Policies in-force as of December 31, 2010 increased by approximately 2%, when compared to the same date in 2009 despite the 6% decline in premium volume. This is primarily due to the mix of volume by state as the average premium per policy varies by state.
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 $33.4 million for the year ended December 31, 2010, compared to $34.4 million for the year ended December 31, 2009.
Managing general agent fees for the period ended December 31, 2010 were $11.0 million and $10.3 million for the same period of 2009, an increase of $0.7 million. The increase in MGA fees is primarily related to the mix of business by state.
Other fee income for the period December 31, 2010 was $0.4 million, a $0.1 million increase 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.
Our investment portfolio is generally highly liquid and consists substantially of readily marketable, investment-grade debt and equity securities. Net investment income is primarily comprised of interest and dividends earned on these securities and related investment expenses, net of realized investments gains and losses. Net investment income, net of realized investment gains was $0.7 million and $0.3 million for the period ended December 31, 2010 and 2009, respectively. The better investment performance was mainly driven by an increase in realized gains on the equity securities portfolio as investment market conditions continued to improve during the year.
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. Our actuaries perform a rolling accident year actuarial analysis each quarter and establish or adjust (for prior accident quarters) reserves, based upon their 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 quarter their estimate of ultimate loss and loss adjustment expenses is evaluated by accident quarter, 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, 2010, was $61.6 million compared to $62.8 million for calendar year 2009.
Premiums receivable as of December 31, 2010, decreased $2.1 million to $33.1 million compared to $35.2 million as of December 31, 2009. The balance represents amounts due from AAIC’s insureds and the decrease is directly attributable to the decrease in AAIC’s premium writings during 2010. The Company’s policy is to write off receivable balances immediately upon cancellation or expiration, and the Company does not consider an allowance for doubtful accounts to be necessary.
Reinsurance recoverables as of December 31, 2010, decreased $9.8 million, to $34.0 million compared to $43.8 million as of December 31, 2009. The decrease is directly related to AAIC’s release of ceded reserves associated with the Company’s strategy to accelerate the settlement of claims in the amount of $6.4 million and reinsurance recoverable on paid losses of $3.4 million. AAIC maintains a quota-share reinsurance treaty with its reinsurers in which it cedes approximately 70% of both premiums and losses. The $34.0 million represents the reinsurers’ portion of losses and loss adjustment expense, both paid and unpaid.
Prepaid reinsurance premiums as of December 31, 2010, decreased $1.5 million to $23.6 million compared to $25.1 million as of December 31, 2009. The decrease results from AAIC’s decline in premium growth and represents premiums ceded to its reinsurers which have not been fully earned.
Property and equipment, net of depreciation, increased $0.1 million to $2.1 million as of December 31, 2010, compared to $2.0 million as of December 31, 2009. The increase is attributable to capitalized software of $0.2 million related to the development of a web based quoting technology, and normal operational software and hardware purchases of $0.8 million, offset by $0.7 million of depreciation on existing computer software and hardware, furniture and leasehold improvements in both its agencies and corporate headquarters.
Other receivables as of December 31, 2010 remained flat overall when compared to December 31, 2009. The balances represent TrustWay receivables from insurance carriers for direct bill commissions, which increased $0.3 million, offset by $0.3 million in collections for balances due to MGA from insurance carriers for amounts owed in accordance with the terms of its managing general agency agreements.
Accounts payable and accrued expenses as of December 31, 2010, increased approximately $0.2 million from December 31, 2009 to $8.8 million from $8.6 million. The increase is primarily due to $0.1 million in accounts payable and accrued expenses for payroll, $0.2 million for an amount due to former owners related to acquisitions, $0.3 million due to carriers, offset by a $0.4 million decrease in deferred revenue.
Reinsurance payable as of December 31, 2010 increased $0.9 million to $29.4 million, compared to $28.5 million as of December 31, 2009. The amount represents premiums owed to the Company’s reinsurers. AAIC maintains seven quota-share reinsurance treaties with its reinsurers in which it cedes approximately 70% of the both premiums and losses for the majority of its states. The increase is attributable to a reimbursement for premiums received from reinsurers of $3.0 million, offset by $2.0 million due to lower AAIC’s premium writings in Florida, Georgia and Louisiana.
Notes payable as of December 31, 2010, decreased $0.6 million to $0.2 million compared to $0.8 million as of December 31, 2009. The change resulted primarily from the final payments applied to the principal balances payable on promissory notes to the Company’s Chairman.
net purchases of investments in the amount of $1.8 million, $0.6 million increase in purchases of computer software and hardware and leasehold improvements in our headquarters and in Trust Way and $0.1 million in acquisitions, offset by $1.8 million of cash transferred to restricted cash in the prior year.
On June 30, 2010, the Company entered into a First Amendment Agreement (the “First Amendment”) to the Loan Agreement between the Company and Wells Fargo Bank, N.A. (as successor in interest by merger to Wachovia Bank, N.A.) (the “Lender”). The First Amendment amends the Loan Agreement, dated July 17, 2009, between the Company and the Lender (the “Loan Agreement”).
In the past the Company received loans from its Chairman and former Division President of the Company to meet some of its financial obligations. Hence, the Company’s related party debt consists of unsecured promissory notes payable to its Chairman. The promissory notes carried an interest rate of 8% per annum and provided for the repayment of principal on an annual basis. The above mentioned notes payable were fully paid off as of June 30, 2010. The Company’s liquidity and capital needs in the future will be met through premium, commission and fee income.
On December 22, 2005, the Company consummated the private placement of 5,000 of the Trust’s floating rate capital securities, with a liquidation amount of $1,000 per capital security (the “Capital Securities”). In connection with the Trust’s issuance and sale of the Capital Securities, the Company purchased from the Trust 155 of the Trust’s floating rate common securities, with a liquidation amount of $1,000 per common security (the “Common Securities”). The Trust used the proceeds from the issuance and sale of the Capital Securities and the Common Securities to purchase $5,155,000 in aggregate principal amount of the floating rate junior subordinated debentures of the Company (the “Debentures”). The Capital Securities mature on December 31, 2035. The Capital Securities require quarterly distributions by the Trust to the holders of the
Capital Securities, at a floating rate of three-month LIBOR plus 5.75% per annum, reset quarterly. Distributions are cumulative and will accrue from the date of original issuance but may be deferred for a period of up to 20 consecutive quarterly interest payment periods, if the Company exercises its right under the Indenture to defer the payment of interest on the Debentures.
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, 2010, AAIC’s statutory Capital and Surplus was $12.1 million.
AssuranceAmerica is required to make certain estimates and assumptions when preparing its financial statements and accompanying notes in accordance with GAAP. One area which requires estimations and assumptions is the establishment of loss and LAE reserves. Loss and LAE reserves are established to reflect the estimated costs of paying claims and claims expenses under insurance policies we have issued. These reserves are an approximation of amounts necessary to settle all outstanding claims, including claims of which we are aware and claims that have been incurred but not reported (“IBNR”) as of the financial statement date.
At December 31, 2010 and 2009, we had $9.9 million and $12.3 million of net loss and LAE reserves, which included $5.2 million and $6.4 million of case reserves and $4.7 million and $5.9 million of IBNR reserves. During 2010, the Company’s case reserves decreased $1.2 million and IBNR reserves declined $1.1 million. This decrease in reserves was primarily driven by a change in claims strategy, implemented during 2009, to settle claims quicker. This change resulted in a 21.8% reduction in outstanding claim counts measured as of December 31, 2010 as compared to December 31, 2009.
The decrease in gross reserves was $8.7 million primarily due to an acceleration of bodily injury claim settlements in the liability line of business of $5.9 million and a decline in auto physical damage of $2.8 million, resulting from improved claim handling, lower average frequency and severity in this line of business.
Our best estimates of the appropriate amounts for our reserves as of December 31, 2010 and 2009 are included in our financial statements for those years. Our goal is to establish the total reserves and determine the adequacy of reserves to cover all loss costs, while sustaining minimal variation from the time reserves are initially established until losses are fully developed. At the point in time when the reserves are established, we have no way of knowing whether our reserve estimates will prove to be high or low and, thus, whether future reserve development will be favorable or unfavorable.
On a quarterly basis, the Company’s external 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 external actuaries.
The following table provides the estimated changes in the liability and related payments made for the calendar years ended December 31, 2010 and 2009:
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. During the year ended December 31, 2010, our loss and LAE ratio increased 1.7%, which reflects 6.5% unfavorable loss development for prior years due to an increase in incurred severity in the bodily injury line as well as increased PIP losses due to fraud in Florida, offset by improvement in accident year 2010 losses in both incurred severity (average cost per claim) and frequency. The increase in bodily injury is primarily due to higher medical costs and the Company has increased rates and reduced writings in Florida in order to minimize its losses in this state and improve profit margins. We continuously monitor internal and industry-wide severity trends and adjust rates as appropriate to compensate for the higher loss costs.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. The Company reports as assets (a) the estimated reinsurance recoverable on unpaid losses, including an estimate for losses incurred but not reported, and (b) amounts paid to reinsurers applicable to the policies-in-force.
Ceded reinsurance for all programs reduced AssuranceAmerica’s incurred losses and LAE by $61.6 million and $62.8 million for the twelve months ended December 31, 2010 and 2009, respectively.
Reinsurance assets include balances due from other contracted reinsurers under the terms of reinsurance agreements. Amounts applicable to ceded unearned premiums ceded loss payments and ceded claims liabilities are reported as assets in the accompanying balance sheets. Under the reinsurance agreements, the Company has four reinsurers that are required to collateralize the reinsurance recoverables. As of December 31, 2010, all reinsurers have provided a letter of credit or a secured trust account to provide security sufficient to satisfy AssuranceAmerica’s obligations under the reinsurance agreement. The Company believes the fair value of its reinsurance recoverables approximates their carrying amounts.
The Company’s reinsurance recoverable balances amounted to $34.0 million and $43.8 million as of December 31, 2010 and 2009, respectively. The recoverable includes ceded unpaid losses and loss adjustment expenses of $23.4 million and $29.7 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 reinsurers under the terms of reinsurance agreements in the amount of $10.6 million and $14.1 million as of December 31, 2010 and 2009, respectively. The paid loss recoverables are in good standing as of December 31, 2010.
We assess the carrying amount of identifiable intangible assets, long-lived assets if events or changes in circumstances indicate that such carrying amount may not be recoverable. We assess the carrying amount of our goodwill at least annually. Factors we consider important, which could trigger an impairment review, include the following: