President and Chief Executive Officer Douglas D. Dirks commented on the revision to the manner in which we account for the contingent profit commission: "Previously and since 2002, we have accounted for paid and accrued contingent profit commission as a reduction in commission expense in the period that the estimate was revised. Under our restated accounting practice, we treat the contingent profit commission as a reduction in the premium paid at the onset of the LPT Agreement, thereby reducing the consideration paid for the agreement and consequently reducing the deferred gain. We will continue to amortize any gain related to the contingent profit over the first twenty five years of the LPT agreement, or until June 30, 2024. The change to this new accounting method did not change the amount of our estimated gain related to the contingent profit commission, which was approximately $44 million at December 31, 2012 and is being amortized into income over that 25 year period. As a result of this change in accounting, our non-GAAP disclosures 'before the impact of the LPT Agreement' now also exclude the impact of the contingent profit commission."

The following table shows the reconciliations of net income, earnings per diluted share and the combined ratio to these measures adjusted for the impact of the LPT Agreement (the Company's non-GAAP measures described in the definitions below), as redefined.

Reconciliation of Net income to Net income before impact of the LPT Agreement, Earnings per diluted common share to Earnings per diluted common share before impact of the LPT Agreement and Combined ratio to Combined ratio before impact of the LPT Agreement
 
             

 
           

 

 

 

 

Three Months

Three Months
Twelve Months

Twelve Months

Ended December

31,

Ended December

31,

Ended December

31,

Ended December

31,
(in thousands except per share data) 2012 2011 2012 2011
 

(As Restated)
 

(As Restated)
Net income $ 87,769   $ 19,962   $ 106,891   $ 48,623  
Less amortization of the Deferred Gain 4,033 4,470 16,976 18,249
Less impact of LPT Agreement Reserve Adjustment 73,349 73,349
 
Less impact of LPT Contingent Commission Adjustment 8,601   316   9,609   1,050  
Net income before impact of the LPT Agreement $ 1,786   $ 15,176   $ 6,957   $ 29,324  
 
Earnings per diluted common share $ 2.82   $ 0.58   $ 3.37   $ 1.30  
Less amortization of the Deferred Gain 0.13 0.13 0.54 0.49
Less impact of LPT Agreement Reserve Adjustment 2.35 2.31
 
Less impact of LPT Contingent Commission Adjustment 0.28   0.01   0.30   0.03  
Earnings per diluted common share before impact of the LPT Agreement $ 0.06   $ 0.44   $ 0.22   $ 0.78  
 
Combined ratio 51.4 % 110.6 % 95.3 % 113.9 %
 
Plus amortization of the Deferred Gain in losses & LAE 2.9 % 4.5 % 3.5 % 4.8 %
Plus impact of LPT Agreement Reserve Adjustment 52.1 % 14.6 %
 
Plus impact of LPT Contingent Commission Adjustment 6.1 % 0.3 % 1.9 % 0.5 %
Combined ratio before impact of the LPT 112.5 % 115.4 % 115.3 % 119.2 %
 

As we have previously disclosed, implementation of the new accounting guidance related to the definition of acquisition costs which may be capitalized, effective in January 2012, also impacted our financial results in the fourth quarter and the full year 2012. This change in the definition of deferred acquisition costs (DAC) lowered our reported net income throughout the year as a result of having to expense certain costs that were capitalized in prior years. The Company's financial results have not been retroactively adjusted for the change in DAC accounting. For ease of comparison, reconciliations of fourth quarter and full year results, which illustrate the year over year impact of the change in DAC accounting and the LPT impact, are included in the tables attached to this press release.

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