Service Income. Service income was $3.7 million for the year ended December 31, 2004 compared to our predecessor’s $0.7 million for the nine months ended September 30, 2003 and our $1.2 million for the three months ended December 31, 2003, representing a period-over-period increase of $1.8 million, or 94.7%. Our service income results from service arrangements we have with LMC for claims processing services, policy administration and administrative services we perform for the Eagle entities’ insurance policies. Average monthly fees are declining as the volume of work required for policy administration decreases as a result of the run off of our predecessor’s business. Our predecessor’s service income resulted from claim service fees for handling policyholder claims for certain LMC subsidiaries in Alaska and Hawaii where those subsidiaries did not have claims offices.
for each loss occurrence in excess $500,000, up to $100.0 million. See the discussion under the heading “Reinsurance” in Part I, Item 1 of this annual report. Given industry and predecessor trends, we believe we are sufficiently capitalized to retain the first $500,000 of each loss occurrence.
Impairment of investment securities results in a charge to operations when the market value of a security declines to below our cost and is deemed to be other-than-temporary. We regularly review our fixed maturity portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. A number of criteria are considered during this process, including but not limited to the current fair value as compared to amortized cost or cost, as appropriate, of the security, the length of time the security’s fair value has been below amortized cost, our intent and ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value and specific credit issues related to the issuer and current economic conditions. In general, we focus on those securities whose fair value was less than 80% of their amortized cost or cost, as appropriate, for six or more consecutive months. Other-than-temporary impairment losses result in a permanent reduction of the carrying amount of the underlying investment. Significant changes in the factors considered when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the financial statements.
The effects of reinsurance on income statements amounts are as follows for the year ended December 31, 2004 and the three month period ended December 31, 2003:
As a result of changes in estimates of insured events in prior periods, the unpaid loss and loss adjustment expenses increased by approximately $451,000 in the period due to development on previously reported claims. LMC is obligated to reimburse the Company for $385,000 of the prior period development. In connection with the Acquisition, KEIC and LMC entered into an agreement to indemnify each other with respect to developments in KEIC’s unpaid loss and loss adjustment expenses over a period of approximately eight years. December 31, 2011 is the date to which the parties will look to determine whether the loss and loss adjustment expenses with respect to KEIC’s insurance policies in effect at the Acquisition have increased or decreased from the amount existing at the date of the Acquisition.
c. In May 2004, the Company was notified of a claim for damages brought by an individual against PointSure for breach of contract. The Company believes PointSure has valid defenses to this claim and has not established any liability in connection with this claim. No litigation has been commenced.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed in the Acquisition.
On January 26, 2005, the Company closed its initial public offering of 8,625,000 shares of common stock, including the underwriters’ over-allotment option, at a price of $10.50 per share for net proceeds of approximately $80.8 million, after deducting underwriters’ fees, commissions and offering costs totaling approximately $9.7 million. On January 26, 2005, the Company contributed approximately $74.8 million of the net proceeds to SeaBright Insurance Company. As part of the initial public offering, all 508,365.25 outstanding shares of the Company’s Series A preferred stock were converted into 7,777,808 shares of the Company’s common stock. Included in other assets at December 31, 2004 is approximately $1.3 million of offering costs associated with the initial public offering. These costs were deducted from the gross proceeds of the offering at closing.
In February 2005, the Company received from the outside actuary the final report of unpaid loss and loss adjustment expenses at September 30, 2004 related to the adverse development cover agreement with LMC (see Note 17). The Company is currently reviewing the results of the final report.
recovery method, which considers the actual recoveries at a particular calculation date in relation to the total estimated recoveries at that date. The amortization (accretion) related to deferred gains of $131,000 and $(1,537,000) was considered other income (expense) for the nine months ending September 30, 2003 and the year ended December 31, 2002, respectively.
Property and equipment are summarized as of December 31, 2002 as follows (in thousands):
Subsequent to the date of the transaction the net liability for losses reinsured increased. As a result, the net losses recoverable by EPIC and PEIC exceed the amount originally paid for the LPT. The amount by which the liabilities associated with the reinsured policies exceed the amount paid for the LPT is amortized into income over the estimated remaining settlement period of the underlying claims using the recovery method. At December 31, 2002, the deferred gains for the Predecessor was $24,359,000. The effects of subsequent changes in estimated or actual cash flows are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction, with a corresponding charge or credit to income.