This Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations contains restated results related to the modification of our method of accounting for the contingent profit commission under the LPT Agreement. See "Explanatory Note" immediately preceding Part I, Item 1 and Note 2, "Revision of Previously Issued Consolidated Financial Statements," to our Consolidated Financial Statements in Part II, Item 8 for a detailed discussion of the modification and effect of the restatement.
District of Columbia, with a concentration in California, where over one-half of our business is generated. Our revenues are primarily comprised of net premiums earned, net investment income, and net realized gains on investments.
Additional information regarding our Investments is set forth under “-Liquidity and Capital Resources-Investments.”
Losses and LAE represents our largest expense item and includes claim payments made, amortization of the Deferred Gain, estimates for future claim payments and changes in those estimates for current and prior periods, and costs associated with investigating, defending, and adjusting claims. The quality of our financial reporting depends in large part on accurately predicting our losses and LAE, which are inherently uncertain as they are estimates of the ultimate cost of individual claims based on actuarial estimation techniques.
Our indemnity claims frequency (the number of claims expressed as a percentage of payroll) is unchanged year-over-year and our loss experience indicates an downward trend in medical and indemnity costs that are reflected in our current accident year loss estimate. We believe our current accident year loss estimate is adequate; however, ultimate losses will not be known with any certainty for many years. We assume that increasing medical and indemnity cost trends will continue to impact our long-term claims costs and current accident year loss estimate, which may be offset by rate increases. Additional information regarding our reserves for losses and LAE is set forth under “-Critical Accounting Policies-Reserves for Losses and LAE.”
Overall, losses and LAE were $287.9 million, $262.5 million, and $193.3 million for the years ended December 31, 2012, 2011, and 2010, respectively. The increase from 2011 to 2012 was primarily due to an increase in net earned premiums, which was partially offset by a $73.3 million favorable LPT Reserve Adjustment and an $8.6 million LPT Contingent Commission Adjustment in the fourth quarter of 2012. The increase from 2010 to 2011 was primarily due to an increase in the current accident year loss estimate, an increase in net earned premiums, and the impact of favorable prior accident year loss development in 2010. Prior accident year loss development in 2012 and 2011 was primarily related to our assigned risk business. Our accident year loss estimates were 77.0%, 77.2%, and 70.6% for the years ended December 31, 2012, 2011, and 2010, respectively. The accident year loss estimate for the year ended December 31, 2010 excludes a $1.6 million expense related to the commutation of certain reinsurance treaties and a $0.9 million expense related to the write-off of certain reinsurance recoverables. The increase in the current accident year loss estimate in 2011 was primarily due to increased loss costs in California.
Reinsurance recoverables represent: (a) amounts currently due from reinsurers on paid losses and LAE; (b) amounts recoverable from reinsurers on case basis estimates of reported losses; and (c) amounts recoverable from reinsurers on actuarial estimates of IBNR for losses and LAE. These recoverables are based on our current estimates of the underlying losses and LAE, and are reported on our consolidated balance sheets separately as assets, as reinsurance does not relieve us of our legal liability to policyholders. We bear credit risk with respect to the reinsurers, which can be significant considering that some of the unpaid losses and LAE remain outstanding for an extended period of time. Reinsurers may refuse or fail to pay losses that we cede to them, or they might delay payment. We are required to pay losses even if a reinsurer refuses or fails to meet its obligations under
The following table presents the impact of the revisions to the previously issued consolidated statements of cash flows for fiscal years 2011 and 2010:
Property and equipment are stated at cost less accumulated depreciation (see Note 9). Expenditures for maintenance and repairs are charged against operations as incurred.
The Company issues stock-based payments, which are recognized in the consolidated statements of income and comprehensive income based on their estimated fair values over the employees' service period (see Note 16).
Loss reserves shown in the consolidated balance sheets are net of $21.0 million and $18.1 million for anticipated subrogation recoveries as of December 31, 2012 and 2011, respectively.
The fourth quarter of 2012 was impacted by two changes in estimate, including: (1) a favorable LPT Reserve Adjustment, which reduced our losses and LAE by $73.3 million, and increased net income by $73.3 million, or $2.38 and $2.35 per basic and diluted share, respectively; and (2) an LPT Contingent Commission Adjustment, which reduced our losses and LAE by $8.6 million, resulting in an increase to net income of $8.2 million, or $0.26 per basic and diluted share. See Note 3.