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UNDER
THE SECURITIES ACT OF 1933
Delaware | 6331 | 73-1665495 | ||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
J. Brett Pritchard Christopher A. Pesch Locke Lord Bissell & Liddell LLP 111 South Wacker Drive Chicago, Illinois 60606 (312) 443-0700 | John J. Sabl Beth Flaming Sidley Austin LLP One South Dearborn Street Chicago, Illinois 60603 (312) 853-7000 |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
Proposed Maximum | Amount of | |||||
Title of Each Class of | Aggregate | Registration | ||||
Securities to be Registered | Offering Price(1)(2) | Fee | ||||
Common Stock, par value $0.001 per share | $207,000,000 | $11,550.60 | ||||
(1) | Includes amount attributable to shares of common stock issuable upon the exercise of the underwriters’ over-allotment option. | |
(2) | Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. |
(3) | Of such fee, $10,588.05 was previously paid. |
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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. |
Per Share | Total | |||||||
Price to public | $ | $ | ||||||
Discounts and commissions to underwriters(1) | $ | $ | ||||||
Net proceeds (before expenses) to us | $ | $ |
(1) | No discounts will be paid to underwriters with respect to shares purchased by our directors, officers and employees or persons having business relationships with us in the directed share program. See “Underwriting” on page 181 of this prospectus for a description of the underwriters’ compensation. |
FBR Capital Markets |
Macquarie Capital |
Oppenheimer & Co. |
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EX-23.2 |
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• | references to “Patriot,” “our company,” “we,” “us” or “our” refer to Patriot Risk Management, Inc. and its direct and indirect wholly-owned subsidiaries, including Guarantee Insurance Group, Inc., Guarantee Insurance Company, PRS Group, Inc. and its subsidiaries and Patriot Underwriters, Inc. and its subsidiary, unless the context suggests otherwise; | |
• | references to “Patriot Risk Management” refer solely to Patriot Risk Management, Inc., unless the context suggests otherwise; | |
• | references to “Guarantee Insurance” refer solely to Guarantee Insurance Company, our wholly-owned insurance company; | |
• | references to “PUI” refer collectively to Patriot Underwriters, Inc. and its direct wholly-owned subsidiary, Patriot General Agency, Inc.; | |
• | references to “PRS” refer collectively to PRS Group, Inc. and its direct and indirect wholly-owned subsidiaries, including Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc., Patriot Insurance Management Company, Inc., Patriot Re International, Inc. and Patriot Recovery, Inc., unless the context suggests otherwise; | |
• | references to “PF&C” and “Argonaut-Southwest” refer solely to Argonaut-Southwest Insurance Company, a shell property and casualty insurance company domiciled in Illinois that is not currently writing new business and that, subject to receiving regulatory approvals, we plan to acquire within 30 days after the date of this prospectus and rename as Patriot Fire & Casualty Insurance Company; | |
• | references to “alternative market business” refer to arrangements in which workers’ compensation insurance policies are written by Guarantee Insurance and the policyholder or another party bears a substantial portion of the underwriting risk, primarily through the reinsurance of the risk by a segregated portfolio captive (as described below). This business also includes other arrangements through which we share underwriting risk with our policyholders, such as pursuant to a large deductible policy or a retrospectively rated policy; | |
• | references to “traditional business” refer to guaranteed cost workers’ compensation insurance policies written by Guarantee Insurance in which Guarantee Insurance bears substantially all of the underwriting risk, subject to reinsurance arrangements. Workers’ compensation insurance is a system established under state and federal laws under which employers provide insurance for benefit payments to their employees for work-related injuries, deaths and diseases, regardless of fault, in exchange for mandatory relinquishment of the employee’s right to sue his or her employer for the tort of negligence; and |
• | references to “segregated portfolio captive” refer to a captive reinsurance company that operates as a single legal entity with segregated pools of assets, or segregated portfolio cells. The pool of assets and associated liabilities of each segregated portfolio cell within a segregated portfolio captive are solely for the benefit of the segregated portfolio cell participants, and the pool of assets of one segregated portfolio cell is statutorily protected from the creditors of the others. In this prospectus, we sometimes refer to the segregated portfolio cell participants as the owners of the cell. |
• | all amounts assume no exercise of the underwriters’ over-allotment option; | |
• | all share numbers assume the automatic conversion of our Series A convertible preferred stock, stated value $1,000 per share, into [ ] shares of our common stock and the automatic conversion of our Series B common stock, par value $.001 per share, into [ ] shares of our common stock upon completion of this offering; and |
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• | all share amounts (other than the stock options and warrants to be issued upon completion of this offering) have been adjusted to reflect a [ ] to 1 stock split to be effected immediately prior to completion of this offering. |
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• | In our insurance services segment, we generate fee income by providing workers’ compensation claims services as well as agency and underwriting services almost entirely for the benefit of Guarantee Insurance, segregated portfolio captives and Guarantee Insurance’s traditional business quota share reinsurers under the Patriot Risk Services brand, and have recently begun providing these services for another insurance company under its brand, a practice which we refer to as business process outsourcing, or BPO. | |
• | In our insurance segment, we generate underwriting income and investment income by providing alternative market workers’ compensation risk transfer solutions and traditional workers’ compensation insurance coverage in Florida and 22 other jurisdictions. |
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• | small to medium-sized employers in a broad array of industries, including clerical and professional services, food services, retail and wholesale operations and industrial services; | |
• | low to medium hazard classes; and | |
• | accounts with annual premiums below $250,000. |
• | Exclusive Focus on Workers’ Compensation Services and Products. Our operations are focused exclusively on workers’ compensation insurance services, workers’ compensation alternative market risk management solutions and traditional workers’ compensation insurance coverage. We believe this focus allows us to provide superior services and products to our customers relative to multiline insurance service providers and multiline insurance carriers. Furthermore, a significant portion of our services and products are provided in Florida, and we believe that certain of our multiline competitors that offer workers’ compensation coverage as part of a package policy including commercial property coverage tend to compete less for Florida workers’ compensation business because of property-related loss experience. |
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• | Hybrid Business Model. In addition to the fee income we earn for nurse case management, cost containment and other insurance services, we also earn ceding commissions on our alternative market business involving segregated portfolio cell captives, and we earn underwriting and investment income on our alternative market and traditional workers’ compensation business. Because our nurse case management and cost containment service income is principally related to workers’ compensation claim frequency and medical costs, the operating results of our insurance services segment are not materially dependent on fluctuations or trends in prevailing workers’ compensation insurance premium rates. We believe that by changing the emphasis we place on our insurance services segment and ceding commission-based alternative market business relative to our traditional workers’ compensation business, we will be better able to achieve attractive returns and growth through a range of market cycles. |
• | Targeted Market for Alternative Market Risk Transfer Solutions. Although other insurers generally only offer alternative market products to large corporate customers, we offer alternative market workers’ compensation solutions to small, medium and larger-sized employers, enabling them and others to share in the claims experience and benefit from favorable loss experience. |
• | Enhanced Traditional Business Product Offerings. In our traditional business, we offer a number of flexible payment plans, including pay-as-you-go plans in which we partner with payroll service companies and our independent agents and their small employer clients to collect premiums and payroll information on a monthly or bi-weekly basis. Pay-as-you-go plans provide us with current payroll data and allow employers to remit premiums through their payroll service provider in an automated fashion. Flexible payment plans give employers a way to purchase workers’ compensation insurance without having to make a large upfront premium deposit payment. We believe that flexible payment plans, including pay-as-you-go plans, for small employers provide us with the opportunity to earn more favorable underwriting margins due to several factors: |
i. | favorable cash flows afforded under this plan can be more important to smaller employers than a price differential; | |
ii. | smaller employers are generally less able to obtain premium rate credits and discounts; and | |
iii. | the premium remittance mechanism results in a more streamlined renewal process and a lower frequency of business being re-marketed at renewal, leading to more favorable retention rates. |
• | Specialized Underwriting Expertise. We select and price our alternative market and traditional business products based on the specific risk associated with each potential policyholder rather than solely on the policyholder’s industry class. We utilize state-specific actuarial models on accounts with annual premiums over $100,000. In our alternative market business, we seek to align our interests with those of our policyholders or other parties participating in the risk-sharing arrangements by having them share in the underwriting profits and losses. We believe that we can compete effectively for alternative market and traditional insurance business based on our specialized underwriting focus and our accessibility to our clients. We generally compete on these attributes more so than on price, which we believe is generally not a differentiating factor in the states in which we write most of our business. For the nine months ended September 30, 2009 and year ended December 31, 2008, we reported consolidated net loss ratios of 55.9% and 57.5%, respectively. The net loss ratio is the ratio between losses and loss adjustment expenses incurred and net premiums earned, and is a measure of the effectiveness of our underwriting efforts. |
• | Effective Claims Management, Nurse Case Management and Cost Containment Services. Guarantee Insurance began writing business as a subsidiary of Patriot Risk Management, in the first quarter of 2004. As our business has grown, we have been successful in reasonably estimating our total liabilities for losses and loss adjustment expenses, establishing and maintaining adequate case reserves and rapidly closing claims. We provide our customers with an active claims management program. Our claims department employees average more than 12 years of workers’ compensation insurance industry experience, and members of our claims management team average more than 24 years of workers’ |
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compensation experience. In addition, our nurse case management and bill review professionals have extensive training and expertise in assisting injured workers to return to work quickly. As of December 31, 2008, approximately 6%, 2%, 1% and 0.4% of total reported claims for accident years 2007, 2006, 2005 and 2004, respectively, remained open. Final net paid losses and loss adjustment expenses associated with closed claims are approximately 5% less than the initial reserves established for them. |
• | Strong Distribution Relationships. We maintain relationships with our network of more than 570 independent, non-exclusive agencies in 23 jurisdictions by emphasizing personal interaction and superior service and maintaining an exclusive focus on alternative market workers’ compensation solutions and traditional workers’ compensation insurance coverage. Our experienced underwriters work closely with our independent agents to market our products and serve the needs of prospective policyholders. | |
• | Proven Leadership and Experienced Management. The members of our senior management team average over 20 years of insurance industry experience and over 15 years of workers’ compensation insurance experience. Their authority and areas of responsibility are consistent with their functional and state-specific experience. |
• | Expand in Our Existing Markets. In all of the states in which we operate, we believe that a significant portion of total workers’ compensation insurance premium is written by numerous companies that individually have a small market share. We believe that our market share in each of the states in which we currently write business does not exceed 2%. We plan to continue to take advantage of our competitive position to expand in our existing markets. We believe that our risk selection, claims management, nurse case management and cost containment capabilities position us to profitably increase market share in our existing markets. |
• | Expand into Additional Markets. We are licensed to write workers’ compensation insurance in 27 jurisdictions, and we also hold 4 inactive workers’ compensation licenses. For the nine months ended September 30, 2009, we wrote traditional and alternative market business in 23 jurisdictions, principally in those jurisdictions that we believe provide the greatest opportunity for near-term profitable growth. For the nine months ended September 30, 2009, approximately 74% of our traditional and alternative market business was written in Florida, New Jersey, Missouri, Georgia and New York. We wrote approximately 28% of our direct premiums written in Florida for the nine months ended September 30, 2009. We plan to expand our business in states where we believe we can profitably write business. To do this, we plan to continue to leverage our talented pool of personnel, some of whom have prior expertise operating in states in which we do not currently operate. In addition, we may seek to acquire other insurance companies, books of business or other workers’ compensation policy and claims administration providers, general agencies or general underwriting organizations as we expand in our existing markets and into additional markets. |
• | Expand our BPO Business. In 2009, we entered into an agreement to produce business and perform insurance services for our BPO customer to gain access to workers’ compensation insurance business in certain additional states. For the nine months ended September 30, 2009, approximately 34% of the business we produced and serviced for our BPO customer was in California, and approximately 31% of such business was in either Texas, Michigan, Illinois or South Carolina. We are in negotiations with two other insurance companies, and are seeking agreements with additional insurance companies, with respect to similar BPO arrangements. |
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• | Expand Nurse Case Management, Cost Containment and Other Insurance Services Operations. We plan to continue to generate fee income through our insurance services segment by offering workers’ compensation nurse case management and cost containment services to segregated portfolio captives and our quota share reinsurers. We plan to offer these services, together with general agency, general underwriting and policy and claims administration services, to other regional and national insurance companies and self-insured employers. We also plan to increase our insurance services income by expanding both organically and through strategic acquisitions of workers’ compensation policy and claims administration service providers, general agencies or general underwriting organizations. Taking advantage of our hybrid business model, we plan to identify and acquire insurance services operations that will create synergies with our alternative market and traditional workers’ compensation business. |
• | Obtain a Favorable Rating from A.M. Best. We have been informed by A.M. Best that after completion of this offering, we may expect Guarantee Insurance to receive a financial strength rating of “A−” (Excellent), which is the fourth highest of fifteen A.M. Best rating levels. This rating assignment is subject to the completion of this offering and the capitalization of Guarantee Insurance (and PF&C if we acquire it) as contemplated in this prospectus and is conditioned on Guarantee Insurance meeting the assumptions included in the business plan we presented to A.M. Best. If we acquire PF&C as described elsewhere in this prospectus, this rating assignment is also conditioned upon regulatory approval of a pooling agreement between Guarantee Insurance and PF&C. Pooling is a risk-sharing arrangement under which premiums and losses are shared between the pool members. We expect to make the contemplated capital contributions within 30 days after the date of this prospectus when we purchase PF&C or conclude not to proceed with that transaction. The prospective rating indication we received from A.M. Best is not a guarantee of final rating outcome. In addition, in order to maintain this rating, Guarantee Insurance (as well as PF&C if it is acquired) must maintain capitalization at a level that A.M. Best requires to support the assignment of the “A−” rating, and any material negative deviation from the business plan presented to A.M. Best, including in terms of management, earnings, capitalization or risk profile could result in negative rating pressure and possibly a rating downgrade. While we have expanded our business profitability without an A.M. Best rating and we believe that we can continue to do so with the net proceeds from this offering, we believe that an “A−” rating from A.M. Best would increase our ability to market to large employers and create new opportunities for our products and services in rating sensitive markets. A.M. Best’s ratings reflect its opinion of an insurance company’s financial strength and ability to meet ongoing obligations to policyholders and are not intended for the protection of investors. |
• | Leverage Existing Infrastructure. We service our insurance services customers and policyholders through regional offices in three states, each of which we believe has been staffed to accommodate a certain level of insurance services business and premium growth. We plan to realize economies of scale in our workforce and leverage other scalable infrastructure costs. |
• | Adequacy of Loss Reserves. Our loss reserves are based upon estimates that are uncertain. These estimates may be inadequate to cover our actual losses, in which case we would need to increase our reserves, which would result in a decrease in our net income. In addition, Guarantee Insurance has legacy asbestos and environmental claims arising out of the sale of general liability insurance and participations in reinsurance assumed through underwriting management organizations prior to 1984. There are significant additional uncertainties in estimating the amount of potential losses from asbestos and environmental claims. As a result, it is more difficult to estimate what the ultimate loss costs will be for these claims than for other types of claims. |
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• | Pricing Our Premiums. We underwrite and price our insurance policies at their inception before all of the underlying costs are known. If we price our premiums too low, we will have insufficient income to cover our losses and expenses. In addition, we do business in several administered pricing states, including Florida, where insurance rates are set by the state insurance regulatory authorities and are adjusted periodically. There can be no assurance that state-mandated insurance rates in administered pricing states will enable us to generate appropriate underwriting margins. For the nine months ended September 30, 2009 and the year ended December 31, 2008, we wrote approximately 52% and 67% of our direct premiums written, respectively, in administered pricing states. |
• | Geographic Concentration. Our business is concentrated in Florida and a few other states. Our financial performance is tied to the business, economic and regulatory conditions in these states. If the environment in these states worsens, there could be an adverse effect on our business, financial condition and results of operations. | |
• | Cyclical Nature of the Workers’ Compensation Industry and Economic Downturn. The workers’ compensation insurance industry has historically fluctuated with periods of low premium rates and excess underwriting capacity resulting from increased competition followed by periods of high premium rates and shortages of underwriting capacity resulting from decreased competition. This cyclicality is beyond our control and may adversely affect our overall financial performance. In addition, the prevailing macroeconomic conditions in the fourth quarter of 2008 and in 2009 have led to a decrease in payrolls and a corresponding decrease in workers’ compensation direct premiums written. | |
• | Limited Operating History. We commenced operations in 2004 after acquiring Guarantee Insurance, and we formed PRS in 2005. An investor in our common stock should consider that, as a relatively new company, we have a limited operating history on which you can evaluate our performance and base an estimate of our future earning prospects. Accordingly, our future results of operations or financial condition may vary significantly from expectations. |
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* | Subject to obtaining regulatory approvals, we plan to acquire PF&C within 30 days after the date of this prospectus. See “— Recent Developments — Acquisition of Shell Insurance Company.” |
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Shares of common stock offered by us | [ ] shares | |
Over-allotment shares of common stock offered by us | [ ] shares | |
Shares of common stock to be outstanding after the offering | [ ] shares |
Use of proceeds | We estimate that our net proceeds from this offering will be approximately $[ ] million, based on an assumed initial public offering price of $[ ] per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. We estimate that our net proceeds will be approximately $[ ] million if the underwriters exercise their over-allotment option in full. We intend to contribute approximately $[ ] million to Guarantee Insurance to support its premium writings. As described elsewhere in this prospectus, we have entered into a letter of intent to acquire PF&C, a shell property and casualty insurance company. The acquisition of PF&C is subject to various regulatory approvals. If we obtain these regulatory approvals and consummate the acquisition within 30 days after the date of this prospectus, we plan instead to use approximately $16.7 million of the net proceeds of this offering to pay the purchase price for PF&C (of which approximately $15.5 million represents the capital and surplus of PF&C), to contribute approximately $[ ] million to PF&C to support its premium writings, and to contribute approximately $[ ] million to Guarantee Insurance to support its premium writings. We expect that the remaining $[ ] million, or $[ ] million if we acquire PF&C, will be used to support our anticipated growth and general corporate purposes and to fund other holding company operations, including the repayment of all or a portion of our existing indebtedness and potential acquisitions although we have no current understandings or agreements regarding any such acquisitions (other than PF&C). If the underwriters exercise all or any portion of their over-allotment option, we intend to use all or a substantial portion of the net proceeds therefrom to pay down the balance of our credit facilities as described elsewhere in this prospectus. See “Use of Proceeds.” |
Dividend policy | We do not expect to pay any cash dividends on our common stock for the foreseeable future. We currently intend to retain any additional future earnings to finance our operations and growth. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent on our earnings, financial condition, operating results, capital requirements, any contractual, regulatory and other restrictions on the payment of dividends by us or by our subsidiaries to us, and other factors that our board of directors deems relevant. |
Proposed New York Stock Exchange symbol | “PRT” |
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• | up to [ ] shares of common stock that may be issued pursuant to the underwriters’ over-allotment option; | |
• | 163,500 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2009; | |
• | [ ] shares of common stock issuable upon the exercise of stock options we intend to grant to our directors, executive officers and other employees upon completion of this offering, at an exercise price equal to the initial public offering price; | |
• | [ ] shares of common stock issuable upon the exercise of warrants we intend to issue to our existing stockholders upon completion of this offering, at an exercise price equal to the initial public offering price; and | |
• | [ ] additional shares of common stock available for future issuance under our 2009 Stock Incentive Plan. |
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Nine Months | ||||||||||||||||||||||||||||
Ended September 30, | Years Ended December 31, | |||||||||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||||
(Unaudited) | In thousands, except per share data and percentages | |||||||||||||||||||||||||||
Income Statement Data | ||||||||||||||||||||||||||||
Gross premiums written | $ | 95,972 | $ | 94,878 | $ | 117,563 | $ | 85,810 | $ | 62,372 | $ | 47,576 | $ | 30,911 | ||||||||||||||
Ceded premiums written | 56,573 | 52,926 | 71,725 | 54,894 | 42,986 | 23,617 | 22,702 | |||||||||||||||||||||
Net premiums written | 39,399 | 41,952 | 45,838 | 30,961 | 19,386 | 23,959 | 8,209 | |||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Net premiums earned | 28,369 | 32,276 | 49,220 | 24,613 | 21,053 | 21,336 | 2,948 | |||||||||||||||||||||
Insurance services income | 9,753 | 4,706 | 5,657 | 7,027 | 7,175 | 4,369 | 6,429 | |||||||||||||||||||||
Net investment income | 1,354 | 1,487 | 2,028 | 1,326 | 1,321 | 1,077 | 233 | |||||||||||||||||||||
Net realized gains (losses) on investments | 903 | (253 | ) | (1,037 | ) | (5 | ) | (1,346 | ) | (2,298 | ) | (4,632 | ) | |||||||||||||||
Total revenues | 40,379 | 38,216 | 55,868 | 32,961 | 28,203 | 24,484 | 4,978 | |||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||
Net losses and loss adjustment expenses | 15,864 | 20,719 | 28,716 | 15,182 | 17,839 | 12,022 | 2,616 | |||||||||||||||||||||
Net policy acquisition and underwriting expenses | 8,498 | 8,176 | 13,535 | 6,023 | 3,834 | 3,168 | 2,016 | |||||||||||||||||||||
Other operating expenses | 11,100 | 8,055 | 10,930 | 8,519 | 9,704 | 6,378 | 4,989 | |||||||||||||||||||||
Interest expense | 1,119 | 1,102 | 1,437 | 1,290 | 1,109 | 1,129 | 555 | |||||||||||||||||||||
Total expenses | 36,581 | 38,052 | 54,618 | 31,014 | 32,486 | 22,697 | 10,176 | |||||||||||||||||||||
Other income | — | 219 | 1,469 | — | 796 | — | 110 | |||||||||||||||||||||
Loss from write-off of deferred equity offering costs(1) | — | — | (3,486 | ) | — | — | — | — | ||||||||||||||||||||
Gain on early extinguishment of debt(2) | — | — | — | — | 6,586 | — | — | |||||||||||||||||||||
Income (loss) before income tax expense benefit | 3,798 | 383 | (767 | ) | 1,947 | 3,099 | 1,787 | (5,088 | ) | |||||||||||||||||||
Income tax expense (benefit) | 1,422 | (217 | ) | (643 | ) | (432 | ) | 1,489 | 687 | (751 | ) | |||||||||||||||||
Net income (loss) | $ | 2,376 | $ | 600 | $ | (124 | ) | $ | 2,379 | $ | 1,610 | $ | 1,100 | $ | (4,337 | ) | ||||||||||||
Earnings Per Share | ||||||||||||||||||||||||||||
Basic | $ | 1.95 | $ | 0.44 | $ | (0.09 | ) | $ | 1.77 | $ | 1.16 | $ | 0.88 | NM | (3) | |||||||||||||
Diluted | 1.94 | 0.44 | (0.09 | ) | 1.76 | 1.15 | 0.87 | NM | (3) | |||||||||||||||||||
Weighted Average Common Shares Outstanding: | ||||||||||||||||||||||||||||
Basic | 1,216 | 1,361 | 1,361 | 1,342 | 1,392 | 1,251 | NM | (3) | ||||||||||||||||||||
Diluted | 1,225 | 1,370 | 1,361 | 1,351 | 1,398 | 1,258 | NM | (3) | ||||||||||||||||||||
Return on average equity(4) | 36.7 | % | 15.1 | % | NM | (3) | 58.5 | % | 107.0 | % | NM | (3) | NM | (3) | ||||||||||||||
Selected Insurance Ratios(5) | ||||||||||||||||||||||||||||
Net loss ratio | 55.9 | % | 64.2 | % | 57.5 | % | 61.7 | % | 84.7 | % | 56.3 | % | NM | (3) | ||||||||||||||
Net expense ratio | 30.0 | % | 25.3 | % | 27.1 | % | 24.5 | % | 18.2 | % | 14.8 | % | NM | (3) | ||||||||||||||
Net combined ratio | 85.9 | % | 89.5 | % | 84.6 | % | 86.2 | % | 102.9 | % | 71.1 | % | NM | (3) | ||||||||||||||
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September 30, 2009 | ||||||||
Actual | As Adjusted(6) | |||||||
(Unaudited) | ||||||||
In thousands | ||||||||
Balance Sheet Data | ||||||||
Investments | $ | 47,051 | 47,051 | |||||
Cash and cash equivalents | 7,452 | [ ] | ||||||
Amounts recoverable from reinsurers | 58,328 | 58,328 | ||||||
Premiums receivable, net | 83,040 | 83,040 | ||||||
Prepaid reinsurance premiums | 42,010 | 42,010 | ||||||
Other assets | 19,910 | 21,110 | ||||||
Total assets | $ | 257,791 | [ ] | |||||
Reserves for losses and loss adjustment expenses | $ | 83,210 | 83,210 | |||||
Unearned and advanced premium reserves | 63,702 | 63,702 | ||||||
Reinsurance funds withheld and balances payable | 56,458 | 56,458 | ||||||
Debt and accrued interest | 20,089 | 20,089 | ||||||
Other liabilities | 24,203 | 24,203 | ||||||
Total liabilities | 247,662 | 247,662 | ||||||
Stockholders’ equity | 10,129 | [ ] | ||||||
Total liabilities and stockholders’ equity | $ | 257,791 | [ ] | |||||
(1) | In 2008, we wrote off approximately $3.5 million of deferred equity offering costs incurred in connection with our prior efforts to consummate an initial public offering during 2007 and 2008. |
(2) | In 2006, Guarantee Insurance entered into a settlement and termination agreement with the former owner of Guarantee Insurance that allowed for an early extinguishment of debt in the amount of $8.8 million in exchange for $2.2 million in cash and release of the indemnification agreement previously entered into by the parties. As a result, we recognized a gain on the early extinguishment of debt on a pre-tax basis of approximately $6.6 million. We also recognized other income in connection with the forgiveness of accrued interest associated with the early extinguishment of debt on a pre-tax basis of $796,000. |
(3) | We do not believe this metric is meaningful for the period indicated. | |
(4) | Return on average equity for a given period (annualized in the case of periods less than one year) is calculated by dividing net income for that period by average stockholders’ equity as of the beginning and end of the period. |
(5) | The net loss ratio is calculated by dividing net losses and loss adjustment expenses by net premiums earned. The net expense ratio is calculated by dividing net policy acquisition and underwriting expenses (which are comprised of gross policy acquisition costs and other gross expenses incurred in our insurance operations, net of ceding commissions earned from our reinsurers) by net premiums earned. The net combined ratio is the sum of the net loss ratio and the net expense ratio. |
(6) | The As Adjusted balance sheet data as of September 30, 2009 reflects the issuance of [ ] shares of our common stock at the assumed initial public offering price of $[ ] per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and the application of the net proceeds therefrom after deducting estimated underwriting discounts and commissions and our estimated offering expenses. |
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• | collect and properly analyze a substantial volume of data; | |
• | develop, test and apply appropriate rating formulae; | |
• | closely monitor and timely recognize changes in trends; and | |
• | make assumptions regarding both the frequency and severity of losses with reasonable accuracy. |
• | insufficient reliable data; | |
• | incorrect or incomplete analysis of available data; | |
• | uncertainties generally inherent in estimates and assumptions, especially in markets in which we have less experience; | |
• | our inability to implement appropriate rating formulae or other pricing methodologies; | |
• | regulatory constraints on rate increases; | |
• | costs of ongoing medical treatment; | |
• | our inability to accurately estimate retention, investment yields and the duration of our liability for losses and loss adjustment expenses; and | |
• | unanticipated court decisions, legislation or regulatory action. |
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• | potentially long waiting periods between exposure and emergence of any bodily injury or property damage; | |
• | difficulty in identifying sources of environmental or asbestos contamination; | |
• | difficulty in properly allocating responsibility and liability for environmental or asbestos damage; | |
• | changes in underlying laws and judicial interpretation of those laws; | |
• | potential for an environmental or asbestos claim to involve many insurance providers over many policy periods; | |
• | long reporting delays from insureds to insurance companies; | |
• | historical data concerning asbestos and environmental losses being more limited than historical information on other types of claims; | |
• | questions concerning interpretation and application of insurance coverage; and | |
• | uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. |
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• | standards of solvency, including risk-based capital measurements; | |
• | restrictions on the nature, quality and concentration of investments; | |
• | restrictions on the terms of insurance policies; | |
• | restrictions on the way premium rates are established and the premium rates are charged; | |
• | procedures for adjusting claims, which can affect the ultimate amount for which a claim is settled; | |
• | standards for appointing general agencies; | |
• | limitations on transactions with affiliates; | |
• | restrictions on mergers and acquisitions; | |
• | medical privacy standards; | |
• | restrictions on the ability of insurance companies to pay dividends; | |
• | establishment of reserves for unearned premiums, losses and other purposes; | |
• | licensing requirements and approvals that affect our ability to do business; | |
• | certain required methods of accounting; and | |
• | potential assessments for state guaranty funds, second injury funds and other mandatory pooling arrangements. |
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• | the need to implement or remediate controls, procedures and policies appropriate for a public company at companies that, prior to the acquisition, lacked these controls, procedures and policies; |
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• | diversion of management time and focus from operating our business to acquisition integration challenges; | |
• | cultural challenges associated with integrating employees from the acquired company into our organization; | |
• | retaining employees from the businesses we acquire; and | |
• | the need to integrate each company’s accounting, management information, human resource and other administrative systems to permit effective management. |
• | identify profitable new geographic markets for entry; | |
• | attract and retain qualified personnel for expanded operations; |
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• | identify potential acquisition targets and successfully acquire them; | |
• | expand existing and develop new agency relationships; | |
• | identify, recruit and integrate new independent agencies; and | |
• | augment our internal monitoring and control systems as we expand our business. |
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• | our results of operations; | |
• | changes in expectations as to our future results of operations, including financial estimates and projections by securities analysts and investors; | |
• | results of operations that vary from those expected by securities analysts and investors; | |
• | developments in the healthcare or insurance industry; | |
• | changes in laws and regulations; | |
• | announcements of claims against us by third parties; | |
• | future sales of our common stock; | |
• | rising levels of claims costs, including medical and prescription drug costs, that we cannot anticipate at the time we establish our premium rates; |
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• | fluctuations in interest rates, inflationary pressures and other changes in the investment environment that affect returns on invested assets; | |
• | changes in the frequency or severity of claims; | |
• | the financial stability of our reinsurers and changes in the level of reinsurance capacity and our capital and surplus; | |
• | new types of claims and new or changing judicial interpretations relating to the scope of liabilities of insurance companies; | |
• | volatile and unpredictable developments, including man-made, weather-related and other natural catastrophes or terrorist attacks; and | |
• | price competition. |
• | pay a price per share that substantially exceeds the book value of our assets after subtracting liabilities; and | |
• | contribute [ ]% of the total amount invested to date to fund our company based on an assumed initial offering price to the public of $[ ] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, but will own only [ ]% of the shares of common stock outstanding after completion of this offering. |
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• | greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than our underwriting, reserving or investment practices anticipate based on historical experience or industry data; | |
• | increased competition on the basis of coverage availability, claims management, loss control services, payment terms, premium rates, policy terms, types of insurance offered, overall financial strength, financial ratings and reputation; | |
• | regulatory risks, including further rate decreases in Florida and other states where we write business; | |
• | the cyclical nature of the workers’ compensation insurance industry; | |
• | negative developments in the workers’ compensation insurance industry; | |
• | decreased level of business activity of our policyholders; | |
• | decreased demand for our insurance; | |
• | adverse developments regarding our legacy asbestos and environmental claims arising from policies written or assumed prior to 1983; | |
• | changes in the availability, cost or quality of reinsurance and the failure of our reinsurers to pay claims in a timely manner or at all; | |
• | changes in regulations or laws applicable to us, our policyholders or the agencies that sell our insurance; | |
• | changes in rating agency policies or practices; | |
• | changes in legal theories of liability under our insurance policies; | |
• | developments in capital markets that adversely affect the performance of our investments; | |
• | loss of the services of any of our senior management or other key employees; | |
• | the effects of U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; and | |
• | changes in general economic conditions, including inflation and other factors. |
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As of September 30, 2009 | ||||||||
Actual | As Adjusted | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Debt Outstanding | ||||||||
Notes payable | $ | 16,815 | $ | 16,815 | ||||
Surplus notes | 1,187 | 1,187 | ||||||
Subordinated debentures | 1,634 | 1,634 | ||||||
Total debt outstanding | 19,636 | 19,273 | ||||||
Stockholders’ equity | ||||||||
Series A convertible preferred stock, par value $.001 per share, 1,200 shares authorized; 1,000 shares issued and outstanding, actual; no shares issued and outstanding, as adjusted(1) | 1,000 | — | ||||||
Preferred stock, par value $.001 per share, 5,000,000 shares authorized; no shares issued and outstanding, actual and as adjusted | — | — | ||||||
Common stock, par value $.001 per share, 40,000,000 shares authorized, 346,026 shares issued and outstanding, actual; [ ] shares issued or outstanding, as adjusted | 1 | [ ] | ||||||
Series B common stock, par value $.001 per share, 4,000,000 shares authorized, 800,000 shares issued and outstanding, actual; no shares authorized, issued or outstanding, as adjusted(2) | 1 | — | ||||||
Additional paid-in capital | 5,521 | [ ] | ||||||
Retained earnings | 2,390 | 1,799 | ||||||
Accumulated other comprehensive income (loss), net of deferred income tax expense (benefit) | 1,216 | $ | 638 | |||||
Total stockholders’ equity | 10,129 | $ | [ ] | |||||
Total capitalization | $ | 29,765 | $ | [ ] | ||||
(1) | At the closing of this offering, all outstanding shares of Series A convertible preferred stock will be automatically converted into [ ] shares of common stock, based on an assumed initial public offering price of $[ ] per share, which is the mid-point of the price range set forth on the cover page of this prospectus. | |
(2) | At the closing of this offering, all outstanding shares of Series B common stock will be automatically converted into shares of common stock on aone-for-one basis. |
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• | up to [ ] shares of common stock that may be issued pursuant to the underwriters’ over-allotment option; | |
• | 163,500 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2009; | |
• | [ ] shares of common stock issuable upon the exercise of stock options we intend to grant to our directors, executive officers and other employees upon completion of this offering, at an exercise price equal to the initial public offering price; | |
• | [ ] shares of common stock issuable upon the exercise of warrants we intend to issue to our existing stockholders upon completion of this offering, at an exercise price equal to the initial public offering price; and | |
• | [ ] additional shares available for future issuance under our 2009 Stock Incentive Plan. |
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Assumed initial public offering price per share | $ | |||||||
Pro forma net tangible book value per share as of September 30, 2008 | ||||||||
Increase in pro forma net tangible book value per share attributable to this offering | $ | |||||||
Pro forma net tangible book value per share after this offering | ||||||||
Dilution per share to new investors in this offering | $ | (1 | ) | |||||
(1) | If the underwriters’ over-allotment is exercised in full, dilution per share to new investors will be $[ ]. |
Average | ||||||||||||||||||||
Shares Issued | Total Consideration | Price | ||||||||||||||||||
Number | Percent | Amount | Percent | per Share | ||||||||||||||||
Existing stockholders | [ ] | [ ] | % | $ | [ ] | [ ] | % | $ | [ ] | |||||||||||
New investors | [ ] | [ ] | $ | [ ] | [ ] | [ ] | ||||||||||||||
Total | [ ] | 100.0 | % | $ | [ ] | 100.0 | % | [ ] |
• | up to [ ] shares of common stock that may be issued pursuant to the underwriters’ over-allotment option; | |
• | 163,500 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2009; | |
• | [ ] shares of common stock issuable upon the exercise of stock options we intend to grant to our directors, executive officers and other employees upon completion of this offering, at an exercise price equal to the initial public offering price; | |
• | [ ] shares of common stock issuable upon the exercise of warrants we intend to issue to our existing stockholders upon completion of this offering, at an exercise price equal to the initial public offering price; and | |
• | [ ] additional shares available for future issuance under our 2009 Stock Incentive Plan. |
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Nine Months | ||||||||||||||||||||||||||||
Ended September 30, | Years Ended December 31, | |||||||||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||||||||
In thousands, except per share data and percentages | ||||||||||||||||||||||||||||
Income Statement Data | ||||||||||||||||||||||||||||
Gross premiums written | $ | 95,972 | $ | 94,878 | $ | 117,563 | $ | 85,810 | $ | 62,372 | $ | 47,576 | $ | 30,911 | ||||||||||||||
Ceded premiums written | 56,573 | 52,926 | 71,725 | 54,894 | 42,986 | 23,617 | 22,702 | |||||||||||||||||||||
Net premiums written | 39,399 | 41,952 | 45,838 | 30,961 | 19,386 | 23,959 | 8,209 | |||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Net premiums earned | 28,369 | 32,276 | 49,220 | 24,613 | 21,053 | 21,336 | 2,948 | |||||||||||||||||||||
Insurance services income | 9,753 | 4,706 | 5,657 | 7,027 | 7,175 | 4,369 | 6,429 | |||||||||||||||||||||
Net investment income | 1,354 | 1,487 | 2,028 | 1,326 | 1,321 | 1,077 | 233 | |||||||||||||||||||||
Net realized gains (losses) on investments | 903 | (253 | ) | (1,037 | ) | (5 | ) | (1,346 | ) | (2,298 | ) | (4,632 | ) | |||||||||||||||
Total revenues | 40,379 | 38,216 | 55,868 | 32,961 | 28,203 | 24,484 | 4,978 | |||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||
Net losses and loss adjustment expenses | 15,864 | 20,719 | 28,716 | 15,182 | 17,839 | 12,022 | 2,616 | |||||||||||||||||||||
Net policy acquisition and underwriting expenses | 8,498 | 8,176 | 13,535 | 6,023 | 3,834 | 3,168 | 2,016 | |||||||||||||||||||||
Other operating expenses | 11,100 | 8,055 | 10,930 | 8,519 | 9,704 | 6,378 | 4,989 | |||||||||||||||||||||
Interest expense | 1,119 | 1,102 | 1,437 | 1,290 | 1,109 | 1,129 | 555 | |||||||||||||||||||||
Total expenses | 36,581 | 38,052 | 54,618 | 31,014 | 32,486 | 22,697 | 10,176 | |||||||||||||||||||||
Other income | — | 219 | 1,469 | — | 796 | — | 110 | |||||||||||||||||||||
Loss from write-off of deferred equity offering costs(1) | — | — | (3,486 | ) | — | — | — | — | ||||||||||||||||||||
Gain on early extinguishment of debt(2) | — | — | — | — | 6,586 | — | — | |||||||||||||||||||||
Income (loss) before income tax expense benefit | 3,798 | 383 | (767 | ) | 1,947 | 3,099 | 1,787 | (5,088 | ) | |||||||||||||||||||
Income tax expense (benefit) | 1,422 | (217 | ) | (643 | ) | (432 | ) | 1,489 | 687 | (751 | ) | |||||||||||||||||
Net income (loss) | $ | 2,376 | $ | 600 | $ | (124 | ) | $ | 2,379 | $ | 1,610 | $ | 1,100 | $ | (4,337 | ) | ||||||||||||
Earnings Per Share | ||||||||||||||||||||||||||||
Basic | $ | 1.95 | $ | 0.44 | $ | (0.09 | ) | $ | 1.77 | $ | 1.16 | $ | 0.88 | NM | (3) | |||||||||||||
Diluted | 1.94 | 0.44 | (0.09 | ) | 1.76 | 1.15 | 0.87 | NM | (3) | |||||||||||||||||||
Weighted Average Common Shares Outstanding: | ||||||||||||||||||||||||||||
Basic | 1,216 | 1,361 | 1,361 | 1,342 | 1,392 | 1,251 | NM | (3) | ||||||||||||||||||||
Diluted | 1,225 | 1,370 | 1,361 | 1,351 | 1,398 | 1,258 | NM | (3) | ||||||||||||||||||||
Return on average equity(4) | 36.7 | % | 15.1 | % | NM(3 | ) | 58.5 | % | 107.0 | % | NM(3 | ) | NM | (3) | ||||||||||||||
Selected Insurance Ratios(5) | ||||||||||||||||||||||||||||
Net loss ratio | 55.9 | % | 64.2 | % | 57.5 | % | 61.7 | % | 84.7 | % | 56.3 | % | NM | (3) | ||||||||||||||
Net expense ratio | 30.0 | % | 25.3 | % | 27.1 | % | 24.5 | % | 18.2 | % | 14.8 | % | NM | (3) | ||||||||||||||
Net combined ratio | 85.9 | % | 89.5 | % | 84.6 | % | 86.2 | % | 102.9 | % | 71.1 | % | NM | (3) | ||||||||||||||
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September 30, | December 31, | |||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||
Investments | $ | 47,051 | $ | 55,089 | $ | 56,816 | $ | 32,543 | $ | 20,955 | $ | 16,446 | ||||||||||||
Cash and cash equivalents | 7,452 | 8,333 | 4,946 | 17,841 | 20,420 | 3,965 | ||||||||||||||||||
Amounts recoverable from reinsurers | 58,328 | 42,134 | 47,519 | 41,531 | 22,955 | 10,978 | ||||||||||||||||||
Premiums receivable, net | 83,040 | 58,826 | 36,748 | 19,450 | 21,943 | 19,244 | ||||||||||||||||||
Prepaid reinsurance premiums | 42,010 | 33,731 | 14,963 | 7,466 | 4,402 | 14,925 | ||||||||||||||||||
Other assets | 19,910 | 13,179 | 14,248 | 11,838 | 9,563 | 8,957 | ||||||||||||||||||
Total assets | $ | 257,791 | $ | 211,292 | $ | 175,237 | $ | 130,669 | $ | 100,238 | $ | 74,515 | ||||||||||||
Reserves for losses and loss adjustment expenses | $ | 83,210 | 74,550 | 69,881 | 65,953 | 39,478 | 19,885 | |||||||||||||||||
Unearned and advanced premium reserves | 63,702 | 44,613 | 29,160 | 15,643 | 13,214 | 20,185 | ||||||||||||||||||
Reinsurance funds withheld and balances payable | 56,458 | 47,449 | 44,073 | 26,787 | 25,195 | 15,697 | ||||||||||||||||||
Debt and accrued interest | 20,089 | 22,592 | 16,907 | 11,741 | 11,995 | 10,379 | ||||||||||||||||||
Other liabilities | 24,203 | 14,951 | 9,780 | 7,851 | 10,040 | 8,324 | ||||||||||||||||||
Total liabilities | 247,662 | 204,155 | 169,801 | 127,975 | 99,922 | 74,470 | ||||||||||||||||||
Stockholders’ equity | 10,129 | 7,137 | 5,436 | 2,694 | 316 | 45 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 257,791 | $ | 211,292 | $ | 175,237 | $ | 130,669 | $ | 100,238 | $ | 74,515 | ||||||||||||
(1) | In 2008, we wrote off approximately $3.5 million of deferred equity offering costs incurred in connection with our prior efforts to consummate an initial public offering in 2007 and 2008. | |
(2) | In 2006, Guarantee Insurance entered into a settlement and termination agreement with the former owner of Guarantee Insurance that allowed for an early extinguishment of debt in the amount of $8.8 million in exchange for $2.2 million in cash and release of the indemnification agreement previously entered into by the parties. As a result, we recognized a gain on the early extinguishment of debt on a pre-tax basis of $6.6 million. We also recognized other income in connection with the forgiveness of accrued interest associated with the early extinguishment of debt on a pre-tax basis of $796,000. | |
(3) | We do not believe this metric is meaningful for the period indicated. | |
(4) | Return on average equity for a given period (annualized in the case of periods less than one year) is calculated by dividing net income for that period by average stockholders’ equity as of the beginning and end of the period. | |
(5) | The net loss ratio is calculated by dividing net losses and loss adjustment expenses by net earned premiums. The net expense ratio is calculated by dividing net policy acquisition and underwriting expenses (which are comprised of gross policy acquisition costs and other gross expenses incurred in our insurance operations, net of ceding commissions earned from our reinsurers) by net earned premiums. The net combined ratio is the sum of the net loss ratio and the net expense ratio. |
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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• | The first factor is the liquidity driven valuation premium inherently available to a company as it transitions from privately held to publicly traded status. | |
• | The second factor relates to our growth prospects, which have improved because the additional capital from this offering will allow us to increase our gross premiums written and retain more of our business, together with improved prospects for claim and cost containment and insurance services income. |
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Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
In thousands | ||||||||
Direct business: | ||||||||
Alternative market | $ | 42,163 | $ | 42,168 | ||||
Traditional business | 44,378 | 51,912 | ||||||
Total direct business | 86,541 | 94,080 | ||||||
Assumed business | ||||||||
BPO customer | 7,824 | — | ||||||
NCCI National Workers’ Compensation Insurance Pool | 1,607 | 798 | ||||||
Total assumed business | 9,431 | 798 | ||||||
Total | $ | 95,972 | $ | 94,878 | ||||
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Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Dollar amounts in thousands | ||||||||
Direct and assumed business: | ||||||||
Gross policy acquisition and underwriting expenses | $ | 23,548 | $ | 21,963 | ||||
Gross premiums earned | 77,154 | 70,829 | ||||||
Gross policy acquisition and underwriting expense ratio | 30.5 | % | 31.0 | % | ||||
Alternative market and traditional business ceded on a quota share basis: | ||||||||
Ceding commissions | 15,050 | 13,787 | ||||||
Ceded premiums earned | 44,047 | 36,679 | ||||||
Effective ceding commission rate | 34.2 | % | 37.6 | % | ||||
Excess of loss reinsurance ceded premiums earned | 4,738 | 1,874 | ||||||
Net business: | ||||||||
Net policy acquisition and underwriting expenses | 8,498 | 8,176 | ||||||
Net premiums earned | 28,369 | 32,276 | ||||||
Net policy acquisition and underwriting expense ratio | 30.0 | % | 25.3 | % | ||||
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2008 | 2007 | |||||||
In thousands | ||||||||
Direct business: | ||||||||
Alternative market | $ | 47,374 | $ | 34,316 | ||||
Traditional business | 69,182 | 50,599 | ||||||
Total direct business | 116,556 | 84,915 | ||||||
Assumed business(1) | 1,007 | 895 | ||||||
Total | $ | 117,563 | $ | 85,810 | ||||
(1) | Represents premiums assumed as a result of our participation in the NCCI National Workers’ Compensation Insurance Pool. |
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2008 | 2007 | |||||||
Dollar amounts in thousands | ||||||||
Direct and assumed business: | ||||||||
Gross policy acquisition and underwriting expenses | $ | 31,499 | $ | 22,644 | ||||
Gross premiums earned | 100,070 | 73,715 | ||||||
Gross policy acquisition and underwriting expense ratio | 31.5 | % | 30.7 | % | ||||
Alternative market and traditional business ceded on a quota share basis: | ||||||||
Ceding commissions | 17,964 | 16,621 | ||||||
Ceded premiums earned | 46,748 | 44,589 | ||||||
Effective ceding commission rate | 38.4 | % | 37.3 | % | ||||
Excess of loss reinsurance ceded premiums earned | 3,402 | 4,513 | ||||||
Net business: | ||||||||
Net policy acquisition and underwriting expenses | 13,535 | 6,023 | ||||||
Net premiums earned | 49,920 | 24,613 | ||||||
Net policy acquisition and underwriting expense ratio | 27.1 | % | 24.5 | % | ||||
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2007 | 2006 | |||||||
In thousands | ||||||||
Direct business: | ||||||||
Alternative market | $ | 34,316 | $ | 33,921 | ||||
Traditional business | 50,599 | 26,636 | ||||||
Total direct business | 84,915 | 60,557 | ||||||
Assumed business(1) | 895 | 1,815 | ||||||
Total | $ | 85,810 | $ | 62,372 | ||||
(1) | Represents premiums assumed as a result of our participation in the NCCI National Workers’ Compensation Insurance Pool. |
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2007 | 2006 | |||||||
Dollar amounts in thousands | ||||||||
Direct and assumed business: | ||||||||
Gross policy acquisition and underwriting expenses | $ | 22,644 | $ | 18,622 | ||||
Gross premiums earned | 73,715 | 60,672 | ||||||
Gross policy acquisition and underwriting expense ratio | 30.7 | % | 30.7 | % | ||||
Alternative market and traditional business ceded on a quota share basis: | ||||||||
Ceding commissions | 16,621 | 14,788 | ||||||
Ceded premiums earned | 44,589 | 37,391 | ||||||
Effective ceding commission rate | 37.3 | % | 39.5 | % | ||||
Excess of loss reinsurance ceded premiums earned | 4,513 | 2,228 | ||||||
Net business: | ||||||||
Net policy acquisition and underwriting expenses | 6,023 | 3,834 | ||||||
Net premiums earned | 24,613 | 21,053 | ||||||
Net policy acquisition and underwriting expense ratio | 24.5 | % | 18.2 | % | ||||
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Nine Months | ||||||||||||||||||||||||
Ended September 30, | Year Ended December 31, | |||||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Insurance Services Segment | ||||||||||||||||||||||||
Revenues — insurance services income | $ | 14,448 | $ | 9,031 | $ | 12,308 | $ | 11,325 | $ | 10,208 | $ | 6,552 | ||||||||||||
Pre-tax net income | $ | 5,041 | $ | 3,666 | $ | 4,452 | $ | 4,201 | $ | 3,764 | $ | 2,358 | ||||||||||||
Income tax expense (benefit) | 1,713 | 1,246 | 1,513 | (481 | ) | 1,744 | 938 | |||||||||||||||||
Net income | $ | 3,328 | $ | 2,420 | $ | 2,939 | $ | 4,682 | $ | 2,020 | $ | 1,420 | ||||||||||||
Insurance Segment | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Premiums earned, net | $ | 28,369 | $ | 32,276 | $ | 49,220 | $ | 24,613 | $ | 21,053 | $ | 21,336 | ||||||||||||
Investment income, net | 1,354 | 1,487 | 2,028 | 1,326 | 1,321 | 1,077 | ||||||||||||||||||
Net realized gains (losses) on investments | 903 | (253 | ) | (1,037 | ) | (5 | ) | 393 | (1,348 | ) | ||||||||||||||
Total revenues | $ | 30,626 | $ | 33,510 | $ | 50,211 | $ | 25,934 | $ | 22,767 | $ | 21,065 | ||||||||||||
Pre-tax net income (loss) | $ | 1,568 | $ | 509 | $ | 2,773 | $ | 431 | $ | (1,939 | ) | $ | 3,692 | |||||||||||
Income tax expense (benefit) | 751 | (174 | ) | 495 | 951 | (689 | ) | 1,198 | ||||||||||||||||
Net income | $ | 817 | $ | 683 | $ | 2,278 | $ | (520 | ) | $ | (1,250 | ) | $ | 2,494 | ||||||||||
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Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
In thousands | ||||||||
Unconsolidated insurance services income | $ | 14,448 | $ | 9,031 | ||||
Insurance services income for services provided to Guarantee Insurance, eliminated in consolidation | (4,695 | ) | (4,325 | ) | ||||
Consolidated insurance services income | $ | 9,753 | $ | 4,706 | ||||
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Year Ended December 31, | ||||||||
2008 | 2007 | |||||||
In thousands | ||||||||
Unconsolidated insurance services income | $ | 12,308 | $ | 11,325 | ||||
Insurance services income for services provided to Guarantee Insurance, eliminated in consolidation | (6,651 | ) | (4,298 | ) | ||||
Consolidated insurance services income | $ | 5,657 | $ | 7,027 | ||||
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Year Ended December 31, | ||||||||
2007 | 2006 | |||||||
In thousands | ||||||||
Unconsolidated insurance services income | $ | 11,325 | $ | 10,208 | ||||
Insurance services income for services provided to Guarantee Insurance, eliminated in consolidation | (4,298 | ) | (3,033 | ) | ||||
Consolidated insurance services income | $ | 7,027 | $ | 7,175 | ||||
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• | non-payment of principal or interest within ten days of the payment due date or any other material nonperformance; | |
• | failure to maintain an employment agreement with Steven M. Mariano or find a suitable replacement for him if he should die or become legally incapacitated; | |
• | insolvency of any borrower or Guarantee Insurance; | |
• | cessation of Steven M. Mariano’s direct or indirect 51% or more ownershipand/or profit interest in us or 51% or more voting control of Patriot Risk Management; | |
• | transfer of direct or indirect ownership of the other borrowers; | |
• | regulatory supervision, control or rehabilitation of Guarantee Insurance, failure of Guarantee Insurance to meet certain risk based capital ratios, or revocation or suspension of Guarantee Insurance’s certificate of authority by the state of Florida or any other regulatory body having authority over it; | |
• | material impairment of the value of collateral; | |
• | deviation by Guarantee Insurance from certain underwriting guidelines without the prior written consent of the lenders; | |
• | entry by Guarantee Insurance into any contract that involves the payment of expenses in excess of 10% of the borrowers’ combined annual revenues without the prior written consent of the lenders; | |
• | failure of Guarantee Insurance to perform its business obligations under material contracts; and | |
• | attempts by other creditors of a borrower to collect any debt any borrower owes through a court proceeding. |
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Interest | Principal | |||||||||||||||
Rate at | and | |||||||||||||||
Year of | Interest Rate | September 30, | Accrued | |||||||||||||
Issuance | Description | Years Due | Terms | 2009 | Interest | |||||||||||
In thousands | ||||||||||||||||
2006/2007 | Brooke loans | 2009 — 2016 | Federal Reserve prime rate plus 4.5% | 7.75 | % | $ | 11,481 | |||||||||
2008 | ULLICO loan | 2009 — 2016 | Federal Reserve prime rate plus 4.5% | 7.75 | 5,023 | |||||||||||
2008 | Steven Mariano loan | 2009 | Federal Reserve prime rate plus 3.0% | 6.25 | 363 | |||||||||||
2004 | Surplus notes payable | 2009 | 3.0% | 3.00 | 1,377 | |||||||||||
18,244 | ||||||||||||||||
2005 | Subordinated debentures | 2011 | 3.0% | 3.00 | 1,845 | |||||||||||
$ | 20,089 | |||||||||||||||
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Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
In thousands | ||||||||
Net income | $ | 2,376 | $ | 600 | ||||
Non-cash decreases in net income | 1,365 | 837 | ||||||
Changes in balances generally reflecting growth in net premiums written(1) | (7,498 | ) | (11,614 | ) | ||||
Changes in balances generally reflecting claim payment patterns(2) | (7,534 | ) | 7,823 | |||||
Other items(3) | 3,235 | (2,171 | ) | |||||
$ | (8,056 | ) | $ | (4,525 | ) | |||
(1) | Includes premiums receivable, unearned and advanced premium reserves, reinsurance funds withheld and balances payable, prepaid reinsurance premiums and funds held by ceding companies and other amounts due from reinsurers | |
(2) | Includes reserves for losses and loss adjustment expenses and reinsurance recoverable balances on paid and unpaid losses and loss adjustment expenses | |
(3) | Principally changes in other assets and accounts payable and accrued expenses |
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2008 | 2007 | |||||||
In thousands | ||||||||
Net income (loss) | $ | (124 | ) | $ | 2,379 | |||
Non-cash decreases in net income | 688 | 202 | ||||||
Changes in balances generally reflecting growth in net premiums written(1) | (21,974 | ) | 5,877 | |||||
Changes in balances generally reflecting claim payment patterns(2) | 10,054 | (2,060 | ) | |||||
Other items(3) | 6,971 | 729 | ||||||
$ | (4,385 | ) | $ | 7,127 | ||||
(1) | Includes premiums receivable, unearned and advanced premium reserves, reinsurance funds withheld and balances payable, prepaid reinsurance premiums and funds held by ceding companies and other amounts due to reinsurers | |
(2) | Includes reserves for losses and loss adjustment expenses and reinsurance recoverable balances on paid and unpaid losses and loss adjustment expenses | |
(3) | Principally changes in accounts payable and accrued expenses |
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2007 | 2006 | |||||||
In thousands | ||||||||
Net income | $ | 2,379 | $ | 1,610 | ||||
Non-cash income derived from early extinguishment of debt and related other income | — | (7,382 | ) | |||||
Non-cash charges related to net realized investment losses | 5 | 1,346 | ||||||
Other non-cash decreases (increases) in net income | 202 | 1,081 | ||||||
Changes in balances typically reflecting growth in net premiums written(1) | 5,877 | 3,414 | ||||||
Changes in balances typically reflecting claim payment patterns(2) | (2,060 | ) | 7,899 | |||||
Other items(3) | 724 | (2,979 | ) | |||||
$ | 7,127 | $ | 4,989 | |||||
(1) | Includes premiums receivable, unearned and advanced premium reserves, reinsurance funds withheld and balances payable, prepaid reinsurance premiums and funds held by ceding companies and other amounts due to reinsurers | |
(2) | Includes reserves for losses and loss adjustment expenses and reinsurance recoverable balances on paid and unpaid losses and loss adjustment expenses | |
(3) | Principally changes in accounts payable and accrued expenses |
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Percentage of | ||||||||
Fair Value | Portfolio | |||||||
(In thousands) | ||||||||
Debt securities available for sale: | ||||||||
U.S. government securities | $ | 3,599 | 6.6 | % | ||||
U.S. government agencies | 308 | 0.6 | ||||||
Asset-backed and mortgage-backed securities | 13,887 | 25.4 | ||||||
State and political subdivisions | 16,376 | 30.0 | ||||||
Corporate securities | 11,964 | 22.0 | ||||||
Total fixed maturity securities | 46,134 | 84.6 | ||||||
Short-term investments | 671 | 1.2 | ||||||
Real estate | 246 | 0.5 | ||||||
Cash and cash equivalents | 7,452 | 13.7 | ||||||
Total investments, including cash and cash equivalents | $ | 54,503 | 100.0 | % | ||||
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S&P Credit Rating | ||||
AAA | 50.9 | % | ||
AA | 24.5 | |||
A | 21.4 | |||
BBB | 3.0 | |||
Below BBB | 0.2 | |||
Total | 100.0 | % | ||
Percentage of Total | ||||||||
State and Political | ||||||||
Subdivision | ||||||||
Guarantor | Fair Value | Securities | ||||||
(In thousands) | ||||||||
Ambac Assurance Corporation | $ | 1,676 | 10.2 | % | ||||
Financial Guaranty Insurance Company | 2,682 | 16.4 | ||||||
Financial Security Assurance, Inc. | 1,675 | 10.2 | ||||||
MBIA, Inc. | 1,146 | 7.0 | ||||||
Total | $ | 7,179 | 43.8 | % | ||||
Fair | Percentage of | |||||||
Value | Portfolio | |||||||
(In thousands) | ||||||||
Due in one year or less | $ | 5,171 | 11.2 | % | ||||
Due after one year through five years | 15,312 | 33.2 | ||||||
Due after five years | 11,764 | 25.5 | ||||||
32,247 | 69.9 | |||||||
Asset-backed and mortgage-backed securities | 13,887 | 30.1 | ||||||
Total | $ | 46,134 | 100.0 | % | ||||
• | how long and by how much the fair value of the security has been below its cost; | |
• | the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect our operations or earnings; | |
• | our intent and ability to keep the security for a sufficient time period for us to recover our value; | |
• | any downgrades of the security by a rating agency; and | |
• | any reduction or elimination of dividends, or nonpayment of scheduled interest payments. |
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Definition | ||
Level 1 | Observable unadjusted quoted prices in active markets for identical securities | |
Level 2 | Observable inputs other than quoted prices in active markets for identical securities, including: | |
(i) quoted prices in active markets for similar securities, | ||
(ii) quoted prices for identical or similar securities in markets that are not active, | ||
(iii) inputs other than quoted prices that are observable for the security (e.g. interest rates, yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates, and | ||
(iv) inputs derived from or corroborated by observable market data by correlation or other means | ||
Level 3 | Unobservable inputs, including the reporting entity’s own data, as long as there is no contrary data indicating market participants would use different assumptions |
Fair Value Measurement, Using | ||||||||||||||||
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets | Significant | |||||||||||||||
for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Securities | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
In thousands | ||||||||||||||||
U.S. government securities | $ | 3,339 | $ | 259 | $ | — | $ | 3,598 | ||||||||
U.S. government agencies | — | 308 | — | 308 | ||||||||||||
Asset-backed and mortgage-backed securities | — | 11,965 | — | 11,965 | ||||||||||||
State and political subdivisions | — | 16,376 | — | 16,376 | ||||||||||||
Corporate securities | — | 13,887 | — | 13,887 | ||||||||||||
$ | 3,339 | $ | 42,795 | $ | — | $ | 46,134 | |||||||||
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Payment Due by Period | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
In thousands | ||||||||||||||||||||
Reserves for losses and loss adjustment expenses(1) | $ | 74,550 | $ | 29,820 | $ | 26,092 | $ | 14,910 | $ | 3,728 | ||||||||||
Notes payable(2) | 28,208 | 5,466 | 7,610 | 7,257 | 7,875 | |||||||||||||||
Surplus notes payable(2) | 1,359 | 1,359 | — | — | — | |||||||||||||||
Subordinated debentures(2)(3) | 1,928 | 1,928 | — | — | — | |||||||||||||||
Non-cancelable operating leases | 2,014 | 1,139 | 875 | — | — | |||||||||||||||
Other obligations | 165 | 165 | — | — | — | |||||||||||||||
$ | 108,224 | $ | 37,949 | $ | 36,505 | $ | 22,167 | $ | 11,603 | |||||||||||
(1) | The payment of reserves for losses and loss adjustment expenses by period are based on actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our estimated payment of reserves for losses and loss adjustment expenses by period is subject to the same uncertainties associated with estimating loss and loss adjustment expense reserves generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of loss and loss adjustment expense reserves, see “Business — Reserves for Losses and Loss Adjustment Expenses.” Actual payment of reserves for losses and loss adjustment expenses by period will vary, perhaps materially, from the table above to the extent that reserves for losses and loss adjustment expenses vary from actual ultimate claims and as a result of variations between expected and actual payout patterns. Our business, financial condition and results of operations may be adversely affected if our actual losses and loss adjustment expenses exceed our estimated loss and loss adjustment expense reserves. See “Risk Factors — Risks Related to Our Business” for a discussion of the uncertainties associated with estimating loss and loss adjustment expense reserves. |
(2) | Amounts include interest at rates in effect on December 31, 2008 associated with these obligations. The principal balance and accrued interest on our notes payable at December 31, 2008 was $18.0 million. The interest rate on our notes payable to Brooke and ULLICO, which together comprise approximately 94% of our total notes payable principal balance at December 31, 2008, is equal to the Federal Reserve prime rate plus 4.5% (7.75% at December 31, 2008 and September 30, 2009 as utilized in the commitment table above) and may change on a daily basis. The interest rate on our notes payable to Mr. Mariano, our Chairman and Chief Executive Officer and the beneficial owner of the majority of our shares, which comprise approximately 6% of our total notes payable principal balance at December 31, 2008, is equal to the |
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Federal Reserve prime rate plus 3.0% (6.25% at December 31, 2008 and September 30, 2009 as utilized in the commitment table above) and may change on a daily basis. The note payable to Mr. Mariano is payable on demand, and, accordingly, the outstanding principal balance and interest payments on this note are reflected as due in less than 1 year. Payments on our notes payable to Brooke and ULLICO Inc. include guaranty fees payable to Mr. Mariano and do not contemplate prepayment. However, pursuant to the credit agreements and amendments thereto, notes payable may be prepaid. There is no prepayment premium. The principal and accrued interest on our surplus notes payable at December 31, 2008 was $1.4 million. The principal and accrued interest on our subordinated debentures at December 31, 2008 was $1.8 million. Interest rates on our surplus notes payable and subordinated debentures are fixed at 3.0%. See “— Liquidity and Capital Resources” for further discussion of our notes payable, surplus notes payable and subordinated debentures. |
(3) | Subordinated debentures are subject to renewal generally for an additional term of three years. Certain of the subordinated debentures are subject to renewal for up to two additional one-year terms. |
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Estimated Increase | ||||||||||||
(Decrease) in | ||||||||||||
Stockholders’ | ||||||||||||
Hypothetical Change in Interest Rates | Fair Value | Fair Value | Equity | |||||||||
In thousands | ||||||||||||
200 basis point increase | $ | 51,448 | $ | (2,925 | ) | $ | (1,931 | ) | ||||
100 basis point increase | 52,791 | (1,582 | ) | (1,044 | ) | |||||||
No change | 54,373 | — | — | |||||||||
100 basis point decrease | 56,156 | 1,783 | 1,177 | |||||||||
200 basis point decrease | 58,130 | 3,757 | 2,479 |
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• | small to medium-sized employers in a broad array of industries, including clerical and professional services, food services, retail and wholesale operations and industrial services; | |
• | low to medium hazard classes; and | |
• | accounts with annual premiums below $250,000. |
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• | Exclusive Focus on Workers’ Compensation Services and Products. Our operations are focused exclusively on workers’ compensation insurance services, workers’ compensation alternative market risk management solutions and traditional workers’ compensation insurance coverage. We believe this focus allows us to provide superior services and products to our customers relative to multiline insurance service providers and multiline insurance carriers. Furthermore, a significant portion of our services and products are provided in Florida, and we believe that certain of our multiline competitors that offer workers’ compensation coverage as part of a package policy including commercial property coverage tend to compete less for Florida workers’ compensation business because of property-related loss experience. | |
• | Hybrid Business Model. In addition to the fee income we earn for nurse case management, cost containment and other insurance services, we also earn ceding commissions on our alternative market business involving segregated portfolio cell captives and we earn underwriting and investment income on our alternative market and traditional workers’ compensation business. Because our nurse case management and cost containment service income is principally related to workers’ compensation claim frequency and medical costs, the operating results of our insurance services segment are not materially dependent on fluctuations or trends in prevailing workers’ compensation insurance premium rates. We believe that by changing the emphasis we place on our insurance services segment and ceding commission-based alternative market business relative to our traditional workers’ compensation business, we will be better able to achieve attractive returns and growth through a range of market cycles. |
• | Targeted Market for Alternative Market Risk Transfer Solutions. Although other insurers generally only offer alternative market products to large corporate customers, we offer alternative market workers’ compensation solutions to small, medium and larger-sized employers, enabling them and others to share in the claims experience and benefit from favorable loss experience. |
• | Enhanced Traditional Business Product Offerings. In our traditional business, we offer a number of flexible payment plans, including pay-as-you-go plans in which we partner with payroll service companies and our independent agents and their small employer clients to collect premiums and payroll information on a monthly or bi-weekly basis. Pay-as-you-go plans provide us with current payroll data and allow employers to remit premiums through their payroll service provider in an automated fashion. Flexible payment plans give employers a way to purchase workers’ compensation insurance without having to make a large upfront premium deposit payment. We believe that flexible payment plans, including pay-as-you-go plans, for small employers provide us with the opportunity to earn more favorable underwriting margins due to several factors: |
i. | favorable cash flows afforded under this plan can be more important to smaller employers than a price differential; |
iii. | the premium remittance mechanism results in a more streamlined renewal process and a lower frequency of business being re-marketed at renewal, leading to more favorable retention rates. |
• | Specialized Underwriting Expertise. We select and price our alternative market and traditional business products based on the specific risk associated with each potential policyholder rather than solely on the policyholder’s industry class. We utilize state-specific actuarial models on accounts with annual premiums over $100,000. In our alternative market business, we seek to align our interests with those of our policyholders or other parties participating in the risk-sharing arrangements by having them share in the underwriting profits and losses. We believe that we can compete effectively for alternative market and traditional insurance business based on our specialized underwriting focus and our accessibility to our clients. We generally compete on these attributes more so than on price, which we believe is generally not a differentiating factor in the states in which we write most of our business. For |
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• | Effective Claims Management, Nurse Case Management and Cost Containment Services. Guarantee Insurance began writing business as a subsidiary of Patriot Risk Management in the first quarter of 2004. As our business has grown, we have been successful in reasonably estimating our total liabilities for losses and loss adjustment expenses, establishing and maintaining adequate case reserves and rapidly closing claims. We provide our customers with an active claims management program. Our claims department employees average more than 12 years of workers’ compensation insurance industry experience, and members of our claims management team average more than 24 years of workers’ compensation experience. In addition, our nurse case management and bill review professionals have extensive training and expertise in assisting injured workers to return to work quickly. As of December 31, 2008, approximately 6%, 2%, 1% and 0.4% of total reported claims for accident years 2007, 2006, 2005 and 2004, respectively, remained open. Final net paid losses and loss adjustment expenses associated with closed claims are approximately 5% less than the initial reserves established for them. |
• | Strong Distribution Relationships. We maintain relationships with our network of more than 570 independent, non-exclusive agencies in 23 jurisdictions by emphasizing personal interaction and superior service and maintaining an exclusive focus on alternative market workers’ compensation solutions and traditional workers’ compensation insurance coverage. Our experienced underwriters work closely with our independent agents to market our products and serve the needs of prospective policyholders. | |
• | Proven Leadership and Experienced Management. The members of our senior management team average over 20 years of insurance industry experience and over 15 years of workers’ compensation insurance experience. Their authority and areas of responsibility are consistent with their functional and state-specific experience. |
• | Expand in Our Existing Markets. In all of the states in which we operate, we believe that a significant portion of total workers’ compensation insurance premium is written by numerous companies that individually have a small market share. We believe that our market share in each of the states in which we currently write business does not exceed 2%. We plan to continue to take advantage of our competitive position to expand in our existing markets. We believe that our risk selection, claims management, nurse case management and cost containment capabilities position us to profitably increase market share in our existing markets. |
• | Expand into Additional Markets. We are licensed to write workers’ compensation insurance in 27 jurisdictions, and we also hold 4 inactive workers’ compensation licenses. For the nine months ended September 30, 2009, we wrote traditional and alternative market business in 23 jurisdictions, principally in those jurisdictions that we believe provide the greatest opportunity for near-term profitable growth. For the nine months ended September 30, 2009, approximately 74% of our traditional and alternative market business was written in Florida, New Jersey, Missouri, Georgia and New York. We wrote approximately 28% of our direct premiums written in Florida for the nine months ended September 30, 2009. We plan to expand our business in states where we believe we can profitably write business. To do this, we plan to continue to leverage our talented pool of personnel, some of whom have prior |
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expertise operating in states in which we do not currently operate. In addition, we may seek to acquire other insurance companies, books of business or other workers’ compensation policy and claims administration providers, general agencies or general underwriting organizations as we expand in our existing markets and into additional markets. |
• | Expand our BPO Business. In 2009, we entered into an agreement to produce business and perform insurance services for our BPO customer to gain access to workers’ compensation insurance business in certain additional states. For the nine months ended September 30, 2009, approximately 65% of the business we produced and serviced for our BPO customer was in California, Texas, Michigan, Illinois and South Carolina. Approximately 34% of the business we produced and serviced for our BPO customer for the nine months ended September 30, 2009 was in California. We are in negotiations with two other insurance companies, and are seeking additional agreements with other insurance companies, with respect to similar BPO arrangements. |
• | Expand Nurse Case Management, Cost Containment and Other Insurance Services Operations. We plan to continue to generate fee income through our insurance services segment by offering workers’ compensation nurse case management and cost containment services to segregated portfolio captives and our quota share reinsurers. We plan to offer these services, together with general agency, general underwriting and policy and claims administration services, to other regional and national insurance companies and self-insured employers. We also plan to increase our insurance services income by expanding both organically and through strategic acquisitions of workers’ compensation policy and claims administration service providers, general agencies or general underwriting organizations. Taking advantage of our hybrid business model, we plan to identify and acquire insurance services operations that will create synergies with our alternative market and traditional workers’ compensation business. |
• | Obtain a Favorable Rating from A.M. Best. We have been informed by A.M. Best that after completion of this offering, we may expect Guarantee Insurance to receive a financial strength rating of “A−” (Excellent), which is the fourth highest of fifteen A.M. Best rating levels. This rating assignment is subject to the completion of this offering and the capitalization of Guarantee Insurance (and PF&C if we acquire it) as contemplated in this prospectus and is conditioned on Guarantee Insurance meeting the assumptions included in the business plan we presented to A.M. Best. If we acquire PF&C as described elsewhere in this prospectus, this rating assignment is also conditioned upon regulatory approval of a pooling agreement between Guarantee Insurance and PF&C. Pooling is a risk-sharing arrangement under which premiums and losses are shared between the pool members. We expect to make the contemplated capital contributions within 30 days after the date of this prospectus when we purchase PF&C or conclude not to proceed with that transaction. The prospective rating indication we received from A.M. Best is not a guarantee of final rating outcome. In addition, in order to maintain this rating, Guarantee Insurance (as well as PF&C if it is acquired) must maintain capitalization at a level that A.M. Best requires to support the assignment of the “A−” rating, and any material negative deviation from the business plan presented to A.M. Best, including in terms of management, earnings, capitalization or risk profile could result in negative rating pressure and possibly a rating downgrade. While we have expanded our business profitability without an A.M. Best rating and we believe that we can continue to do so with the net proceeds from this offering, we believe that an “A−” rating from A.M. Best would increase our ability to market to large employers and create new opportunities for our products and services in rating sensitive markets. A.M. Best’s ratings reflect its opinion of an insurance company’s financial strength and ability to meet ongoing obligations to policyholders and are not intended for the protection of investors. |
• | Leverage Existing Infrastructure. We service our insurance services customers and policyholders through regional offices in three states, each of which we believe has been staffed to accommodate a certain level of insurance services business and premium growth. We plan to realize economies of scale in our workforce and leverage other scalable infrastructure costs. |
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• | Insurance Services Segment. In our insurance services segment, we generate fee income by providing workers’ compensation claims services as well as agency and underwriting services. Workers’ compensation claims services include nurse case management, cost containment services and, beginning in the second quarter of 2009, claims administration and adjudication services. Workers’ compensation agency and underwriting services include general agency services and, beginning in the second quarter of 2009, specialty underwriting, policy administration and captive management services. Nurse case management and cost containment services are performed for the benefit of Guarantee Insurance, segregated portfolio captives and our traditional business quota share reinsurers under the Patriot Risk Services brand. In addition, claims services and agency and underwriting services are performed for the benefit of another insurance company, which we refer to as our BPO customer, through business process outsourcing relationships. |
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• | Insurance Segment. In our insurance segment, we provide workers’ compensation alternative market insurance solutions and traditional workers’ compensation policies for small to mid-sized employers as well as larger companies, generally with annual premiums of less than $3 million. In the alternative market, we write policies under which the policyholder, an agent or another party bears a substantial portion of the underwriting risk through a segregated portfolio captive. Alternative market business also includes other arrangements through which we share underwriting risk with our policyholders, including large deductible policies and retrospectively rated policies, all of which allow policyholders to share in their own claims experience. We also write workers’ compensation business for employers with annual premiums generally below $250,000 for which Guarantee Insurance bears substantially all of the underwriting risk (subject to reinsurance arrangements), which we refer to as traditional business. For employers with larger annual premiums, we evaluate whether the risk is appropriate for our traditional business or more suited to an alternative market solution. |
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• | Nurse Case Management. PRS provides nurse case management services for the benefit of Guarantee Insurance, segregated portfolio captives, our quota share reinsurers and our BPO customer. PRS has been awarded Case Management Accreditation by the Utilization Review Accreditation Committee (URAC), a nationally recognized leader in promoting health care quality through its accreditation and certification programs. PRS’s nurse case managers have nationally recognized credentials accepted by workers’ compensation insurers, including the following: Registered Nurse, Certified Rehabilitation Registered Nurse and State Qualified Rehabilitation Provider. Upon receipt of the notice of injury, claims are assigned to a nurse case manager. PRS’s nurse case managers do not provide health care services to the claimant. The nurse case manager’s role is to assist in resolving the claim and returning the injured worker to work as efficiently as possible. PRS nurse case managers actively monitor each file pursuant to a process that includes peer review and utilization guidelines for treatment. PRS’s nurse case managers contact the injured worker within 24 hours after claim filing to assess and assist in the early-intervention process. We believe that early intervention is essential for medical management and early return to work. PRS’s nurse case managers remain active on the claim from inception until claim resolution. The nurse case manager and the claims adjuster work together to achieve the overall goal of helping the injured employee return to work and closing the claim. The case management process remains active during the course of treatment to help ensure there is medically necessary treatment towards resolution and the injured worker returns to work or pre-injury status. PRS provides these nurse case management services for a flat monthly fee over the life of the claim. For the nine months ended September 30, 2009 and the year ended December 31, 2008, fees earned by PRS for nurse case management services represented approximately 38% and 47% of total unconsolidated insurance services income, respectively. |
• | Cost Containment Services. PRS provides cost containment services for the benefit of Guarantee Insurance, segregated portfolio captives and our quota share reinsurers. In the second quarter of 2009, PRS also began providing cost containment services for the benefit of our BPO customer. PRS has developed an extensive preferred provider network of physicians, clinics, hospitals, pharmacies and the like. Participating in PPO networks allows access to discounted services, which yield medical costs savings. For the years ended December 31, 2008 and 2007, PRS cost containment activities reduced medical bills by an average of 54% and 45%, resulting in a total savings in medical costs of $20.5 million and $10.6 million, respectively. PRS provides these bill review services on a percentage of savings basis. For the nine months ended September 30, 2009 and the year ended December 31, 2008, fees earned by PRS for cost containment services represented approximately 36% and 43% of total unconsolidated insurance services income, respectively. |
• | Claims Administration and Adjudication Services. In the second quarter of 2009, PRS began providing workers’ compensation claims administration and adjudication services for the benefit of our BPO customer. Claims administration and adjudication services are provided pursuant to and in compliance with state rules and regulations as well as client-specific process guidelines. For the nine months ended September 30, 2009, fees earned by PRS for claims administration and adjudication services represented 1% of total unconsolidated insurance services income. No fees were earned by PRS for claims administration for the year ended December 31, 2008. |
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Nine Months Ended September 30, 2009 | ||||||||||||||||||||||||
Alternative Market | ||||||||||||||||||||||||
Business | Traditional Business | Total | ||||||||||||||||||||||
Premium | Percentage | Premium | Percentage | Premium | Percentage | |||||||||||||||||||
$ in thousands | ||||||||||||||||||||||||
California | $ | 6,630 | 34.1 | % | $ | — | — | % | $ | 6,630 | 34.1 | % | ||||||||||||
Texas | 2,211 | 11.4 | — | — | 2,211 | 11.4 | ||||||||||||||||||
Illinois | 1,419 | 7.3 | — | — | 1,419 | 7.3 | ||||||||||||||||||
Michigan | 1,240 | 6.4 | — | — | 1,240 | 6.4 | ||||||||||||||||||
South Carolina | 1,138 | 5.9 | — | — | 1,138 | 5.9 | ||||||||||||||||||
Florida | 686 | 3.5 | — | — | 686 | 3.5 | ||||||||||||||||||
North Carolina | 685 | 3.5 | — | — | 685 | 3.5 | ||||||||||||||||||
Idaho | 663 | 3.4 | — | — | 663 | 3.4 | ||||||||||||||||||
Tennessee | 543 | 2.8 | — | — | 543 | 2.8 | ||||||||||||||||||
Oklahoma | 532 | 2.7 | — | — | 532 | 2.7 | ||||||||||||||||||
Arizona | 516 | 2.7 | — | — | 516 | 2.7 | ||||||||||||||||||
Other States | 3,165 | 16.3 | — | — | 3,165 | 16.3 | ||||||||||||||||||
Total | $ | 19,428 | 100.0 | % | $ | — | — | % | $ | 19,428 | 100.0 | % | ||||||||||||
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• | low to medium risk classifications and hazard levels; and | |
• | accounts with annual premiums below $250,000. |
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• | Segregated portfolio captive insurance plans. We offer segregated portfolio captive plans to small, medium and larger-sized employers in a broad array of industries, including hospitality companies, construction companies, professional employer organizations, clerical and professional temporary staffing companies, industrial companies, car dealerships, food services and retail and wholesale operations, using both onshore and offshore captive facilities. Prior to the advent of segregated portfolio captive programs, only very large risks could afford the capitalization and administrative costs associated with captive insurance company formation. Our approach utilizes standardized agreements and processes that allow employers, insurance agencies and other parties with annual premiums as low as $200,000 to participate. Through our captive insurance plans, we write a workers’ compensation policy for the employer and facilitate the establishment of a segregated portfolio cell within a segregated portfolio captive by coordinating the necessary interactions among the party controlling the cell, the insurance agency, the segregated portfolio captive, our manager and insurance regulators in the jurisdiction where the captive is domiciled. These segregated portfolio cells may be controlled by policyholders, insurance agencies, parties related to policyholders or other parties. |
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* | Ceded premiums, net of ceding commission, are held by Guarantee Insurance for the account of the segregated portfolio cell and, along with the collateral, constitute the loss fund for payment of reinsured claims. |
• | Large deductible plans. In 2008, we began offering large deductible plans as an alternative market insurance solution. Under these plans, we generally receive a lower premium than we would for a traditional plan, but the insured retains a greater share of the underwriting risk through a higher per-occurrence deductible. This gives the policyholder greater incentive to exercise effective loss controls. The per-occurrence deductibles on these plans range from $100,000 to $1,000,000, with various levels of aggregate protection. Under these plans, the policyholder is responsible for payments of claims that fall below the deductible. Guarantee Insurance pays thebelow-the-deductible portion of the claim and bills the policyholder for reimbursement. These types of programs require collateral from the policyholder based upon its individual loss profile and the loss development factors in the states where it is insured. For the nine months ended September 30, 2009 and the year ended December 31, 2008, approximately 7% and 6% of our direct premiums written on alternative market business were derived from large deductible plans, respectively. |
• | Retrospectively rated plans. Under retrospectively rated plans, we charge an initial premium that is subject to adjustment at the end of the policy period. Retrospectively rated policies use formulae to adjust premiums based on the policyholder’s actual losses and loss adjustment expenses incurred and paid during the policy period, subject to a minimum and maximum premium. These policies are typically subject to annual adjustments until claims are closed. Unlike policyholder dividend plans in our traditional business (described below), retrospective premium adjustments are established contractually and are not determined at the discretion of the board of directors of Guarantee Insurance. Guarantee Insurance generally offers retrospectively rated policies to employers with minimum annual premiums of $100,000. For the nine months ended September 30, 2009 and the year ended December 31, 2008, approximately 2% and 4% of our direct premiums written on alternative market business were derived from retrospectively rated policies, respectively. |
• | Guaranteed cost policies with no risk sharing features. Our alternative market business also includes policies issued to certain professional employer organizations and professional temporary staffing organizations on which we retain the risk. The excess of loss reinsurance on these policies is provided |
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by the same reinsurer that covers our segregated portfolio captive insurance plans, retrospectively rated plans and large deductible plans, and these plans may be converted to risk sharing arrangements in the future. For the nine months ended September 30, 2009 and the year ended December 31, 2008, approximately 11% and 12% of our direct premiums written on alternative market business were derived from these guaranteed cost policies issued to certain professional employer organizations and professional temporary staffing organizations. |
• | Guaranteed cost plans. Our basic traditional product is a guaranteed cost policy, under which the premium for a policyholder is set in advance based upon rate filings approved by the insurance regulator and varies based only upon changes in the policyholder’s employee class codes and payroll. The premium does not increase or decrease based upon an updated participating employee census during the policy period. We regularly audit the payroll records of our policyholders to help ensure that appropriate premiums are being charged and paid and adjust premiums as appropriate. For the nine months ended September 30, 2009 and the year ended December 31, 2008, approximately 73% and 76% of our direct premiums written on traditional business were derived from guaranteed cost products, respectively. |
• | Pay-as-you-go plans. We offer a monthly self-reporting option, under which a policyholder’s monthly premium payments are calculated by the policyholder using actual monthly payroll figures. We refer to these as pay-as-you-go plans. Pay-as-you-go plans are a relatively recent innovation in the workers’ compensation industry. With pay-as-you-go plans, the insured works with a payroll vendor to collect accurate payrolls and corresponding premiums to be remitted to us. Pay-as-you-go plans have become popular with insureds, and as a result some payroll companies now own their own insurance agency and some traditional insurance agencies now own their own payroll company. We believe that pay-as-you-go plans are a more efficient method of underwriting and administering workers’ compensation. These plans reduce our credit exposure for additional premiums that we determine we are owed based on payroll audits. Furthermore, the plans create a more precise ongoing workers’ compensation insurance expense and more predictable ongoing cash flow expectations for our policyholders. We began offering pay-as-you-go plans in late 2006. For the nine months ended September 30, 2009 and the year ended December 31, 2008, approximately 17% and 18% of our direct premiums written on traditional business were derived from pay-as-you-go plans, respectively. |
• | Policyholder dividend plans. Generally, under a policyholder dividend plan a fixed premium is charged based upon rate filings approved by the insurance regulator, but the insured may receive a dividend based upon favorable loss experience during the policy period. We began offering policyholder dividend plans in Florida and other states in 2007. Eligibility for these plans varies based upon the nature of the policyholder’s operations, value of premium generated, loss experience and existing controls intended to minimize workers’ compensation claims and costs. Policyholder dividends, which are to be paid at the discretion of the board of directors of Guarantee Insurance and in accordance with law, cannot be guaranteed and are generally based upon the policyholder’s loss experience and other terms stipulated in the policyholder dividend plan filed with the appropriate insurance regulators and policy terms, including the applicable dividend endorsements. We plan to pay dividends, if any, |
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18 months after policy expiration. For the nine months ended September 30, 2009 and the year ended December 31, 2008, approximately 10% and 6% of our direct premiums written on traditional business were derived from policyholder dividend plans, respectively. |
Nine Months | ||||||||||||||||||||
Ended September 30, | Years Ended December 31, | |||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Gross premiums written: | ||||||||||||||||||||
Direct business: | ||||||||||||||||||||
Alternative market | $ | 42,163 | $ | 42,168 | $ | 47,374 | $ | 34,316 | $ | 33,921 | ||||||||||
Traditional business | 44,378 | 51,912 | 69,182 | 50,599 | 26,636 | |||||||||||||||
Total direct business | 86,541 | 94,080 | 116,566 | 84,915 | 60,557 | |||||||||||||||
Assumed business | ||||||||||||||||||||
BPO Customer | $ | 7,824 | $ | — | $ | — | $ | — | $ | — | ||||||||||
NCCI National Workers’ Compensation Pool | 1,607 | 798 | — | — | — | |||||||||||||||
Total assumed business | 9,431 | 798 | 1,007 | 895 | 1,815 | |||||||||||||||
Total | $ | 95,972 | $ | 94,878 | $ | 117,563 | $ | 85,810 | $ | 62,372 | ||||||||||
Net premiums earned: | ||||||||||||||||||||
Direct business: | ||||||||||||||||||||
Alternative market | $ | 8,444 | $ | 8,110 | $ | 15,733 | $ | 3,054 | $ | 2,852 | ||||||||||
Traditional business | 16,971 | 23,350 | 32,456 | 20,490 | 16,584 | |||||||||||||||
Total direct business | 25,415 | 31,460 | 48,189 | 23,544 | 19,436 | |||||||||||||||
Assumed business(1) | ||||||||||||||||||||
BPO Customer | $ | 1,538 | $ | — | $ | — | $ | — | $ | — | ||||||||||
NCCI National Workers’ Compensation Pool | 1,416 | 816 | — | — | — | |||||||||||||||
Total assumed business | 2,954 | 816 | 1,031 | 1,069 | 1,617 | |||||||||||||||
Total | $ | 28,369 | $ | 32,276 | $ | 49,220 | $ | 24,613 | $ | 21,053 | ||||||||||
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Nine Months Ended September 30, 2009 | ||||||||||||||||||||||||
Alternative Market | ||||||||||||||||||||||||
Business | Traditional Business | Total | ||||||||||||||||||||||
Premium | Percentage | Premium | Percentage | Premium | Percentage | |||||||||||||||||||
In thousands (other than percentages) | ||||||||||||||||||||||||
Florida | 14,112 | 33.5 | % | 9,911 | 22.3 | % | 24,023 | 27.8 | % | |||||||||||||||
New Jersey | 8,530 | 20.2 | % | 9,078 | 20.5 | % | 17,608 | 20.3 | % | |||||||||||||||
New York | 4,099 | 9.7 | % | 4,273 | 9.6 | % | 8,372 | 9.7 | % | |||||||||||||||
Georgia | 5,297 | 12.6 | % | 3,049 | 6.9 | % | 8,346 | 9.6 | % | |||||||||||||||
Missouri | 1,629 | 3.9 | % | 3,686 | 8.3 | % | 5,315 | 6.1 | % | |||||||||||||||
Arkansas | 873 | 2.1 | % | 2,568 | 5.8 | % | 3,441 | 4.0 | % | |||||||||||||||
Oklahoma | 1,745 | 4.1 | % | 1,569 | 3.5 | % | 3,314 | 3.8 | % | |||||||||||||||
Indiana | 407 | 1.0 | % | 2,738 | 6.2 | % | 3,145 | 3.6 | % | |||||||||||||||
Virginia | 875 | 2.1 | % | 1,806 | 4.1 | % | 2,681 | 3.1 | % | |||||||||||||||
Other States | 4,596 | 10.9 | % | 5,700 | 12.8 | % | 10,296 | 11.9 | % | |||||||||||||||
Total | 42,163 | 100.0 | % | 44,378 | 100.0 | % | 86,541 | 100.0 | % | |||||||||||||||
Year Ended December 31, 2008 | ||||||||||||||||||||||||
Alternative Market | ||||||||||||||||||||||||
Business | Traditional Business | Total | ||||||||||||||||||||||
Premium | Percentage | Premium | Percentage | Premium | Percentage | |||||||||||||||||||
In thousands (other than percentages)s | ||||||||||||||||||||||||
Florida | $ | 32,977 | 69.6 | % | $ | 20,658 | 29.9 | % | $ | 53,635 | 46.0 | % | ||||||||||||
New Jersey | 1,792 | 3.8 | 9,681 | 14.0 | 11,473 | 9.8 | ||||||||||||||||||
Missouri | 981 | 2.1 | 8,590 | 12.4 | 9,571 | 8.2 | ||||||||||||||||||
Georgia | 4,097 | 8.6 | 4,508 | 6.5 | 8,605 | 7.4 | ||||||||||||||||||
Indiana | 255 | 0.5 | 6,330 | 9.1 | 6,585 | 5.6 | ||||||||||||||||||
New York | 2,586 | 5.5 | 3,510 | 5.1 | 6,096 | 5.2 | ||||||||||||||||||
Arkansas | 474 | 1.0 | 4,523 | 6.5 | 4,997 | 4.3 | ||||||||||||||||||
Alabama | 1,465 | 3.1 | 1,068 | 1.5 | 2,533 | 2.2 | ||||||||||||||||||
Oklahoma | 492 | 1.0 | 1,834 | 2.7 | 2,326 | 2.0 | ||||||||||||||||||
Other States | 2,255 | 4.8 | 8,480 | 12.3 | 10,735 | 9.2 | ||||||||||||||||||
Total | $ | 47,374 | 100.0 | % | $ | 69,182 | 100.0 | % | $ | 116,556 | 100.0 | % | ||||||||||||
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• | Coverage Verification. Immediate analysis and documentation of confirmation of coverage. | |
• | Contact. Contact with the parties involved in the loss within 24 hours of the receipt of a claim. When the claim is received, the adjuster and a telephonic case manager registered nurse will make contact with the injured worker, employerand/or medical provider. We believe that having both an adjuster and nurse case manager make these contacts and assist in establishing the most appropriate and efficient medical treatment helps restore health and return the injured party to work as soon as practical. | |
• | Investigation. Within 14 days of receipt of a claim, a claim adjudication and management strategy is developed, including the identification and communication of what we believe to be the most appropriate medical treatment and indemnity benefits to be paid. | |
• | Recovery and Cost Offsets. Effective recognition, investigation and pursuit of recovery and cost offsets. Recoveries can be for a third-party claim and, in certain states (e.g., South Carolina and Georgia), for second injury fund claims. In some jurisdictions, such as Florida, where the claimant may |
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also be eligible for social security disability benefits, the amount of such benefits received can be offset from the weekly workers’ compensation rate using a prescribed formula. |
• | Evaluation. Appropriate analysis of claim exposure to probable ultimate cost. The claim file should reflect the action plan necessary to resolve the claim, while complying with applicable state laws, rules and regulations and corporate, insurer, reinsurer and employer reporting requirements. | |
• | Medical/Disability/Rehabilitation Management. Appropriate assistance in managing medical care and treatment, utilizing a broad range of techniques designed to return the injured worker to work as quickly as practical. We believe that the most successful technique in returning injured workers back to work as soon as possible is ongoing communication with the injured worker, medical provider and employer. Consistent contact with the medical provider, including requests for light duty restrictions as appropriate, can hasten an injured worker’s return to work. In many cases, the medical provider does not know the employer is able to make reasonable accommodations or offer the injured worker alternative work during recuperation. We reinforce the value of a working employee with the employer and assist in the identification of suitable light duty work when appropriate. Securing an employer’s cooperation to identify suitable jobs and assisting in promptly returning employees to work can substantially reduce overall claim costs. | |
• | Negotiation and Disposition. Timely claim negotiation and disposition to achieve an equitable, cost-effective result. | |
• | Litigation Management. A proactive initiative by claims staff to manage litigation and, where necessary, involve defense counsel who are committed to providing aggressive, high quality, efficient representation under the direction of the claims management team. | |
• | Supervision. Consistent supervision of the claim by our claims staff with precise, documented guidance and coaching throughout the life of the claim that clearly pursues resolution and strives to ensure best practices of claims handling. | |
• | Data Quality. Clear understanding of the importance of data quality, reflected through prompt, accurate and thorough maintenance of claims data, resulting in timely and accurate reporting. | |
• | Customer Service. Prompt initial contact and ongoing contact with insured employers, including thorough and prompt responses to requests. | |
• | Privacy. An ongoing commitment to maintaining the integrity of claimant data and safeguarding medical and other information pertaining to injured workers and healthcare providers. |
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Worker’s | ||||||||||||
Compensation | ||||||||||||
Patriot | Industry Average | |||||||||||
As of December 31, 2008 | Open Claims as a | |||||||||||
Open Claims as a | Percent of | |||||||||||
Number of | Percentage of | Reported Claims as of | ||||||||||
Open Claims | Reported Claims | December 31, 2008 | ||||||||||
Current accident year | 1,745 | 25.8 | % | 30.0 | % | |||||||
Prior accident year | 314 | 6.3 | % | 8.6 | % | |||||||
Second prior accident year | 85 | 1.8 | % | 4.3 | % | |||||||
Third prior accident year | 38 | 1.0 | % | 2.6 | % | |||||||
Fourth prior accident year | 4 | 0.4 | % | 1.8 | % |
• | reduce net liability on individual risks; | |
• | mitigate the effect of individual loss occurrence (including catastrophic losses); | |
• | stabilize underwriting results; |
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• | decrease underwriting leverage; and | |
• | increase its underwriting capacity. |
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• | For losses incurred under policies commencing during the period July 1, 2005 through June 30, 2006, the first layer of excess of loss reinsurance provides $250,000 of coverage per occurrence excess of Guarantee Insurance’s $750,000 retention. This layer reinsures losses in excess of the $750,000 retention up to $1.0 million and only applies to our traditional business. |
• | For losses incurred under policies commencing during the period July 1, 2005 through June 30, 2006, the second layer of excess of loss reinsurance provides $4.0 million of coverage per occurrence excess of $1.0 million. This layer reinsures losses in excess of $1.0 million up to $5.0 million, subject to a maximum amount of recovery under this layer equal to 225% of the total reinsurance premiums paid by Guarantee Insurance for the layer. However, in the event of a loss falling within this layer, reinsurance premiums payable by Guarantee Insurance are based on a 3% minimum reinsurance premium rate applied to the subject premium base of $70 million plus 110% of paid losses falling within the layer, all subject to a maximum premium amount of $8.75 million. This means that regardless of the number of occurrences covered by this reinsurance with incurred losses in excess of $1.0 million, no net income statement benefit is received for the first $6.65 million of aggregate losses falling within this layer. The aggregate amount of reinsurance recoveries paid under this layer will never exceed $19.69 million. This reinsurance applies to both traditional and alternative market business. |
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• | The third layer of excess of loss reinsurance consists of two separate clash cover treaties. Each of these treaties provides $5.0 million of coverage per occurrence in excess of $5.0 million. Each reinsures losses in excess of $5.0 million up to $10.0 million. The first of these treaties, which applied to losses incurred under policies commencing during the period from July 1, 2005 through June 30, 2006, was commuted in 2006 and no longer is in force. The second of these treaties, which has not been commuted and remains in force, applies to losses occurring from January 1, 2006 through December 31, 2006. This second treaty covers both traditional and alternative market business but excludes coverage for participation in assigned risk pools. | |
• | The fourth layer of excess of loss reinsurance also consists of two separate clash cover treaties. Each of these treaties provides $10.0 million of coverage per occurrence in excess of $10.0 million. Each reinsures losses in excess of $10.0 million up to $20.0 million. The first of these treaties, which applied to losses incurred under policies commencing from July 1, 2005 through June 30, 2006, was commuted in 2006 and no longer is in force. The second of these treaties, which has not been commuted and remains in force, applies to losses occurring from January 1, 2006 through December 31, 2006. This second treaty covers both traditional and alternative market business but excludes coverage for participation in assigned risk pools. |
• | For losses incurred under policies commencing during the period July 1, 2006 through June 30, 2007, the first layer of excess of loss reinsurance provides $4.3 million of coverage per occurrence excess of Guarantee Insurance’s $750,000 retention. This layer has an annual aggregate deductible of $250,000 and reinsures losses in excess of the $750,000 retention up to $5.0 million. Pursuant to these deductible provisions, Guarantee Insurance must pay $250,000 in combined statutory workers’ compensation and employers’ liability losses incurred in the twelve-month contract period in addition to its $750,000 retention before it is entitled to any excess of loss reinsurance recovery under this layer. | |
• | The second layer of excess of loss reinsurance consists of two separate treaties. Each of these treaties provides $5.0 million of coverage per occurrence in excess of $5.0 million. Each reinsures losses in excess of $5.0 million up to $10.0 million. The first of these treaties is a clash cover, which applies to losses occurring from January 1, 2006 through December 31, 2006. The second is not a clash cover and applies to losses occurring from January 1, 2007 through June 30, 2008, subject to an aggregate limit of $10.0 million. This aggregate limit means that regardless of the number of occurrences during the18-month contract period with incurred losses in excess of $5.0 million, the aggregate amount paid under this treaty would not exceed $10.0 million. Both of these treaties cover traditional and alternative market business but exclude coverage for participation in assigned risk pools. | |
• | The third layer of excess of loss reinsurance consists of two separate clash cover treaties. Each of these treaties provides $10.0 million of coverage per occurrence in excess of $10.0 million. Each reinsures losses in excess of $10.0 million up to $20.0 million. The first of these treaties applies to losses occurring from January 1, 2006 through December 31, 2006. The second applies to losses occurring from January 1, 2007 through June 30, 2008, subject to an aggregate limit of $20.0 million. Both of these treaties cover traditional and alternative market business but exclude coverage for participation in assigned risk pools. |
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• | Pursuant to a workers’ compensation excess of loss reinsurance agreement between Guarantee Insurance and Midwest Employers Casualty Company, the first layer of the excess of loss reinsurance provides $4.0 million of coverage per occurrence excess of Guarantee Insurance’s $1.0 million retention for losses insured under policies commencing during the period July 1, 2007 through June 30, 2008. It reinsures losses in excess of $1.0 million up to $5.0 million. | |
• | Pursuant to a workers’ compensation excess of loss reinsurance agreement between Guarantee Insurance and reinsurers Max Re, Ltd., Aspen Insurance UK Limited and various underwriters at Lloyd’s London, the second layer of excess of loss reinsurance provides $5.0 million of coverage per occurrence in excess of $5.0 million for losses occurring on or after January 1, 2007 and prior to July 1, 2008. This second layer reinsures losses in excess of $5.0 million up to $10.0 million and has an aggregate limit of $10.0 million. The second layer covers both traditional and alternative market business and excludes coverage for participation in assigned risk pools. | |
• | The third layer of excess of loss reinsurance is a clash cover provided pursuant to a workers’ compensation excess of loss reinsurance agreement between Guarantee Insurance and the reinsurers Aspen Insurance UK Limited and various underwriters at Lloyd’s London. This reinsurance applies to losses occurring from January 1, 2007 through June 30, 2008 and provides $10.0 million of coverage per occurrence in excess of $10.0 million, subject to an aggregate limit of $20.0 million. This third layer reinsures losses in excess of $10.0 million up to $20.0 million. The third layer covers both traditional and alternative market business and excludes coverage for participation in assigned risk pools. |
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Reinsurance Recoverable Balances | ||||||||||||||||||||||||
Unpaid | ||||||||||||||||||||||||
Paid Losses | Losses | |||||||||||||||||||||||
and Loss | and Loss | |||||||||||||||||||||||
A.M. | Adjustment | Adjustment | Net | |||||||||||||||||||||
Best Rating | Expenses | Expenses | Total | Collateral(1) | Exposures | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Authorized reinsurers: | ||||||||||||||||||||||||
National Indemnity Company (a subsidiary of Berkshire Hathaway, Inc.) | A++ | $ | 2,301 | $ | 13,435 | $ | 15,736 | $ | — | $ | 15,736 | |||||||||||||
Swiss Reinsurance America Corporation | A+ | 293 | 1,643 | 1,936 | — | 1,936 | ||||||||||||||||||
Midwest Employers Casualty Company | A+ | 1,474 | 1,674 | 3,148 | — | 3,148 | ||||||||||||||||||
Other authorized reinsurers | 441 | 2,468 | 2,909 | 238 | 2,671 | |||||||||||||||||||
Total authorized reinsurers | 4,509 | 19,220 | 23,729 | 238 | 23,491 | |||||||||||||||||||
Unauthorized reinsurers: | ||||||||||||||||||||||||
Excess of loss reinsurers: | ||||||||||||||||||||||||
With net exposures | — | — | — | — | — | |||||||||||||||||||
With no net exposures | — | 537 | 537 | 1,618 | — | |||||||||||||||||||
Total excess of loss reinsurers | — | 537 | 537 | 1,618 | — | |||||||||||||||||||
Segregated portfolio cell captives: | ||||||||||||||||||||||||
With net exposures | — | 3,011 | 3,011 | 1,574 | 1,437 | |||||||||||||||||||
With no net exposures | — | 11,340 | 11,340 | 22,301 | — | |||||||||||||||||||
Total segregated portfolio cell captives | — | 14,351 | 14,351 | 23,875 | — | |||||||||||||||||||
Legacy exposure reinsurers: | ||||||||||||||||||||||||
With net exposures | 340 | 2,111 | 2,451 | 1,303 | 1,148 | |||||||||||||||||||
With no net exposures | 93 | 1,273 | 1,366 | 2,350 | — | |||||||||||||||||||
Total legacy exposure reinsurers | 433 | 3,384 | 3,817 | 3,653 | 1,148 | |||||||||||||||||||
Total unauthorized reinsurers | 433 | 18,272 | 18,705 | 29,146 | 2,585 | |||||||||||||||||||
Total | 4,942 | 37,492 | 42,434 | $ | 29,384 | $ | 26,076 | |||||||||||||||||
Less allowance | (300 | ) | — | (300 | ) | |||||||||||||||||||
Net | $ | 4,642 | $ | 37,492 | $ | 42,134 | ||||||||||||||||||
(1) | Collateral is principally comprised of funds held by Guarantee Insurance under reinsurance treaties and letters of credit. |
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• | type of loss; | |
• | severity of the injury or damage; | |
• | age and occupation of the injured employee; | |
• | estimated length of temporary disability; | |
• | anticipated permanent disability; | |
• | expected medical procedures, costs and duration; | |
• | our knowledge of the circumstances surrounding the claim; | |
• | insurance policy provisions, including coverage, related to the claim; | |
• | jurisdiction of the occurrence; and | |
• | other benefits defined by applicable statute. |
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Unallocated | ||||||||||||||||||||||||
Alternative | Loss | |||||||||||||||||||||||
Traditional | Market | Assumed | Legacy | Adjustment | ||||||||||||||||||||
Business | Business | Business | Business | Expenses | Total | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Low end of the range | $ | 19,410 | $ | 8,521 | $ | 1,767 | $ | 4,523 | $ | 1,683 | $ | 35,904 | ||||||||||||
Net reserves, as reported | 20,001 | 9,018 | 1,767 | 4,523 | 1,749 | 37,058 | ||||||||||||||||||
High end of the range | 21,181 | 10,022 | 1,767 | 4,523 | 1,881 | 39,374 |
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2008 | 2007 | 2006 | ||||||||||
In thousands | ||||||||||||
Balances, January 1 | $ | 69,881 | $ | 65,953 | $ | 39,084 | ||||||
Less reinsurance recoverable | (43,317 | ) | (41,103 | ) | (21,699 | ) | ||||||
Net balances, January 1 | 26,564 | 24,850 | 17,385 | |||||||||
Incurred related to: | ||||||||||||
Current year | 27,422 | 18,642 | 15,328 | |||||||||
Prior years | 1,294 | (3,460 | ) | 2,511 | ||||||||
Total incurred | 28,716 | 15,182 | 17,839 | |||||||||
Paid related to: | ||||||||||||
Current year | 6,171 | 4,668 | 3,290 | |||||||||
Prior years | 12,051 | 8,800 | 7,084 | |||||||||
Total paid | 18,222 | 13,468 | 10,374 | |||||||||
Net balances, December 31 | 37,058 | 26,564 | 24,850 | |||||||||
Plus reinsurance recoverable | 37,492 | 43,317 | 41,103 | |||||||||
Balances, December 31 | $ | 74,550 | $ | 69,881 | $ | 65,953 | ||||||
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Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
In thousands | ||||||||||||
Balances, January 1 | $ | 6,789 | $ | 6,999 | $ | 7,302 | ||||||
Less reinsurance recoverable | (3,758 | ) | (3,402 | ) | (3,780 | ) | ||||||
Net balances, January 1 | 3,031 | 3,597 | 3,522 | |||||||||
Incurred related to claims in prior years | 285 | (169 | ) | 363 | ||||||||
Paid related to prior years | (323 | ) | (397 | ) | (288 | ) | ||||||
Net balances, December 31 | 2,993 | 3,031 | 3,597 | |||||||||
Plus reinsurance recoverable | 3,785 | 3,758 | 3,402 | |||||||||
Balances, December 31 | $ | 6,778 | $ | 6,789 | $ | 6,999 | ||||||
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
In thousands | ||||||||||||
Balances, January 1 | $ | 3,742 | $ | 6,050 | $ | 6,006 | ||||||
Less reinsurance recoverable | (1,996 | ) | (2,974 | ) | (2,949 | ) | ||||||
Net balances, January 1 | 1,746 | 3,056 | 3,057 | |||||||||
Incurred related to claims in prior years | 424 | (1,154 | ) | 153 | ||||||||
Paid related to prior years | (640 | ) | (176 | ) | (134 | ) | ||||||
Net balances, December 31 | 1,530 | 1,746 | 3,076 | |||||||||
Plus reinsurance recoverable | 2,076 | 1,996 | 2,974 | |||||||||
Balances, December 31 | $ | 3,606 | $ | 3,742 | $ | 6,050 | ||||||
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2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Net reserves for losses and loss adjustment expenses at end of year | $ | 11,800 | $ | 17,385 | $ | 24,850 | $ | 26,564 | $ | 37,058 | ||||||||||
Reserves re-estimated: | ||||||||||||||||||||
One year later | 12,383 | 19,896 | 21,390 | 27,858 | ||||||||||||||||
Two years later | 13,506 | 16,887 | 21,255 | |||||||||||||||||
Three years later | 10,973 | 16,688 | ||||||||||||||||||
Four years later | 11,371 | |||||||||||||||||||
Net cumulative redundancy (deficiency): | ||||||||||||||||||||
Amount | $ | 429 | $ | 697 | $ | 3,595 | $ | (1,294 | ) | |||||||||||
Percentage | 3.6 | % | 4.0 | % | 14.5 | % | (4.9 | )% | ||||||||||||
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2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Cumulative net paid losses and loss adjustment expenses at: | ||||||||||||||||||||
End of current year | $ | 203 | $ | 3,996 | $ | 3,290 | $ | 4,668 | $ | 6,279 | ||||||||||
One year later | 1,966 | 10,159 | 12,124 | 13,329 | ||||||||||||||||
Two years later | 3,308 | 13,312 | 14,740 | |||||||||||||||||
Three years later | 4,048 | 13,073 | ||||||||||||||||||
Four years later | 4,953 | |||||||||||||||||||
Reserves at end of year: | ||||||||||||||||||||
Net reserves for losses and loss adjustment expenses | $ | 11,800 | $ | 17,385 | $ | 24,850 | $ | 26,564 | $ | 37,058 | ||||||||||
Reinsurance recoverables on unpaid losses and loss adjustment expenses | 8,085 | 22,093 | 41,103 | 43,317 | 37,492 | |||||||||||||||
Reserves for losses and loss adjustment expenses | $ | 19,885 | $ | 39,478 | $ | 65,953 | $ | 69,881 | $ | 74,550 | ||||||||||
Reserves re-estimated at December 31, 2008: | ||||||||||||||||||||
Net reserves for losses and loss adjustment expenses | $ | 11,371 | $ | 16,688 | $ | 21,255 | $ | 27,858 | ||||||||||||
Reinsurance recoverables on unpaid losses and loss adjustment expenses | 8,969 | 16,160 | 29,310 | 41,105 | ||||||||||||||||
Reserves for losses and loss adjustment expenses | $ | 20,340 | $ | 32,848 | $ | 50,565 | $ | 68,963 | ||||||||||||
Gross cumulative redundancy (deficiency): | ||||||||||||||||||||
Amount | $ | (351 | ) | $ | 657 | $ | 15,388 | $ | 918 | |||||||||||
Percentage | (1.8 | )% | 1.7 | % | 23.3 | % | 1.3 | % | ||||||||||||
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Fair | Percentage of | |||||||
Value | Portfolio | |||||||
In thousands | ||||||||
Debt securities available for sale: | ||||||||
U.S. government securities | $ | 3,598 | 6.6 | % | ||||
U.S. government agencies | 308 | 0.6 | ||||||
Asset-backed and mortgage-backed securities | 11,965 | 22.0 | ||||||
State and political subdivisions | 16,376 | 30.0 | ||||||
Corporate securities | 13,887 | 25.5 | ||||||
Total fixed maturity securities | 46,134 | 84.7 | ||||||
Short-term investments | 671 | 1.2 | ||||||
Real estate held for the production of income | 246 | 0.5 | ||||||
Cash and cash equivalents | 7,452 | 13.6 | ||||||
Total investments, including cash and cash equivalents | $ | 54,503 | 100.0 | % | ||||
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S&P Credit Rating | ||||
AAA | 50.9 | % | ||
AA | 24.5 | |||
A | 21.4 | |||
BBB | 3.0 | |||
Below BBB | 0.2 | |||
Total | 100.0 | % | ||
Percentage of | ||||||||
Total State | ||||||||
and Political | ||||||||
Subdivision | ||||||||
Guarantor | Fair Value | Securities | ||||||
(In thousands) | ||||||||
Ambac Assurance Corporation | $ | 1,676 | 10.2 | % | ||||
Financial Guaranty Insurance Company | 2,682 | 16.4 | ||||||
Financial Security Assurance, Inc | 1,675 | 10.2 | ||||||
MBIA, Inc | 1,146 | 7.0 | ||||||
Total | $ | 7,179 | 43.8 | % | ||||
Percentage of | ||||||||
Fair Value | Portfolio | |||||||
(In thousands) | ||||||||
Due in one year or less | $ | 5,171 | 11.2 | % | ||||
Due after one year through five years | 15,312 | 33.2 | ||||||
Due after five years | 11,764 | 25.5 | ||||||
32,247 | 69.9 | |||||||
Asset-backed and mortgage-backed securities | 13,887 | 30.1 | ||||||
Total | $ | 46,134 | 100.0 | % | ||||
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Actual | ||||||||
Ratio | Usual Range | Results | Reasons for Unusual Results | |||||
Change in Net Premiums Written | Less than 33%, greater than -33% | 58.0 | % | Our gross premiums written increased by 37% in 2008 compared to 2007. In addition, the portion of our gross premiums written subject to quota share reinsurance was lower in 2008 compared to 2007 due to (i) an increase in traditional business, which generally has a higher retention than alternative market business and (ii) the commutation of certain alternative market segregated portfolio captive cell treaties in 2008. We believe that the premium growth in 2008 was prudent and did not reflect any material pricing inadequacy or any deterioration in underwriting discipline. | ||||
Surplus Aid to Policyholder’s Surplus | Less than 15% | 57.0 | % | Under statutory accounting principles, direct policy acquisition costs are recognized as an expense at the inception of the policy year rather than deferred over the life of the underlying insurance contracts. Likewise, ceding commissions are recognized as an offset to expenses at the inception of the policy year. The ratio of surplus aid to policyholders’ surplus measures the degree to which statutory surplus benefits from the recognition of ceding commissions in advance of the emergence of underlying ceded earned premium. Because of the nature of our alternative market business, whereby segregated portfolio captives generally assume between 50% and 90% of the risk, our results typically generate a surplus aid unusual value relative to the industry as a whole. In addition, this ratio was higher in 2008 in connection with a quota share reinsurance agreement pursuant to which we ceded 37.83% of our gross unearned premium reserves as of December 31, 2008. | ||||
Estimated Current Reserve Deficiency to Policyholders’ Surplus | Less than 25% | 73.0 | % | The estimated current reserve deficiency to policyholders’ surplus ratio compares the ratio of (i) current year-end reserves for losses and loss adjustment expenses to current year net premiums earned to (ii) the prior two-year average ratio of year end reserves, developed to current year end, to prior two year average net premiums earned. We believe that this ratio fell outside the usual range in connection with favorable accident year 2008 loss experience, together with additional net premiums earned in 2008 attributable to audit adjustments on prior year policy years. |
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Name | Age | Position | ||||
Executive Officer and Directors | ||||||
Steven M. Mariano(1) | 45 | Chairman of the Board, President and Chief Executive Officer | ||||
Michael W. Grandstaff | 49 | Senior Vice President and Chief Financial Officer | ||||
Charles K. Schuver | 53 | Senior Vice President and Chief Underwriting Officer, Guarantee Insurance | ||||
Timothy J. Ermatinger | 60 | Chief Executive Officer, PRS | ||||
Richard G. Turner | 59 | Senior Vice President and Executive Vice President of Alternative Markets | ||||
Theodore G. Bryant | 39 | Senior Vice President, Counsel and Secretary | ||||
Timothy J. Tompkins(1) | 48 | Director | ||||
Richard F. Allen(3) | 76 | Director | ||||
Ronald P. Formento Sr.(2) | 66 | Director | ||||
John R. Del Pizzo(3) | 62 | Director | ||||
C. Timothy Morris(2) | 59 | Director | ||||
Key Employees | ||||||
Dean D. Watters | 53 | Vice President — Business Development | ||||
Maria C. Allen | 57 | Vice President — Client Services/Corporate Claims, Guarantee Insurance | ||||
Gary W. Roche | 45 | Vice President — Operations | ||||
Robert G. Zamary, Jr. | 43 | Vice President — Claims Management, PRS | ||||
Josephine L. Graves | 44 | President, Patriot Risk Services, Inc. | ||||
John J. Rearer | 51 | Vice President — Chief Underwriting Officer, PUI | ||||
Michael J. Sluka | 57 | Vice President and Chief Accounting Officer |
(1) | Term expires in 2009. | |
(2) | Term expires in 2010. | |
(3) | Term expires in 2011. |
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• | establishing, monitoring and assessing our policies and procedures with respect to business practices, including the adequacy of our internal controls over accounting and financial reporting; | |
• | retaining our independent auditors and conducting an annual review of the independence of our independent auditors; | |
• | pre-approving any non-audit services to be performed by our independent auditors; | |
• | reviewing the annual audited financial statements and quarterly financial information with management and the independent auditors; |
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• | reviewing with the independent auditors the scope and the planning of the annual audit; | |
• | reviewing the findings and recommendations of the independent auditors and management’s response to the recommendations of the independent auditors; | |
• | overseeing compliance with applicable legal and regulatory requirements, including ethical business standards; | |
• | approve related party transactions; | |
• | preparing the audit committee report to be included in our annual proxy statement; | |
• | establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters; | |
• | establishing procedures for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; and | |
• | reviewing the adequacy of the audit committee charter on an annual basis. |
• | evaluating the performance of and determining the compensation for our executive officers, including our chief executive officer; | |
• | administering and making recommendations to our board with respect to our equity incentive plans; | |
• | overseeing regulatory compliance with respect to compensation matters; | |
• | reviewing and approving employment or severance arrangements with senior management; | |
• | reviewing our director compensation policies and making recommendations to our board; | |
• | taking the required actions with respect to the compensation discussion and analysis to be included in our annual proxy statement; | |
• | preparing the compensation committee report to be included in our annual proxy statement; and | |
• | reviewing the adequacy of the compensation committee charter. |
• | developing and recommending corporate governance principles and procedures applicable to our board and employees; | |
• | recommending committee composition and assignments; | |
• | identifying individuals qualified to become directors; | |
• | recommending director nominees; | |
• | assist in succession planning; | |
• | recommending whether incumbent directors should be nominated for re-election to our board; and | |
• | reviewing the adequacy of the nominating and corporate governance committee charter. |
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• | To attract and retain talented and experienced insurance and risk management executives who will help us achieve our financial and strategic goals and objectives; | |
• | To motivate and reward executives whose knowledge, skills and performance are critical to our success; | |
• | To encourage executives to manage our business to meet our long-term objectives by aligning an element of compensation to those objectives so as to be consistent with our strategy; and | |
• | To align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value and reward executive officers when appropriate. |
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Stock | Option | All Other | ||||||||||||||||||||||||||
Salary | Bonus | Awards | Awards(1) | Compensation | Total | |||||||||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
Steven M. Mariano — | 2008 | 492,308 | — | — | — | 22,926 | (2) | 515,234 | ||||||||||||||||||||
President and Chief Executive Officer | 2007 | 400,000 | 500,000 | 240,600 | (3) | 65,380 | (4) | 54,648 | (5) | 1,260,628 | ||||||||||||||||||
Michael W. Grandstaff — | 2008 | 312,885 | — | — | — | 73,976 | (7) | 386,861 | ||||||||||||||||||||
Senior Vice President and Chief Financial Officer(6) | ||||||||||||||||||||||||||||
Charles K. Schuver — | 2008 | 172,885 | 30,000 | — | — | — | 202,885 | |||||||||||||||||||||
Senior Vice President and Chief Underwriting Officer of Guarantee Insurance(8) | ||||||||||||||||||||||||||||
Timothy J. Ermatinger — | 2008 | 217,308 | — | — | — | — | 217,308 | |||||||||||||||||||||
Chief Executive Officer of PRS | 2007 | 205,000 | — | — | — | — | 205,000 | |||||||||||||||||||||
Theodore G. Bryant — | 2008 | 230,000 | — | — | — | 7,105 | (9) | 237,105 | ||||||||||||||||||||
Senior Vice President, Counsel and Secretary | 2007 | 180,000 | 47,500 | — | — | 14,003 | (10) | 269,861 | ||||||||||||||||||||
Michelle A. Masotti | 2007 | 241,231 | 20,000 | — | — | 8,630 | (12) | 269,861 | ||||||||||||||||||||
Chief Financial Officer(11) |
(1) | The fair value of each stock option grant is established on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for options granted in 2007. The expected volatility is 32% for options, based on historical volatility of similar entities that are publicly traded. The estimated term of the options, all of which expire ten years after the grant date, is six years based on expected behavior of the group of option holders. The assumed risk-free interest rate is 4-5%, based on yields on five to seven year U.S. Treasury Bills, which term approximates the estimated term of the options. The expected forfeiture rate is 18%. There was no expected dividend yield. |
(2) | Represents payment of annual club dues. |
(3) | Represents an unrestricted grant of 36,355 shares of our common stock for Mr. Mariano’s service on our Board of Directors. Pursuant to our current director compensation policy, directors who are also our full-time employees do not receive additional compensation for their service as directors. The value of this unrestricted grant of shares was determined by multiplying the number of shares granted by the per-share price of $8.02, which was the fair value of our common stock as established by our board of directors at the time of grant. |
(4) | Represents an award of options to purchase 24,237 shares of our common stock for Mr. Mariano’s service on our Board of Directors. |
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(5) | Consists of a car allowance of $42,000 (representing a $1,000 per month allowance that had not been paid to Mr. Mariano for 42 months), and payment of dues and assessments for Mr. Mariano’s homeowner’s association. |
(6) | Mr. Grandstaff joined our company in February 2008. |
(7) | Consists of relocation expenses related to Mr. Grandstaff’s move to Florida of $63,976 and a car allowance of $10,000. |
(8) | Mr. Schuver joined our company in June 2008. |
(9) | Represents a car allowance. |
(10) | Represents relocation expenses related to Mr. Bryant’s move to Florida. |
(11) | Ms. Masotti ceased service as the Chief Financial Officer in February 2008. |
(12) | Represents Ms. Masotti’s temporary living expenses during her move to Florida. |
Option Awards | ||||||||||||||
Number of | Number of | |||||||||||||
Securities | Securities | |||||||||||||
Underlying | Underlying | |||||||||||||
Unexercised | Unexercised | Option | ||||||||||||
Options | Options | Exercise | Option Expiration | |||||||||||
Name | (#) Exercisable | (#) Unexercisable | Price ($) | Date | ||||||||||
Steven M. Mariano | 25,000 | — | 5.00 | February 10, 2015 | ||||||||||
10,000 | — | 8.02 | February 22, 2016 | |||||||||||
10,000 | 10,000 | (1) | 8.02 | May 19, 2017 | ||||||||||
Timothy J. Ermatinger | 3,333 | 1,667 | (2) | 8.02 | June 1, 2016 | |||||||||
6,667 | 3,333 | (3) | 8.02 | October 11, 2016 | ||||||||||
Theodore G. Bryant | 3,333 | 1,667 | (4) | 8.02 | December 17, 2016 |
(1) | Shares become exercisable on May 20, 2009. | |
(2) | Shares become exercisable on June 2, 2009. | |
(3) | Shares become exercisable on October 12, 2009. | |
(4) | Shares become exercisable on December 17, 2009. |
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Voluntary | ||||||||
Voluntary | Termination for | |||||||
Termination for | Good Reason or | |||||||
Good Reason or | involuntary | |||||||
Involuntary | Termination without | |||||||
Termination without | Cause Following a | |||||||
Named executive officer | Cause | Change of Control | ||||||
Steven M. Mariano | ||||||||
Cash Severance Payment | $ | 2,400,000 | $ | 2,400,000 | ||||
Present value of continuing benefits as of December 31, 2008 | 12,442 | 12,442 | ||||||
Excise taxgross-up | — | 872,784 | ||||||
Total termination benefits | $ | 2,412,442 | $ | 3,285,226 | ||||
Michael W. Grandstaff | ||||||||
Cash Severance Payment | $ | 350,000 | $ | 700,000 | ||||
Present value of continuing benefits as of December 31, 2008 | — | — | ||||||
Excise taxgross-up | — | — | ||||||
Total termination benefits | $ | 350,000 | $ | 700,000 | ||||
Charles K. Schuver | ||||||||
Cash Severance Payment | $ | 310,000 | $ | 620,000 | ||||
Present value of continuing benefits as of December 31, 2008 | — | — | ||||||
Excise taxgross-up | — | — | ||||||
Total termination benefits | $ | 310,000 | $ | 620,000 | ||||
Timothy J. Ermatinger | ||||||||
Cash Severance Payment | $ | 225,000 | $ | 225,000 | ||||
Present value of continuing benefits as of December 31, 2008 | — | — | ||||||
Excise taxgross-up | — | — | ||||||
Total termination benefits | $ | 225,000 | $ | 225,000 | ||||
Theodore G. Bryant | ||||||||
Cash Severance Payment | $ | 273,750 | $ | 547,500 | ||||
Present value of continuing benefits as of December 31, 2008 | ||||||||
Excise taxgross-up | 16,467 | 16,467 | ||||||
Total termination benefits | $ | 290,217 | $ | 563,967 | ||||
Fees Earned | Stock | Option | ||||||||||||||
or Paid in Cash | Awards | Awards | Total | |||||||||||||
Name | ($) | ($) | ($) | ($) | ||||||||||||
Richard F. Allen | 40,500 | — | — | 40,500 | ||||||||||||
Ronald P. Formento, Sr. | 41,000 | — | — | 41,000 | ||||||||||||
C. Timothy Morris | 37,500 | — | — | 37,500 | ||||||||||||
John R. Del Pizzo | 58,500 | — | — | 58,500 | ||||||||||||
Timothy J. Tompkins | 55,000 | — | — | 55,000 |
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• | in cash; | |
• | with the approval of the Compensation Committee, by delivering or attesting to the ownership of shares of common stock held for at least six months, having a fair market value on the date of exercise equal to the exercise price of the option; or | |
• | by such other method as the Compensation Committee shall approve, including payment through a broker in accordance with cashless exercise procedures permitted by Regulation T of the Federal Reserve Board. |
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Number of Securities | ||||||||||||
Remaining for Future | ||||||||||||
Number of | Weighted-Average | Issuance Under | ||||||||||
Securities to | Exercise Price of | Equity Compensation | ||||||||||
be Issued Upon | Outstanding | Plans (Excluding | ||||||||||
Exercise of | Options, | Securities | ||||||||||
Outstanding Options, | Warrants and | Reflected in | ||||||||||
Warrants and Rights | Rights | Column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | 163,500 | 7.37 | 186,500 | |||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 163,500 | 7.37 | 186,500 | |||||||||
• | any breach of their duty of loyalty to Patriot Risk Management or our stockholders, | |
• | acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, | |
• | unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law, or | |
• | any transaction from which the director derived an improper personal benefit. |
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Beneficial Ownership Prior to the Offering | Beneficial Ownership After the Offering | |||||||||||||||||||||||
Percentage of | Percentage of | Percentage of | ||||||||||||||||||||||
Number of | Outstanding | Total | Number of | Outstanding | Percentage of | |||||||||||||||||||
Name of Beneficial Owner | Shares | Shares(1) | Vote(2) | Shares | Shares | Total Vote | ||||||||||||||||||
Common Stock: | ||||||||||||||||||||||||
Steven M. Mariano(3)(14) | 219,161 | 19.1 | % | 6.2 | % | |||||||||||||||||||
John R. Del Pizzo(4) | 55,000 | 4.8 | % | 1.6 | % | |||||||||||||||||||
Timothy J. Tompkins(5) | 25,500 | 2.2 | % | * | ||||||||||||||||||||
Ronald P. Formento Sr.(6) | 19,569 | 1.7 | % | * | ||||||||||||||||||||
Michael W. Grandstaff | — | — | — | |||||||||||||||||||||
Charles K. Schuver | — | — | — | |||||||||||||||||||||
Timothy J. Ermatinger(7) | 15,000 | 1.3 | * | |||||||||||||||||||||
Richard G. Turner | — | — | — | |||||||||||||||||||||
Theodore G. Bryant(8) | 5,000 | * | * | |||||||||||||||||||||
Richard F. Allen(9) | — | — | — | |||||||||||||||||||||
C. Timothy Morris(10) | — | — | — | |||||||||||||||||||||
Series B Common Stock: | ||||||||||||||||||||||||
Steven M. Mariano(11)(14) | 800,000 | 69.8 | 90.2 | % | — | — | — | |||||||||||||||||
All directors and executive officers as a group (11 persons) | 1,139,230 | 99.4 | % | |||||||||||||||||||||
Series A Convertible Preferred Stock:(12) | ||||||||||||||||||||||||
Steven M. Mariano(14) | 500 | 50.0 | % | — | — | — | — | |||||||||||||||||
Key Payroll Solutions(13) | 200 | 20.0 | — | — | — | — | ||||||||||||||||||
Ronald P. Formento Sr. | 150 | 15.0 | — | — | — | — | ||||||||||||||||||
Richard F. Allen | 100 | 10.0 | — | — | — | — | ||||||||||||||||||
C. Timothy Morris | 50 | 5.0 | — | — | — | — | ||||||||||||||||||
100.0 | % |
* | Less than 1%. | |
(1) | Ownership of common stock and Series B common stock is shown as the combined ownership of both those classes together. Ownership of Series A convertible preferred stock is shown as a percentage of that class. | |
(2) | Combined voting power of common stock and Series B common stock. Each holder of Series B common stock is entitled to four votes per share, and each holder of common stock is entitled to one vote per share. At the closing of this offering, all shares of Series B common stock will automatically be converted into common stock on aone-for-one basis and no additional Series B common stock will be issuable. Upon completion of this offering and based on an assumed initial public offering price of [ ] per share, which is the mid-point of the price range set forth on the cover page of this prospectus, each share of Series A convertible preferred stock will be converted into [ ] shares of common stock. | |
(3) | Includes 100,000 shares held in the name of the Steven M. Mariano Revocable Trust, an entity controlled by Mr. Mariano. Mr. Mariano has sole dispositive and voting control over the shares held by the Steven M. Mariano Revocable Trust. Also includes 55,000 shares issuable upon exercise of options that are currently exercisable. The number of shares shown after the offering includes [ ] shares of common stock to be issued upon the automatic conversion of 500 shares of Series A convertible preferred stock at the closing of this offering. Excludes [ ] shares issuable upon the exercise of warrants that will become exercisable upon the expiration of thelock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” |
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(4) | Includes 27,500 shares issuable upon exercise of options that are currently exercisable. Excludes [ ] shares issuable upon the exercise of warrants that will become exercisable upon the expiration of thelock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” | |
(5) | Includes 5,000 shares issuable upon exercise of options that are currently exercisable. Excludes [ ] shares issuable upon the exercise of warrants that will become exercisable upon the expiration of thelock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” | |
(6) | These shares are held in the name of Exmoor, Inc., an entity that is controlled by Mr. Formento. Mr. Formento has sole dispositive and voting control over these shares. The number of shares shown after the offering includes [ ] shares of common stock to be issued upon the automatic conversion of 150 shares of Series A convertible preferred stock at the closing of this offering. Excludes [ ] shares issuable upon the exercise of warrants that will become exercisable upon the expiration of thelock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” | |
(7) | Consists of 15,000 shares issuable upon exercise of options that are currently exercisable. | |
(8) | Consists of 5,000 shares issuable upon exercise of options that are exercisable within 60 days after October 31, 2009. | |
(9) | The number of shares shown after the offering consists of [ ] shares of common stock to be issued upon the automatic conversion of 100 shares of Series A convertible preferred stock at the closing of this offering. | |
(10) | The number of shares shown after the offering consists of [ ] shares of common stock to be issued upon the automatic conversion of 50 shares of Series A convertible preferred stock at the closing of this offering. | |
(11) | Consists of 800,000 shares held in the name of the Steven M. Mariano Revocable Trust, an entity controlled by Mr. Mariano. Mr. Mariano has sole dispositive and voting control over the shares held by the Steven M. Mariano Revocable Trust. | |
(12) | The shares of Series A convertible preferred stock are non-voting. | |
(13) | Key Payroll Solution’s address is 3622 Tamiami Trail, Port Charlotte, Florida 33952. | |
(14) | Mr. Mariano has pledged all of the shares of our capital stock beneficially owned by him, and which may be acquired by him in the future, as security for his guarantee of the ULLICO loan. |
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• | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise dispose of or transfer (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any share of our common stock or any security convertible into, exercisable for or exchangeable for any share of our common stock; |
• | enter into any swap or any other arrangement or transaction that transfers to another person, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such swap or transaction described above is to be settled by delivery of shares of our common stock or other securities, in cash or otherwise; |
• | make any demand for or exercise any right (or, in the case of us, file) or cause to be filed a registration statement (other than the registration statement onForm S-8 that is described in this prospectus) under the Securities Act including any amendment thereto, with respect to the registration of any shares of our common stock or securities convertible into, exercisable for or exchangeable for any share of our common stock or any of our other securities; or |
• | publicly disclose the intention to do any of the foregoing, | |
• | in each case, for alock-up period of 180 days after the date of the final prospectus relating to this offering. Thelock-up period described in the preceding sentence will be extended if: |
• | during the last 17 days of thelock-up period, we issue an earnings release or material news or a material event relating to us occurs; or | |
• | prior to the expiration of thelock-up period, we announce that we will release earnings results during the16-day period beginning on the last day of thelock-up period; |
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• | one percent of the number of shares of common stock then outstanding (approximately [ ] shares immediately after the offering); and | |
• | the average weekly trading volume of the common stock on the New York Stock Exchange during the four calendar weeks preceding the filing with the SEC of a notice on Form 144 with respect to the sale. |
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Number of | ||||
Underwriter | Shares | |||
FBR Capital Markets & Co. | ||||
Macquarie Capital (USA) Inc. | ||||
Oppenheimer & Co. Inc. | ||||
Total | ||||
No | Full | |||||||
Paid by Us | Exercise | Exercise | ||||||
Per Share | $ | $ | ||||||
Total | $ | $ |
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• | Short positions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares or purchasing shares in the open market. | |
• | Stabilizing transactions permit bids to purchase the underlying security as long as the stabilizing bids do not exceed a specific maximum price. | |
• | Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the underwriters’ option to purchase additional shares. If the underwriters sell more shares than could be covered by underwriters’ option to purchase additional shares, thereby creating a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. | |
• | Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. | |
• | In passive market marking, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchase shares of our common stock until the time, if any, at which a stabilizing bid is made. |
• | offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise dispose of or transfer (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of), any share of our common stock or any security convertible into, exercisable for or exchangeable for any share of our common stock; |
• | enter into any swap or any other arrangement or transaction that transfers to another person, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such |
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swap or transaction described above is to be settled by delivery of shares of our common stock or other securities, in cash or otherwise; |
• | make any demand for or exercise any right (or, in the case of us, file) or cause to be filed a registration statement (other than the registration statement on Form S-8 that is described in this prospectus) under the Securities Act, including any amendment thereto, with respect to the registration of any shares of our common stock or securities convertible into, exercisable for or exchangeable for any share of our common stock or any of our other securities; or |
• | publicly disclose the intention to do any of the foregoing, |
• | during the last 17 days of thelock-up period, we issue an earnings release or material news or a material event relating to us occurs; or | |
• | prior to the expiration of thelock-up period, we announce that we will release earnings results during the16-day period beginning on the last day of thelock-up period; |
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Page | ||||
Audited Consolidated Financial Statements as of December 31, 2008 and for the three years in the period ended December 31, 2008 of Patriot Risk Management, Inc. and its Wholly-Owned Subsidiaries | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
Unaudited Interim Consolidated Financial Statements as of September 30, 2009 and for the nine month periods ended September 30, 2009 and 2008 of Patriot Risk Management, Inc. Holdings, Inc. and its Wholly-Owned Subsidiaries | ||||
F-35 | ||||
F-36 | ||||
F-37 | ||||
F-38 | ||||
F-39 |
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December 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Investments | ||||||||
Debt securities, available for sale, at fair value | $ | 54,373 | $ | 55,688 | ||||
Equity securities, available for sale, at fair value | 222 | 634 | ||||||
Short-term investments | 244 | 238 | ||||||
Real estate held for the production of income | 250 | 256 | ||||||
Total investments | 55,089 | 56,816 | ||||||
Cash and cash equivalents | 8,333 | 4,943 | ||||||
Premiums receivable, net | 58,826 | 36,748 | ||||||
Deferred policy acquisition costs, net of deferred ceding commissions | — | 1,477 | ||||||
Prepaid reinsurance premiums | 33,731 | 14,963 | ||||||
Reinsurance recoverable, net | ||||||||
Unpaid losses and loss adjustment expenses | 37,492 | 43,317 | ||||||
Paid losses and loss adjustment expenses | 4,642 | 4,202 | ||||||
Funds held by ceding companies and other amounts due from reinsurers | 2,507 | 2,550 | ||||||
Net deferred tax assets | 3,967 | 3,022 | ||||||
Fixed assets, net | 733 | 1,165 | ||||||
Receivable from related party | 500 | — | ||||||
Federal income taxes recoverable | 110 | 391 | ||||||
Intangible assets | 1,287 | 1,287 | ||||||
Other assets, net | 4,075 | 4,356 | ||||||
Total Assets | $ | 211,292 | $ | 175,237 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Reserves for losses and loss adjustment expenses | $ | 74,550 | $ | 69,881 | ||||
Reinsurance payable on paid losses and loss adjustment expenses | 756 | 404 | ||||||
Unearned and advanced premium reserves | 44,613 | 29,160 | ||||||
Deferred ceding commissions, net of deferred policy acquisition costs | 83 | — | ||||||
Reinsurance funds withheld and balances payable | 47,449 | 44,073 | ||||||
Notes payable, including $1.5 million of related party notes payable, and accrued interest of $224,000 and $180,000 | 20,783 | 15,108 | ||||||
Subordinated debentures, including accrued interest of $175,000 and $139,000 | 1,809 | 1,799 | ||||||
Accounts payable and accrued expenses | 14,112 | 9,376 | ||||||
Total liabilities | 204,155 | 169,801 | ||||||
Stockholders’ Equity | ||||||||
Series A convertible preferred stock | 1,000 | — | ||||||
Common stock | 1 | — | ||||||
Series A common stock | — | 1 | ||||||
Series B common stock | 1 | 1 | ||||||
Paid-in capital | 5,456 | 5,363 | ||||||
Retained earnings | 72 | 196 | ||||||
Accumulated other comprehensive income (loss), net of deferred income taxes | 607 | (125 | ) | |||||
Total stockholders’ equity | 7,137 | 5,436 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 211,292 | $ | 175,237 | ||||
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2008 | 2007 | 2006 | ||||||||||
(In thousands, except per share data) | ||||||||||||
Revenues | ||||||||||||
Premiums earned | $ | 49,220 | $ | 24,613 | $ | 21,053 | ||||||
Insurance services income | 5,657 | 7,027 | 7,175 | |||||||||
Net investment income | 2,028 | 1,326 | 1,321 | |||||||||
Net realized losses on investments | (1,037 | ) | (5 | ) | (1,346 | ) | ||||||
Total revenues | 55,868 | 32,961 | 28,203 | |||||||||
Expenses | ||||||||||||
Net losses and loss adjustment expenses | 28,716 | 15,182 | 17,839 | |||||||||
Net policy acquisition and underwriting expenses | 13,535 | 6,023 | 3,834 | |||||||||
Other operating expenses | 10,930 | 8,519 | 9,704 | |||||||||
Interest expense | 1,437 | 1,290 | 1,109 | |||||||||
Total expenses | 54,618 | 31,014 | 32,486 | |||||||||
Other Income | 1,469 | — | 796 | |||||||||
Loss from Write-off of Deferred Equity Offering Costs | (3,486 | ) | — | — | ||||||||
Gain on Early Extinguishment of Debt | — | — | 6,586 | |||||||||
Income (loss) before income tax expense | (767 | ) | 1,947 | 3,099 | ||||||||
Income Tax Expense (Benefit) | (643 | ) | (432 | ) | 1,489 | |||||||
Net Income (Loss) | $ | (124 | ) | $ | 2,379 | $ | 1,610 | |||||
Earnings (Loss) Per Common Share | ||||||||||||
Basic | $ | (.09 | ) | $ | 1.77 | $ | 1.16 | |||||
Diluted | (.09 | ) | 1.76 | 1.15 | ||||||||
Weighted Average Common Shares Outstanding: | ||||||||||||
Basic | 1,361 | 1,342 | 1,392 | |||||||||
Diluted | 1,370 | 1,351 | 1,398 | |||||||||
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Retained | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Series A Convertible | Series A | Series B | Earnings | Other | Total | |||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Common Stock | Common Stock | Paid-in | (Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Income (Loss) | Equity | |||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance,January 1, 2006 | — | $ | — | — | $ | — | 384 | $ | — | 800 | $ | 1 | $ | 3,666 | $ | (3,023 | ) | $ | (328 | ) | $ | 316 | ||||||||||||||||||||||||||
Redemption of common stock | — | — | — | — | (94 | ) | — | — | — | (812 | ) | (170 | ) | — | (982 | ) | ||||||||||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | — | — | — | — | (600 | ) | — | (600 | ) | ||||||||||||||||||||||||||||||||||
Issuance of common stock and paid in capital | — | — | — | — | 169 | 1 | — | — | 1,355 | — | — | 1,356 | ||||||||||||||||||||||||||||||||||||
Unrestricted common stock grants | — | — | — | — | 62 | — | — | — | 502 | — | — | 502 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | 190 | — | — | 190 | ||||||||||||||||||||||||||||||||||||
Balance before comprehensive income | — | — | — | — | 521 | 1 | 800 | 1 | 4,901 | (3,793 | ) | (328 | ) | 782 | ||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 1,610 | — | 1,610 | ||||||||||||||||||||||||||||||||||||
Net unrealized appreciation in available for sale securities, net of deferred taxes of $255,000 | — | — | — | — | — | — | — | — | — | — | 579 | 579 | ||||||||||||||||||||||||||||||||||||
Reclassification adjustment for net gains realized in net income during the year, net of tax effect of $143,000 | — | — | — | — | — | — | — | — | — | — | (277 | ) | (277 | ) | ||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | — | 1,610 | 302 | 1,912 | ||||||||||||||||||||||||||||||||||||
Balance,December 31, 2006 | — | — | — | — | 521 | 1 | 800 | 1 | 4,901 | (2,183 | ) | (26 | ) | 2,694 | ||||||||||||||||||||||||||||||||||
Redemption of common stock | — | — | — | — | (13 | ) | — | — | — | (100 | ) | — | — | (100 | ) | |||||||||||||||||||||||||||||||||
Unrestricted common stock grants | — | — | — | — | 53 | — | — | — | 425 | — | — | 425 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | 137 | — | — | 137 | ||||||||||||||||||||||||||||||||||||
Balance before comprehensive income | — | — | — | — | 561 | 1 | 800 | 1 | 5,363 | (2,183 | ) | (26 | ) | 3,156 | ||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 2,379 | — | 2,379 | ||||||||||||||||||||||||||||||||||||
Net unrealized depreciation in available for sale securities, net of deferred taxes of $51,000 | — | — | — | — | — | — | — | — | — | — | (99 | ) | (99 | ) | ||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | — | 2,379 | (99 | ) | 2,280 | |||||||||||||||||||||||||||||||||||
Balance, December 31, 2007 | — | — | — | — | 561 | 1 | 800 | 1 | 5,363 | 196 | (125 | ) | 5,436 | |||||||||||||||||||||||||||||||||||
Conversion of all outstanding shares of Series A common stock into common stock | — | — | 561 | 1 | (561 | ) | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Issuance of preferred stock | 1,000 | 1,000 | — | — | — | — | — | — | — | — | — | 1,000 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | 93 | — | — | 93 | ||||||||||||||||||||||||||||||||||||
Balance before comprehensive income | 1,000 | 1,000 | 561 | 1 | — | — | 800 | 1 | 5,456 | 196 | (125 | ) | 6,529 | |||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | (124 | ) | — | (124 | ) | ||||||||||||||||||||||||||||||||||
Net unrealized appreciation in available for sale securities, net of deferred taxes of $374,000 | — | — | — | — | — | — | — | — | — | — | 732 | 732 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | — | (124 | ) | 732 | 608 | |||||||||||||||||||||||||||||||||||
Balance, December 31, 2008 | 1,000 | $ | 1,000 | 561 | $ | 1 | — | $ | — | 800 | $ | 1 | $ | 5,456 | $ | 72 | $ | 607 | $ | 7,137 | ||||||||||||||||||||||||||||
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2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Operating Activities | ||||||||||||
Net income (loss) | $ | (124 | ) | $ | 2,379 | $ | 1,610 | |||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Gain on early extinguishment of debt | — | — | (6,586 | ) | ||||||||
Forgiveness of debt in connection with commutation of reinsurance | (231 | ) | — | — | ||||||||
Net realized losses on investments | 1,037 | 5 | 1,346 | |||||||||
Depreciation and amortization | 844 | 1,030 | 396 | |||||||||
Stock compensation expense | 93 | 561 | 692 | |||||||||
Amortization (accretion) of debt securities | 263 | (63 | ) | (76 | ) | |||||||
Deferred income tax expense (benefit) | (1,318 | ) | (1,331 | ) | 69 | |||||||
Changes in certain assets and liabilities: | ||||||||||||
Decrease (increase) in: | ||||||||||||
Premiums receivable | (22,078 | ) | (17,298 | ) | 2,493 | |||||||
Deferred policy acquisition costs | 1,477 | (703 | ) | 636 | ||||||||
Prepaid reinsurance premiums | (18,768 | ) | (7,497 | ) | (3,064 | ) | ||||||
Reinsurance recoverable on: | ||||||||||||
Unpaid losses and loss adjustment expenses | 5,825 | (2,214 | ) | (19,404 | ) | |||||||
Paid losses and loss adjustment expenses | (440 | ) | (3,774 | ) | 828 | |||||||
Funds held by ceding companies and other amounts due from reinsurers | 43 | (131 | ) | (36 | ) | |||||||
Federal income taxes recoverable | 281 | — | — | |||||||||
Other assets | 42 | (193 | ) | (3,001 | ) | |||||||
Increase (decrease) in: | ||||||||||||
Reserves for losses and loss adjustment expenses | 4,669 | 3,928 | 26,475 | |||||||||
Reinsurance payable on paid loss and loss adjustment expenses | 352 | (243 | ) | (627 | ) | |||||||
Unearned and advanced premium reserves | 15,453 | 13,517 | 2,429 | |||||||||
Net deferred ceding commissions | 83 | — | — | |||||||||
Reinsurance funds withheld and balances payable | 3,376 | 17,286 | 1,592 | |||||||||
Federal income taxes payable | — | (1,829 | ) | 178 | ||||||||
Accounts payable and accrued expenses | 4,736 | 3,697 | (961 | ) | ||||||||
Net Cash Provided By (Used In) Operating Activities | (4,385 | ) | 7,127 | 4,989 | ||||||||
Investment Activities | ||||||||||||
Proceeds from sales and maturities of debt securities | 19,076 | 20,817 | 6,899 | |||||||||
Purchases of debt securities | (17,544 | ) | (45,224 | ) | (22,168 | ) | ||||||
Proceeds from sales of equity securities | — | 280 | 2,457 | |||||||||
Purchases of equity securities | — | — | (1,766 | ) | ||||||||
Net sales (purchases) of short-term investments | (6 | ) | (238 | ) | 2,142 | |||||||
Purchases of fixed assets | (87 | ) | (639 | ) | (1,235 | ) | ||||||
Net Cash Provided by (Used In) Investment Activities | 1,439 | (25,004 | ) | (13,671 | ) | |||||||
Financing Activities | ||||||||||||
Proceeds from notes payable | 6,950 | 5,665 | 8,652 | |||||||||
Repayment of notes payable | (1,114 | ) | (586 | ) | (2,320 | ) | ||||||
Proceeds from issuance of common stock | — | — | 1,355 | |||||||||
Net disbursements for redemption of common stock | — | (100 | ) | (984 | ) | |||||||
Common stock dividends paid | — | — | (600 | ) | ||||||||
Proceeds from issuance of preferred stock, net of receivable from related party | 500 | — | — | |||||||||
Net Cash Provided By Financing Activities | 6,336 | 4,979 | 6,103 | |||||||||
Increase (Decrease) in Cash and Cash Equivalents | 3,390 | (12,898 | ) | (2,579 | ) | |||||||
Cash and Cash Equivalents,beginning of period | 4,943 | 17,841 | 20,420 | |||||||||
Cash and Cash Equivalents,end of period | $ | 8,333 | $ | 4,943 | $ | 17,841 | ||||||
Supplemental Cash Flow Information | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 1,324 | $ | 1,188 | $ | 1,538 | ||||||
Income taxes | 1,065 | 850 | 400 | |||||||||
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1. | Nature of Operations and Significant Accounting Policies |
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2. | Investments |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
U.S. government securities | $ | 3,981 | $ | 247 | $ | — | $ | 4,228 | ||||||||
U.S. government agencies | 300 | 11 | — | 311 | ||||||||||||
Asset-backed and mortgage-backed securities | 16,128 | 806 | 617 | 16,317 | ||||||||||||
State and political subdivisions | 23,058 | 867 | 11 | 23,914 | ||||||||||||
Corporate securities | 9,745 | 72 | 214 | 9,603 | ||||||||||||
$ | 53,212 | $ | 2,003 | $ | 842 | $ | 54,373 | |||||||||
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Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
U.S. government securities | $ | 3,997 | $ | 36 | $ | — | $ | 4,033 | ||||||||
U.S. government agencies | 2,742 | 8 | 1 | 2,749 | ||||||||||||
Asset-backed and mortgage-backed securities | 15,994 | 130 | 11 | 16,113 | ||||||||||||
State and political subdivisions | 22,212 | 303 | — | 22,515 | ||||||||||||
Corporate securities | 10,225 | 87 | 34 | 10,278 | ||||||||||||
$ | 55,170 | $ | 564 | $ | 46 | $ | 55,688 | |||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Available for Sale | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In thousands, except numbers of securities data) | ||||||||||||||||||||||||
U.S. government securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
U.S. government agencies | — | — | — | — | — | — | ||||||||||||||||||
Asset-backed and mortgage-backed securities | 3,598 | 518 | 359 | 99 | 3,957 | 617 | ||||||||||||||||||
State and political subdivisions | 745 | 11 | — | — | 745 | 11 | ||||||||||||||||||
Corporate securities | 6,882 | 214 | — | — | 6,882 | 214 | ||||||||||||||||||
Total | $ | 11,224 | $ | 742 | $ | 359 | $ | 99 | $ | 11,583 | $ | 842 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | 42 | 3 | 45 | |||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Unrealized | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Gross | |||||||||||||||||||
Available for Sale | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In thousands, except numbers of securities data) | ||||||||||||||||||||||||
U.S. government securities | $ | 651 | $ | 1 | $ | — | $ | — | $ | 651 | $ | 1 | ||||||||||||
U.S. government agencies | — | — | 1,059 | 1 | 1,059 | 1 | ||||||||||||||||||
Asset-backed and mortgage-backed securities | 882 | 3 | 1,454 | 8 | 2,336 | 11 | ||||||||||||||||||
Corporate securities | 2,427 | 30 | 2,742 | 3 | 5,169 | 33 | ||||||||||||||||||
Total | $ | 3,960 | $ | 34 | $ | 5,255 | $ | 12 | $ | 9,215 | $ | 46 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | 12 | 18 | 30 | |||||||||||||||||||||
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Amortized | Fair | |||||||
Cost | Value | |||||||
(In thousands) | ||||||||
Due in one year or less | $ | 1,511 | $ | 1,527 | ||||
Due after one year through five years | 22,442 | 22,886 | ||||||
Due after five years | 13,131 | 13,643 | ||||||
37,084 | 38,056 | |||||||
Asset-backed and mortgage-backed securities | 16,128 | 16,317 | ||||||
$ | 53,212 | $ | 54,373 | |||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Common stock | $ | 466 | $ | — | $ | 244 | $ | 222 | ||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Common stock | $ | 1,341 | $ | — | $ | 707 | $ | 634 | ||||||||
F-15
Table of Contents
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
(In thousands, except numbers of securities data) | ||||||||||||||||||||||||
Stocks — common stocks | $ | — | $ | — | $ | 222 | $ | 244 | $ | 222 | $ | 244 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | — | 4 | 4 | |||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
(In thousands, except numbers of securities data) | ||||||||||||||||||||||||
Stocks — common stocks | $ | 407 | $ | 286 | $ | 227 | $ | 421 | $ | 634 | $ | 707 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | 2 | 6 | 8 | |||||||||||||||||||||
F-16
Table of Contents
Definition | ||
Level 1 | Observable unadjusted quoted prices in active markets for identical securities | |
Level 2 | Observable inputs other than quoted prices in active markets for identical securities, including: | |
(i) quoted prices in active markets for similar securities, | ||
(ii) quoted prices for identical or similar securities in markets that are not active, | ||
(iii) inputs other than quoted prices that are observable for the security (e.g. interest rates, yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates, and | ||
(iv) inputs derived from or corroborated by observable market data by correlation or other means | ||
Level 3 | Unobservable inputs, including the reporting entity’s own data, as long as there is no contrary data indicating market participants would use different assumptions |
Fair Value Measurement, Using | ||||||||||||||||
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Securities | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Debt securities | $ | 3,968 | $ | 50,405 | $ | — | $ | 54,373 | ||||||||
Equity securities | 222 | — | — | 222 | ||||||||||||
$ | 4,190 | $ | 50,405 | $ | — | $ | 54,595 | |||||||||
F-17
Table of Contents
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Debt securities | $ | 2,377 | $ | 2,088 | $ | 764 | ||||||
Equity securities | 8 | 8 | 15 | |||||||||
Cash, cash equivalents, short-term and other investment income | 117 | 412 | 1,264 | |||||||||
Rent income | 4 | 10 | 10 | |||||||||
Gross investment income | 2,506 | 2,518 | 2,053 | |||||||||
Investment expenses, primarily interest credited to reinsurance funds withheld balances | (478 | ) | (1,192 | ) | (732 | ) | ||||||
Net investment income | $ | 2,028 | $ | 1,326 | $ | 1,321 | ||||||
F-18
Table of Contents
3. | Deferred Policy Acquisition Costs and Deferred Ceding Commissions |
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Net deferred policy acquisition costs, January 1 | $ | 1,477 | $ | 774 | $ | 1,410 | ||||||
Amounts capitalized: | ||||||||||||
Direct and assumed | 27,039 | 19,852 | 14,582 | |||||||||
Ceded | (20,692 | ) | (18,492 | ) | (15,253 | ) | ||||||
Net amounts capitalized | 6,347 | 1,360 | (671 | ) | ||||||||
Net amounts amortized | (7,907 | ) | (657 | ) | 35 | |||||||
Net deferred policy acquisition costs (net deferred ceding commissions), December 31 | $ | (83 | ) | $ | 1,477 | $ | 774 | |||||
4. | Fixed Assets |
2008 | 2007 | |||||||
(In thousands) | ||||||||
Software | $ | 2,061 | $ | 1,857 | ||||
Furniture, equipment and leasehold improvements | 589 | 706 | ||||||
2,650 | 2,563 | |||||||
Accumulated depreciation and amortization | (1,917 | ) | (1,398 | ) | ||||
Fixed assets, net of accumulated depreciation and amortization | $ | 733 | $ | 1,165 | ||||
5. | Reinsurance |
F-19
Table of Contents
2008 | 2007 | 2006 | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Direct and assumed premiums | $ | 117,563 | $ | 100,070 | $ | 85,810 | $ | 73,714 | $ | 62,372 | $ | 60,672 | ||||||||||||
Ceded premiums | 71,725 | 50,850 | 54,849 | 49,101 | 42,986 | 39,619 | ||||||||||||||||||
Net premiums | $ | 45,838 | $ | 49,220 | $ | 30,961 | $ | 24,613 | $ | 19,386 | $ | 21,053 | ||||||||||||
6. | Premiums Receivable |
F-20
Table of Contents
7. | Federal Income Taxes |
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Current income tax expense | $ | 675 | $ | 899 | $ | 1,419 | ||||||
Deferred income tax expense (benefit): | ||||||||||||
Tax benefit on temporary differences | (1,318 | ) | (130 | ) | (387 | ) | ||||||
Increase (decrease) in valuation allowance | — | (1,201 | ) | 457 | ||||||||
Deferred income tax expense (benefit) | (1,318 | ) | (1,331 | ) | 70 | |||||||
Income tax expense (benefit) | $ | (643 | ) | $ | (432 | ) | $ | 1,489 | ||||
F-21
Table of Contents
2008 | 2007 | 2006 | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||||||||
Income (loss) before income tax expense | $ | (767 | ) | $ | 1,947 | $ | 3,099 | |||||||||||||||||
Income tax expense (benefit) at statutory rate | $ | (261 | ) | 34.0 | % | $ | 662 | 34.0 | % | 1,054 | 34.0 | % | ||||||||||||
Tax effect of: | ||||||||||||||||||||||||
Tax exempt investment income | (238 | ) | 31.0 | (85 | ) | (4.3 | ) | — | — | |||||||||||||||
Other items, net | 101 | (13.2 | ) | 127 | 6.5 | (22 | ) | (0.7 | ) | |||||||||||||||
Change in reserve for uncertain tax positions | (290 | ) | 37.9 | 711 | 36.5 | — | — | |||||||||||||||||
True up related to prior years | 45 | (5.9 | ) | 65 | 3.3 | — | — | |||||||||||||||||
(643 | ) | 83.8 | 1,480 | 76.0 | 1,032 | 33.3 | ||||||||||||||||||
Increase (decrease) in valuation allowance | — | — | (1,912 | ) | (98.2 | ) | 457 | 14.7 | ||||||||||||||||
Actual income tax expense (benefit) | $ | (643 | ) | 83.8 | % | $ | (432 | ) | (22.2 | )% | $ | 1,489 | 48.0 | % | ||||||||||
F-22
Table of Contents
2008 | 2007 | |||||||
(In thousands) | ||||||||
Deferred Tax Assets | ||||||||
Loss reserve adjustments | $ | 1,847 | $ | 1,174 | ||||
Unearned premium adjustments | 740 | 965 | ||||||
Net operating loss carryforward | 529 | 1,318 | ||||||
Unrealized capital losses | — | 64 | ||||||
Other than temporary impairment on investments | 852 | 431 | ||||||
Stock option compensation | 143 | 111 | ||||||
Bad debt allowance | 323 | 340 | ||||||
Deferred equity offering costs written off | 1,185 | — | ||||||
Other | 63 | 125 | ||||||
Total deferred tax assets | 5,682 | 4,528 | ||||||
Deferred Tax Liabilities | ||||||||
Deferred acquisition costs | 1,113 | 1,110 | ||||||
Purchase price adjustment | 293 | 293 | ||||||
Unrealized capital gains | 309 | — | ||||||
Other | — | 103 | ||||||
Total deferred tax liabilities | 1,715 | 1,506 | ||||||
Net deferred tax assets | $ | 3,967 | $ | 3,022 | ||||
F-23
Table of Contents
8. | Losses and Loss Adjustment Expenses |
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Balances, January 1 | $ | 69,881 | $ | 65,953 | $ | 39,084 | ||||||
Less reinsurance recoverable | (43,317 | ) | (41,103 | ) | (21,699 | ) | ||||||
Net balances, January 1 | 26,564 | 24,850 | 17,385 | |||||||||
Incurred related to | ||||||||||||
Current years | 27,422 | 18,642 | 15,328 | |||||||||
Prior years | 1,294 | (3,460 | ) | 2,511 | ||||||||
Total incurred | 28,716 | 15,182 | 17,839 | |||||||||
Paid related to | ||||||||||||
Current years | 6,171 | 4,668 | 3,290 | |||||||||
Prior years | 12,051 | 8,800 | 7,084 | |||||||||
Total paid | 18,222 | 13,468 | 10,374 | |||||||||
Net balances, December 31 | 37,058 | 26,564 | 24,850 | |||||||||
Plus reinsurance recoverable | 37,492 | 43,317 | 41,103 | |||||||||
Balances, December 31 | $ | 74,550 | $ | 69,881 | $ | 65,953 | ||||||
F-24
Table of Contents
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Balances, January 1 | $ | 6,789 | $ | 6,999 | $ | 7,302 | ||||||
Less reinsurance recoverable | (3,758 | ) | (3,402 | ) | (3,780 | ) | ||||||
Net balances, January 1 | 3,031 | 3,597 | 3,522 | |||||||||
Incurred related to claims in prior years | 285 | (169 | ) | 363 | ||||||||
Paid related to prior years | (323 | ) | (397 | ) | (288 | ) | ||||||
Net balances, December 31 | 2,993 | 3,031 | 3,597 | |||||||||
Plus reinsurance recoverable | 3,785 | 3,758 | 3,402 | |||||||||
Balances, December 31 | $ | 6,778 | $ | 6,789 | $ | 6,999 | ||||||
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Balances, January 1 | $ | 3,742 | $ | 6,050 | $ | 6,006 | ||||||
Less reinsurance recoverable | (1,996 | ) | (2,974 | ) | (2,949 | ) | ||||||
Net balances, January 1 | 1,746 | 3,076 | 3,057 | |||||||||
Incurred related to claims in prior years | 424 | (1,154 | ) | 153 | ||||||||
Paid related to prior years | (640 | ) | (176 | ) | (134 | ) | ||||||
Net balances, December 31 | 1,530 | 1,746 | 3,076 | |||||||||
Plus reinsurance recoverable | 2,076 | 1,996 | 2,974 | |||||||||
Balances, December 31 | $ | 3,606 | $ | 3,742 | $ | 6,050 | ||||||
9. | Notes Payable |
F-25
Table of Contents
F-26
Table of Contents
Interest | Principal | |||||||||||||
Rate at | and | |||||||||||||
Year of | Years | Interest Rate | December 31, | Accrued | ||||||||||
Issuance | Description | Due | Terms | 2008 | Interest | |||||||||
(In thousands) | ||||||||||||||
2006/7 | Notes payable to Brooke Capital Corp. | 2009-2016 | Prime rate plus 4.5% | 7.75 | % | $ | 12,465 | |||||||
2008 | Note payable to Steven Mariano | 2009 | Prime rate plus 3.0% | 6.25 | 1,527 | |||||||||
2008 | Note payable to Ullico Inc. | 2009-2016 | Prime rate plus 4.5% | 7.75 | 5,450 | |||||||||
2004 | Surplus notes payable | 2009 | 3.0% | 3.00 | 1,341 | |||||||||
Total notes payable | 20,783 | |||||||||||||
2005 | Subordinated debentures | 2009 | 3.0% | 3.00 | 1,809 | |||||||||
$ | 22,592 | |||||||||||||
Guaranty | ||||||||||||||||
Principal | Interest | Fees | Total | |||||||||||||
(In thousands) | ||||||||||||||||
2009 | $ | 3,408 | $ | 1,343 | $ | 715 | $ | 5,466 | ||||||||
2010 | 2,042 | 1,166 | 639 | 3,847 | ||||||||||||
2011 | 2,206 | 1,002 | 557 | 3,765 | ||||||||||||
2012 | 2,380 | 827 | 469 | 3,676 | ||||||||||||
2013 | 2,574 | 633 | 373 | 3,580 | ||||||||||||
Thereafter | 6,762 | 644 | 468 | 7,874 | ||||||||||||
$ | 19,372 | $ | 5,615 | $ | 3,221 | $ | 28,208 | |||||||||
10. | Subordinated Debentures |
F-27
Table of Contents
11. | Common and Preferred Stock |
12. | Share-Based Compensation Plan |
F-28
Table of Contents
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Options | Price | |||||||
(In thousands) | ||||||||
Options Outstanding, January 1, 2006 | 148 | $ | 6.18 | |||||
Options granted | 72 | 8.02 | ||||||
Options exercised | — | — | ||||||
Options canceled | (55 | ) | 5.00 | |||||
Options Outstanding, December 31, 2006 | 165 | 7.38 | ||||||
Options granted | 58 | 8.02 | ||||||
Options exercised | — | — | ||||||
Options canceled | (50 | ) | 8.02 | |||||
Options Outstanding, December 31, 2007 | 173 | 7.39 | ||||||
Options granted | — | — | ||||||
Options exercised | — | — | ||||||
Options canceled | (10 | ) | 8.02 | |||||
Options Outstanding, December 31, 2008 | 163 | $ | 7.37 | |||||
Options Exercisable, December 31, 2008 | 125 | $ | 7.17 | |||||
F-29
Table of Contents
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Options | Fair Value | |||||||
(In thousands) | ||||||||
Unvested options, January 1, 2006 | 148 | $ | 2.44 | |||||
Options granted | 72 | 3.27 | ||||||
Options vested | (38 | ) | 2.62 | |||||
Options canceled or forfeited | (55 | ) | 1.94 | |||||
Unvested options, December 31, 2006 | 127 | 3.07 | ||||||
Options granted | 58 | 3.27 | ||||||
Options vested | (47 | ) | 2.78 | |||||
Options canceled or forfeited | (40 | ) | 3.25 | |||||
Unvested options, December 31, 2007 | 98 | 3.26 | ||||||
Options granted | — | — | ||||||
Options vested | (55 | ) | 3.26 | |||||
Options canceled or forfeited | (4 | ) | 3.32 | |||||
Unvested options, December 31, 2008 | 39 | $ | 3.26 | |||||
13. | Capital, Surplus and Dividend Restrictions |
F-30
Table of Contents
14. | Other Contingencies and Commitments |
F-31
Table of Contents
(In thousands) | ||||
2009 | $ | 1,139 | ||
2010 | 875 | |||
2011 | — | |||
2012 | — | |||
2013 | — | |||
$ | 2,014 | |||
15. | Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk |
16. | Retirement Plan |
17. | Segment Reporting |
F-32
Table of Contents
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Revenues | ||||||||||||
Insurance services segment — insurance services income | $ | 12,308 | $ | 11,325 | $ | 10,208 | ||||||
Insurance segment: | ||||||||||||
Premiums earned | 49,220 | 24,613 | 21,053 | |||||||||
Net investment income | 2,028 | 1,326 | 1,321 | |||||||||
Net realized gains (losses) on investments | (1,037 | ) | (5 | ) | 393 | |||||||
Insurance segment revenues | 50,211 | 25,934 | 22,767 | |||||||||
Intersegment revenues | (6,651 | ) | (4,298 | ) | (3,033 | ) | ||||||
Non-allocated items | — | — | (1,739 | ) | ||||||||
Consolidated revenues | $ | 55,868 | $ | 32,961 | $ | 28,203 | ||||||
Pre-tax net income (loss) | ||||||||||||
Insurance services segment | $ | 4,452 | $ | 4,201 | $ | 3,764 | ||||||
Insurance segment | 2,773 | 431 | (1,939 | ) | ||||||||
Non-allocated items | (7,992 | ) | (2,685 | ) | 1,274 | |||||||
Consolidated pre-tax net income (loss) | $ | (767 | ) | $ | 1,947 | $ | 3,099 | |||||
Net income (loss) | ||||||||||||
Insurance services segment | $ | 2,939 | $ | 4,682 | $ | 2,020 | ||||||
Insurance segment | 2,278 | (520 | ) | (1,250 | ) | |||||||
Non-allocated items | (5,341 | ) | (1,783 | ) | 840 | |||||||
Consolidated net income (loss) | $ | (124 | ) | $ | 2,379 | $ | 1,610 | |||||
F-33
Table of Contents
2008 | 2007 | 2006 | ||||||||||
(In thousands) | ||||||||||||
Holding company expenses | $ | (3,068 | ) | $ | (1,395 | ) | $ | (3,260 | ) | |||
Interest expense | (1,438 | ) | (1,290 | ) | (1,109 | ) | ||||||
Loss from write-off of deferred equity offering costs | (3,486 | ) | — | — | ||||||||
Gain on early extinguishment of debt | — | — | 6,586 | |||||||||
Other income — forgiveness of interest due on extinguished debt | — | — | 796 | |||||||||
Other than temporary impairment of Tarheel investment in Foundation | — | — | (1,739 | ) | ||||||||
Total unallocated items before income tax expense (benefit) | (7,992 | ) | (2,685 | ) | 1,274 | |||||||
Income tax expense (benefit) on unallocated items | (2,651 | ) | (905 | ) | 434 | |||||||
Total unallocated items | $ | (5,341 | ) | $ | (1,783 | ) | $ | 840 | ||||
18. | Related Party Transactions |
19. | Business Combination |
2008 | 2007 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Revenues | $ | — | $ | — | $ | 283 | ||||||
Pre-tax net loss | — | (343 | ) | (326 | ) |
F-34
Table of Contents
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Investments | �� | |||||||
Debt securities, available for sale, at fair value | $ | 46,134 | $ | 54,373 | ||||
Equity securities, available for sale, at fair value | — | 222 | ||||||
Short-term investments | 671 | 244 | ||||||
Real estate | 246 | 250 | ||||||
Total investments | 47,051 | 55,089 | ||||||
Cash and cash equivalents | 7,452 | 8,333 | ||||||
Insurance services income receivable | 3,892 | — | ||||||
Premiums receivable, net | 83,040 | 58,826 | ||||||
Deferred policy acquisition costs, net of deferred ceding commissions | 478 | — | ||||||
Prepaid reinsurance premiums | 42,010 | 33,731 | ||||||
Reinsurance recoverable, net | ||||||||
Unpaid losses and loss adjustment expenses | 49,970 | 37,492 | ||||||
Paid losses and loss adjustment expenses | 8,358 | 4,642 | ||||||
Funds held by ceding companies and other amounts due from reinsurers | 3,116 | 2,507 | ||||||
Net deferred tax assets | 2,250 | 3,967 | ||||||
Fixed assets, net | 766 | 733 | ||||||
Receivable from related party | — | 500 | ||||||
Income taxes recoverable | 927 | 110 | ||||||
Intangible assets | 1,287 | 1,287 | ||||||
Other assets, net | 7,194 | 4,075 | ||||||
Total Assets | $ | 257,791 | $ | 211,292 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Reserves for losses and loss adjustment expenses | $ | 83,210 | $ | 74,550 | ||||
Reinsurance payable on paid losses and loss adjustment expenses | 1,073 | 756 | ||||||
Unearned and advanced premium reserves | 63,702 | 44,613 | ||||||
Deferred ceding commissions, net of deferred policy acquisition costs | — | 83 | ||||||
Reinsurance funds withheld and balances payable | 56,458 | 47,449 | ||||||
Notes payable, including $363,000 of related party notes payable, and accrued interest of $242,000 and $224,000 | 18,244 | 20,783 | ||||||
Subordinated debentures, including accrued interest of $211,000 and $175,000 | 1,845 | 1,809 | ||||||
Accounts payable and accrued expenses | 23,130 | 14,112 | ||||||
Total liabilities | 247,662 | 204,155 | ||||||
Stockholders’ Equity | ||||||||
Series A convertible preferred stock | 1,000 | 1,000 | ||||||
Common stock | 1 | 1 | ||||||
Series B common stock | 1 | 1 | ||||||
Paid-in capital | 5,521 | 5,456 | ||||||
Retained earnings | 2.390 | 72 | ||||||
Accumulated other comprehensive income, net of deferred income taxes | 1,216 | 607 | ||||||
Total stockholders’ equity | 10,129 | 7,137 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 257,791 | $ | 211,292 | ||||
F-35
Table of Contents
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Unaudited | ||||||||
(In thousands) | ||||||||
Revenues | ||||||||
Premiums earned | $ | 28,369 | $ | 32,276 | ||||
Insurance services income | 9,753 | 4,706 | ||||||
Investment income, net | 1,354 | 1,487 | ||||||
Net realized gains (losses) on investments | 903 | (253 | ) | |||||
Total revenues | 40,379 | 38,216 | ||||||
Expenses | ||||||||
Net losses and loss adjustment expenses | 15,864 | 20,719 | ||||||
Net policy acquisition and underwriting expenses | 8,498 | 8,176 | ||||||
Other operating expenses | 11,100 | 8,055 | ||||||
Interest expense | 1,119 | 1,102 | ||||||
Total expenses | 36,581 | 38,052 | ||||||
Other Income | — | 219 | ||||||
Income before income tax expense (benefit) | 3,798 | 383 | ||||||
Income Tax Expense (Benefit) | 1,422 | (217 | ) | |||||
Net income | $ | 2,376 | $ | 600 | ||||
Earnings Per Common Share | ||||||||
Basic | $ | 1.95 | $ | .44 | ||||
Diluted | 1.94 | .44 | ||||||
Weighted Average Common Shares Outstanding: | ||||||||
Basic | 1,216 | 1,361 | ||||||
Diluted | 1,225 | 1,370 | ||||||
F-36
Table of Contents
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||||||||||||||
Series A | Series B | Comprehensive | Total | |||||||||||||||||||||||||||||||||||||||||||||
Series A Convertible Preferred Stock | Common Stock | Common Stock | Common Stock | Paid-in | Retained | Income | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | (Loss) | Equity | |||||||||||||||||||||||||||||||||||||
Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2008 | 1,000 | $ | 1,000 | 561 | $ | 1 | — | $ | — | 800 | $ | 1 | $ | 5,456 | $ | 72 | $ | 607 | $ | 7,137 | ||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | 65 | — | — | 65 | ||||||||||||||||||||||||||||||||||||
Repurchase and retirement of 215,263 shares of common stock at par value | — | — | (215 | ) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Series A convertible preferred stock dividend | — | — | — | — | — | — | — | — | — | (58 | ) | — | (58 | ) | ||||||||||||||||||||||||||||||||||
Balance before comprehensive income | 1,000 | 1,000 | 346 | 1 | — | — | 800 | 1 | 5,521 | 14 | 607 | 7,144 | ||||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 2,376 | — | 2,376 | ||||||||||||||||||||||||||||||||||||
Net unrealized appreciation in available for sale securities, net of deferred taxes of $316,000 | — | — | — | — | — | — | — | — | — | — | 609 | 609 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | — | 2,376 | 609 | 2,985 | ||||||||||||||||||||||||||||||||||||
Balance, September 30, 2009 | 1,000 | $ | 1,000 | 346 | $ | 1 | — | $ | — | 800 | $ | 1 | $ | 5,521 | $ | 2,390 | $ | 1,216 | $ | 10,129 | ||||||||||||||||||||||||||||
Unaudited | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2007 | — | $ | — | — | $ | — | 561 | $ | 1 | 800 | $ | 1 | $ | 5,363 | $ | 196 | $ | (125 | ) | $ | 5,436 | |||||||||||||||||||||||||||
Reclassification of all outstanding shares of Series A common stock into common stock on a one-for-one basis | — | — | 561 | 1 | (561 | ) | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | — | — | — | 57 | — | — | 57 | ||||||||||||||||||||||||||||||||||||
Balance before comprehensive income | — | — | 561 | 1 | — | — | 800 | 1 | 5,420 | 196 | (125 | ) | 5,493 | |||||||||||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 600 | — | 600 | ||||||||||||||||||||||||||||||||||||
Net unrealized depreciation in available for sale securities, net of deferred tax benefit of $490,000 | — | — | — | — | — | — | — | — | — | — | (952 | ) | (952 | ) | ||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | — | — | — | 600 | (952 | ) | (352 | ) | ||||||||||||||||||||||||||||||||||
Balance, September 30, 2008 | — | $ | — | 561 | $ | 1 | — | $ | — | 800 | $ | 1 | $ | 5,420 | $ | 796 | $ | (1,077 | ) | $ | 5,141 | |||||||||||||||||||||||||||
F-37
Table of Contents
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Unaudited | ||||||||
(In thousands) | ||||||||
Operating Activities | ||||||||
Net income | $ | 2,376 | $ | 600 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Net realized (gains) losses on investments | (903 | ) | 253 | |||||
Other income | — | (219 | ) | |||||
Depreciation and amortization | 579 | 599 | ||||||
Share-based compensation expense | 65 | 57 | ||||||
Amortization of debt securities | 224 | 197 | ||||||
Deferred income tax expense (benefit) | 1,400 | (50 | ) | |||||
Changes in certain assets and liabilities: | ||||||||
Decrease (increase) in: | ||||||||
Insurance services income receivable | (3,892 | ) | — | |||||
Premiums receivable | (24,214 | ) | (22,801 | ) | ||||
Deferred policy acquisition costs, net of deferred ceding commissions | (561 | ) | (1,015 | ) | ||||
Prepaid reinsurance premiums | (8,279 | ) | (12,996 | ) | ||||
Reinsurance recoverable on: | ||||||||
Unpaid losses and loss adjustment expenses | (12,478 | ) | (7,669 | ) | ||||
Paid losses and loss adjustment expenses | (3,716 | ) | 244 | |||||
Funds held by ceding companies and other amounts due from reinsurers | (609 | ) | (366 | ) | ||||
Income taxes recoverable | (817 | ) | (1,087 | ) | ||||
Other assets | (3,321 | ) | (5,705 | ) | ||||
Increase in: | ||||||||
Reserves for losses and loss adjustment expenses | 8,660 | 15,248 | ||||||
Reinsurance payable on paid loss and loss adjustment expenses | 317 | 43 | ||||||
Unearned and advanced premium reserves | 19,089 | 22,282 | ||||||
Reinsurance funds withheld and balances payable | 9,009 | 2,224 | ||||||
Accounts payable and accrued expenses | 9,015 | 5,636 | ||||||
Net cash used in operating activities | (8,056 | ) | (4,525 | ) | ||||
Investment Activities | ||||||||
Proceeds from sales and maturities of debt securities | 20,515 | 14,960 | ||||||
Proceeds from sales of equity securities | 329 | — | ||||||
Purchases of debt securities | (10,778 | ) | (15,689 | ) | ||||
Net purchases of short-term investments | (427 | ) | (144 | ) | ||||
Purchases of fixed assets | (407 | ) | (87 | ) | ||||
Net cash provided by (used in) investment activities | 9,232 | (960 | ) | |||||
Financing Activities | ||||||||
Proceeds from notes payable | — | 1,500 | ||||||
Repayments of notes payable | (2,557 | ) | (761 | ) | ||||
Change in receivable from related party for Series A convertible preferred stock | 500 | — | ||||||
Net cash provided by (used in) financing activities | (2,057 | ) | 739 | |||||
Decrease in cash and cash equivalents | (881 | ) | (4,746 | ) | ||||
Cash and cash equivalents,beginning of period | 8,333 | 4,943 | ||||||
Cash and cash equivalents,end of period | $ | 7,452 | $ | 197 | ||||
F-38
Table of Contents
(1) | Summary of Significant Accounting Policies |
F-39
Table of Contents
F-40
Table of Contents
F-41
Table of Contents
F-42
Table of Contents
F-43
Table of Contents
(2) | Investments |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
September 30, 2009 | Cost | Gains | Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
U.S. government securities | $ | 3,444 | $ | 155 | $ | — | $ | 3,599 | ||||||||
U.S. government agencies | 300 | 8 | — | 308 | ||||||||||||
Asset-backed and mortgage-backed securities | 13,709 | 335 | 157 | 13,887 | ||||||||||||
State and political subdivisions | 15,346 | 1,030 | — | 16,376 | ||||||||||||
Corporate securities | 11,492 | 473 | 1 | 11,964 | ||||||||||||
$ | 44,291 | $ | 2,001 | $ | 158 | $ | 46,134 | |||||||||
F-44
Table of Contents
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
December 31, 2008 | Cost | Gains | Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
U.S. government securities | $ | 3,981 | $ | 247 | $ | — | $ | 4,228 | ||||||||
U.S. government agencies | 300 | 11 | — | 311 | ||||||||||||
Asset-backed and mortgage-backed securities | 16,128 | 806 | 617 | 16,317 | ||||||||||||
State and political subdivisions | 23,058 | 867 | 11 | 23,914 | ||||||||||||
Corporate securities | 9,745 | 72 | 214 | 9,603 | ||||||||||||
$ | 53,212 | $ | 2,003 | $ | 842 | $ | 54,373 | |||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
September 30, 2009 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In thousands, except numbers of securities data) | ||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
U.S. government securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
U.S. government agencies | — | — | — | — | — | — | ||||||||||||||||||
Asset-backed and mortgage-backed securities | 357 | 1 | 1,943 | 156 | 2,300 | 157 | ||||||||||||||||||
State and political subdivisions | — | — | — | — | — | — | ||||||||||||||||||
Corporate securities | 250 | — | 699 | 1 | 949 | 1 | ||||||||||||||||||
Total | $ | 607 | $ | 1 | $ | 2,642 | $ | 157 | $ | 3,249 | $ | 158 | ||||||||||||
Total number of securities in an unrealized loss position | 2 | 9 | 11 | |||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
December 31, 2008 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In thousands, except numbers of securities data) | ||||||||||||||||||||||||
U.S. government securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
U.S. government agencies | — | — | — | — | — | — | ||||||||||||||||||
Asset-backed and mortgage-backed securities | 3,598 | 518 | 359 | 99 | 3,957 | 617 | ||||||||||||||||||
State and political subdivisions | 745 | 11 | — | — | 745 | 11 | ||||||||||||||||||
Corporate securities | 6,882 | 214 | — | — | 6,882 | 214 | ||||||||||||||||||
Total | $ | 11,224 | $ | 742 | $ | 359 | $ | 99 | $ | 11,583 | $ | 842 | ||||||||||||
Total number of securities in an unrealized loss position | 42 | 3 | 45 | |||||||||||||||||||||
F-45
Table of Contents
Amortized | Estimated | |||||||
Unaudited | Cost | Fair Value | ||||||
(In thousands) | ||||||||
Due in one year or less | $ | 5,098 | $ | 5,171 | ||||
Due after one year through five years | 14,485 | 15,312 | ||||||
Due after five years | 10,999 | 11,764 | ||||||
30,582 | 32,247 | |||||||
Asset-backed and mortgage-backed securities | 13,709 | 13,887 | ||||||
$ | 44,291 | $ | 46,134 | |||||
(3) | Fair Value Measurements |
F-46
Table of Contents
Definition | ||
Level 1 | Observable unadjusted quoted prices in active markets for identical securities | |
Level 2 | Observable inputs other than quoted prices in active markets for identical securities, including: | |
(i) quoted prices in active markets for similar securities, | ||
(ii) quoted prices for identical or similar securities in markets that are not active, | ||
(iii) inputs other than quoted prices that are observable for the security (e.g. interest rates, yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates, and | ||
(iv) inputs derived from or corroborated by observable market data by correlation or other means | ||
Level 3 | Unobservable inputs, including the reporting entity’s own data, as long as there is no contrary data indicating market participants would use different assumptions |
Fair Value Measurement, Using | ||||||||||||||||
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
In Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Securities | Inputs | Inputs | ||||||||||||||
September 30, 2009 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(In thousands) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
U.S. government securities | $ | 3,339 | $ | 260 | $ | — | $ | 3,599 | ||||||||
U.S. government agencies | — | 308 | — | 308 | ||||||||||||
Asset-backed and mortgage-backed securities | — | 11,964 | — | 11,964 | ||||||||||||
State and political subdivisions | — | 16,376 | — | 16,376 | ||||||||||||
Corporate securities | — | 13,887 | — | 13,887 | ||||||||||||
$ | 3,339 | $ | 42,795 | $ | — | $ | 46,134 | |||||||||
F-47
Table of Contents
Fair Value Measurement, Using | ||||||||||||||||
Quoted | ||||||||||||||||
Prices | ||||||||||||||||
In Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Securities | Inputs | Inputs | ||||||||||||||
December 31, 2008 | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
(In thousands) | ||||||||||||||||
U.S. government securities | $ | 3,968 | $ | 260 | $ | — | $ | 4,228 | ||||||||
U.S. government agencies | — | 311 | — | 311 | ||||||||||||
Asset-backed and mortgage-backed securities | — | 16,317 | — | 16,317 | ||||||||||||
State and political subdivisions | — | 23,914 | — | 23,914 | ||||||||||||
Corporate securities | — | 9,603 | — | 9,603 | ||||||||||||
Total debt securities | $ | 3,968 | $ | 50,405 | $ | — | $ | 54,373 | ||||||||
Equity securities | 222 | — | — | 222 | ||||||||||||
$ | 4,190 | $ | 50,405 | $ | — | $ | 54,595 | |||||||||
(4) | Notes Payable and Subordinated Debentures |
F-48
Table of Contents
(5) | Business Process Outsourcing |
• | Producing and underwriting the policies, for which insurance services income is based on a percentage of gross written premiums produced for its BPO customer, reduced by an allowance for estimated insurance services income that will not be received due to the cancellation of policies prior to expiration and reductions in payrolls, |
• | Administering the policies and, in certain cases, managing a segregated portfolio cell captive, for which insurance services income is based on a percentage of gross earned premiums produced for its BPO customer, |
• | Administering the claims, for which insurance services income is based on a percentage of gross written premiums produced for its BPO customer before deducting premium rate credits attributable to large deductible policies (recognized on a pro rata basis over the period of time the Company is contractually obligated to administer the claims), |
• | Providing nurse case management services, for which insurance services income is based on a monthly charge per claimant, and | |
• | Providing cost containment services, for which insurance services income is based on a percentage of claims savings |
F-49
Table of Contents
(6) | Reinsurance |
F-50
Table of Contents
Nine Months Ended September 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Written | Earned | Written | Earned | |||||||||||||
Unaudited | ||||||||||||||||
Direct premiums | $ | 86,541 | $ | 74,199 | $ | 94,080 | $ | 70,013 | ||||||||
Assumed premiums: | ||||||||||||||||
BPO customer | 7,824 | 1,539 | — | — | ||||||||||||
NCCI National Workers’ Compensation Insurance Pool | 1,607 | 1,416 | 798 | 816 | ||||||||||||
Total assumed premiums | 9,431 | 2,955 | 798 | 816 | ||||||||||||
Gross premiums | 95,972 | 77,154 | 94,878 | 70,829 | ||||||||||||
Ceded premiums | (56,573 | ) | (48,785 | ) | (52,926 | ) | (38,553 | ) | ||||||||
Net premiums | $ | 39,399 | $ | 28,369 | $ | 41,952 | $ | 32,276 | ||||||||
(7) | Net Losses and Loss Adjustment Expenses |
F-51
Table of Contents
(8) | Share-Based Compensation Plan |
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Options | Price | |||||||
(In thousands) | ||||||||
Unaudited | ||||||||
Options outstanding, December 31, 2008 | 163 | $ | 7.37 | |||||
Options outstanding, September 30, 2009 | 163 | $ | 7.37 | |||||
Options exercisable, September 30, 2009 | 149 | $ | 7.31 | |||||
(9) | Income Taxes |
Nine Months Ended September 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Unaudited | ||||||||||||||||
Income before income tax expense | $ | 3,798 | $ | 383 | ||||||||||||
Income tax at statutory rate | $ | 1,291 | 34.0 | % | $ | 130 | 34.0 | % | ||||||||
Tax effect of: | ||||||||||||||||
Tax exempt investment income | (155 | ) | (4.1 | ) | (178 | ) | (46.5 | ) | ||||||||
Change in reserve for uncertain tax positions | (131 | ) | (3.4 | ) | (290 | ) | (75.8 | ) | ||||||||
True-up of prior year tax provision | 204 | 5.4 | — | — | ||||||||||||
Other items, net | 213 | 5.6 | 121 | 31.6 | ||||||||||||
Actual income tax rate | $ | 1,422 | 37.4 | % | $ | (217 | ) | (56.7 | )% | |||||||
F-52
Table of Contents
(10) | Capital, Surplus and Dividend Restrictions |
(11) | Segment Reporting |
F-53
Table of Contents
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Unaudited | ||||||||
Revenues | ||||||||
Insurance services segment — insurance services income | $ | 14,448 | $ | 9,031 | ||||
Insurance segment: | ||||||||
Premiums earned | 28,369 | 32,276 | ||||||
Net investment income | 1,354 | 1,487 | ||||||
Net realized gains (losses) on investments | 903 | (253 | ) | |||||
Insurance segment revenues | 30,626 | 33,510 | ||||||
Intersegment revenues | (4,695 | ) | (4,325 | ) | ||||
Consolidated revenues | $ | 40,379 | $ | 38,216 | ||||
Pre-tax net income (loss) Insurance services segment | $ | 5,041 | $ | 3,666 | ||||
Insurance segment | 1,568 | 509 | ||||||
Non-allocated items | (2,811 | ) | (3,792 | ) | ||||
Consolidated pre-tax net income | $ | 3,798 | $ | 383 | ||||
Net income (loss) Insurance services segment | $ | 3,328 | $ | 2,420 | ||||
Insurance segment | 817 | 683 | ||||||
Non-allocated items | (1,769 | ) | (2,503 | ) | ||||
Consolidated net income | $ | 2,376 | $ | 600 | ||||
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Unaudited | ||||||||
Holding company expenses | $ | (1,692 | ) | $ | (2,690 | ) | ||
Interest expense | (1,119 | ) | (1,102 | ) | ||||
Total unallocated items before income tax benefit | (2,811 | ) | (3,792 | ) | ||||
Income tax benefit on unallocated items | (1,042 | ) | (1,289 | ) | ||||
Total unallocated items | $ | (1,769 | ) | $ | (2,503 | ) | ||
(12) | Commitments and Contingencies |
F-54
Table of Contents
F-55
Table of Contents
FBR Capital Markets |
Macquarie Capital |
Oppenheimer & Co. |
Table of Contents
Item 13. | Other Expenses of Issuance and Distribution. |
SEC Registration Fee | $ | 10,588 | ||
FINRA Filing Fees | 12,000.00 | |||
New York Stock Exchange Listing Fee | 125,000 | |||
Legal Fees and Expenses | * | |||
Accounting Fees and Expenses | * | |||
Transfer Agent and Registrar Fees | * | |||
Printing and Engraving Expenses | * | |||
Blue Sky Fees and Expenses | * | |||
Miscellaneous Expenses | * | |||
Total | $ | * | ||
* | To be supplied by amendment. |
Item 14. | Indemnification of Directors and Officers. |
Item 15. | Recent Sales of Unregistered Securities. |
II-1
Table of Contents
Item 16. | Exhibits and Financial Statement Schedules. |
Exhibit | ||||
No. | Description of Exhibit | |||
1 | .1 | Form of Underwriting Agreement* | ||
3 | .1 | Amended and Restated Certificate of Incorporation of the Registrant** | ||
3 | .2 | Amended and Restated Bylaws of the Registrant** | ||
3 | .3 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock** | ||
4 | .3 | Form of Guarantee Insurance Company’s Surplus Notes** | ||
4 | .4 | Form of Registrant’s Subordinated Debentures** | ||
4 | .5 | Form of Registrant’s Warrant to Purchase Common Stock** | ||
5 | .1 | Opinion of Locke Lord Bissell & Liddell LLP* | ||
10 | .1 | Employment Agreement between the Registrant and Steven M. Mariano** | ||
10 | .2 | Offer Letter to Theodore G. Bryant dated November 17, 2006** | ||
10 | .3 | Second Amended and Restated Employment Agreement dated as of July 10, 2009 between the Registrant and Theodore G. Bryant** | ||
10 | .4 | Offer Letter to Timothy J. Ermatinger dated August 1, 2007** | ||
10 | .5 | Employment Agreement between the Registrant and Timothy J. Ermatinger** | ||
10 | .6 | Employment Agreement, dated as of February 11, 2008, between the Registrant and Michael W. Grandstaff** | ||
10 | .7 | 2005 Stock Option Plan** | ||
10 | .8 | Form of Option Award Agreement for 2005 Stock Option Plan** | ||
10 | .9 | 2006 Stock Option Plan** | ||
10 | .10 | Form of Option Award Agreement for 2006 Stock Option Plan** | ||
10 | .11 | 2009 Stock Incentive Plan* | ||
10 | .12 | Form of Option Award Agreement for 2009 Stock Incentive Plan* | ||
10 | .13 | Commercial Loan Agreement, Addendum to Commercial Loan Agreement and Consent in relation to Addendum to Commercial Loan Agreement dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** | ||
10 | .14 | Commercial Promissory Note and Addendum A to Promissory Note dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** | ||
10 | .15 | Commercial Security Agreement and Addendum A to Commercial Security Agreement dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** | ||
10 | .16 | Extension of Security Agreement dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** |
II-2
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
10 | .17 | Stock Pledge Agreement dated March 30, 2006 between Brooke Credit Corporation and Brandywine Insurance Holdings, Inc.** | ||
10 | .18 | Irrevocable Proxy undated by Brandywine Insurance Holdings, Inc. appointing Brooke Credit Corporation** | ||
10 | .19 | Irrevocable Proxy undated by Registrant appointing Brooke Credit Corporation** | ||
10 | .20 | Guaranty and Addendum A to Guaranty dated March 30, 2006 between Brooke Credit Corporation and Steven M. Mariano** | ||
10 | .21 | Amendment to Commercial Loan Agreement (Including Joinder of Additional Borrowers) dated September 27, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .22 | Commercial Promissory Note dated September 27, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .23 | Form of Commercial Security Agreement dated September 27, 2006 between Brooke Credit Corporation and SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .24 | Form of Extension of Security Agreement dated September 27, 2006 between Brooke Credit Corporation and SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .25 | Second Amendment to Commercial Loan Agreement dated November 16, 2006, among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .26 | Third Amendment to Commercial Loan Agreement dated February 19, 2008, among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .27 | Fourth Amendment to Commercial Loan Agreement dated October 1, 2008, among Aleritas Capital Corporation, the Registrant, Guarantee Insurance Group, Patriot Risk Services, SunCoast Capital, Inc., PRS Group, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .28 | Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-001/2007 between Guarantee Insurance Company and National Indemnity Insurance Company** | ||
10 | .29 | Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-002/2007 between Guarantee Insurance Company and Midwest Employers Casualty Company** | ||
10 | .30 | Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-003/2007 between Guarantee Insurance Company, as Cedent, and Max Re, Ltd., Aspen Insurance UK Limited and Various Underwriters at Lloyds, as Reinsurers** | ||
10 | .31 | Workers’ Compensation Excess of Loss Reinsurance Agreement between Guarantee Insurance Company, as Cedent, and Aspen Insurance UK Limited and Various Underwriters at Lloyds, as Reinsurers** | ||
10 | .32 | Quota Share Reinsurance Agreement GIC-005/2007 between Guarantee Insurance Company and National Indemnity Insurance Company** | ||
10 | .40 | Third Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and Max Bermuda, Ltd., Tokio Millennium Reinsurance Limited, Aspen Insurance UK Limited and Various Underwriters at Lloyd’s London as Reinsurers** | ||
10 | .41 | Purchase and Sale Agreement dated January 1, 2006 between The Tarheel Group, Inc., Tarheel Insurance Management Company and the Registrant** | ||
10 | .42 | Promissory Note dated June 13, 2006 between The Tarheel Group, Inc. and the Registrant** | ||
10 | .43 | Personal Guaranty of Promissory Note dated June 13, 2006 between the Registrant and Steven M. Mariano** |
II-3
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
10 | .44 | Contribution Agreement dated April 20, 2007 between Steven M. Mariano and the Registrant** | ||
10 | .45 | Form of Director and Officer Indemnification Agreement** | ||
10 | .46 | Settlement Stipulation and Release dated June 28, 2007 among Foundation Insurance Company, Steven M. Mariano, New Pacific International, Inc. and Peterson, Goldman & Villani, Inc.** | ||
10 | .47 | Stock Pledge Agreement between Brooke Credit Corporation and the Registrant** | ||
10 | .48 | Promissory Note dated June 26, 2008, as amended and restated on June 16, 2009 between the Registrant and Steven M. Mariano** | ||
10 | .49 | Workers’ Compensation Quota Share Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and National Indemnity Company and Swiss Reinsurance America Corporation as Reinsurers** | ||
10 | .50 | Traditional Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and Midwest Employers Casualty Company as Reinsurer** | ||
10 | .51 | Alternative Market Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and National Indemnity Company as Reinsurer** | ||
10 | .52 | Second Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and Max Bermuda, Ltd., Aspen Insurance UK Limited and Various Underwriters at Lloyd’s London as Reinsurers** | ||
10 | .53 | Employment Agreement, dated September 29, 2008, between the Registrant and Richard G. Turner** | ||
10 | .54 | Employment Agreement, dated September 29, 2008, between the Registrant and Charles K. Schuver** | ||
10 | .55 | First Amendment to Employment Agreement, dated September 26, 2008, between the Registrant and Steven M. Mariano** | ||
10 | .57 | Amendment No. 1 to the 2005 Stock Option Plan** | ||
10 | .58 | Amendment No. 2 to the 2005 Stock Option Plan** | ||
10 | .59 | Amendment No. 1 to the 2006 Stock Option Plan** | ||
10 | .60 | Amendment No. 2 to the 2006 Stock Option Plan** | ||
10 | .61 | Workers’ Compensation Quota Share Reinsurance Contract, effective December 31, 2008, between Guarantee Insurance Company and Harco National Insurance Company* | ||
10 | .62 | Traditional Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company as cedant and Maiden Re, Max Re, Ullico Casualty and various underwriters at Lloyd’s London as reinsurers | ||
10 | .63 | Alternative Market Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company as cedant and National Fire & Liability and Ullico Casualty as reinsurers | ||
10 | .64 | Second Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company and Aspen Insurance UK Limited, Hannover Re, and certain other reinsurers* | ||
10 | .65 | Workers’ Compensation Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company as cedant and Max Re Bermuda, Tokio Millennium Re, Aspen Re UK, Hannover Re and various underwriters at Lloyd’s London as reinsurers* | ||
10 | .66 | Traditional Workers’ Compensation Quota Share Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company and Swiss Re | ||
10 | .67 | Traditional Workers Compensation Quota Share Reinsurance Contract for Florida, Georgia and New Jersey, between Guarantee Insurance Company as cedant and ULLICO Casualty Company as reinsurer** |
II-4
Exhibit | ||||
No. | Description of Exhibit | |||
10 | .68 | Commercial Loan Agreement dated December 31, 2008 among the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc., SunCoast Capital, Inc. and Ullico Inc.** | ||
10 | .69 | Commercial Security Agreement dated December 31, 2008 among the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc., SunCoast Capital, Inc. and Ullico Inc.** | ||
10 | .70 | Stock Pledge Agreement dated December 31, 2008 among Steven M. Mariano, Steven M. Mariano Revocable Trust, the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc. and Ullico Inc.** | ||
10 | .71 | Irrevocable Proxy dated December 31, 2008 among Steven M. Mariano, Steven M. Mariano Revocable Trust and Ullico Inc.** | ||
10 | .72 | Guaranty dated December 31, 2008 between Steven M. Mariano and Ullico Inc.** | ||
10 | .73 | Intercreditor Agreement dated December 31, 2008 among the Existing Lenders identified therein, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc., SunCoast Capital, Inc., Registrant and Ullico, Inc.** | ||
10 | .74 | Promissory Note from Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc. and SunCoast Capital, Inc. to Ullico, Inc., dated December 31, 2008** | ||
10 | .75 | Side Letter Agreement dated December 31, 2008 among Steven M. Mariano, the Registrant and Ullico Inc. | ||
10 | .76 | Post-Closing Letter Agreement dated December 31, 2008 among the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc. and Ullico Inc. | ||
21 | .1 | Subsidiaries of the Registrant** | ||
23 | .1 | Consent of Locke Lord Bissell & Liddell LLP (included as part of its opinion filed as Exhibit 5.1 hereto)* | ||
23 | .2 | Consent of BDO Seidman, LLP | ||
24 | .1 | Power of Attorney** |
* | To be filed by amendment | |
** | Previously filed |
Index to Financial Statement Schedules | Schedule | |||
— | ||||
I | ||||
II | ||||
III | ||||
IV | ||||
V | ||||
VI |
Item 17. | Undertakings. |
II-5
Table of Contents
II-6
Table of Contents
By: | /s/ Steven M. Mariano |
Signature | Title | Date | ||||
/s/ Steven M. Mariano Steven M. Mariano | Principal Executive Officer and Director | December 11, 2009 | ||||
/s/ Michael W. Grandstaff Michael W. Grandstaff | Principal Financial Officer | December 11, 2009 | ||||
/s/ Michael J. Sluka Michael J. Sluka | Principal Accounting Officer | December 11, 2009 | ||||
* Richard F. Allen | Director | December 11, 2009 | ||||
* John R. Del Pizzo | Director | December 11, 2009 | ||||
* Timothy J. Tompkins | Director | December 11, 2009 | ||||
* Ronald P. Formento Sr. | Director | December 11, 2009 | ||||
* C. Timothy Morris | Director | December 11, 2009 | ||||
* /s/ Steven M. Mariano Steven M. Mariano * Attorney in Fact | December 11, 2009 |
II-7
Table of Contents
S-1
Table of Contents
SCHEDULE I
SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2008
Amount | ||||||||||||
Shown on | ||||||||||||
Amortized | Balance | |||||||||||
Cost | Value | Sheet | ||||||||||
In thousands | ||||||||||||
Debt securities available for sale: | ||||||||||||
U.S. government securities | $ | 3,981 | $ | 4,228 | $ | 4,228 | ||||||
U.S. government agencies | 300 | 311 | 311 | |||||||||
Asset-backed and mortgage-backed securities | 16,128 | 16,317 | 16,317 | |||||||||
State and political subdivisions | 23,058 | 23,914 | 23,914 | |||||||||
Corporate securities | 9,745 | 9,603 | 9,603 | |||||||||
Total debt securities available for sale | 53,212 | 54,373 | 54,373 | |||||||||
Equity securities available for sale | 466 | 222 | 222 | |||||||||
Short-term investments | 244 | 244 | 244 | |||||||||
Real estate held for the production of income | 250 | 250 | 250 | |||||||||
Total investments | $ | 54,172 | $ | 55,089 | $ | 55,089 | ||||||
S-2
Table of Contents
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
BALANCE SHEETS
December 31, | ||||||||
2008 | 2007 | |||||||
In thousands | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 453 | $ | 10 | ||||
Investments in subsidiaries | 24,106 | 18,137 | ||||||
Receivable from subsidiaries | 550 | — | ||||||
Other assets | 5,183 | 3,336 | ||||||
Total Assets | $ | 30,292 | $ | 21,483 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Notes payable and accrued interest | $ | 19,442 | $ | 13,601 | ||||
Subordinated debentures and accrued interest | 1,809 | 1,938 | ||||||
Other liabilities | 1,904 | 508 | ||||||
Total liabilities | 23,155 | 16,047 | ||||||
Stockholders’ Equity | ||||||||
Series A convertible preferred stock | 1,000 | — | ||||||
Common stock | 1 | 1 | ||||||
Series B common stock | 1 | 1 | ||||||
Paid-in capital | 5,456 | 5,363 | ||||||
Retained earnings | 72 | 196 | ||||||
Accumulated other comprehensive income (loss), net of deferred income taxes | 607 | (125 | ) | |||||
Total stockholders’ equity | 7,137 | 5,436 | ||||||
Total liabilities and stockholders’ equity | $ | 30,292 | $ | 21,483 | ||||
S-3
Table of Contents
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF INCOME
2008 | 2007 | 2006 | ||||||||||
In thousands | ||||||||||||
Revenue | $ | 170 | $ | 69 | $ | 57 | ||||||
Expenses: | ||||||||||||
Other operating expenses | 2,779 | 1,394 | 1,187 | |||||||||
Interest expense | 1,378 | 1,262 | 878 | |||||||||
Total expenses | 4,157 | 2,656 | 2,065 | |||||||||
Loss from write-off of deferred equity offering costs | ( 3,486 | ) | — | — | ||||||||
Loss before income taxes and subsidiary equity earnings | (7,473 | ) | (2,587 | ) | (2,008 | ) | ||||||
Income tax benefit | (2,842 | ) | (805 | ) | (1,157 | ) | ||||||
Loss before subsidiary equity earnings | (4,631 | ) | (1,782 | ) | (851 | ) | ||||||
Subsidiary equity earnings | 4,507 | 4,161 | 2,461 | |||||||||
Net income | $ | (124 | ) | $ | 2,379 | $ | 1,610 | |||||
S-4
Table of Contents
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF COMPREHENSIVE INCOME
2008 | 2007 | 2006 | ||||||||||
In thousands | ||||||||||||
Net income (loss) | $ | (124 | ) | $ | 2,379 | $ | 1,610 | |||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Net unrealized appreciation (depreciation) in available for sale securities, net of deferred taxes of $374,000, ($51,000) and $255,000 | 732 | (99 | ) | 579 | ||||||||
Reclassification adjustment for net gains (losses) realized in net income during the year, net of tax effect of $0, $0 and ($143,000) | — | — | (277 | ) | ||||||||
Other comprehensive income (loss) | 732 | (99 | ) | 302 | ||||||||
Comprehensive income | $ | 608 | $ | 2,280 | $ | 1,912 | ||||||
S-5
Table of Contents
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
2008 | 2007 | 2006 | ||||||||||
In thousands | ||||||||||||
Net cash used in operating activities | $ | (5,135 | ) | $ | (2,055 | ) | $ | (3,013 | ) | |||
Investing Activities: | ||||||||||||
Investments in subsidiaries | (3,082 | ) | (3,000 | ) | (3,000 | ) | ||||||
Other | (43 | ) | (113 | ) | (392 | ) | ||||||
Net cash used in investing activities | (3,125 | ) | (3,113 | ) | (3,392 | ) | ||||||
Financing Activities: | ||||||||||||
Proceeds from notes payable | 6,950 | 5,665 | 8,652 | |||||||||
Net proceeds from issuance of common stock | — | — | 1,355 | |||||||||
Net disbursements for redemption of common stock | — | (100 | ) | (984 | ) | |||||||
Repayment of debt | (1,113 | ) | (677 | ) | (2,320 | ) | ||||||
Proceeds from issuance of preferred stock, net of receivable from related party | 500 | — | — | |||||||||
Dividends received from subsidiaries | 2,366 | — | — | |||||||||
Dividends paid | — | — | (600 | ) | ||||||||
Net cash used in financing activities | 8,703 | 4,888 | 6,103 | |||||||||
Increase (decrease) in cash and cash equivalents | 443 | (280 | ) | (302 | ) | |||||||
Cash and cash equivalents,beginning of period | 10 | 290 | 592 | |||||||||
Cash and cash equivalents,end of period | $ | 453 | $ | 10 | $ | 290 | ||||||
S-6
Table of Contents
Deferred | ||||||||||||||||||||
Ceding | Future | |||||||||||||||||||
Commissions, | Policy | |||||||||||||||||||
Net of | Benefits, | Other | ||||||||||||||||||
Deferred | Losses, | Policy | ||||||||||||||||||
Policy | Claims | Claims and | ||||||||||||||||||
Acquisition | and Loss | Unearned | Benefits | Premium | ||||||||||||||||
Costs | Expenses | Premium | Payable | Revenue | ||||||||||||||||
In thousands | ||||||||||||||||||||
Insurance | $ | 83 | $ | 74,550 | $ | 44,613 | $ | — | $ | 49,220 | ||||||||||
Insurance services | — | — | — | — | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 83 | $ | 74,550 | $ | 44,613 | $ | — | $ | 49,220 | |||||||||||
Benefits, | ||||||||||||||||||||
Claims, | Amortization of | |||||||||||||||||||
Net | Losses and | Deferred Policy | Other | |||||||||||||||||
Investment | Settlement | Acquisition | Operating | Premiums | ||||||||||||||||
Income | Expenses | Costs | Expenses(1) | Written | ||||||||||||||||
Insurance | $ | 2,028 | $ | 28,716 | $ | (7,907 | ) | $ | 21,442 | $ | 45,838 | |||||||||
Insurance services | — | — | — | 10,930 | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 2,028 | $ | 28,716 | $ | (7,907 | ) | $ | 32,372 | $ | 45,838 | ||||||||||
(1) | Other operating expenses are identified by segment based on the direct identification method. |
S-7
Table of Contents
Deferred | Future | |||||||||||||||||||
Policy | Policy | |||||||||||||||||||
Acquisition | Benefits, | Other | ||||||||||||||||||
Costs, Net of | Losses, | Policy | ||||||||||||||||||
Deferred | Claims | Claims and | ||||||||||||||||||
Ceding | and Loss | Unearned | Benefits | Premium | ||||||||||||||||
Commissions | Expenses | Premium | Payable | Revenue | ||||||||||||||||
In thousands | ||||||||||||||||||||
Insurance | $ | 1,477 | $ | 69,881 | $ | 29,160 | $ | — | $ | 24,613 | ||||||||||
Insurance services | — | — | — | — | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 1,477 | $ | 69,881 | $ | 29,160 | $ | — | $ | 24,613 | |||||||||||
Amortization | ||||||||||||||||||||
Benefits, | of | |||||||||||||||||||
Claims, | Deferred | |||||||||||||||||||
Net | Losses and | Policy | Other | |||||||||||||||||
Investment | Settlement | Acquisition | Operating | Premiums | ||||||||||||||||
Income | Expenses | Costs | Expenses | Written | ||||||||||||||||
Insurance | $ | 1,326 | $ | 15,182 | $ | (657 | ) | $ | 6,680 | $ | 30,961 | |||||||||
Insurance services | — | — | — | 8,519 | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 1,326 | $ | 15,182 | $ | (657 | ) | $ | 15,199 | $ | 30,961 | ||||||||||
(1) | Other operating expenses are identified by segment based on the direct identification method. |
S-8
Table of Contents
Deferred | Future | |||||||||||||||||||
Policy | Policy | |||||||||||||||||||
Acquisition | Benefits, | Other | ||||||||||||||||||
Costs, Net of | Losses, | Policy | ||||||||||||||||||
Deferred | Claims | Claims and | ||||||||||||||||||
Ceding | and Loss | Unearned | Benefits | Premium | ||||||||||||||||
Commissions | Expenses | Premium | Payable | Revenue | ||||||||||||||||
In thousands | ||||||||||||||||||||
Insurance | $ | 774 | $ | 65,953 | $ | 15,643 | $ | — | $ | 21,053 | ||||||||||
Insurance services | — | — | — | — | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 774 | $ | 65,953 | $ | 15,643 | $ | — | $ | 21,053 | |||||||||||
Benefits, | ||||||||||||||||||||
Claims, | Amortization of | |||||||||||||||||||
Net | Losses and | Deferred Policy | Other | |||||||||||||||||
Investment | Settlement | Acquisition | Operating | Premiums | ||||||||||||||||
Income | Expenses | Costs | Expenses | Written | ||||||||||||||||
Insurance | $ | 1,321 | $ | 17,839 | $ | 35 | $ | 3,799 | $ | 19,386 | ||||||||||
Insurance services | — | — | — | 9,704 | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 1,321 | $ | 17,839 | $ | 35 | $ | 13,503 | $ | 19,386 | |||||||||||
(1) | Other operating expenses are identified by segment based on the direct identification method. |
S-9
Table of Contents
Assumed | Percentage of | |||||||||||||||||||
Ceded to | From | Amount | ||||||||||||||||||
Gross | Other | Other | Net | Assumed to | ||||||||||||||||
Amount | Companies | Companies | Amount | Net | ||||||||||||||||
In thousands | ||||||||||||||||||||
2008 | $ | 99,039 | $ | 50,850 | $ | 1,031 | $ | 49,220 | 2.1 | % | ||||||||||
2007 | 72,645 | 49,101 | 1,069 | 24,613 | 4.3 | % | ||||||||||||||
2006 | 58,659 | 39,619 | 2,013 | 21,053 | 9.6 | % |
S-10
Table of Contents
Additions | Additions | Deductions | ||||||||||||||||||
Balance, | Charged to | Charged to | from | Balance, | ||||||||||||||||
Beginning of | Costs and | Other | Allowance | End of | ||||||||||||||||
Period | Expense | Accounts | Account | Period | ||||||||||||||||
In thousands | ||||||||||||||||||||
Allowance for doubtful accounts | ||||||||||||||||||||
2008 | $ | 1,000 | $ | 100 | $ | — | $ | — | $ | 1,100 | ||||||||||
2007 | 1,000 | — | — | — | 1,000 | |||||||||||||||
2006 | — | 1,000 | — | — | 1,000 |
S-11
Table of Contents
Deferred | ||||||||||||||||||||
Policy | ||||||||||||||||||||
Acquisition | Reserves | |||||||||||||||||||
Costs, Net of | for Losses | |||||||||||||||||||
Deferred | and Loss | Net | Net | |||||||||||||||||
Ceding | Adjustment | Unearned | Premiums | Investment | ||||||||||||||||
Commissions | Expenses(1)(2) | Premiums(2) | Earned | Income | ||||||||||||||||
In thousands | ||||||||||||||||||||
(a) Property and casualty subsidiary | ||||||||||||||||||||
2008 | $ | (83 | ) | $ | 74,550 | $ | 44,613 | $ | 49,220 | $ | 2,028 | |||||||||
2007 | 1,477 | 69,881 | 29,160 | 24,613 | 1,326 | |||||||||||||||
2006 | 774 | 65,953 | 15,643 | 21,053 | 1,321 |
Loss and | ||||||||||||||||||||
Loss | Loss and | |||||||||||||||||||
Adjustment | Loss | Amortization of | Paid Losses | |||||||||||||||||
Expenses- | Adjustment | Deferred Policy | and Loss | Net | ||||||||||||||||
Current | Expenses- | Acquisition | Adjustment | Premiums | ||||||||||||||||
Year | Prior Years | Expenses | Expenses | Written | ||||||||||||||||
2008 | $ | 27,422 | $ | 1,294 | $ | (7,907 | ) | $ | 18,222 | $ | 45,838 | |||||||||
2007 | 18,642 | (3,460 | ) | (657 | ) | 13,468 | 30,961 | |||||||||||||
2006 | 15,328 | 2,511 | 35 | 10,374 | 19,386 |
(1) | The Company does not apply discounting factors to reserves for losses and loss adjustment expenses. | |
(2) | Reserves for losses and loss adjustment expenses are shown gross of reinsurance recoverables on unpaid losses and loss adjustment expenses of $37.5 million, $43.3 million and $41.1 million as of December 31, 2008, 2007 and 2006, respectively. Unearned premiums are shown gross of ceded unearned premiums of $33.7 million, $15.0 million and $8.3 million as of December 31, 2008, 2007 and 2006, respectively. |
S-12
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
1 | .1 | Form of Underwriting Agreement* | ||
3 | .1 | Amended and Restated Certificate of Incorporation of the Registrant** | ||
3 | .2 | Amended and Restated Bylaws of the Registrant** | ||
3 | .3 | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock** | ||
4 | .3 | Form of Guarantee Insurance Company’s Surplus Notes** | ||
4 | .4 | Form of Registrant’s Subordinated Debentures** | ||
4 | .5 | Form of Registrant’s Warrant to Purchase Common Stock** | ||
5 | .1 | Opinion of Locke Lord Bissell & Liddell LLP* | ||
10 | .1 | Employment Agreement between the Registrant and Steven M. Mariano** | ||
10 | .2 | Offer Letter to Theodore G. Bryant dated November 17, 2006** | ||
10 | .3 | Second Amended and Restated Employment Agreement dated as of July 10, 2009 between the Registrant and Theodore G. Bryant** | ||
10 | .4 | Offer Letter to Timothy J. Ermatinger dated August 1, 2007** | ||
10 | .5 | Employment Agreement between the Registrant and Timothy J. Ermatinger** | ||
10 | .6 | Employment Agreement, dated as of February 11, 2008, between the Registrant and Michael W. Grandstaff** | ||
10 | .7 | 2005 Stock Option Plan** | ||
10 | .8 | Form of Option Award Agreement for 2005 Stock Option Plan** | ||
10 | .9 | 2006 Stock Option Plan** | ||
10 | .10 | Form of Option Award Agreement for 2006 Stock Option Plan** | ||
10 | .11 | 2009 Stock Incentive Plan* | ||
10 | .12 | Form of Option Award Agreement for 2009 Stock Incentive Plan* | ||
10 | .13 | Commercial Loan Agreement, Addendum to Commercial Loan Agreement and Consent in relation to Addendum to Commercial Loan Agreement dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** | ||
10 | .14 | Commercial Promissory Note and Addendum A to Promissory Note dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** | ||
10 | .15 | Commercial Security Agreement and Addendum A to Commercial Security Agreement dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** | ||
10 | .16 | Extension of Security Agreement dated March 30, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc. and Patriot Risk Services, Inc.** | ||
10 | .17 | Stock Pledge Agreement dated March 30, 2006 between Brooke Credit Corporation and Brandywine Insurance Holdings, Inc.** | ||
10 | .18 | Irrevocable Proxy undated by Brandywine Insurance Holdings, Inc. appointing Brooke Credit Corporation** | ||
10 | .19 | Irrevocable Proxy undated by Registrant appointing Brooke Credit Corporation** | ||
10 | .20 | Guaranty and Addendum A to Guaranty dated March 30, 2006 between Brooke Credit Corporation and Steven M. Mariano** | ||
10 | .21 | Amendment to Commercial Loan Agreement (Including Joinder of Additional Borrowers) dated September 27, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .22 | Commercial Promissory Note dated September 27, 2006 among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .23 | Form of Commercial Security Agreement dated September 27, 2006 between Brooke Credit Corporation and SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** |
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
10 | .24 | Form of Extension of Security Agreement dated September 27, 2006 between Brooke Credit Corporation and SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .25 | Second Amendment to Commercial Loan Agreement dated November 16, 2006, among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .26 | Third Amendment to Commercial Loan Agreement dated February 19, 2008, among Brooke Credit Corporation, the Registrant, Brandywine Insurance Holdings, Inc., Patriot Risk Services, SunCoast Capital, Inc., Patriot Risk Management, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .27 | Fourth Amendment to Commercial Loan Agreement dated October 1, 2008, among Aleritas Capital Corporation, the Registrant, Guarantee Insurance Group, Patriot Risk Services, SunCoast Capital, Inc., PRS Group, Inc. and Patriot Risk Management of Florida, Inc.** | ||
10 | .28 | Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-001/2007 between Guarantee Insurance Company and National Indemnity Insurance Company** | ||
10 | .29 | Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-002/2007 between Guarantee Insurance Company and Midwest Employers Casualty Company** | ||
10 | .30 | Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-003/2007 between Guarantee Insurance Company, as Cedent, and Max Re, Ltd., Aspen Insurance UK Limited and Various Underwriters at Lloyds, as Reinsurers** | ||
10 | .31 | Workers’ Compensation Excess of Loss Reinsurance Agreement between Guarantee Insurance Company, as Cedent, and Aspen Insurance UK Limited and Various Underwriters at Lloyds, as Reinsurers** | ||
10 | .32 | Quota Share Reinsurance Agreement GIC-005/2007 between Guarantee Insurance Company and National Indemnity Insurance Company** | ||
10 | .40 | Third Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and Max Bermuda, Ltd., Tokio Millennium Reinsurance Limited, Aspen Insurance UK Limited and Various Underwriters at Lloyd’s London as Reinsurers** | ||
10 | .41 | Purchase and Sale Agreement dated January 1, 2006 between The Tarheel Group, Inc., Tarheel Insurance Management Company and the Registrant** | ||
10 | .42 | Promissory Note dated June 13, 2006 between The Tarheel Group, Inc. and the Registrant** | ||
10 | .43 | Personal Guaranty of Promissory Note dated June 13, 2006 between the Registrant and Steven M. Mariano** | ||
10 | .44 | Contribution Agreement dated April 20, 2007 between Steven M. Mariano and the Registrant** | ||
10 | .45 | Form of Director and Officer Indemnification Agreement** | ||
10 | .46 | Settlement Stipulation and Release dated June 28, 2007 among Foundation Insurance Company, Steven M. Mariano, New Pacific International, Inc. and Peterson, Goldman & Villani, Inc.** | ||
10 | .47 | Stock Pledge Agreement between Brooke Credit Corporation and the Registrant** | ||
10 | .48 | Promissory Note dated June 26, 2008, as amended and restated on June 16, 2009 between the Registrant and Steven M. Mariano** | ||
10 | .49 | Workers’ Compensation Quota Share Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and National Indemnity Company and Swiss Reinsurance America Corporation as Reinsurers** | ||
10 | .50 | Traditional Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and Midwest Employers Casualty Company as Reinsurer** | ||
10 | .51 | Alternative Market Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and National Indemnity Company as Reinsurer** | ||
10 | .52 | Second Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2008, between Guarantee Insurance Company as Cedent and Max Bermuda, Ltd., Aspen Insurance UK Limited and Various Underwriters at Lloyd’s London as Reinsurers** | ||
10 | .53 | Employment Agreement, dated September 29, 2008, between the Registrant and Richard G. Turner** |
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
10 | .54 | Employment Agreement, dated September 29, 2008, between the Registrant and Charles K. Schuver** | ||
10 | .55 | First Amendment to Employment Agreement, dated September 26, 2008, between the Registrant and Steven M. Mariano** | ||
10 | .57 | Amendment No. 1 to the 2005 Stock Option Plan** | ||
10 | .58 | Amendment No. 2 to the 2005 Stock Option Plan** | ||
10 | .59 | Amendment No. 1 to the 2006 Stock Option Plan** | ||
10 | .60 | Amendment No. 2 to the 2006 Stock Option Plan** | ||
10 | .61 | Workers’ Compensation Quota Share Reinsurance Contract, effective December 31, 2008, between Guarantee Insurance Company and Harco National Insurance Company* | ||
10 | .62 | Traditional Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company as cedant and Maiden Re, Max Re, Ullico Casualty and various underwriters at Lloyd’s London as reinsurers | ||
10 | .63 | Alternative Market Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company as cedant and National Fire & Liability and Ullico Casualty as reinsurers | ||
10 | .64 | Second Workers’ Compensation Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company and Aspen Insurance UK Limited, Hannover Re, and certain other reinsurers* | ||
10 | .65 | Workers’ Compensation Catastrophe Excess of Loss Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company as cedant and Max Re Bermuda, Tokio Millennium Re, Aspen Re UK, Hannover Re and various underwriters at Lloyd’s London as reinsurers* | ||
10 | .66 | Traditional Workers’ Compensation Quota Share Reinsurance Contract, effective July 1, 2009, between Guarantee Insurance Company and Swiss Re | ||
10 | .67 | Traditional Workers Compensation Quota Share Reinsurance Contract for Florida, Georgia and New Jersey, between Guarantee Insurance Company as cedant and ULLICO Casualty Company as reinsurer** | ||
10 | .68 | Commercial Loan Agreement dated December 31, 2008 among the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc., SunCoast Capital, Inc. and Ullico Inc.** | ||
10 | .69 | Commercial Security Agreement dated December 31, 2008 among the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc., SunCoast Capital, Inc. and Ullico Inc.** | ||
10 | .70 | Stock Pledge Agreement dated December 31, 2008 among Steven M. Mariano, Steven M. Mariano Revocable Trust, the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc. and Ullico Inc.** | ||
10 | .71 | Irrevocable Proxy dated December 31, 2008 among Steven M. Mariano, Steven M. Mariano Revocable Trust and Ullico Inc.** | ||
10 | .72 | Guaranty dated December 31, 2008 between Steven M. Mariano and Ullico Inc.** | ||
10 | .73 | Intercreditor Agreement dated December 31, 2008 among the Existing Lenders identified therein, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc., SunCoast Capital, Inc., Registrant and Ullico Inc.** | ||
10 | .74 | Promissory Note from Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc. and SunCoast Capital, Inc. to Ullico, Inc., dated December 31, 2008** | ||
10 | .75 | Side Letter Agreement dated December 31, 2008 among Steven M. Mariano, the Registrant and Ullico Inc. | ||
10 | .76 | Post-Closing Letter Agreement dated December 31, 2008 among the Registrant, PRS Group, Inc., Guarantee Insurance Group, Inc., Patriot Risk Services, Inc., Patriot Risk Management of Florida, Inc. and Ullico Inc. | ||
21 | .1 | Subsidiaries of the Registrant** | ||
23 | .1 | Consent of Locke Lord Bissell & Liddell LLP (included as part of its opinion filed as Exhibit 5.1 hereto)* |
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
23 | .2 | Consent of BDO Seidman, LLP | ||
24 | .1 | Power of Attorney** |
* | To be filed by amendment | |
** | Previously filed |