The Company reported a net after-tax loss on continuing operations of $9.0 million for the year ended December 31, 2011 compared to earnings of $2.7 million for the year ended December 31, 2010. The Company reported basic and fully diluted losses per common share from continuing operations of $0.136 for the year ended December 31, 2011 compared to earnings of $0.042 for the same period in 2010. The pre-tax loss from continuing operations was $6.5 million for the period ended December 31, 2011 compared to pre-tax earnings of $4.7 million for the same period in 2010.
Reinsurance recoverable as of December 31, 2011, increased $2.7 million to $36.7 million compared to $34.0 million as of December 31, 2010. The increase is directly related to an increase in ceded loss reserves. AAIC maintains quota-share reinsurance treaties whereby it ceded approximately 65% of premiums and 67% of losses in 2011. The $36.7 million represents the reinsurers’ portion of losses and loss adjustment expenses, both paid and unpaid.
Paid and incurred Bornhuetter-Ferguson method adding expected development to actual paid or incurred experience to project ultimate losses;
Factors that can affect actual frequency include, among others, changes in weather, driving patterns or trends and class of driver. Estimates of average frequency can be affected by changes in claims settlement and reserving practices. Loss severity can be affected by auto repair and medical cost inflation, jury awards and changes in policy limit profiles. Estimation of LAE reserves is subject to variation from factors such as the use of outside adjusters, frequency of lawsuits, claims staffing and experience levels. Key assumptions as of December 31, 2011 and 2010 were premised on historical loss reserve development patterns.
Effective January 1, 2011, the Company entered into a new quota share agreement with Swiss Reinsurance America Corporation for the 2011 treaty year business. The Company ceded 75.0% of the bodily injury liability coverage and 82.5% of physical damage and other automobile liability coverages. The agreement includes a loss corridor of 75.0%-79.0%, whereby the Company shall retain the amount by which losses and LAE incurred exceed 75.0% of net premiums earned, subject to a maximum additional retention equal to 4% of net premiums earned. The reinsurance contract will cover all states except Florida. Further, the Company shall retain the amount by which losses and LAE incurred, after the application of the loss corridor, exceeds 120% of collected net premiums earned. The Company will receive a 21.0% ceding commission on ceded premiums earned if the loss and loss adjustment expense ratio is 73.5% or greater. If the loss ratio is 73.5%, but not less than 71.5% then the ceding commission shall be 21.0%, plus the difference in percentage points between 73.5% and the actual loss ratio. If the loss ratio is 71.5% or less, the ceding commission rate will be 23.0%.
The Company’s reinsurance strategies have not changed from previous years and the Company’s limited loss exposure is based on the existing quota share agreement. While the Company monitors conditions within the reinsurance market, adverse conditions could have an impact on the Company’s ability to secure reinsurance capacity, thereby limiting its ability to cede future premium and losses.