Net loss for the year ended December 31, 2002 includes a $9.1 million charge, net of tax, for the write-off of goodwill related to the adoption of Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets.” In accordance with the transitional
guidance given in SFAS No. 142, this write-off, related to the adoption of the standard, was treated as a cumulative effect of a change in accounting principle.
During the year ended December 31, 2004, we recorded losses of $489,000 related to various stocks whose decline was deemed to be other than temporary based on their anticipated liquidation, as well as $1,050,000 impairment losses on real estate. During 2004, we sold investment real estate for which $500,000 of impairment losses had previously been recorded. During the year ended December 31, 2003, we recorded an impairment charge of $1.3 million on enhanced equipment trust certificates that were issued by Delta Airlines. During the year ended December 31, 2002, we recorded an impairment charge of $520,000 related to bonds issued by Frontier Corporation, a subsidiary of Global Crossings. These bonds were converted into Global Crossings common stock in December 2003, and sold by us in 2004.
We annually review the financial stability of all of our reinsurers. This review includes a ratings analysis of each reinsurer participating in a reinsurance contract. At December 31, 2004, we have not recorded an allowance for any potentially uncollectible amounts. However, we are closely monitoring the cash flows and financial condition of PMA Capital Insurance Company and Converium Reinsurance (NA), Inc. in light of announcements made by those companies during 2004. At December 31, 2004, we had reinsurance recoverables, including pre-paid reinsurance premiums, from PMA Capital and Converium of approximately $2.5 million and $1.5 million, respectively.
We will continue to weigh the evidence concerning the availability of future taxable income as of the end of each quarter. If we continue to report net income in 2005, we believe that there is a strong likelihood that the weight of the positive evidence concerning the availability of future taxable income will exceed the negative evidence presented by our losses in 2003, 2002 and 2001, and that the valuation allowance may be reduced or eliminated in the period when such a conclusion is reached. With the exception of the initial recognition, by the reduction or elimination of the valuation allowance, of certain tax benefits that are credited or charged directly to accumulated other comprehensive income or other shareholders’ equity accounts, the reduction or the elimination of the valuation allowance will be reported in the period of reversal as a federal income tax benefit and included in net income, which will have a positive impact on our effective tax rate.
Net premiums earned decreased during 2004, as compared to 2003, primarily as a result of our exit from the other insurance lines of business, which we announced in the fourth quarter of 2003. These decreases were partially offset by the effect of premium rate increases in our medical professional liability line of business and an $837,000 increase in net premiums earned related to the commutation of our reinsurance treaties with Gerling. We anticipate that net premiums earned will continue to remain at lower levels than in previous years for the near future as we complete our exit from the other insurance lines. However, we believe that rate increases related to our medical professional liability line will eventually offset the decrease in net premiums earned from the exit of these lines.
The loss ratio, on an accident year basis, was 85.3% for the year ended December 31, 2004 compared to 96.5% for the year ended December 31, 2003. The decrease in the accident year loss ratio was primarily the result of rate increases in all markets, exiting Florida and certain occurrence-based markets and stricter underwriting standards,
The restructuring of the books of business, combined with rate increases and improved claims management, have translated into lower loss and loss adjustment expenses and lower calendar year and accident year loss ratios. The decrease in underwriting expenses was primarily the result of the decrease in premiums written.
2004 Compared to 2003. The corporate and other segment consists of the operations of our holding company and its non-insurance subsidiaries. For this segment, loss before federal income taxes and minority interests for the year ended December 31, 2004 was ($7.3) million compared to ($3.4) million for the same period of 2003. The increase in losses were attributable to increases in general and administrative expenses and interest expense, which are described more fully in Consolidated Results of Operations.
offsets cash paid for underwriting and general and administrative expenses. A large portion of our investment expense is related to depreciation on investment in real estate, which is a non-cash charge. Moderate premium rate increases are expected to have a positive impact on our cash flows from operations in 2005.
For the year ended December 31, 2004, we recorded an increase in ultimate loss estimates, net of reinsurance of $6.2 million, or 1.1% of $574.6 million of net loss and loss adjustment expense reserves as of December 31, 2003. The increase in net ultimate loss estimates reflected revisions in the estimated reserves as a result of actual claims activity in calendar year 2004 that differed from projected activity, as well as $4.4 million of unfavorable development on prior year reserves as a result of the Gerling commutation. Specifically, in 2004, a pattern of increasing paid severity emerged on our workers’ compensation losses, causing an upward revision in the expected future severities on both known and unknown claims. This increase was offset by favorable development on medical professional liability losses due to lower than expected paid severity, most notably in the Ohio and Michigan markets. The Gerling commutation is more fully discussed in Note 10 of the Notes to the accompanying Consolidated Financial Statements, which information is herein incorporated by reference.
Activity in the liability for unpaid loss and loss adjustment expenses by insurance segment for the year ended December 31, 2004 was as follows:
are determined on the basis of dealer or market quotations, or comparable securities on which quotations are available.
The Company uses the intrinsic value-based method to account for all stock-based employee compensation plans and has adopted the disclosure alternative of SFAS No. 123 “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (“SFAS No. 148”). The Company’s policy regarding stock options is to issue options with an exercise price equal to the market price on the date of grant. Accordingly, no compensation expense has been recognized for options granted in 2004, 2003, and 2002. The Company, however, does recognize compensation expense related to restricted stock grants, equal to the fair market value as of the date of grant, as there is no consideration due from employees for these awards at the date they vest. This expense is recognized on a straight-line basis over the period of vesting, with future compensation expense, net of deferred taxes, reflected as a reduction of shareholders’ equity in the accompanying Consolidated Balance Sheets.
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For the year ended December 31, 2004, the Company received $1,482,000 for one-time call premiums.
statutory accounting practices encompass all accounting practices not so prescribed. Such practices vary in certain respects from GAAP. The principal variances are as follows: