Add
PRA to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PRA > SEC Filings for PRA > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
Quarterly Report
We evaluate each of our ceded reinsurance contracts at inception to determine
if there is sufficient risk transfer to allow the contract to be accounted for
as reinsurance under current accounting guidance. At September 30, 2009 all
ceded contracts are accounted for as risk transferring contracts.
Our receivable from reinsurers on unpaid losses and loss adjustment expenses
represents our estimate of the amount of our reserve for losses that will be
recoverable under our reinsurance programs. We base our estimate of funds
recoverable upon our expectation of ultimate losses and the portion of those
losses that we estimate to be allocable to reinsurers based upon the terms of
our reinsurance agreements. Our assessment of the collectability of the recorded
amounts receivable from reinsurers considers the payment history of the
reinsurer, publicly available financial and rating agency data, our
interpretation of the underlying contracts and policies, and responses by
reinsurers. Appropriate reserves are established for any balances we believe may
not be collected.
Given the uncertainty of the ultimate amounts of our losses, our estimates of
losses and related amounts recoverable may vary significantly from the eventual
outcome. Also, we estimate premiums ceded under reinsurance agreements wherein
the premium due to the reinsurer, subject to certain maximums and minimums, is
based in part on losses reimbursed or to be reimbursed under the agreement. Any
adjustments are reflected in then-current operations. Due to the size of our
reinsurance balances, an adjustment to these estimates could have a material
effect on our results of operations for the period in which the adjustment is
made.
Investment Valuations
Virtually all of our financial assets are comprised of investments recorded
at fair value. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Assets and liabilities valued at
fair value are classified as Level 1, 2, or 3 based on how transparent
(observable) the inputs are that are used to determine the fair value with Level
1 being the most observable and Level 3 the least or not observable.
Of the Company's investments recorded at fair value totaling $3.7 billion,
approximately 99% of our investments are based on observable market prices or
observable market parameters (i.e. broker quotes, benchmark yield curves, issuer
spreads, bids, etc.). The availability of observable market prices and pricing
parameters (referred to as observable inputs) can vary from investment to
investment. We utilize observable inputs, when such inputs are available and
relate to normal active markets. In many cases, we obtain multiple observable
inputs for an investment to derive the fair value without requiring significant
judgments.
We use a pricing service, Interactive Data Corporation (IDC), to value our
investments that have an exchange traded price or multiple observable inputs
related to comparable securities. Because most fixed income securities do not
trade daily, values provided by IDC are generally based on evaluated pricing
models. Such models vary by asset class and utilize data based on trade, bid and
other market information as well as cash flow and available loan performance
data for securities considered comparable to the security being valued. IDC has
indicated that trade and bid data are included in its valuation models only
after it has been scrutinized for consistency with other market information
obtained or developed by IDC. We do not utilize IDC to price investments that do
not have multiple observable inputs (Level 3). IDC discloses the inputs used for
each asset class that it prices. We review the inputs for the asset classes we
own in order to make the appropriate level designation.
All securities priced by IDC using an exchange traded price are designated by
us as Level 1. Level 1 investments are currently limited to exchange traded
common and preferred equity securities, and money market funds with quoted Net
Asset Values (NAVs).
We designate as Level 2 those securities not actively traded on an exchange
for which IDC uses multiple verifiable observable inputs including last reported
trade, non-binding broker quotes, benchmark yield curves, issuer spreads, two
sided markets, benchmark securities, bids, offers, and assumed prepayment
speeds.
IDC provides a single price per instrument quoted. We review the pricing for
reasonableness each quarter by comparing market yields generated by the supplied
price versus market yields observed
in the market place. If a supplied price is deemed unreasonable, we will
challenge the price with IDC and make adjustments if deemed necessary. To date,
we have not adjusted any prices supplied by IDC.
For securities that do not have multiple observable inputs (Level 3), we do
not rely on a price from IDC. Our Level 3 assets are primarily non-publicly
traded investments which are valued by management either using non-binding
broker quotes or pricing models that utilize market based assumptions which have
limited observable inputs including treasury yield levels, issuer spreads and
non-binding broker quotes. The valuation techniques involve some degree of
judgment. Approximately $46.0 million of our investments (1% of investments
recorded at fair value) are valued in this manner.
Most of our investments recorded at fair value are considered
available-for-sale although the majority of our equity securities are classified
as trading. For investments considered available-for-sale, changes in the fair
value are recognized as unrealized gains and losses and are included, net of
related tax effects, in stockholders' equity as a component of other
comprehensive income (loss). Gains or losses on these investments are recognized
in earnings in the period the investment is sold or when an other-than-temporary
impairment (OTTI) is deemed to have occurred. Changes in the fair value of
investments considered as trading are recorded in realized investment gains and
losses in the current period.
We also have other investments, primarily comprised of equity interests in
private investment funds (non-public investment partnerships and limited
liability companies), $47.4 million of which are accounted for using the equity
method and $31.1 million of which are carried at cost. We evaluate these
investments for OTTI by considering any declines in fair value below the
recorded value. Determining whether there has been a decline in fair value
involves assumptions and estimates as there are typically no observable inputs
to determine the fair value of these investments.
We evaluate all our investments on at least a quarterly basis for declines in
fair value that represent OTTI. Some of the factors we consider in the
evaluation of our investments are:
• the extent to which the fair value of an investment is less than its
recorded basis;
• the length of time for which the fair value of the investment has been less than its recorded basis;
• the financial condition and near-term prospects of the issuer underlying the investment, taking into consideration the economic prospects of the issuer's industry and geographical region, to the extent that information is publicly available;
• third party research and credit rating reports;
• the extent to which the decline in fair value is attributable to credit risk specifically associated with an investment or its issuer;
• the extent to which we believe market assessments of credit risk for a specific investment or category of investments are either well founded or are speculative;
• our internal assessments and those of our external portfolio managers regarding specific circumstances surrounding an investment, which can cause us to believe the investment is more or less likely to recover its value than other investments with a similar structure;
• for asset-backed securities: the origination date of the underlying loans, the remaining average life, the probability that credit performance of the underlying loans will deteriorate in the future, and our assessment of the quality of the collateral underlying the loan;
• for equity securities, our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value;
• for debt securities, our intent to sell the security and whether or not we are more likely than not to be required to sell the security before recovery of its amortized cost basis;
• the historical and implied volatility of the fair value of the security;
• the payment structure of the debt security (for example, nontraditional loan terms) and the likelihood of the issuer being able to make payments that increase in the future;
• failure of the issuer of the security to make scheduled interest or principal payments;
• any changes to the rating of the security by a rating agency;
• recoveries or additional declines in fair value subsequent to the balance sheet date.
Determining whether a decline in the fair value of investments is an OTTI may
also involve a variety of assumptions and estimates, particularly for
investments that are not actively traded in established markets or during
periods of market dislocation. For example, assessing the value of certain
investments requires us to perform an analysis of expected future cash flows or
prepayments. For investments in tranches of structured transactions, we are
required to assess the credit worthiness of the underlying investments of the
structured transaction.
When we judge a decline in fair value of debt securities to be
other-than-temporary, we recognize in earnings the portion of the impairment
loss that is due to credit loss (the excess of the current amortized cost basis
of the security and the present value of expected future cash flows). We
recognize the portion that is due to non-credit factors in other comprehensive
income, provided that we have no intent to sell the security and it is not more
likely than not that we will be required to sell the security prior to recovery
of its amortized cost basis. In subsequent periods, we base any measurement of
gain or loss or impairment on the revised amortized basis of the security.
Deferred Policy Acquisition Costs
Policy acquisition costs, primarily commissions, premium taxes and
underwriting salaries, which are directly related to the acquisition of new and
renewal premiums, are capitalized as deferred policy acquisition costs and
charged to expense as the related premium revenue is recognized. We evaluate the
recoverability of our deferred policy acquisition costs each reporting period
and any amounts estimated to be unrecoverable are charged to expense in the
current period.
Deferred Taxes
Deferred federal income taxes arise from the recognition of temporary
differences between the basis of assets and liabilities determined for financial
reporting purposes and the basis determined for income tax purposes. Our
temporary differences principally relate to loss reserves, unearned premiums,
deferred policy acquisition costs, unrealized investment gains (losses) and
investment impairments. Deferred tax assets and liabilities are measured using
the enacted tax rates expected to be in effect when such benefits are realized.
We review our deferred tax assets quarterly for impairment. If we determine that
it is more likely than not that some or all of a deferred tax asset will not be
realized, a valuation allowance is recorded to reduce the carrying value of the
asset. In assessing the need for a valuation allowance, management is required
to make certain judgments and assumptions about our future operations based on
historical experience and information as of the measurement period regarding
reversal of existing temporary differences, carryback capacity, future taxable
income, including its capital and operating characteristics, and tax planning
strategies.
Goodwill
We make at least an annual assessment as to whether the value of our goodwill
assets is impaired. Management evaluates the carrying value of goodwill annually
during the fourth quarter and before the annual evaluation if events occur or
circumstances change that would more likely than not reduce the fair value below
the carrying value. In assessing goodwill, management estimates the fair value
of each reporting unit and compares that estimate to the carrying value of the
reporting unit. We did not record any impairment of goodwill as of our last
evaluation date, October 1, 2008, and do not believe there has been any change
of events or circumstances that would indicate that a re-evaluation of goodwill
is required as of September 30, 2009.
Accounting Changes Adopted
FASB Accounting Standards Codification
On July 1, 2009, the FASB published the FASB Accounting Standards
Codification (the Codification) as the single source of authoritative
nongovernmental GAAP, effective for interim and annual periods ending after
September 15, 2009. The Codification is not intended to change current GAAP, but
rather to provide all the authoritative literature related to a particular topic
in one place. Upon the effective date, all pre-existing accounting standard
documents were superseded and accounting literature not included in the
Codification became non-authoritative. We have adopted use of the Codification
as of the quarter ending September 30, 2009; adoption had no effect on our
results of operations or financial position.
Subsequent Events
Effective for fiscal years, and interim periods within those fiscal years,
ending on or after June 15, 2009, GAAP guidance was revised to more clearly set
forth the period after the balance sheet date during which management should
evaluate events or transactions for potential recognition or disclosure in the
financial statements, the circumstances under which events or transactions after
the balance sheet date should be recognized and the disclosures that should be
made regarding such events. We adopted the revised guidance as of the quarter
ended June 30, 2009; adoption had no effect on our results of operations or
financial position.
Fair Value
Effective for fiscal years, and interim periods within those fiscal years,
ending on or after June 15, 2009, the FASB revised existing GAAP guidance
regarding the valuation of assets or liabilities when the volume and level of
market transactions for those assets or liabilities has significantly decreased.
The revised guidance clarifies factors to be considered in determining whether
there has been a significant decrease in market activity for an asset in
relation to normal activity and provides additional guidance on when the use of
multiple (or different) valuation techniques may be warranted and considerations
for determining the weight that should be applied to the various techniques. The
revisions also establish a requirement that conclusions about whether
transactions are orderly be based on the weight of the evidence and require
entities to disclose any changes to valuation techniques (and related inputs)
that result from a conclusion that markets are not orderly and the effect of the
change, if practicable. We adopted the revised guidance as of the quarter ended
June 30, 2009; adoption had no significant effect on our results of operations
or financial position.
Effective for fiscal years, and interim periods within those fiscal years,
ending on or after June 15, 2009, the FASB has revised previously existing
guidance to require publicly traded companies to provide disclosures about fair
values of financial instruments for interim reporting periods as well as in
annual financial statements and in any summarized financial information issued
at interim reporting periods. We adopted the revised guidance as of the quarter
ended June 30, 2009; adoption had no effect on our results of operations or
financial position.
Investments-Disclosure Requirements; Other-than-temporary Impairments
Effective for fiscal years, and interim periods within those fiscal years,
ending on or after June 15, 2009, the FASB altered previously existing GAAP
guidance for investments in debt and equity securities. The new guidance
specifies that disclosures for debt and equity securities should be provided for
interim as well as annual periods. GAAP guidance related to other-than-temporary
impairments was also altered. Previous investment guidance required that an
impairment of a debt security be considered as other-than-temporary unless
management could assert both the intent and the ability to hold the impaired
security until recovery of value. The revised impairment guidance specifies that
an impairment be considered as other-than-temporary unless an entity can assert
that it has no intent to sell the security and that it is not more likely than
not that the entity will be required to sell the security before recovery of its
anticipated amortized cost basis. The new guidance also establishes the concept
of credit loss. Credit loss is defined as the difference between the present
value of the cash flows expected to be collected from a debt security and the
amortized cost basis of the security. The new guidance states that "in instances
in which a determination is made that a credit loss exists but the entity does
not intend to sell the debt security and it is not more likely than not that the
entity will be required to sell the debt security
before the anticipated recovery of its remaining amortized cost basis" an
impairment is to be separated into (a) the amount of the total impairment
related to the credit loss and (b) the amount of total impairment related to all
other factors. The credit loss component of the impairment is to be recognized
in income of the current period. The non-credit component is to be recognized as
a part of other comprehensive income. Transition provisions require a cumulative
effect adjustment to reclassify the noncredit component of a previously
recognized other-than-temporary impairment from retained earnings to accumulated
other comprehensive income "if an entity does not intend to sell and it is not
more likely than not that the entity will be required to sell the security
before recovery of its amortized cost basis". We adopted this guidance as of the
beginning of the quarter ended June 30, 2009. As of April 1, 2009, our debt
securities included non-credit impairment losses previously recognized in
earnings of approximately $5.4 million. In accordance with the transition
provisions of the revised guidance, we reclassified these credit losses, net of
tax, from retained earnings to accumulated comprehensive income as of April 1,
2009 (a $3.5 million increase to retained earnings; a $3.5 million decrease to
accumulated other comprehensive income).
Convertible Debentures
Effective January 1, 2009 previous GAAP guidance regarding the accounting for
Convertible Debentures has been revised. The revised guidance requires issuers
to account for convertible debt securities that allow for either mandatory or
optional cash settlement (including partial cash settlement) by separating the
liability and equity components in a manner that reflects the issuer's
nonconvertible debt borrowing rate at the time of issuance and requires
recognition of additional (non-cash) interest expense in subsequent periods
based on the nonconvertible rate. Additionally, when such debt instruments are
repaid or converted, any consideration transferred at settlement is to be
allocated between the extinguishment of the liability component and the
reacquisition of the equity component. The revised guidance is applicable to the
Convertible Debentures which we converted in July 2008. We adopted the revised
guidance as of its effective date January 1, 2009; adoption had no effect on
2009 operating results because no convertible debt has been outstanding during
2009. The cumulative effect of adoption, which would be an increase to
additional paid-in capital of $65,000 and an offsetting decrease to retained
earnings of the same amount, has not been recorded because the effect is
immaterial and would not change total stockholders' equity.
Non-controlling Interests in Subsidiaries
Effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, existing GAAP guidance was revised to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. We adopted this
guidance as of its effective date, January 1, 2009. Adoption did not have an
effect on our results of operations or financial position.
Business Combinations
Existing GAAP guidance related to business combinations has been revised
effective prospectively for combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The revision retains the previous requirement that the
acquisition method of accounting be used for all business combinations but
provides new and additional guidance including: defining the acquirer in a
transaction, the valuation of assets and liabilities when noncontrolling
interests exist, the treatment of contingent consideration, the treatment of
costs incurred to effect the acquisition, the treatment of reorganization costs,
and the valuation of assets and liabilities when the purchase price is below the
net fair value of assets acquired. We adopted the new guidance as of its
effective date, January 1, 2009 and accounted for our acquisitions of
Mid-Continent General Agency, Inc. (Mid-Continent), Georgia Lawyers Insurance
Company (Georgia Lawyers) and Podiatry Insurance Company of America
(PICA) during the first and second quarters of 2009 in accordance with the
revised guidance (see Note 3).
Accounting Changes Not Yet Adopted
Consolidation of Variable Interest Entities
In June 2009, the FASB issued new guidance (effective for fiscal years
beginning after November 15, 2009 and interim periods within those fiscal years)
which changes how a reporting entity determines whether or not to consolidate
its interest in an entity that is insufficiently capitalized or is not
controlled through voting (or similar) rights. The determination of whether a
reporting entity is required to consolidate another entity will now be based on,
among other things, the other entity's purpose and design and the reporting
entity's ability to direct the activities of the other entity that most
significantly impact the other entity's economic performance. The revised
guidance also requires the reporting entity to provide additional disclosures
about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. A reporting entity will be
required to disclose how its involvement with a variable interest entity affects
the reporting entity's financial statements. Management is currently evaluating
the new guidance and has not yet completed its determination of the impact on
our results of operations or financial position.
Fair Value
In August 2009 the FASB issued updated guidance regarding the valuation of
liabilities at fair value; the guidance is effective for the first reporting
period that begins after issuance of the guidance. The updated guidance
clarifies that when a quoted price in an active market for an identical
. . .
|
|