Excludes premiums of $35,000 in 2003, $1,727,000 in 2002, $16,627,000 in 2001 and $26,973,000 in 2000 from the Company’s fronting arrangements, the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which the Company was a servicing carrier and the reinsurance arrangement in Florida whereby MGA premiums are ceded to a non-affiliated reinsurer and assumed by General Agents.
Includes after tax net realized gains (losses) from securities transactions of $1,261,000, $1,353,000, $1,352,000, $2,822,000 and $(1,258,000) for 2004, 2003, 2002, 2001 and 2000, respectively.
Based on 21,169,736 shares of Common Stock outstanding at the end of 2004, 2003, 2002, 2001 and 2000. This assumes redemption would occur on all Series of Preferred Stock. Future changes in Shareholders’ equity will impact these numbers. See Note 7 and Note 12 of Notes to Consolidated Financial Statements.
In 2004 the Company recorded net income of $5,508,719 compared to net income of $3,375,772 in 2003 as it continued to experience profitable operating results from its nonstandard personal auto business in Florida. The other segments, which are all in runoff, have produced less unfavorable results in 2004 than in 2003 and less unfavorable results in 2003 than in 2002. Management continued in 2004 to implement actions intended to enhance the profit potential of the Company’s only active insurance line, nonstandard personal auto. Significant improvement in the combined ratio for this business is the primary reason for its level of profitability. The net loss of $8,761,087 in 2002 was attributable primarily to unfavorable claims experience and goodwill impairment. The Company’s focus on its obligations to the holders of its Preferred Stock, however, limited the Company’s ability to pursue opportunities to further expand its personal auto business in 2004. However, in January 2005 the Company completed a recapitalization transaction that removed this obstacle to the pursuit of a long-term strategic growth plan. See “Capital Transactions - 2005 Recapitalization”.
The source of revenues for the Company in 2004 are premiums earned on nonstandard personal auto risks, net investment income from the investment portfolio of the Company, net realized gains from the sale of investments and fee income from the insurance agency operations.
This growth strategy necessarily entails increased operational risks and other challenges that are greater than and different from those to which the Company has previously been subject in writing nonstandard personal automobile insurance. These new risks and challenges include, but are not limited to, the following:
• competitive conditions for the Company’s product have intensified recently, and further pressures on pricing are anticipated;
• pricing decisions in new states and markets, involving different claims environments, distribution sources and customer demographics, will be made without the same level of experience and data that is available in existing markets;
• the Company’s expected growth will require additional personnel resources (including management personnel), relationships with agents and vendors with whom the Company has not previously done business, and additional dependence on operating systems and technology. The Company will face substantial challenges in maintaining adequate customer service and retaining business, particularly because of the additional complexity of operating in multiple states and time zones; and
• if the Company grows significantly or if adverse underwriting results occur, additional capital may be required, and such capital may not be available on favorable or acceptable terms. The ability of the Company to maintain sufficient capital and perform successfully will be important factors in determinations of its A. M. Best rating, and that rating could have a significant influence on its marketing initiatives.
The Company’s ability to manage the foregoing risks and challenges, as well as potentially declining market conditions and possible unforeseen developments affecting its business, will determine in large part whether the Company’s strategy for profitable growth can be implemented successfully. There is no assurance that the Company will be able to achieve the objectives of its growth strategy.
On February 7, 2002, the Company announced its decision to cease writing commercial insurance, due to continued adverse claims development and unprofitable results. As a result, the Company had only 3 commercial policies remaining in force at December 31, 2004. The discontinuance of writing commercial lines has resulted in the Company ceasing to be approved to write insurance in several states, however, this state action has not materially restricted the geographic expansion of the Company’s personal auto lines thus far.
The Company continues to settle and reduce its inventory of commercial lines claims. At year-end 2004, there were 264 claims associated with the Company’s overall runoff book outstanding, compared to 525 a year earlier. Due to the long tail and litigious nature of these claims, the Company anticipates it will take a substantial number of years to complete the adjustment and settlement process with regard to existing claims and the additional claims it expects to receive in the future from its past business writings. Most of the remaining claims are in litigation and the Company’s future results may or may not be impacted either negatively or positively based on its ability to settle the remaining claims and new anticipated claims within its established reserve level.
In July 2003, A.M. Best Property and Casualty Insurance Reports was published and indicated for the Company’s insurance subsidiaries group that “the rating (“B-” Fair) reflects the group’s weak operating performance, which has depleted capital in recent years, and the continued demands on the operating subsidiaries to fund the obligations of the Company, which have had an impact on its liquidity and cash flow position.” In April 2004, A.M. Best announced a rating assignment of the Company’s insurance subsidiaries of “B-” (Fair) with a stable outlook.
Policy acquisition costs, principally commissions and premium taxes, are deferred and charged to operations over periods in which the related premiums are earned. The change in the resulting deferred asset is charged (credited) to operations. The Company utilizes investment income when assessing recoverability of deferred policy acquisition costs. Recoverability is based upon assumptions as to loss ratios, investment income and maintenance expenses and would vary with changes in these estimates.
The Company maintains reserves for the payment of claims and claim adjustment expenses for both case and IBNR under policies written by its subsidiaries. These claims reserves are estimates, at a given point in time, of amounts that the Company expects to pay on incurred claims based on facts and circumstances then known. The amount of case claim reserves is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding the claim, and the policy provisions relating to the type of claim. The amount of IBNR claims reserves is determined on the basis of historical information and anticipated future conditions by lines of insurance and actuarial review. Reserves for claim adjustment expenses are intended to cover the ultimate costs of settling claims, including investigation and defense of lawsuits resulting from such claims. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.
Ultimate liability may be greater or lower than current reserves. Reserves are monitored by the Company using new information on reported claims and a variety of statistical techniques. The Company does not discount to present value that portion of its claim reserves expected to be paid in future periods. Beginning in the third quarter of 2002 and for each quarter thereafter, the Company has set reserves equal to the selected reserve estimate as established by an independent actuarial firm. Formerly reserves were set based upon actuarial analysis by an actuary who was an employee of the Company and these reserves were reviewed annually by an independent actuarial firm.
In June 2004, the FASB issued EITF 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-01 requires an investor to determine when an investment is considered impaired, evaluate whether that impairment is other than temporary, and, if the impairment is other than temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The impairment loss recognition and measurement guidance was to be applicable to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. In September 2004, the FASB proposed additional guidance related to debt securities that are impaired because of interest rate and/or sector spread increases, and delayed the effective date of EITF 03-01. We do not know the effect the adoption of EITF 03-01 will have on our financial condition, results of operations or liquidity. EITF 03-01 also includes disclosure requirements for investments in an unrealized loss position for which other-than-temporary impairments have not been recognized. These disclosures are included in our Form 10-K Annual Report for the year ended December 31, 2004 as required by the EITF.
Gross premiums written in 2004 were 27% above 2003 but in 2003 they were 22% below 2002. The growth in 2004 was primarily related to growth in Florida nonstandard personal auto. The Company’s decision in the first quarter of 2002 to discontinue writing commercial lines is primarily the reason for the decrease in 2003. In the first quarter of 2002 nonstandard personal auto became the only line of insurance marketed by the Company.
The following table compares nonstandard personal auto and all of the remaining lines that are in runoff (“Runoff lines”) between the years for gross premiums written:
Nonstandard Personal Auto increased 34% in 2004 over 2003 primarily due to growth within Florida, with Texas and Arizona contributing 13 points of the increase.
The Company recorded net realized capital gains of $1,910,359, $2,050,236 and $2,048,848 in 2004, 2003 and 2002, respectively. Variability in the timing of realized investment gains should be expected. During 2002, the Company reduced the carrying value of a non-rated commercial mortgage backed security to $0 resulting in a write down of $2,010,670 (recorded as a realized loss in the statement of operations) as a result of a significant increase in the default rate in the underlying commercial mortgage portfolio, which had disrupted the cash flow stream sufficiently to make future cash flows unpredictable. This write-down was offset by net realized gains of $3,604,462 recorded from the sale of various bond securities and other investments in 2002 and the gain of $455,056 recognized from the sale of the home office building.
Other income increased $829,550 in 2004 from 2003 primarily as a result of an increase in agency revenues due to the increase in writings. The decrease of $2,085,012 in 2003 from 2002 was primarily the result of a decrease in the amortization of deferred reinsurance recoveries from claim payments under the reserve reinsurance cover agreement. Amortization is based upon claims recovered from the reinsurer in relation to the amount of the reinsured layer under the reserve reinsurance cover agreement. In accordance with GAAP, the reinsurance recoveries from these reserve increases are recorded as deferred revenue and not immediately recognized as reductions to Claims and claim adjustment expenses (“C & CAE”). At December 31, 2004, $1,108,973 remains as deferred reinsurance recoveries that will ultimately be amortized into Other income in future periods.
C & CAE increased $1,492,027 in 2004 from 2003 and decreased $30,897,174 in 2003 from 2002. The C & CAE ratio was 69.1% in 2004, 74.2% in 2003 and 93.6% in 2002. The decrease in the C & CAE ratio in 2004 was primarily related to favorable development in 2004 from nonstandard personal auto and commercial auto. The decrease in the C & CAE ratio in 2003 is due to smaller increases in estimated ultimate liabilities recorded in 2003 than was recorded in 2002. In 2003 the commercial general liability lines recorded increases in the 2000 and 2001 accident years, but this was offset to some extent with decreases recorded in the commercial auto and personal auto lines for the 1999 and 2002 accident years. With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company does not provide environmental impairment coverage and excludes pollution and asbestos related coverages in its policies. A portion of the Company’s remaining claims are related to construction defects. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.
The ratio of commissions and the change in deferred policy acquisition costs (“DPAC”) to net premiums earned was 12% in 2004, 13% in 2003 and 15% in 2002. The progressive decrease in this ratio is primarily due to the shift in the mix of business to nonstandard personal auto, which has lower acquisition costs than commercial lines, and changes of estimates in the calculation of DPAC in 2004.
in 2002 are primarily attributable to the amortization of previous DPAC exceeding current DPAC as a result of the decision to discontinue writing commercial lines in 2002.
Interest expense from the note payable decreased in 2003 primarily as a result of principal payments on the note which was paid in full in the fourth quarter of 2003.
Goodwill impairment in 2002 is a result of the Company positioning itself for an exit from the personal auto business in the second quarter of 2002 and the consideration of a sale of the Lalande Group. A re-evaluation of goodwill for the Lalande Group was made during this period and an additional impairment of $2,859,507 was recorded. This re-evaluation was based upon market indications of value contained in a proposal from a potential acquirer and upon the uncertainty of achieving value levels.
The Company is named as a defendant in a proceeding initially filed in the United States District Court for the Southern District of Florida (the “Florida Federal Court”) styled, “Earl Culp, on behalf of himself, and all others similarly situated, Plaintiff, v. GAINSCO, INC., Glenn W. Anderson, and Daniel J. Coots, Defendants,” Case No. 03-20854-CIV-Lenard/Simonton. Defendant Anderson is the Company’s President and Chief Executive Officer, and Defendant Coots is the Company’s Senior Vice President and Chief Financial Officer. In the proceeding, which is a consolidation of two previously separately pending actions filed at approximately the same time and involving essentially the same facts and claims, the plaintiff alleges violations of the Federal securities laws in connection with the Company’s acquisition, operation and divestiture of its former Tri-State, Ltd. (“Tri-State”) subsidiary, a South Dakota company selling non-standard personal auto insurance.
On March 29, 2004, plaintiff filed a Second Consolidated Amended Class Action Complaint (the “Second Amended Complaint”) that is based on the same claims as the previously consolidated proceedings. The alleged class period begins on November 17, 1999, when the Company issued a press release announcing its agreement to acquire Tri-State, and ends on February 7, 2002, when the Company issued a press release warning investors that it “expect[ed] to report a significant loss for the fourth quarter and year ended December 31, 2001.” The Second Amended Complaint seeks class certification for the litigation.
In general, the Second Amended Complaint alleges that during the class period the Company’s press releases and filings with the SEC contained non-disclosures and deceptive disclosures in respect of Tri-State, that the Company’s press releases and filings with the SEC disclosing the Company’s losses in 2000 and 2001 failed to disclose the alleged declining financial condition and declining profitability of Tri-State, and that the Company’s financial statements were not prepared in accordance with generally accepted accounting principles, all in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder. More particularly, the Second Amended Complaint includes allegations that (i) the Company issued a press release on November 17, 1999 announcing the acquisition of Tri-State and stating that the Tri-State acquisition was “expected to be minimally accretive to earnings” in 2000; (ii) the Company failed to disclose that it had imposed more lenient underwriting and claims procedures on Tri-State’s book of nonstandard personal automobile insurance policies than Tri-State’s former owners, causing a reduction in Tri-State’s net income; (iii) the Company hid problems it was having at Tri-State and failed to disclose that Tri-State had lost profitability almost immediately after the Company acquired Tri-State in January 2000; (iv) the Company “buried” Tri-State’s financial performance in its LaLande business segment or in the reporting of the Company’s overall financial performance; (v) the Company failed to disclose in a Form 8-K a lawsuit it had filed on July 7, 2001 against Herb Hill, the founder of Tri-State, contending that the Herb Hill lawsuit was a material pending legal proceeding; (vi) Defendant Anderson hid Tri-State’s performance from the Company’s board of directors; and (vii) the Company violated generally accepted accounting principles by failing to record an impairment in or write-down of approximately $5.4 million in goodwill attributable to the Tri-State acquisition until the Company announced the sale of Tri-State in August 2001 back to Herb Hill for $900,000.
On May 24, 2004, the Company and the individual defendants filed in the Florida Federal Court a motion to dismiss the Second Amended Complaint for failure to state a cause and a motion to transfer venue of the case to the United States District Court for the Northern District of Texas, Fort Worth Division (the “Fort Worth Federal Court”). On September 22, 2004 the Florida Federal Court granted defendants’ motion to transfer venue and transferred the case to the Fort Worth Federal Court. The pending defendants’ motion to dismiss was not ruled upon and was transferred with the case to the Fort Worth Federal Court and the parties were instructed to re-file all pleadings with the motion to dismiss.
Background of 2001 Transactions with GMSP and Mr. Stallings. In early 2001 it became apparent to management that the Company’s insurance company subsidiaries had suffered more unexpected severe claims development in the fourth quarter of 2000 than originally thought, largely due to runoff from the commercial trucking lines that the Company announced on November 9, 2000 that it had determined to cease writing. As a result the Company was not in compliance with two covenants in its bank credit agreement, and, if the situation were not quickly addressed through the raising of additional equity capital, the Company faced the possibility of a qualified opinion from its auditors on the year ended December 31, 2000 and a downgrade of its A.M. Best rating, which at the time was A-. Under these circumstances the Company approached GMSP for financial assistance. GMSP in turn introduced the Company to Mr. Stallings with whom GMSP has previously had a successful relationship through its investment in Pilgrim Capital Corporation.
Obligation to Redeem Series A Preferred Stock on January 1, 2006. On March 23, 2001, in satisfaction of a condition to the closing of the sale of $3,000,000 of Series C Preferred Stock to GMSP, the Company called the Series A Preferred Stock for redemption so that on January 1, 2006 the Company would be obligated to pay $31,620,000 to GMSP, subject to certain conditions. To the extent that the Company was restricted from redeeming the Series A Preferred Stock because of the conditions, the Company would be obligated to pay quarterly an amount equal to 8% interest per annum on any unpaid balance.
Obligation to Redeem Series B and Series C Preferred Stock on March 23, 2007. The Series B and Series C Preferred Stock would become redeemable at the option of the holders commencing March 23, 2007 for the aggregate liquidation amount of $6,000,000 plus accrued dividends, subject to conditions similar to those conditions on the Company’s obligation to redeem the Series A Preferred Stock.
On November 17, 2003 the Board discussed how the writing of additional private passenger automobile insurance policies to provide the possibility of expanded premium and investment income would require the commitment of additional capital in the insurance subsidiaries, but that the taking of dividends out of the insurance company subsidiaries to satisfy dividend obligations to the Preferred Stock would limit these growth opportunities. There was also discussed an opportunity to enter into a potentially long-term exclusive relationship with a general agency in another state that, if it could be properly arranged and executed, possibly could lead to significant growth in premiums written. The Board then discussed the possibility of recapitalizing some or all of the Series A, B and C Preferred Stock in order to ease pressures on the Company’s capital structure and its A.M. Best rating. See “A.M. Best Rating” below. At this Board meeting the mandate of the Special Committee was expanded to authorize and empower the Special Committee to review and evaluate any recapitalization proposal made by any holder of Preferred Stock or other affiliate, and to take all action that in its judgment may be necessary or appropriate in order to evaluate, negotiate, approve or reject any transaction arising out of any such recapitalization proposal. The Special Committee was also granted the authority to engage such investment bankers, counsel and other advisors necessary to help the Special Committee evaluate any recapitalization proposal. The membership of the Compensation Committee and the Special Committee overlapped and, when it became apparent that the recapitalization would require arrangements for the compensation of individual officers and directors, the Special Committee began to meet with the Compensation Committee.
On August 27, 2004 after 44 meetings, often with its counsel and financial advisors, the Special Committee approved the recapitalization agreements which are described below, and the Compensation Committee approved the related employment arrangements. The Special Committee received a fairness opinion from an independent investment banking firm to the effect that the consideration to be received by the Company in the recapitalization was fair, from a financial point of view, to the holders of the Common Stock other than those affiliated with GMSP, First Western and Mr. Stallings. Later on August 27, 2004 the full Board met and approved the recapitalization agreements and related employment agreements, in each case subject to shareholder approval.
As a result of the recapitalization, the number of shares of Common Stock outstanding increased from 21,169,736 previously to 61,084,960 after closing of the recapitalization. GMSP now owns approximately 33% of the outstanding Common Stock, Mr. Stallings owns approximately 22% and First Western owns approximately 11%.
In conjunction with the recapitalization, Mr. Stallings became executive Chairman of the Board of the Company, and Mr. Reis became Executive Vice President of the Company with responsibility for risk management. Mr. Stallings’ agreements entered into with the Company in the 2001 transactions were terminated, as was First Western’s consulting agreement with a subsidiary of the Company. Mr. Anderson remains as the Company’s President and Chief Executive Officer.
In its recapitalization agreement, GMSP further agreed that at least until January 21, 2007, it would not purchase or otherwise acquire additional shares of Common Stock if thereafter it would beneficially own more than 37.5% of the voting stock (excluding the shares of Series A Preferred Stock entitled to vote on matters submitted to the holders of Common Stock) and that GMSP would not be deemed collectively to own more than 37.5% of the voting stock solely by reason of the acquisition of Common Stock (i) by Mr. Goff, pursuant to any existing or future Company incentive stock plans, or (ii) pursuant to the conversion of shares of Series A Preferred Stock or the exercise of the Series B Warrant. Additionally, GMSP agreed that during this two year period it would vote the shares of Series A Preferred Stock in respect of each matter submitted to the holders of the Common Stock in proportion to the vote of all shares of Common Stock voted on such matter such that the vote of the shares of Series A Preferred Stock will have no effect on the outcome of any proposal submitted to the holders of the Common Stock. During this two-year period GMSP also is entitled to designate Mr. Goff to serve on the Board for so long as GMSP beneficially owns at least 20% of the voting stock.
(C) Retirement of 13,500 shares of Series A Preferred Stock to be exchanged for 19,125,612 shares of Common Stock and to record an adjustment to the discount on the remaining 18,120 shares of Series A Preferred Stock related to modification of terms.
(H) Additional paid-in capital is adjusted for transactions described in A, B, C, F and G.
• Nonrecurring deduction of $722,150 which represents the fair value of the Common Stock transferred to the holders of the Preferred Stock over the carrying amount of the Preferred Stock retired or redeemed, net of cancellation of the warrant issued to Mr. Stallings; and
1) Regarding Net income and Net income to common shareholders, a nonrecurring expense item of $330,000 that is non-cash compensation to Mr. Anderson resulting from the grant of 200,000 shares of Common Stock to him upon closing of the recapitalization on January 21, 2005.
GAINSCO, INC. (“GNAC”) is a holding company that provides administrative and financial services for its wholly owned subsidiaries. GNAC needs cash during the next twelve months primarily for: (1) preferred stock dividends, (2) administrative expenses, and (3) investments. The primary source of cash to meet these obligations is existing cash and investment balances. A secondary source, which is not expected to be needed, is statutory permitted dividend payments from its insurance subsidiary, General Agents Insurance Company of America, Inc. (“General Agents”), an Oklahoma corporation. Statutes in Oklahoma restrict the payment of dividends by the insurance company to the available surplus funds. The maximum amount of cash dividends that General Agents may declare without regulatory approval in any 12-month period is the greater of net income for the 12-month period ended the previous December 31 or ten percent (10%) of policyholders’ surplus as of the previous December 31. General Agents could pay dividends to GNAC of $4,148,459, based upon 10% of its surplus amounts at December 31, 2004. GNAC believes the existing cash and liquid investments should be sufficient to meet its expected obligations for 2005 without requiring a dividend from General Agents.
The Company believes that the recapitalization transactions described elsewhere in this Report did not trigger a limitation on the Company’s ability to utilize its loss carryforwards for federal income tax purposes. The recapitalization transactions did, however, result in a substantial ownership shift. Future transactions in Company stock by the Company or others could affect the Company’s ability to utilize the net operating loss carryforwards.
Net cash used for operating activities was $7,148,709 in 2004, $3,050,682 in 2003 and $64,099,534 in 2002. The cash used for operating activities in 2004 was primarily attributable to claims paid in the runoff lines. The cash used in 2002 was primarily attributable to the transfer of trust assets to the reinsurer for the reserve reinsurance cover agreement in the first quarter of 2002.
Investments decreased primarily due to negative cash flows from operations as a result of runoff claim payments. At December 31, 2004, 93% of the Company’s investments were investment grade with an average duration of approximately .5 years and were 80% invested in short-term investments. The return on average investments was 2.2% in 2004, 2.9% in 2003 and 3.0% in 2002. The Company classifies its bond securities as available for sale. In February 2002 GMSP purchased the equity investments and the note receivable, classified as “Other investments” for approximately $2,087,000 which was their carrying value at December 31, 2001. In March 2002, the Company reduced the carrying value of a non-rated security to $0 resulting in a write down of $2,010,670 as a result of a significant increase in the default rate in January and February of 2002 in the underlying collateral, which had disrupted the cash flow stream sufficiently to virtually eliminate future cash flows. The unrealized gain associated with the investment portfolio was $468,828 (net of tax effects) at December 31, 2004. The duration of the bonds available for sale is less than the average expected payout of claims.
Premiums receivable increased as a result of the increase in writings in nonstandard personal auto. This balance is comprised primarily of premiums due from insureds for nonstandard personal auto. The nonstandard personal auto premiums are written with a down payment and monthly payment terms of up to four months. The Company has recorded an allowance for doubtful accounts of $95,000, which it considers adequate at the present time.
Reinsurance balances receivable decreased primarily as a result of C & CAE paid under the reserve reinsurance cover agreement for commercial lines. This balance is primarily comprised of ceded unpaid C & CAE under the reserve reinsurance cover agreement of $6,183,236 and C & CAE by the Company and due from reinsurers under the Company’s various reinsurance agreements. An allowance for doubtful accounts of $300,792 was recorded for 2004 and $122,484 had been recorded for 2003 regarding the collectibility of amounts due. The increase in the allowance for doubtful accounts in 2004 was due to an increase in disputed claim amounts. Balances written off in previous years have been immaterial. The Company considers the allowance adequate at the present time.
DPAC increased primarily due to changes of estimates in the calculation of DPAC in 2004 and growth in nonstandard personal auto premiums.
Goodwill of $609,000 is associated with the 1998 acquisition of the Lalande Group and reflects a value no more than the estimated fair valuation levels of combined agency and claims handling operations of this type in the personal automobile marketplace. Effective in 2002, goodwill is no longer amortized but is subject to an impairment test based on its estimated fair value. Additional impairment losses could be recorded in future periods.
As of December 31, 2004, in respect of its commercial and runoff lines, the Company had $44,721,656 in net unpaid C & CAE. Historically, the Company has experienced significant volatility in its reserve projections for its commercial lines. This volatility has been primarily attributable to its commercial automobile and general liability product lines. See Item 1 "Business - Unpaid Claims and Claim Adjustment Expenses.” On February 7, 2002, the Company announced it had decided to discontinue writing commercial lines insurance
The Company considers the unpaid C & CAE to be adequate; they are set to equal the selected reserve estimate determined by an independent actuarial firm.
Unearned premiums increased as a result of the growth in nonstandard personal premiums written mentioned previously.
Accumulated other comprehensive income of $468,828 was recorded at December 31, 2004 as a result of the unrealized gains on bonds available for sale, net of tax..
The decrease in Retained deficit of $927,973 is attributable to the net income of $5,508,719, offset by the accretion of discount on the Series A and Series B Preferred Stock of $3,442,000 and dividends on the Series B and Series C Preferred Stock of $1,138,746.
The following table summarizes the Company’s contractual obligations as of December 31, 2004: