Premium Deficiency

9 Months Ended

Sep. 30, 2011

2.	Premium Deficiency

The Company recognizes a premium deficiency if the sum of expected loss and loss adjustment expenses and unamortized acquisition costs exceeds related unearned premium after consideration of investment income. Any future expected loss on the related unearned premium is recorded first by impairing the unamortized acquisition costs on the related unearned premium followed by an increase to loss and loss adjustment expense reserves on additional expected loss in excess of unamortized acquisition costs.

During the quarter and nine months ended September 30, 2011, the Company incurred a pre-tax premium deficiency charge of $10.5 million, or $0.35 per diluted share, and $11.0 million, or $0.36 per diluted share, respectively. There were no premium deficiency charges incurred during the quarter or nine months ended September 30, 2010.

The charge of $10.5 million incurred during the quarter ended September 30, 2011 consisted of $7.6 million charged to our U.S. Insurance Operations and $2.9 million charged to our Reinsurance Operations. The $7.6 million charge to our U.S. Insurance Operations consisted of $3.7 million recorded to acquisition costs and other underwriting expenses and $3.9 million recorded to loss and loss adjustment expenses. The $2.9 million charge to our Reinsurance Operations was recorded to acquisition costs and other underwriting expenses.

The charge of $11.0 million incurred during the nine months ended September 30, 2011 consisted of $7.6 million charged to our U.S. Insurance Operations and $3.3 million charged to our Reinsurance Operations. The $7.6 million charge to our U.S. Insurance Operations consisted of $3.7 million recorded to acquisition costs and other underwriting expenses and $3.9 million recorded to loss and loss adjustment expenses. The $3.3 million charge to our Reinsurance Operations was recorded to acquisition costs and other underwriting expenses.

As a result of these charges, the Company reduced deferred acquisition costs during the quarter and nine months ended September 30, 2011 by $6.6 million and $7.0 million, respectively. Additionally, the Company accrued a premium deficiency reserve of $3.9 million included in loss and loss adjustment expense reserves during the quarter and nine months ended September 30, 2011.