Net premiums earned for UC products increased 2.3%, or 128,739, to $5,697,627 in 2006 from $5,568,888 in 2005 primarily due to an increase in volume for our excess of loss product.
charges included in net realized gains on investments were $7,310 in 2006 compared to zero a year ago. For more information concerning impairment charges, see “Critical Accounting Policies-Other-Than-Temporary Impairment of Investments” below.
Net Realized Gain on Sale of Affiliate. In connection with the sale of ALPC, the Company recorded a net realized gain of approximately $2.5 million ($1.7 million after tax or $0.33 per diluted share) during 2006. See “Overview-Sale of Affiliate” above and Note 1 to the Consolidated Financial Statements for more information concerning this transaction.
Net realized gains on investments increased 17.1%, or $187,581, to $1,281,755 in 2005 from $1,094,174 a year ago. This increase was a combination of the timing of sales of individual securities and other-than-temporary impairments on investments. There were no impairment charges included in net realized gains on investments in 2005 compared to $535,487 in 2004. Included in impairment charges for 2004 is a write down of $334,136 related to a private equity investment due to its financial uncertainty. For more information
preferred debt and revolving line of credit. In addition, a rise in interest rates could decrease the fair value of the Company’s fixed income investment portfolio.
Loss and LAE Reserves at Year End. As of December 31, 2006 and 2005, gross loss and LAE reserves by product line were split between incurred but not reported (“IBNR”) and case reserves as follows:
The discontinued bond program deficiencies were partially offset by reserve redundancies in our automobile lender/dealer, UC and WIP product lines. Our automobile lender/dealer line experienced the largest redundancy ( $1.1 million) which was primarily attributable to the GAP and ULIN product lines as discussed below.
In accordance with SFAS No. 60, the Company recorded this change in reserves as a change in estimate during 2006.
In conjunction with the Sale, on August 31, 2006, the Company also made an investment (the “Investment”) in the Purchaser in the amount of $250,000, consisting of (1) a $137,500 cash purchase of equity securities of the Purchaser and (2) a $112,500 loan to the Purchaser in the form of a subordinated convertible promissory note (the “Convertible Note”). The Convertible Note is to be repaid on August 31, 2016 (if not previously converted), bears interest at an annual rate of 8.0% and is convertible at any time at the option of the Company into additional equity securities of the Purchaser.
As part of its annual goodwill impairment testing in the fourth quarter of 2004, the Company concluded that an impairment of goodwill existed at its property/casualty insurance segment. The Company, with the assistance of an independent appraisal firm, determined that the carrying value of the reporting segment exceeded the fair value of the reporting segment, resulting in a non-cash impairment charge. The fair value of the reporting segment was estimated using the expected present value of future cash flows. As a result of this impairment, the Company a recorded non-cash impairment charge in the fourth quarter of 2004 in the aggregate amount of $753,737.
We have a $10,000,000 unsecured revolving line of credit with a maturity date of June 30, 2009 with no outstanding balance at December 31, 2006 and December 31, 2005. The revolving line of credit provides for interest payable quarterly at an annual rate equal to the prime rate less 75 basis points. The Company utilizes the line of credit from time to time based on short-term cash flow needs. The terms of the revolving credit agreement contain various restrictive covenants. As of December 31, 2006, the Company was in compliance with all such covenants. The bank that provides the line of credit is also a policyholder of the Company.
Effective January 1, 2005, the Company entered into a producer-owned reinsurance arrangement with a guaranteed auto protection insurance agent whereby 100% of that agent’s premiums (along with the associated risk) were ceded to its PORC. For this reinsurance arrangement, the Company has obtained collateral in the form of a letter of credit to secure its obligations. Under the provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and the Company has immediate access to such collateral if necessary. Under this arrangement, the Company ceded premiums earned of $1,987,640, $734,435 and $0 for the years ended December 31, 2006, 2005 and 2004, respectively.