The ratio of net premiums written divided by ending statutory surplus, except for 2003, where a weighted average of statutory surplus is used.
Loss and loss adjustment expenses are affected by a number of factors, including:
The Group has received $4.3 million in 2007 as a reimbursement of protested payments of retaliatory tax, including accrued interest thereon, previously made by the Group for the periods 1999-2004. The refund has been recorded, after reduction for Federal income tax, in the amount of $2.8 million in the consolidated statement of earnings, with $2.5 million recorded in the quarter ended June 30, 2007, and $0.3 million recorded in the quarter ended September 30, 2007. The allocation of the refund to pre-tax earnings included an increase to net investment income of $720,000, with $687,000 of that amount recognized in the quarter ended June 30, 2007, and $33,000 recognized in the quarter ended September 30, 2007, for the interest received on the refund, and $3.6 million as a reduction to Other Expense to recognize the recovery of amounts previously charged to Other Expense, with $3.1 million of that amount recognized in the quarter ended June 30, 2007, and $0.5 million recognized in the quarter ended September 30, 2007. This is a non-recurring item which significantly affects the earnings for the year ended December 31, 2007, and related performance metrics such as the combined ratio.
FPIG was included in the Group’s operating results from October 1, 2005. FPIC’s book of business tends to operate with higher loss ratios and lower expense ratios than the Group’s business prior to the acquisition. In addition, due to FPIC’s higher usage of reinsurance, it also records higher levels of ceded commission and contingent ceded commission. In the year ended December 31, 2006, the Group, based on FPIC’s reinsurance participations, recognized ceded commissions and net contingent ceded commissions on reinsurance contracts of $9.7 million and $1.2 million, respectively as compared to the year ended December 31, 2005, where the Group recognized ceded commissions and net contingent ceded commissions on reinsurance contracts relating to FPIC of $4.2 million and $1.5 million, respectively.
Federal income tax expense was $4.4 million and $2.9 million for 2006 and 2005, respectively. The effective tax rate was 29.5% for both 2006 and 2005. The 2006 effective tax rate was impacted by an increase in the tax rate on current taxable income of 1% (due to the graduated tax rate structure), offset by higher tax-advantaged income (municipal bond interest and dividend income, which reduce the effective tax rate).
The fair value of an equity security the Group holds in a reinsurance company is based on the estimated selling price of the company based on current offers, which is lower than statutory book value. After receipt of a bona fide offer to purchase this security, the stock must first be offered to the investors or its other shareholders at the lower of statutory book value or the offered price. The investors also have the ability to determine that the potential purchaser is not appropriate and void such an offer. The carrying value of this investment was $776 and $938 at December 31, 2007 and 2006, respectively.
The Group applies the provisions of Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” to account for internally developed computer software costs. In accordance with SOP 98-1, the Group has capitalized $2,499, $942 and $939 in software development costs, respectively, in 2007, 2006 and 2005. Amortization expense of $648 and $641, respectively, was recorded in 2007 and 2006. The unamortized balance was $3,973 and $2,122 at December 31, 2007 and 2006, respectively. These costs are amortized over their useful lives, ranging from three to five years, from the dates the systems technology becomes operational.
Proceeds from the sales of securities were $39,027, $152,438 and $66,537 in 2007, 2006, and 2005, respectively.
The effect of reinsurance with unrelated insurers on unearned premiums as of December 31, 2007 and 2006 is as follows:
All dividends from MIC to MIG require prior notice to the Pennsylvania Insurance Department. All “extraordinary” dividends require advance approval. A dividend is deemed “extraordinary” if, when aggregated with all other dividends paid within the preceding 12 months, the dividend exceeds the greater of (a) statutory net income (excluding unrealized capital gains) for the preceding calendar year or (b) 10% of statutory surplus as of the preceding December 31. As of December 31, 2007, the amount available for payment of dividends from MIC in 2008, without the prior approval, is approximately $6.2 million. In 2005, MIC applied for, and received, approval to pay an extraordinary dividend of $10 million, which was used in connection with the acquisition of FPIG.
Since the merger date, the final tax return was filed for FPIG, resulting in a $8 reduction of goodwill in 2006. In addition, goodwill was reduced by $209 as a result of the adoption of FIN 48 as of January 1, 2007. The change in the carrying amount of goodwill for the years ended December 31, 2007 and 2006 is as follows:
Financial Pacific Statutory Trust II (Trust II) is a Connecticut statutory business trust. The Trust issued 3,000 shares of the Trust preferred securities at a price of $1 per share for $3,000. The Trust purchased $3,093 in Junior Subordinated Debentures from the Group that mature on May 15, 2033. The annual effective rate of interest at December 31, 2007 is 7.35%.