The following summary sets forth selected financial data with respect to AIIG for the five fiscal years ended December 31, 1997. The balance sheet and income statement data have been derived from AIIG's consolidated financial statements, which have been audited by Johnson Lambert & Co. (1994-1997) and Altschuler, Melvoin and Glasser (1993), AIIG's independent auditors. The data set forth below should be read in conjunction with the audited financial statements and notes thereto included elsewhere herein.
The accompanying 1993 financial statements have been reclassified to conform with the 1994-1997 presentation.
Premiums earned increased by 9% in 1997 to $5,852,286 from $5,386,388 in 1996. Premiums earned for 1996 decreased by 2% from $5,494,413 reported in 1995. In 1997, 1996, and 1995 premiums earned includes $720,298, $693,976 and $611,916, respectively resulting from reductions in the ultimate estimated premium ceded pursuant to retrocession agreements in effect during 1989 through mid-1993. Ultimate premiums are dependent on loss experience under the agreements and are reevaluated as ultimate losses are reevaluated. Excluding the effect of the reduction of estimated ultimate premiums ceded, 1997 premiums earned increased by 9% as compared to 1996 premiums earned, and 1995 premiums earned decreased by 4% from 1994. The increase in earned premiums in 1997 resulted from an increase in the number of insureds, attracted through a "step plan" in which new insureds are offered premium discounts for favorable loss history. The step plan was initiated during 1995, but has only recently had significant impact. The reduction in earned premiums in 1996, excluding the effect of the reduction of estimated ultimate premiums ceded, primarily reflects the increased competition in the accountants professional liability market which has placed downward pressure on premiums.
Unrealized gain on investments net of tax is $1,016,956 at December 31, 1997 as compared to $424,621 at December 31, 1996. AIIG considers all of its investment portfolio to be available for sale and accordingly all investments are reported at market value, with changes in net unrealized gains and losses reflected as an adjustment to stockholders' equity. The increase in net unrealized gain as of December 31, 1997 as compared to 1996 is primarily attributable to the increase in the proportion of invested assets in equity securities which experienced significant market value increases during 1997.
AIIG continues to invest in high grade debt and equity securities.
The Company's cash needs consist of settlement of losses and expenses under its reinsurance treaties and funding day-to-day operations. Management expects to be able to meet these cash needs from cash flows arising from its investment portfolio. Because substantially all of the Company's assets are marketable securities, the Company has sufficient flexibility to provide for unbudgeted cash needs which may arise, without resorting to borrowing.
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions, and general economic trends. These anticipated trends are monitored based on actual development, and are modified if necessary.
The following table shows the development of the estimated liability for the previous nine years of the Company's P/C operations:
The above table presents the development of balance sheet liabilities for 1988 through 1997 as of year end 1997. The top line of the table shows the original recorded unpaid liability for losses and LAE recorded at the balance sheet date for each of the indicated years.
The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, the 1994 year end liability was originally $21,264,000. As of December 31, 1997, the Company had paid $7,721,000 of the currently estimated $13,635,000 of losses and LAE that had been incurred for 1994 and prior years through the end of 1997; thus an estimated $5,914,000 in losses incurred through 1994 remain unpaid as of the current financial statement date.