Unpaid losses and loss adjustment expenses are comprised of case reserves for known claims, incurred but not reported reserves for unknown claims and any potential development for known claims, and reserves for the cost of administration and settlement of both known and unknown claims. Such liabilities are established based on known facts and interpretation of circumstances, including the Company’s experience with similar cases and historical trends involving claim payment patterns, loss payments and pending levels of unpaid claims, as well as court decisions and economic conditions. The effects of inflation are considered in the reserving process. Establishing appropriate reserves is an inherently uncertain process; the ultimate liability may be in excess of or less than the amount provided. Any increase in the amount of reserves, including reserves for insured events of prior years, could have an adverse effect on the Company’s results for the period in which the adjustments are made. The Company utilizes both its internal actuarial staff and independent consulting actuaries in establishing its reserves. The Company does not discount its loss and loss adjustment expense reserves.
reinsurance transaction with GoshawK Reinsurance Limited (Goshawk Re), a Bermuda reinsurance subsidiary of GoshawK Insurance Holdings plc, a publicly held London-based Lloyd’s underwriter (GoshawK), under which the Company ceded to GoshawK Re almost all of its unearned assumed reinsurance premiums as of June 30, 2002, together with written reinsurance premiums after that date, in each case related to the assumed reinsurance business for the 2001 and 2002 underwriting years. The effect of this transaction was to retrocede to GoshawK $129.3 million of written premium in 2002 and $38.0 million of written premium in 2003. The Company retains certain losses related to the assumed reinsurance business, including those related to the World Trade Center, and the Company continues to participate in one Lloyd’s syndicate for the 2003 underwriting year. The GoshawK Re treaty relieved the Company of underwriting leverage in 2002 and 2003 and improves the Company’s risk-based capital adequacy ratios under both the A.M. Best and NAIC models. Other than net written premiums of $18.3 million from the Lloyd’s syndicate in 2003, the Company had no significant net premiums written from prior year contracts.
The following tables present the Company’s results of operations before taxes:
The Company currently has a net deferred tax asset of $43.7 million as of December 31, 2003, of which $13.9 million relates to a net operating loss carryforward of $39.9 million, which expires in 2021. The Company will be able to utilize this carryforward to reduce taxes in future periods. The losses in 2001 to 2003 which gave rise to the operating loss carryforward were derived primarily by underwriting losses generated by the non-core direct healthcare liability and assumed reinsurance businesses. Since these operations are now in run-off and the core business has historically been profitable on both a GAAP and tax basis after consideration of investment income, the Company’s projections indicate that it is more likely than not that the net operating carryforward will be fully utilized within the carryforward period.