The discussion in this Item includes forward-looking statements and should be read in the context of the risks, uncertainties and other variables referred to below under the caption “Forward-Looking Statements.”
Following development of a larger and more diverse franchise in 2005 and 2006, which resulted in significant premium growth, the Company encountered challenges in 2007. Despite efforts to operate profitably, the emergence of a claims ratio higher than previously estimated, resulting primarily from our rapid growth, caused a loss for the year ended December 31, 2007. Throughout 2007, the Company implemented actions to address these challenges and improve the claims and expense ratios, including the following:
Net premiums earned were $192.8 million and $186.8 million in 2007 and 2006, respectively, and gross premiums written were $184.9 million and $202.4 million in 2007 and 2006, respectively. The Company reported a net loss of $18.6 million for the year ended December 31, 2007, compared with net income of $11.4 million for the year ended December 31, 2006.
As of December 31, 2007, the statutory surplus was $96.0 million, as compared with $95.6 million as of December 31, 2006. The unpaid claims and claim adjustment expenses stood at $74.7 million and $77.9 million at December 31, 2007 and 2006, respectively, of which unpaid claims and claim adjustment expenses attributable to ongoing nonstandard personal automobile lines was $55.7 million and $47.7 million, respectively.
The Company limited its nonstandard personal auto insurance business to Florida until the fourth quarter of 2003, when it began writing policies in Texas. The Company began writing policies in Arizona and Nevada in 2004, in California, with an independent managing general agency, in 2005, and in South Carolina in 2006, and we entered New Mexico in the first quarter of 2007. The Company markets its policies through 3,700 independent agency locations in Arizona, Florida, Nevada, New Mexico, South Carolina and Texas and one general agency in California that markets through approximately 1,000 insurance broker locations. Beginning in 2005, significant growth has been realized as a result of these expansion activities, which has increased the operating leverage, the claims ratio and the overall financial and operational risk profile of the Company.
(3) Commissions, change in deferred acquisition costs, underwriting expenses and operating expenses (insurance subsidiaries only) are offset by agency revenues and are stated as a percentage of net premiums earned.
The Company believes it is pursuing a strategy that has the potential to build a substantially larger, competitively distinctive and successful franchise in the nonstandard personal auto business over time and is endeavoring to manage its investments and risks to achieve this result. These risks and other challenges, occurring in rapidly changing economic, competitive, regulatory and claims environments, are greater than and in some cases different from those to which the Company has previously been subject in writing nonstandard personal auto insurance. The Company’s operating and financial results vary from period to period as a result of numerous factors inherent in the insurance business, many of which are affected by such changes.
Until 2005, the Company limited its growth due primarily to capital constraints. However, capital restructuring transactions, along with key investments in operations, have permitted management to pursue a more aggressive, geographically diversified expansion plan beginning in 2005.
Gross premiums written in 2007 decreased 9% as compared to 2006 as a result of rate increases and selective reduction in the agency force to reduce unprofitable business. The following table presents gross premiums written by region in thousands of dollars:
Net investment income increased $2,217,000 (32%) in 2007 primarily due to the 17% increase in average investments and the increase in Bonds available for sale, which provide higher returns than Short-term investments. At December 31, 2007 Bonds available for sale comprised 73% of Investments versus 57% at December 31, 2006. The return on average investments was 5.0% in 2007 versus 4.5% in 2006.
The Company recorded net realized capital gains of $4,629,000 and $137,000 in 2007 and 2006, respectively. In November 2007, the Company completed the sale of General Agents and recorded a net gain of $4,560,000. See “Significant Corporate Transactions - Sale of General Agents.” Variability in the timing of net realized capital gains and losses should be expected.
Other income has decreased in 2007 as a result of the continued runoff of the commercial auto claims under the reserve reinsurance cover agreement. This item is primarily comprised of recognition of the deferred reinsurance gain from the reserve reinsurance cover agreement. At December 31, 2007, $134,000 remained in Other liabilities to be recognized in Other income in the future. For the year ended December 31, 2007, $10,000 was recognized in other income.
Claims for “extra-contractual” liability arise when a claim is originally denied or the claimant asserts that a claim has been handled inappropriately, and the claimant further asserts that such denial or allegedly inappropriate response was improper or in “bad faith.” In such cases, which tend to arise in cases involving serious injury or death, it is not unusual for the amount of the claim to exceed by a substantial amount the policy limits that would otherwise be applicable. Where the Company becomes aware of such a potential claim, it typically consults with outside counsel and, if appropriate, seeks to settle the claim on terms as favorable as possible in light of all the relevant circumstances. The amounts required for settlement of such claims, and the potential award if a case cannot be settled on acceptable terms, vary widely depending on the specific facts of the claim, the applicable law and other factors.
Policy acquisition costs include commission expense, change in deferred policy acquisition costs, premium taxes, marketing expenses and some underwriting expenses. The decrease of $4,498,000 (11)% in 2007 is primarily due to decreases in commission rates, marketing expenses and underwriting expenses and a premium deficiency charge, net of anticipated investment income, of $623,000 for expected underwriting losses on the South Central business. The decrease in premiums written also contributed to the decrease in Policy acquisition costs. The ratio of Policy acquisition costs to Net premiums earned was 18% and 21% for 2007 and 2006, respectively. The decrease in the ratio of Policy acquisition costs to Net premiums earned in 2007 was primarily due to decreases in commission rates, marketing expenses and some underwriting expenses.
The increase in interest expense is primarily related to the $18.0 million of Subordinated debentures issued in December 2006. See “Capital Transaction - 2006 Subordinated Debentures.” In 2007, interest for a full year was recorded versus approximately one month in 2006.
The Company recorded deferred tax expense in 2007 as a result of increasing the valuation allowance for Deferred Federal income taxes. The Company considered it appropriate to increase the valuation allowance, see “Liquidity and Capital Resources - Net Operating Loss Carryforwards.”
In December 2006, the Company organized GAINSCO Statutory Trust II, which issued $18 million of 30-year capital securities. The statutory trust is not consolidated with the Company. The capital securities require quarterly payments of interest at a floating interest rate equal to the 3-month LIBOR (London interbank offered rate for U.S. dollar deposits) plus a margin of 3.75%. The capital securities will mature on March 15, 2037 and are redeemable at the Company’s option beginning after March 15, 2012, in whole or in part, at the liquidation amount of $1,000 per capital security. Taken together, the Company’s obligations provide a full, irrevocable and unconditional guarantee of payments of distributions and other amounts due on the capital securities, subject to the subordination provisions of the agreements.
GAN provides administrative and financial services for its wholly owned subsidiaries. GAN needs cash during 2008 primarily for administrative expenses and interest on the Subordinated debentures and the Note payable. GAN has approximately $1.8 million in short-term investments and marketable securities that can be used for general corporate purposes. Another source of cash to meet obligations is statutorily permitted dividend payments from its insurance subsidiary. Statutes restrict the payment of dividends by the insurance company to the available surplus funds. The maximum amount of cash dividends that may be declared 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. For 2008, the maximum amount of cash dividends that may be paid without regulatory approval is approximately $9.6 million. GAN believes the cash available from its short-term investments should be sufficient to meet its expected obligations for 2008.
As a result of losses in prior years, as of December 31, 2007 the Company had net operating loss carryforwards for tax purposes aggregating $74,720,000. These net operating loss carryforwards of $13,420,000, $33,950,000, $13,687,000, $633,000 and $13,030,000, if not utilized, will expire in 2020, 2021, 2022, 2023 and 2027, respectively. As of December 31, 2007, the tax benefit of the net operating loss carryforwards was $25,405,000, which is calculated by applying the Federal statutory income tax rate of 34% against the net operating loss carryforwards of $74,720,000. The $13,030,000 that will expire in 2027 was generated in 2007.
The Company considers available evidence, both objective and subjective, including historical levels of income, expectations and risks associated with estimates of future taxable income in assessing the need for the valuation allowance. In the fourth quarter of 2006, management’s analysis of available evidence, both objective and subjective, concluded it was more likely than not that additional portions of this asset would be used in future periods so the valuation allowance was reduced by $5.5 million, producing a tax benefit of $5.5 million in the fourth quarter of 2006. The Company required both sufficient capital to support its expanded operations and cover fixed costs and evidence that business written could achieve margins comparable to those found in other property and casualty insurers before it was appropriate to reduce the valuation allowance relating to net operating loss carryforwards. Until the fourth quarter of 2006, such evidence was not available.
The primary sources of the insurance subsidiary’s liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At December 31, 2007, the insurance subsidiary held short-term investments and cash that the insurance subsidiary believes is at adequate liquidity for the payment of claims and other short-term commitments.
Net cash used for operating activities was $18,277,000 for 2007 versus cash provided by operating activities of $20,615,000 for 2006. The increase in cash used for operating activities in 2007 was primarily attributable to the increase in C & CAE payments for nonstandard personal auto. The cash provided for 2006 was primarily attributable to the growth in premium writings in 2006.
In early 2008, several bond insurers had their credit ratings downgraded or placed under review by the major nationally recognized credit rating agencies. These downgrades were as a result of a perceived weakening by the rating agencies of the insurers’ financial strength as a result of losses these insurers incurred from mortgage-backed and asset-backed securities they had insured that were experiencing increased delinquencies and defaults from weakening of the economy in general and weakening within the housing market in particular. In light of the market conditions, during 2007, we performed a detailed review of our asset-backed securities to identify the extent to which our asset values may have been impacted by direct exposure to the subprime mortgage loan disruption, as well as broader credit market events. Certain of our mortgage-backed securities are collateralized by residential mortgage loans that are considered subprime. The cost and fair value of these securities totaled $1,639,000 and $1,553,000 at December 31, 2007, respectively. Our practice for acquiring and monitoring subprime mortgage-backed securities takes into consideration the quality of the originator, quality of the servicer, security credit rating, underlying characteristics of the mortgages, borrower characteristics, level or credit enhancement in the transaction, and bond insurer strength, where applicable. All of our subprime securities are rated investment grade. Of this amount, 0.5% has a based Standard and Poor’s rating of “AAA,” and the remaining 99.5% an “A” rating. We have $8,427,000 of our securities in Alt-A securities, which are nonprime collateralized mortgage obligations. The cost and fair value of these investments were $8,382,000 and $8,331,000, respectively, at December 31, 2007. The Company expects to receive all payments on these securities in accordance with their original contractual term as the securities approach their maturity dates or sooner if market yield for such securities decline. The Company has determined that none of the subprime securities are impaired because of credit quality or because of any company or industry specific event. Based on management’s evaluation and intent, none of the unrealized losses are considered other than temporary.
Funds held by reinsured company is primarily comprised of amounts held in trust by various insurance departments for the benefit of General Agents. Under the terms of the sale, General Agents is obligated to return these amounts to the Company when they are released by the insurance department.
As of December 31, 2007 and 2006, in respect of its runoff lines, the Company had $10,275,000 and $15,864,000, respectively, 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. On February 7, 2002, the Company announced it had decided to discontinue writing commercial lines insurance due to continued adverse claims development and unprofitable results. The Company has been settling and reducing its remaining inventory of commercial claims. See “Business Operations - “Discontinuance of Commercial Lines.” As of December 31, 2007, 47 runoff claims remained versus 73 at December 31, 2006. The average runoff claim reserve was approximately $219,000 per claim and $217,000 per claim at December 31, 2007 and December 31, 2006, respectively.
Bonds available for sale are stated at fair value with changes in fair value recorded as a component of comprehensive income. Short-term investments are stated at cost. The “specific identification” method is used to determine costs of investments sold. Provisions for possible losses are recorded only when the values have experienced impairment considered “other than temporary” by a charge to realized losses resulting in a new cost basis of the investment. The Company regularly monitors its portfolio for pricing changes, which might indicate potential impairments, and performs reviews of securities with unrealized losses. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to (i) fundamental factors specific to the issuer, such as financial conditions, business prospects or other factors, or (ii) market-related factors, such as interest rates. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” for a discussion of variability of estimates.
The process of establishing claims reserves is imprecise and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured claim and the settlement of the claim. The actual emergence of claims and claim adjustment expenses may vary, perhaps materially, from the Company’s estimates thereof, because (a) estimates of liabilities are subject to large potential revisions, as the ultimate disposition of claims incurred prior to the financial statement date, whether reported or not, is subject to the outcome of events that have not yet occurred (e.g., jury decisions, court interpretations, legislative changes (even after coverage is written and reserves are initially set) that broaden liability and policy definitions and increase the severity of claims obligations, changes in the medical condition of claimants, public attitudes and social/economic conditions such as inflation), (b) estimates of claims do not make provision for extraordinary future emergence of new classes of claims or types of claims not sufficiently represented in the Company’s historical data base or which are not yet quantifiable, and (c) estimates of future costs are subject to the inherent limitation on the ability to predict the aggregate results of future events.
Our growth strategy necessarily entails increased financial and operational risks and other challenges that are greater than and different from those to which we have previously been subject as the nature of our business has changed and grown. Generally, new business initially produces higher claim ratios than more seasoned in-force business, and this factor is likely to be magnified to the extent that we enter multiple new states and market areas within a short period of time. Furthermore, it amplifies the importance of our ability to assess any new trends timely and accurately and respond effectively.
Our growth requires additional personnel resources, including management and technical underwriting, claims and servicing personnel, relationships with agents and vendors with whom we have not previously done business, and additional dependence on operating systems and technology. As a result, we often do not have as much reliable historical information about costs and trends in claims as would an insurer with more experience in the markets in which we grown.
We have recently made significant operational changes in management of our claims administration to accelerate the recognition and resolution of claims. These changes may result in an increase in the amount of aggregate claim settlements and cause our ultimate claim and claim adjustment expense to increase in comparison to prior periods. In addition, changing claims trends increase the uncertainties which exist in the estimation process and could lead to inaccurate estimates of claim and claims adjustment expense.
The following table discloses the amount of the gross unpaid claims and claim adjustment expense for each year presented and separately identifies the amount of IBNR for each material line of business.
In analyzing claims data for the fourth quarter of 2006, it became apparent that the underlying accident quarter data reflected variances from historical patterns and required further analysis. Based on that analysis, we made adjustments to account for these variances, as follows:
During the fourth quarter of 2006, we analyzed the time from loss date that it took to record a claim in our system. We noticed a significant reduction in the number of days from loss date to the date recorded, starting during late second quarter 2006, with major acceleration occurring during the fourth quarter of 2006, which we believe is the result of changes we have made in our claim practices. This speed-up in exposure recognition implies future development patterns will be different from historical patterns which are used to estimate ultimate liabilities. We attempted to take this into consideration in our estimate of reserves through various adjustments to our loss development factors and utilizing actuarial judgment.
During 2006, we greatly expanded our writings, diversifying both into other states, and, within states, into different geographical areas. We also expanded into various other driver classes, namely into the internationally licensed segment. Expanding into different geographical segments meant writing more business in jurisdictions with different judicial systems and negligence laws, including areas that may be more susceptible to insurance fraud. These changes can affect development patterns, so that historical patterns may not be reflective of future patterns. Although no adjustments were recorded in the fourth quarter of 2006 as a result of changes in these assumptions, they are closely monitored as we seek to identify any deviations from existing patterns.
The trend that had been identified in 2006 continued and accelerated in 2007, and we made adjustments to take this into account. We attempted to take the acceleration of claims settlement rates into consideration by utilizing a Berquist-Sherman adjustment, selection of loss development factors and use of actuarial judgment.
The law of large numbers applies to selecting development patterns; i.e. the confidence of a point estimate is improved by increasing the amount of data used to develop the estimate; however, the data must be reasonably homogeneous, and exhibit little variation over time. Changes associated with the assumptions listed above affect the homogeneity of our data, and the variance associated with the loss development factors derived from the data. This implies that the variance around our point estimate has increased over time, or that the confidence interval around our point estimate has widened over time. This in turn implies there is greater volatility associated with our point estimate and we attempted to take this uncertainty into consideration with our estimates for the fourth quarter of 2006 and for 2007.
We utilize somewhat different processes for the estimation of reserves in the runoff line and in the nonstandard personal automobile business. We consider our commercial runoff business (which consists primarily of commercial auto and general liability coverages) to be long-tailed. For most of this business, we use the same methods employed for our personal lines business, namely the paid loss method and the incurred loss method, as well as other methods not utilized for personal lines. For our specialty and umbrella lines, for which we have fewer years of experience, we use an expected loss ratio method and test the results with a Bornheutter-Ferguson method.
These estimates were set forth in a detailed presentation to the Audit Committee of the Board of Directors, together with underlying statistical information on which the estimates are based. The Audit Committee met each quarter with management and a representative of the independent actuarial consulting firm and engaged in a detailed discussion regarding the reserve selections and underlying statistical data.
Claims that have occurred, but have not been reported to us.
We compute unpaid claims and claim adjustment expense (excluding claims department expense IBNR) for the above four provisions on a combined basis, by first estimating ultimate claims and claim adjustment expense (CAE) amounts for each accident quarter, and then subtracting from these amounts the cumulative paid and case reserves on known claims for each accident quarter. There are several methods we utilize to estimate ultimate loss and LAE amounts:
In addition, ultimate claim counts are estimated using closed and reported claim count data. Ultimate claims and CAE estimates are divided by ultimate claim count estimates to determine an ultimate claim severity, which provides a reasonability check for our ultimate loss and ALAE amounts. If severities are in line with expectations, we have an additional degree of confidence in our estimates.
In arriving at each individual point estimate of reserves for IBNR claims and CAE in each separate data subset, our actuarial staff considers the likely predictive value of the various methodologies employed in light of internal and external variables that may impact the reserves. For each data subset in each accident quarter, the point estimate selected is not necessarily one of the points produced by any particular methodology utilized, but may be another point that takes into consideration each of the points produced by the several loss methodologies used and is based on actuarial judgment. For example, the current accident quarter may not have enough paid claims data to rely upon, leading our actuarial staff to conclude that an incurred development methodology provides a better estimate than a paid development methodology. In such a case, more weight would be given to an incurred methodology for that particular accident quarter.
We believe it is reasonably likely that our loss costs could increase or decrease by 2% from current estimates, as remaining claims are recorded and resolved. Loss costs reflect the incurred loss per unit of exposure and are the product of frequency and severity. A 2% increase or decrease in our loss costs would result in unfavorable or favorable development of $7 million (assuming the size of the Company remains constant). This estimate of sensitivity is informational only, is not a projection of future results and does not take into account possible effects of extraordinary litigation events (such as class action claims).
The Company considers available evidence, both objective and subjective, including historical levels of income, expectations and risks associated with estimates of future taxable income in assessing the need for the valuation allowance. In the fourth quarter of 2006, management’s analysis of available evidence, both objective and subjective, concluded it was more likely than not that additional portions of this asset would be used in future periods so the valuation allowance was reduced by $5.5 million, producing a tax benefit of $5.5 million in the fourth quarter of 2006. The Company required both sufficient capital to support its expanded operations and cover fixed costs and evidence that business written could achieve margins comparable to those found in other property and casualty insurers before it was appropriate to begin reducing the valuation allowance relating to net operating loss carryforwards. Until the fourth quarter of 2006, such evidence was not available.
As of December 31, 2007 and 2006, the net deferred tax asset before valuation allowance was $28,951,000 and $25,862,000, and the valuation allowance was $28,699,000 and $15,516,000, respectively.
The Company has evaluated tax contingencies in accordance with FIN No. 48. At December 31, 2007, the Company does not have any uncertain tax positions.
In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS 141(R) changes the accounting for acquisitions specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and changes when restructurings related to acquisitions can be recognized. The standard is effective for fiscal years beginning on or after December 15, 2008 and will only impact the accounting for acquisitions that are made after adoption.
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of Statement No. 115”. Statement No. 159 permits a company to choose, at specified election dates, to measure at fair value certain eligible financial assets and liabilities that are not currently required to be measured at fair value. The specified election dates include, but are not limited to, the date when an entity first recognizes the item, when an entity enters into a firm commitment or when changes in the financial instrument causes it to no longer qualify for fair value accounting under a different accounting standard. An entity may elect the fair value option for eligible items that exist at the effective date. At that date, the difference between the carrying amounts and the fair values of eligible items for which the fair value option is elected should be recognized as a cumulative effect adjustment to the opening balance of retained earnings. The fair value option may be elected for each entire financial instrument, but need not be applied to all similar instruments. Once the fair value option has been elected, it is irrevocable. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. Statement No. 159 is effective as of the beginning of fiscal years that begin after November 15, 2007. In February 2008, the FASB issued Staff Position 157-b, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities until January 1, 2009. We are currently determining the impact whether fair value accounting is appropriate for any of our eligible items, if any, which SFAS No. 159 may have on our consolidated financial position or results of operations and financial condition.
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value investments. Statement No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, Statement No. 157 does not require any new fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods of those fiscal years and is required to be adopted by the Company in the first quarter of 2008. We do not anticipate that SFAS No. 157 will have a material effect on our consolidated financial position or results of operations and financial condition, although we are continuing to evaluate the full impact of the adoption of SFAS No. 157.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes.” FIN 48 prescribes a comprehensive financial statement model of how a company should recognize, measure, present, and disclose uncertain tax positions that the Company has taken or expects to take in its income tax returns. Guidance is also provided on derecognition, classification, interest and penalties, interim accounting, and disclosure. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial derecognition amounts would be reported as a cumulative effect of a change in accounting principle, as an adjustment to the opening balance of retained earnings for the 2007 fiscal year. FIN 48 applies to all tax positions and is effective for the Company beginning in fiscal year 2007. The adoption of FIN 48 did not affect the Company’s consolidated financial position or results of operations and financial condition and no cumulative effect adjustment was required to the January 1, 2007 balance of retained deficit.
In October 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” SOP 05-1 provides accounting guidance for DAC associated with internal replacements of insurance and investment contracts other than those set forth in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs through the exchange of an existing contract for a new contract, or by amendment, endorsement or rider to an existing contract, or by the election of a feature or coverage within an existing contract. The Company adopted SOP -5-1 as of January 1, 2007 and has determined there has been no impact on our consolidated financial position or results of operations and financial condition.
These forward-looking statements reflect our current views, but they are based on assumptions and are subject to risks, uncertainties, and other variables which you should consider in making an investment decision, including, in addition to the terms discussed under “PART I. ITEM 1A. Risk Factors” of this document, (a) operational risks and other challenges associated with rapid growth into new and unfamiliar markets and states, (b) adverse market conditions, including heightened competition, (c) factors considered by A.M. Best in the rating of our insurance subsidiary, and the acceptability of our current rating, or a future rating, to agents and customers, (d) the Company’s ability to adjust and settle the remaining claims associated with our exit from the commercial insurance business on terms consistent with our estimates and reserves, (e) the adoption or amendment of legislation, uncertainties in the outcome of litigation and adverse trends in litigation and regulation, (f) inherent uncertainty arising from the use of estimates and assumptions in decisions about pricing and reserves, (g) the effects on claims levels resulting from natural disasters and other adverse weather conditions, (h) the availability of reinsurance and our ability to collect reinsurance recoverables, (i) the availability and cost of capital, which may be required in order to implement the Company’s strategies, and (j) limitations on the our ability to use net operating loss carryforwards.
Consolidated Statements of Operations for the Years Ended December 31, 2007 and 2006