Importantly, the recent loss projections from both events continue to be comfortably within our reinsurance coverage limits. After taking into account anticipated reinsurance recoveries for losses and LAE, our combined retention on the two major hurricanes was approximately $5.0 million. Our reinsurance program provided $55.0 million of coverage per event after a $5.0 million retention that involves four layers of participation by highly-rated reinsurers. In addition, we had an aggregate catastrophe program that provided for recovery of another $5.0 million after a $10.0 million retention. These programs also provided for reimbursement for the reinstatement
Equity in earnings of unconsolidated foreign insurance company. We record our 30% investment in Atlas on the equity basis of accounting. Equity in earnings of unconsolidated foreign insurance company includes our share of the income of Atlas.
Our critical accounting policies involve (1) revenue recognition, (2) recognition of losses and LAE, (3) estimating the recoverability of certain key assets, including reinsurance recoverables, premium receivables and deferred policy acquisition costs, (4) valuation of investments, (5) deferred taxes, (6) accounting for business combinations and (7) accounting for stock-based compensation. The unaffiliated MGAs provide monthly accounting reports of premium, loss and expense activity, which are generally delayed one month from actual activity; accordingly, our financial information for this segment is reported on a one-month lag. The following should be read in conjunction with the notes to our audited consolidated and combined financial statements included in this annual report.
The consolidated net loss ratio of 62.6% in 2004 declined 10.7 points from the net loss ratio of 73.3% in 2003 Total. The 2004 net loss ratio included 3.2 points for catastrophe losses compared to 7.3 points of catastrophe losses in the 2003 Total net loss ratio. The year 2004 had the lowest amount of catastrophe losses with only $7.2 million in losses and represented a year with low frequency and low severity in weather related loss activity, whereas net catastrophe losses in 2003 were at the high end of the range for our five year average catastrophe claims experience. Further, we did not have the benefit of an aggregate catastrophe reinsurance program in 2003. We included this coverage starting in our 2004 reinsurance program and benefited from an additional recovery of $5.0 million in catastrophe losses in 2005. The consolidated net loss ratio in 2004 was also favorably impacted by the rate increases and coverage changes implemented in prior years in response to the mold coverage issues in Texas. The overall reduction in 2004 resulted from a 11.9 point improvement in the Personal Lines segment and a 22.1 point improvement in the Program Management segment.
Net insurance premiums earned of $125.7 million in 2005 were only slightly higher than in 2004 because of the impact of the additional ceded premium associated with the third and fourth reinsurance covers purchased after Hurricanes Katrina and Rita, and because the earned impact of our low value dwelling and growth in homeowners written premium will not be fully realized until after 2005. Net insurance premiums earned of $124.5 million in 2004 declined 10.6% from the $139.2 million in 2003 Total. The 2004 decline in earned premiums was less than the decline in written premiums since the impact of the higher 2003 Total written premiums was still being earned over the applicable policy periods in 2004. Net insurance premiums earned for this segment were negatively impacted by the amortization of the fair value adjustment of the unearned premium liability of $9.5 million and $5.1 million in 2004 and the 2003 Stub Period, respectively.
Underwriting income-The net combined ratio in 2005 increased modestly to 89.5% from 89.2% in the comparable period in 2004 despite the unusually significant weather-related events of 2005. Excluding the impact of catastrophe losses, the combined ratio was 4.9 points better in 2005 than in 2004. The improvement in the 2005 loss ratio was offset by an increase in the expense ratio, although the lower expense ratio in 2004 was primarily due to the fair value adjustment.
premiums of $19.3 million in 2003 Total, $8.8 million in 2004 and $0 in 2005; a commercial auto program that had gross written premium of $13.5 million in 2003 Total, $9.3 million in 2004 and $0 in 2005; and another commercial auto and general liability program that had gross written premiums of $6.7 million in 2003 Total, $0.7 million in 2004 and $0 in 2005). Partially offsetting the terminated programs was an increase of 2.8% and 8.8% in 2005 and 2004, respectively, in the gross written premiums in our largest unaffiliated MGA program Texas General Agency, Inc. (“TGA”), to $116.7 million in 2005 and $113.5 million in 2004. The growth from the writings of our new nonsubscriber program and a long-standing commercial auto/small casualty program generated by our largest MGA in 2005 and 2004 was offset by the loss of premium from the terminated programs. Approximately half of our largest MGA’s gross written premium consists of commercial auto and approximately one-third is commercial casualty business. Their casualty lines have doubled over the past several years while their auto lines have remained relatively flat.
Income (loss) from continuing operations before income taxes and equity in earnings of foreign insurance company
December 31, 2004 primarily because of higher ceded recoverables for losses and LAE related to Hurricanes Katrina and Rita. We have experienced no collectibility issues regarding these recoverables and anticipate no uncollectible reinsurance recoverables associated with these storms.
If an event of default under the terms of our senior secured credit facility occurs, and continues beyond any applicable grace period and is not waived by the lender, the entire principal and the interest accrued thereon may be declared to be due and payable immediately. At December 31, 2005, we are in compliance with all of the financial and restrictive covenants associated with this facility.
failure to comply with the covenants or other provisions of the trust preferred securities; or
Our cash and investment portfolio totaled $404.7 million and $349.4 million as of December 31, 2005 and 2004, respectively, and is summarized by type of investment as follows:
our ability and willingness to hold the security until the fair value is expected to recover.
We have audited the accompanying combined statements of operations (predecessor basis), net assets and comprehensive income (loss) (predecessor basis), and cash flows (predecessor basis) of Republic Underwriters Insurance Company and Affiliates (the Company) for the period January 1, 2003 to August 28, 2003. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audit.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of operations (predecessor basis), changes in net assets and comprehensive income (loss) (predecessor basis), and cash flows (predecessor basis) of Republic Underwriters Insurance Company and Affiliates for the period January 1, 2003 to August 28, 2003 in conformity with U.S. generally accepted accounting principles.
Years ended December 31, 2005 and 2004, the period August 29, 2003 to December 31, 2003,
Premiums are earned ratably over the term (generally one year) of the related policy. Net insurance premiums earned are the portion of our net written premiums ratably earned during a measured period. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premium liabilities and are realized as revenue in subsequent periods over the remaining term of the policy. As described in more detail in Note 2, our unearned premium liability was adjusted to fair value at the 2003 Acquisition date. The fair value adjustment of the unearned premium liability was amortized over a twelve month period following the Acquisition since the related policies have one year terms or less.
which are not yet quantifiable, and (3) estimates of future costs are subject to the inherent limitation on the ability to predict the aggregate course of future events. There are no discounts deducted from any liability balances.
The Company’s insurance subsidiaries are subject to state guaranty fund assessments, which enable states to meet policyholder requirements or meet other insurance obligations from insurance company insolvencies. The Company accrues for these assessments when it is probable that an assessment will be imposed, the obligatory event has occurred, and the amount of the assessment can be reasonably estimated. As of December 31, 2005 and 2004, the Company had accrued assessments of $302,000 and $415,000, respectively.
On September 16, 2005, the Company declared a dividend of 12 cents per common share, payable on October 14, 2005 to shareholders of record on September 30. On December 12, 2005, the Company declared a dividend of 12 cents per common share, payable on January 13, 2006 to shareholders of record on December 30.
The Company’s insurance subsidiaries’ combined policyholders’ surplus and statutory net income (loss), as filed with their states of domicile, as of and for the years ended December 31, 2005, 2004 and 2003 were:
The plan invests in a diversified portfolio consisting of U.S. and foreign equity securities, fixed income securities, and cash within the target asset allocation ranges. Investments are made to maximize long-term returns while recognizing the need for adequate liquidity to meet on-going benefit and administrative obligations. Equity investments are used primarily to increase overall plan returns.
Upon Acquisition, the Company assumed from RFSI and is maintaining a 401(k) plan that covers employees of RCGI and its subsidiaries who have attained the age of 18 and completed one month of service. Under this plan, employees may contribute a portion of their compensation, which will be matched by a discretionary amount by the Company. In connection with this plan, the Company contributed approximately $406,000, $422,000, $136,000, and $374,000 for the years ended December 31, 2005 and 2004, the periods August 29 to December 31, 2003 and January 1 to August 28, 2003, respectively. The plan may be terminated at any time by the RCGI board of directors.
The Company is subject to claims and lawsuits that arise in the ordinary course of business. On the basis of information presently available in connection with the claims and lawsuits, it is the opinion of the Company’s management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company.
become and remain stockholders of the Company and to provide an opportunity to do so through payroll deductions. The ESPP enables substantially all employees to purchase shares of common stock on a semi-annual basis at the lower of 85% of the fair market value of the shares on the first day of the plan period or the last day of the plan period. A total of 500,000 shares of common stock are authorized for issuance under the ESPP. No shares had been purchased under this plan as of December 31, 2005.