Due to the time lag inherent in the reporting of premiums by ceding companies, a significant portion of amounts included as premiums written and premiums earned represents estimated premiums and are not currently due based on the terms of the underlying contracts. Earned premiums, including EBNR, are a measure of exposure to losses, LAE and acquisition expenses. Consequently, when previous estimates of premiums earned are increased or decreased, the related provisions for losses and LAE and acquisition costs previously recorded are also increased or decreased. An allowance for uncollectible premiums is established for possible non-payment of such amounts due, as deemed necessary. As of December 31, 2005, we did not establish an allowance based on our historical experience, the general profile of our ceding companies and our ability in most cases to contractually offset those premium receivables against losses and loss adjustment expense or other amounts payable to the same parties.
The gross liabilities recorded on our balance sheet as of December 31, 2005 and 2004 for unpaid losses and LAE were $2,323,990,000 and $1,380,955,000 respectively. The following table sets forth a breakdown between case reserves and IBNR by segment at December 31, 2005 and 2004 ($ in thousands):
We apply the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their corresponding tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applicable to
The net loss in 2005 is due to losses arising from severe hurricanes in the southeastern United States and the Caribbean. In 2005, three significant named hurricanes, Katrina, Rita and Wilma (the “2005 Hurricanes”), caused severe damage in Louisiana, Mississippi, Texas, Florida and several other states in the Gulf Coast region of the United States as well as Mexico and the Caribbean. Based on current industry estimates, Hurricane Katrina is the costliest natural disaster in U.S. history. In 2004, four significant named hurricanes, Charley, Frances, Ivan and Jeanne (the “2004 Hurricanes”), caused severe damage in the Caribbean and the southeastern United States, principally Florida.
The net loss in 2005 as compared with net income in 2004 is primarily attributable to a decline in underwriting income of $296,679,000. The decline in underwriting income was due to significantly greater losses arising from the 2005 Hurricanes than the 2004 Hurricanes. The hurricane losses in both 2005 and 2004 were partially offset by growth of profitable business in the Casualty segment and net favorable development. Net favorable development includes the development of prior years’ unpaid losses and LAE and the related impact on premiums and commissions. Net favorable development was $79,256,000 and $55,520,000 in 2005 and 2004, respectively. The net loss in 2005 as compared with net income in 2004 was also favorably impacted by an increase in net investment income of $44,913,000 and a decrease in income tax expense of $55,316,000, partially offset by an increase in operating expenses of $3,494,000 and loss on repurchase of debt of $2,486,000.
Year Ended December 31, 2004 as Compared with the Year Ended December 31, 2003