The Company leases office space for its corporate headquarters located at RiverEdge One, Suite 600, 5500 Interstate North Parkway, Atlanta, Georgia 30328. Effective October 1, 2009 the Company signed an amendment to extend its lease until 2019 under more favorable lease terms. The Company leases retail office space at various locations in Georgia, Florida and Alabama under short to medium term commercial leases. The Company’s agencies are all located in leased locations throughout Alabama, Florida, and Georgia under short to medium term commercial leases. The Company also leases office equipment for use in its various locations. Rent expense for long-term leases with predetermined minimum rental escalations is recognized on a straight-line basis, and the difference between the recognized rental expense and amounts payable under the leases, or deferred rent, is included in other liabilities.
Premiums written refers to the total amount of premiums billed to the policyholder less the amount of premiums returned, generally as a result of cancellations, during a given period. Premiums written become premiums earned as the policy ages. Barring premium rate changes, if an insurance company writes the same mix of business each year, premiums written and premiums earned will be equal and the unearned premium reserve
will remain constant. During periods of growth, the unearned premium reserve will increase, causing premiums earned to be less than premiums written. Conversely, during periods of decline, the unearned premium reserve will decrease, causing premiums earned to be greater than premiums written. The Company’s net premiums earned, after deducting reinsurance, was $34.4 million for the year ended December 31, 2009, compared to $28.8 million for the year ended December 31, 2008.
Other fee income for the period ended December 31, 2009 was $0.4 million, an increase of $0.1 million when compared to the same period last year. The increase is primarily due to higher revenue generated from towing and rental add-on products offered to insureds in the retail (Trustway) segment.
Insurance losses and loss adjustment expenses include payments made to settle claims, estimates for future claim payments and changes in those estimates for current and prior periods, as well as loss adjustment expenses incurred in connection with settling claims. Insurance losses and loss adjustment expenses are influenced by many factors, such as claims frequency and severity trends, the impact of changes in estimates for prior accident years, and increases in the cost of medical treatment and automobile repairs. The anticipated impact of inflation is considered when we establish our premium rates and set loss reserves. We perform a rolling quarterly actuarial analysis each month and establish or adjust (for prior accident quarters) reserves, based upon our estimate of the ultimate incurred losses and loss adjustment expenses to reflect loss development information and trends that
have been updated for the most recent quarter’s activity. Each month our estimate of ultimate loss and loss adjustment expenses is evaluated by accident quarter, by state and by major coverage group (e.g., bodily injury, physical damage) and changes in estimates are reflected in the period the additional information becomes known.
We have historically used reinsurance to manage our exposure to loss by ceding a portion of our gross losses and loss adjustment expenses to reinsurers. We remain obligated for amounts covered by reinsurance in the event that the reinsurers do not meet their obligations under the agreements due to, for example, disputes with the reinsurer or the reinsurer’s insolvency. The Company cedes approximately 70% of its direct loss and loss adjustment expenses incurred to its reinsurers and the amount ceded for the year ended December 31, 2009, was $62.8 million compared to $54.5 million as of December 31, 2008.
After making deductions for the effect of reinsurance, losses and loss adjustment expenses were $25.2 million for the period ended December 31, 2009, compared $23.7 million for the same period in 2008. As a percentage of earned premiums, this amount decreased for the period ended December 31, 2009, from 82.5% to 73.3%, when compared with the same period in 2008. The amount represents actual payments made and changes in estimated future payments to be made to or on behalf of AAIC’s policyholders, including the expenses associated with settling claims. The decrease in the year-over-year loss ratio is mainly attributable to the Company’s increase in premiums, and policy fees, in addition to favorable loss development in certain states.
As of December 31, 2009, the Company had investments and cash of $19.0 million, compared to $19.1 million as of December 31, 2008. The Company’s investment strategy is to be highly liquid in cash, short-term investments, and equity securities as well as investing in long-term bonds with short durations in order to meets its insurance obligations. For the year ended December 31, 2009, the Company had $8.4 million in cash and short-term investments, which included $1.8 million of cash restricted to provide security for certain reinsurance reserve obligations. The equity security portfolio amounted to $1.9 million and is diversified amongst various industries. The Company’s long term investments of $8.5 million are spread among direct obligations of the U.S. Treasury as well as those securities unconditionally guaranteed as to the payment of principal and interest by the United States government or any agency thereof and in corporate bonds.
Index to Financial Statements The Company’s investment activities are made in accordance with the Company’s investment policy. The objectives of the investment policy are to obtain favorable after-tax returns on investments through a diversified portfolio of fixed income, equity and real estate holdings. The Company’s investment criteria and practices reflect the short-term duration of its contractual obligations with policyholders and regulators. Tax considerations include federal and state income tax as well as premium tax abatement and credit opportunities offered to insurance companies in the states where AAIC writes policies.
Reinsurance recoverables as of December 31, 2009, increased $4.8 million, to $43.8 million compared to $39.0 million as of December 31, 2008. The increase is directly related to AAIC’s continued growth. AAIC maintains a quota-share reinsurance treaty with its reinsurers in which it cedes approximately 70% of both premiums and losses. The $43.8 million represents the reinsurers’ portion of losses and loss adjustment expense, both paid and unpaid.
Property and equipment, net of depreciation, decreased $0.5 million to $2.0 million as of December 31, 2009, compared to $2.5 million as of December 31, 2008. The decrease is attributable to lower depreciation on existing computer software and hardware at the Company’s corporate headquarters and furniture and leasehold improvements in both its agencies and corporate headquarters.
Prepaid expenses as of December 31, 2009, decreased $0.1 million to $0.5 as of December 31, 2009, compared to $0.6 million as of December 31, 2009. The decrease in prepaid was mainly due to the amortization of prepaid insurance and advertising costs.
Accounts payable and accrued expenses as of December 31, 2009, increased approximately $1.0 million from December 31, 2008 to $8.6 million from $7.5 million. The increase is primarily due to $0.7 million in accrued expenses for payroll and management incentive expense and $0.3 million of balances due to carriers related to an increase in direct bill agency business.
Unpaid losses and loss adjustment expenses decreased $0.6 million to $42.0 million as of December 31, 2009 from $42.6 million at December 31, 2008. This amount represents management’s estimates of future amounts needed to pay claims and related expenses.
Reinsurance payable as of December 31, 2009 increased $2.1 million to $28.5 million, compared to $26.4 million as of December 31, 2008. The amount represents premiums owed to the Company’s reinsurers. AAIC maintains seven quota-share reinsurance treaties with its reinsurers in which it cedes 70% of the both premiums and losses for the majority of its states. The increase is attributable to the higher AAIC’s premium writings in Florida, Arizona, and Texas. The increase also reflects a reimbursement of $1.7 million of premiums received from its reinsurers as a result of an overpayment in prior years.
Provisional commission reserves represent the difference between our minimum ceding commission and the provisional amount paid by the reinsurers. These balances as of December 31, 2009 increased $0.2 million to $3.6 million, compared to the balance at December 31, 2008. The increase is related to increases in AAIC writings.
Investing activities used for the year ended December 31, 2009 amounted to $1.7 million as compared to $4.6 million provided as of December 31, 2008. The increase in the amount used was mainly attributable to lower net sales of investments in the amount of $5.5 million, the transfer of $1.8 million to restricted cash, offset by $1.0 million decrease in purchases of computer software and hardware and leasehold improvements in our headquarters and in Trust Way.
Financing activities for the year ended December 31, 2009 included debt repayments for the year ended December 31, 2009 in the amount of $1.1 and $3.0 million as of December 31, 2008, offset the incurrence of approximately $1.5 million in indebtedness under the terms of a new revolving line of credit.
To support Company growth, the Company maintains a highly liquid investment portfolio and closely manages capital requirements. AAIC is required by the state of South Carolina to maintain minimum Statutory Capital and Surplus of $3.0 million. As of December 31, 2009, AAIC’s statutory Capital and Surplus was $12.3 million.
The Company considers its historical loss experience and the factors set forth above at a state, product, and line of business level to estimate its loss and LAE reserves. The Company reviews its loss and LAE reserves by line of business on a monthly basis as new information becomes known and it is able to observe actual loss development. Our statistical average reserves are reviewed, at a minimum, on a semiannual basis. If emerging issues relating to a product or state necessitate a change in our scheduled reviews of a particular coverage of the business, we would identify and measure variances and make adjustments if necessary. For example, we track medical and auto repair costs and may adjust statistical averages if trends were emerging.
The following table presents the gross reserves by line of business as of December 31, 2009 and 2008:
In analyzing the ultimate accident year loss experience, our staff reviews incurred and paid loss development patterns at a detailed, line of business level. Changes in patterns are taken into account when selecting loss development factors. These lines of business consist of minimal liability limits, and the loss development is usually short term because a large majority of the parties involved in an accident report their claims within a short time period after the occurrence.
Assumptions regarding needed reserve levels made by the staff take into consideration influences on available historical data that reduce the predictability of our projected future loss costs. Internal considerations that are process-related, which generally result from changes in our claims organization’s activities, include claim closure rates and the number of claims that are closed without payment. External items considered include the litigation atmosphere, state-by-state changes in medical costs, and the availability of services to resolve claims. These also are better understood at the state level than at a more generalized national level.
Index to Financial Statements IBNR reserves are established on a monthly basis and are based on a reserve analysis by the Company’s internal staff performing actuarial functions. Various standard actuarial tests are applied to lines of business. Included in the analyses are the following:
The Company’s internal staff performing actuarial functions determines the appropriate level of reserves based on its monthly reserve analysis. On a semiannual basis, the Company’s third-party actuary performs an in-depth independent review of our actuarial data and determines whether or not the established reserves for both IBNR, and LAE are within an acceptable range. At the end of each year, our third-party actuary opines on and certifies our reserves. For all years presented, our independent actuary has determined that our reserves are within acceptable ranges, and therefore management has not adjusted the liability for unpaid losses and LAE from the amount determined by its internal staff.
Factors that can affect actual frequency include, among others, changes in weather, driving patterns or trends and class of driver. Estimates of average frequency can be affected by changes in claims settlement and reserving practices. Loss severity can be affected by auto repair and medical cost inflation, jury awards and changes in policy limit profiles. Estimation of LAE reserves is subject to variation from factors such as the use of outside adjusters, frequency of lawsuits, claims staffing and experience levels. Key assumptions as of December 31, 2009 and 2008 were premised on historical loss reserve development patterns.
The Company’s claims costs represents payments made and estimated future payments to be made to or on behalf of our policyholders, including expenses needed to adjust or settle claims. These costs relate to current costs under our non-standard state-mandated automobile insurance programs. Claims costs are impacted by loss severity and frequency and are influenced by inflation and driving patterns, among other factors. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company periodically reviews the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. Six of the Company’s current reinsurers are A- rated or better based on the most recent A.M. Best ratings available, while the seventh reinsurer does not have a rating but is currently in run-off. Further, the reinsurers cover up to $2,000,000 in aggregate claims for extra contractual obligations each policy year.
During 2009 and 2008, the Company ceded approximately 70% of its premium and losses to the contracted reinsurers. Premium ceded under this reinsurance agreement for the twelve months ended December 31, 2009 and 2008 were $72.0 million and $64.4 million, respectively. The related ceding commission was approximately $16.7 million in 2009 and $14.9 million in 2008. The growth in ceded premium is mainly due to increased premium volume in the states of Florida, Arizona, South Carolina, Indiana and Texas.
Ceded reinsurance for all programs reduced AssuranceAmerica’s incurred losses and LAE by $62.8 million and $54.5 million for the twelve months ended December 31, 2009 and 2008, respectively.
The Company’s reinsurance recoverable balances amounted to $43.8 million and $39.0 million as of December 31, 2009 and 2008, respectively. The recoverable includes ceded unpaid losses and loss adjustment expenses of $29.7 million and $29.8 million of the same periods, respectively. The ceded reserves from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies ceded. Reinsurance recoverable assets include paid loss balances due from other insurance companies under the terms of reinsurance agreements in the amount of $14.1 million and $9.2 million as of December 31, 2009 and 2008, respectively. The paid loss recoverables are in good standing as of December 31, 2009.
AssuranceAmerica’s ceded unearned premium relates to policies in force and is earned ratably over the policy period. As of December 31, 2009 and 2008, the ceded unearned reserves amounted to $25.1 million and $22.9 million, respectively. The unearned premium will become earned over the term of the policy. Reinsurance payable of $28.5 million and $26.4 million as of December 31, 2009 and 2008 represents the amounts due to reinsurers for ceded premiums net of commissions. The Company pays its reinsurers on a collected premium basis, and no balances are in dispute through December 31, 2009.
AssuranceAmerica’s quota share reinsurance facility has a significant impact on its cash flows. Since the Company cedes approximately 70% of its premium and losses, the Company relies heavily on its reinsurers to settle outstanding reinsurance balances due for loss payments net of premiums collected. AssuranceAmerica paid ceded premiums net of commissions of $53.1 million and $48.3 million and received reinsurance recoverables on paid loss and loss adjustment expenses of $58.1 million and $44.8 million in 2009 and 2008, respectively.