We lease an aggregate of approximately 462,000 square feet of office space for our agencies, insurance companies and retail stores in various locations throughout the United States.
Intangible assets with finite lives are amortized over their useful lives and are periodically reviewed to ensure that no conditions exist indicating the recorded amount of finite life intangible assets is not recoverable from future undiscounted cash flows.
We issue non-standard personal automobile insurance policies through Affirmative Insurance Company and Insura, our two Illinois-domiciled insurance company subsidiaries. Our insurance companies are licensed to write business in 32 states, although our business is concentrated in 11 states. Our insurance companies possess the certificates of authority and capital necessary to transact insurance business and issue policies, but they rely on both our underwriting agencies and unaffiliated underwriting agencies to design, distribute and service those policies.
Claims processing fees for the year ended December 31, 2003 were $26.9 million, an increase of $388,000 from claims processing fees of $26.5 million in the prior year. Claims processing fees are paid to us based on a contractual rate relative to the amount of gross premiums earned on business that underwriting agencies produce. We recognize these fees over the expected service period based on the historical amount and timing of claims settlement expenses relative to the revenue we receive for performing claims settlement services.
Net cash used in investment activities amounted to $129.2 million for the year ended December 31, 2004, as compared to net cash used in investment activities of $22.2 million for the year ended December 31, 2003 and net cash used in investment activities of $2.6 million for the year ended December 31, 2002. The increase in cash used in investment activities for the year ended December 31, 2004 compared to the prior year is primarily due to the increased bond purchases in the investment portfolios of our insurance companies due to their increased capitalization following our initial public offering. The increase in cash used in investment activities for the year ended December 31, 2003 as compared to the prior year resulted from increases in our purchases of bonds and property and equipment, and an increased use of cash in connection with our acquisition program.
Certain previously reported amounts have been reclassified in order to conform to current year presentation. Such reclassification had no effects on net income or stockholders’ equity.
Pursuant to SFAS No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” we are required to review the contractual terms of all our reinsurance purchases to ensure compliance with that statement. The statement establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. For all reinsurance transactions, immediate recognition of gains is precluded unless our liability to our policyholders is extinguished. Contracts that do not result in the reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed generally do not meet the conditions for reinsurance accounting and must be accounted for as deposits. SFAS No. 113 also requires us to disclose the nature, purpose and effect of reinsurance transactions, including the premium amounts associated with reinsurance assumed and ceded. It also requires disclosure of concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums. We believe we have properly accounted for all of our reinsurance contracts. (Note 7)
The $575,000 of other intangible assets acquired was allocated to non-compete agreements, which was amortized over 23 months.
On December 31, 2002, we purchased all the non-standard personal automobile assets of InsureOne Independent Insurance Agency, Inc. and 80.0% of the partnership interests in InsureOne Independent Agency, LLC from J. Gordon Gaines, Inc., a subsidiary of Vesta, for 2,355,019 shares of our common stock. InsureOne is a non-standard automobile managing general agency, acquired by J. Gordon Gaines, Inc. on January 1, 2002, with operations in Illinois, Indiana, and Missouri.
Prior to December 31, 2003, Affirmative Insurance Company and Insura ceded premiums to Vesta through a 100% quota share reinsurance treaty. However, the historical financial statements of Affirmative Insurance Company and Insura include certain fees that were not required to be ceded to Vesta under the contract. Accordingly, we recorded fee income in the amount of $9.6 million and $10.7 million for the years ended December 31, 2003 and 2002, respectively.
Prior to May 2003, we leased office space from a minority shareholder of InsureOne Independent Agency, LLC. Total rent paid to the minority shareholder through May 2003 $682,000.
The payout pattern for reserves and loss adjustment expense is based upon historical payment patterns and do not represent actual contractual obligations. The timing and amounts ultimately paid can and will vary from these estimates.
Weighted average risk-free interest rate: 1998 Plan 3.82%, 2004 Plan 4.0%
We sponsor a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees who meet specified service requirements. Under the plan, we may, at our discretion, match 100% of each employee’s contribution, up to 3% of the employee’s salary, plus 50% of each employee’s contribution for the next 2% of the employee’s salary. We made $1.1 million in contributions to the plan during each of 2004 and 2003.
Private Passenger Automobile Quota Share Reinsurance Contract issued to Affirmative Insurance Company and Insura Property & Casualty Insurance Company, covering New Mexico and South Carolina business, effective January 1, 2004 (incorporated by reference to Exhibit 10.10 to Amendment No. 3 to our Registration Statement on Form S-1 filed with the SEC on June 14, 2004, File No. 333-113793).
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
We maintain reserves in the amount of the estimated ultimate liability for unpaid losses and loss adjustment expenses related to incurred claims and our estimate of unreported claims. Our estimation of the ultimate liability for unpaid losses and loss adjustment expenses is based on projections developed by our actuaries using analytical methodology commonly used in the property-casualty insurance industry. Our liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based on: (1) the accumulation of estimates of individual claims for losses reported prior to the close of the accounting period; (2) estimates received from ceding companies, reinsurers and insurance pools and associations; (3) estimates of unreported losses based on past experience; (4) estimates based on past experience of expenses for investigating and adjusting claims; and (5) estimates of subrogation and salvage collections. We periodically adjust our loss and loss adjustment expense reserves for changes in product mix, underwriting standards, loss cost trends and other factors. Our loss and loss adjustment expense reserves may also be impacted by factors such as the rate of inflation, claims settlement pattern, litigation and legislative activities. Unpaid losses and loss adjustment expenses have not been reduced for reinsurance recoverable. Changes in estimates of our liabilities for unpaid loss and loss adjustment expenses are reflected in our consolidated statement of operations in the period in which determined. Ultimately, our actual losses and loss adjustment expenses may differ materially from the estimates we have recorded.
Profit sharing commissions, which enable us to collect commissions and fees in excess of provisional commissions, are recorded when we conclude it is probable that estimates of loss ratios will be below the levels stated in our agency contracts.
As discussed in Note 6, we acquired two insurance companies effective December 31, 2003 which are accounted for as a pooling of interest. Pursuant to pooling of interest accounting treatment, our historical financial statements have been presented to reflect the results of operations for these two insurance companies on a combined basis for all years presented.