We own three office buildings, all of which are unencumbered. In Birmingham, Alabama we own a 165,000 square foot building in which we currently occupy approximately 82,000 square feet with the remaining office space leased to unaffiliated persons or available to be leased. In Okemos, Michigan we own, and fully occupy a 53,000 square foot building and in Madison, Wisconsin we own and fully occupy a 38,000 square foot building.
The largest component of our liabilities is our reserve for losses and the largest component of expense for our operations is incurred losses. Net losses in any period reflect our estimate of net losses incurred related to the premiums earned in that period as well as any changes to our estimates of the reserve established for net losses of prior periods.
External actuaries review our reserve for losses at least semiannually in order to provide management with an independent viewpoint and broader perspective regarding our loss experience and industry loss trends. We compile loss and exposure data from our own company experience which is analyzed by both the external actuaries and our internal actuarial staff. In establishing reserves, management considers the estimates and inputs of our internal actuarial staff as well as those of our external actuaries. Factors considered by management and the actuaries in establishing reserves include known or estimated changes in the frequency and severity of claims, loss retention levels and premium rates.
A brief description of each method follows. The descriptions require some explanation as to how we and actuaries view our reserves. We segment our reserves by accident year, which is the year in which the claim becomes our liability. As claim payments are made, they are aggregated by accident year for analysis purposes. We also segment our reserves by reserve type: case reserves and IBNR (incurred but not reported) reserves. Case reserves are established by our claims department based upon the particular circumstances of each reported claim and represent our estimate of the future loss costs (often referred to as expected losses) that will be paid on reported claims. Case reserves are decremented as claim payments are made and are periodically adjusted upward or downward as claim department estimates regarding the amount of future losses are revised; reported loss is the case reserve at any point in time plus the claim payments that have been made to date. IBNR reserves represent our estimate of the loss costs that will eventually be paid on all claims, less the case reserves we have established.
Backward Recursive Development Method. This method is an extrapolation on the movements in case reserve adequacy in order to estimate unpaid loss costs. Historical data showing incremental changes to case reserves over progressive time periods is used to derive factors that represent the ratio of case reserve values at successive maturities. Historical claim payments data showing the additional payments in progressive time periods is used to derive factors that represent the portion of a case reserve paid in the following period. Starting from the most mature period, after which all the case reserve is paid and the case reserve is exhausted, the next prior ultimate development factor for the prior case reserve can be calculated as the case factor times the established ultimate development factor plus the
The claims environment in which we and others in our industry operate is inherently uncertain. The development of a statistical distribution models the uncertainty as well as the limited predictive power of past loss data. The distributions represent an estimate of the range of possible outcomes and should not be confused with a range of best estimates. Given the number of factors considered it is neither practical nor meaningful to isolate a particular assumption or parameter of the process and calculate the impact of changing that single item.
We evaluate each of our ceded reinsurance contracts at inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting guidance. At December 31, 2008 all ceded contracts are accounted for as risk transferring contracts.
Our receivable from reinsurers on unpaid losses and loss adjustment expenses represents our estimate of the amount of our reserve for losses that will be recoverable under our reinsurance programs. We base our estimate of funds recoverable upon our expectation of ultimate losses and the portion of those losses that we estimate to be allocable to reinsurers based upon the terms of our reinsurance agreements. Our assessment of the collectibility of the recorded amounts receivable from reinsurers considers the payment history of the reinsurer, publicly available financial and rating agency data, our interpretation of the underlying contracts and policies, and responses by reinsurers. Appropriate reserves are established for any balances we believe may not be collected.
We adopted a new accounting pronouncement, Statement of Financial Accounting Standards 157, Fair Value Measurements, effective January 1, 2008. The new pronouncement revises the definition of fair value and establishes a framework for measuring fair value. The pronouncement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework establishes a three level hierarchy for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value. For example, a quoted market price for an actively traded security on an established trading exchange is considered the most transparent (observable) input used to establish a fair value for that security and is classified as a Level 1 in the fair value hierarchy. An investment valued using multiple broker dealer quotes is considered to be valued using observable input that is not as transparent as a quoted market price on an exchange and is classified as a Level 2. An investment valued using either a single broker dealer quote or based on a cash flow valuation model is considered to be valued based on limited observable input and a significant amount of judgment and is classified as Level 3. For further information on the adoption of the pronouncement and the fair value of our investments, see Note 2 to the Consolidated Financial Statements.
We designate as Level 2 those securities not actively traded on an exchange for which IDC uses multiple verifiable observable inputs including last reported trade, non-binding broker quotes, benchmark yield curves, issuer spreads, two sided markets, benchmark securities, bids, offers, and assumed prepayment speeds.
Most of our investments recorded at fair value are considered available-for-sale with a small portion classified as trading. For investments considered available-for-sale, changes in the fair value are recognized as unrealized gains and losses and are included, net of related tax effects, in stockholders’ equity as a component of other comprehensive income (loss). Gains or losses on these investments are recognized in earnings in the period the investment is sold or an other-than-temporary impairment is deemed to have occurred. Changes in the fair value of investments considered as trading are recorded in realized investment gains and losses in the current period.
We evaluate all our investments on at least a quarterly basis for declines in fair value that represent other-than-temporary impairments. Some of the factors we consider in the evaluation of our investments are:
the extent to which the decline in fair value is attributable to credit risk specifically associated with an investment or its issuer,
the extent to which we believe market assessments of credit risk for a specific investment or category of investments are either well founded or are speculative,
our internal assessments and those of our external portfolio managers regarding specific circumstances surrounding an investment, which can cause us to believe the investment is more or less likely to recover its value than other investments with a similar structure,
Determining whether a decline in the fair value of investments is an other-than-temporary impairment may also involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets or during periods of market dislocation. For example, assessing the value of certain investments requires us to perform an analysis of expected future cash flows or prepayments. For investments in tranches of structured transactions, we are required to assess the credit worthiness of the underlying investments of the structured transaction.
When we judge a decline in fair value to be other-than-temporary, we reduce the basis of the investment to fair value and recognize a loss in the current period income statement for the amount of the reduction. In subsequent periods, we base any measurement of gain or loss or decline in value upon the recorded cost basis of the investment.
Policy acquisition costs, primarily commissions, premium taxes and underwriting salaries, which are directly related to the acquisition of new and renewal premiums, are capitalized as deferred policy acquisition costs and charged to expense as the related premium revenue is recognized. We evaluate the recoverability of our deferred policy acquisition costs each reporting period and any amounts estimated to be unrecoverable are charged to expense in the current period.
We are an insurance holding company and our operating results are primarily derived from the operations of our insurance subsidiaries, all of which principally write medical and other professional liability insurance.
Through our regional underwriting and claims office structure, we are able to gain a strong understanding of local market conditions and efficiently adapt our underwriting and claims strategies to regional conditions. Our regional presence also allows us to maintain active relationships with our customers and be more responsive to their needs. We understand the importance of the professional identity and reputation of our insureds. An important part of our strategy is to emphasize the needs of our insureds throughout our operations. We attempt to further our understanding of those needs through the use of advisory boards and operational committees that ensure we understand the challenges facing our insureds and ways we may best assist them. We also believe that it is important to employ medical and legal professionals throughout our organization, especially on our senior management team. We emphasize our pledge that each insured professional will be treated fairly in all of our conduct with them and that all of our business actions will be informed by the core values that guide our organization: integrity, respect, doctor involvement, collaboration, communication and enthusiasm. We believe our strategy allows us to compete on a basis other than just price. We also believe that our presence in local markets allows us to monitor and understand changes in the liability climate and thus develop better business strategies in a timely manner.
We have sustained our financial stability during difficult market conditions through responsible pricing and loss reserving practices and through conservative investment practices. We are committed to maintaining prudent operating and financial leverage and conservatively investing our assets. We recognize the importance that our customers and producers place on the financial strength of our principal insurance subsidiaries and we intend to manage our business to protect our financial security.
We expect our long-term growth to come through controlled expansion in states where we are already writing business and into additional states within, or adjacent to, our existing business footprint. We also look to expand through the acquisition of other companies or books of business; however, such expansion is opportunistic and cannot be predicted.
We face price-based competition in virtually all of our markets, with some competitors offering coverage at rates that we believe do not meet our long-term profitability goals. Additionally, a number of physicians and hospitals are seeking to lower their costs through the use of alternative risk transfer approaches such as self insurance and risk sharing pools, although these alternatives become less attractive as prices soften in the traditional insurance markets.
PICA’s near-universal licensure will help us become a national writer of medical professional liability insurance, and its experience in markets in which we do not write could make it easier for us to expand our existing medical professional liability lines. Further, its experience in writing high volume, lower cost professional liability policies, such as those for chiropractors, will be advantageous as we expand our allied health care professional liability business.
Mid-Continent, which underwrote approximately $26 million in premium in 2008, also underwrites other lines of professional and general liability coverage. In 2008, Mid-Continent generated approximately $2.7 million of premium for ProAssurance. Business they underwrite, but do not place with ProAssurance, will generate commission income for us.
Our acquisition of Georgia Lawyers was completed in February of 2009, and we believe we can use that business as a springboard for expansion in the legal professional liability market throughout the southeast. We have written legal professional liability
In December 2007 the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research Bulletin (ARB) 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We will adopt the Statement on its effective date. The adoption is not expected to have an effect on our results of operations or financial position.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. The standard revises the definition of fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS 157 is applicable to other accounting pronouncements that require or permit fair value measurements but does not establish new guidance regarding the assets and liabilities required or allowed to be measured at fair value. The statement is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. We adopted SFAS 157 on January 1, 2008. We did not recognize any cumulative effect related to the adoption of SFAS 157 and the adoption did not have a significant effect on our 2008 results of operations or financial condition.
ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. Because it has no other business operations, dividends from its operating subsidiaries represent a significant source of funds for its obligations, including debt service. The ability of our insurance subsidiaries to pay dividends is subject to limitation by state insurance regulations. See our discussions under “Regulation of Dividends and Other Payments from Our Operating Subsidiaries” in Part I, and in Note 16 of our Notes to the Consolidated Financial Statements for additional information regarding the ordinary dividends that can be paid by our insurance subsidiaries in 2009. At December 31, 2008 we held cash and investments of approximately $204 million outside of our insurance subsidiaries that are available for use without regulatory approval. Cash of approximately $135 million will be used in the ProAssurance-sponsored demutualization of PICA, $15 million of which will be a surplus contribution to PICA. The transaction is expected to close in the second quarter of 2009 (see Note 10 to the Consolidated Financial Statements).
The decline in operating cash flows during 2008 as compared to 2007 is primarily attributable to:
The following table provides summarized information regarding our investments as of December 31, 2008:
We held cash and short-term securities of $445.5 million at December 31, 2008 as compared to $260.1 million at December 31, 2007. The increased balance as of December 31, 2008 reflected our intent to hold additional highly liquid assets in response to the instability of credit markets as well as to meet the funding requirements for our planned acquisitions with PICA, Mid-Continent and Georgia Lawyers.
The weighted average effective duration of our fixed maturity securities at December 31, 2008 is 4.0 years; the weighted average effective duration of our fixed maturity securities and our short-term securities combined is 3.5 years. The duration of our fixed maturity securities has shortened due to expected prepayments on mortgage-backed securities increasing.
Due to our financial strength and capital position, these realized losses have not had and are not expected to have an impact on our ability to fund capital requirements. Furthermore, we have accumulated sufficient liquidity in the form of highly liquid assets to meet our capital needs until order is restored to the market. Our investment portfolio continues to be comprised of high quality fixed income securities with approximately 98% of our fixed maturities being either United States government agency or investment grade securities as determined by national rating agencies.
As a result of the turmoil in the U.S. credit markets, the overall value of fixed maturity securities declined in 2008. At December 31, 2008 we continue to hold fixed maturity securities in an unrealized loss position with pretax net unrealized losses of approximately $43 million as compared to pretax net unrealized gains of $20 million as of December 31, 2007. The declines reflect the effect of increased market rates for securities not considered risk-free as well as widespread concern regarding the credit quality of mortgages and financial institutions, the future of the U.S. credit markets in general and fears that the U.S. will experience a severe economic recession. It is our belief that we will recover the recorded cost basis of the fixed maturity securities that we hold in an unrealized loss position. We consider the declines in value to be temporary because we have the intent, and, due to the duration of our overall portfolio and positive cash flows, we have the ability to hold the securities to recovery of book value or maturity.
At December 31, 2008 we held asset-backed securities with a fair value of $834.4 million (recorded cost basis of $854.9 million). In 2008, we realized $9.1 million of losses on asset-backed securities (as reflected in the table above) primarily relating to mortgage-backed securities impacted by the deterioration of the housing market. In performing our other-than-temporary impairment assessment of mortgage-backed securities, management projects expected cash flows, making assumptions regarding expected foreclosure rates and the value of collateral available to recover losses. If estimated cash flows project a loss, an other-than-temporary impairment is realized for the difference between the book value and fair value of the security in accordance with generally accepted accounting principles. In some cases, the impairment loss is greater than the projected loss because market values are depressed as a result of market uncertainty and an aversion to risk by market participants. If we continue to hold these securities, and our estimates of projected loss prove over time to be accurate, the economic loss that we ultimately realize will be less than the impairment loss that has been recorded. Conversely, because our judgments about future foreclosure rates, the timing of expected cash flows and the estimated value of collateral may not prove over time to be accurate, we may experience losses on asset-backed securities that we are not currently projecting.
Financial institutions and asset-backed securities, as a whole, have been particularly affected by the market events noted above. The overall U.S. economy has also experienced a downturn which is expected to continue in 2009. The U.S. Government recently enacted legislation and created several programs to help stabilize credit markets and financial institutions and restore liquidity, including the Emergency Economic Stabilization Act of 2008 (EESA), the Federal Reserve’s Commercial Paper Funding Facility (CPFF) and Money Market Investor Funding Facility and the Federal Deposit Insurance Corporations (FDIC) Temporary Liquidity Guarantee Program. The EESA authorizes the Secretary of the U.S. Treasury to establish the Troubled Asset Relief Program (TARP) for the repurchase of up to $700 billion of mortgage-backed securities and other troubled financial instruments from financial institutions. Among other EESA provisions are tax code revisions, budget measures, guidance related to the administration of TARP, and measures intended to mitigate mortgage foreclosures. Additional government actions are expected in 2009 to stimulate the economy. It is difficult to predict how recently enacted legislation and future government actions will impact the economy, certain industry sectors and specifically the value of certain investments we hold.
We continue to monitor our exposure to financial institutions. Our largest exposures, including both fixed maturity and equity securities, are to Bank of America ($27.3 million), Morgan Stanley ($24.3 million), and Wells Fargo ($20.9 million). Our concentration of exposure to these institutions has increased as a result of the acquisition of Merrill Lynch by Bank of America and the acquisition of Wachovia by Wells Fargo.
In each year reflected in the table, we have estimated our reserve for losses utilizing the actuarial methodologies discussed in critical accounting estimates. These techniques are applied to the data in a consistent manner and the resulting projections are evaluated by management to establish the estimate of the reserve.
Factors that have contributed to the variation in loss development are primarily related to the extended period of time required to resolve medical professional liability claims and include the following:
Activity in our net reserve for losses during 2008, 2007 and 2006 is summarized below:
At December 31, 2008 our gross reserve for losses included case reserves of approximately $1.078 billion and IBNR reserves of approximately $1.301 billion. Our consolidated reserve for losses on a GAAP basis exceeds the combined reserves of our insurance subsidiaries on a statutory basis by approximately $43.4 million, which is principally due to the portion of the GAAP reserve for losses that is reflected for statutory accounting purposes as unearned premiums. These unearned premiums are applicable to extended reporting endorsements (“tail” coverage) issued without a premium charge upon death, disability, or retirement of an insured.
Our risk retention level is dependent upon numerous factors including our risk appetite and the capital we have to support it, the price and availability of reinsurance, volume of business, level of experience and our analysis of the potential underwriting results within each state. We purchase reinsurance from a number of companies to mitigate concentrations of credit risk. Our reinsurance broker assists us in the analysis of the credit quality of our reinsurers. We base our reinsurance buying decisions on an evaluation of the then-current financial strength, rating and stability of prospective reinsurers. However, the financial strength of our reinsurers, and their corresponding ability to pay us, may change in the future due to forces or events we cannot control or anticipate.
We have not experienced significant collection difficulties due to the financial condition of any reinsurer; however, periodically, reinsurers may dispute our claim for reimbursement from them. We have established appropriate reserves for any balances that we believe may not be ultimately collected. Should future events lead us to believe that any reinsurer will not meet its obligations to us, adjustments to the amounts recoverable would be reflected in the results of current operations. Such an adjustment has the potential to be significant to the results of operations in the period in which it is recorded; however, we would not expect such an adjustment to have a material effect on our capital position or our liquidity.
At December 31, 2008 our receivable from reinsurers on unpaid losses is $268.4 million and our receivable from reinsurers on paid losses is $17.8 million. The following table identifies our reinsurers from which our recoverables (net of amounts due to the reinsurer) are $10 million or more as of December 31, 2008:
Our long-term debt as of December 31, 2008 is comprised of the following:
A detailed description of our debt is provided in Note 11 to the Consolidated Financial Statements.
As discussed in Note 11, in mid-December 2008 we extinguished approximately $23 million of our Trust Preferred Securities/Debentures due in 2034 (the TPS/TPS Debentures) for approximately $18.4 million, and recognized a gain on the extinguishment of $4.6 million.
ProAssurance has issued guarantees that amounts paid to the Trusts related to the TPS Subordinated Debentures will subsequently be remitted to the holders of the related TPS.
A schedule of our non-cancelable contractual obligations at December 31, 2008 follows:
For the purposes of this table, all long-term debt is assumed to be settled at its contractual maturity and interest on variable rate long-term debt is calculated using interest rates in effect at December 31, 2008. The anticipated payout of loss and loss adjustment expenses is based upon our historical payout patterns. Both the timing and amount of these payments may vary from the payments indicated. Our operating lease obligations are primarily for the rental of office space and office equipment.
Each of our debt instruments allows for repayment before maturity, at our option, on or after certain dates. For more information on our debt see Note 11 to the Consolidated Financial Statements.
The Board of Directors of ProAssurance authorized $150 million in April 2007, of which $80.3 million was available for use at January 1, 2008, and $100 million in August 2008 for the repurchase of common shares or the retirement of outstanding debt. During the year ended December 31, 2008, we repurchased approximately 1.8 million of our common shares having a total cost of $87.6 million and reacquired debt for $18.4 million. As of December 31, 2008, the repurchase authorization remaining available for use is approximately $74.4 million.
There are risks, as outlined in our Risk Factors in Part 1, that any of these actions could cost us more than our estimates. In particular, we or our insureds may receive adverse verdicts; post-trial motions may be denied, in whole or in part; any appeals that may be undertaken may be unsuccessful; we may be unsuccessful in our legal efforts to limit the scope of coverage available to insureds; and we may become a party to bad faith litigation over the resolution of a claim. To the extent that the cost of resolving these actions exceeds our estimates, the legal actions could have a material effect on our results of operations in the period in which any such action is resolved.
Net realized investment losses during 2008 are almost $51 million as compared to net realized investment losses of $5.9 million in 2007, primarily due to other-than-temporary impairments of $47.0 million in 2008. The 2008 impairments are primarily related to our investments in the preferred stock of Fannie Mae and Freddie Mac, and debt securities issued by Lehman Brothers.
During 2008 our retention rate remained above 85% which is consistent with prior years. The professional liability market place remains extremely competitive and many of our competitors have been aggressive, particularly in pricing their products to retain their existing business as well as in seeking new business.
Equity in earnings (loss) of unconsolidated subsidiaries is derived from our investment interests in three private funds accounted for on the equity method. The funds primarily hold trading portfolios, and changes in the fair value of securities held by the fund are included in current earnings of the fund. The performance of two funds reflects the decline and volatility of equity and credit markets, and we experienced negative returns from our interest in these funds during 2008. The third fund is an early phase private equity fund of funds that is still incurring the costs associated with its startup phase.
Underwriting, acquisition and insurance expenses include share-based compensation expense of approximately $7.8 million and $8.3 million for the years ended December 31, 2008 and 2007, respectively. Share-based compensation expense for 2007 reflects a one-time expense of $1.8 million related to options awarded to our CEO upon his hiring. Awards to retirement eligible employees are fully expensed when granted and were approximately $680,000 and $1.2 million for the years ended December 31, 2008 and 2007.
Guaranty fund assessments, in general, are recorded when they are declared by state regulatory authorities. Periodically we receive refunds of previous assessments. Additionally, certain states permit us to recoup previous guaranty fund assessments through surcharges to our insureds. In 2008 refunds/recoupments exceeded assessments and reduced underwriting expense by $1.3 million. In 2007 net guaranty fund assessments increased underwriting expense by approximately $550,000. The amounts recouped through surcharges collected from our insureds approximated $1.1 million for 2008 and $706,000 for 2007. During both 2008 and 2007, the amounts recouped primarily relate to assessment previously paid to the Florida Insurance Guaranty Association, Inc. We estimate that recoupments in 2009 will approximate $824,000; we are unable to estimate assessments that might be declared in 2009.
Interest expense by debt obligation is provided in the following table:
We did not recognize any valuation allowance related to our deferred tax assets in 2008. We expect to be able to realize the full benefit of deferred tax assets associated with impairment losses because capital gains were recognized during the statutory carryback period that are sufficient to absorb the impairment losses.
In certain of the tables and discussions that follow, we have segregated and separately identified the results that are directly attributable to PRA Wisconsin.
Premiums written declined during 2007 as compared to 2006 due to the effects of increased competition and rate reductions. Additional premiums from the acquisition of PRA Wisconsin partially offset the reduction in premium in our existing book of business (The operations of PRA Wisconsin are included for twelve months in 2007 versus five months in 2006.) In periods of market softening, our strategy is to maintain our underwriting and pricing discipline and grow primarily through selective acquisitions.
Our ongoing commitment to adequate rates and strong underwriting standards affects our willingness to write new business and to renew existing business in the face of this price-based competition. Improvements in loss cost trends have allowed us to reduce rates in certain markets during 2007 and to offer targeted new business and renewal retention programs in selected markets. While this improves retention of business, it decreases our average premium rates.
Hospital and facility coverages are the most significant component of non-physician premiums and represent approximately 6% of our total gross premiums written during both 2007 and 2006. Other non-physician coverages consist primarily of professional liability coverages provided to lawyers and to health care professionals such as dentists and nurses.
We are required to offer extended reporting endorsement or “tail” policies to insureds that are discontinuing their claims-made coverage with us, but we do not market such coverages separately. The amount of tail premium written and earned can vary widely from period to period. Because of this volatility, we separate premiums associated with tail coverages from our other premiums. In 2007, tail premiums totaled $26.4 million (5% of gross written premiums), a decrease of $2.3 million as compared to 2006.
Exclusive of the effect of tail premiums, the decline in premiums earned in 2007 reflects on a pro rata basis declines in gross premiums written during 2006 and 2007, as well as reduced earned premium benefit related to acquisitions.
Exclusive of the amounts in the preceding paragraphs, our reinsurance expense ratio (ceded premiums as a percentage of premiums earned) is 9.0% for the year ended December 31, 2007, as compared to 9.1% for the same period in 2006.
Net Investment Income, Net Realized Investment Gains (Losses); Equity in Earnings (Loss) of Unconsolidated Subsidiaries
The 2007 increase in net investment income from fixed maturities reflects both higher average invested funds and improved yields. The positive cash flows from our insurance operations and the PRA Wisconsin merger significantly increased average invested funds during 2007 as compared to 2006. Market interest rates of the past several years allowed us to consistently invest new and matured funds at rates that exceed the average held in our portfolio. Average yields for our available-for-sale fixed maturity securities during 2007 and 2006 are as follows:
During 2007 we recognized other-than-temporary impairment losses of $6.5 million related to asset-backed bonds (particularly those with subprime loan exposures). We also recognized impairments of approximately $1.1 million related to a passive investment that we hold in a non-public investment pool and impairments of $185,000 related to corporate bonds that have suffered a significant decline in value.
The following table summarizes calendar year net losses and net loss ratios for the years ended December 31, 2007 and 2006 by separating losses between the current accident year and all prior accident years.
PRA Wisconsin accounted for approximately $65.6 million and $34.3 million of our calendar year net losses for the years ended December 31, 2007 and 2006, respectively. PRA Wisconsin is included in our results for all 12 months of our 2007 fiscal year as compared to only 5 months during 2006.
In our exposures greater than $1 million, which are generally reinsured with third parties, we observed a trend that was somewhat counter to the trend discussed above. In particular, given the number of large verdicts experienced by the industry we increased our reserves for these exposures resulting in a $44 million increase to gross losses. The effect of this increase was largely offset by a corresponding increase to the anticipated recoverables from our reinsurers. Our analysis of 2007 data indicates increased claims severity and frequency trends related to losses in both categories. We believe the recognition of these trends represents a cautious approach to what we are observing.
Approximately $670,000 of the 2007 increase in interest expense is related to long term debt ($11.6 million) assumed in the PRA Wisconsin merger. Interest expense also increased because our Subordinated Debentures carry variable rates based on LIBOR and the average LIBOR reset rate for our debt increased an average of approximately half a percentage point in 2007 as compared to 2006. Interest expense by debt obligation is provided in the following table: