the Board of Directors of National Atlantic Holdings Corporation (NAHC) approved the Compensation Committee’s recommendation to grant 343,000 stock appreciation rights (SARS) to the executive
In accordance with SFAS 123R, the Company records share based compensation liabilities at fair value or a portion thereof (depending upon the percentage of requisite service that has been rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the liability at each reporting date through the date of settlement; consequently, compensation cost recognized through each period of the vesting period (as well as each period throughout the date of settlement) will vary based on the award’s fair value and the vesting schedule.
On September 15, 2005, Proformance commuted the Auto Physical Damage Quota Share Contract with Odyssey Re. The commutation was initiated in September 2005 and all items previously recorded in connection with the agreement were reversed as of that period. The transaction was recorded as a decrease of ceded written premium of $4,000,969, a decrease in ceded commissions of $1,200,291 and a decrease in ceded unearned premiums of $2,426,517. The overall net effect of the commutation is a loss of $160,039.
Our expenses consist primarily of three types: losses and loss adjustment expenses, including estimates for losses and loss adjustment expenses incurred during the period and changes in estimates from prior periods, less the portion of those insurance losses and loss adjustment expenses that we cede to our reinsurers; and acquisition
When a claim is reported, claims personnel establish a “case reserve” for the estimated amount of ultimate payment. The amount of the reserve is primarily based upon an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss. The estimate reflects informed judgment of such personnel based on general insurance reserving practices and on the experience and knowledge of the claims personnel. During the loss adjustment period, these estimates are revised as deemed necessary by our claims department based on subsequent developments and periodic reviews of the cases.
For the year ended December 31, 2006, reserves decreased by $28.0 million primarily due to a decrease in the loss and loss adjustment expense ratio for the same period. This decrease can be attributed to a decline in earned premium, a reduction in claim frequency in private passenger automobile coverage and significant growth in commercial lines business, which in 2006, have exhibited lower loss ratios. For the year ended December 31, 2006, prior year reserves increased by $0.02 million. The actuarial estimates as of December 31, 2005 have shown to be adequate overall. This increase is due to favorable development in bodily injury and no-fault coverages offset by a reduction in ceded loss estimates for prior years.
We have made a change in a key assumption to the estimates of liabilities for loss and loss adjustment expenses for the year ended December 31, 2006. During the year ended December 31, 2006, there was a change in the loss reserving procedures implemented by our claims department. Higher initial (factor) reserves are being posted for new liability claims and the timeframes for establishing an ultimate value of liability has been accelerated. As a result, we placed more reliance on projected claim counts and paid loss development methods rather than on incurred loss development techniques.
The volume of reported losses and reported claim frequency for the accident years 2005 and 2006 are at a lower rate than prior periods, especially for personal auto liability. If this development continues, reserves for accident years could be redundant.
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and how to measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures
Net Realized Investment Gain. Net realized investment gain for the year ended December 31, 2006 and 2005 was $1.0 million and $0.4 million, respectively.
Other Income. Other income for the year ended December 31, 2006 and 2005 was $1.4 million and $1.7 million, respectively. The decrease in other income is primarily related to a decrease in revenue related to claims handling services provided by Riverview in connection with the AT&T contract. Claims handling revenue for the year ended December 31, 2006 was $0.3 million, as compared with $0.4 million for the comparable 2005 period.
Underwriting, Acquisition and Insurance Related Expenses. Underwriting, acquisition and insurance related expenses for the year ended December 31, 2006 increased by $6.0 million, or 14.2%, to $48.3 million from $42.3 million in the comparable 2005 period. The increase is due to an increase in salary expense in the amount of $1.3 million and a $4.7 million change in the amortization of deferred acquisition costs in 2006 as compared to the comparable 2005 period. Underwriting, acquisition and insurance related expenses, excluding deferred acquisition costs for the year ended December 31, 2006 were $49.8 million, as compared with $48.5 million, in the comparable 2005 period. For the year ended December 31, 2006, the deferred acquisition cost asset increased by $1.5 million, to $18.6 million as compared to an increase of $6.2 million to $17.1 million in the comparable 2005 period. The effect of the increase in the deferred acquisition cost asset is recorded as a reduction of underwriting, acquisition and insurance related expenses. As a percentage of net written premiums, our underwriting, acquisition and insurance related expense ratio for the year ended December 31, 2006 was 30.0% as compared to 22.4% for the comparable 2005 period. For the year ended December 31, 2006, unearned premiums increased $4.0 million, to $85.5 million from $81.5 million in the comparable 2005 period. Commission expense for the year ended December 31, 2006 decreased by $1.8 million, or 7.0%, to $23.9 million from $25.7 million in the comparable 2005 period. The ratio of commission expense to direct written premiums during 2006 was 14.0% compared to 13.0% for the comparable 2005 period.
Other Operating and General Expenses. Other operating and general expenses for the year ended December 31, 2006 decreased by $1.7 million, or 42.5%, to $2.3 million from $4.0 million in the comparable 2005 period. The decrease in other operating and general expenses for the year ended December 31, 2006 is primarily related to a decrease in stock based compensation expense offset by an increase in deferred compensation expense. For the year ended December 31, 2006, stock based compensation expense was $0.0 million, as compared to $3.1 million for the comparable 2005 period. For the year ended December 31, 2006, deferred compensation expense was $1.1 million as compared to $0.0 million for the comparable 2005 period.
Net Premiums Earned. Net premiums earned for the twelve months ended December 31, 2005 decreased by $6.9 million, or 3.8%, to $172.8 million from $179.7 million in the comparable 2004 period.
Replacement Carrier Revenue. Replacement carrier revenue for the twelve months ended December 31, 2005 decreased by $18.0 million to $0.0 million from $18.0 million in the comparable 2004 period. The decrease was due to the completion of the revenue recognition process associated with the Met P&C and Sentry Insurance replacement carrier transactions that began in the fourth quarter of 2003 and were completed during 2004.
Losses and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred for the twelve months ended December 31, 2005 decreased by $2.2 million, or 1.6%, to $132.8 million from $135.0 million in the comparable 2004 period. For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million. This increase was due to (i) increases in average severity for Personal Injury Protection (No-fault) losses of $9.4 million (ii) higher Commercial Auto Liability projected loss ratios for 2002-2004 due to the fact that actual loss development was higher than expected for those years, resulting in an increase of $1.8 million and (iii) Homeowners losses of $0.6 million and Other Liability losses of $1.6 million. This development was partially offset by continued favorable trends in loss development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million), and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly and we have reduced our projected loss ratios in recognition of this trend. As a percentage of net earned
premiums, losses and loss adjustment expenses incurred for the year ended December 31, 2005 was 76.9% as compared to 75.1% for the year ended December 31, 2004. The ratio of net losses, excluding loss adjustment expenses, to net earned premiums during the year ended December 31, 2005 was 65.6% compared to 59.5% for the comparable 2004 period.
Underwriting, Acquisition and Insurance Related Expenses. Underwriting, acquisition and insurance related expenses for the twelve months ended December 31, 2005 decreased by $4.5 million, or 9.6%, to $42.3 million from $46.8 million in the comparable 2004 period. As a percentage of net written premiums, our underwriting, acquisition and insurance related expense ratio for the twelve months ended December 31, 2005 was 22.4% as compared to 24.2% for the comparable 2004 period. The decrease in underwriting, acquisition and insurance related expenses is due to the decrease in net written premium and the related policy acquisition expenses incurred (principally the commission paid to agents) to produce and underwrite that premium, offset by the amount of deferred acquisition costs amortized.
Proformance’s primary sources of funds are premiums received, investment income and proceeds from the sale and redemption of investment securities. Our non-insurance subsidiaries’ primary source of funds is policy service revenues. Our subsidiaries use funds to pay operating expenses, make payments under the tax allocation agreement, and pay dividends to us. In addition, Proformance uses funds to pay claims and purchase investments.
We have historically received much of our capital in connection with replacement carrier transactions. As discussed more fully in the “Overview” section of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we cannot be certain that replacement carrier transactions on acceptable terms will continue to be available to us. If we are unable to enter into replacement carrier transactions on acceptable terms in the future, we may be forced to seek other sources of capital (including the issuance in either a public offering or a private placement of common stock or other equity or debt securities), which sources could be unavailable to us, or if available, could be more costly to us.
For the years ended December 31, 2006, 2005 and 2004, our consolidated cash flow used for investing activities was $19.2 million, $66.5 million and $67.2 million , respectively. The decrease in cash used in investing activities for the year ended December 31, 2006 as compared to the same period in the prior year is related primarily due to the conversion of our private passenger automobile business from six month to twelve month policies which began on January 1, 2005. This conversion process led to an increase in premium writings for the year ended December 31, 2005, which was subsequently invested by the Company along with the continued investment of the capital received as part of the initial public offering which was completed on April 21, 2005. Direct written premiums for the year ended December 31, 2006 decreased by $26.9 million, or 13.6%, to $171.1 million from $198.0 million in the comparable 2005 period. In addition, for the year ended December 31, 2006 our consolidated cash flow used in investing activities was in excess of our cash provided by operations as Proformance invested the $9 million which was contributed by National Atlantic Holdings during the period. Net cash used in investing activities for the year ended December 31, 2005 was consistent with the same period in the prior year as the capital received in connection with the Company’s initial public offering which was completed on April 21, 2005 was used to purchase additional investments.
For the years ended December 31, 2006, 2005 and 2004, our consolidated cash flow (used in) provided by financing activities was ($1.6) million, $62.7 million and $0.0 million, respectively. The decrease in our consolidated cash flows from financing activities for the year ended December 31, 2006 is related to the repurchase of capital stock as authorized by the board of directors on July 5, 2006 as well as the capital received during 2005 in connection with the Company’s initial public offering which was completed on April 21, 2005. The increase in our consolidated cash flows from financing activities for the year ended December 31, 2005 as compared to the year ended December 31, 2004 is directly related to the capital received in connection with the Company’s initial public offering, which was completed on April 21, 2005.
There are no restrictions on the payment of dividends by our non-insurance subsidiaries other than customary state corporation laws regarding solvency. Dividends from Proformance are subject to restrictions relating to statutory surplus and earnings. Proformance may not make an “extraordinary dividend” until 30 days after the Commissioner of the NJDOBI (which we refer to as the Commissioner) has received notice of the intended dividend and has not objected or has approved it in such time. An extraordinary dividend is defined as any dividend or distribution whose fair market value together with that of other distributions made within the preceding twelve months exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income (excluding realized capital gains) for the twelve-month period ending on the preceding December 31, in each case determined in accordance with statutory accounting practices. Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from its unassigned funds, also known as its earned surplus. The insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs following payment of any dividend or distribution to stockholders. As of December 31, 2006, Proformance is permitted to pay dividends without the approval of the Commissioner. Proformance has not paid any dividends in the past and we do not anticipate that Proformance will pay dividends in the foreseeable future because we wish to reduce our reinsurance purchases in order to retain more of the gross premiums written we generate. We also seek stronger financial strength ratings for Proformance, and both of these objectives require that the capital of Proformance be increased. In addition, the payment of dividends and other distributions by Mayfair is regulated by Bermuda insurance law and regulations.
Aggregate minimum rental commitments of the Company as of December 31, 2006 are as follows:
As of December 31, 2006, gross unrealized losses totaled $2,323,461 for available for sale securities. This amount was calculated using the following data: $1,859,870 of unrealized losses related to securities of the U.S. Government, government agencies and authorities, $291,578 related to state, local and government agencies, $156,865 related to industrial and miscellaneous, $15,148 related to mortgage backed securities.
As of December 31, 2006, gross unrealized losses totaled $773,100 for held to maturity securities. This amount was calculated using the following data: $253,084 of unrealized losses related to securities of the U.S. Government, government agencies and authorities, $57,768 related to state, local and government agencies, $462,248 related to industrial and miscellaneous.
Our gross unrealized losses represented 1.00% of cost or amortized cost of the investment portfolio as of December 31, 2006. Fixed maturities represented 99.2% of the investment portfolio and 96.5% of the unrealized losses as of December 31, 2006.
There are three equity and one preferred security having an unrealized loss of $111,057 a fair value of $877,488 and an amortized cost of $988,545 as of December 31, 2006, which has been in a continuous unrealized loss position for greater than 12 months. There is one equity and one preferred security having an unrealized loss of $70,330, a fair value of $816,865 and an amortized cost of $887,195 as of December 31, 2005, which has been in a continuous unrealized loss position for greater than 12 months. There were three hundred and twenty-six fixed maturity securities having an unrealized loss of $2,668,806, a fair value of $198,113,358 and an amortized cost of $200,782,164 as of December 31, 2006, which have been in a continuous unrealized loss position for greater than 12 months. There were ninety six fixed maturity securities having an unrealized loss of $1,287,760, a fair value of $50,811,392 and an amortized cost of $52,099,152 as of December 31, 2005, which have been in a continuous unrealized loss position for greater than 12 months.
Our fixed income securities in an unrealized loss position have an average “AA1” credit rating by Moody’s, with extended maturity dates, which have been adversely impacted by the increase in interest rates after the purchase date. As part of our ongoing security monitoring process by our investment manager and investment committee, it was concluded that no securities in the portfolio were considered to be other-than-temporarily impaired as of December 31, 2005. We believe, with the investment committee’s confirmation, that securities that are temporarily impaired that continue to pay principal and interest in accordance with their contractual terms, will continue to do so.
Management considers a number of factors when selling securities. For fixed income securities, management considers realizing a loss if the interest payments are not made on schedule or the credit quality has deteriorated. Management also considers selling a fixed income security in order to increase liquidity. Management considers selling an equity security at a loss if it believes that the fundamentals, i.e ., earnings growth, earnings guidance, prospects of dividends, and management quality have deteriorated. Management considers selling equity securities
Our policy states that if the fair value of a security is less than the amortized cost, the security will be considered impaired. For investments classified as available for sale, we need to consider writing down the investment to its fair value if the impairment is considered other-than-temporary. If a security is considered other-than-temporarily impaired pursuant to this policy, the cost basis of the individual security will be written down to the current fair value. The amount of the write-down will be calculated as the difference between cost and fair value and accounted for as a realized loss for accounting purposes which negatively impacts future earnings.
As of December 31, 2006 and as of December 31, 2005, our fixed income portfolio was 63.5% and 62.3% and respectively, concentrated in U.S. government securities and securities of government agencies and authorities that carry an “Aaa” rating from Moody’s, respectively.
Securities in an Unrealized Loss Position for 6 to 12 Months
Securities in an Unrealized Loss Position for greater than 12 Months
Securities with a Decline in Fair Value below Carrying Values of 20%-50%
Securities with a Decline in Fair Value Below Carrying Values Greater than 50%
The following table summarizes our long-term contractual obligations and credit-related commitments as of December 31, 2006.
As of December 31, 2006 we had property and casualty reserves of $191.4 million. The amounts and timing of these obligations are not set contractually. Nonetheless, based on cumulative property and casualty claims paid over the last ten years, we anticipate that approximately 52.0% will be paid within a year, an additional 33.5% between one and three years, 13.0% between three and five years and 1.5% in more than five years. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this payment estimate because of the potential impact from changes in:
Represents our minimum rental commitments as of December 31, 2006 pursuant to our seven-year lease agreement for the use of our office space and equipment at 4 Paragon Way, Freehold, NJ 07728 and our four-year lease agreement for the use of our office space and equipment at 3 Paragon Way, Freehold, NJ 07728. Off-Balance Sheet Arrangements
On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) which provides guidance on accounting for a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The guidance in FIN 48 is effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption, with the cumulative effect adjustment reported as an adjustment to the opening balance of retained earnings. The adoption will be accounted for as a change in accounting principle. The Company has determined that the adoption will not have a material impact on the Company’s consolidated financial statements.
periods beginning after December 15, 2005 and management has determined that the effect of adopting FSP 115-1 did not have a material impact on the Company’s consolidated financial statements. The Company has complied with the disclosure requirements of EITF-03-1, which were effective December 31, 2003 and remain in effect.