In addition to case reserves, the Company establishes loss and ALAE reserves on an aggregate basis for case incurred development and IBNR claims. Case incurred development and IBNR reserves are primarily intended to provide for aggregate changes in preexisting case incurred amounts and, secondarily, to provide for the unpaid cost of IBNR claims for which an initial case reserve has not been established.
As of December 31, 2010, the Company recognized a deferred tax asset of $1.9 million related to other-than-temporary investment impairments. Under United States federal income tax rules and regulations, capital losses can only be utilized to offset income generated from capital gains. Capital losses can be carried back to offset capital gains reported in the three prior tax periods and can be carried forward for five tax periods. Management has determined, based on a review of its investment portfolio and giving consideration to capital gains reported in prior tax periods, that the Company’s deferred tax asset related to other-than-temporary investment impairments and net unrealized losses on investments is recoverable; therefore, a valuation allowance has not been recorded as of December 31, 2010. Due to the significant volatility in the investment markets, management’s conclusion on the recoverability of the deferred tax asset could change in future periods. Further declines in the estimated fair value of the Company’s investments may result in the need for a valuation allowance, which could have an adverse impact of the Company’s financial condition and/or results of operations.
The increase in consolidated revenue primarily reflects new business of $32.7 million, an increase in realized gains related to the sale of investments, and a decline in other-than-temporary investment impairments, partially offset by a decrease in net investment income.
The corporate/other segment reported a net loss of $3.4 million for the year ended December 31, 2010, compared to a net loss of $3.2 million for the same period in 2009. The change in equity interest in the Company’s investment in segregated portfolio cells decreased from 2009 to 2010, and was partially offset by a decrease in intangible asset amortization.
The effective tax rate was 29.3% and 31.6% for the years ended December 31, 2009 and 2008, respectively. The difference between the statutory tax rate of 35.0% and the effective tax rate primarily reflects tax exempt income on municipal bond securities. The decrease in the effective tax rate primarily reflects a prior year tax return adjustment that decreased income tax expense in 2009, compared to a prior year tax return adjustment that increase income tax expense in 2008.
Cash flows from financing activities for the year ended December 31, 2009 primarily reflects the payment of the quarterly shareholder dividends and the semi-annual loan payments.
In June 2009, the FASB issued new accounting guidance related to variable interest entities. The new guidance 1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosures about an enterprise’s involvement in variable interest entities. The new guidance was effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company adopted the new accounting guidance effective January 1, 2010. The adoption of the new guidance had no impact on the Company’s consolidated financial statements.
Amortization expense totaled $1,284, $1,732 and $1,373 for the years ended December 31, 2010, 2009 and 2008, respectively.
As of December 31, 2010, there were 291,949 shares of common stock available for issuance of future share-based awards. The following table presents additional information regarding options outstanding as of December 31, 2010:
For the years ended December 31, 2010, 2009 and 2008, the Company increased (decreased) its workers’ compensation and segregated portfolio cell reinsurance reserves for unpaid losses and LAE, including the accretion of prior period discount, by the following amounts (in thousands):
For the year ended December 31, 2009, the Company recognized net favorable development on prior accident year segregated portfolio cell reinsurance reserves of $2.8 million, representing 12.6% of the Company’s estimated segregated portfolio cell reinsurance reserves as of December 31, 2008 and 11.1% of the Company’s segregated portfolio cell reinsurance net premiums earned for the year ended December 31, 2008. The favorable development arose primarily from accident years 2006 and 2008, but was generally prevalent in most prior accident years, and resulted from actual loss development being somewhat lower than the Company had expected based on its historical loss development experience, reflecting continued improvements in loss mitigation and underwriting. The improvements in loss mitigation and underwriting include greater availability and use of employers’ return to work programs.
In addition to the income tax provision, the net deferred tax asset decreased $1,471 and $3,283 in 2010 and 2009, respectively, as a result of changes in the unrealized gains and losses related to the Company’s fixed income and equity securities portfolio. The net deferred tax asset was also increased by $179 in 2010 and decreased by $127 in 2009 related to changes in the unrecognized benefit plan gains. The tax effect of these items is recorded directly to accumulated other comprehensive income, which is a component of shareholders’ equity.