1. Paid Bornhuetter-Ferguson Method - A method assigning partial weight to the initial expected losses (calculated from the initial expected loss ratio) and partial weight to observed paid losses. The weights assigned to the initial expected losses decrease as the accident year matures.
4. Incurred Development Method - A method using historical, cumulative incurred losses by accident year and develops those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years.
Improve Expected Loss Ratio by 10% and Deteriorate Loss Development Patterns by 10% 4,192
Our reserves are driven by a number of important assumptions including litigation and regulatory trends, legislative activity, social and economic patterns and claims inflation assumptions. Our reserve estimates reflect expected inflation in legal claims settlements and assume we will not be subject to losses from significant new legal liability theories. Our reserve estimates also assume that we will not experience significant losses from mass torts and that we will not incur losses from future mass torts not known to us today. While it is not possible to predict the impact of changes in this environment, if new mass torts or expanded legal theories of liability emerge, our IBNR claims may differ substantially from our IBNR reserves. Our reserve estimates assume that there will not be significant changes in the regulatory and legislative environment. The impact of potential changes in the regulatory or
Gross premiums earned increased $16.7 million, or 6.4% in 2005 as compared to 2004. This increase was the result of consistent overall growth each quarter throughout 2004 and 2005.
Interest expense increased $1.6 million, or 113.1% in 2005 as compared to 2004. The increase is due to interest paid on $32.0 million of surplus notes issued to third parties in 2004. These surplus notes were issued at various times during the second and third quarters of 2004 and are subject to floating interest rates. The rates increased in 2005 by over 200 basis points.
o Pinnacle Benefits, Inc. ("Pinnacle Benefits"), a wholly owned claims processing company;
DEFERRED POLICY ACQUISITION COSTS--To the extent recoverable from future policy revenues, costs that vary with and are primarily related to the production of new and renewal business, including premium tax, commissions, assessments and other general acquisition expenses, net of reinsurance ceding allowances received, have been deferred and are amortized over the effective period of the related insurance policies. The components of deferred policy acquisition costs at December 31, 2006 and 2005 are as follows (in thousands):
POLICYHOLDER DEPOSITS--Policyholders are required to maintain deposits with the Company for certain installment pay plans. Based on the selected pay plan, management determines the deposit amount, which is based on a percentage of the policyholders' estimated annual premium. Deposits are analyzed annually and adjusted as considered necessary.
STOCK-BASED COMPENSATION-- The Company grants stock options to its employees, officers and directors. Effective January 1, 2006, the Company adopted the provisions of SFAS 123R, for its stock based compensation plans. Among other things, SFAS 123R requires that compensation expense for all share-based awards be recognized in the financial statements based upon the grant-date fair value of those awards.
2006 2005 2004 ------- ------- ------- Income: Fixed maturity securities ............. $17,031 $11,038 $ 6,484 Cash and cash equivalents ............. 1,265 674 317 ------- ------- ------- Investment income ..................... 18,296 11,712 6,801 Investment expenses ................... 835 914 724 ------- ------- ------- Net investment income ................... $17,461 $10,798 $ 6,077 ======= ======= =======
2006 2005 --------- --------- Unpaid losses and LAE, gross of related reinsurance recoverables at beginning of period ................................. $ 309,857 $ 297,698 Less reinsurance recoverables on unpaid losses and LAE at beginning of period ................................................. 78,659 107,155 --------- --------- Unpaid losses and LAE, net of related reinsurance recoverables at beginning of period ................................. 231,198 190,543 --------- --------- Add provision for losses and LAE, net of reinsurance,occurring in: Current period ...................................................... 177,841 168,355 Prior periods ....................................................... (14,171) (24,692) --------- --------- Incurred losses during the current period ............................. 163,670 143,663 --------- --------- Deduct payments for losses and LAE, net of reinsurance, occurring in: Current period ...................................................... 56,448 48,299 Prior periods ....................................................... 76,353 54,709 --------- --------- Payments for losses and LAE during the current period, net of reinsurance ......................................................... 132,801 103,008 --------- --------- Unpaid losses and LAE, net of related reinsurance recoverables at end of period ....................................... 262,067 231,198 Reinsurance recoverables on unpaid losses and LAE at end of period .............................................................. 72,296 78,659 --------- --------- Unpaid losses and LAE, gross of reinsurance recoverables on unpaid losses at end of period ...................................... $ 334,363 $ 309,857 ========= =========
During 1996, the Board approved an employee stock option plan (the "1996 Plan") and reserved 272,878 shares of the Company's common stock, subsequently increased to 960,531 shares, for future issuance thereunder. The employee options vest over a period determined at the time of grant and are exercisable over a period of not more than 10 years at an exercise price equal to management's estimate of the fair market value of the common stock at the date of grant in the case of incentive options and not less than 80% of such fair market value in the case of nonqualified options. In September 2005, the Board terminated the 1996 Plan, which had no effect on options outstanding thereunder.