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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 | |||
(Do not check if a smaller reporting company) |
Amount of | ||||||
Registration | ||||||
Fee | ||||||
Proposed Maximum | ||||||
Title of Each Class of | Aggregate | |||||
Securities to be Registered | Offering Price(1)(2) | |||||
Common Stock, par value $0.001 per share | $189,750,000 | $7,457.18(3) | ||||
(1) | Includes amount attributable to shares of common stock issuable upon the (1) 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, $5,875.35 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. |
![PATRIOT](https://capedge.com/proxy/S-1A/0000950137-08-012266/c22948a5s2294800.gif)
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 170 of this prospectus for a description of the underwriters’ compensation. |
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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, SunCoast Capital, Inc. and SunCoast Premium Finance, Inc., 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 “PRS Group” refer solely to PRS Group, Inc., our wholly-owned subsidiary, and references to “PRS” refer collectively to PRS Group and its direct and indirect wholly-owned subsidiaries, including Patriot Risk Services, Inc., Patriot Re International, Inc., Patriot Risk Management of Florida, Inc. and Patriot Insurance Management Company, Inc., unless the context suggests otherwise; |
• | references to “Guarantee Fire & Casualty” and “Madison” refer solely to Madison Insurance Company, a shell property and casualty insurance company domiciled in Georgia 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 Guarantee Fire & Casualty Insurance Company; |
• | 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; |
• | 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. 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; and |
• | “segregated portfolio captive” refers 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. |
• | all amounts assume no exercise of the underwriters’ over-allotment option; |
• | all share numbers assume the automatic conversion of our Series B common stock, par value $.001 per share, into shares of our common stock on a one-for-one basis upon completion of this offering; and |
• | all share amounts (other than the stock options and warrants to be issued upon completion of this offering) have been adjusted to reflect a 1.211846 to 1 stock split to be effected immediately prior to completion of this offering. |
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• | in our insurance segment, we generate underwriting and investment income by providing alternative market risk transfer solutions and traditional workers’ compensation insurance; and | |
• | in our insurance services segment, we generate fee income by providing nurse case management, cost containment and captive management services. |
• | larger and medium-sized employers such as hospitality companies, construction companies, professional employer organizations, clerical and professional temporary staffing companies, industrial companies and car dealerships; |
• | low to medium hazard classes and some higher hazard classes; and | |
• | accounts with annual premiums ranging from $200,000 to $3 million. |
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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. |
• | nurse case management services; | |
• | cost containment services for workers’ compensation claims; and | |
• | captive management services. |
• | Exclusive Focus on Workers’ Compensation Insurance and Related Services. Our operations are focused exclusively on providing alternative market risk management solutions and traditional workers’ compensation insurance and related services. We believe this focus allows us to provide superior |
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products and services to our customers relative to traditional multi-line carriers. For example, we believe that certain of our multi-line competitors that offer workers’ compensation coverage as part of a package policy that includes 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 income we earn from our risk bearing insurance business, we earn consolidated fee income for claim, cost containment and insurance services, including nurse case management, cost containment and captive management services, which we currently provide for the benefit of the segregated portfolio captives and our quota share reinsurer. Because our claim 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 premium-based risk-bearing business relative to our claim and cost containment services business, we will be better able to achieve attractive returns and growth through a range of market cycles than if we only offered premium-based risk-bearing products and insurance services that are materially dependent on prevailing workers’ compensation insurance premium rates. | |
• | Enhanced Traditional Business Product Offerings. In our traditional business, we offer “pay-as-you-go” plans, generally to small employers, 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. This program provides us with current payroll data and gives employers a way in which to purchase workers’ compensation insurance without having to make an upfront premium deposit payment, easing their cash flow and enabling employers to remit their premiums to us through their payroll service provider in an automated fashion. We believe that “pay-as-you-go” plans for small employers provide us with the opportunity to earn more favorable underwriting margins due to several factors: |
• | favorable cash flows afforded under this plan can be more important to smaller employers than a price differential; | |
• | smaller employers are generally less able to obtain premium rate credits and discounts; and | |
• | 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. |
• | Enhanced Alternative Market Product Offering. Although other insurers generally only offer alternative market products to large corporate customers, we offer such products to medium-sized employers as well as larger companies, enabling them to share in their own claims experience and be rewarded for favorable loss experience. We believe that primarily as a result of our efforts to deliver an alternative market workers’ compensation solution to medium-sized employers as well as larger companies, and in response to our “pay-as-you-go” traditional business offering, our gross premiums written on alternative market, traditional business and assumed business grew by 38%, 31% and 54% in 2007, 2006 and 2005, respectively. Our gross premiums written grew by 29% for the six months ended June 30, 2008 compared to the same period of 2007. |
• | Specialized Underwriting Expertise. We select and price our alternative market and traditional policies 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. Our field underwriters are experienced underwriting workers’ compensation insurance. 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 traditional and alternative market 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 six |
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months ended June 30, 2008 and the year ended December 31, 2007, we achieved a net loss ratio of 59.5% and 61.7%, respectively. Our 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. |
• | Proactive Claims Management and Sound Reserving Practices. Guarantee Insurance began writing business under the Patriot umbrella in the first quarter of 2004. As our business has grown, we have demonstrated success in (1) estimating our total liabilities for losses, (2) establishing and maintaining adequate case reserves and (3) 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. Our case management professionals have extensive training and expertise in assisting injured workers to return to work quickly. As of December 31, 2007, approximately 1%, 2%, 5% and 27% of total reported claims for accident years 2004, 2005, 2006 and 2007, respectively, remained open. Final net paid losses and loss adjustment expenses associated with closed claims for these accident years were approximately 17% less than the initial reserves established for them. |
• | Strong Distribution Relationships. We maintain relationships with our network of more than 400 independent, non-exclusive agencies in 19 states by emphasizing personal interaction, offering superior services and maintaining an exclusive focus on workers’ compensation insurance. 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 19 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 the strength of our risk selection, claims management, nurse case management and cost containment services positions us to profitably increase our market share in our existing markets. |
• | Expand into Additional Markets. We are licensed to write workers’ compensation insurance in 26 states and the District of Columbia, and we also hold 4 inactive licenses. For the six months ended June 30, 2008, we wrote traditional and alternative market business in 20 jurisdictions, principally in those jurisdictions that we believe provide the greatest opportunity for near-term profitable growth. For the six months ended June 30, 2008, approximately 80% of our traditional and alternative market business was written in Florida, Missouri, New Jersey, Indiana and Arkansas. We wrote approximately 55% of our direct premiums written in Florida for the six months ended June 30, 2008. With the additional capital from this offering and a favorable A.M. Best rating we hope to obtain after the completion of this offering, we plan to expand our business to other states where we believe we can profitably write business. To do this, we plan to leverage our talented pool of personnel that have prior expertise operating in states in which we do not currently operate. In addition, we may seek to acquire |
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books of business or other insurance companies as we expand in our existing markets and into additional markets. |
• | Expand Claim, Cost Containment and Insurance Services Business. We plan to continue to generate fee income through our insurance services segment by offering nurse case management, cost containment and captive management services to the segregated portfolio captives. We plan to offer these claim, cost containment and insurance services, together with reinsurance intermediary, claims administration and general agency services, to other regional and national insurance companies and self-insured employers. We also plan to increase the amount of fee income we earn by expanding both organically and through strategic acquisitions of claim administrators, general agencies, or preferred provider network organizations. Taking advantage of our hybrid business model, we plan to identify and acquire claim, cost containment and insurance services operations that will create synergies with our traditional and alternative market insurance operations. |
• | 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 Guarantee Fire & Casualty 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 Guarantee Fire & Casualty as described elsewhere in this prospectus, this rating assignment is also conditioned upon regulatory approval of a pooling agreement between Guarantee Insurance and Guarantee Fire & Casualty. 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 Guarantee Fire & Casualty 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 Guarantee Fire & Casualty 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 policyholders and customers through our regional offices in three states, each of which we believe has been staffed to accommodate a certain level of premium growth. We plan to realize economies of scale in our workforce and leverage other scalable infrastructure costs, which will lower our expense ratio as we increase gross premiums written. |
• | 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 and suffer 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 |
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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. |
• | 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 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 six months ended June 30, 2008 and the year ended December 31, 2007, we wrote approximately 70% and 74% of our direct premiums written, respectively, in these four 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. 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. | |
• | 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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1 | Subject to obtaining regulatory approvals, we plan to acquire Guarantee Fire & Casualty 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 | 15,000,000 shares |
Over-allotment shares of common stock offered by us | 2,250,000 shares |
Shares of common stock to be outstanding after the offering | 16,650,875 shares |
Use of proceeds | We estimate that our net proceeds from this offering will be approximately $150.4 million, based on an assumed initial public offering price of $11.00 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 $173.4 million if the underwriters exercise their over-allotment option in full. We intend to contribute approximately $132.0 million to Guarantee Insurance to support its premium writings. As described elsewhere in this prospectus, we have entered into a stock purchase agreement to acquire Guarantee Fire & Casualty, a shell property and casualty insurance company. The stock purchase agreement 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 $10.0 million of the net proceeds of this offering to pay the purchase price for Guarantee Fire & Casualty, to contribute approximately $109.0 million to Guarantee Fire & Casualty to support its premium writings, and to contribute approximately $14.0 million to Guarantee Insurance to support its premium writings. In addition, we plan to use approximately $1.5 million of the net proceeds from the offering to pay off a loan from Mr. Mariano, our Chairman, President and Chief Executive Officer. We expect that the remaining $16.9 million, or $15.9 million if we acquire Guarantee Fire & Casualty, 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 the Aleritas debt and potential acquisitions although we have no current understandings or agreements regarding any such acquisitions (other than Guarantee Fire & Casualty). If the underwriters exercise all or any portion of theirover-allotment option, we intend to use all or a substantial portion of the net proceeds from any such exercise to pay down the balance of our credit facility with Aleritas Capital Corporation, or Aleritas. If the over-allotment option is exercised in full, we will use approximately $13.2 million of the net proceeds to pay off the credit facility with Aleritas and the remaining $9.8 million, or $8.8 million if we acquire Guarantee Fire & Casualty, for general corporate purposes. |
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 |
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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 Nasdaq Global Market symbol | “PRMI” |
• | up to 2,250,000 shares of common stock that may be issued pursuant to the underwriters’ over-allotment option; |
• | 204,207 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2008; |
• | 1,295,000 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; |
• | 700,000 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 |
• | 273,100 additional shares of common stock available for future issuance under our 2008 Stock Incentive Plan. |
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Six Months Ended June 30, | Years Ended December 31, | |||||||||||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | 2004 | 2003(1) | ||||||||||||||||||||||
In thousands, except per share data | ||||||||||||||||||||||||||||
Income Statement Data | ||||||||||||||||||||||||||||
Gross premiums written | $ | 69,732 | $ | 54,029 | $ | 85,810 | $ | 62,372 | $ | 47,576 | $ | 30,911 | $ | — | ||||||||||||||
Ceded premiums written | 40,438 | 37,331 | 54,849 | 42,986 | 23,617 | 22,702 | — | |||||||||||||||||||||
Net premiums written | 29,294 | 16,698 | 30,961 | 19,386 | 23,959 | 8,209 | — | |||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Net premiums earned | 20,104 | 9,988 | 24,613 | 21,053 | 21,336 | 2,948 | — | |||||||||||||||||||||
Insurance services income | 3,008 | 3,058 | 7,027 | 7,175 | 4,369 | 6,429 | 5,952 | |||||||||||||||||||||
Net investment income | 980 | 537 | 1,326 | 1,321 | 1,077 | 233 | 94 | |||||||||||||||||||||
Net realized gains (losses) on investments | 56 | (8 | ) | (5 | ) | (1,346 | ) | (2,298 | ) | (4,632 | ) | 126 | ||||||||||||||||
Total revenues | 24,148 | 13,575 | 32,961 | 28,203 | 24,484 | 4,978 | 6,172 | |||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||
Net losses and loss adjustment expense | 11,956 | 5,991 | 15,182 | 17,839 | 12,022 | 2,616 | — | |||||||||||||||||||||
Net policy acquisition and underwriting expenses | 5,495 | 2,392 | 6,023 | 3,834 | 3,168 | 2,016 | — | |||||||||||||||||||||
Other operating expenses | 4,233 | 4,062 | 8,519 | 9,704 | 6,378 | 4,989 | 7,760 | |||||||||||||||||||||
Interest expense | 725 | 568 | 1,290 | 1,109 | 1,129 | 555 | 148 | |||||||||||||||||||||
Total expenses | 22,409 | 13,013 | 31,014 | 32,486 | 22,697 | 10,176 | 7,908 | |||||||||||||||||||||
Other income | 219 | — | — | 796 | (2) | — | 110 | — | ||||||||||||||||||||
Gain on early extinguishment of debt | — | — | — | 6,586 | (2) | — | — | — | ||||||||||||||||||||
Income (loss) before income taxes | 1,958 | 562 | 1,947 | 3,099 | 1,787 | (5,088 | ) | (1,736 | ) | |||||||||||||||||||
Income tax expense (benefit) | 250 | (899 | ) | (432 | ) | 1,489 | 687 | (751 | ) | — | ||||||||||||||||||
Net income (loss) | $ | 1,708 | $ | 1,461 | $ | 2,379 | $ | 1,610 | $ | 1,100 | $ | (4,337 | ) | $ | (1,736 | ) | ||||||||||||
Earnings Per Share | ||||||||||||||||||||||||||||
Basic | $ | 1.03 | $ | .92 | $ | 1.46 | $ | .96 | $ | .73 | NM | (3) | NM | (3) | ||||||||||||||
Diluted | 1.03 | .92 | 1.45 | .95 | .72 | NM | (3) | NM | (3) | |||||||||||||||||||
Weighted Average Number of Shares Used in the Determination of: | ||||||||||||||||||||||||||||
Basic | 1,649 | 1,588 | 1,626 | 1,687 | 1,516 | NM | (3) | NM | (3) | |||||||||||||||||||
Diluted | 1,660 | 1,598 | 1,637 | 1,694 | 1,525 | NM | (3) | NM | (3) | |||||||||||||||||||
Return on average equity(4) | 55.7 | % | 82.0 | % | 58.5 | % | 107.0 | % | NM | (3) | NM | (3) | NM | (3) | ||||||||||||||
Selected Insurance Ratios(5) | ||||||||||||||||||||||||||||
Net loss ratio | 59.5 | % | 60.0 | % | 61.7 | %(6) | 84.7 | %(6) | 56.3 | % | NM | (3) | NM | (3) | ||||||||||||||
Net expense ratio | 27.3 | 23.9 | 24.5 | 18.2 | 14.8 | NM | (3) | NM | (3) | |||||||||||||||||||
Net combined ratio | 86.8 | % | 83.9 | % | 86.2 | % | 102.9 | % | 71.1 | % | NM | (3) | NM | (3) | ||||||||||||||
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June 30, | As | |||||||
2008 | Adjusted(7) | |||||||
(Unaudited) | ||||||||
In thousands | ||||||||
Balance Sheet Data | ||||||||
Cash and cash equivalents | $ | 4,538 | $ | 153,438 | ||||
Investments | 54,199 | 54,199 | ||||||
Amounts recoverable from reinsurers | 43,670 | 43,670 | ||||||
Premiums receivable | 60,594 | 60,594 | ||||||
Prepaid reinsurance premiums | 31,341 | 31,341 | ||||||
Other assets | 17,543 | 17,543 | ||||||
Total assets | $ | 211,885 | $ | 360,785 | ||||
Reserves for losses and loss adjustment expenses | $ | 72,687 | $ | 72,687 | ||||
Unearned and advanced premium reserves | 54,624 | 54,624 | ||||||
Reinsurance funds withheld and balances payable | 45,559 | 45,559 | ||||||
Debt | 17,689 | 16,189 | ||||||
Other liabilities | 14,501 | 14,501 | ||||||
Total liabilities | 205,060 | �� | 203,560 | |||||
Stockholders’ equity | 6,825 | 157,225 | ||||||
Total liabilities and stockholders’ equity | $ | 211,885 | $ | 360,785 | ||||
(1) | The income statement data for 2003 reflects the results of our insurance services operations. The balance sheet at December 31, 2003 reflects the financial position associated with Guarantee Insurance’s legacy commercial general liability business, which Guarantee Insurance ceased writing in 1983, together with our insurance services operations. |
(2) | In 2006, we 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 is calculated by dividing net income, annualized in the case of periods less than one year, 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. |
(6) | On an accident year basis, our net loss ratios for 2007 and 2006 were 75.7% and 72.8%, respectively. An accident year loss ratio is calculated by dividing net loss and loss adjustment expenses for insured events occurring during a particular year, regardless of when reported, by net earned premiums for that year. See “Business — Reconciliation of Reserves for Losses and Loss Adjustment Expenses.” |
(7) | The As Adjusted balance sheet data as of June 30, 2008 reflects the issuance of 15,000,000 shares of our common stock at the assumed initial public offering price of $11.00 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 estimated 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 the insurance policies we offer; | |
• | restrictions on the way our premium rates are established and the premium rates we may charge; | |
• | 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 our insurance company subsidiaries to pay dividends to Patriot; | |
• | 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 larger public company at companies that prior to the acquisition lacked these controls, procedures and policies; | |
• | 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. |
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• | identify profitable new geographic markets for entry; | |
• | attract and retain qualified personnel for expanded operations; | |
• | 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 industries; | |
• | 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; | |
• | 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 96.8% of the total amount invested to date to fund our company based on an assumed initial offering price to the public of $11.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, but will own only 90.1% 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 June 30, 2008 | ||||||||
Actual | As Adjusted | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Debt Outstanding | ||||||||
Notes payable | $ | 14,504 | $ | 13,004 | ||||
Surplus notes | 1,187 | 1,187 | ||||||
Subordinated debentures | 1,658 | 1,658 | ||||||
Total debt outstanding | 17,349 | 15,849 | ||||||
Stockholders’ equity | ||||||||
Preferred stock, par value $.001 per share, 5,000,000 shares authorized, no shares issued and outstanding, actual or as adjusted. | — | — | ||||||
Series A common stock, par value $.001 per share, 3,000,000 shares authorized, 561,289 shares issued and outstanding, actual; no shares authorized or issued and outstanding, as adjusted(1) | 1 | — | ||||||
Series B common stock, par value $.001 per share, 800,000 shares authorized, 800,000 shares issued and outstanding, actual; 4,000,000 shares authorized, no shares issued and outstanding, as adjusted(2) | 1 | — | ||||||
Common stock, par value $.001 per share, no shares authorized or issued and outstanding, actual; 40,000,000 shares authorized; 16,650,875 shares issued and outstanding, as adjusted(1) | — | 17 | ||||||
Additional paid-in capital | 5,509 | 155,909 | ||||||
Retained earnings | 1,904 | 1,904 | ||||||
Accumulated other comprehensive loss, net of deferred income tax benefit | (590 | ) | (590 | ) | ||||
Total stockholders’ equity | 6,825 | 157,240 | ||||||
Total capitalization | $ | 24,174 | 173,089 | |||||
(1) | On August 27, 2008, we amended our certificate of incorporation to authorize 40,000,000 shares of common stock, par value $.001 per share, at which time all outstanding shares of Series A common stock were reclassified as shares of common stock on a one-for-one basis. |
(2) | On August 27, 2008, we amended our certificate of incorporation to authorize 4,000,000 shares of Series B common stock, par value $.001 per share. At the closing of this offering, all outstanding shares of Series B common stock will be automatically converted into shares of common stock on a one-for-one basis. |
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• | up to 2,250,000 shares of common stock that may be issued pursuant to the underwriters’ over-allotment option; |
• | 204,207 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2008; |
• | 1,295,000 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; |
• | 700,000 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 |
• | 273,100 additional shares available for future issuance under our 2008 Stock Incentive Plan. |
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Assumed initial public offering price per share | $ | 11.00 | ||||||
Net tangible book value per share as of June 30, 2008 | $ | 3.35 | ||||||
Increase in net tangible book value per share attributable to this offering | 6.02 | |||||||
Net tangible book value per share after this offering | 9.37 | |||||||
Dilution per share to new investors in this offering | $ | 1.63 | ||||||
Average | ||||||||||||||||||||
Shares Issued | Total Consideration | Price | ||||||||||||||||||
Number | Percent | Amount | Percent | per Share | ||||||||||||||||
Existing stockholders | 1,650,875 | 9.9 | % | $ | 5,371,899 | 3.2 | % | $ | 3.94 | |||||||||||
New investors | 15,000,000 | 90.1 | $ | 165,000,000 | 96.8 | 11.00 | ||||||||||||||
Total | 16,650,875 | 100.0 | % | $ | 170,371,899 | 100.0 | % | 10.23 | ||||||||||||
• | up to 2,250,000 shares of common stock that may be issued pursuant to the underwriters’ over-allotment option; |
• | 204,207 shares of common stock issuable upon the exercise of options outstanding as of June 20, 2008; |
• | 1,295,000 shares of common stock issuable upon the exercise of stock options we intend to grant to our executive officers and other employees upon completion of this offering, at an exercise price equal to the initial public offering price; |
• | 700,000 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 |
• | 273,100 additional shares available for future issuance under our 2008 Stock Incentive Plan. |
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Six Months Ended | ||||||||||||||||||||||||||||
June 30, | Years Ended December 31, | |||||||||||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | 2004 | 2003(1) | ||||||||||||||||||||||
In thousands, except per share data | ||||||||||||||||||||||||||||
Income Statement Data | ||||||||||||||||||||||||||||
Gross premiums written | $ | 69,732 | $ | 54,029 | $ | 85,810 | $ | 62,372 | $ | 47,576 | $ | 30,911 | $ | — | ||||||||||||||
Ceded premiums written | 40,438 | 37,331 | 54,849 | 42,986 | 23,617 | 22,702 | — | |||||||||||||||||||||
Net premiums written | 29,294 | 16,698 | 30,961 | 19,386 | 23,959 | 8,209 | — | |||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||||
Net premiums earned | 20,104 | 9,988 | 24,613 | 21,053 | 21,336 | 2,948 | — | |||||||||||||||||||||
Insurance services income | 3,008 | 3,058 | 7,027 | 7,175 | 4,369 | 6,429 | 5,952 | |||||||||||||||||||||
Net investment income | 980 | 537 | 1,326 | 1,321 | 1,077 | 233 | 94 | |||||||||||||||||||||
Net realized losses on investments | 56 | (8 | ) | (5 | ) | (1,346 | ) | (2,298 | ) | (4,632 | ) | 126 | ||||||||||||||||
Total revenues | 24,148 | 13,575 | 32,961 | 28,203 | 24,484 | 4,978 | 6,172 | |||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||||
Net losses and loss adjustment expense | 11,956 | 5,991 | 15,182 | 17,839 | 12,022 | 2,616 | — | |||||||||||||||||||||
Net policy acquisition and underwriting expenses | 5,495 | 2,392 | 6,023 | 3,834 | 3,168 | 2,016 | — | |||||||||||||||||||||
Other operating expenses | 4,233 | 4,062 | 8,519 | 9,704 | 6,378 | 4,989 | 7,760 | |||||||||||||||||||||
Interest expense | 725 | 568 | 1,290 | 1,109 | 1,129 | 555 | 148 | |||||||||||||||||||||
Total expenses | 22,409 | 13,013 | 31,014 | 32,486 | 22,697 | 10,176 | 7,908 | |||||||||||||||||||||
Other income | 219 | — | — | 796 | (2) | — | 110 | — | ||||||||||||||||||||
Gain on early extinguishment of debt | — | — | — | 6,586 | (2) | — | — | — | ||||||||||||||||||||
Income (loss) before income taxes | 1,958 | 562 | 1,947 | 3,099 | 1,787 | (5,088 | ) | (1,736 | ) | |||||||||||||||||||
Income tax expense (benefit) | 250 | (899 | ) | (432 | ) | 1,489 | 687 | (751 | ) | — | ||||||||||||||||||
Net income (loss) | $ | 1,708 | $ | 1,461 | $ | 2,379 | $ | 1,610 | $ | 1,100 | $ | (4,337 | ) | $ | (1,736 | ) | ||||||||||||
Earnings Per Share | ||||||||||||||||||||||||||||
Basic | $ | 1.03 | $ | .92 | $ | 1.46 | $ | .96 | $ | .73 | NM | (3) | NM | (3) | ||||||||||||||
Diluted | 1.03 | .92 | 1.45 | .95 | .72 | NM | (3) | NM | (3) | |||||||||||||||||||
Weighted Average Number of Shares Used in the Determination of: | ||||||||||||||||||||||||||||
Basic | 1,649 | 1,588 | 1,626 | 1,687 | 1,516 | NM | (3) | NM | (3) | |||||||||||||||||||
Diluted | 1,660 | 1,598 | 1,637 | 1,694 | 1,525 | NM | (3) | NM | (3) | |||||||||||||||||||
Return on average equity(4) | 55.7 | % | 82.0 | % | 58.5 | % | 107.0 | % | NM | (3) | NM | (3) | NM | (3) | ||||||||||||||
Selected Insurance Ratios(5) | ||||||||||||||||||||||||||||
Net loss ratio | 59.5 | % | 60.0 | % | 61.7 | %(6) | 84.7 | %(6) | 56.3 | % | NM | (3) | NM | (3) | ||||||||||||||
Net expense ratio | 27.3 | 23.9 | 24.5 | 18.2 | 14.8 | NM | (3) | NM | (3) | |||||||||||||||||||
Net combined ratio | 86.8 | % | 83.9 | % | 86.2 | % | 102.9 | % | 71.1 | % | NM | (3) | NM | (3) | ||||||||||||||
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June 30, | December 31, | |||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | 2003(1) | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Balance Sheet Data | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,538 | $ | 4,943 | $ | 17,841 | $ | 20,420 | $ | 3,965 | $ | 2,276 | ||||||||||||
Investments | 54,199 | 56,816 | 32,543 | 20,955 | 16,446 | 17,577 | ||||||||||||||||||
Amounts recoverable from reinsurers | 43,670 | 47,519 | 41,531 | 22,955 | 10,978 | 8,265 | ||||||||||||||||||
Premiums receivable | 60,594 | 36,748 | 19,450 | 21,943 | 19,244 | — | ||||||||||||||||||
Prepaid reinsurance premiums | 31,341 | 14,963 | 7,466 | 4,402 | 14,925 | — | ||||||||||||||||||
Other assets | 17,543 | 14,248 | 11,838 | 9,563 | 8,957 | 5,352 | ||||||||||||||||||
Total assets | $ | 211,885 | $ | 175,237 | $ | 130,669 | $ | 100,238 | $ | 74,515 | $ | 33,470 | ||||||||||||
Reserves for losses and loss adjustment expenses | $ | 72,687 | $ | 69,881 | $ | 65,953 | $ | 39,478 | $ | 19,885 | $ | 13,676 | ||||||||||||
Unearned and advanced premium reserves | 54,624 | 29,160 | 15,643 | 13,214 | 20,185 | — | ||||||||||||||||||
Reinsurance funds withheld and balances payable | 45,559 | 44,073 | 26,787 | 25,195 | 15,697 | 2,685 | ||||||||||||||||||
Debt | 17,689 | 16,907 | 11,741 | 11,995 | 10,379 | 8,934 | ||||||||||||||||||
Other liabilities | 14,501 | 9,780 | 7,851 | 10,040 | 8,324 | 6,558 | ||||||||||||||||||
Total liabilities | 205,060 | 169,801 | 127,975 | 99,922 | 74,470 | 31,853 | ||||||||||||||||||
Stockholders’ equity | 6,825 | 5,436 | 2,694 | 316 | 45 | 1,617 | ||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 211,885 | $ | 175,237 | $ | 130,669 | $ | 100,238 | $ | 74,515 | $ | 33,470 | ||||||||||||
(1) | The income statement data for 2003 reflects the results of our insurance services operations. The balance sheet at December 31, 2003 reflects the financial position associated with Guarantee Insurance’s legacy commercial general liability business, which Guarantee Insurance ceased writing in 1983, together with our insurance services operations. |
(2) | In 2006, we 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 is calculated by dividing net income, annualized in the case of periods less than one year, 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. |
(6) | On an accident year basis, our net loss ratios for 2007 and 2006 were 75.7% and 72.8%, respectively. An accident year loss ratio is calculated by dividing net loss and loss adjustment expenses for insured events occurring during a particular year, regardless of when reported, by net earned premiums for that year. See “Business — Reconciliation of Reserves for Losses and Loss Adjustment Expenses.” |
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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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Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
In thousands | ||||||||
Direct business: | ||||||||
Traditional business | $ | 36,307 | $ | 28,212 | ||||
Alternative market | 32,841 | 25,386 | ||||||
�� | ||||||||
Total direct business | 69,148 | 53,598 | ||||||
Assumed business(1) | 584 | 431 | ||||||
Total | $ | 69,732 | $ | 54,029 | ||||
(1) | Represents premiums assumed as a result of our participation in the NCCI National Workers’ Compensation Insurance Pool. |
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
In thousands | ||||||||
Direct business: | ||||||||
Traditional business | $ | 19,684 | $ | 15,239 | ||||
Alternative market | 9,026 | 1,028 | ||||||
Total direct business | 28,710 | 16,267 | ||||||
Assumed business | 584 | 431 | ||||||
Total | $ | 29,294 | $ | 16,698 | ||||
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Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Dollar amounts in thousands | ||||||||
Direct and assumed business: | ||||||||
Gross policy acquisition and underwriting expenses | $ | 14,144 | $ | 9,983 | ||||
Gross premiums earned | 43,039 | 32,486 | ||||||
Gross policy acquisition and underwriting expense ratio | 32.9 | % | 30.7 | % | ||||
Alternative market business quota share reinsurance: | ||||||||
Ceding commissions | 4,868 | 5,164 | ||||||
Ceded premiums earned | 12,288 | 13,554 | ||||||
Effective ceding commission rate | 39.6 | % | 38.1 | % | ||||
Traditional business quota share reinsurance: | ||||||||
Ceding commissions | 3,781 | 2,427 | ||||||
Ceded premiums earned | 10,664 | 6,926 | ||||||
Effective ceding commission rate | 35.5 | % | 35.0 | % | ||||
Excess of loss reinsurance ceded premiums earned | (17 | ) | 2,018 | |||||
Net business: | ||||||||
Net policy acquisition and underwriting expenses | 5,495 | 2,392 | ||||||
Net premiums earned | 20,104 | 9,988 | ||||||
Net policy acquisition and underwriting expense ratio | 27.3 | % | 23.9 | % | ||||
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2007 | 2006 | |||||||
In thousands | ||||||||
Direct business: | ||||||||
Traditional business | $ | 50,599 | $ | 26,636 | ||||
Alternative market | 34,316 | 33,921 | ||||||
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 business quota share reinsurance: | ||||||||
Ceding commissions | 10,800 | 13,013 | ||||||
Ceded premiums earned | 28,063 | 32,329 | ||||||
Effective ceding commission rate | 38.5 | % | 40.3 | % | ||||
Traditional business quota share reinsurance: | ||||||||
Ceding commissions | 5,821 | 1,775 | ||||||
Ceded premiums earned | 16,526 | 5,062 | ||||||
Effective ceding commission rate | 35.2 | % | 35.1 | % | ||||
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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2006 | 2005 | |||||||
In thousands | ||||||||
Direct business: | ||||||||
Traditional business | $ | 26,636 | $ | 19,525 | ||||
Alternative market | 33,921 | 26,541 | ||||||
Total direct business | 60,557 | 46,066 | ||||||
Assumed business(1) | 1,815 | 1,510 | ||||||
Total | $ | 62,372 | $ | 47,576 | ||||
(1) | Represents premiums assumed as a result of our participation in the NCCI National Workers’ Compensation Insurance Pool. |
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Six Months | ||||||||||||||||||||
Ended June 30, | Years Ended December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
In thousands | ||||||||||||||||||||
Insurance Segment | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Premiums earned | $ | 20,104 | $ | 9,988 | $ | 24,613 | $ | 21,053 | $ | 21,336 | ||||||||||
Investment income, net | 980 | 537 | 1,326 | 1,321 | 1,077 | |||||||||||||||
Net realized gains (losses) on investments | 56 | (8 | ) | (5 | ) | 393 | (1,348 | ) | ||||||||||||
Total revenues | $ | 21,140 | $ | 10,517 | $ | 25,934 | $ | 22,767 | $ | 21,065 | ||||||||||
Pre-tax net income (loss) | $ | 1,083 | $ | 432 | $ | 431 | $ | (1,939 | ) | $ | 3,692 | |||||||||
Income tax expense (benefit) | (51 | ) | 958 | 951 | (689 | ) | 1,198 | |||||||||||||
Net income | $ | 1,134 | $ | (526 | ) | $ | (520 | ) | $ | (1,250 | ) | $ | 2,494 | |||||||
Insurance Services Segment | ||||||||||||||||||||
Revenues — insurance services income | $ | 5,833 | $ | 4,760 | $ | 11,325 | $ | 10,208 | $ | 6,552 | ||||||||||
Pre-tax net income | $ | 2,078 | $ | 1,274 | $ | 4,201 | $ | 3,764 | $ | 2,358 | ||||||||||
Income tax expense (benefit) | 710 | (1,478 | ) | (481 | ) | 1,744 | 938 | |||||||||||||
Net income | $ | 1,368 | $ | 2,752 | $ | 4,682 | $ | 2,020 | $ | 1,420 | ||||||||||
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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; |
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• | Steven M. Mariano ceases to directly or indirectly own 51% or more of the ownershipand/or profit interest in Patriot or 51% or more of the voting control of Patriot; | |
• | transfer of direct or indirect ownership of the other borrowers; | |
• | Guarantee Insurance becomes subject to any regulatory supervision, control or rehabilitation, fails to meet certain risk based capital ratios, or has any certificate of authority suspended or revoked; | |
• | material impairment of the value of collateral; | |
• | deviation by Guarantee Insurance from certain underwriting guidelines without the prior written consent of Aleritas; | |
• | 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 Aleritas; | |
• | Guarantee Insurance fails to perform its business obligations under material contracts; and | |
• | another creditor of a borrower attempts to collect any debt any borrower owes through a court proceeding. |
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Interest | Principal | |||||||||||||||
Rate at | and | |||||||||||||||
Year of | Interest Rate | June 30, | Accrued | |||||||||||||
Issuance | Description | Years Due | Terms | 2008 | Interest | |||||||||||
In thousands: | ||||||||||||||||
2006/2007 | Note payable to Aleritas Capital Corporation | 2008-2016 | Prime plus 4.5% | 9.5 | % | $ | 13,055 | |||||||||
2008 | Note payable to Steven Mariano | 2008 | Prime plus 3.0% | 8.0 | % | 1,500 | ||||||||||
2004 | Surplus notes payable | 2009 | 3.0% | 3.0 | % | 1,323 | ||||||||||
2005 | Subordinated debentures | 2008 | 3.0% | 3.0 | % | 1,811 | ||||||||||
$ | 17,689 | |||||||||||||||
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
In thousands | ||||||||
Net income | $ | 1,708 | $ | 1,461 | ||||
Non-cash decreases (increases) in net income | 205 | (1,685 | ) | |||||
Changes in balances generally reflecting growth in net premiums written(1) | (13,794 | ) | (2,042 | ) | ||||
Changes in balances generally reflecting claim payment patterns(2) | 6,655 | (719 | ) | |||||
Other non cash items(3) | 2,170 | 2,449 | ||||||
$ | (3,056 | ) | $ | (536 | ) | |||
(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 other assets and accounts payable and accrued expenses |
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2007 | 2006 | |||||||
In thousands | ||||||||
Net income | $ | 2,379 | $ | 1,610 | ||||
Changes in balances typically reflecting growth in net premiums written(1) | 6,008 | 3,450 | ||||||
Changes in balances typically reflecting claim payment patterns(2) | (2,060 | ) | 7,899 | |||||
Non-cash income derived from early extinguishment of debt and related other income | — | (7,382 | ) | |||||
Non-cash charges related to net realized investment losses | — | 1,346 | ||||||
Other non cash items(3) | 800 | (1,934 | ) | |||||
$ | 7,127 | $ | 4,989 | |||||
(1) | Includes premiums receivable, unearned and advanced premium reserves, reinsurance funds withheld and balances payable and prepaid reinsurance premiums | |
(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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2006 | 2005 | |||||||
In thousands | ||||||||
Net income | $ | 1,610 | $ | 1,100 | ||||
Changes in balances generally reflecting growth in net premiums written(1) | 3,450 | 10,351 | ||||||
Changes in balances generally reflecting claim payment patterns(2) | 7,899 | 7,618 | ||||||
Non-cash income derived from early extinguishment of debt and related other income | (7,382 | ) | — | |||||
Non-cash charges related to net realized investment losses | 1,346 | 2,297 | ||||||
Other non cash items(3) | (1,934 | ) | 1,363 | |||||
$ | 4,989 | $ | 22,729 | |||||
(1) | Includes premiums receivable, unearned and advanced premium reserves, reinsurance funds withheld and balances payable and prepaid reinsurance premiums | |
(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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Carrying | Percentage of | |||||||
Value | Portfolio | |||||||
In thousands | ||||||||
Debt securities available for sale: | ||||||||
U.S. government securities | $ | 4,726 | 8.0 | % | ||||
U.S. government agencies | 977 | 1.7 | ||||||
Asset-backed and mortgage-backed securities | 15,358 | 26.1 | ||||||
State and political subdivisions | 22,133 | 37.7 | % | |||||
Corporate securities | 9,882 | 16.8 | ||||||
Total fixed maturity securities | 53,076 | 90.4 | ||||||
Equity securities available for sale | 488 | 0.8 | ||||||
Short-term investments | 382 | 0.7 | ||||||
Real estate held for the production of income | 253 | 0.4 | ||||||
Cash and cash equivalents | 4,538 | 7.7 | ||||||
Total investments, including cash and cash equivalents | $ | 58,737 | 100.0 | % | ||||
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• | 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 its operations or earnings; | |
• | Our intent and ability to keep the security for a sufficient time period for it to recover its value; | |
• | Any downgrades of the security by a rating agency; and | |
• | Any reduction or elimination of dividends, or nonpayment of scheduled interest payments. |
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 |
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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 | $ | 4,726 | $ | 48,350 | $ | — | $ | 53,076 | ||||||||
Equity securities | 488 | — | — | 488 | ||||||||||||
$ | 5,214 | $ | 48,350 | $ | — | $ | 53,564 | |||||||||
Payment Due by Period | ||||||||||||||||||||
Less Than | More Than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Reserves for losses and loss adjustment expenses(1) | $ | 69,881 | $ | 27,952 | $ | 24,458 | $ | 13,976 | $ | 3,495 | ||||||||||
Notes payable(2) | 23,882 | 2,987 | 6,080 | 5,868 | 8,947 | |||||||||||||||
Surplus notes payable(2) | 1,443 | — | 1,443 | — | — | |||||||||||||||
Subordinated debentures(2)(3) | 1,961 | 1,961 | — | — | — | |||||||||||||||
Non-cancelable operating leases | 2,561 | 997 | 1,564 | — | — | |||||||||||||||
Other obligations | 330 | 180 | 150 | |||||||||||||||||
$ | 100,058 | $ | 34,077 | $ | 33,695 | $ | 19,844 | $ | 12,442 | |||||||||||
(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. |
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See “Risk Factors — Risks Related to Our Business — 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” 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, 2007 associated with these obligations. The principal balance and accrued interest on our notes payable at December 31, 2007 was $13.6 million. The interest rate on our notes payable to Aleritas is prime plus 4.5% (11.75% at December 31, 2007 as utilized in the commitment table above) and may change on a daily basis. Because of a reduction in the prime rate, the interest rate on our notes payable to Aleritas was 9.5% at June 30, 2008. Payments on our notes payable include a guaranty fee and do not contemplate prepayment. However, pursuant to the credit agreement and amendments thereto, notes payable may be prepaid, subject to a prepayment penalty equal to 6% if prepayment is made on or before March 29, 2009. There is no prepayment premium if prepayment is made after March 30, 2009. The principal and accrued interest on our surplus notes payable at December 31, 2007 was $1.4 million. The principal and accrued interest on our subordinated debentures at December 31, 2007 was $2.0 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, at our option, generally for an additional term of three years. Certain of the subordinated debentures are subject to renewal, at our option, 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 | $ | 52,013 | $ | (3,675 | ) | $ | (2,426 | ) | ||||
100 basis point increase | 53,828 | (1,860 | ) | (1,228 | ) | |||||||
No change | 55,688 | — | — | |||||||||
100 basis point decrease | 57,554 | 1,866 | 1,232 | |||||||||
200 basis point decrease | 59,441 | 3,753 | 2,477 |
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• | Exclusive Focus on Workers’ Compensation Insurance and Related Services. Our operations are focused exclusively on providing alternative market risk management solutions and traditional workers’ compensation insurance and related services. We believe this focus allows us to provide superior products and services to our customers relative to traditional multi-line carriers. For example, we believe that certain of our multi-line competitors that offer workers’ compensation coverage as part of a package policy that includes 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 income we earn from our risk bearing insurance business, we earn consolidated fee income for claim, cost containment and insurance services, including nurse case management, cost containment and captive management services, which we currently provide for the benefit of the segregated portfolio captives and our quota share reinsurer. Because our claim 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 premium-based risk-bearing business relative to our claim and cost containment services business, we will be better able to achieve attractive returns and growth through a range of market cycles than if we only offered premium-based risk-bearing products and insurance services that are materially dependent on prevailing workers’ compensation insurance premium rates. | |
• | Enhanced Traditional Business Product Offerings. In our traditional business, we offer “pay-as-you-go” plans, generally to small employers, 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. This program provides us with current payroll data and gives employers a way in which to purchase workers’ compensation insurance without having to make an upfront premium deposit payment, easing their cash flow and enabling employers to remit their premiums to us through their payroll service provider in an automated fashion. We believe that “pay-as-you-go” plans for small employers provide us with the opportunity to earn more favorable underwriting margins due to several factors: |
• | favorable cash flows afforded under this plan can be more important to smaller employers than a price differential; | |
• | smaller employers are generally less able to obtain premium rate credits and discounts; and | |
• | 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. |
• | Enhanced Alternative Market Product Offering. Although other insurers generally only offer alternative market products to large corporate customers, we offer such products to medium-sized employers as well as larger companies, enabling them to share in their own claims experience and be rewarded for favorable loss experience. We believe that primarily as a result of our efforts to deliver an alternative market workers’ compensation solution to medium-sized employers as well as larger companies, and in response to our “pay-as-you-go” traditional business offering, our gross premiums written on alternative market, traditional business and assumed business grew by 38%, 31% and 54% in 2007, 2006 and 2005, respectively. Our gross premiums written grew by 29% for the six months ended June 30, 2008 compared to the same period of 2007. |
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• | Specialized Underwriting Expertise. We select and price our alternative market and traditional policies 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. Our field underwriters are experienced underwriting workers’ compensation insurance. 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 traditional and alternative market 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 six months ended June 30, 2008 and the year ended December 31, 2007, we achieved a net loss ratio of 59.5% and 61.7%, respectively. Our 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. |
• | Proactive Claims Management and Sound Reserving Practices. Guarantee Insurance began writing business under the Patriot umbrella in the first quarter of 2004. As our business has grown, we have demonstrated success in (1) estimating our total liabilities for losses, (2) establishing and maintaining adequate case reserves and (3) 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. Our case management professionals have extensive training and expertise in assisting injured workers to return to work quickly. As of December 31, 2007, approximately 1%, 2%, 5% and 27% of total reported claims for accident years 2004, 2005, 2006 and 2007, respectively, remained open. Final net paid losses and loss adjustment expenses associated with closed claims for these accident years were approximately 17% less than the initial reserves established for them. |
• | Strong Distribution Relationships. We maintain relationships with our network of more than 400 independent, non-exclusive agencies in 19 states by emphasizing personal interaction, offering superior services and maintaining an exclusive focus on workers’ compensation insurance. 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 19 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 the strength of our risk selection, claims management, nurse case management and cost containment services positions us to profitably increase our market share in our existing markets. |
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• | Expand into Additional Markets. We are licensed to write workers’ compensation insurance in 26 states and the District of Columbia, and we also hold 4 inactive licenses. For the six months ended June 30, 2008, we wrote traditional and alternative market business in 20 jurisdictions, principally in those jurisdictions that we believe provide the greatest opportunity for near-term profitable growth. For the six months ended June 30, 2008, approximately 80% of our traditional and alternative market business was written in Florida, Missouri, New Jersey, Indiana and Arkansas. We wrote approximately 55% of our direct premiums written in Florida for the six months ended June 30, 2008. With the additional capital from this offering and a favorable A.M. Best rating we hope to obtain after the completion of this offering, we plan to expand our business to other states where we believe we can profitably write business. To do this, we plan to leverage our talented pool of personnel that have prior expertise operating in states in which we do not currently operate. In addition, we may seek to acquire books of business or other insurance companies as we expand in our existing markets and into additional markets. |
• | Expand Claim, Cost Containment and Insurance Services Business. We plan to continue to generate fee income through our insurance services segment by offering nurse case management, cost containment and captive management services to the segregated portfolio captives. We plan to offer these claim, cost containment and insurance services, together with reinsurance intermediary, claims administration and general agency services, to other regional and national insurance companies and self-insured employers. We also plan to increase the amount of fee income we earn by expanding both organically and through strategic acquisitions of claim administrators, general agencies, or preferred provider network organizations. Taking advantage of our hybrid business model, we plan to identify and acquire claim, cost containment and insurance services operations that will create synergies with our traditional and alternative market insurance operations. |
• | Obtain a Favorable Rating from A.M. Best. We have been informed by A.M. Best that after the 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 Guarantee Fire & Casualty 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 Guarantee Fire & Casualty as described elsewhere in this prospectus, this prospective rating is also conditioned upon regulatory approval of a pooling agreement between Guarantee Insurance and Guarantee Fire & Casualty. 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 Guarantee Fire & Casualty 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 Guarantee Fire & Casualty 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 policyholders and customers through our regional offices in three states, each of which we believe has been staffed to accommodate a certain level of premium growth. We plan to realize economies of scale in our workforce and leverage other scalable infrastructure costs, which will lower our expense ratio as we increase gross premiums written. |
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• | Insurance Segment. In our insurance segment, Guarantee Insurance writes workers’ compensation policies for small to mid-sized employers, as well as larger companies generally with annual premiums of less than $3 million. We refer to business that we write for employers with annual premiums generally below $250,000 in which Guarantee Insurance bears substantially all of the underwriting risk (subject to reinsurance arrangements) as our traditional business. For employers with larger annual premiums, we evaluate whether the risk is appropriate for our traditional business or our alternative market business. In the alternative market, Guarantee Insurance writes policies under which the policyholder or another party bears a substantial portion of the underwriting risk through a segregated portfolio captive. This business also includes other arrangements through which we share underwriting risk with our policyholders, such as a large deductible policy or a retrospectively rated policy. Our alternative market programs allow policyholders to share in their own claims experience. |
• | Insurance Services Segment. In our insurance services segment, we generate fee income related to Guarantee Insurance’s premium and risk retention levels by providing nurse case management, cost containment and captive management services to Guarantee Insurance, for its benefit and for the benefit of the segregated portfolio captives and our quota share reinsurer. |
• | low to medium hazard classes; and | |
• | accounts with annual premiums below $250,000. |
• | larger and medium-sized employers such as hospitality companies, construction companies, professional employer organizations, clerical and professional temporary staffing companies, industrial companies and car dealerships; |
• | low to medium hazard classes and some higher hazard classes; and |
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• | accounts with annual premiums ranging from $200,000 to $3 million. |
• | Guaranteed cost plans. Our basic 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 six months ended June 30, 2008 and the year ended December 31, 2007, approximately 73% and 69% 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, which we refer to as pay-as-you-go plans. Pay-as-you-go plans are a 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 six months ended June 30, 2008 and the year ended |
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December 31, 2007, approximately 23% and 28% 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, 18 months after policy expiration. For the six months ended June 30, 2008 and the year ended December 31, 2007, approximately 4% and 2% of our direct premiums written on traditional business were derived from policyholder dividend plans, respectively. |
• | Segregated portfolio captive insurance plans. We offer a segregated portfolio captive plan to medium-sized and large employers in a broad array of industries, including hospitality companies, construction companies, professional employer organizations, clerical and professional temporary staffing companies, industrial companies and car dealerships, using offshore and onshore 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 formation. Our approach utilizes standardized agreements and processes that allow employers with annual premiums as low as $200,000 to participate. With our captive insurance plan, 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, its manager and insurance regulators in the jurisdiction where the captive is domiciled. These segregated portfolio cells may be controlled by policyholders, parties related to policyholders, insurance agencies or others. |
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![BAR CHART](https://capedge.com/proxy/S-1A/0000950137-08-012266/c22948a5s2294855.gif)
* | 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. |
• | 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 incurred and paid during the policy period, subject to a minimum and maximum premium. These policies are typically subject to annual adjustment until claims are closed. Unlike policyholder dividend plans in our traditional business, 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 in excess of $100,000. For the six months ended June 30, 2008 and the year ended December 31, 2007, approximately 4% and 6% of our direct premiums written were derived from retrospectively rated policies, respectively. | |
• | Large deductible plans. In 2008, we began offering large deductible plans in our alternative market business. Under these plans, Guarantee Insurance generally receives a lower premium than a guaranteed cost, pay-as-you-go or policyholder dividend 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. We expect the per-occurrence deductibles on these plans to 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 the below-the-deductible portion of the claim and bill the policyholder for reimbursement. These types of programs require substantial collateral from the policyholder based upon its individual loss profile and the loss development factors in the states where it is insured. None of our direct premiums written on alternative market business |
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were derived from large deductible plans in 2007. For the six months ended June 30, 2008 approximately 9% of our direct premiums written on alternative market business were derived from large deductible plans. |
Six Months | ||||||||||||||||
Ended | ||||||||||||||||
June 30, | Year Ended December 31, | |||||||||||||||
2008 | 2007 | 2006 | 2005 | |||||||||||||
Gross premiums written: | ||||||||||||||||
Direct business: | ||||||||||||||||
Traditional business | $ | 36,307 | $ | 50,599 | $ | 26,636 | $ | 19,525 | ||||||||
Alternative market | 32,841 | 34,316 | 33,921 | 26,541 | ||||||||||||
Total direct business | 69,148 | 84,915 | 60,557 | 46,066 | ||||||||||||
Assumed business(1) | 584 | 895 | 1,815 | 1,510 | ||||||||||||
Total | $ | 69,732 | $ | 85,810 | $ | 62,372 | $ | 47,576 | ||||||||
Net premiums earned: | ||||||||||||||||
Direct business: | ||||||||||||||||
Traditional business | $ | 14,129 | $ | 20,490 | $ | 16,584 | $ | 16,090 | ||||||||
Alternative market | 5,397 | 3,054 | 2,852 | 4,052 | ||||||||||||
Total direct business | 19,526 | 23,544 | 19,436 | 20,142 | ||||||||||||
Assumed business(1) | 578 | 1,069 | 1,617 | 1,194 | ||||||||||||
Total | $ | 20,104 | $ | 24,613 | $ | 21,053 | $ | 21,336 | ||||||||
(1) | Represents premiums assumed as a result of our participation in the NCCI National Workers’ Compensation Insurance Pool. |
Six Months Ended June 30, 2008 | ||||||||||||||||||||||||
Traditional Business | Alternative Market Business | Total | ||||||||||||||||||||||
Premium | Percentage | Premium | Percentage | Premium | Percentage | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Florida | $ | 11,491 | 31.6 | % | $ | 26,757 | 81.5 | % | $ | 38,248 | 55.3 | % | ||||||||||||
Missouri | 5,063 | 13.9 | 220 | 0.7 | 5,283 | 7.6 | ||||||||||||||||||
New Jersey | 3,989 | 11.0 | 1,075 | 3.3 | 5,064 | 7.3 | ||||||||||||||||||
Indiana | 3,162 | 8.7 | 203 | 0.6 | 3,365 | 4.9 | ||||||||||||||||||
Arkansas | 2,852 | 7.9 | 414 | 1.3 | 3,267 | 4.7 | ||||||||||||||||||
Georgia | 1,471 | 4.1 | 1,310 | 4.0 | 2,780 | 4.0 | ||||||||||||||||||
S. Carolina(1) | 1,730 | 4.8 | 378 | 1.2 | 2,108 | 3.0 | ||||||||||||||||||
New York | 1,237 | 3.4 | 687 | 2.1 | 1,924 | 2.8 | ||||||||||||||||||
Louisiana | 771 | 2.1 | 693 | 2.1 | 1,464 | 2.1 | ||||||||||||||||||
Alabama | 479 | 1.3 | 791 | 2.4 | 1,270 | 1.8 | ||||||||||||||||||
New Mexico | 1,027 | 2.8 | 25 | 0.1 | 1,052 | 1.5 | ||||||||||||||||||
Other States | 3,035 | 8.4 | 289 | 0.9 | 3,324 | 4.8 | ||||||||||||||||||
Total | $ | 36,307 | 100.0 | % | $ | 32,841 | 100.0 | % | $ | 69,148 | 100.0 | % | ||||||||||||
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(1) | Guarantee Insurance is not currently writing new business in South Carolina. See — “Business — Regulation — State Insurance Regulation.” |
Year Ended December 31, 2007 | ||||||||||||||||||||||||
Traditional Business | Alternative Market Business | Total | ||||||||||||||||||||||
Premium | Percentage | Premium | Percentage | Premium | Percentage | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Florida | $ | 20,788 | 41.1 | % | $ | 28,906 | 84.2 | % | $ | 49,694 | 58.5 | % | ||||||||||||
Missouri | 8,596 | 17.0 | 726 | 2.1 | 9,322 | 11.0 | ||||||||||||||||||
Indiana | 5,820 | 11.5 | 46 | 0.1 | 5,866 | 6.9 | ||||||||||||||||||
Arkansas(1) | 5,390 | 10.7 | (23 | ) | (0.1 | ) | 5,367 | 6.3 | ||||||||||||||||
New Jersey | 2,391 | 4.7 | 1,230 | 3.6 | 3,621 | 4.3 | ||||||||||||||||||
New York | 1,775 | 3.5 | 1,568 | 4.6 | 3,343 | 3.9 | ||||||||||||||||||
Georgia | 1,936 | 3.8 | 545 | 1.6 | 2,481 | 2.9 | ||||||||||||||||||
New Mexico | 1,586 | 3.1 | 110 | 0.3 | 1,696 | 2.0 | ||||||||||||||||||
Oklahoma | 504 | 1.0 | 257 | 0.7 | 761 | 0.9 | ||||||||||||||||||
Other States | 1,813 | 3.6 | 951 | 2.9 | 2,764 | 3.3 | ||||||||||||||||||
Total | $ | 50,599 | 100.0 | % | $ | 34,316 | 100.0 | % | $ | 84,915 | 100.0 | % | ||||||||||||
(1) | The negative premium on Arkansas reflects the return of premium to a policyholder as a result of a premium audit. |
Year Ended December 31, 2006 | ||||||||||||||||||||||||
Traditional Business | Alternative Market Business | Total | ||||||||||||||||||||||
Premium | Percentage | Premium | Percentage | Premium | Percentage | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Florida | $ | 7,116 | 26.7 | % | $ | 27,021 | 79.7 | % | $ | 34,137 | 56.4 | % | ||||||||||||
Missouri | 7,327 | 27.5 | 583 | 1.7 | 7,910 | 13.1 | ||||||||||||||||||
Indiana | 4,977 | 18.7 | 1 | 0.0 | 4,978 | 8.2 | ||||||||||||||||||
Arkansas | 4,460 | 16.7 | — | 0.0 | 4,460 | 7.4 | ||||||||||||||||||
Georgia | 463 | 1.7 | 1,696 | 5.0 | 2,159 | 3.6 | ||||||||||||||||||
New York | 983 | 3.7 | 296 | 0.9 | 1,279 | 2.1 | ||||||||||||||||||
New Jersey | 247 | 0.9 | 545 | 1.6 | 792 | 1.3 | ||||||||||||||||||
Oklahoma | 89 | 0.3 | 585 | 1.7 | 674 | 1.1 | ||||||||||||||||||
Virginia | 147 | 0.6 | 487 | 1.4 | 634 | 1.0 | ||||||||||||||||||
Other States | 860 | 3.2 | 2,674 | 7.9 | 3,534 | 5.8 | ||||||||||||||||||
Total | $ | 26,669 | 100.0 | % | $ | 33,888 | 100.0 | % | $ | 60,557 | 100.0 | % | ||||||||||||
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• | Coverage: Immediate documentation of confirmation or analysis 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, employer and medical provider. We find that using a team approach of having both the adjuster and nurse make these contacts and plan the appropriate medical treatment helps restore health to the injured worker as soon as possible. |
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• | Investigation: Within 14 days of receipt of a claim, a strategy to resolve the claim, including identification of appropriate medical treatment and indemnity benefits to be paid, is developed. | |
• | Recovery/Cost Offsets: Effective recognition, investigation and pursuit of recovery and cost offsets. Recoveries can be for a third-party claim, while some states (e.g., South Carolina and Georgia) allow recoveries for second injury fund claims, if accepted. In some jurisdictions, such as Florida, where the claimant may 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: Aggressive management of the medical care and treatment of the injured worker, utilizing a wide variety of techniques designed to return the injured worker to work as quickly as possible. The most successful technique in returning injured workers back to work as soon as possible is the ongoing communication with the injured worker, medical provider and employer. Consistent contact with the medical provider and requesting light duty restrictions as soon as feasible 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 also stress to the employer that a working employee is more beneficial to the employer’s bottom line. Our nurses, adjusters and loss control specialists can often identify suitable light duty work at most employers’ locations. Obtaining an employer’s cooperation to identify suitable jobs and assist in returning employees back to work promptly ultimately reduces the overall expenses of a claim. | |
• | Negotiation/Disposition: Timely claims disposition based on sound reasoning and good communications with the parties involved 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 that our best practices of claims handling are met. | |
• | Data Quality: Clear understanding of the importance of data quality, reflected through prompt, accurate and thorough completion of data elements, 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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As of December 31, 2007 | ||||||||||||
Industry | ||||||||||||
Average | ||||||||||||
Open | Open | |||||||||||
Claims as a | Claims as a | |||||||||||
Number of | Percent of | Percent of | ||||||||||
Open | Reported | Reported | ||||||||||
Accident Year | Claims | Claims | Claims(1) | |||||||||
2007 | 1,274 | 27.2 | % | 29.0 | % | |||||||
2006 | 235 | 5.1 | % | 9.7 | % | |||||||
2005 | 68 | 1.8 | % | 5.0 | % | |||||||
2004 | 7 | 0.8 | % | 2.9 | % |
(1) | Source: Highline Data, an affiliate of The National Underwriter Company and a provider of insurance industry financial performance data. |
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• | Nurse Case Management. PRS provides nurse case management services for the benefit of Guarantee Insurance, the segregated portfolio captives and our quota share reinsurer. Our 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, Guarantee Insurance claims are assigned to a nurse case manager. Our 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 from claim filing to assess and assist in the early-intervention process. 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 Guarantee Insurance adjuster work together to achieve the overall goal of helping the injured employee return to work and closing of 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 six months ended June 30, 2008 and the year ended December 31, 2007, fees earned by PRS for nurse case management services represented approximately 40% and 29% of total unconsolidated PRS insurance services income, respectively. |
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• | Cost Containment Services. PRS provides cost containment services for the benefit of Guarantee Insurance, the segregated portfolio captives and our quota share reinsurer. 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 savings in medical costs. For the six months ended June 30, 2008 and the year ended December 31, 2007, PRS cost containment activities reduced medical bills by an average of 50% and 45%, resulting in a total savings in medical costs of $8.2 million and $10.6 million, respectively. PRS provides these bill review services on a percentage of savings basis. For the six months ended June 30, 2008 and the year ended December 31, 2007, fees earned by PRS for cost containment services represented approximately 42% and 34% of total unconsolidated PRS insurance services income, respectively. | |
• | Captive Management Services. PRS provides captive management services, which have historically included general agency and captive administration services, including accounting and regulatory reporting, associated with segregated portfolio captive cells. As consideration for providing general agency services for alternative market business, Guarantee Insurance paid PRS general agency commission compensation, a portion of which was retained by PRS and a portion of which was paid by PRS as commission compensation to the producing agents. PRS’s fees for captive management services are based on a percentage of premium. PRS does not perform underwriting, claim, or loss prevention services on behalf of segregated portfolio captives. Effective January 1, 2008, Guarantee Insurance began working directly with agents to market segregated portfolio captive insurance solutions and paying commissions directly to the producing agents. As a result, PRS ceased earning general agency commissions from Guarantee Insurance and ceased paying commissions to the producing agents. For the six months ended June 30, 2008 and the year ended December 31, 2007, fees earned by PRS for captive management services represented approximately 7% and 27% of total unconsolidated PRS insurance services income, respectively. Most of this unconsolidated income for the year ended December 31, 2007 was derived from fees earned for general agency services, which services are now provided by Guarantee Insurance. Therefore, PRS’s unconsolidated income attributable to captive management services is materially less in 2008 than in 2007. | |
• | Reinsurance Intermediary Services. Through a co-brokering relationship that we entered into in 2008 with an independent reinsurance intermediary, PRS places excess of loss reinsurance and quota share reinsurance for Guarantee Insurance. For the six months ended June 30, 2008 and the year ended December 31, 2007, fees earned by PRS for reinsurance intermediary services represented approximately 8% and 9% of total unconsolidated PRS insurance services income, respectively. | |
• | General Agency Services for Other Insurance Companies. PRS began acting as a general agent for other insurance companies in late 2007. We facilitate the placement of workers’ compensation submissions on behalf of independent retail agents throughout the country, and receive commission income as a percentage of premiums written. PRS does not take underwriting risk. For the six months ended June 30, 2008, fees earned by PRS for general agency services provided to other insurance companies represented approximately 2% of total unconsolidated PRS insurance services income. For the year ended December 31, 2007, fees earned by PRS for general agency services were not material. PRS plans to expand its general agency services by obtaining additional carrier appointments. | |
• | Claims Administration Services. PRS plans to provide claim handling services for medical and lost-time claims to other carriers and self-insured plans. These services are expected to be provided pursuant to and in compliance with state rules and regulations as well as client-specific process guidelines. PRS expects to provide these services for both workers compensation insurance policies and other casualty lines. |
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• | reduce net liability on individual risks; | |
• | mitigate the effect of individual loss occurrence (including catastrophic losses); | |
• | stabilize underwriting results; | |
• | decrease 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. This means that regardless of the number of occurrences covered by this reinsurance with incurred losses in excess of $1.0 million, the aggregate amount paid under the layer would not exceed an amount equal to 225% of the total reinsurance premiums for the layer. The amount of these premiums is $3,850,000, subject to adjustment. This reinsurance applies to both traditional and alternative market business. | |
• | 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. |
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• | 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. |
• | Pursuant to Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-003/2007 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 Workers’ Compensation Excess of Loss Reinsurance Agreement GIC-002/2007 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 |
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per occurrence in excess of $5.0 million for losses occurring on or after January 1, 2007 and prior to July 1, 2008. It 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. It provides $10.0 million of coverage per occurrence in excess of $10.0 million, subject to an aggregate limit of $20.0 million. It 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 | ||||||||||||||||||||||||
Paid | Unpaid | |||||||||||||||||||||||
Losses and | Losses and | |||||||||||||||||||||||
A.M. | Loss | Loss | ||||||||||||||||||||||
Best | Adjustment | Adjustment | Net | |||||||||||||||||||||
Rating | Expenses | Expenses | Total | Collateral(1) | Exposures | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Authorized reinsurers: | ||||||||||||||||||||||||
National Indemnity Company | A++ | $ | 1,030 | $ | 9,304 | $ | 10,334 | $ | — | $ | 10,334 | |||||||||||||
Midwest Employers Casualty Company | A+ | 264 | 2,883 | 3,147 | — | 3,147 | ||||||||||||||||||
Other authorized reinsurers | 97 | 1,942 | 2,039 | 80 | 1,959 | |||||||||||||||||||
Total authorized reinsurers | 1,391 | 14,129 | 15,520 | 80 | 15,440 | |||||||||||||||||||
Unauthorized reinsurers: | ||||||||||||||||||||||||
Segregated portfolio cell captives: | ||||||||||||||||||||||||
With net exposures | — | 7,927 | 7,927 | 2,405 | 5,522 | |||||||||||||||||||
With no net exposures | — | 15,049 | 15,049 | 25,748 | — | |||||||||||||||||||
Total segregated portfolio cell captives | — | 22,976 | 22,976 | 28,153 | 5,522 | |||||||||||||||||||
Legacy exposure reinsurers: | ||||||||||||||||||||||||
With net exposures | 368 | 3,091 | 3,459 | 1,487 | 1,972 | |||||||||||||||||||
With no net exposures | 29 | 1,986 | 2,015 | 4,881 | — | |||||||||||||||||||
Total legacy exposure reinsurers | 397 | 5,077 | 5,474 | 6,368 | 1,972 | |||||||||||||||||||
Total unauthorized reinsurers | 397 | 28,053 | 28,450 | 34,521 | 7,494 | |||||||||||||||||||
Total | 1,788 | 42,182 | 43,970 | $ | 34,601 | $ | 22,934 | |||||||||||||||||
Less allowance | (300 | ) | — | (300 | ) | |||||||||||||||||||
Net | $ | 1,488 | $ | 42,182 | $ | 43,670 | ||||||||||||||||||
(1) | Collateral is 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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• | NCCI loss development factors are modified by a factor to reflect more favorable loss reserve development experience from our first two policy years ended December 31, 2004 and 2005, which we believe is principally attributable to our claims reserving and claims management practices. | |
• | NCCI loss development factors are modified by a factor to reflect the difference between unlimited benefits, which serve as the basis for NCCI factors, and our excess of loss reinsurance per occurrence retention. | |
• | We have certain open claims for which we are carrying case reserves, as though the claims were eligible for payment, even though we have denied the claims for various reasons. Our historical experience indicates that a substantial portion of these open but denied claims will ultimately be closed with no payment. Our aggregate reserves for losses and loss adjustment expenses includes the case reserves on these claims, with no further adverse development. This methodology reflects the assumption that favorable development on open but denied claims ultimately closed with no payment will fully offset any adverse development on open but denied claims ultimately settled and paid. |
• | open and closed claim counts and percentages, | |
• | claim closure rates, | |
• | changes in average case reserves and average losses and loss adjustment expenses incurred on open claims, | |
• | reported and ultimate average case incurred changes, | |
• | reported and projected ultimate loss ratios, | |
• | loss payment patterns, and | |
• | claim denial rates and the portion of denied claims closed with no payment. |
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• | a 10% decrease in the factor which we apply to NCCI loss development factors to reflect what we believe to be differences in our claims reserving and claims management practices, | |
• | a 10% decrease in the factor which we apply to NCCI loss development factors to reflect the estimated effect of our per occurrence excess of loss reinsurance retention, and | |
• | 25% of open but denied claims, which are fully reserved on acase-by-case basis, will ultimately be closed with no payment and the remaining 75% of open but denied claims will ultimately be settled at case reserve amounts. |
• | a 10% increase in the factor which we apply to NCCI loss development factors to reflect what we believe to be differences in our claims reserving and claims management practices, | |
• | a 10% increase in the factor which we apply to NCCI loss development factors to reflect the estimated effect of our per occurrence excess of loss reinsurance retention, and | |
• | No open but denied claims will ultimately be closed with no payment, and all such claims will ultimately be settled in an amount that includes the estimated adverse development commensurate with our total book of business. |
Unallocated | ||||||||||||||||||||||||
Alternative | Loss | |||||||||||||||||||||||
Traditional | Market | Assumed | Legacy | Adjustment | ||||||||||||||||||||
Business | Business | Business | Business | Expenses | Total | |||||||||||||||||||
In thousands | ||||||||||||||||||||||||
Composite low end of the range | $ | 15,289 | $ | 2,429 | $ | 1,602 | $ | 4,777 | $ | 995 | $ | 25,092 | ||||||||||||
Net reserves, as reported | 16,215 | 2,975 | 1,602 | 4,777 | 995 | 26,564 | ||||||||||||||||||
Composite high end of the range | 17,319 | 3,684 | 1,602 | 4,777 | 995 | 28,377 |
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2007 | 2006 | 2005 | ||||||||||
In thousands | ||||||||||||
Balances, January 1 | $ | 65,953 | $ | 39,084 | $ | 19,989 | ||||||
Less reinsurance recoverable | (41,103 | ) | (21,699 | ) | (8,189 | ) | ||||||
Net balances, January 1 | 24,850 | 17,385 | 11,800 | |||||||||
Incurred related to Current year | 18,642 | 15,328 | 11,439 | |||||||||
Prior years | (3,460 | ) | 2,511 | 583 | ||||||||
Total incurred | 15,182 | 17,839 | 12,022 | |||||||||
Paid related to Current year | 4,668 | 3,290 | 4,674 | |||||||||
Prior years | 8,800 | 7,084 | 1,763 | |||||||||
Total paid | 13,468 | 10,374 | 6,437 | |||||||||
Net balances, December 31 | 26,564 | 24,850 | 17,385 | |||||||||
Plus reinsurance recoverable | 43,317 | 41,103 | 21,699 | |||||||||
Balances, December 31 | $ | 69,881 | $ | 65,953 | $ | 39,084 | ||||||
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Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
In thousands | ||||||||||||
Balances, January 1 | $ | 6,999 | $ | 7,302 | $ | 7,433 | ||||||
Less reinsurance recoverable | (3,402 | ) | (3,780 | ) | (3,735 | ) | ||||||
Net balances, January 1 | 3,597 | 3,522 | 3,698 | |||||||||
Incurred related to claims in prior years | (169 | ) | 363 | 119 | ||||||||
Paid related to prior years | (397 | ) | (288 | ) | (295 | ) | ||||||
Net balances, December 31 | 3,031 | 3,597 | 3,522 | |||||||||
Plus reinsurance recoverable | 3,758 | 3,402 | 3,780 | |||||||||
Balances, December 31 | $ | 6,789 | $ | 6,999 | $ | 7,302 | ||||||
Years Ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
In thousands | ||||||||||||
Balances, January 1 | $ | 6,050 | $ | 6,006 | $ | 5,864 | ||||||
Less reinsurance recoverable | (2,974 | ) | (2,949 | ) | (2,773 | ) | ||||||
Net balances, January 1 | 3,056 | 3,057 | 3,091 | |||||||||
Incurred related to claims in prior years | (1,154 | ) | 153 | 302 | ||||||||
Paid related to prior years | (176 | ) | (134 | ) | (336 | ) | ||||||
Net balances, December 31 | 1,746 | 3,076 | 3,057 | |||||||||
Plus reinsurance recoverable | 1,996 | 2,974 | 2,949 | |||||||||
Balances, December 31 | $ | 3,742 | $ | 6,050 | $ | 6,006 | ||||||
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Years Ended December 31, | ||||||||||||||||
2004 | 2005 | 2006 | 2007 | |||||||||||||
In thousands | ||||||||||||||||
Net reserves for losses and loss adjustment expenses at end of year | $ | 11,800 | $ | 17,385 | $ | 24,850 | $ | 26,564 | ||||||||
Reserves re-estimated: | ||||||||||||||||
One year later | 12,383 | 19,896 | 21,390 | |||||||||||||
Two years later | 13,506 | 16,887 | ||||||||||||||
Three years later | 10,973 | |||||||||||||||
Net cumulative redundancy: | ||||||||||||||||
Amount | $ | 827 | $ | 498 | $ | 3,460 | ||||||||||
Percentage | 7.0 | % | 2.9 | % | 13.9 | % | ||||||||||
Cumulative net paid losses and loss adjustment expenses at: | ||||||||||||||||
End of current year | $ | 203 | $ | 3,996 | $ | 6,071 | ||||||||||
One year later | 1,966 | 10,159 | 12,124 | |||||||||||||
Two years later | 3,308 | 13,312 | ||||||||||||||
Three years later | 4,048 | |||||||||||||||
Reserves at end of year: | ||||||||||||||||
Net reserves for losses and loss adjustment expenses | $ | 11,800 | $ | 17,385 | $ | 24,850 | $ | 26,564 | ||||||||
Reinsurance recoverables on unpaid losses and loss adjustment expenses | 8,189 | 21,699 | 41,103 | 43,317 | ||||||||||||
Reserves for losses and loss adjustment expenses | $ | 19,989 | $ | 39,084 | $ | 65,953 | $ | 69,881 | ||||||||
Reserves re-estimated at December 31, 2007: | ||||||||||||||||
Net reserves for losses and loss adjustment expenses | $ | 10,973 | $ | 16,887 | $ | 21,390 | ||||||||||
Reinsurance recoverables on unpaid losses and loss adjustment expenses | 9,785 | 21,540 | 31,439 | |||||||||||||
Reserves for losses and loss adjustment expenses | $ | 20,758 | $ | 38,427 | $ | 52,829 | ||||||||||
Gross cumulative redundancy (deficiency): | ||||||||||||||||
Amount | $ | (769 | ) | $ | 657 | $ | 13,124 | |||||||||
Percentage | (3.8 | )% | 1.7 | % | 19.9 | % | ||||||||||
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Carrying | Percentage of | |||||||
Value | Portfolio | |||||||
In thousands | ||||||||
Fixed maturity securities, available for sale: | ||||||||
U.S. government securities | $ | 4,726 | 8.0 | % | ||||
U.S. government agencies | 977 | 1.7 | ||||||
Asset-backed and mortgage-backed securities | 15,538 | 26.4 | ||||||
State and political subdivisions | 22,133 | 37.6 | ||||||
Corporate bonds | 9,882 | 16.7 | ||||||
Total fixed maturity securities, available for sale | 53,076 | 90.4 | ||||||
Equity securities, available for sale | 488 | 0.8 | ||||||
Short-term investments | 382 | 0.7 | ||||||
Real estate | 253 | 0.4 | ||||||
Total investments, excluding cash and cash equivalents | 54,199 | 92.3 | ||||||
Cash and cash equivalents | 4,538 | 7.7 | ||||||
Total investments and cash and cash equivalents | $ | 58,737 | 100.0 | % | ||||
Percentage of | ||||
Total Fixed | ||||
S&P Credit Rating | Maturity Securities | |||
AAA | 61.6 | % | ||
AA | 25.2 | |||
A | 12.2 | |||
BBB | 1.0 | |||
Total | 100.0 | % | ||
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Carrying | Percentage of | |||||||
Value | Portfolio | |||||||
In thousands | ||||||||
Due in one year or less | $ | 3,386 | 6.4 | % | ||||
Due after one year through five years | 22,015 | 41.4 | ||||||
Due after five years through ten years | 8,125 | 15.3 | ||||||
Due after ten years | 4,721 | 8.9 | ||||||
Asset-backed and mortgage-backed securities | 14,829 | 28.0 | ||||||
Total | $ | 53,076 | 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% | 44.0 | % | Our gross premiums written increased by 38% in 2007 compared to 2006. We believe that the premium growth in 2007 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% | 36.0 | % | 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 have generally assumed between 50% and 90% of the risk written by us, our results typically generate a surplus aid unusual value relative to the industry as a whole, which generally retains a larger portion of its direct business. | ||||
Investment Yield | Less than 6.5%, greater than 3% | 1.7 | % | Pursuant to our alternative market business segregated portfolio captive arrangements, funds representing ceded premiums, net of ceding commissions and paid losses and loss adjustments expenses are held on a funds withheld basis, together with collateral, for reinsurance recoverables from segregated portfolio captives. These funds held are credited with interest at negotiated contractual rates, and the credited interest is accounted for as interest expense, serving to reduce net investment yields below the usual range. | ||||
Gross Change in Policyholder’s Surplus | Less than 50%, greater than -10% | 52.0 | % | Guarantee Insurance received a $3.0 million capital infusion in 2007. The IRIS usual range does not contemplate capital infusions. Absent the capital infusion, the gross change in policyholders’ surplus was within the usual range at 21%. |
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Name | Age | Position | ||||
Directors and Executive Officers | ||||||
Steven M. Mariano(1) | 44 | Chairman of the Board, President and Chief Executive Officer | ||||
Michael W. Grandstaff | 48 | Senior Vice President and Chief Financial Officer | ||||
Charles K. Schuver | 52 | Senior Vice President and Chief Underwriting Officer of Guarantee Insurance | ||||
Timothy J. Ermatinger | 59 | Chief Executive Officer of PRS Group, Inc. | ||||
Richard G. Turner | 58 | Senior Vice President | ||||
Theodore G. Bryant | 38 | Senior Vice President, Counsel and Secretary | ||||
Timothy J. Tompkins(1) | 47 | Director | ||||
Richard F. Allen(3) | 75 | Director | ||||
Ronald P. Formento Sr.(2) | 65 | Director | ||||
John R. Del Pizzo(3) | 61 | Director | ||||
C. Timothy Morris(2) | 58 | Director | ||||
Key Employees | ||||||
Maria C. Allen | 56 | Vice President — Client Services/Corporate Claims | ||||
Katherine H. Antonello | 44 | Vice President and Chief Actuary | ||||
Marshall N. Gordon | 65 | Vice President — Marketing of Guarantee Insurance | ||||
Josephine L. Graves | 43 | President of Patriot Risk Services, Inc. | ||||
John J. Rearer | 50 | Chief Underwriting Officer of PRS | ||||
Michael J. Sluka | 56 | Vice President and Chief Accounting Officer | ||||
Dean D. Watters | 51 | Vice President — Business Development |
(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; | |
• | 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; |
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• | 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(1) | Awards(1) | Compensation | Total | |||||||||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
Steven M. Mariano President and Chief Executive Officer | 2007 | 400,000 | 500,000 | 240,600(3 | ) | 65,380 | (4) | 54,648(2 | ) | 1,260,628 | ||||||||||||||||||
Timothy J. Ermatinger — Chief Executive Officer of PRS Group, Inc. | 2007 | 205,000 | — | — | 205,000 | |||||||||||||||||||||||
Theodore G. Bryant — Senior Vice President, Counsel and Secretary | 2007 | 180,000 | 47,500 | — | 14,003(5 | ) | 241,503 | |||||||||||||||||||||
Michelle A. Masotti Chief Financial Officer(6) | 2007 | 241,231 | 20,000 | — | 8,630(7 | ) | 269,861 |
(1) | The value of this unrestricted grant of shares was determined by multiplying the number of shares granted by the per-share price of $6.62, which was the fair value of our common stock as established by our board of directors at the time of grant. 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 grants in 2007 and 2006. The expected volatility is 32% for options granted in 2007 and 2006, based on |
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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% for options granted in 2007 and 2006, 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% on options granted in 2007 and 11% on options granted in 2006. There was no expected dividend yield for the options granted in 2006 or 2007. | ||
(2) | Consists of a car allowance of $42,000 (representing a $1,000 per month allowance that had not been paid to Mr. Mariano for 42 months), and payment of dues and assessments for Mr. Mariano’s homeowner’s association. |
(3) | Represents an unrestricted grant of 36,355 shares of our common stock for Mr. Mariano’s service on our Board of Directors. |
(4) | Represents an award of options to purchase 24,237 shares of our common stock for Mr. Mariano’s service on our Board of Directors. |
(5) | Represents relocation expenses related to Mr. Bryant’s move to Florida. |
(6) | Ms. Masotti ceased service as the Chief Financial Officer in February 2008. |
(7) | Represents Ms. Masotti’s temporary living expenses during her move to Florida. |
All Other | ||||||||||||||
Option Awards: | ||||||||||||||
Number of | ||||||||||||||
Securities | Exercise or Base | Grant Date Fair | ||||||||||||
Underlying | Price of Option | Value of Stock and | ||||||||||||
Name | Grant Date | Options (#) | Awards ($/Sh) | Option Awards ($)(1) | ||||||||||
Steven M. Mariano | May 20, 2007 | 24,237 | $ | 6.62 | (2) | 65,380 | (3) |
(1) | The dollar amount shown represents the full grant date fair value of the award determined in accordance with SFAS 123R. The assumptions used to calculate these values are set forth in Note 15 to our Consolidated Financial Statements included elsewhere in this prospectus. | |
(2) | The exercise price of this award was determined by the board of directors based on their determination of the fair market value of the stock underlying these awards. |
(3) | 50% of this award vested on May 20, 2008, the remainder will vest on May 20, 2009. |
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Option Awards | ||||||||||||||
Number of | Number of | |||||||||||||
Securities | Securities | |||||||||||||
Underlying | Underlying | |||||||||||||
Unexercised | Unexercised | Option | ||||||||||||
Options | Options | Exercise | ||||||||||||
(#) | (#) | Price | ||||||||||||
Name | Exercisable | Un-exercisable | ($) | Option Expiration Date | ||||||||||
Steven M. Mariano | 30,297 | 0 | 4.13 | February 10, 2015 | ||||||||||
6,060 | 6,059(1 | ) | 6.62 | February 22, 2016 | ||||||||||
0 | 24,237(2 | ) | 6.62 | May 19, 2017 | ||||||||||
Timothy J. Ermatinger | 2,020 | 4,040(3 | ) | 6.62 | June 1, 2016 | |||||||||
4,040 | 8,079(4 | ) | 6.62 | October 11, 2016 | ||||||||||
Theodore G. Bryant | 2,020 | 4,040(5 | ) | 6.62 | December 17, 2016 | |||||||||
Michelle A. Masotti | 4,040 | 8,079(6 | ) | 6.62 | November 15, 2016 |
(1) | Became exercisable on February 23, 2008. |
(2) | 12,119 shares of this award became exercisable on May 20, 2008; 12,118 shares of this award will become exercisable on May 20, 2009. |
(3) | 2,020 shares of this award became exercisable on June 2, 2008; 2,020 shares of this award will become exercisable on June 2, 2009. |
(4) | 4,040 shares of this award will become exercisable on October 12, 2008; 4,039 shares of this award will become exercisable on October 12, 2009. |
(5) | 2,020 shares of this award will become exercisable on December 17, 2008; 2,020 shares of this award will become exercisable on December 17, 2009. |
(6) | 4,040 shares of this award will become exercisable on November 16, 2008; 4,039 shares of this award will become exercisable on November 16, 2009. |
Stock Awards | ||||||||
Number of Shares | Value Realized on | |||||||
Name | Acquired on Vesting (#) | Vesting ($)(1) | ||||||
Steven M. Mariano | 36,355 | 240,600 |
(1) | The value of this unrestricted grant of shares was determined by multiplying the number of shares granted by the per-share price of $6.62, which was the fair value of our common stock as established by our board of directors at the time of grant. |
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Fees Earned or | Stock | Option | ||||||||||||||
Paid in Cash | Awards | Awards | Total | |||||||||||||
Name | ($)(1) | ($)(1) | ($) | ($) | ||||||||||||
John R. Del Pizzo | 100,000 | 120,300 | (2) | 24,518 | (3) | 244,818 | ||||||||||
Timothy J. Tompkins | 57,000 | 64,160 | (4) | 16,345 | (5) | 137,505 |
(1) | The dollar amounts shown represent the compensation cost for the year ended December 31, 2007 of stock awards and option awards granted to certain of our non-employee directors as determined pursuant to SFAS 123R. The assumptions used to calculate these values are set forth in Note 15 to our Consolidated Financial Statements included elsewhere in this prospectus. |
(2) | Consists of an unrestricted grant of 18,177 shares of our common stock. |
(3) | Consists of an option to purchase 9,089 shares of our common stock, of which 4,545 shares vested on May 20, 2008 and 4,544 shares will vest on May 20, 2009. |
(4) | Consists of an unrestricted grant of 9,695 shares of our common stock. |
(5) | Consists of an option to purchase 6,060 shares of our common stock, of which 3,030 shares vested on May 20, 2008 and 3,030 shares will vest on May 20, 2009. |
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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 Securities to be | Weighted-Average | Issuance Under Equity | ||||||||||
Issued Upon Exercise of | Exercise Price of | Compensation Plans | ||||||||||
Outstanding Options, | Outstanding Options, | (Excluding Securities | ||||||||||
Warrants and Rights | Warrants and Rights | Reflected in Column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders | — | — | — | |||||||||
Equity compensation plans not approved by security holders(1) | 210,267 | $ | 6.11 | 213,879 | ||||||||
Total | 210,267 | $ | 6.11 | 213,879 |
(1) | Relates to awards granted under our 2005 Plan and 2006 Plan, both of which were approved by our stockholders in 2008. |
• | 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 | |||||||||||||||||||||||
Number of | Outstanding | Percentage of | Number of | Outstanding | Percentage of | |||||||||||||||||||
Name of Beneficial Owner | Shares | Shares(1) | Total Vote(2) | Shares | Shares | Total Vote | ||||||||||||||||||
Series B Common Stock: | ||||||||||||||||||||||||
Steven M. Mariano(3) | 969,476 | 58.7 | % | 85.0 | % | — | ||||||||||||||||||
Common Stock: | ||||||||||||||||||||||||
Steven M. Mariano(4) | 253,471 | 15.4 | % | 5.6 | % | 1,222,947 | 7.3 | % | 7.3 | % | ||||||||||||||
Steven F. Herrig(5) | 260,865 | 15.8 | % | 5.7 | % | 260,865 | 1.6 | % | 1.6 | % | ||||||||||||||
John R. Del Pizzo(6) | 62,109 | 3.8 | % | 1.4 | % | 62,109 | * | * | ||||||||||||||||
Timothy J. Tompkins(7) | 27,872 | 1.7 | % | * | 27,872 | * | * | |||||||||||||||||
Ronald P. Formento Sr.(8) | 23,714 | 1.4 | % | * | 23,714 | * | * | |||||||||||||||||
Timothy J. Ermatinger(9) | 12,120 | * | * | 12,120 | * | * | ||||||||||||||||||
Theodore G. Bryant(10) | 2,020 | * | * | 2,020 | * | * | ||||||||||||||||||
Michael W. Grandstaff | — | — | — | — | — | — | ||||||||||||||||||
Richard F. Allen | — | — | — | — | — | — | ||||||||||||||||||
C. Timothy Morris | — | — | — | — | — | — | ||||||||||||||||||
Charles K. Schuver | — | — | — | — | — | — | ||||||||||||||||||
Richard G. Turner | — | — | — | — | — | — | ||||||||||||||||||
All directors and executive officers as a group (11 persons) | 1,350,782 | 81.8 | % | 1,350,782 | 8.1 | % | 8.1 | % |
* | Less than 1%. | |
(1) | Combined percentage ownership of common stock and Series B common stock. |
(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 |
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converted into common stock on a one-for-one basis and no additional Series B common stock will be issuable. |
(3) | Consists of 969,476 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. Excludes 411,072 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.” |
(4) | Includes 121,184 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 54,535 shares issuable upon exercise of options that are exercisable within 60 days after September 15, 2008. Mr. Mariano also holds options to purchase 12,118 additional shares that will vest on May 20, 2009, and warrants to purchase 84,353 shares that will become exercisable upon the expiration of thelock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” |
(5) | These shares are held in the name of Westwind Holding Company, LLC, an entity that is controlled by Elite II, Inc., a company that is controlled by Mr. Herrig. Mr. Herrig has sole dispositive and voting control over these shares. Excludes 110,611 shares issuable upon the exercise of warrants that will become exercisable upon the expiration of the lock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” Mr. Herrig’s address is 2921 Stirling Road, Fort Lauderdale, Florida 33312. |
(6) | Includes 28,784 shares issuable upon exercise of options that are exercisable within 60 days after September 15, 2008. Mr. Del Pizzo also holds options to purchase 4,544 additional shares that will vest on May 20, 2009, and warrants to purchase 14,131 shares that will become exercisable upon the expiration of thelock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” |
(7) | Includes 3,030 shares issuable upon exercise of options that are exercisable within 60 days after September 15, 2008. Mr. Tompkins also holds options to purchase 3,030 additional shares that will vest on May 20, 2009, and warrants to purchase 10,534 shares that will become exercisable upon the expiration of thelock-up agreements as described in “Shares Eligible for Future Sale —Lock-Up Agreements.” |
(8) | 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. Excludes 10,055 shares issuable upon the exercise of warrants that will become exercisable upon the expiration of the lock-up agreements as described in “Shares Eligible for Future Sale — Lock-Up Agreements.” |
(9) | Consists of 12,120 shares issuable upon exercise of options that are exercisable within 60 days after September 15, 2008. Mr. Ermatinger also holds options to purchase 2,020 additional shares that will vest on June 2, 2009 and options to purchase 4,039 additional shares that will vest on October 12, 2009. |
(10) | Consists of 2,020 shares issuable upon exercise of options that are exercisable within 60 days after September 15, 2008. Mr. Bryant also holds options to purchase 2,020 additional shares that will vest on December 18, 2008 and options to purchase 2,020 additional shares that will vest on December 18, 2009. |
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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), directly or indirectly, 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 directly or indirectly, 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 under the Securities Act (other than a registration statement onForm S-8), including any amendment thereto, with respect to the registration of any shares of 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 the lock-up period, we issue an earnings release or material news or a material event relating to us occurs; or |
• | prior to the expiration of the lock-up period, we announce that we will release earnings results during the16-day period beginning on the last day of the lock-up period; |
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• | one percent of the number of shares of common stock then outstanding (approximately 166,509 shares immediately after the offering); and |
• | the average weekly trading volume of the common stock on the Nasdaq Global Market 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 | |||
Friedman, Billings, Ramsey & Co., Inc. | ||||
Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC | ||||
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), directly or indirectly, any share of our common |
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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, directly or indirectly, 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 under the Securities Act, including any amendment thereto, with respect to the registration of any shares of 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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ACCOUNTING AND FINANCIAL DISCLOSURE
174
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175
Page | ||||
Audited Consolidated Financial Statements as of December 31, 2007 and for the three years in the period ended December 31, 2007 of Patriot Risk Management, Inc. and its Wholly-Owned Subsidiaries | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
Interim Consolidated Financial Statements as of June 30, 2008 and for the six month periods ended June 30, 2008 and 2007 of Patriot Risk Management, Inc. Holdings, Inc. and its Wholly-Owned Subsidiaries | ||||
F-32 | ||||
F-33 | ||||
F-34 | ||||
F-35 | ||||
F-36 |
F-1
Table of Contents
F-2
Table of Contents
December 31, | ||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Investments | ||||||||
Debt securities, available for sale, at fair value for 2007 and held to maturity, at amortized cost for 2006 | $ | 55,688 | $ | 30,697 | ||||
Equity securities, available for sale, at fair value | 634 | 1,581 | ||||||
Short-term investments | 238 | — | ||||||
Real estate held for the production of income | 256 | 265 | ||||||
Total investments | 56,816 | 32,543 | ||||||
Cash and cash equivalents | 4,943 | 17,841 | ||||||
Premiums receivable | 36,748 | 19,450 | ||||||
Deferred policy acquisition costs | 1,477 | 774 | ||||||
Prepaid reinsurance premiums | 14,963 | 7,466 | ||||||
Reinsurance recoverable | ||||||||
Unpaid losses and loss adjustment expenses | 43,317 | 41,103 | ||||||
Paid losses and loss adjustment expenses | 4,202 | 428 | ||||||
Funds held by ceding companies and other amounts due from reinsurers | 2,550 | 2,419 | ||||||
Net deferred tax assets | 3,022 | 1,639 | ||||||
Fixed assets | 1,165 | 1,411 | ||||||
Federal income taxes recoverable | 391 | — | ||||||
Intangible assets | 1,287 | 1,287 | ||||||
Other assets | 4,356 | 4,308 | ||||||
Total assets | $ | 175,237 | $ | 130,669 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Reserves for losses and loss adjustment expenses | $ | 69,881 | $ | 65,953 | ||||
Reinsurance payable on paid losses and loss adjustment expenses | 404 | 647 | ||||||
Unearned and advanced premium reserves | 29,160 | 15,643 | ||||||
Reinsurance funds withheld and balances payable | 44,073 | 26,787 | ||||||
Notes payable and accrued interest | 14,969 | 9,693 | ||||||
Subordinated debentures and accrued interest | 1,938 | 2,048 | ||||||
Income taxes payable | — | 1,438 | ||||||
Accounts payable and accrued expenses | 9,376 | 5,766 | ||||||
Total liabilities | 169,801 | 127,975 | ||||||
Stockholders’ Equity | ||||||||
Common stock — Series A | 1 | 1 | ||||||
Common stock — Series B | 1 | 1 | ||||||
Paid-in capital | 5,363 | 4,901 | ||||||
Accumulated earnings (deficit) | 196 | (2,183 | ) | |||||
Accumulated other comprehensive loss, net of deferred income taxes | (125 | ) | (26 | ) | ||||
Total stockholders’ equity | 5,436 | 2,694 | ||||||
Total liabilities and stockholders’ equity | $ | 175,237 | $ | 130,669 | ||||
F-3
Table of Contents
2007 | 2006 | 2005 | ||||||||||
(In thousands except per share data) | ||||||||||||
Revenues | ||||||||||||
Premiums earned | $ | 24,613 | $ | 21,053 | $ | 21,336 | ||||||
Insurance services income | 7,027 | 7,175 | 4,369 | |||||||||
Investment income, net | 1,326 | 1,321 | 1,077 | |||||||||
Net realized losses on investments | (5 | ) | (1,346 | ) | (2,298 | ) | ||||||
Total revenues | 32,961 | 28,203 | 24,484 | |||||||||
Expenses | ||||||||||||
Net losses and loss adjustment expenses | 15,182 | 17,839 | 12,022 | |||||||||
Net policy acquisition and underwriting expenses | 6,023 | 3,834 | 3,168 | |||||||||
Other operating expenses | 8,519 | 9,704 | 6,378 | |||||||||
Interest expense | 1,290 | 1,109 | 1,129 | |||||||||
Total expenses | 31,014 | 32,486 | 22,697 | |||||||||
Other income | — | 796 | — | |||||||||
Gain on early extinguishment of debt | — | 6,586 | — | |||||||||
Income before income tax expense | 1,947 | 3,099 | 1,787 | |||||||||
Income tax expense (benefit) | (432 | ) | 1,489 | 687 | ||||||||
Net income | $ | 2,379 | $ | 1,610 | $ | 1,100 | ||||||
Earnings Per Share | ||||||||||||
Basic | $ | 1.46 | $ | .96 | $ | .73 | ||||||
Diluted | 1.45 | .95 | .72 | |||||||||
Weighted Average Number of Shares Used in the Determination of: | ||||||||||||
Basic | 1,626 | 1,687 | 1,516 | |||||||||
Diluted | 1,637 | 1,694 | 1,525 | |||||||||
F-4
Table of Contents
Accumulated | ||||||||||||||||||||||||||||||||
Common | Common | Accumulated | Other | Total | ||||||||||||||||||||||||||||
Stock | Stock | Paid-in | Earnings | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Shares | Series A | Shares | Series B | Capital | (Deficit) | Income (Loss) | Equity | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balance,January 1, 2005 | 435 | $ | — | 969 | $ | 1 | $ | 3,416 | $ | (3,066 | ) | $ | (307 | ) | $ | 44 | ||||||||||||||||
Issuance of common stock and paid in capital | 30 | — | — | — | 250 | — | — | 250 | ||||||||||||||||||||||||
Cash dividends | — | — | — | — | — | (1,057 | ) | — | (1,057 | ) | ||||||||||||||||||||||
Balance before comprehensive income | 465 | — | 969 | 1 | 3,666 | (4,123 | ) | (307 | ) | (763 | ) | |||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 1,100 | — | 1,100 | ||||||||||||||||||||||||
Net unrealized depreciation in available for sale securities, net of deferred taxes of $467,000 | — | — | — | — | — | — | (1,002 | ) | (1,002 | ) | ||||||||||||||||||||||
Reclassification adjustment for net gains realized in net income during the year, net of tax effect of $505,000 | — | — | — | — | — | — | 981 | 981 | ||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 1,100 | (21 | ) | 1,079 | |||||||||||||||||||||||
Balance,December 31, 2005 | 465 | — | 969 | 1 | 3,666 | (3,023 | ) | (328 | ) | 316 | ||||||||||||||||||||||
Redemption of common stock | (114 | ) | — | — | — | (812 | ) | (170 | ) | — | (982 | ) | ||||||||||||||||||||
Cash dividends | — | — | — | — | — | (600 | ) | — | (600 | ) | ||||||||||||||||||||||
Issuance of common stock and paid in capital | 205 | 1 | — | — | 1,355 | — | — | 1,356 | ||||||||||||||||||||||||
Unrestricted common stock grants | 75 | — | — | — | 502 | — | — | 502 | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | 190 | — | — | 190 | ||||||||||||||||||||||||
Balance before comprehensive income | 631 | 1 | 969 | 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 losses 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 | 631 | 1 | 969 | 1 | 4,901 | (2,183 | ) | (26 | ) | 2,694 | ||||||||||||||||||||||
Redemption of common stock | (16 | ) | — | — | — | (100 | ) | — | — | (100 | ) | |||||||||||||||||||||
Unrestricted common stock grants | 64 | — | — | 425 | — | — | 425 | |||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | 137 | — | — | 137 | |||||||||||||||||||||||||
Balance before comprehensive income | 680 | 1 | 969 | 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 | 680 | $ | 1 | 969 | $ | 1 | $ | 5,363 | $ | 196 | $ | (125 | ) | $ | 5,436 | |||||||||||||||||
F-5
Table of Contents
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Operating Activities | ||||||||||||
Net income | $ | 2,379 | $ | 1,610 | $ | 1,100 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Gain on early extinguishment of debt | — | (6,586 | ) | — | ||||||||
Net realized losses on investments | 5 | 1,346 | 2,297 | |||||||||
Depreciation and amortization | 1,030 | 396 | 134 | |||||||||
Stock compensation expense | 561 | 692 | — | |||||||||
Amortization (accretion) of debt securities | (63 | ) | (76 | ) | 18 | |||||||
Deferred income tax expense (benefit) | (1,331 | ) | 69 | (573 | ) | |||||||
Changes in certain assets and liabilities: | ||||||||||||
Decrease (increase) in: | ||||||||||||
Premiums receivable | (17,298 | ) | 2,493 | (2,699 | ) | |||||||
Deferred policy acquisition costs | (703 | ) | 636 | (1,476 | ) | |||||||
Prepaid reinsurance premiums | (7,497 | ) | (3,064 | ) | 10,523 | |||||||
Reinsurance recoverable on: | ||||||||||||
Unpaid losses and loss adjustment expenses | (2,214 | ) | (19,404 | ) | (11,361 | ) | ||||||
Paid losses and loss adjustment expenses | (3,774 | ) | 828 | (615 | ) | |||||||
Funds held by ceding companies and other amounts due from reinsurers | (131 | ) | (36 | ) | 412 | |||||||
Other assets | (193 | ) | (3,001 | ) | 597 | |||||||
Increase (decrease) in: | ||||||||||||
Reserves for losses and loss adjustment expenses | 3,928 | 26,475 | 19,594 | |||||||||
Reinsurance payable on paid loss and loss adjustment expenses | (243 | ) | (627 | ) | 963 | |||||||
Unearned and advanced premium reserves | 13,517 | 2,429 | (6,971 | ) | ||||||||
Reinsurance funds withheld and balances payable | 17,286 | 1,592 | 9,498 | |||||||||
Income taxes payable | (1,829 | ) | 178 | 1,260 | ||||||||
Accounts payable and accrued expenses | 3,697 | (961 | ) | 28 | ||||||||
Net cash provided by operating activities | 7,127 | 4,989 | 22,729 | |||||||||
Investment Activities | ||||||||||||
Proceeds from sales and maturities of debt securities | 20,817 | 6,899 | 3,895 | |||||||||
Purchases of debt securities | (45,224 | ) | (22,168 | ) | (7,057 | ) | ||||||
Proceeds from sales of equity securities | 280 | 2,457 | 1,760 | |||||||||
Net sales (purchases) of short-term investments | (238 | ) | 2,142 | (2,142 | ) | |||||||
Purchase of real estate | — | — | (272 | ) | ||||||||
Purchases of equity securities | — | (1,766 | ) | (2,994 | ) | |||||||
Purchases of fixed assets | (639 | ) | (1,235 | ) | (272 | ) | ||||||
Net cash used in investment activities | (25,004 | ) | (13,671 | ) | (7,082 | ) | ||||||
Financing Activities | ||||||||||||
Proceeds from notes payable | 5,665 | 8,652 | — | |||||||||
Net proceeds from issuance of common stock | — | 1,355 | 250 | |||||||||
Net disbursements for redemption of common stock | (100 | ) | (984 | ) | — | |||||||
Repayment of debt | (586 | ) | (2,320 | ) | — | |||||||
Proceeds from issuance of subordinated debentures | — | — | 1,956 | |||||||||
Dividends paid | — | (600 | ) | (1,057 | ) | |||||||
Payments on affiliated loans | — | — | (341 | ) | ||||||||
Net cash provided by financing activities | 4,979 | 6,103 | 808 | |||||||||
Increase (decrease) in cash and cash equivalents | (12,898 | ) | (2,579 | ) | 16,455 | |||||||
Cash and cash equivalents,beginning of period | 17,841 | 20,420 | 3,965 | |||||||||
Cash and cash equivalents,end of period | $ | 4,943 | $ | 17,841 | $ | 20,420 | ||||||
Supplemental Cash Flow Information | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 1,188 | $ | 1,538 | $ | 924 | ||||||
Income taxes | 850 | 400 | — | |||||||||
F-6
Table of Contents
(1) | Nature of Operations and Significant Accounting Policies |
F-7
Table of Contents
F-8
Table of Contents
F-9
Table of Contents
F-10
Table of Contents
(2) | Debt Securities |
F-11
Table of Contents
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Available for Sale | 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 | |||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
Held to Maturity | Cost | Gains | Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
U.S. government securities | $ | 5,287 | $ | — | $ | 42 | $ | 5,245 | ||||||||
U.S. government agencies | 8,921 | 44 | — | 8,965 | ||||||||||||
Corporate securities | 16,489 | 19 | 93 | 16,415 | ||||||||||||
$ | 30,697 | $ | 63 | $ | 135 | $ | 30,625 | |||||||||
F-12
Table of Contents
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 | $ | 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 | |||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Held to Maturity | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In thousands, except numbers of securities data) | ||||||||||||||||||||||||
U.S. government securities | $ | 3,013 | $ | 14 | $ | 2,132 | $ | 28 | $ | 5,145 | $ | 42 | ||||||||||||
U.S. government agencies | 1,510 | — | — | — | 1,510 | — | ||||||||||||||||||
Corporate securities | 4,902 | 13 | 6,749 | 80 | 11,651 | 93 | ||||||||||||||||||
Total | $ | 9,425 | $ | 27 | $ | 8,881 | $ | 108 | $ | 18,306 | $ | 135 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | 34 | 27 | 61 | |||||||||||||||||||||
F-13
Table of Contents
Amortized | Fair | |||||||
Cost | Value | |||||||
(In thousands) | ||||||||
Due in one year or less | $ | 7,323 | $ | 7,343 | ||||
Due after one year through five years | 18,218 | 18,398 | ||||||
Due after five years | 13,635 | 13,834 | ||||||
39,176 | 39,575 | |||||||
Asset-backed and mortgage-backed securities | 15,994 | 16,113 | ||||||
$ | 55,170 | $ | 55,688 | |||||
(3) | Equity Securities Available for Sale |
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Common stock | $ | 1,341 | $ | — | $ | 707 | $ | 634 | ||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Common stock | $ | 1,622 | $ | 216 | $ | 257 | $ | 1,581 | ||||||||
F-14
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 | $ | 407 | $ | 286 | $ | 227 | $ | 421 | $ | 634 | $ | 707 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | 2 | 6 | 8 | |||||||||||||||||||||
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 | $ | — | $ | — | $ | 413 | $ | 257 | $ | 413 | $ | 257 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | — | 6 | 6 | |||||||||||||||||||||
(4) | Net Investment Income |
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Debt securities | $ | 2,088 | $ | 764 | $ | 413 | ||||||
Equity securities | 8 | 15 | 38 | |||||||||
Cash, cash equivalents, short-term and other investment income | 412 | 1,264 | 755 | |||||||||
Rent income | 10 | 10 | — | |||||||||
Gross investment income | 2,518 | 2,053 | 1,206 | |||||||||
Investment expenses | (1,192 | ) | (732 | ) | (129 | ) | ||||||
Net investment income | $ | 1,326 | $ | 1,321 | $ | 1,077 | ||||||
F-15
Table of Contents
(5) | Net Realized Losses on Investments |
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Debt securities: | ||||||||||||
Gross realized gains on sales | $ | 3 | $ | — | $ | — | ||||||
Gross realized losses on sales | — | — | — | |||||||||
Net realized gains on debt securities | 3 | — | — | |||||||||
Equity securities: | ||||||||||||
Gross realized gains on sales | — | 587 | 265 | |||||||||
Gross realized losses: | ||||||||||||
On sales | (8 | ) | (194 | ) | — | |||||||
On securities deemed other-than-temporarily impaired | — | (1,739 | ) | (2,563 | ) | |||||||
Net realized losses on equity securities | (8 | ) | (1,346 | ) | (2,298 | ) | ||||||
Net realized losses on investments | $ | (5 | ) | $ | (1,346 | ) | $ | (2,298 | ) | |||
(6) | Premiums Receivable |
2007 | 2006 | |||||||
(In thousands) | ||||||||
Uncollected premium balances in the course of collection | $ | 4,718 | $ | 11,273 | ||||
Installments booked but deferred and not yet due | 32,030 | 8,177 | ||||||
Premiums receivable | $ | 36,748 | $ | 19,450 | ||||
(7) | Deferred Policy Acquisition Costs |
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Balance, beginning of period | $ | 774 | $ | 1,410 | $ | (66 | ) | |||||
Amounts capitalized: | ||||||||||||
Direct and assumed | 19,852 | 14,582 | 11,138 | |||||||||
Ceding commissions | (18,492 | ) | (15,253 | ) | (7.806 | ) | ||||||
Amounts capitalized, net of ceding commissions | 1,360 | (671 | ) | 3,332 | ||||||||
Amounts amortized, net of ceding commissions | (657 | ) | 35 | (1,856 | ) | |||||||
Balance, end of period | $ | 1,477 | $ | 774 | $ | 1,410 | ||||||
F-16
Table of Contents
(8) | Fixed Assets |
2007 | 2006 | |||||||
(In thousands) | ||||||||
Software | $ | 1,857 | $ | 1,653 | ||||
Furniture, equipment and leasehold improvements | 706 | 350 | ||||||
2,563 | 2,003 | |||||||
Accumulated depreciation and amortization | (1,398 | ) | (592 | ) | ||||
Fixed assets, net of accumulated depreciation | $ | 1,165 | $ | 1,411 | ||||
(9) | Reinsurance |
F-17
Table of Contents
2007 | 2006 | 2005 | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Direct and assumed premiums | $ | 85,810 | $ | 73,714 | $ | 62,372 | $ | 60,672 | $ | 47,576 | $ | 55,781 | ||||||||||||
Ceded premiums | 54,849 | 49,101 | 42,986 | 39,619 | 23,617 | 34,445 | ||||||||||||||||||
Net premiums | $ | 30,961 | $ | 24,613 | $ | 19,386 | $ | 21,053 | $ | 23,959 | $ | 21,336 | ||||||||||||
(10) | Federal Income Taxes |
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Current income tax expense | $ | 899 | $ | 1,419 | $ | 1,260 | ||||||
Deferred income tax expense (benefit): | ||||||||||||
Tax expense (benefit) on temporary differences | 581 | (387 | ) | (709 | ) | |||||||
Increase (decrease) in valuation allowance | (1,912 | ) | 457 | 136 | ||||||||
Deferred income tax expense (benefit) | (1,331 | ) | 70 | (573 | ) | |||||||
Income tax expense (benefit) | $ | (432 | ) | $ | 1,489 | $ | 687 | |||||
F-18
Table of Contents
2007 | 2006 | 2005 | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Income before income tax expense | $ | 1,947 | $ | 3,099 | $ | 1,787 | ||||||||||||||||||
Income tax at statutory rate | $ | 662 | 34.0 | % | $ | 1,054 | 34.0 | % | 608 | 34.0 | % | |||||||||||||
Tax effect of: | ||||||||||||||||||||||||
Tax exempt investment income | (85 | ) | (4.3 | ) | — | — | — | — | ||||||||||||||||
Other items, net | 127 | 6.5 | (22 | ) | (0.7 | ) | (57 | ) | (3.2 | ) | ||||||||||||||
Unrecognized tax benefits | 711 | 36.5 | — | — | — | — | ||||||||||||||||||
True up related to prior years | 65 | 3.3 | — | — | — | — | ||||||||||||||||||
1,480 | 76.0 | 1,032 | 33.3 | 551 | 30.8 | |||||||||||||||||||
Increase (decrease) in valuation allowance | (1,912 | ) | (98.2 | ) | 457 | 14.7 | 136 | 7.6 | ||||||||||||||||
Actual income tax rate | $ | (432 | ) | (22.2 | )% | $ | 1,489 | 48.0 | % | $ | 687 | 38.4 | % | |||||||||||
2007 | 2006 | |||||||
(In thousands) | ||||||||
Deferred Tax Assets | ||||||||
Loss reserve adjustments | $ | 1,174 | $ | 980 | ||||
Unearned premium adjustments | 965 | 777 | ||||||
Net operating loss carryforward | 1,318 | 1,912 | ||||||
Unrealized capital losses | 64 | 14 | ||||||
Other than temporary impairment on investments | 431 | 447 | ||||||
Stock option compensation | 111 | 65 | ||||||
Bad debt allowance | 340 | 340 | ||||||
Other | 125 | — | ||||||
4,528 | 4,535 | |||||||
Less valuation allowance | — | (1,912 | ) | |||||
Total deferred tax assets | 4,528 | 2,623 | ||||||
Deferred Tax Liabilities | ||||||||
Deferred acquisition costs | 502 | 655 | ||||||
Unrecognized tax benefits | 711 | — | ||||||
Purchase price adjustment | 293 | 293 | ||||||
Other | — | 36 | ||||||
Total deferred tax liabilities | 1,506 | 984 | ||||||
Net deferred tax assets | $ | 3,022 | $ | 1,639 | ||||
F-19
Table of Contents
(11) | Losses and Loss Adjustment Expenses |
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Balances, January 1 | $ | 65,953 | $ | 39,084 | $ | 19,989 | ||||||
Less reinsurance recoverable | (41,103 | ) | (21,699 | ) | (8,189 | ) | ||||||
Net balances, January 1 | 24,850 | 17,385 | 11,800 | |||||||||
Incurred related to | ||||||||||||
Current years | 18,642 | 15,328 | 11,439 | |||||||||
Prior years | (3,460 | ) | 2,511 | 583 | ||||||||
Total incurred | 15,182 | 17,839 | 12,022 | |||||||||
Paid related to | ||||||||||||
Current years | 4,668 | 3,290 | 4,674 | |||||||||
Prior years | 8,800 | 7,084 | 1,763 | |||||||||
Total paid | 13,468 | 10,374 | 6,437 | |||||||||
Net balances, December 31 | 26,564 | 24,850 | 17,385 | |||||||||
Plus reinsurance recoverable | 43,317 | 41,103 | 21,699 | |||||||||
Balances, December 31 | $ | 69,881 | $ | 65,953 | $ | 39,084 | ||||||
F-20
Table of Contents
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Balances, January 1 | $ | 6,999 | $ | 7,302 | $ | 7,433 | ||||||
Less reinsurance recoverable | (3,402 | ) | (3,780 | ) | (3,735 | ) | ||||||
Net balances, January 1 | 3,597 | 3,522 | 3,698 | |||||||||
Incurred related to claims in prior years | (169 | ) | 363 | 119 | ||||||||
Paid related to prior years | (397 | ) | (288 | ) | (295 | ) | ||||||
Net balances, December 31 | 3,031 | 3,597 | 3,522 | |||||||||
Plus reinsurance recoverable | 3,758 | 3,402 | 3,780 | |||||||||
Balances, December 31 | $ | 6,789 | $ | 6,999 | $ | 7,302 | ||||||
F-21
Table of Contents
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Balances, January 1 | $ | 6,050 | $ | 6,006 | $ | 5,864 | ||||||
Less reinsurance recoverable | (2,974 | ) | (2,949 | ) | (2,773 | ) | ||||||
Net balances, January 1 | 3,076 | 3,057 | 3,091 | |||||||||
Incurred related to claims in prior years | (1,154 | ) | 153 | 302 | ||||||||
Paid related to prior years | (176 | ) | (134 | ) | (336 | ) | ||||||
Net balances, December 31 | 1,746 | 3,076 | 3,057 | |||||||||
Plus reinsurance recoverable | 1,996 | 2,974 | 2,949 | |||||||||
Balances, December 31 | $ | 3,742 | $ | 6,050 | $ | 6,006 | ||||||
(12) | Notes Payable |
F-22
Table of Contents
Guaranty | ||||||||||||||||
Principal | Interest | Fees | Total | |||||||||||||
(In thousands) | ||||||||||||||||
2008 | $ | 1,041 | $ | 1,526 | $ | 428 | $ | 2,995 | ||||||||
2009 | 1,161 | 1,406 | 496 | 3,063 | ||||||||||||
2010 | 1,305 | 1,262 | 449 | 3,016 | ||||||||||||
2011 | 1,466 | 1,101 | 397 | 2,964 | ||||||||||||
Thereafter | 8,563 | 2,356 | 933 | 11,852 | ||||||||||||
$ | 13,536 | $ | 7,651 | $ | 2,703 | $ | 23,890 | |||||||||
(13) | Subordinated Debentures |
(14) | Common and Preferred Stock |
F-23
Table of Contents
(15) | Share-Based Compensation Plan |
F-24
Table of Contents
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Options | Price | |||||||
(In thousands) | ||||||||
Options Outstanding, January 1, 2005 | — | $ | — | |||||
Options granted | 179 | 5.10 | ||||||
Options exercised | — | — | ||||||
Options canceled | — | — | ||||||
Options Outstanding, December 31, 2005 | 179 | 5.10 | ||||||
Options granted | 87 | 6.62 | ||||||
Options exercised | — | — | ||||||
Options canceled | (67 | ) | 4.13 | |||||
Options Outstanding, December 31, 2006 | 200 | 6.09 | ||||||
Options granted | 70 | 6.62 | ||||||
Options exercised | — | — | ||||||
Options canceled | (61 | ) | 6.62 | |||||
Options Outstanding, December 31, 2007 | 210 | $ | 6.11 | |||||
Options Exercisable, December 31, 2007 | 91 | $ | 5.43 | |||||
F-25
Table of Contents
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Options | Fair Value | |||||||
(In thousands) | ||||||||
Unvested options, January 1, 2005 | — | $ | — | |||||
Options granted | 179 | 2.01 | ||||||
Options vested | — | — | ||||||
Options canceled | — | — | ||||||
Unvested options, December 31, 2005 | 179 | 2.01 | ||||||
Options granted | 87 | 2.70 | ||||||
Options vested | (46 | ) | 2.16 | |||||
Options canceled | (67 | ) | 1.60 | |||||
Unvested options, December 31, 2006 | 154 | 2.53 | ||||||
Options granted | 70 | 1.85 | ||||||
Options vested | (57 | ) | 2.29 | |||||
Options canceled | (48 | ) | 2.68 | |||||
Unvested options, December 31, 2007 | 119 | $ | 2.19 | |||||
(16) | Capital, Surplus and Dividend Restrictions |
F-26
Table of Contents
(17) | Other Contingencies and Commitments |
(In thousands) | ||||
2008 | $ | 997 | ||
2009 | 847 | |||
2010 | 717 | |||
$ | 2,561 | |||
F-27
Table of Contents
(18) | Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk |
(19) | Retirement Plan |
(20) | Segment Reporting |
F-28
Table of Contents
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Revenues | ||||||||||||
Premiums earned | $ | 24,613 | $ | 21,053 | $ | 21,336 | ||||||
Investment income, net | 1,326 | 1,321 | 1,077 | |||||||||
Net realized gains (losses) on investments | (5 | ) | 393 | (1,348 | ) | |||||||
Insurance segment revenues | 25,934 | 22,767 | 21,065 | |||||||||
Insurance services income | 11,325 | 10,208 | 6,552 | |||||||||
Intersegment revenues | (4,298 | ) | (3,033 | ) | (2,183 | ) | ||||||
Non-allocated items | — | (1,739 | ) | (950 | ) | |||||||
Consolidated revenues | $ | 32,961 | $ | 28,203 | $ | 24,484 | ||||||
Net Income (Loss) | ||||||||||||
Insurance segment | $ | (520 | ) | $ | (1,250 | ) | $ | 2,494 | ||||
Insurance services segment | 4,682 | 2,020 | 1,420 | |||||||||
Non-allocated items | (1,783 | ) | 840 | (2,814 | ) | |||||||
Consolidated net income | $ | 2,379 | $ | 1,610 | $ | 1,100 | ||||||
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Gain on early extinguishment of debt | $ | — | $ | 6,586 | $ | — | ||||||
Other income — forgiveness of interest due on extinguished debt | — | 796 | — | |||||||||
Holding company expenses | (1,395 | ) | (3,260 | ) | (2,184 | ) | ||||||
Interest expense | (1,290 | ) | (1,109 | ) | (1,129 | ) | ||||||
Other than temporary impairment of Tarheel investment in Foundation | — | (1,739 | ) | (950 | ) | |||||||
Total unallocated items before income tax expense (benefit) | (2,685 | ) | 1,274 | (4,263 | ) | |||||||
Income tax expense (benefit) on unallocated items | (902 | ) | 434 | (1,449 | ) | |||||||
Total unallocated items | $ | (1,783 | ) | $ | 840 | $ | (2,814 | ) | ||||
(21) | Related Party Transactions |
F-29
Table of Contents
(22) | Business Combination |
2007 | 2006 | 2005 | ||||||||||
(In thousands) | ||||||||||||
Revenues | $ | — | $ | 283 | $ | 3,647 | ||||||
Pre-tax net income (loss) | (343 | ) | (326 | ) | 69 |
(23) | Subsequent Events |
F-30
Table of Contents
(24) | Changes Relating to Proposed Initial Public Offering and Other Matters |
F-31
Table of Contents
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Investments | ||||||||
Debt securities, available for sale, at fair value | $ | 53,076 | $ | 55,688 | ||||
Equity securities, available for sale, at fair value | 488 | 634 | ||||||
Short-term investments | 382 | 238 | ||||||
Real estate held for the production of income | 253 | 256 | ||||||
Total investments | 54,199 | 56,816 | ||||||
Cash and cash equivalents | 4,538 | 4,943 | ||||||
Premiums receivable | 60,594 | 36,748 | ||||||
Deferred policy acquisition costs | 1,398 | 1,477 | ||||||
Prepaid reinsurance premiums | 31,341 | 14,963 | ||||||
Reinsurance recoverable | ||||||||
Unpaid losses and loss adjustment expenses | 42,182 | 43,317 | ||||||
Paid losses and loss adjustment expenses | 1,488 | 4,202 | ||||||
Funds held by ceding companies and other amounts due from reinsurers | 3,070 | 2,550 | ||||||
Net deferred tax assets | 3,409 | 3,022 | ||||||
Fixed assets | 969 | 1,165 | ||||||
Federal income taxes recoverable | 282 | 391 | ||||||
Intangible assets | 1,287 | 1,287 | ||||||
Other assets | 7,128 | 4,356 | ||||||
Total Assets | $ | 211,885 | $ | 175,237 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Reserves for losses and loss adjustment expenses | $ | 72,687 | $ | 69,881 | ||||
Reinsurance payable on paid losses and loss adjustment expenses | 783 | 404 | ||||||
Unearned and advanced premium reserves | 54,624 | 29,160 | ||||||
Reinsurance funds withheld and balances payable | 45,559 | 44,073 | ||||||
Notes payable and accrued interest, including $1.5 million of related party notes payable | 15,878 | 14,969 | ||||||
Subordinated debentures and accrued interest | 1,811 | 1,938 | ||||||
Accounts payable and accrued expenses | 13,718 | 9,376 | ||||||
Total liabilities | 205,060 | 169,801 | ||||||
Stockholders’ Equity | ||||||||
Common stock — Series A | 1 | 1 | ||||||
Common stock — Series B | 1 | 1 | ||||||
Paid-in capital | 5,509 | 5,363 | ||||||
Accumulated earnings | 1,904 | 196 | ||||||
Accumulated other comprehensive loss, net of deferred income tax benefit | (590 | ) | (125 | ) | ||||
Total stockholders’ equity | 6,825 | 5,436 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 211,885 | $ | 175,237 | ||||
F-32
Table of Contents
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
(In thousands, except | ||||||||
per share data) | ||||||||
Revenues | ||||||||
Premiums earned | $ | 20,104 | $ | 9,988 | ||||
Insurance services income | 3,008 | 3,058 | ||||||
Investment income, net | 980 | 537 | ||||||
Net realized gains (losses) on investments | 56 | (8 | ) | |||||
Total revenues | 24,148 | 13,575 | ||||||
Expenses | ||||||||
Net losses and loss adjustment expenses | 11,956 | 5,991 | ||||||
Net policy acquisition and underwriting expenses | 5,495 | 2,392 | ||||||
Other operating expenses | 4,233 | 4,062 | ||||||
Interest expense | 725 | 568 | ||||||
Total expenses | 22,409 | 13,013 | ||||||
Other income | 219 | — | ||||||
Income before income tax expense | 1,958 | 562 | ||||||
Income Tax Expense (Benefit) | 250 | (899 | ) | |||||
Net Income | $ | 1,708 | $ | 1,461 | ||||
Earnings Per Share | ||||||||
Basic | $ | 1.03 | $ | .92 | ||||
Diluted | 1.03 | .92 | ||||||
Weighted Average Number of Shares Used in the Determination of: | ||||||||
Basic | 1,649 | 1,588 | ||||||
Diluted | 1,660 | 1,598 | ||||||
F-33
Table of Contents
Accumulated | ||||||||||||||||||||||||||||||||
Common | Common | Accumulated | Other | Total | ||||||||||||||||||||||||||||
Stock | Stock | Paid-in | Earnings | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
Shares | Series A | Shares | Series B | Capital | (Deficit) | Income (Loss) | Equity | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balance, December 31, 2007 | 680 | $ | 1 | 969 | $ | 1 | $ | 5,363 | $ | 196 | $ | (125 | ) | $ | 5,436 | |||||||||||||||||
Stock-based compensation expense | — | — | — | 146 | — | — | 146 | |||||||||||||||||||||||||
Balance before comprehensive income | 680 | 1 | 969 | 1 | 5,509 | 196 | (125 | ) | 5,582 | |||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 1,708 | — | 1,708 | |||||||||||||||||||||||||
Net unrealized depreciation in available for sale securities, net of deferred tax benefit of $239,000 | — | — | — | — | — | (465 | ) | (465 | ) | |||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 1,708 | (465 | ) | 1,243 | |||||||||||||||||||||||
Balance, June 30, 2008 | 680 | $ | 1 | 969 | $ | 1 | $ | 5,509 | $ | 1,904 | $ | (590 | ) | $ | 6,825 | |||||||||||||||||
Balance, December 31, 2006 | 631 | 1 | 969 | 1 | 4,901 | (2,183 | ) | (26 | ) | 2,694 | ||||||||||||||||||||||
Unrestricted common stock grants | 61 | — | — | — | 401 | — | — | 401 | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | 59 | — | — | 59 | |||||||||||||||||||||||||
Balance before comprehensive income | 692 | 1 | 969 | 1 | 5,361 | (2,183 | ) | (26 | ) | 3,154 | ||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 1,461 | — | 1,461 | |||||||||||||||||||||||||
Net unrealized depreciation in available for sale securities, net of deferred tax benefit of $96,000 | — | — | — | — | — | (184 | ) | (184 | ) | |||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | 1,461 | (184 | ) | 1,277 | |||||||||||||||||||||||
Balance, June 30, 2007 | 692 | $ | 1 | 969 | $ | 1 | $ | 5,361 | $ | (722 | ) | $ | (210 | ) | $ | 4,431 | ||||||||||||||||
F-34
Table of Contents
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Operating Activities | ||||||||
Net income | $ | 1,708 | $ | 1,461 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Net realized (gains) losses on investments | (56 | ) | 8 | |||||
Other income | (219 | ) | — | |||||
Depreciation and amortization | 358 | 439 | ||||||
Stock compensation expense | 146 | 460 | ||||||
Amortization (accretion) of debt securities | 124 | (68 | ) | |||||
Deferred income tax expense (benefit) | (148 | ) | (2,524 | ) | ||||
Changes in certain assets and liabilities: | ||||||||
Decrease (increase) in: | ||||||||
Premiums receivable | (23,846 | ) | (22,918 | ) | ||||
Deferred policy acquisition costs | 79 | (876 | ) | |||||
Prepaid reinsurance premiums | (16,378 | ) | (14,831 | ) | ||||
Reinsurance recoverable on: | ||||||||
Unpaid losses and loss adjustment expenses | 1,135 | (457 | ) | |||||
Paid losses and loss adjustment expenses | 2,714 | (816 | ) | |||||
Funds held by ceding companies and other amounts due from reinsurers | (520 | ) | (2,214 | ) | ||||
Federal income tax recoverable | 109 | — | ||||||
Other assets | (2,772 | ) | 646 | |||||
Increase (decrease) in: | ||||||||
Reserves for losses and loss adjustment expenses | 2,806 | 554 | ||||||
Reinsurance payable on paid loss and loss adjustment expenses | 379 | (420 | ) | |||||
Unearned and advanced premium reserves | 25,464 | 22,178 | ||||||
Reinsurance funds withheld and balances payable | 1,486 | 15,743 | ||||||
Income taxes payable | — | 735 | ||||||
Accounts payable and accrued expenses | 4,375 | 2,364 | ||||||
Net Cash Used in Operating Activities | (3,056 | ) | (536 | ) | ||||
Investment Activities | ||||||||
Proceeds from sales and maturities of debt securities | 9,938 | 8,346 | ||||||
Purchases of debt securities | (7,952 | ) | (17,948 | ) | ||||
Proceeds from sales of equity securities | — | 281 | ||||||
Net sales (purchases) of short-term investments | (144 | ) | — | |||||
Purchases of fixed assets | (159 | ) | (216 | ) | ||||
Net Cash Provided by (Used In) Investment Activities | 1,683 | (9,537 | ) | |||||
Financing Activities | ||||||||
Proceeds from notes payable | 1,500 | — | ||||||
Repayment of debt | (532 | ) | (197 | ) | ||||
Net Cash Provided By (Used In) Financing Activities | 968 | (197 | ) | |||||
Decrease in Cash and Cash Equivalents | (405 | ) | (10,270 | ) | ||||
Cash and Cash Equivalents,beginning of period | 4,943 | 17,841 | ||||||
Cash and Cash Equivalents,end of period | $ | 4,538 | $ | 7,571 | ||||
F-35
Table of Contents
(1) | Summary of Significant Accounting Policies |
F-36
Table of Contents
F-37
Table of Contents
F-38
Table of Contents
(2) | Debt Securities |
June 30, 2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
(In thousands) | ||||||||||||||||
U.S. government securities | $ | 4,682 | $ | 44 | $ | — | $ | 4,726 | ||||||||
U.S. government agencies | 974 | 3 | — | 977 | ||||||||||||
Asset-backed and mortgage-backed securities | 15,534 | 22 | 198 | 15,358 | ||||||||||||
State and political subdivisions | 21,988 | 205 | 60 | 22,133 | ||||||||||||
Corporate securities | 9,938 | 76 | 132 | 9,882 | ||||||||||||
$ | 53,116 | $ | 350 | $ | 390 | $ | 53,076 | |||||||||
F-39
Table of Contents
December 31, 2007 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | 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 | |||||||||
June 30, 2008 | ||||||||||||||||||||||||
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) | ||||||||||||||||||||||||
U.S. government securities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
U.S. government agencies | — | — | — | — | — | — | ||||||||||||||||||
Asset-backed and mortgage-backed securities | 11,396 | 143 | 927 | 55 | 12,323 | 198 | ||||||||||||||||||
State and political subdivisions | 4,693 | 60 | — | — | 4,693 | 60 | ||||||||||||||||||
Corporate securities | 5,191 | 114 | 732 | 18 | 5,924 | 132 | ||||||||||||||||||
Total | $ | 21,280 | $ | 317 | $ | 1,659 | $ | 73 | $ | 22,940 | $ | 390 | ||||||||||||
Total Number of Securities in an Unrealized Loss Position | 74 | 8 | 82 | |||||||||||||||||||||
December 31, 2007 | ||||||||||||||||||||||||
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 | $ | 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 | ||||||||||||||||||
State and political subdivisions | — | — | — | — | — | — | ||||||||||||||||||
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 | |||||||||||||||||||||
F-40
Table of Contents
(3) | Fair Value Measurements |
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 |
F-41
Table of Contents
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 | $ | 4,726 | $ | 48,350 | $ | — | $ | 53,076 | ||||||||
Equity securities | 488 | — | — | 488 | ||||||||||||
$ | 5,214 | $ | 48,350 | $ | — | $ | 53,564 | |||||||||
(4) | Notes Payable and Subordinated Debentures |
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(5) | Reinsurance |
Six Months Ended June 30, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Written | Earned | Written | Earned | |||||||||||||
Gross premiums | $ | 69,732 | $ | 43,039 | $ | 54,029 | $ | 32,486 | ||||||||
Ceded premiums | 40,438 | 22,935 | 37,331 | 22,498 | ||||||||||||
Net premiums | $ | 29,294 | $ | 20,104 | $ | 16,698 | $ | 9,988 | ||||||||
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(6) | Net Losses and Loss Adjustment Expenses |
(7) | Share-Based Compensation Plan |
Weighted | ||||||||
Average | ||||||||
Number of | Exercise | |||||||
Options | Price | |||||||
(In thousands) | ||||||||
Options outstanding, December 31, 2007 | 210 | $ | 6.11 | |||||
Options canceled | (5 | ) | 6.62 | |||||
Options outstanding, June 30, 2008 | 205 | $ | 6.10 | |||||
Options exercisable, June 30, 2008 | 144 | $ | 5.88 | |||||
(8) | Income Taxes |
Six Months Ended June 30, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Income before income tax expense | $ | 1,958 | $ | 562 | ||||||||||||
Income tax at statutory rate | $ | 666 | 34.0 | % | $ | 191 | 34.0 | % | ||||||||
Tax effect of: | ||||||||||||||||
Tax exempt investment income | (169 | ) | (8.6 | ) | (17 | ) | (3.0 | ) | ||||||||
Increase (decrease) in unrecognized tax benefits | (290 | ) | (14.8 | ) | 711 | 126.4 | ||||||||||
Other items, net | 43 | 2.2 | 128 | 22.8 | ||||||||||||
250 | 12.8 | 1,013 | 180.2 | |||||||||||||
Decrease in valuation allowance | — | (1,912 | ) | (340.2 | ) | |||||||||||
Actual income tax rate | $ | 250 | 12.8 | % | $ | (899 | ) | (160.0 | )% | |||||||
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(9) | Capital, Surplus and Dividend Restrictions |
(10) | Segment Reporting |
F-45
Table of Contents
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Revenues | ||||||||
Premiums earned | $ | 20,104 | $ | 9,988 | ||||
Net investment income | 980 | 537 | ||||||
Net realized gains (losses) on investments | 56 | (8 | ) | |||||
Insurance segment revenues | 21,140 | 10,517 | ||||||
Insurance services income | 5,833 | 4,760 | ||||||
Intersegment revenues | (2,825 | ) | (1,702 | ) | ||||
Consolidated revenues | $ | 24,148 | $ | 13,575 | ||||
Pre-tax net income (loss) | ||||||||
Insurance segment | $ | 1,083 | $ | 432 | ||||
Insurance services segment | 2,078 | 1,274 | ||||||
Non-allocated items | (1,203 | ) | (1,144 | ) | ||||
Consolidated pre-tax net income | $ | 1,958 | $ | 562 | ||||
Net income (loss) | ||||||||
Insurance segment | $ | 1,134 | $ | (526 | ) | |||
Insurance services segment | 1,368 | 2,752 | ||||||
Non-allocated items | (794 | ) | (765 | ) | ||||
Consolidated net income | $ | 1,708 | $ | 1,461 | ||||
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Holding company expenses | $ | (478 | ) | $ | (576 | ) | ||
Interest expense | (725 | ) | (568 | ) | ||||
Total unallocated items before income tax benefit | (1,203 | ) | (1,144 | ) | ||||
Income tax benefit on unallocated items | (409 | ) | (379 | ) | ||||
Total unallocated items | $ | (794 | ) | $ | (765 | ) | ||
(11) | Commitments and Contingencies |
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(12) | Changes Relating to Proposed Initial Public Offering and Other Matters |
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![(COMPANY LOGO)](https://capedge.com/proxy/S-1A/0000950137-08-012266/c22948a5s2294800.gif)
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Item 13. | Other Expenses of Issuance and Distribution. |
SEC Registration Fee | $ | 7,457 | ||
FINRA Filing Fees | 18,500 | |||
Nasdaq Listing Fee | 100,000 | |||
Legal Fees and Expenses | 1,850,000 | |||
Accounting Fees and Expenses | 710,500 | |||
Transfer Agent and Registrar Fees | 15,000 | |||
Printing and Engraving Expenses | 250,000 | |||
Blue Sky Fees and Expenses | 5,000 | |||
Miscellaneous Expenses | 93,500 | |||
Total | $ | 3,049,957 | ||
Item 14. | Indemnification of Directors and Officers. |
Item 15. | Recent Sales of Unregistered Securities. |
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Item 16. | Exhibits and Financial Statement Schedules. |
Exhibit | ||||
No. | Description of Exhibit | |||
1 | .1 | Form of Underwriting Agreement | ||
2 | .1 | Stock Purchase Agreement dated March 4, 2008 between SunTrust Bank Holding Company and Guarantee Insurance Group, Inc.** | ||
2 | .2 | First Amendment dated July 24, 2008 to Stock Purchase Agreement between SunTrust Bank Holding Company and Guarantee Insurance Group, Inc. | ||
2 | .3 | Second Amendment dated September 24, 2008 to Stock Purchase Agreement between SunTrust Bank Holding Company and Guarantee Insurance Group, Inc. | ||
3 | .1 | Amended and Restated Certificate of Incorporation of the Registrant** | ||
3 | .2 | Amended and Restated Bylaws of the Registrant** | ||
4 | .1 | Investor Rights Agreement, dated November 2, 2004, among the Registrant, Steven M. Mariano and Westwind Holding Company, LLC** | ||
4 | .2 | Waiver, dated March 5, 2008, relating to Investor Rights Agreement, dated November 2, 2004, among the Registrant, Steven M. Mariano and Westwind Holding Company, LLC** | ||
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 | Employment Agreement 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 | 2008 Stock Incentive Plan** | ||
10 | .12 | Form of Option Award Agreement for 2008 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.** |
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Exhibit | ||||
No. | Description of Exhibit | |||
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.** | ||
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, 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** |
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Exhibit | ||||
No. | Description of Exhibit | |||
10 | .33 | Collateral Carry Forward Agreement for Owner of Segregated Portfolio in Caledonian Reinsurance SPC, dated August 16, 2005, among Westwind Holding Company, LLC, Progressive Employer Services III, LLC and Guarantee Insurance Company** | ||
10 | .34 | Form of Subordinated Debenture between the Registrant and Westwind Holding Company, LLC** | ||
10 | .35 | Non-Negotiable Fully Subordinated Surplus Note, dated August 13, 2004, between Guarantee Insurance Company and Westwind Holding Company, LLC** | ||
10 | .36 | Workers Compensation Reinsurance Agreement Quota Share Agreement and Aggregate Excess of Loss, dated August, 2005, between Guarantee Insurance Company and Segregated Portfolio 110, a segregated portfolio of Caledonian Reinsurance SPC** | ||
10 | .37 | Note Offset and Call Option Agreement dated July 29, 2004 and Amendment dated November 2, 2004 between Guarantee Insurance Company and Westwind Holding Company, LLC** | ||
10 | .38 | Participation Agreement dated August 16, 2004 between Westwind Holding Company, LLC and Caledonian Reinsurance SPC** | ||
10 | .39 | Renewal Participation Agreement dated August 16, 2005 between Westwind Holding Company, LLC and Caledonian Reinsurance SPC** | ||
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 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 | .56 | First Amendment to 2008 Stock Incentive Plan | ||
10 | .57 | Amendment No. 1 to the 2005 Stock Option Plan | ||
10 | .58 | Amendment No. 2 to the 2005 Stock Option Plan |
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Exhibit | ||||
No. | Description of Exhibit | |||
10 | .59 | Amendment No. 1 to the 2006 Stock Option Plan | ||
10 | .60 | Amendment No. 2 to the 2006 Stock Option Plan | ||
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** |
** | Previously filed |
Index to Financial Statement Schedules | Schedule | |
Report of BDO Seidman, LLP | — | |
Summary of Investments — Other Than Investments in Related Parties | I | |
Condensed Financial Information of Registrant Parent Company Only | II | |
Supplemental Insurance Information | III | |
Property and Liability Reinsurance | IV | |
Valuation and Qualifying Accounts | V | |
Supplemental Information Concerning Property and Casualty Insurance Operations | VI |
Item 17. | Undertakings. |
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By: | /s/ Steven M. Mariano Steven M. Mariano President and Chief Executive Officer |
Signature | Title | Date | ||||
/s/ Steven M. Mariano | Principal Executive Officer and Director | October 2, 2008 | ||||
/s/ Michael W. Grandstaff | Principal Financial Officer | October 2, 2008 | ||||
/s/ Michael J. Sluka | Principal Accounting Officer | October 2, 2008 | ||||
* Richard F. Allen | Director | October 2, 2008 | ||||
* John R. Del Pizzo | Director | October 2, 2008 | ||||
* Timothy J. Tompkins | Director | October 2, 2008 | ||||
* Ronald P. Formento Sr. | Director | October 2, 2008 | ||||
* C. Timothy Morris | Director | October 2, 2008 | ||||
* /s/ Steven M. Mariano Steven M. Mariano, * Attorney in Fact | October 2, 2008 |
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Amount | ||||||||||||
Shown on | ||||||||||||
Amortized | Balance | |||||||||||
Cost | Value | Sheet | ||||||||||
In thousands | ||||||||||||
Debt securities available for sale: | ||||||||||||
U.S. government securities | $ | 3,997 | $ | 4,033 | $ | 4,033 | ||||||
U.S. government agencies | 2,742 | 2,749 | 2,749 | |||||||||
Asset-backed and mortgage-backed securities | 15,994 | 16,113 | 16,113 | |||||||||
State and political subdivisions | 22,212 | 22,515 | 22,515 | |||||||||
Corporate securities | 10,225 | 10,278 | 10,278 | |||||||||
Total debt securities available for sale | 55,170 | 55,688 | 55,688 | |||||||||
Equity securities available for sale | 1,341 | 634 | 634 | |||||||||
Short-term investments | 238 | 238 | 238 | |||||||||
Real estate held for the production of income | 256 | 256 | 256 | |||||||||
Total investments | $ | 57,005 | $ | 56,816 | $ | 56,816 | ||||||
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SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
BALANCE SHEETS
December 31, | ||||||||
2007 | 2006 | |||||||
In thousands | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 10 | $ | 290 | ||||
Investments in subsidiaries | 17,478 | 10,378 | ||||||
Receivable from subsidiaries | — | 349 | ||||||
Other assets | 4,099 | 2,627 | ||||||
Total Assets | $ | 21,587 | $ | 13,644 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities | ||||||||
Notes payable and accrued interest | $ | 13,601 | $ | 8,532 | ||||
Subordinated debentures and accrued interest | 1,938 | 1,956 | ||||||
Other liabilities | 612 | 462 | ||||||
Total liabilities | 16,151 | 10,950 | ||||||
Stockholders’ Equity | ||||||||
Common stock — Series A | 1 | 1 | ||||||
Common stock — Series B | 1 | 1 | ||||||
Paid-in capital | 5,363 | 4,901 | ||||||
Accumulated earnings (deficit) | 196 | (2,183 | ) | |||||
Accumulated other comprehensive loss, net of deferred income taxes | (125 | ) | (26 | ) | ||||
Total stockholders’ equity | 5,436 | 2,694 | ||||||
Total liabilities and stockholders’ equity | $ | 21,587 | $ | 13,644 | ||||
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PARENT COMPANY ONLY
INCOME STATEMENTS
2007 | 2006 | 2005 | ||||||||||
In thousands | ||||||||||||
Revenue | $ | 69 | $ | 57 | $ | 3 | ||||||
Expenses: | ||||||||||||
Other operating expenses | 1,394 | 1,187 | 562 | |||||||||
Interest expense | 1,262 | 878 | 44 | |||||||||
Total expenses | 2,656 | 2,065 | 606 | |||||||||
Loss before income taxes and subsidiary equity earnings | (2,587 | ) | (2,008 | ) | (603 | ) | ||||||
Income tax benefit | (805 | ) | (1,157 | ) | (205 | ) | ||||||
Loss before subsidiary equity earnings | (1,782 | ) | (851 | ) | (398 | ) | ||||||
Subsidiary equity earnings | 4,161 | 2,461 | 1,498 | |||||||||
Net income | $ | 2,379 | $ | 1,610 | $ | 1,100 | ||||||
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PARENT COMPANY ONLY
STATEMENTS OF COMPREHENSIVE INCOME
2007 | 2006 | 2005 | ||||||||||
In thousands | ||||||||||||
Net income | $ | 2,379 | $ | 1,610 | $ | 1,100 | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||
Net unrealized appreciation (depreciation) in available for sale securities, net of deferred taxes of ($51,000), $255,000 and $467,000 | (99 | ) | 579 | (1,002 | ) | |||||||
Reclassification adjustment for net gains (losses) realized in net income during the year, net of tax effect of $0, ($143,000) and $505,000 | — | (277 | ) | 981 | ||||||||
Other comprehensive income (loss) | (99 | ) | 302 | (21 | ) | |||||||
Comprehensive income | $ | 2,280 | $ | 1,912 | $ | 1,079 | ||||||
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CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
2007 | 2006 | 2005 | ||||||||||
In thousands | ||||||||||||
Net cash used in operating activities | $ | (2,130 | ) | $ | (3,013 | ) | $ | (531 | ) | |||
Investing Activities: | ||||||||||||
Investments in subsidiaries | (3,000 | ) | (3,000 | ) | — | |||||||
Other | (129 | ) | (392 | ) | — | |||||||
Net cash used in investing activities | (3,129 | ) | (3,392 | ) | — | |||||||
Financing Activities: | ||||||||||||
Proceeds from notes payable | 5,665 | 8,652 | — | |||||||||
Net proceeds from issuance of common stock | — | 1,355 | 250 | |||||||||
Net disbursements for redemption of common stock | (100 | ) | (984 | ) | — | |||||||
Repayment of debt | (586 | ) | (2,320 | ) | — | |||||||
Proceeds from issuance of subordinated debentures | — | — | 1,956 | |||||||||
Dividends paid | — | (600 | ) | (1,057 | ) | |||||||
Payments on affiliated loans | — | — | (341 | ) | ||||||||
Net cash used in financing activities | 4,979 | 6,103 | 808 | |||||||||
Increase (decrease) in cash and cash equivalents | (280 | ) | (302 | ) | 277 | |||||||
Cash and cash equivalents,beginning of period | 290 | 592 | 315 | |||||||||
Cash and cash equivalents,end of period | $ | 10 | $ | 290 | $ | 592 | ||||||
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Future | ||||||||||||||||||||
Policy | ||||||||||||||||||||
Benefits, | Other | |||||||||||||||||||
Deferred | Losses, | Policy | ||||||||||||||||||
Policy | Claims | Claims and | ||||||||||||||||||
Acquisition | and Loss | Unearned | Benefits | Premium | ||||||||||||||||
Costs | 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 | |||||||||||
Benefits, | ||||||||||||||||||||
Claims, | Amortization of | |||||||||||||||||||
Net | Losses and | Deferred Policy | Other | |||||||||||||||||
Investment | Settlement | Acquisition | Operating | Premiums | ||||||||||||||||
Income | Expenses | Costs | Expenses(1) | 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. |
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As of and for the Year Ended December 31, 2006
Future | ||||||||||||||||||||
Policy | ||||||||||||||||||||
Benefits, | Other | |||||||||||||||||||
Deferred | Losses, | Policy | ||||||||||||||||||
Policy | Claims | Claims and | ||||||||||||||||||
Acquisition | and Loss | Unearned | Benefits | Premium | ||||||||||||||||
Costs | 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. |
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As of and for the Year Ended December 31, 2005
Future | ||||||||||||||||||||
Policy | ||||||||||||||||||||
Benefits, | Other | |||||||||||||||||||
Deferred | Losses, | Policy | ||||||||||||||||||
Policy | Claims | Claims and | ||||||||||||||||||
Acquisition | and Loss | Unearned | Benefits | Premium | ||||||||||||||||
Costs | Expenses | Premium | Payable | Revenue | ||||||||||||||||
In thousands | ||||||||||||||||||||
Insurance | $ | 1,410 | $ | 39,084 | $ | 13,214 | $ | — | $ | 21,336 | ||||||||||
Insurance services | — | — | — | — | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 1,410 | $ | 39,084 | $ | 13,214 | $ | — | $ | 21,336 | |||||||||||
Benefits, | ||||||||||||||||||||
Claims, | Amortization of | |||||||||||||||||||
Net | Losses and | Deferred Policy | Other | |||||||||||||||||
Investment | Settlement | Acquisition | Operating | Premiums | ||||||||||||||||
Income | Expenses | Costs | Expenses | Written | ||||||||||||||||
Insurance | $ | 1,077 | $ | 12,022 | $ | (1,856 | ) | $ | 5,024 | $ | 23,959 | |||||||||
Insurance services | — | — | — | 6,378 | — | |||||||||||||||
Unallocated | — | — | — | — | — | |||||||||||||||
$ | 1,077 | $ | 12,022 | $ | (1,856 | ) | $ | 11,402 | $ | 23,959 | ||||||||||
(1) | Other operating expenses are identified by segment based on the direct identification method. |
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Assumed | Percentage of | |||||||||||||||||||
Ceded to | from | Amount | ||||||||||||||||||
Gross | Other | Other | Net | Assumed to | ||||||||||||||||
Amount | Companies | Companies | Amount | Net | ||||||||||||||||
In thousands | ||||||||||||||||||||
2007 | $ | 72,645 | $ | 49,101 | $ | 1,069 | $ | 24,613 | 4.3 | % | ||||||||||
2006 | 58,659 | 39,619 | 2,013 | 21,053 | 9.6 | % | ||||||||||||||
2005 | 54,271 | 34,445 | 1,510 | 21,336 | 7.1 | % |
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For the Years Ended December 31,
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 | ||||||||||||||||||||
2007 | $ | 1,000 | $ | — | $ | — | $ | — | $ | 1,000 | ||||||||||
2006 | — | 1,000 | — | — | 1,000 | |||||||||||||||
2005 | — | — | — | — | — |
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SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY
INSURANCE OPERATIONS
As of and For the Years Ended December 31, 2007, 2006 and 2005
Reserves | ||||||||||||||||||||
Deferred | for Losses | |||||||||||||||||||
Policy | and Loss | Net | Net | |||||||||||||||||
Acquisition | Adjustment | Unearned | Premiums | Investment | ||||||||||||||||
Costs | Expenses(1)(2) | Premiums(2) | Earned | Income | ||||||||||||||||
In thousands | ||||||||||||||||||||
(a) Property and casualty subsidiary | ||||||||||||||||||||
2007 | $ | 1,477 | $ | 69,881 | $ | 29,160 | $ | 24,613 | $ | 1,326 | ||||||||||
2006 | 774 | 65,953 | 15,643 | 21,053 | 1,321 | |||||||||||||||
2005 | 1,410 | 39,084 | 13,214 | 21,336 | 1,077 |
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 | ||||||||||||||||
2007 | $ | 18,642 | $ | (3,460 | ) | $ | 657 | ) | $ | 13,648 | $ | 30,961 | ||||||||
2006 | 15,328 | 2,511 | (35 | ) | 10,374 | 19,386 | ||||||||||||||
2005 | 11,439 | 583 | 1,856 | 6,437 | 23,959 |
(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 $43.3 million, $41.1 million and $28.5 million as of December 31, 2007, 2006 and 2005, respectively. Unearned premiums are shown gross of ceded unearned premiums of $15.0 million, $8.3 million and $4.2 million as of December 31, 2007, 2006 and 2005, respectively. |
S-12
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Exhibit | ||||
No. | Description of Exhibit | |||
1 | .1 | Form of Underwriting Agreement | ||
2 | .1 | Stock Purchase Agreement dated March 4, 2008 between SunTrust Bank Holding Company and Guarantee Insurance Group, Inc.** | ||
2 | .2 | First Amendment dated July 24, 2008 to Stock Purchase Agreement between SunTrust Bank Holding Company and Guarantee Insurance Group, Inc. | ||
2 | .3 | Second Amendment dated September 24, 2008 to Stock Purchase Agreement between SunTrust Bank Holding Company and Guarantee Insurance Group, Inc. | ||
3 | .1 | Amended and Restated Certificate of Incorporation of the Registrant** | ||
3 | .2 | Amended and Restated Bylaws of the Registrant** | ||
4 | .1 | Investor Rights Agreement, dated November 2, 2004, among the Registrant, Steven M. Mariano and Westwind Holding Company, LLC** | ||
4 | .2 | Waiver, dated March 5, 2008, relating to Investor Rights Agreement, dated November 2, 2004, among the Registrant, Steven M. Mariano and Westwind Holding Company, LLC** | ||
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 | Employment Agreement 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 | 2008 Stock Incentive Plan** | ||
10 | .12 | Form of Option Award Agreement for 2008 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** |
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
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, 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 | .33 | Collateral Carry Forward Agreement for Owner of Segregated Portfolio in Caledonian Reinsurance SPC, dated August 16, 2005, among Westwind Holding Company, LLC, Progressive Employer Services III, LLC and Guarantee Insurance Company** | ||
10 | .34 | Form of Subordinated Debenture between the Registrant and Westwind Holding Company, LLC** | ||
10 | .35 | Non-Negotiable Fully Subordinated Surplus Note, dated August 13, 2004, between Guarantee Insurance Company and Westwind Holding Company, LLC** | ||
10 | .36 | Workers Compensation Reinsurance Agreement Quota Share Agreement and Aggregate Excess of Loss, dated August, 2005, between Guarantee Insurance Company and Segregated Portfolio 110, a segregated portfolio of Caledonian Reinsurance SPC** | ||
10 | .37 | Note Offset and Call Option Agreement dated July 29, 2004 and Amendment dated November 2, 2004 between Guarantee Insurance Company and Westwind Holding Company, LLC** | ||
10 | .38 | Participation Agreement dated August 16, 2004 between Westwind Holding Company, LLC and Caledonian Reinsurance SPC** | ||
10 | .39 | Renewal Participation Agreement dated August 16, 2005 between Westwind Holding Company, LLC and Caledonian Reinsurance SPC** |
Table of Contents
Exhibit | ||||
No. | Description of Exhibit | |||
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 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 | .56 | First Amendment to 2008 Stock Incentive Plan | ||
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 | ||
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** |
** | Previously filed |