(6) Unallocated ESOP shares at December 31 of each year are not reflected in weighted average shares.
The reported or incurred loss development method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at comparable stages of maturity. Historical “age-to-age” loss development factors are calculated to measure the relative development of an accident year from one maturity point to the next. We then select appropriate age-to-age loss development factors based on these historical factors and use the selected factors to project the ultimate losses.
The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature accident years. For these immature years, the amounts reported or paid may be small and unstable and therefore not predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when changing reporting patterns or payment patterns distort the historical development of losses.
The Company is party to a consolidated lawsuit associated with the Merger Agreement. Under the terms of a memorandum of understanding executed with the plaintiffs, the Company expects to settle the lawsuit including the payment of plaintiffs’ counsel fees. Such fees will either be agreed upon by the parties or determined via the Court, subject to the terms of the memorandum of understanding. The Company carries directors and officers liability insurance that provides a primary liability limit of $5 million, which includes defense costs, subject to a $250,000 deductible. It is expected that the settlement of plaintiffs’ counsel fees associated with this lawsuit will be within the limits of liability provided by the directors’ and officers’ liability insurance. Please see the discussion under “Legal Proceedings - Litigation Relating to the Merger Agreement with United Fire and Casualty Company” in Item 3.
Fixed maturity investments with unrealized losses for less than twelve months are primarily due to changes in the interest rate environment. At December 31, 2010 the Group has no fixed maturity securities with unrealized losses for more than twelve months.
The components of income for 2009 and 2008, and the change and percentage change from year to year, are shown in the charts below. The accompanying narrative refers to the statistical information displayed in the chart immediately above the narrative.
The equity securities sold at a loss had been expected to appreciate in value, but were sold due to a desire to reduce exposure to certain issuers and industries or in light of difficult economic conditions.
Accumulated other comprehensive income was net of deferred income taxes of $7,984 and $6,390 applicable to net unrealized investment gains at December 31, 2010 and 2009, respectively.
The Group evaluates their estimated ultimate liability by line of business on a quarterly basis. The establishment of loss and loss adjustment expense reserves is an inherently uncertain process and reserve uncertainty stems from a variety of sources. Court decisions, regulatory changes and economic conditions, among other factors, can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Similarly, actual experience, including the number of claims and the severity of claims, to the extent it varies from data previously used or projected, will be used to update the projected ultimate liability for losses, by accident year and line of business. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such changes are made.
Underwriting results for commercial lines and personal lines take into account premiums earned, incurred losses and loss adjustment expenses, and underwriting expenses. The investments segment is evaluated by consideration of net investment income (investment income less investment expenses) and realized gains and losses.