Table of Contents
SECURITIES AND EXCHANGE COMMISSION
UNDER
THE SECURITIES ACT OF 1933
Pennsylvania (State or other jurisdiction of incorporation or organization) | 6331 (Primary Standard Industrial Classification Code Number) | 23-0794050 (I.R.S. Employer Identification Number) |
Cleona, PA 17042
(717) 272-6655
President and Chief Executive Officer
LMI Holdings, Inc.
137 West Penn Avenue
Cleona, PA 17042
(717) 272-6655
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Jeffrey P. Waldron, Esquire Wesley R. Kelso, Esquire Stevens & Lee 620 Freedom Business Center Suite 200 King of Prussia, PA 19406 (610) 205-6028 | Charles J. Ferry, Esquire Rhoads & Sinon LLP 12th Floor One South Market Square Harrisburg, PA 17108 (717) 233-5731 |
Large accelerated filero | Accelerated filero | Non-accelerated filero | Smaller reporting companyþ | |||
(Do not check if a smaller reporting company) |
Proposed | ||||||||||||||
Title of each class | Maximum | Proposed Aggregate | Amount of | |||||||||||
of securities to be | Amount to be | Offering Price | Maximum Offering | Registration | ||||||||||
registered | Registered | Per Share | Price(1) | Fee(2) | ||||||||||
Common Stock, $0.01 par value per share | 1,086,111 shares | $10.00 | $10,861,110 | $607.00 | ||||||||||
(1) | Estimated solely for the purpose of calculating the registration fee. | |
(2) | Calculated in accordance with Rule 457(a) and previously paid. | |
Table of Contents
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
• | policyholders of Lebanon Mutual as of December 19, 2007; | ||
• | our employee stock ownership plan, which we refer to as our ESOP; and | ||
• | officers, directors and employees of Lebanon Mutual. | ||
Table of Contents
Price: $10.00 per share
Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
Number of shares offered | 722,500 | 850,000 | 977,500 | 1,086,111 | ||||||||||||
Gross offering proceeds | $ | 7,225,000 | $ | 8,500,000 | $ | 9,775,000 | $ | 10,861,110 | ||||||||
Less: Proceeds from ESOP shares (1) | $ | 722,500 | $ | 850,000 | $ | 977,500 | $ | 1,086,110 | ||||||||
Offering expenses (2)(3) | $ | 2,500,000 | $ | 2,500,000 | $ | 2,500,000 | $ | 2,500,000 | ||||||||
Commissions (3)(4) | $ | -0- | $ | -0- | $ | -0- | $ | -0- | ||||||||
Net proceeds | $ | 4,002,500 | $ | 5,150,000 | $ | 6,297,500 | $ | 7,275,000 | ||||||||
Net proceeds per share | $ | 5.54 | $ | 6.06 | $ | 6.44 | $ | 6.70 |
(1) | The calculation of net proceeds from this offering does not include the shares being purchased by our ESOP because we will loan a portion of the proceeds to the ESOP to fund the purchase of such shares. The ESOP is purchasing such number of shares as will equal 10% of the total number of shares sold in the offering. | |
(2) | Includes $75,000 and $25,000 that Lebanon Mutual paid as retainers to Stevens & Lee and Griffin Financial in 2007 for services performed in connection with the offering. | |
(3) | See “The Conversion — Marketing and Underwriting Arrangements”. | |
(4) | Assumes that no shares are sold in a syndicated offering. | |
Table of Contents
Page | ||||
1 | ||||
2 | ||||
17 | ||||
33 | ||||
35 | ||||
37 | ||||
40 | ||||
41 | ||||
42 | ||||
44 | ||||
52 | ||||
69 | ||||
94 | ||||
128 | ||||
142 | ||||
150 | ||||
151 | ||||
151 | ||||
151 | ||||
152 | ||||
F-1 | ||||
(i)
Table of Contents
• | “LMI Holdings,” “we,” “us” and “our” refer to LMI Holdings, Inc. prior to completion of the conversion and after completion of the conversion refer to LMI Holdings, Inc. and all of its subsidiaries; | ||
• | the “conversion” refers to a series of transactions by which Lebanon Mutual will convert from a mutual property and casualty insurance company to a stock property and casualty insurance company, become a subsidiary of LMI Holdings and change its name to Lebanon Insurance Company; | ||
• | the “offering” and the “conversion offering” refer to the offering by LMI Holdings of up to 977,500 shares of its common stock to eligible subscribers under the Plan of Conversion in a subscription offering and to the general public in a community offering and a syndicated offering. The subscription offering and the community offering will be conducted at the same time, and the syndicated offering may be conducted concurrently with the subscription and community offerings; | ||
• | “members” refers to the named insureds under an insurance policy issued by Lebanon Mutual; and | ||
• | the “Tuscarora Companies” means Tuscarora-Wayne Mutual Insurance Company and Tuscarora Wayne Investments, LLC. | ||
1
Table of Contents
2
Table of Contents
• | Griffin MTS Partners, LLC agreed to advance substantially all of the costs of the conversion in exchange for a fee of $2.4 million, which is due at closing; and | ||
• | The Tuscarora Companies have agreed to purchase the lesser of (i) 35% of the number of shares sold in the offering or (ii) 600,000 shares, in exchange for a right, subject to any required regulatory approval, to require us to repurchase this investment beginning on the first anniversary of the conversion and ending on the fourth anniversary of the conversion. The Tuscarora Companies will purchase shares of our class B common stock, which, except as described in this prospectus, has the same rights as our class A common stock. | ||
3
Table of Contents
4
Table of Contents
• | The Tuscarora Companies have agreed to purchase the lesser of (i) 35% of the number of shares sold in the offering, or (ii) 600,000 shares. The Tuscarora Companies have agreed to submit their orders in the community offering. We will have the option to accept or reject, in whole or in part, the orders submitted by the Tuscarora Companies in the offering, but the Tuscarora Companies will have no obligation to purchase any shares unless they are permitted to purchase at least 25% of the shares sold in the offering. The shares purchased by the Tuscarora Companies will be a separate class of common stock designated as class B common stock and will be restricted securities. Except as described below, the class B common stock will be identical in all respects to the class A common stock. | ||
• | If we reject all or any portion of the Tuscarora Companies’ order in the community offering, then in exchange for the Tuscarora Companies committing the capital necessary to satisfy their agreement to purchase such shares, we have agreed to pay a fee of $0.50 for each share that either Tuscarora Investments or Tuscarora Wayne orders in the community offering that we do not issue to them. If the offering is completed at the maximum of the offering range, the maximum number of shares that the Tuscarora Companies would subscribe to purchase in the community offering is 342,125. If we reject the Tuscarora Companies’ community offering order in full, then the maximum amount we would be obligated to pay the Tuscarora Companies is $171,063. | ||
• | We have agreed to reimburse Tuscarora Wayne for the legal fees and expenses that it incurs in connection with the Investment Agreement and its purchase of our class B common stock in the offering, up to $200,000. | ||
• | We and Tuscarora Wayne have entered into a management services agreement pursuant to which, effective April 1, 2009, Tuscarora Wayne is responsible for managing the day-to-day operations of LMI Holdings and Lebanon Mutual. See “Management — Management Services Agreement.” | ||
• | The obligation of the Tuscarora Companies to purchase any of our class B shares in the offering is conditioned upon Tuscarora Investments obtaining financing to purchase its portion of such shares as described in this prospectus. See “ The Conversion — The Investment Agreement.” | ||
• | As long as the Tuscarora Companies hold any shares of our class B common stock, during the next three years they will vote their class B shares in favor of our nominees for the board of directors and for our stock-based compensation program. | ||
• | The Tuscarora Companies have each agreed not to increase its ownership interest in our class A or class B common stock without our consent for a period of three years. | ||
5
Table of Contents
• | Beginning six months after completion of the conversion, the Tuscarora Companies will have the right to sell in the open market shares that they purchased in the conversion offering, subject to a weekly and an aggregate volume limitation. However, if we give written notice to the Tuscarora Companies, they must cease any market sales for 30 days, provided that we can give such notice only twice during any twelve month period. The Tuscarora Companies have each agreed that they will not sell shares in any week in an amount in excess of 0.50% of our outstanding shares and that they will stop selling any shares in the open market upon receipt of a written request from us. Beginning on the third anniversary of the conversion, the Tuscarora Companies are free to sell any or all of their class B shares in the market or in privately negotiated transactions, provided that no block sale of more than 75,000 shares will be made. Upon any sale to anyone other than an affiliate of Tuscarora Wayne, the class B shares that are sold automatically convert into class A shares and all attributes of the class B shares sold, including the redemption and dividend rights described herein, terminate. | ||
• | For approximately fourteen months after completion of the conversion, we will retain proceeds from the offering in an amount sufficient to redeem class B shares owned by Tuscarora Investments having a Redemption Price equal to the amount necessary to repay the loan it obtained to purchase such shares and will invest such proceeds only in obligations issued or guaranteed by the United States of America. We will also grant a security interest in such investments to Tuscarora Investments. Thereafter, we will be permitted to contribute such proceeds to Lebanon Mutual. At the maximum of the offering range, the redemption price for the shares that Tuscarora Investments has agreed to purchase is approximately $1.9 million at the first anniversary of completion of the conversion. | ||
• | Until any obligation to redeem the class B shares has expired or been satisfied, the consent of the holders of a majority of the class B shares is required before either we or Lebanon Mutual (i) issue any security, except shares issued under our stock incentive plan, (ii) pay any dividend or other distribution on or redeem any class A shares unless an equal dividend is paid on the class B shares, (iii) engage in any merger, consolidation, liquidation, dissolution, winding-up, recapitalization, reorganization or sale of all or substantially all of our assets unless the holders of class B shares receive at least the Redemption Price in exchange for their class B shares, (iv) amend our articles of incorporation or bylaws, (v) increase the size of our board of directors or any committee thereof, (vi) issue any security of Lebanon Mutual or any other subsidiary to any person other than LMI Holdings, (vii) engage in the acquisition of the stock or assets of any person other than in the ordinary course of business, (viii) engage in any line of business other than those engaged in at the date of completion of the conversion, (ix) incur any indebtedness or guaranty the obligation of any other person other than in the ordinary course of business (excluding the loan to the ESOP as described in this prospectus), (x) increase the number of shares of capital stock or options available for issuance to employees, officers, directors, consultants and advisors in excess of the amounts described in this prospectus, or (xi) engage in any transaction with affiliates. | ||
• | After the date of a redemption default and at any time after the third anniversary of the completion of the conversion, the Tuscarora Companies will have certain rights to demand that we register their shares for sale in a public offering under the Securities Act of 1933, as amended. | ||
• | The holders of our class B shares will be entitled to vote as a separate class and will be entitled to nominate and elect two directors to our board of directors. The class B shares will vote together with the class A common stock with respect to the election of all other directors. | ||
• | Beginning on the first anniversary of the conversion and continuing until the fourth anniversary of the conversion, and subject to any required approval of the Pennsylvania Insurance Department, each holder of class B shares will have the right to require us to repurchase any or all of its class B shares at the Redemption Price. | ||
• | In the event that any holder of class B shares asks us to redeem any of its class B shares and we fail to redeem such shares, which we refer to as a redemption default, the class B common stock will accrue a dividend at the rate of $0.499 per share, per annum until all class B shares are redeemed. Payment of the dividend may be subject to the prior approval of the Pennsylvania Insurance Department. | ||
• | Until the fourth anniversary of the conversion, the holders of the class B common stock voting as a separate class, have the right to disapprove any fundamental transaction such as a merger or sale of LMI Holdings or Lebanon Mutual that does not provide for the redemption, exchange or repurchase of the class B shares for a price equal to or greater than the Redemption Price. | ||
• | If a redemption default ocurrs and continues until the end of the fourth anniversary of the completion of the conversion and the Tuscarora Companies still own fifty percent or more of the class B shares that they purchased in the offering, then the holders of the class B shares will have the right to elect a majority of the members of the board of directors of LMI Holdings and to cast a majority of the votes entitled to be cast in connection with any proposed merger, consolidation or sale of the assets of LMI Holdings or any similar transaction. | ||
– | Increase commercial and casualty writings. We intend to increase our volume of casualty business by expanding our commercial and casualty lines and marketing these lines to our existing producers and by forming and developing relationships with new producers that are focused on commercial and casualty business. Our efforts may be impeded by events outside our control, including a soft market phase of the insurance industry cycle, or our inability to secure a higher rating from A.M. Best Company. | ||
6
Table of Contents
– | Reduce our reliance on reinsurance. We believe the increased capital from the conversion will allow us to increase the risk we retain on individual policies, which will increase our net premium volume. Retention of additional risk will also increase our exposure to and may result in additional losses and loss adjustment expense, which may have an adverse effect on our operating results and our ability to obtain a higher rating from A.M. Best. | ||
– | Attract and retain high-quality insurance producers. We intend to implement this strategy through increased marketing activities in targeted growth markets to attract high quality producers. We believe the increased capital resulting from the conversion may enable us to eventually secure a higher rating from A.M. Best Company, which should help us to attract producers. Our ability to achieve this goal may be affected by our competitors who may offer producers higher commissions on the sale of their insurance products and by our ability to identify and retain qualified marketing personnel. In addition, the increased capital resulting from the conversion does not guaranty that we will be able to secure a higher rating from A.M. Best. | ||
– | Invest in technology. We will continue to invest in technology, both to make our system more user-friendly for our producers and facilitate increases in premium volume and to improve our profitability by reducing expenses. For these technology initiatives to be successful, we must successfully demonstrate to our producers the competitive advantages that can be gained by utilizing the new technology and we must re-engineer our internal processes to realize the potential efficiencies available through implementation of the new systems. | ||
– | Diversify our business geographically. We intend to increase our business outside Pennsylvania by selectively expanding our producer relationships. Geographic expansion will most likely be focused on the Mid-Atlantic region of the United States, but we intend to explore any opportunities that arise to determine if they are financially attractive. The successful diversification of our business will be contingent upon our ability to implement our disciplined underwriting, pricing and product strategies over a larger operating region and our ability to engage and retain qualified personnel, producers and third party claims administrators that may be necessary for expansion. | ||
– | Catastrophic or other significant natural losses may negatively affect our financial and operating results. We have experienced catastrophe losses and can be expected to experience catastrophe losses in the future. Catastrophe losses can be caused by various events, including coastal storms, snow storms, ice storms, freezing, hurricanes, earthquakes, tornadoes, wind, hail, fires, and other natural or man-made disasters. In the event that we experience catastrophe losses, we cannot assure you that our unearned premium, loss reserves and reinsurance will be adequate to cover these risks. Due to the geographic concentration of our business, catastrophe and natural peril losses may have a greater adverse effect on us than they would on a more geographically diverse property and casualty insurer. | ||
7
Table of Contents
– | Tuscarora Wayne competes with Lebanon Mutual with respect to certain insurance products that both offer, and Tuscarora Wayne may direct profitable business opportunities to itself and its affiliates. Because Tuscarora Wayne will be responsible for managing the day-to-day operations of Lebanon Mutual, it may become aware of business opportunities that are available to both Lebanon Mutual and Tuscarora Wayne and may decide to take advantage of such opportunities for itself or its affiliates. | ||
– | Transaction expenses are high as a percentage of gross proceeds and in relation to the size of our business.If the offering is completed we are obligated to pay Griffin MTS Partners, LLC a fee of $2.4 million, from which it will pay all transaction expenses. If the transaction is not completed, we are not obligated to pay any fee to Griffin MTS Partners, LLC and it will be solely responsible for unpaid transaction expenses. If the transaction is completed, total transaction expenses will be $2.5 million and will range between 25.6% and 34.6% of the gross proceeds of the offering. | ||
– | Because of the small offering size and the large percentage of shares that will be owned by our management, our ESOP and the Tuscarora Companies, an active trading market is not likely to develop, and you may find it difficult to sell your shares.No market currently exists for our shares, and an active trading market is not likely to develop. This is, in part, because the size of the offering is very small, and a substantial portion of the stock likely will be held by our management, our ESOP and the Tuscarora Companies which, except for limited open market sales, have promised not to sell their stock in the market for three years. This will reduce the amount of market activity in our stock and make it more difficult for you to sell your shares. Furthermore in the future we may elect to deregister with the SEC, which could potentially eliminate the public market for our shares. | ||
– | Because Stevens & Lee and Griffin Financial are acting as legal and financial advisors to us in this transaction, and through its funding of the obligations of Griffin MTS Partners, LLC, Stevens & Lee is also acting as a principal, a conflict of interest exists which may adversely affect you.After payment of the transaction expenses, Griffin MTS Partners, LLC will pay Griffin Financial an additional $225,000 and between approximately $1.0 million and $1.1 million will be paid to Stevens & Lee. Conflicts of interest exist because Stevens & Lee and Griffin Financial are acting as advisors and Stevens & Lee is acting as a principal in this transaction. This could cause Stevens & Lee and Griffin Financial to act in what they perceive as their own best interests rather than providing advice that is in our best interests and the best interests of other investors. | ||
8
Table of Contents
• | such person’s spouse; | ||
• | relatives of such person or such person’s spouse living in the same house; | ||
• | companies, trusts or other entities in which such person or entity holds 10% or more of the equity securities; or |
9
Table of Contents
• | a trust or estate in which such person or entity holds a substantial beneficial interest or serves in a fiduciary capacity. |
10
Table of Contents
Amount | ||||||||
Amount | at the adjusted | |||||||
at the minimum | maximum | |||||||
Use of Net Proceeds | ||||||||
Loan to ESOP | $ | 722,500 | $ | 1,086,110 | ||||
Redemption of class B shares or payment of standby fee (1) | 2,781,625 | 171,063 | ||||||
Payment of Tuscarora Wayne legal fees (2) | 200,000 | 200,000 | ||||||
Purchase of investment securities (3) | 1,020,875 | 6,903,937 | ||||||
Total | $ | 4,725,000 | $ | 8,361,110 | ||||
(1) | We may be required to use a portion of the net proceeds to fund our obligation to redeem the class B shares beginning one year after completion of the offering. If the Tuscarora Companies together purchase 35% of the shares issued in the conversion, the amount of net proceeds needed to fund our obligation to redeem the class B shares at the first anniversary of the completion of the offering will range between $2,781,625 at the minimum of the appraisal range and $3,763,375 at the maximum of the appraisal range, resulting in net proceeds of between $1,020,875 and $2,334,125 after redemption of such shares, payment of offering expenses, the payment of Tuscarora-Wayne’s legal fees, and the loan to the ESOP. To the extent that the Tuscarora Companies exercise their right under the Investment Agreement to sell their shares in the market, our redemption obligation will be reduced and the net proceeds we have to deploy in our business will increase. If the number of shares subscribed for in the subscription offering prevent the Tuscarora Companies from purchasing at least 25% of the total number of shares sold in the offering, then the Tuscarora Companies will not be obligated to purchase any shares and the maximum standby fee that we would by obligated to pay to the Tuscarora Companies is $171,063. | |
(2) | We have agreed to reimburse Tuscarora Wayne for the legal fees that it incurs in connection with the Investment Agreement and the purchase of our shares in the offering, in an amount not to exceed $200,000. | |
(3) | The amount of funds available to contribute to Lebanon Mutual to be used to increase its statutory surplus and for other corporate purposes will depend on the number of shares sold in the offering and the number of class B shares sold in the offering. | |
• | First: To policyholders as of December 19, 2007; | ||
• | Second: To the ESOP; and | ||
• | Third: To directors, officers and employees of Lebanon Mutual. | ||
11
Table of Contents
• | Tuscarora Wayne and Tuscarora Investments; | ||
• | natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are residents of Berks, Dauphin, Lancaster, or Lebanon Counties in Pennsylvania; | ||
• | licensed insurance agencies and brokers that have been appointed by Lebanon Mutual to market and distribute policies of insurance; and | ||
• | policyholders under policies of insurance issued by Lebanon Mutual after December 19, 2007. | ||
Shares Available | ||||||
Offering | Eligible Purchasers | for Purchase | ||||
Subscription Offering | • | Policyholders at December 19, 2007 | 977,500 shares | |||
• | Officers, Directors and Employees of Lebanon Mutual | |||||
Community Offering | All members of the general public, with preferences given to: | 977,500 shares, less shares | ||||
• | Tuscarora Wayne and Tuscarora Investments | subscribed for in the Subscription Offering | ||||
• | residents of Lebanon, Lancaster, Berks or Dauphin Counties in Pennsylvania | |||||
• | licensed insurance agencies and brokers appointed by Lebanon Mutual | |||||
• | Policyholders issued policies after December 19, 2007 | |||||
Syndicated Offering | All members of the general public | 977,500 shares, less shares subscribed for in the Subscription Offering |
12
Table of Contents
Minimum | Midpoint | Maximum | Adjusted Maximum | |||||||||||||
Number of shares outstanding | 722,500 | 850,000 | 977,500 | 1,086,111 | ||||||||||||
Number of shares owned by Tuscarora Companies | 252,875 | 1 | 297,500 | 1 | 342,125 | 1 | 0 | 1 | ||||||||
Percentage of outstanding shares owned by Tuscarora Companies | 35 | %1 | 35 | %1 | 35 | %1 | 0 | %1 |
1 | Although the Tuscarora Companies have agreed to purchase 35% of the shares sold in connection with the conversion, they are still obligated to purchase shares provided that the amount they are permitted to purchase is no less than 25% of the total shares sold. Accordingly, the number of shares and percentage of outstanding shares owned by the Tuscarora Companies after the offering at the minimum, the midpoint, and the maximum of the offering range may be substantially lower than shown in this table. The number of shares issued in the offering will be limited to 977,500 unless all of such shares are subscribed for in the subscription offering, in which event no shares will be available for purchase by the Tuscarora Companies. | |
13
Table of Contents
• | that 1,086,111 shares will be sold in the conversion; | ||
• | that shares issued pursuant to restricted stock awards under the stock-based incentive plan will be issued from authorized but unissued common stock; | ||
• | that shares issued pursuant to the exercise of stock options granted under the stock-based incentive plan will be issued from authorized but unissued common stock; and | ||
• | that the value of the stock in the table is $10.00 per share. | ||
14
Table of Contents
% of | Value of Shares | |||||||||||||
Individuals Eligible to | Shares | Number of | Based on $10.00 | |||||||||||
Plan | Receive Awards | Issued | Shares | Share Price | ||||||||||
ESOP | All eligible full-time employees | 10.0 | % | 108,611 | $ | 1,086,110 | ||||||||
Shares available under the stock-based incentive plan for restricted stock awards | Directors and selected officers and employees | 4.0 | % | 43,444 | $ | 434,440 | ||||||||
Shares available under the stock-based incentive plan for stock options | Directors and selected officers and employees | 10.0 | % | 108,611 | $ | (1) |
(1) | Stock options will be granted with a per share exercise price at least equal to the market price of our common stock on the date of grant. The value of a stock option will depend upon increases, if any, in the price of our common stock during the term of the stock option. |
• | The Pennsylvania Insurance Department must issue an order approving the conversion and related transactions; | ||
• | Lebanon Mutual’s eligible policyholders must approve the Plan of Conversion; and | ||
• | We must sell at least the minimum number of shares offered. |
• | Griffin MTS Partners, LLC has agreed to jointly engage with us all providers of professional services in connection with the conversion, pay all professional fees and expenses and other out-of-pocket expenses prior to completion of the conversion, and absorb all costs and fees in the event the conversion is not completed, unless the reason for non-completion is because we elect to abandon the transaction. | ||
• | Fees and expenses that Griffin MTS Partners, LLC has agreed to pay include, among others, our independent counsel, our appraiser, the Pennsylvania Insurance Department’s appraiser, our independent registered public accountants, our marketing agent, Stifel Nicolaus, our financial printer and other filing fees and incidental expenses. Like Stevens & Lee and Griffin Financial, each provider of professional services has agreed to look solely to Griffin MTS Partners, LLC for payment of its fees and expenses. As of the date hereof, Griffin MTS Partners, LLC has advised us that it estimates that professional fees and expenses, other than the fees and expenses of Stevens & Lee and Griffin Financial, will be between $1.1 million and $1.2 million. | ||
• | Upon completion of the conversion, we have agreed to pay Griffin MTS Partners, LLC a fee of $2.4 million out of the net proceeds of the offering. This payment will reimburse Griffin MTS Partners, LLC for fees and expenses of the other professionals that it has advanced or will pay at the closing. Of the remaining amount, Griffin MTS Partners, LLC expects to pay $225,000 to Griffin Financial for its financial advisory services and the balance will be paid to Stevens & Lee for its legal services. This additional payment to Stevens & Lee is estimated to be between $1.0 million and $1.1 million. | ||
15
Table of Contents
16
Table of Contents
17
Table of Contents
• | rising levels of actual costs that are not known by companies at the time they price their products; | ||
• | volatile and unpredictable developments, including man-made and natural catastrophes; | ||
• | changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers’ liability develop; and | ||
• | fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of losses. |
18
Table of Contents
• | trends in claim frequency and severity; | ||
• | information regarding each claim for losses; | ||
• | legislative enactments, judicial decisions and legal developments regarding damages; and | ||
• | trends in general economic conditions, including inflation. |
19
Table of Contents
• | Our prior success has been achieved by taking a disciplined approach to underwriting and pricing. We also have expanded our exposure to commercial and casualty risks and proportionally reduced our personal and property risks as a percentage of our entire business. We may not be able to successfully implement our underwriting, pricing and product strategies over a larger operating region. | ||
• | We may not be able to attract and retain the qualified personnel needed for expanded operations. | ||
• | We may not be able to attract and retain the qualified producers that we will need to achieve success outside of Pennsylvania. | ||
• | Our internal monitoring and control systems may prove inadequate to adequately monitor the increase in policies resulting from expansion into other states. | ||
• | We may be unable to engage third party claims administrators or hire internal claims personnel that are familiar with insurance laws in the states into which we expand. |
20
Table of Contents
21
Table of Contents
• | approval of policy forms and premium rates; | ||
• | standards of solvency, including establishing statutory and risk-based capital requirements for statutory surplus; | ||
• | classifying assets as admissible for purposes of determining statutory surplus; | ||
• | licensing of insurers and their producers; | ||
• | advertising and marketing practices; | ||
• | restrictions on the nature, quality and concentration of investments; | ||
• | assessments by guaranty associations; |
22
Table of Contents
• | restrictions on the ability of Lebanon Mutual to pay dividends to us; | ||
• | restrictions on transactions between LMI Holdings and Lebanon Mutual and any other affiliates; | ||
• | restrictions on the size of risks insurable under a single policy; | ||
• | requiring deposits for the benefit of policyholders; | ||
• | requiring certain methods of accounting; | ||
• | periodic examinations of our operations and finances; | ||
• | claims practices; | ||
• | prescribing the form and content of records of financial condition required to be filed; and | ||
• | requiring reserves for unearned premium, losses and other purposes. |
23
Table of Contents
24
Table of Contents
25
Table of Contents
• | Management of LMI Holdings and their affiliates and associates expect to subscribe for approximately 68,000 shares of the common stock to be issued in the offering. | ||
• | The ESOP will purchase 10% of the shares to be issued in the offering. The shares held by the ESOP will be voted in the manner directed by our employees. | ||
• | The Tuscarora Companies have agreed to purchase the lesser of 35% of the shares to be issued in connection with the conversion or 600,000 shares. | ||
• | The holders of our class B shares have the right to nominate and elect two directors of LMI Holdings, and the Tuscarora Companies will own all of our class B shares. | ||
• | Following the conversion, and subject to shareholder approval, we intend to implement the stock-based incentive plan pursuant to which shares of restricted stock and stock options will be issued to our directors and selected officers and employees. | ||
• | Certain statutory and regulatory provisions, as well as provisions in our articles of incorporation and bylaws, may make it easier for existing management to retain their positions with LMI Holdings and discourage certain acquisition proposals. | ||
• | Pursuant to the management services agreement that we entered into with Tuscarora Wayne, it will have significant influence on any decisions our board of directors may make, including strategic decisions such as whether to seek potential mergers. | ||
26
Table of Contents
27
Table of Contents
28
Table of Contents
• | quarterly variations in our results of operations; | ||
• | changes in expectations as to our future results of operations, including financial estimates by securities analysts and investors; | ||
• | announcements by third parties of claims against us; | ||
• | changes in law and regulation; | ||
• | results of operations that vary from those expected by investors; and | ||
• | future sales of shares of our common stock. |
• | any gain realized by an eligible policyholder as a result of the receipt of subscription rights with a fair market value must be recognized, whether or not such rights are exercised; and | ||
• | the amount of gain recognized by each eligible policyholder should equal the fair market value of subscription rights received by the eligible policyholder. |
29
Table of Contents
• | the prohibition of voting of shares having in excess of 10% of the total voting power of the outstanding stock of LMI Holdings (excluding any class B shares held by such person) for a period of three years after the conversion; | ||
• | a classified board of directors divided into three classes serving for successive terms of three years each; | ||
• | the holders of our class B shares have the right to nominate and elect two directors (and in certain circumstances a majority of directors) to our board of directors; | ||
• | that the board of directors has the authority to issue shares of authorized but unissued common stock and preferred stock and to establish the terms of any one or more series of preferred stock, including voting rights, without additional shareholder approval; | ||
• | the prohibition of cumulative voting in the election of directors; | ||
• | that until the fourth anniversary of the conversion, holders of a majority of our class B shares must approve any merger, consolidation, share exchange, or sale, lease, exchange or other transfer of all or substantially all our assets unless the transaction calls for payment to the class B shareholders of an amount for each class B share at least equal to the Redemption Price; | ||
• | that any merger, consolidation, sale of assets or similar transaction involving LMI Holdings requires the affirmative vote of shareholders entitled to cast at least 80% of the votes which all shareholders are entitled to cast, unless the transaction is approved in advance by a majority of the members of the board of directors; | ||
• | that nominations for the election of directors made by shareholders and any shareholder proposals for inclusion on the agenda at any annual meeting must be made by notice (in writing) delivered or mailed to us not less than 90 days or more than 120 days prior to the meeting; | ||
• | that a person who aquires 25% of the total voting power (excluding any class B shares held by such person) must make a mandatory tender offer for all of our capital stock; | ||
30
Table of Contents
• | the prohibition of shareholder action without a meeting and the prohibition of shareholders being able to call a special meeting; | ||
• | the requirement that certain provisions of our articles of incorporation can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of all votes that shareholders are entitled to cast, unless approved by an affirmative vote a majority of the members of the board of directors; and | ||
• | the requirement that certain provisions of our bylaws can only be amended by the board of directors or by an affirmative vote of shareholders entitled to cast at least 66 2/3%, or in certain cases 80%, of all votes that shareholders are entitled to cast. | ||
31
Table of Contents
32
Table of Contents
• | statements of goals, intentions and expectations; | ||
• | statements regarding prospects and business strategy; and | ||
• | estimates of future costs, benefits and results. |
• | future economic conditions in the Pennsylvania market in which we compete which are less favorable than expected; | ||
• | the effects of weather-related and other catastrophic events; | ||
• | the effect of legislative, judicial, economic, demographic and regulatory events in Pennsylvania; | ||
• | our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network; | ||
• | financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains, an acceleration of the amortization of deferred acquisition costs, reduction in the value of our investment portfolio or a reduction in the demand for our products; | ||
• | the impact of acts of terrorism and acts of war; | ||
• | the effects of terrorist related insurance legislation and laws; | ||
• | changes in general economic conditions, including inflation, unemployment, interest rates and other factors; | ||
• | the cost, availability and collectability of reinsurance; | ||
• | estimates and adequacy of loss reserves and trends in losses and loss adjustment expenses; | ||
• | heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors; |
33
Table of Contents
• | changes in the coverage terms selected by insurance customers, including higher deductibles and lower limits; | ||
• | our inability to obtain regulatory approval of, or to implement, premium rate increases; | ||
• | the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Financial Accounting Standards Board or other standard-setting bodies; | ||
• | inability to carry out marketing and sales plans, including, among others, development of new products or changes to existing products and acceptance of the new or revised products in the market; | ||
• | unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations; | ||
• | adverse litigation or arbitration results; and | ||
• | new federal laws and regulations governing insurance holding companies and insurance companies, adverse changes in existing applicable laws, regulations or rules governing insurance holding companies and insurance companies, and environmental, tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products. | ||
34
Table of Contents
At or for the years ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(Dollars in thousands) | ||||||||||||
Statement of Operations Data: | ||||||||||||
Direct premiums written | $ | 12,039 | $ | 13,642 | $ | 14,583 | ||||||
Net premiums written | $ | 7,891 | $ | 9,618 | $ | 10,163 | ||||||
Net premiums earned | $ | 8,445 | $ | 9,883 | $ | 10,451 | ||||||
Net investment income | 540 | 581 | 673 | |||||||||
Net realized investment gains (losses) | (970 | ) | 55 | 610 | ||||||||
Other revenues | 82 | 92 | 66 | |||||||||
Total revenues | $ | 8,097 | $ | 10,611 | $ | 11,800 | ||||||
Expenses | ||||||||||||
Loss and loss adjustment expenses | $ | 4,066 | $ | 5,777 | $ | 6,030 | ||||||
Salaries and benefits | 1,601 | 1,248 | 1,220 | |||||||||
Commissions | 1,323 | 1,601 | 1,740 | |||||||||
Other operating expenses | 1,084 | 1,176 | 1,137 | |||||||||
Total losses and expenses | $ | 8,074 | $ | 9,802 | $ | 10,127 | ||||||
Income before income taxes | $ | 23 | $ | 810 | $ | 1,673 | ||||||
Income tax expense (benefit) | (35 | ) | 227 | 527 | ||||||||
Net income | $ | 58 | $ | 583 | $ | 1,146 | ||||||
Balance Sheet Data (at period end): | ||||||||||||
Total investments, cash and cash equivalents | $ | 19,642 | $ | 21,218 | $ | 21,736 | ||||||
Total assets | 26,621 | 27,801 | 30,088 | |||||||||
Unpaid losses and loss adjustment expenses | 6,281 | 6,645 | 9,096 | |||||||||
Unearned premiums | 6,093 | 6,610 | 7,074 | |||||||||
Total liabilities | 13,927 | 14,727 | 17,684 | |||||||||
Total equity | 12,694 | 13,074 | 12,404 | |||||||||
U.S. GAAP Ratios: | ||||||||||||
Loss and loss adjustment expense ratio (1) | 48.15 | % | 58.45 | % | 57.70 | % | ||||||
Underwriting expense ratio (2) | 47.46 | % | 40.73 | % | 39.20 | % | ||||||
Combined ratio (3) | 95.61 | % | 99.18 | % | 96.90 | % | ||||||
Return on average equity | .45 | % | 4.58 | % | 9.68 | % | ||||||
Statutory Data: | ||||||||||||
Statutory net income | $ | 499 | $ | 1,266 | $ | 1,092 | ||||||
Statutory surplus | 11,654 | 11,564 | 10,809 | |||||||||
Ratio of net premiums written to statutory surplus | 67.71 | % | 83.17 | % | 94.02 | % |
(1) | Calculated by dividing loss and loss adjustment expenses by net premiums earned. | |
(2) | Calculated by dividing the sum of salaries and benefits, commissions, and other operating expenses by net premiums earned. | |
(3) | The sum of the loss and loss adjustment expense ratio and the underwriting expense ratio. A combined ratio of less than 100% means a company is |
35
Table of Contents
making an underwriting profit. |
36
Table of Contents
Adjusted | ||||||||
Minimum | Maximum | |||||||
Net Proceeds | ||||||||
Gross proceeds | $ | 7,225,000 | $ | 10,861,110 | ||||
Offering expenses (1) | 2,500,000 | 2,500,000 | ||||||
Net proceeds before loan to ESOP | $ | 4,725,000 | $ | 8,361,110 | ||||
Use of Net Proceeds | ||||||||
Loan to ESOP | $ | 722,500 | $ | 1,086,110 | ||||
Redemption of class B shares or payment of standby fee (2) | 2,781,625 | 171,063 | ||||||
Payment of Tuscarora Wayne legal fees (3) | 200,000 | 200,000 | ||||||
Purchase of investment securities (4) | 1,020,875 | 6,903,937 | ||||||
Total | $ | 4,725,000 | $ | 8,361,110 | ||||
(1) | Griffin MTS Partners, LLC has agreed to jointly engage with us all providers of professional services in connection with the conversion, pay all professional fees and expenses and other out-of-pocket expenses prior to completion of the conversion, and absorb all costs and fees in the event the conversion is not completed, unless the reason for non-completion is because we elect to abandon the transaction. Fees and expenses that Griffin MTS Partners, LLC has agreed to pay include, among others, our independent counsel, Stevens & Lee, Griffin Financial, our appraiser, the Pennsylvania Insurance Department’s appraiser, our independent registered public accounting firm, our placement agent, Stifel Nicolaus, our financial printer and other filing fees and incidental expenses. Each provider of professional services has agreed to look solely to Griffin MTS Partners, LLC for payment of its fees and expenses. As of the date hereof, Griffin MTS Partners, LLC has advised us that professional fees and expenses, other than the fees and expenses of Stevens & Lee and Griffin Financial, are estimated to be between $1,100,000 and $1,200,000. In 2007, we paid Stevens & Lee a $75,000 retainer and Griffin Financial a $25,000 retainer for their services in the conversion. Any of the $2,400,000 to be paid to Griffin MTS Partners, LLC at the closing of the conversion that is not paid by Griffin MTS Partners, LLC to third party providers will be paid to Stevens & Lee and Griffin Financial. See “The Conversion — The Investment Agreement.” | |
(2) | We may be required to use a portion of the net proceeds to fund our obligation to redeem the class B shares pursuant to the terms of our class B common stock, which could occur as early as the first anniversary of the conversion. The amount of net proceeds needed to fund our obligation to redeem the class B shares at the first anniversary will range between $2.8 million at the minimum of the appraisal range and $3.8 million at the maximum of the appraisal range, resulting in net proceeds of between $1.0 million and $3.3 million after the redemption of such shares, the payment of Tuscarora-Wayne’s legal fees, and the loan to the ESOP. To the extent that Tuscarora Wayne or Tuscarora Investments exercises its right under the Investment Agreement to sell any of its shares in the market, our redemption obligation will be reduced and the net proceeds we have to deploy in our business will increase. If the number of shares subscribed for in the subscription offering prevent the Tuscarora Companies from purchasing at least 25% of the total number of shares sold in the offering, the maximum standby fee that we would be required to pay to the Tuscarora Companies is $171,063. | |
37
Table of Contents
(3) | We have agreed to reimburse Tuscarora Wayne for the legal fees that incurs in connection with the Investment Agreement and purchasing our shares in the offering, in an amount not to exceed $200,000. | |
(4) | The amount of funds available to contribute to Lebanon Mutual to be used to purchase investment securities and provide Lebanon Mutual with additional statutory capital, and for other corporate purposes will depend on the number of shares sold in the offering and the number of class B shares sold in the offering. | |
38
Table of Contents
39
Table of Contents
40
Table of Contents
41
Table of Contents
(In Thousands) | ||||||||||||||||||||
Lebanon | ||||||||||||||||||||
Mutual | ||||||||||||||||||||
Historical | Adjusted | |||||||||||||||||||
Capitalization | Minimum(1) | Midpoint(1) | Maximum(1) | Maximum(1) | ||||||||||||||||
Long term debt | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Redeemable common stock(2) | $ | — | $ | 2,529 | $ | 2,975 | $ | 3,421 | $ | — | (2) | |||||||||
Shareholders’ equity: | ||||||||||||||||||||
Common stock, $0.01 par value per share; authorized shares - 20,000,000 | $ | — | $ | 4 | $ | 6 | $ | 6 | $ | 11 | ||||||||||
Additional paid in capital | — | 1,993 | 2,819 | 3,649 | 4,729 | |||||||||||||||
Retained earnings | 12,918 | 12,918 | 12,918 | 12,918 | 12,918 | |||||||||||||||
Accumulated other comprehensive loss, net of tax | (224 | ) | (224 | ) | (224 | ) | (224 | ) | (224 | ) | ||||||||||
Less: common stock to be acquired by ESOP (3) | — | (723 | ) | (850 | ) | (978 | ) | (1,086 | ) | |||||||||||
Total shareholders’ equity | $ | 12,694 | $ | 13,968 | $ | 14,669 | $ | 15,371 | $ | 16,348 | ||||||||||
(1) | No effect has been given to the issuance of additional shares of common stock pursuant to the proposed LMI Holdings stock-based incentive plan. LMI Holdings has adopted a stock-based incentive plan and will submit such plan to shareholders for approval at a meeting of shareholders to be held at least six months following completion of the conversion. If the plan is approved by shareholders, an amount equal to 14% of the shares of common stock sold in the offering will be reserved for future issuance under such plan and, of this amount, 4% will be reserved for future restricted stock awards and 10% will be reserved for future stock option grants. Your ownership percentage would decrease by approximately 12.3% if shares were issued from LMI Holdings authorized but unissued shares upon the grant of all potential restricted stock awards and the exercise of all potential stock options, and if 850,000 shares were sold in the conversion. See “Pro Forma Unaudited Financial Information — Additional Pro Forma Data” and “Management — Benefit Plans and Agreements — Stock-Based Incentive Plan.” |
42
Table of Contents
(2) | Assumes that the Tuscarora Companies together purchase 35% of the shares issued in connection with the conversion at the minimum, midpoint and maximum. At the adjusted maximum the Tuscarora Companies will purchase no shares. The redemption of the class B shares on or after the first anniversary of the conversion is considered to be redeemable common stock and therefore is accounted for as mezzanine equity and recorded at fair value under Rule 5.02.28 of Regulation S-X. If we issue shares in the community offering and reject the orders of the Tuscarora Companies in the community offering, we will be required to pay standby fees of no more than $171,063 to the Tuscarora Companies. | |
(3) | Assumes that 10% of the common stock sold in the offering will be purchased by the ESOP. The common stock acquired by the ESOP is reflected as a reduction in shareholders’ equity. Assumes the funds used to acquire the ESOP shares will be borrowed from LMI Holdings. See Note 1 to the table set forth under “Pro Forma Unaudited Financial Information—Additional Pro Forma Data” and “Management—Benefit Plans and Agreements—Employee Stock Ownership Plan.” | |
43
Table of Contents
44
Table of Contents
As of December 31, 2008
(In thousands, except per share data)
Lebanon | Pro Forma | LMI Holdings | ||||||||||
Mutual | Conversion | Pro Forma | ||||||||||
Historical | Adjustments | Consolidated | ||||||||||
Assets | ||||||||||||
Cash and invested assets | $ | 19,642 | $ | 3,803 | (1) | $ | 23,645 | |||||
Premiums receivable | 2,006 | — | 2,006 | |||||||||
Deferred acquisition costs | 1,220 | — | 1,220 | |||||||||
Reinsurance receivable and recoverable | 2,231 | — | 2,231 | |||||||||
Deferred income taxes | 587 | — | 587 | |||||||||
Accrued investment income | 148 | — | 148 | |||||||||
Property and equipment, cost less accumulated depreciation | 315 | — | 315 | |||||||||
Other assets | 472 | — | 472 | |||||||||
Total assets | $ | 26,621 | $ | 3,803 | $ | 30,624 | ||||||
Liabilities | ||||||||||||
Unpaid losses and loss adjustment expense | $ | 6,281 | — | $ | 6,281 | |||||||
Unearned premiums | 6,093 | — | 6,093 | |||||||||
Advance premiums | 200 | — | 200 | |||||||||
Accounts payable and accrued expenses | 1,027 | — | 1,027 | |||||||||
Other liabilities | 326 | — | 326 | |||||||||
Total liabilities | $ | 13,927 | — | $ | 13,927 | |||||||
Redeemable common stock | — | 2,529 | (3) | 2,529 | ||||||||
Shareholders’ equity | ||||||||||||
Class A common stock | — | 4 | 4 | |||||||||
Unearned compensation | — | (723 | )(2) | (723 | ) | |||||||
Additional paid in capital | — | 1,993 | 1,993 | |||||||||
Retained earnings | 12,918 | — | 12,918 | |||||||||
Accumulated comprehensive other loss, net of deferred taxes | (224 | ) | — | (224 | ) | |||||||
Total shareholders’ equity | $ | 12,694 | $ | 1,274 | $ | 13,968 | ||||||
Total liabilities, redeemable common stock and shareholders’ equity | $ | 26,621 | $ | 3,803 | $ | 30,424 | ||||||
Pro forma shareholders’ equity per share | $ | 19.33 | ||||||||||
(1) | The unaudited pro forma condensed balance sheet, as prepared, gives effect to the sale of common stock at the minimum of the estimated range of the pro forma market value of Lebanon Mutual as a subsidiary of LMI Holdings, as determined by the independent valuation of Feldman Financial. The unaudited pro forma condensed balance sheet is based upon the assumptions set forth under “Use of Proceeds.” For comparison with the above, the following table provides the net proceeds we will receive from the sale of common stock at the minimum, midpoint and maximum of the estimated valuation range and at the adjusted maximum, which |
45
Table of Contents
includes the shares to be issued to the ESOP in the event LMI Holdings accepts subscriptions to purchase the maximum number of shares from other purchasers in the offering. | ||
Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
Gross proceeds from the conversion | $ | 7,225,000 | $ | 8,500,000 | $ | 9,775,000 | $ | 10,861,110 | ||||||||
Less: common stock acquired by the ESOP | (722,500 | ) | (850,000 | ) | (977,500 | ) | (1,086,110 | ) | ||||||||
Less: offering expenses | (2,500,000 | ) | (2,500,000 | ) | (2,500,000 | ) | (2,500,000 | ) | ||||||||
Less: payment of Tuscarora-Wayne’s legal fees | (200,000 | ) | (200,000 | ) | (200,000 | ) | (200,000 | ) | ||||||||
Net proceeds from conversion | $ | 3,802,500 | $ | 4,950,000 | $ | 6,097,500 | $ | 7,075,000 | ||||||||
Total shares issued by LMI Holdings as a result of conversion |
(2) | Reflects the $722,500 loan from LMI Holdings to the ESOP, the proceeds of which will be used to purchase 10% of the common stock issued in the conversion at a purchase price of $10.00 per share. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine the estimated net funds available for investment. The amount of the ESOP loan will increase to $850,000, $977,500 and $1,086,110 if 850,000, 977,500, and 1,086,111 shares, respectively, are sold in the offering. The ESOP loan will bear interest at a fixed annual rate equal to the applicable federal rate for loans having a term of ten years and providing for annual payments of principal and interest as published by the Internal Revenue Service for the month preceding the closing date of the conversion. | |
The ESOP loan will require at least annual payments of principal and interest for a term of 10 years. Lebanon Mutual intends to make contributions to the ESOP at least equal to the principal and interest requirement of the ESOP loan. As the ESOP loan is repaid, shareholders’ equity will be increased. Interest income earned by LMI Holdings on the ESOP loan offsets the interest paid by Lebanon Mutual on the ESOP loan. The ESOP expense reflects adoption of Statement of Position (SOP) 93-6, which requires recognition of expense based upon shares committed to be allocated under the ESOP, and the exclusion of unallocated shares from earnings per share computations. The valuation of shares committed to be allocated under the ESOP, would be based upon the average market value of the shares during the year. For purposes of this calculation, the average market value was assumed to be equal to $10.00 per share. See “Management—Certain Benefit Plans and Agreements.” | ||
(3) | The redemption of the class B shares is considered to be redeemable common stock and therefore accounted for as mezzanine equity and recorded at fair value under Rule 5.02.28 of Regulation S-X. Each holder of class B shares has the right to require LMI Holdings to repurchase such stockholder’s class B shares beginning on the first anniversary date of the conversion and ending on the fourth anniversary of the conversion at a price equal to the Redemption Price. At December 31, 2008, the class B common stock is carried at a fair value of $10.00 per share. | |
46
Table of Contents
Year Ended December 31, 2008
(in thousands, except per share data)
Lebanon | LMI Holdings | |||||||||||
Mutual | Pro Forma | Pro Forma | ||||||||||
Historical | Adjustments | Consolidated | ||||||||||
Revenue: | ||||||||||||
Net premiums earned | $ | 8,445 | — | $ | 8,445 | |||||||
Net investment income | 540 | 76 | (1) | 616 | ||||||||
Net realized investment losses | (970 | ) | — | (970 | ) | |||||||
Other revenues | 82 | — | 82 | |||||||||
Total revenues | 8,097 | 76 | 8,173 | |||||||||
Expenses: | ||||||||||||
Losses and loss adjustment expenses | 4,066 | — | 4,066 | |||||||||
Salaries and benefits | 1,601 | — | 1,601 | |||||||||
Commissions | 1,323 | — | 1,323 | |||||||||
Other operating expenses | 1,084 | 72 | (2) | 1,156 | ||||||||
Total expenses | 8,074 | 72 | 8,146 | |||||||||
Income before income taxes | 23 | 4 | 27 | |||||||||
Income tax expense (benefit) | (35 | ) | 1 | (3) | (34 | ) | ||||||
Net income | $ | 58 | $ | 3 | $ | 61 | ||||||
Earnings per share data: (5) | ||||||||||||
Net income per share of Class A common stock | $ | .08 | ||||||||||
Net income | $ | 61 | ||||||||||
Allocated to Class A common stock | 40 | |||||||||||
Allocated to Class B common stock | 21 | |||||||||||
Accretion of the difference between fair value of the Class B common stock at January 1, 2008 and the redemption amount at December 31, 2008 | (253 | ) | ||||||||||
Net loss allocated to Class B common stock | $ | (232 | ) | |||||||||
Net loss per share of Class B common stock | $ | (.92 | ) | |||||||||
Class A shares considered outstanding in calculating pro forma net income per share (4) | 469,625 | |||||||||||
Class B shares considered outstanding in calculating pro forma net loss per share | 252,875 |
47
Table of Contents
(1) | Assumes that that the net proceeds of $3,803,000 from the offering were available for investment and received as of January 1, 2008, and that they were invested with an average annual pre-tax rate of return of 2.0%. | |
(2) | General operating expenses include a pro forma adjustment to recognize compensation expense under the ESOP for shares of common stock committed to be released to participants as the principal and interest of the $722,500 loan from LMI Holdings to the ESOP is repaid. The pro forma adjustment reflects the amounts repaid on the ESOP loan based on 10 equal annual installments. | |
(3) | Adjustments to reflect the federal income tax effects of (1) – (2) above assuming an effective federal income tax rate of 34%. | |
(4) | It is assumed that 10% of the shares issuable in the offering will be purchased by LMI Holdings’ ESOP. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the ESOP from LMI Holdings. The amount to be borrowed is reflected as a reduction to shareholders’ equity. Annual contributions are expected to be made to the ESOP in an amount at least equal to the principal and interest requirement of the debt. LMI Holdings’ total annual payment of the ESOP debt is based upon 10 equal annual installments of principal and interest. The pro forma net earnings assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirement for the year ended December 31, 2008, at an average fair value of $10.00 per share; (ii) that 7,225, 8,500, 9,775, and 10,861 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the year ended December 31, 2008, at an average fair value of $10.00 per share in accordance with SOP 93-6; and (iii) for purposes of calculating the net income per share, the weighted average of the ESOP shares which have not been committed for release, equal to 68,638, 80,750, 92,863, and 103,181 at the minimum, midpoint, maximum and adjusted maximum of the offering range during the year ended December 31, 2008, were subtracted from total shares outstanding of 722,500, 850,000, 977,500, and 1,086,111 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such date. | |
(5) | In accordance with the Revised EITF Topic D-98 (Topic D-98) issued in March 2008, the class B common stock should be valued at fair value with the changes in fair value accreted to the redemption amount at the first redemption date and recorded as dividends. In this case, for purposes of the December 31, 2008 unaudited pro forma condensed balance sheet, the fair value of the class B shares is $10.00 per share as of December 31, 2008. The redemption price of these class B shares at the first redemption date is $11.00 per share. Therefore, in accordance with Topic D-98, the difference of $1.00 between the original fair value and the redemption price should be accreted over the period to the first redemption date. For purposes of the unaudited pro forma condensed statement of operations for the year ended December 31, 2008, the redemption is assumed to occur at December 31, 2008 and such change in fair value is included as dividends for purposes of calculating the earnings per share for the class B shares. | |
48
Table of Contents
• | The ESOP will purchase 10.0% of the shares of common stock sold in the offering with a loan from LMI Holdings; | ||
• | Expenses of the offering will be $2.5 million; and | ||
• | LMI Holdings pays $200,000 from the gross proceeds of the offering to Tuscarora-Wayne to reimburse it for its legal fees. | ||
• | Pro forma earnings have been calculated assuming the stock had been sold at the beginning of the period; | ||
• | Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of stock, as adjusted to give effect to the purchase of shares by the ESOP; and | ||
• | Pro forma shareholders’ equity amounts have been calculated as if LMI Holdings common stock had been sold in the offering on December 31, 2008, and, accordingly, no effect has been given to the assumed earnings effect of the net proceeds from the conversion offering. | ||
49
Table of Contents
At or For the year ended December 31, 2008 | ||||||||||||||||
1,086,111 shares | ||||||||||||||||
722,500 shares | 850,000 shares | 977,500 shares | sold at $10.00 per | |||||||||||||
sold at $10.00 per | sold at $10.00 per | sold at $10.00 per | share (Adjusted | |||||||||||||
share (Minimum | share (Midpoint | share (Maximum | Maximum | |||||||||||||
of range) | of range) | of range) | of range) | |||||||||||||
Pro forma conversion offering proceeds | ||||||||||||||||
Gross proceeds of public offering | $ | 7,225,000 | $ | 8,500,000 | $ | 9,775,000 | $ | 10,861,110 | ||||||||
Less offering expenses | (2,500,000 | ) | (2,500,000 | ) | (2,500,000 | ) | (2,500,000 | ) | ||||||||
Less legal fees of Tuscarora-Wayne | (200,000 | ) | (200,000 | ) | (200,000 | ) | (200,000 | ) | ||||||||
Net conversion proceeds | 4,525,000 | 5,800,000 | 7,075,000 | 8,161,110 | ||||||||||||
Less ESOP shares (1) | (722,500 | ) | (850,000 | ) | (977,500 | ) | (1,086,110 | ) | ||||||||
Net conversion proceeds after ESOP shares | $ | 3,802,500 | $ | 4,950,000 | $ | 6,097,500 | $ | 7,075,000 | ||||||||
Pro forma shareholders’ equity | ||||||||||||||||
Historical equity of Lebanon Mutual | $ | 12,693,815 | $ | 12,693,815 | $ | 12,693,815 | $ | 12,693,815 | ||||||||
Pro forma conversion proceeds after ESOP shares | 3,802,500 | 4,950,000 | 6,097,500 | 7,075,000 | ||||||||||||
Redeemable common stock or standby fee (2) | (2,528,750 | ) | (2,975,000 | ) | (3,421,250 | ) | 171,063 | |||||||||
Pro forma shareholders’ equity (3) | $ | 13,967,565 | $ | 14,668,815 | $ | 15,370,065 | $ | 19,597,752 | ||||||||
Pro forma outstanding shares | ||||||||||||||||
Total shares offered in conversion | 722,500 | 850,000 | 977,500 | 1,086,111 | ||||||||||||
Pro forma book value (including redeemable common stock) per share (5) | $ | 22.83 | $ | 20.76 | $ | 19.22 | $ | 18.04 | ||||||||
Pro forma price to book value (including redeemable common stock) (5) | 43.8 | % | 48.2 | % | 52.0 | % | 55.4 | % | ||||||||
Pro forma net income: | ||||||||||||||||
Historical net income | $ | 58,332 | $ | 58,332 | $ | 58,332 | $ | 58,332 | ||||||||
Earnings on proceeds (7) | 49,433 | 64,350 | 79,281 | 91,975 | ||||||||||||
ESOP expense (8) | (47,685 | ) | (56,100 | ) | (64,515 | ) | (71,683 | ) | ||||||||
Pro forma net income (8) | $ | 60,080 | $ | 66,582 | $ | 73,098 | $ | 78,624 | ||||||||
Weighted average shares outstanding (4) | 653,862 | 769,250 | 884,637 | 982,930 | ||||||||||||
Pro forma net income per share (6) | $ | 0.09 | $ | 0.09 | $ | 0.08 | $ | 0.08 | ||||||||
Pro forma price to net income per share (6) | 111.1 | x | 111.1 | x | 125.0 | x | 125.0 | x |
(1) | It is assumed that 10% of the aggregate shares sold in the offering will be purchased by the ESOP. The funds used to acquire such shares are assumed to have been borrowed by the ESOP from LMI Holdings. The amount to be borrowed is reflected as a reduction to shareholders’ equity. Annual contributions are expected to be made to the ESOP in an amount at least equal to the principal and interest requirement of the debt. The pro forma net income assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirements for the year ended December 31, 2008, at an average fair value of $10.00 per share; and (ii) only the ESOP shares committed to be released were considered outstanding for purposes of the net income per share calculations. | |
(2) | Assumes that the Tuscarora Companies together purchase class B shares equal to 35% of the shares issued in connection with the conversion at the minimum, the midpoint, and the maximum. At the adjusted maximum the Tuscarora Companies will purchase no shares and the standby fee would be $171,063. | |
(3) | No effect has been given to the issuance of additional shares in connection with the grant of options or restricted stock awards under the stock-based incentive plan that LMI Holdings expects to implement if shareholders approve the plan following the conversion. Under the stock-based incentive plan, an amount equal to the aggregate of 10% of the common stock sold in the offering, or 72,250, 85,000, 97,750 and 108,611 shares at the minimum, midpoint, maximum, and adjusted maximum of the estimated offering range, respectively, will be reserved for future issuance upon the exercise of options to be granted under the stock-based incentive plan. Also under the stock-based incentive plan an amount equal to the aggregate of 4% of the shares of common stock sold in the offering, or 28,900, 34,000, 39,100 and 43,444 shares of common stock at the minimum, midpoint, maximum, and adjusted maximum of the estimated offering range, respectively, will be purchased either through open market purchases or directly from LMI Holdings for the purposes of making restricted stock awards under the stock-based incentive plan. LMI Holdings expects to seek shareholder approval of the plan six months after completion of the conversion. The issuance of authorized but unissued shares of LMI Holdings common stock for the purpose of making restricted stock awards under the stock-based incentive plan instead of open market purchases would dilute the voting interests of existing shareholders by approximately 9% at the midpoint of the offering range. | |
(4) | It is assumed that 10% of the shares issuable in the offering will be purchased by LMI Holdings’ ESOP. For | |
50
Table of Contents
purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the ESOP from LMI Holdings. The amount to be borrowed is reflected as a reduction to stockholders’ equity. Annual contributions are expected to be made to the ESOP in an amount at least equal to the principal and interest requirement of the debt. LMI Holdings’ total annual payment of the ESOP debt is based upon 10 equal annual installments of principal and interest. The pro forma net earnings assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirement for the year ended December 31, 2008, at an average fair value of $10.00 per share; (ii) that 7,225, 8,500, 9,775; and 10,861 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the year ended December 31, 2008, at an average fair value of $10.00 per share in accordance with SOP 93-6; and (iii) for purposes of calculating the net income per share, the weighted average of the ESOP shares which have not been committed for release, equal to 68,638, 80,750, 92,863, and 103,181 at the minimum, midpoint, maximum and adjusted maximum of the offering range during the year ended December 31, 2008, were subtracted from total shares outstanding of 722,500, 850,000, 977,500 and 1,086,111 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such dates. | ||
(5) | These calculations assume that the Tuscarora Companies together purchase class B shares equal to 35% of the shares sold in connection with the conversion at the minimum, the midpoint, the maximum and the adjusted maximum. If the proceeds of the redeemable common stock were excluded from this calculation, the pro forma book value per share and pro forma price to book value per share would be as follows: | |
Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
Pro forma book value per share | $ | 19.33 | $ | 17.26 | $ | 15.72 | $ | 18.20 | ||||||||
Pro forma price to book value | 51.7 | % | 57.9 | % | 63.6 | % | 54.9 | % |
Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
Pro forma book value per share after redemption | $ | 29.20 | $ | 26.10 | $ | 23.65 | $ | 18.20 | ||||||||
Pro forma price to book value | 34.2 | % | 38.4 | % | 42.3 | % | 54.9 | % |
(6) | Price to net income per share is annualized, based on pro forma net income for the year ended December 31, 2008. This excludes any impact of the change in fair value of the class B common stock shares which is recorded as dividends and, therefore, does not impact pro forma net income. | |
(7) | Assumes an average after-tax rate of return of 1.3% per annum on the net proceeds of the offering. | |
(8) | Net of tax expense. | |
51
Table of Contents
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
52
Table of Contents
53
Table of Contents
54
Table of Contents
• | type of loss; | ||
• | severity of injury or damage to people or property; | ||
• | age and occupation of people injured or value of property damaged; | ||
• | expected medical procedures, costs and duration; | ||
• | estimated length of temporary disability or anticipated permanent disability; | ||
• | knowledge of the circumstances surrounding the claim; | ||
• | possibility and amount of any salvage value of damaged property or recovery under subrogation claims; and | ||
• | insurance policy provisions, including coverage, related to the claim. |
55
Table of Contents
Commercial | Personal | |||||||||||
Lines | Lines | Total | ||||||||||
As of December 31, 2008 | ||||||||||||
Case reserves | $ | 1,393 | $ | 559 | $ | 1,952 | ||||||
IBNR reserves | 2,093 | 398 | 2,491 | |||||||||
Net unpaid losses and LAE | 3,486 | 957 | 4,443 | |||||||||
Reinsurance recoverables on unpaid losses and LAE | 1,682 | 156 | 1,838 | |||||||||
Reserves for unpaid losses and LAE | $ | 5,168 | $ | 1,113 | $ | 6,281 | ||||||
As of December 31, 2007 | ||||||||||||
Case reserves | $ | 1,751 | $ | 503 | $ | 2,254 | ||||||
IBNR reserves | 2,130 | 481 | 2,611 | |||||||||
Net unpaid losses and LAE | 3,881 | 984 | 4,865 | |||||||||
Reinsurance recoverables on unpaid losses and LAE | 1,866 | (86 | ) | 1,780 | ||||||||
Reserves for unpaid losses and LAE | $ | 5,747 | $ | 898 | $ | 6,645 | ||||||
As of December 31, 2006 | ||||||||||||
Case reserves | $ | 1,916 | $ | 817 | $ | 2,733 | ||||||
IBNR reserves | 2,051 | 607 | 2,658 | |||||||||
Net unpaid losses and LAE | 3,967 | 1,424 | 5,391 | |||||||||
Reinsurance recoverables on unpaid losses and LAE | 3,165 | 540 | 3,705 | |||||||||
Reserves for unpaid losses and LAE | $ | 7,132 | $ | 1,964 | $ | 9,096 | ||||||
Reserve Range for Unpaid Losses and LAE | ||||
(in thousands) | ||||
Recorded | Low End | High End | ||
$4,443 | $4,013 | $5,013 |
56
Table of Contents
December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Commercial lines segment | ||||||||||||
Deferred acquisition costs | $ | 874 | $ | 971 | $ | 968 | ||||||
Unearned premium reserves | $ | 4,335 | $ | 4,645 | $ | 4,936 | ||||||
Personal lines segment | ||||||||||||
Deferred acquisition costs | $ | 346 | $ | 385 | $ | 401 | ||||||
Unearned premium reserves | $ | 1,758 | $ | 1,965 | $ | 2,138 |
57
Table of Contents
Years Ended | ||||||||||||
December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Operating Revenues | ||||||||||||
Net premiums earned | $ | 8,445 | $ | 9,883 | $ | 10,451 | ||||||
Net investment income | 540 | 581 | 673 | |||||||||
Net realized investment gains (losses) | (970 | ) | 55 | 610 | ||||||||
Other revenue | 82 | 92 | 66 | |||||||||
Total operating revenues | $ | 8,097 | $ | 10,611 | $ | 11,800 | ||||||
58
Table of Contents
Commercial Lines | Personal Lines | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Loss and LAE ratio | 45.72 | % | 54.02 | % | 53.01 | % | 67.85 | % | ||||||||
Expense ratio | 48.71 | % | 40.56 | % | 44.97 | % | 41.09 | % | ||||||||
Combined ratio | 94.43 | % | 94.58 | % | 97.98 | % | 108.94 | % | ||||||||
59
Table of Contents
60
Table of Contents
Commercial Lines | Personal Lines | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Loss and LAE ratio | 54.02 | % | 46.24 | % | 67.85 | % | 79.73 | % | ||||||||
Expense ratio | 40.56 | % | 40.05 | % | 41.09 | % | 37.60 | % | ||||||||
Combined ratio | 94.58 | % | 86.29 | % | 108.94 | % | 117.33 | % | ||||||||
61
Table of Contents
62
Table of Contents
63
Table of Contents
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Cash flows provided by (used in) operating activities | $ | 232 | $ | (533 | ) | $ | 683 | |||||
Cash flows provided by (used in) in investing activities | 546 | (454 | ) | 116 | ||||||||
Cash flows from financing activities | — | — | — | |||||||||
Net (decrease) increase in cash and cash equivalents | $ | 778 | $ | (987 | ) | $ | 799 | |||||
64
Table of Contents
65
Table of Contents
Hypothetical | ||||||||||||
Percentage Increase | ||||||||||||
Hypothetical Change in | Estimated Change | (Decrease) in | ||||||||||
Interest Rates | in Fair Value | Fair Value | Shareholders’ Equity | |||||||||
(dollars in thousands) | ||||||||||||
200 basis point increase | $ | (921 | ) | $ | 14,270 | (7.26 | )% | |||||
100 basis point increase | (442 | ) | 14,749 | (3.48 | ) | |||||||
No change | — | 15,191 | 0.0 | |||||||||
100 basis point decrease | 386 | 15,577 | 3.04 | |||||||||
200 basis point decrease | 760 | 15,951 | 5.99 |
66
Table of Contents
67
Table of Contents
68
Table of Contents
69
Table of Contents
70
Table of Contents
– | the amount of capital raised in the conversion; | ||
– | our evaluation of our ability to incur multiple losses; and | ||
– | the revised terms and limits that we establish with our reinsurers. |
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Direct Premiums Written: | ||||||||||||
Commercial multi-peril | $ | 4,830,240 | $ | 5,424,826 | $ | 5,815,259 | ||||||
Workers’ compensation | 1,671,301 | 1,986,559 | 1,788,960 | |||||||||
Commercial automobile | 1,070,792 | 1,373,768 | 1,627,422 | |||||||||
Other liability | 498,903 | 521,183 | 731,855 | |||||||||
Fire, allied, inland marine | 226,871 | 229,034 | 268,735 | |||||||||
Other | 316,169 | 236,822 | 82,239 | |||||||||
71
Table of Contents
For the years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Total | $ | 8,614,276 | $ | 9,772,192 | $ | 10,314,470 | ||||||
Net Premiums Earned: | ||||||||||||
Commercial multi-peril | $ | 3,547,762 | $ | 4,137,096 | $ | 4,165,579 | ||||||
Workers’ compensation | 880,398 | 1,054,183 | 932,947 | |||||||||
Commercial automobile | 767,522 | 1,015,172 | 1,160,136 | |||||||||
Other liability | 175,762 | 251,046 | 382,738 | |||||||||
Fire, allied, inland marine | 179,042 | 190,214 | 223,595 | |||||||||
Other | 81,333 | 74,126 | 11,317 | |||||||||
Total | $ | 5,631,819 | $ | 6,721,837 | $ | 6,876,312 | ||||||
Net Loss Ratios: | ||||||||||||
Commercial multi-peril | 26.56 | % | 53.78 | % | 45.84 | % | ||||||
Workers’ compensation | 50.65 | 60.35 | 12.06 | |||||||||
Commercial automobile | 28.98 | 44.08 | 53.04 | |||||||||
Other liability | 71.19 | 5.30 | 103.76 | |||||||||
Fire, allied, inland marine | 13.29 | 55.32 | 38.25 | |||||||||
Other | 50.93 | 1.88 | — | |||||||||
All products | 31.98 | % | 54.02 | % | 45.66 | % | ||||||
Expense Ratio: | ||||||||||||
Commercial multi-peril | 51.15 | % | 45.18 | % | 45.36 | % | ||||||
Workers’ compensation | 40.77 | 29.57 | 26.86 | |||||||||
Commercial automobile | 46.66 | 34.67 | 33.36 | |||||||||
Other liability | 52.60 | 32.10 | 30.37 | |||||||||
Fire, allied, inland marine | 47.82 | 45.47 | 42.88 | |||||||||
Other | 41.21 | 35.29 | 131.41 | |||||||||
All products | 48.71 | % | 40.56 | % | 40.05 | % | ||||||
Combined Ratios: (1) | ||||||||||||
Commercial multi-peril | 77.71 | % | 98.96 | % | 91.20 | % | ||||||
Workers’ compensation | 91.42 | 95.92 | 38.92 | |||||||||
Commercial automobile | 75.64 | 78.75 | 86.40 | |||||||||
Other liability | 123.78 | 37.40 | 134.13 | |||||||||
Fire, allied, inland marine | 61.11 | 100.79 | 81.13 | |||||||||
Other | 92.14 | 37.17 | 131.41 | |||||||||
All products | 80.69 | % | 94.50 | % | 85.71 | % | ||||||
(1) | A combined ratio over 100% means that an insurer’s underwriting operations are not profitable. |
72
Table of Contents
73
Table of Contents
Years ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Direct Premiums Written: | ||||||||||||
Homeowners | $ | 3,145,590 | $ | 3,540,005 | $ | 3,849,844 | ||||||
Fire, allied, inland marine | 192,037 | 211,970 | 236,203 | |||||||||
Personal auto | 71,871 | 104,316 | 164,763 | |||||||||
Other liability | 14,970 | 13,836 | 17,780 | |||||||||
Total | $ | 3,424,468 | $ | 3,870,127 | $ | 4,268,590 | ||||||
Net Premiums Earned: | ||||||||||||
Homeowners | $ | 2,597,257 | $ | 2,896,754 | $ | 3,234,672 | ||||||
Fire, allied, inland marine | 159,632 | 179,033 | 203,230 | |||||||||
Personal auto | 51,860 | 81,276 | 127,866 | |||||||||
Other liability | 4,690 | 4,559 | 8,605 | |||||||||
Total | $ | 2,813,439 | $ | 3,161,622 | $ | 3,574,373 | ||||||
Net Loss Ratios: | ||||||||||||
Homeowners | 41.12 | % | 70.01 | % | 72.81 | % | ||||||
Fire, allied, inland marine | 42.60 | 50.74 | 49.74 | |||||||||
Personal auto | 125.30 | 32.45 | 307.82 | |||||||||
Other liability | — | — | — | |||||||||
All products | 42.69 | % | 67.85 | % | 79.73 | % | ||||||
Expense Ratio: | ||||||||||||
Homeowners | 44.72 | % | 41.19 | % | 37.87 | % | ||||||
Fire, allied, inland marine | 48.17 | 46.87 | 42.49 | |||||||||
Personal auto | 46.65 | 25.27 | 23.26 | |||||||||
Other liability | 52.60 | 32.11 | 30.38 | |||||||||
All products | 44.97 | % | 41.09 | % | 37.60 | % | ||||||
Combined Ratios: (1) | ||||||||||||
Homeowners | 85.84 | % | 111.20 | % | 110.68 | % | ||||||
Fire, allied, inland marine | 90.77 | 97.61 | 93.23 | |||||||||
Personal auto | 171.95 | 57.72 | 331.08 | |||||||||
Other liability | 52.60 | 32.11 | 30.38 | |||||||||
All products | 87.65 | % | 108.94 | % | 117.33 | % | ||||||
(1) | A combined ratio over 100% means that an insurer’s underwriting operations are not profitable. |
74
Table of Contents
75
Table of Contents
76
Table of Contents
– | to continue to re-engineer our internal processes to allow for more efficient operations; | ||
– | to improve our producers’ ability to transact business with us; and | ||
– | to enable our producers to efficiently provide their clients with a high level of service. |
77
Table of Contents
– | reduce net liability on individual risks; | ||
– | mitigate the effect of individual loss occurrences (including catastrophic losses); | ||
– | stabilize underwriting results; | ||
– | decrease leverage; and | ||
– | increase our underwriting capacity. |
78
Table of Contents
– | Personal and commercial automobile liability; | ||
– | Personal lines of liability, including the liability portions of homeowners’, mobile homeowners’ and boatowners’ policies for coverages regarding bodily injury, property damage, personal injury or medical payments liabilities; | ||
– | Commercial lines of liability, including general liability, comprehensive general liability and the liability portion of commercial multi-peril policies for the following coverages: bodily injury, property damage, personal injury, medical payments, advertising injury and fire legal liabilities; and | ||
– | Workers’ compensation and employers’ liability. | ||
79
Table of Contents
80
Table of Contents
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
(in thousands) | ||||||||||||
Balance at January 1 | $ | 6,645 | $ | 9,096 | $ | 9,409 | ||||||
Reinsurance recoverable on unpaid losses and LAE | (1,780 | ) | (3,705 | ) | (3,598 | ) | ||||||
Net balance at January 1 | 4,865 | 5,391 | 5,811 | |||||||||
Losses and LAE incurred, net: | ||||||||||||
Current year | 4,239 | 5,715 | 6,659 | |||||||||
Prior years | (173 | ) | 62 | (629 | ) | |||||||
Total incurred losses and LAE | 4,066 | 5,777 | 6,030 | |||||||||
Less losses and LAE paid, net: | ||||||||||||
Current year | 2,401 | 3,664 | 4,153 | |||||||||
Prior years | 2,087 | 2,639 | 2,297 | |||||||||
Total loss and LAE expenses paid | 4,488 | 6,303 | 6,450 | |||||||||
Net unpaid losses and LAE, at December 31 | 4,443 | 4,865 | 5,391 | |||||||||
Reinsurance recoverable on unpaid losses and LAE | 1,838 | 1,780 | 3,705 | |||||||||
Reserve for unpaid losses and LAE at December 31 | $ | 6,281 | $ | 6,645 | $ | 9,096 | ||||||
81
Table of Contents
Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||||||
Liability for unpaid losses and LAE, net of reinsurance recoverables | $ | 4,396 | $ | 5,221 | $ | 5,066 | $ | 5,005 | $ | 6,447 | $ | 8,057 | $ | 6,599 | $ | 5,811 | $ | 5,391 | $ | 4,865 | $ | 4,443 | |||||||||||||||||||||||
Cumulative amount of liability paid through: | |||||||||||||||||||||||||||||||||||||||||||||
One year later | 1,869 | 2,285 | 3,135 | 2,646 | 2,992 | 3,977 | 2,468 | 2,296 | 2,600 | 2,079 | — | ||||||||||||||||||||||||||||||||||
Two years later | 2,748 | 3,591 | 4,292 | 3,876 | 4,939 | 5,285 | 3,774 | 3,493 | 3,808 | ||||||||||||||||||||||||||||||||||||
Three years later | 3,442 | 4,192 | 5,139 | 4,896 | 5,893 | 6,132 | 4,511 | 4,254 | |||||||||||||||||||||||||||||||||||||
Four years later | 3,619 | 4,804 | 5,645 | 5,544 | 6,286 | 6,572 | 4,924 | ||||||||||||||||||||||||||||||||||||||
Five years later | 3,844 | 5,155 | 5,995 | 5,690 | 6,579 | 6,812 | |||||||||||||||||||||||||||||||||||||||
Six years later | 3,934 | 5,296 | 6,058 | 5,791 | 6,801 | ||||||||||||||||||||||||||||||||||||||||
Seven years later | 4,005 | 5,327 | 6,118 | 5,861 | |||||||||||||||||||||||||||||||||||||||||
Eight years later | 4,030 | 5,385 | 6,139 | ||||||||||||||||||||||||||||||||||||||||||
Nine years later | 4,087 | 5,404 | |||||||||||||||||||||||||||||||||||||||||||
Ten years later | 4,104 | ||||||||||||||||||||||||||||||||||||||||||||
Liability estimated as of: | |||||||||||||||||||||||||||||||||||||||||||||
One year later | 4,538 | 4,481 | 5,636 | 5,905 | 7,437 | 7,817 | 5,515 | 5,186 | 5,413 | 4,687 | |||||||||||||||||||||||||||||||||||
Two years later | 3,848 | 5,052 | 5,988 | 6,101 | 7,127 | 7,026 | 5,366 | 4,893 | 5,187 | ||||||||||||||||||||||||||||||||||||
Three years later | 4,078 | 5,166 | 6,253 | 5,964 | 6,914 | 7,115 | 5,329 | 4,942 | |||||||||||||||||||||||||||||||||||||
Four years later | 4,033 | 5,500 | 6,116 | 5,988 | 6,903 | 7,035 | 5,413 | ||||||||||||||||||||||||||||||||||||||
Five years later | 4,111 | 5,404 | 6,173 | 6,002 | 6,866 | 7,071 | |||||||||||||||||||||||||||||||||||||||
Six years later | 4,065 | 5,386 | 6,184 | 5,964 | 6,954 | ||||||||||||||||||||||||||||||||||||||||
Seven years later | 4,071 | 5,390 | 6,184 | 5,930 | |||||||||||||||||||||||||||||||||||||||||
Eight years later | 4,074 | 5,415 | 6,153 | ||||||||||||||||||||||||||||||||||||||||||
Nine years later | 4,109 | 5,417 | |||||||||||||||||||||||||||||||||||||||||||
Ten years later | 4,117 | ||||||||||||||||||||||||||||||||||||||||||||
Cumulative total redundancy (deficiency) | $ | 279 | $ | (196 | ) | $ | (1,087 | ) | $ | (925 | ) | $ | (507 | ) | $ | 986 | $ | 1,186 | $ | 869 | $ | 204 | $ | 178 | — | ||||||||||||||||||||
Gross liability — end of year | $ | 8,914 | $ | 9,049 | $ | 9,167 | $ | 8,779 | $ | 10,379 | $ | 14,335 | $ | 10,340 | $ | 9,409 | $ | 9,096 | $ | 6,645 | 6,281 | ||||||||||||||||||||||||
Reinsurance recoverables | 4,518 | 3,828 | 4,101 | 3,774 | 3,932 | 6,278 | 3,741 | 3,598 | 3,705 | 1,780 | $ | 1,838 | |||||||||||||||||||||||||||||||||
Net liability — end of year | $ | 4,396 | $ | 5,221 | $ | 5,066 | $ | 5,005 | $ | 6,447 | $ | 8,057 | $ | 6,599 | $ | 5,811 | $ | 5,391 | $ | 4,865 | $ | 4,443 | |||||||||||||||||||||||
Gross reestimated liability – latest | $ | 7,370 | $ | 9,656 | $ | 11,374 | $ | 10,712 | $ | 12,969 | $ | 14,393 | $ | 9,738 | $ | 8,177 | $ | 8,842 | $ | 7,025 | |||||||||||||||||||||||||
Reestimated reinsurance recoverables – latest | 3,253 | 4,239 | 5,221 | 4,782 | 6,015 | 7,322 | 4,325 | 3,235 | 3,655 | 2,338 | |||||||||||||||||||||||||||||||||||
Net reestimated liability – latest | $ | 4,117 | $ | 5,417 | $ | 6,153 | $ | 5,930 | $ | 6,954 | $ | 7,071 | $ | 5,413 | $ | 4,942 | $ | 5,187 | $ | 4,687 | |||||||||||||||||||||||||
82
Table of Contents
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Gross cumulative redundancy (deficiency) | $ | 1,544 | $ | (607 | ) | $ | (2,207 | ) | $ | (1,933 | ) | $ | (2,590 | ) | $ | (58 | ) | $ | 602 | $ | 1,232 | $ | (254 | ) | $ | (380 | ) | — | ||||||||||||||||
• | Interest only securities backed by prepayment sensitive residential MBS; | ||
• | Principal only securities backed by prepayment sensitive residential MBS; | ||
• | Inverse floating rate securities; and | ||
• | Interest rate swaps, futures and options. |
83
Table of Contents
At December 31, | ||||||||||||||||||||||||
2008 | 2007 | 2006 | ||||||||||||||||||||||
Cost or | Estimated | Cost or | Estimated | Cost or | Estimated | |||||||||||||||||||
Amortized | Fair | Amortized | Fair | Amortized | Fair | |||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
Obligations of U.S. government corporations and agencies | $ | 151 | $ | 161 | $ | 202 | $ | 203 | $ | — | $ | — | ||||||||||||
States, territories and possessions | 1,317 | 1,327 | 1,182 | 1,181 | 1,062 | 1,046 | ||||||||||||||||||
Special revenue | 2,684 | 2,752 | 2,981 | 2,975 | 3,316 | 3,258 | ||||||||||||||||||
Public utilities | 74 | 74 | 73 | 74 | 173 | 181 | ||||||||||||||||||
Industrial and miscellaneous | 3,351 | 3,047 | 3,328 | 3,315 | 2,978 | 2,958 | ||||||||||||||||||
Mortgage-backed securities | 7,921 | 7,830 | 8,245 | 8,231 | 7,585 | 7,438 | ||||||||||||||||||
Total Debt Securities | 15,498 | 15,191 | 16,011 | 15,979 | 15,114 | 14,881 | ||||||||||||||||||
Equity securities | 187 | 154 | 5 | 361 | 5 | 430 | ||||||||||||||||||
Convertible securities | 3,908 | 3,324 | 4,626 | 4,683 | 4,560 | 5,244 | ||||||||||||||||||
$ | 19,593 | $ | 18,669 | $ | 20,642 | $ | 21,023 | $ | 19,679 | $ | 20,555 | |||||||||||||
Estimated | ||||||||
Rating (1) | Fair Value | Percent of Total (2) | ||||||
Obligations of U.S. government corporations and agencies | $ | 5,246 | 28.3 | % | ||||
AAA | 4,571 | 24.7 | % | |||||
AA | 3,208 | 17.3 | % | |||||
A | 2,943 | 15.9 | % | |||||
BBB | 1,698 | 9.2 | % | |||||
Below Investment Grade | 849 | 4.6 | % | |||||
Total | $ | 18,515 | 100.0 | % | ||||
(1) | The ratings set forth in this table are based on the ratings assigned by S&P. If S&P’s ratings were unavailable, the equivalent ratings supplied by Moody’s Investor Service, Fitch Investors Service, Inc. or the NAIC were used where available. | |
(2) | Represents percent of fair value for classification as a percent of the total portfolio. | |
84
Table of Contents
Cost or Amortized Cost | Estimated Fair Value (1) | |||||||
Less than one year | $ | 1,232 | $ | 1,237 | ||||
One though five years | 4,868 | 4,730 | ||||||
Five through ten years | 2,028 | 1,903 | ||||||
Greater than ten years | 3,357 | 2,815 | ||||||
Mortgaged-backed securities (2) | 7,921 | 7,830 | ||||||
Total debt securities | $ | 19,406 | $ | 18,515 | ||||
(1) | Debt securities are carried at fair value in our financial statements beginning on page F-1. | |
(2) | Mortgage-backed securities consist of residential and commercial mortgage-backed securities and securities collateralized by home equity loans. These securities are presented separately in the maturity schedule due to the inherent risk associated with prepayment or early amortization. The average duration of this portfolio is 2.25 years. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures. | |
December 31, 2008 | ||||||||
Average Credit | ||||||||
Fair Value | Rating | |||||||
U.S. Agency guaranteed RMBS | $ | 5,084,593 | ||||||
Non-Agency guaranteed RMBS | ||||||||
Prime First Lien | 544,104 | AAA | ||||||
Prime Second Lien | 42,643 | A | ||||||
Alt-A Loans | — | |||||||
Total | $ | 5,671,340 | ||||||
85
Table of Contents
December 31, 2008 | ||||||||
Average Credit | ||||||||
Fair Value | Rating | |||||||
Auto loan backed securities | $ | 97,256 | AAA | |||||
Home equity loan backed securities | 42,643 | AAA | ||||||
Municipal bonds | 3,378,159 | AAA | ||||||
Insurer | Fair Value at December 31, 2008 | |||
AMBAC | $ | 412,288 | ||
FGIC | 796,260 | |||
FSA | 1,025,083 | |||
MBIA | 1,060,598 | |||
PSF | 88,630 | |||
BHAC | 135,200 | |||
Underlying Rating of Issuer | Fair Value at December 31, 2008 | |||
AAA | $ | 457,624 | ||
AA | 2,362,042 | |||
A | 457,750 | |||
BBB | — | |||
Not Rated (1) | 240,643 | |||
(1) | Includes (i) municipal bonds with a fair value of $198,000 at December 31, 2008, and (ii) asset backed securities secured by home equity loans with a fair value of $42,643 at December 31, 2008, for which no underlying rating is available. | |
Year Ended December 31, | |||||||||||||
2008 | 2007 | 2006 | |||||||||||
Average cash and invested assets | $ | 20,429,840 | $ | 21,477,145 | $ | 21,395,571 | |||||||
Net investment income | 540,449 | 580,868 | 673,399 | ||||||||||
Return on average cash and invested assets | 2.6 | % | 2.7 | % | 3.1 | % | |||||||
86
Table of Contents
— | the company’s profitability, leverage and liquidity; | ||
— | its book of business; | ||
— | the adequacy and soundness of its reinsurance; | ||
— | the quality and estimated market value of its assets; | ||
— | the adequacy of its reserves and surplus; | ||
— | its capital structure; | ||
— | the experience and competence of its management; and | ||
— | its marketing presence. | ||
87
Table of Contents
— | approval of policy forms and premium rates; | ||
— | standards of solvency, including establishing statutory and risk-based capital requirements for statutory surplus; | ||
— | classifying assets as admissible for purposes of determining statutory surplus; | ||
— | licensing of insurers and their producers; | ||
— | advertising and marketing practices; | ||
— | restrictions on the nature, quality and concentration of investments; | ||
— | assessments by guaranty associations; | ||
— | restrictions on the ability of Lebanon Mutual to pay dividends to us; | ||
— | restrictions on transactions between Lebanon Mutual and LMI Holdings; | ||
— | restrictions on the size of risks insurable under a single policy; | ||
— | requiring deposits for the benefit of policyholders; | ||
— | requiring certain methods of accounting; | ||
— | periodic examinations of our operations and finances; | ||
— | claims practices; | ||
— | prescribing the form and content of records of financial condition required to be filed; and | ||
— | requiring reserves for unearned premiums, losses and other purposes. |
88
Table of Contents
89
Table of Contents
— | audit committees; | ||
— | certification of financial statements by the chief executive officer and the chief financial officer; |
90
Table of Contents
— | the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; | ||
— | a prohibition on insider trading during pension plan black out periods; | ||
— | disclosure of off-balance sheet transactions; | ||
— | a prohibition on personal loans to directors and officers; | ||
— | expedited filing requirements for Form 4 statement of changes of beneficial ownership of securities required to be filed by officers, directors and 10% shareholders; | ||
— | disclosure of whether or not a company has adopted a code of ethics; | ||
— | “real time” filing of periodic reports; | ||
— | auditor independence; and | ||
— | various increased criminal penalties for violations of securities laws. |
91
Table of Contents
92
Table of Contents
93
Table of Contents
94
Table of Contents
95
Table of Contents
• | Increase our commercial and casualty writings.We believe that the actions that we have taken over the last twenty years to increase our commercial and casualty premium volume will continue to increase the percentage of our direct written premiums from these products. Our “main street” business owner program that targets commercial coverages for main street businesses, such as businesses in the home, and complementary coverages such as commercial automobile insurance covering light to medium weight trucks and passenger-type vehicles used for commercial purposes is focused on furthering this goal. | ||
• | Attract and retain high-quality insurance producers.We intend to implement this strategy through increased marketing activities in targeted growth markets to attract high quality producers. We believe the increased capital resulting from the conversion may enable us to eventually secure a higher rating from A.M. Best and Company, which should help us to attract producers. In September 2008 we hired an additional marketing representative to assist in this increased marketing effort. | ||
• | Reduce our ratio of expenses to net premiums earned through continued investment in technology.We will continue to invest in technology, both to make our system more user-friendly for our producers and facilitate increases in premium volume and to improve our profitability by reducing expenses. | ||
• | Reduce our reliance on reinsurance.We believe the increased capital from the conversion will allow us to increase the risk we retain on individual policies, which will increase net premium volume. | ||
• | Diversify our business geographically.We intend to increase our business outside Pennsylvania by selectively expanding our producer relationships. |
96
Table of Contents
97
Table of Contents
• | The Tuscarora Companies have agreed to purchase in the conversion the lesser of (i) 35% of the number of shares sold in connection with the conversion, or (ii) 600,000 shares. The Tuscarora Companies have agreed to submit their offers in the community offering as follows: Tuscarora Wayne will submit an order for the lesser of 17.5% of the shares sold in the offering (plus one share) and 300,001 shares, and Tuscarora Wayne Investments, LLC will submit an order for the lesser of 17.5% of the shares sold in the offering (less one share) and 299,999 shares. We will have the option to accept or reject, in whole or in part, the orders submitted by the Tuscarora Companies in the offering, but the Tuscarora Companies will have no obligation to purchase any of our class B shares in the offering unless between them they are permitted to purchase at least 25% of the total number of shares sold in the offering. The shares purchased by the Tuscarora Companies will be a separate class of common stock designated as class B common stock and will be restricted securities. Except as described below, the class B common stock will be identical in all respects to the class A common stock. | ||
• | If we reject all or any portion of the Tuscarora Companies’ order in the community offering, then in exchange for the Tuscarora Companies committing the capital necessary to satisfy their agreement to purchase such shares, we have agreed to pay to the Tuscarora Companies a fee of $0.50 for each share that they order in the community offering that we do not issue to the Tuscarora Companies. If the offering were completed at the maximum of the offering range, the maximum number of shares that the Tuscarora Companies would subscribe to purchase in the community offering is 342,125. If we reject the Tuscarora Companies’ community offering order in full, then the maximum amount we would be obligated to pay to the Tuscarora Companies is $171,063. | ||
• | We have agreed to reimburse Tuscarora Wayne for the legal fees and expenses that it incurs in connection with the Investment Agreement and its purchase of our class B common stock in the offering, up to $200,000. | ||
• | We and Tuscarora Wayne have entered into a management services agreement pursuant to which, effective April 1, 2009, Tuscarora Wayne is responsible for managing the day-to-day operations of LMI Holdings and Lebanon Mutual. See “ Management — Management Services Agreement.” | ||
• | The obligation of the Tuscarora Companies to purchase any of our class B shares in the offering is conditioned upon Tuscarora Investments obtaining financing to purchase its portion of such shares as described in this prospectus. See “ — Conditions in the Investment Agreement.” | ||
• | As long as the Tuscarora Companies hold any shares of our class B common stock, during the next three years they will vote their class B shares in favor of our nominees for the board of directors and for our stock-based compensation program. | ||
• | The Tuscarora Companies have each agreed not to increase its ownership interest in our class A or class B common stock without our consent for a period of three years. | ||
98
Table of Contents
• | Beginning six months after completion of the conversion, the Tuscarora Companies will have the right to sell in the open market a limited number of the shares that they purchased in the offering. The Tuscarora Companies have each agreed that they will not sell shares in any week in an amount in excess of 0.5% of our outstanding shares. The Tuscarora Companies have each also agreed that they will stop selling any shares in the open market for 30 days upon receipt of a written request from us, provided that we can give such notice only twice during any twelve month period. Beginning on the third anniversary of the conversion, the Tuscarora Companies are free to sell any or all of their class B shares in the market or in privately negotiated transactions, provided that no block sale of more than 75,000 shares will be made. Upon any sale to anyone other than an affiliate of Tuscarora Wayne, the class B shares that are sold automatically convert into class A shares and all attributes of the class B shares sold, including the redemption and dividend rights described herein, terminate. | ||
• | For approximately fourteen months after completion of the conversion, we will retain proceeds from the offering in an amount sufficient to redeem the class B shares owned by Tuscarora Investments having a Redemption Price sufficient to repay the loan that it obtained to purchase such shares and will invest such proceeds only in obligations issued or guaranteed by the United States of America. If the maximum of 977,500 shares are sold in the offering, the redemption price for such shares at the first anniversary of completion of the conversion will be approximately $1.9 million. We will also grant a security interest in such investments to Tuscarora Investments. Thereafter, we will be permitted to contribute such proceeds to Lebanon Mutual. | ||
• | Until any obligation to redeem the class B shares has expired or been satisfied, the consent of the holders of a majority of the class B shares is required before either we or Lebanon Mutual (i) issue any security, except shares issued under our stock incentive plan, (ii) pay any dividend or other distribution on or redeem any class A shares, (iii) engage in any merger, consolidation, liquidation, dissolution, winding-up, recapitalization, reorganization or sale of all or substantially all of our assets unless the holders of class B shares receive at least the Redemption Price in exchange for their class B shares, (iv) amend our articles of incorporation or bylaws, (v) increase the size of our board of directors or any committee thereof, (vi) issue any security of Lebanon Mutual or any other subsidiary to any person other than LMI Holdings, (vii) engage in the acquisition of the stock or assets of any person other than in the ordinary course of business, (viii) engage in any line of business other than those engaged in at the date of completion of the conversion, (ix) incur any indebtedness or guaranty the obligation of any other person other than in the ordinary course of business (excluding the loan to the ESOP as described in this prospectus), (x) increase the number of shares of capital stock or options available for issuance to employees, officers, directors, consultants and advisors in excess of the amounts described in this prospectus, or (xi) engage in any transaction with affiliates. | ||
• | After the date of a redemption default and at any time after the third anniversary of the completion of the conversion, the Tuscarora Companies will have certain rights to demand that we register their shares for sale in a public offering under the Securities Act of 1933, as amended. | ||
• | The holders of our class B shares will be entitled to vote as a separate class and will be entitled to nominate and elect two directors to our board of directors. The class B shares will vote together with the class A common stock with respect to the election of all other directors. | ||
• | Beginning on the first anniversary of the conversion and continuing until the fourth anniversary of the conversion, and subject to any required approval of Pennsylvania Insurance Department, each holder of class B shares will have the right to require us to repurchase any or all of its class B shares at the Redemption Price. | ||
• | In the event that any holder of class B shares asks us to redeem any of its class B shares and we fail to redeem such shares, the class B common stock will accrue a dividend at the rate of $0.499 per share, per annum until all class B shares are redeemed. Payment of the dividend may be subject to the prior approval of the Pennsylvania Insurance Department. | ||
• | Until the fourth anniversary of the conversion, the holders of the class B common stock voting as a separate class, have the right to disapprove any fundamental transaction such as a merger or sale of LMI Holdings or Lebanon Mutual that does not provide for the redemption, exchange or repurchase of the class B shares for a price equal to or greater than the Redemption Price. | ||
• | If a redemption default occurs and continues until the end of the fourth anniversary of the completion of the conversion and the Tuscarora Companies still own fifty percent or more of the class B shares that they purchased in the offering, then the holders of the class B shares will have the right to elect a majority of the members of the board of directors of LMI Holdings and to cast a majority of the votes entitled to be cast in connection with any proposed merger, consolidation or sale of the assets of LMI Holdings or any similar transaction. | ||
• | approval of the Plan of Conversion and the amended articles of incorporation of Lebanon Mutual by Eligible Members; | ||
• | receipt of all required regulatory approvals, including the expiration or termination of any notice and waiting periods; | ||
• | the absence of any legal order prohibiting the transaction; | ||
• | the registration statement of which this prospectus is a part shall have been declared effective by the SEC; | ||
• | the confirmation of the appraisal value by Feldman Financial; |
99
Table of Contents
• | the common stock shall have been registered under the Securities Exchange Act of 1934, as amended; | ||
• | delivery of a tax opinion to Tuscarora Wayne, LMI Holdings and Lebanon Mutual; and | ||
• | the conversion offering shall have been completed and the funds released from escrow simultaneously with the completion of closing under the Investment Agreement. |
• | the accuracy in all material respects as of the date of the Investment Agreement and as of the closing of the conversion of the representations and warranties of the Tuscarora Companies Griffin MTS Partners, LLC, LMI Holdings and Lebanon Mutual, except as to any representation or warranty which specifically relates to an earlier date; | ||
• | the order of the Pennsylvania Insurance Department approving the conversion not containing any condition materially burdensome to the Tuscarora Companies, Griffin MTS Partners, LLC, Lebanon Mutual or LMI Holdings; | ||
• | Tuscarora Investments obtaining a loan to fund its purchase of shares of LMI Holdings, Inc. class B common stock on the terms provided in the Investment Agreement; | ||
• | the other party’s material performance of all its covenants and obligations; and | ||
• | other conditions customary for similar transactions, such as the receipt of officer certificates. |
• | no material adverse effect shall have occurred with respect to Lebanon Mutual or LMI Holdings between the date of the Investment Agreement and the closing of the conversion; | ||
• | LMI Holdings and the Tuscarora Companies shall have entered into an agreement granting the Tuscarora Companies certain rights to have their shares of LMI Holdings common stock registered for sale under the Securities Act of 1933; | ||
• | LMI Holdings shall have accepted the orders of the Tuscarora Companies to purchase shares in the offering for at least 25% of the total number of shares sold in the offering; | ||
• | The Tuscarora Companies shall have received a “comfort letter” from Beard Miller Company LLP, Lebanon Mutual’s independent registered public accounting firm with respect to the financial information included in this prospectus; and | ||
• | Except for the requirements of eligible policyholder approval, regulatory approvals and the absence of any legal order preventing the transaction, each of the conditions described above may be waived in the manner and to the extent described in the Investment Agreement. See “— Amendment; Waivers” below. | ||
• | the organization of the Tuscarora Companies, Griffin MTS Partners, LLC, LMI Holdings and Lebanon Mutual; | ||
• | the capitalization of Lebanon Mutual and LMI Holdings and the absence of any subsidiaries of Lebanon Mutual and LMI Holdings, and the absence of assets or business of LMI Holdings; |
100
Table of Contents
• | the approval and enforceability of the Investment Agreement; | ||
• | required consents or approvals of regulatory authorities or third parties; | ||
• | the absence of undisclosed material pending or threatened litigation; | ||
• | the accuracy of information to be supplied for inclusion in the registration statement of which this prospectus forms a part; and | ||
• | the absence of undisclosed brokers’ or finders’ fees. |
• | the preparation of Lebanon Mutual financial statements in accordance with accounting principles generally accepted in the United States and statutory accounting principles prescribed or permitted by the Pennsylvania Insurance Department; | ||
• | the absence of any changes or events having a material adverse effect on Lebanon Mutual since the date of its September 30, 2008 statutory financial statements; | ||
• | the absence of undisclosed liabilities; | ||
• | the filing of tax returns and payment of taxes; | ||
• | the quality of title to assets and properties; | ||
• | the compliance by Lebanon Mutual with all applicable insurance laws, its possession of all necessary insurance permits and licenses; | ||
• | Lebanon Mutual’s rating from A.M. Best & Company; | ||
• | the filing of all required regulatory reports; | ||
• | the provision to Griffin MTS Partners, LLC and the Tuscarora Companies of complete and correct information regarding Lebanon Mutual’s investments; | ||
• | the aggregate loss reserves of Lebanon Mutual having been prepared in accordance with sound actuarial principles, the inclusion of such reserves in Lebanon Mutual’s statutory financial statements and compliance with the requirements of the Pennsylvania Insurance Department; | ||
• | retirement and other employee plans and matters relating to the Employee Retirement Income Security Act of 1974; | ||
• | intellectual property rights; | ||
• | material contracts entered into by Lebanon Mutual; |
101
Table of Contents
• | the absence of material environmental violations, actions or liabilities; | ||
• | the maintenance of adequate insurance; and | ||
• | compliance with privacy laws and policies. |
• | amend or change any provision of its articles of incorporation, charter or bylaws; | ||
• | issue or commit to issue any shares of capital stock, or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any shares of capital stock; | ||
• | merge or consolidate with any other person or entity or acquire a material amount of assets or equity in another person or entity; | ||
• | make any capital expenditures in excess of $100,000 in the aggregate; | ||
• | enter into or amend any lease; | ||
• | sell, lease, license or encumber any real property or other assets except in the ordinary course consistent with past practice; | ||
• | enter into or amend any employment agreement; | ||
• | adopt, enter into or amend any employee benefit plan or pay any benefit not required by a benefit plan; | ||
• | increase the compensation, bonus or fringe or other benefits other than in the ordinary course consistent with past practice; | ||
• | grant any severance or termination pay other than in the ordinary course consistent with past practice; | ||
• | make any changes in its accounting methods, except as may be required under generally accepted accounting principles or statutory accounting principles; | ||
• | take any action that would cause the conversion not to qualify as a reorganization for federal tax purposes; |
102
Table of Contents
• | pay, discharge, settle or compromise any claims, liabilities or obligations, other than insurance claims, any litigation (other than claims litigation) in the amount not in excess of $25,000 individually or $100,000 in the aggregate, or payments in the ordinary course of business; | ||
• | other than in the ordinary course consistent with past practice, make or change any election with respect to taxes, settle or compromise any controversy relating to taxes in excess of $50,000, request any tax ruling (other than in connection with any benefit plan under ERISA), or change any method for reporting income and deductions for federal tax purposes; | ||
• | abandon, modify, waive, terminate or otherwise change any of its insurance licenses; | ||
• | take any action which would result in any of the representations and warranties of becoming untrue or would cause or could be reasonably expected to cause a material adverse effect; | ||
• | terminate, cancel or amend any insurance coverage that is not replaced by comparable coverage; | ||
• | take any action that would be reasonably be expected to result in a reduction of it’s A.M. Best & Company financial strength rating; | ||
• | make any material change in its underwriting, claims management, pricing or reserving practices; | ||
• | incur or assume any indebtedness for borrowed money in excess of $200,000 or guarantee or act as a surety for any other person or entity; or | ||
• | agree or commit to do any of the foregoing. |
• | LMI Holdings and Lebanon Mutual will grant reasonable access to Tuscarora Wayne to books and records and all other information reasonably requested; | ||
• | they will make all filings and use reasonable best efforts to obtain all regulatory approvals; | ||
• | they will cooperate with respect to public communications; | ||
• | they will consummate the transactions contemplated by the Investment Agreement in accordance with all privacy laws; | ||
• | LMI Holdings and Lebanon Mutual will cooperate in connection with obtaining a tax opinion with respect to the conversion; | ||
• | they will use reasonable best efforts to have the conversion qualify as a reorganization for federal tax purposes; and | ||
• | they will use their reasonable best efforts to obtain all required regulatory approvals. | ||
103
Table of Contents
• | to indemnify the directors and officers of Lebanon Mutual against certain liabilities for a period of at least two years after the closing date of the conversion and defend all such persons against any claim attributable to such person’s status as a director or officer of Lebanon Mutual; and | ||
• | to indemnify the Tuscarora Companies against any losses or damages resulting from or arising out of the breach of any covenant, representation or warranty of Lebanon Mutual or LMI Holdings contained in the Investment Agreement. | ||
• | soliciting, initiating or encouraging any inquiries relating to or the making of any proposal or offer with respect to a merger, consolidation or other business combination, acquisition of any equity interest, sale of assets, recapitalization , restructuring or similar transaction (we refer to any such proposal or offer as an “acquisition proposal”); | ||
• | participating in any discussions or negotiations regarding an acquisition proposal, or facilitating a third party making an acquisition proposal; | ||
• | withdraw or modify in a manner adverse to Griffin MTS Partners, LLC or Tuscarora Wayne its approval or recommendation of the Plan of Conversion; | ||
• | approving or recommending, or publicly proposing to approve or recommend, an acquisition proposal; or | ||
• | approving, recommending or entering into a letter of intent, agreement in principle or any other similar agreement relating to an acquisition proposal. |
• | amend the Investment Agreement; | ||
• | extend the time for the performance of any obligations or other acts required in the Investment Agreement; | ||
• | waive any inaccuracies in the representations and warranties contained in the Investment Agreement; or | ||
• | waive compliance with any of the agreements or conditions contained in the Investment Agreement. |
104
Table of Contents
• | if Lebanon Mutual’s eligible policyholders do not approve the Plan of Conversion at the special meeting; | ||
• | if a regulatory authority whose approval or consent has been requested will not be granted; | ||
• | if the closing of the conversion does not occur on or before September 30, 2009; unless the failure to close is due to the failure of a party to perform its obligations under the Investment Agreement, then that party may not terminate the Investment Agreement; | ||
• | a court of competent jurisdiction shall have issued an order, decree or ruling enjoining completion of the transactions contemplated by the Investment Agreement; or | ||
• | a party has materially breached any representation, warranty or covenant in the Investment Agreement, and such breaching party has not cured the breach by the earlier of 30 days of the date the non-breaching gives written notice of the breach to the breaching party or the closing of the conversion. |
105
Table of Contents
• | the Tuscarora Companies | ||
• | natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are residents of Berks, Dauphin, Lancaster, or Lebanon Counties in Pennsylvania; | ||
• | licensed insurance agencies and brokers that have been appointed by Lebanon Mutual to market and distribute policies of insurance; and | ||
• | policyholders under policies of insurance issued by Lebanon Mutual after December 19, 2007. | ||
106
Table of Contents
107
Table of Contents
(1) | “Eligible Policyholders,” which means a person or entity who is the named insured under an insurance policy issued by Lebanon Mutual that is issued and in force as of the close of business on December 19, 2007; | ||
(2) | the ESOP; and | ||
(3) | directors, officers and employees of Lebanon Mutual as of December 19, 2007, and as of the closing date of the conversion. | ||
108
Table of Contents
109
Table of Contents
• | Tuscarora Wayne and Tuscarora Investments; | ||
• | natural persons and trusts of natural persons (including individual retirement and Keogh retirement accounts and personal trusts in which such natural persons have substantial interests) who are residents of Berks, Dauphin, Lancaster, or Lebanon Counties, Pennsylvania; | ||
• | licensed insurance agencies and brokers that have been appointed by or otherwise are under contract with Lebanon Mutual to market and distribute policies of insurance; and | ||
• | named insureds under policies of insurance issued by Lebanon Mutual after December 19, 2007. |
110
Table of Contents
111
Table of Contents
112
Table of Contents
113
Table of Contents
• | the present and projected operating results and financial condition of Lebanon Mutual and the economic and demographic conditions in Lebanon Mutual’s existing marketing areas; | ||
• | certain historical, financial and other information relating to Lebanon Mutual; | ||
• | a comparative evaluation of the operating and financial statistics of Lebanon Mutual with those of other similarly situated publicly traded insurance companies located in Pennsylvania and other regions of the United States; | ||
• | the aggregate size of the offering of LMI Holdings common stock as determined by Feldman Financial; | ||
• | the impact of the conversion on Lebanon Mutual’s net worth and earnings potential as determined by Feldman Financial; |
114
Table of Contents
• | the proposed dividend policy of LMI Holdings; | ||
• | the trading market for securities of comparable institutions and general conditions in the market for such securities; and | ||
• | the purchase by the Tuscarora Companies of a significant portion of the common stock and the effect of this purchase on the liquidity of the common stock. | ||
115
Table of Contents
LTM(1) | Total | |||||||||||||||||||||||
Total | Total | Total | Equity/ | LTM | LTM | |||||||||||||||||||
Assets | Equity | Revenue | Assets | ROA(1) | ROE(1) | |||||||||||||||||||
($000s) | ($000s) | ($000s) | (%) | (%) | (%) | |||||||||||||||||||
Comparative Group | ||||||||||||||||||||||||
21st Century Holding Company | 197,110 | 76,231 | 67,356 | 38.67 | (1.18 | ) | (3.04 | ) | ||||||||||||||||
Baldwin & Lyons, Inc. | 777,743 | 330,067 | 156,930 | 42.44 | (0.93 | ) | (2.16 | ) | ||||||||||||||||
CRM Holdings, Ltd. | 444,192 | 108,860 | 143,171 | 24.51 | (0.36 | ) | (1.34 | ) | ||||||||||||||||
Donegal Group, Inc. | 880,109 | 363,584 | 372,312 | 41.31 | 2.93 | 7.16 | ||||||||||||||||||
Eastern Insurance Holdings, Inc. | 377,311 | 138,137 | 131,204 | 36.61 | (4.51 | ) | (10.80 | ) | ||||||||||||||||
First Mercury Financial Corporation | 943,653 | 261,637 | 215,367 | 27.73 | 4.69 | 16.16 | ||||||||||||||||||
Hallmark Financial Services, Inc. | 538,398 | 179,412 | 268,690 | 33.32 | 2.37 | 6.92 | ||||||||||||||||||
Mercer Insurance Group, Inc. | 568,986 | 137,270 | 161,462 | 24.13 | 1.48 | 6.09 | ||||||||||||||||||
National Interstate Corporation | 990,812 | 216,074 | 293,716 | 21.81 | 1.08 | 4.97 | ||||||||||||||||||
National Security Group, Inc. | 124,890 | 34,648 | 61,233 | 27.74 | (3.79 | ) | (12.29 | ) | ||||||||||||||||
SeaBright Insurance Holdings, Inc. | 842,687 | 324,813 | 267,262 | 38.54 | 3.68 | 9.49 | ||||||||||||||||||
Specialty Underwriters’ Alliance, Inc. | 454,737 | 136,289 | 153,491 | 29.97 | 1.72 | 5.54 | ||||||||||||||||||
Unico American Corporation | 184,603 | 76,958 | 46,769 | 41.69 | 2.81 | 7.33 | ||||||||||||||||||
Comparative Group Mean | 563,479 | 183,383 | 179,920 | 32.96 | 0.77 | 2.62 | ||||||||||||||||||
Comparative Group Median | 538,398 | 138,137 | 156,930 | 33.32 | 1.48 | 5.54 | ||||||||||||||||||
Lebanon Mutual | 26,621 | 12,694 | 8,098 | 47.68 | 0.21 | 0.45 |
(1) | LTM corresponds to last twelve months ended December 31, 2008. ROA indicates return on average assets for the period. ROE indicates return on average equity for the period. | |
Total | Price/ | Price/ | Price/ | Price/ | Price/ | |||||||||||||||||||
Market | Book | Tang. | LTM | LTM | Total | |||||||||||||||||||
Value | Value | Book | EPS(1) | Rev.(1) | Assets | |||||||||||||||||||
($Mil.) | (%) | (%) | (x) | (x) | (%) | |||||||||||||||||||
Comparative Group | ||||||||||||||||||||||||
21st Century Holding Company | 28.5 | 37.3 | 37.3 | NM | 0.42 | 14.43 | ||||||||||||||||||
Baldwin & Lyons, Inc. | 295.9 | 91.9 | 92.8 | NM | 1.89 | 38.05 | ||||||||||||||||||
CRM Holdings, Ltd. | 9.9 | 9.3 | 9.6 | NM | 0.07 | 2.24 | ||||||||||||||||||
Donegal Group, Inc. | 425.9 | 117.1 | 117.4 | 16.7 | 1.14 | 48.39 | ||||||||||||||||||
Eastern Insurance Holdings, Inc. | 70.6 | 52.5 | 61.4 | NM | 0.54 | 18.70 | ||||||||||||||||||
First Mercury Financial Corporation | 260.7 | 99.1 | 131.8 | 6.6 | 1.21 | 27.63 | ||||||||||||||||||
Hallmark Financial Services, Inc. | 160.7 | 84.7 | 131.5 | 7.4 | 0.60 | 29.84 | ||||||||||||||||||
Mercer Insurance Group, Inc. | 86.5 | 60.6 | 63.2 | 10.4 | 0.54 | 15.20 | ||||||||||||||||||
National Interstate Corporation | 368.3 | 169.6 | 169.6 | 34.5 | 1.25 | 37.17 | ||||||||||||||||||
National Security Group, Inc. | 15.4 | 44.5 | 44.5 | NM | 0.25 | 12.35 | ||||||||||||||||||
SeaBright Insurance Holdings, Inc. | 234.3 | 72.1 | 73.2 | 7.9 | 0.88 | 27.81 | ||||||||||||||||||
Specialty Underwriters’ Alliance, Inc. | 48.8 | 39.2 | 42.6 | 7.2 | 0.32 | 10.73 | ||||||||||||||||||
Unico American Corporation | 41.8 | 54.3 | 54.3 | 8.1 | 0.89 | 22.65 | ||||||||||||||||||
Comparative Group Mean | 157.5 | 71.7 | 79.2 | 12.3 | 0.77 | 23.48 | ||||||||||||||||||
Comparative Group Median | 86.5 | 60.6 | 63.2 | 8.0 | 0.60 | 22.65 | ||||||||||||||||||
Lebanon Mutual (pro forma range maximum) | 9.8 | 52.0 | 52.0 | 125.0 | �� | 1.19 | 29.88 |
(1) | LTM corresponds to earnings per share for the last twelve months ended December 31, 2008. LTM revenue corresponds to total revenue for the last twelve months ended December 31, 2008. | |
116
Table of Contents
117
Table of Contents
118
Table of Contents
• | the conversion of Lebanon Mutual from mutual to stock form will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, which we refer to as the “Code”; | ||
• | no gain or loss will be recognized by Lebanon Mutual in its pre-conversion mutual or post-conversion stock form solely as a result of the reorganization; | ||
• | Lebanon Mutual’s basis in its assets, holding period for its assets, earnings and profits and accounting methods will not be affected by the reorganization, nor will Lebanon Mutual’s net operating loss carryforward, if any, and capital loss carryforward, if any, be affected by the reorganization, except for possible limitations on the rate at which such carryforwards may be used after the reorganization; | ||
• | as discussed below, eligible policyholders will be required to recognize gain upon the receipt of subscription rights if and to the extent that the subscription rights that are allocated to an eligible policyholder are determined to have fair market value; | ||
• | the basis of the common stock purchased by an eligible policyholder pursuant to the exercise of subscription rights will equal the sum of the purchase price of the stock, plus the gain, if any, recognized by the eligible policyholder on the subscription rights that are exercised; and | ||
• | the holding period of the common stock purchased by an eligible policyholder through the exercise of subscription rights will begin on the date on which the subscription rights are exercised. In all other cases, the holding period of common stock purchased by an eligible policyholder will begin on the date following the date on which the stock is purchased. |
• | any gain realized by an eligible policyholder as a result of the receipt of subscription rights with a fair market value must be recognized, whether or not such rights are exercised; and | ||
• | the amount of gain recognized by each eligible policyholder should equal the fair market value of subscription rights received by the eligible policyholder. |
119
Table of Contents
• | Tuscarora Investments has agreed to submit an order in the community offering to purchase that number of shares of our class B common stock equal to the lesser of (1) 299,999 and (2) 17.5% of the total number of shares that would be sold in the offering less one share, and Tuscarora Wayne has agreed to submit an order in the community offering to purchase that number of shares of our class B common stock equal to the lesser of (1) 300,001 and (2) 17.5% of the total number of shares that would be sold in the offering plus one share; | ||
• | to compensate each of the Tuscarora Companies for agreeing to standby and purchase the amount of stock indicated in its community offering order, we have agreed to pay to each of the Tuscarora Companies an amount, which we refer to as the “standby fee,” equal to $0.50 per share for each share that such company offered to purchase in the offering that we decide not to sell to such company; and | ||
• | beginning on the first anniversary of the Effective Date and continuing until the fourth anniversary of the Effective Date, which we refer to as the “Redemption Period,” subject to the prior approval of the Pennsylvania Insurance Department, each holder of class B shares shall have the right to require us to redeem any or all of the class B shares owned by such stockholder by delivery of one or more written notices of redemption to us. The redemption price per share for each class B share redeemed, which we refer to as the “Redemption Price,” will be equal to the sum of (A) $10.00 per share, plus (B) any dividends that have accumulated and not been paid on such class B share as of the date of redemption, plus (C) an amount calculated as a simple dividend accruing from the Effective Date to the date of redemption on the purchase price paid for such class B share in the offering at a rate of (w) 10% per annum if the redemption notice is received on or before thirty (30) days after the first anniversary of the Effective Date, (x) 9% per annum if the redemption notice is received later thirty (30) days after the first anniversary of the Effective Date, but on or before thirty (30) days after the second anniversary of the Effective Date, (y) 8% per annum if the redemption notice is received later thirty (30) days after the second anniversary of the Effective Date, but on or before thirty (30) days after the third anniversary of the Effective Date, and (z) 7% per annum if the redemption notice is received later than thirty (30) days after the third anniversary of the Effective Date, but on or before thirty (30) days after the fourth anniversary of the Effective Date. | ||
120
Table of Contents
121
Table of Contents
• | a stock order form is not delivered and is returned to the sender by the United States Postal Service or we are unable to locate the addressee; | ||
• | a stock order form is not returned or is received after the termination date of this offering; | ||
• | a stock order form is defectively completed or executed; and | ||
• | a stock order form that is not accompanied by payment in full for the shares of common stock subscribed for in the form. |
122
Table of Contents
• | act as our financial advisor to evaluate financial, marketing and regulatory issues; | ||
• | develop and manage the Stock Information Center; | ||
• | prepare procedures for processing subscriptions and purchase orders; | ||
• | educate our directors, officers and employees about the conversion and their roles in the offering; | ||
• | coordinate functions with and between the data processing agent, printer, transfer agent, stock certificate printer and other professionals; | ||
• | manage the pro-ration process in the event of subscription and community offering oversubscription; | ||
• | assist us in targeting our sales efforts, including assisting in the preparation of offering and marketing materials; | ||
• | assist us with solicitation of subscriptions and purchase orders for shares in the offering; and | ||
• | if we decide to conduct a syndicated community offering, serve as sole book-running manager of a group of broker-dealers participating in such an offering on a best-efforts basis. | ||
123
Table of Contents
• | No person or entity may purchase fewer than 25 shares of common stock in the conversion. | ||
• | No purchaser may purchase more than 50,000 shares ($500,000) of common stock. | ||
• | No purchaser, together with purchaser’s affiliates and associates or a group acting in concert, may purchase more than 50,000 shares ($500,000) of common stock. | ||
124
Table of Contents
(1) | any corporation or organization (other than an affiliate of Lebanon Mutual) of which you are an officer or partner or the beneficial owner of 10% or more of any class of equity securities; | ||
(2) | any trust or other estate in which you have a substantial beneficial interest or as to which you serve as trustee or in a similar fiduciary capacity; | ||
(3) | any of your relatives or your spouse, or any relative of your spouse, who lives at home with you; | ||
(4) | any person or entity who you control, who controls you, or who together with you is controlled by the same third party; | ||
(5) | any person or entity who is knowingly participating with you in a joint activity or interdependent conscious parallel action toward a common goal; or | ||
(6) | any person or entity with whom you are combining or pooling voting or other interests in the securities of an issuer for a common purpose pursuant to any agreement or relationship. |
(1) | any corporation or organization (other than an affiliate of Lebanon Mutual) of which the officer or director is an officer or partner or the beneficial owner of 10% or more of any class of equity securities; | ||
(2) | any trust or other estate in which the officer or director has a substantial beneficial interest or as to which he or she serves as trustee or in a similar fiduciary capacity; or | ||
(3) | any of the officer’s or director’s relatives or his or her spouse, or any relative of the spouse, who lives at home with the officer or director. |
125
Table of Contents
126
Table of Contents
Number of | ||||||||||||
Name | Amount ($) | Shares (1)(2) | Percent (3) | |||||||||
Directors: | ||||||||||||
Darwin G. Glick | $ | 50,000 | 5,000 | * | ||||||||
S. Bruce Kurtz | 30,000 | 3,000 | * | |||||||||
Milton Garrison | 10,000 | 1,000 | * | |||||||||
Mark J. Keyser (4) | 500,000 | 50,000 | 6.9 | % | ||||||||
Joseph F. Lauck, Jr. | 10,000 | 1,000 | * | |||||||||
Warren L. Lewis | 20,000 | 2,000 | * | |||||||||
Rollin P. Rissinger, Jr. | 0 | 0 | * | |||||||||
Keith A. Ulsh | 50,000 | 5,000 | * | |||||||||
Executive Officers: | ||||||||||||
Stephanie M. Keiser, Secretary | 10,000 | 1,000 | * | |||||||||
All Directors and Executive Officers as a Group (9 persons) | $ | 680,000 | 68,000 | 9.41 | % | |||||||
* | Less than one percent. | |
(1) | Does not include shares that will be allocated to employees under the ESOP. Under the ESOP, employees of LMI Holdings and its subsidiaries will be allocated over time, in the aggregate, shares in an amount equal to 10% of the common stock issued in the conversion (which equals between 72,250 shares if 722,500 shares are sold in the conversion and 97,750 shares if 977,500 shares are sold in the conversion). | |
(2) | Does not include shares that would be issuable upon the exercise of options or the vesting of restricted stock awards granted under our proposed stock-based incentive plan. Under the stock-based incentive plan, we expect to grant to directors, executive officers and other employees options to purchase common stock and restricted stock awards in an aggregate amount equal to 14% of the shares issued in the conversion (which equals between 101,150 shares if 722,500 shares are sold in the conversion, and 136,850 shares if 977,500 shares are sold in the conversion). No options or awards will be granted or awarded unless the stock-based incentive plan is approved by LMI Holdings’ shareholders at a meeting held not less than six months after completion of the conversion. | |
(3) | Assumes that 722,500 shares are issued in the offering, including the shares purchased by the ESOP. | |
(4) | Includes shares to be purchased by Mutual Management Company II, of which Mr. Keyser is a principal. | |
127
Table of Contents
128
Table of Contents
Age at December 31, 2008 | Director Since (1) | Position with LMI Holdings | ||||||||||
Darwin G. Glick | 74 | 1981 | Chairman | |||||||||
S. Bruce Kurtz | 72 | 1978 | Vice Chairman | |||||||||
Milton Garrison | 74 | 1988 | Director | |||||||||
Mark J. Keyser | 55 | 2000 | Director | |||||||||
Joseph F. Lauck, Jr. | 70 | 1975 | Director | |||||||||
Warren L. Lewis | 68 | 1975 | Director | |||||||||
Rollin P. Rissinger, Jr. | 64 | 1995 | President and CEO | |||||||||
Keith A. Ulsh | 47 | 1996 | Treasurer and CFO | |||||||||
(1) | Indicates year first elected as a director of Lebanon Mutual. All members of the Board of Directors of LMI Holdings have served as directors of LMI Holdings since its incorporation in 2007. |
129
Table of Contents
• | a director who is employed by LMI Holdings or Lebanon Mutual; |
130
Table of Contents
• | a director who is an officer or employee of any entity controlled by, controlling, or under common control with Lebanon Mutual; or | ||
• | a director who owns a controlling interest in the voting stock of LMI Holdings. | ||
• | review, evaluate and approve the compensation and benefit plans and policies of Lebanon Mutual employees, including its officers; | ||
• | review, evaluate and approve the compensation and benefit plans and policies for the officers and directors of LMI Holdings; | ||
• | grant stock options and restricted stock awards to employees, management and directors under our proposed stock-based incentive plan; | ||
• | be responsible for producing an annual report on executive compensation for inclusion in LMI Holdings’ proxy statement and for ensuring compliance of compensation and benefit programs with all other legal, tax and regulatory requirements; and | ||
• | make recommendations to our board of directors regarding these matters. |
131
Table of Contents
• | be responsible for the selection, retention, oversight and termination of our independent registered public accounting firm; | ||
• | approve the non-audit services provided by the independent registered public accounting firm; | ||
• | review the results and scope of the audit and other services provided by our independent registered public accounting firm; | ||
• | approve the estimated cost of the annual audit; | ||
• | establish procedures to facilitate the receipt, retention and treatment of complaints received from third parties regarding accounting, internal accounting controls, or auditing matters; | ||
• | establish procedures to facilitate the receipt, retention, and treatment of confidential, anonymous submissions of concerns regarding questionable accounting or auditing matters by Lebanon Mutual or LMI Holdings employees; | ||
• | review and approve all related party transactions and transactions raising potential conflicts of interest; | ||
• | review the annual financial statements and the results of the audit with management and the independent registered public accounting firm; | ||
• | review with management and the independent registered public accounting firm the adequacy of our system of internal control over financial reporting, including their effectiveness at achieving compliance with any applicable laws or regulations; | ||
• | review with management and the independent registered public accounting firm the significant recommendations made by the independent registered public accounting firm with respect to changes in accounting procedures and internal control over financial reporting; and | ||
• | report to the board of directors on the results of its review and make such recommendations as it may deem appropriate. |
• | make independent recommendations to the Board of Directors as to best practices for Board governance and evaluation of Board performance; |
132
Table of Contents
• | produce a Code of Ethics and submit it for Board approval, and periodically review the Code of Ethics for necessary revisions; | ||
• | identify suitable candidates for Board membership and in such capacity will consider any nominees recommended by shareholders; | ||
• | propose to the Board a slate of directors for election by the shareholders at each annual meeting; and | ||
• | propose candidates to fill vacancies on the Board based on qualifications it determines to be appropriate. |
133
Table of Contents
Nonqualified | ||||||||||||||||||||||||||||||||||||
Non-Equity | Deferred | |||||||||||||||||||||||||||||||||||
Name and | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||||||||||
Principal | Salary | Awards | Awards | Compensation | Earnings | Compensation | ||||||||||||||||||||||||||||||
Position | Year | ($) | Bonus ($) | ($) | ($) | ($) | ($) | ($) (1) | Total | |||||||||||||||||||||||||||
Rollin P. | 2008 | 435,108 | (2) | 24,998 | — | — | — | — | 61,063 | 521,169 | ||||||||||||||||||||||||||
Rissinger, Jr., | 2007 | 191,828 | 51,496 | — | — | — | — | 25,419 | 268,743 | |||||||||||||||||||||||||||
President and Chief Executive Officer | ||||||||||||||||||||||||||||||||||||
Keith A. Ulsh, | 2008 | 140,737 | 16,666 | — | — | — | — | 12,498 | 169,901 | |||||||||||||||||||||||||||
Treasurer and | 2007 | 130,443 | 38,217 | — | — | — | — | 9,859 | 178,519 | |||||||||||||||||||||||||||
Chief Financial Officer |
(1) | Consists of matching contributions to 401(k) plan, life and long term disability insurance premiums, and car allowance and incremental cost (mileage at Internal Revenue Service reimbursement rates) on behalf of Mr. Rissinger and Mr. Ulsh. | |
(2) | Includes the severance payment of $283,083 paid to Mr. Rissinger in connection with his retirement. | |
134
Table of Contents
135
Table of Contents
136
Table of Contents
137
Table of Contents
– the nature and responsibility of the position; | |||
– the impact, contribution, expertise and experience of the executive; | |||
– to the extent available and relevant, competitive market information; and | |||
– the importance of retaining the executive along with the competitiveness of the market for the executive’s talent and services. |
138
Table of Contents
139
Table of Contents
140
Table of Contents
Director Compensation | ||||||||||||||||||||||||||||
Change in | ||||||||||||||||||||||||||||
Pension Value | ||||||||||||||||||||||||||||
and | ||||||||||||||||||||||||||||
Fees | Nonqualified | |||||||||||||||||||||||||||
Earned or | Non-Equity | Deferred | ||||||||||||||||||||||||||
Paid in | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||
Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||
($) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||||||
Darwin G. Glick | $ | 25,666 | — | — | — | — | — | $ | 25,666 | |||||||||||||||||||
S. Bruce Kurtz | $ | 21,825 | — | — | — | — | — | $ | 21,825 | |||||||||||||||||||
Milton Garrison | $ | 6,015 | — | — | — | — | — | $ | 6,015 | |||||||||||||||||||
Mark J. Keyser | $ | 7,505 | — | — | — | — | — | $ | 7,505 | |||||||||||||||||||
Joseph L. Lauck, Jr. | $ | 6,760 | — | — | — | — | — | $ | 6,760 | |||||||||||||||||||
Warren L Lewis | $ | 5,736 | — | — | — | — | — | $ | 5,736 |
141
Table of Contents
142
Table of Contents
143
Table of Contents
144
Table of Contents
145
Table of Contents
146
Table of Contents
• | the provisions that require 80% shareholder approval of certain actions, | ||
• | those establishing a classified board of directors, | ||
• | the prohibition on cumulative voting for directors | ||
• | the prohibition on acquiring or voting more than 10% of the voting stock, | ||
• | the prohibition on shareholder action without a meeting, | ||
• | the prohibition on shareholders calling special meetings, | ||
• | the action required to amend our bylaws; | ||
• | the factors that our board of directors may consider when evaluating the offer of any party to acquire LMI Holdings or its assets; | ||
• | the requirement of a 25% shareholder to purchase all remaining shareholders’ stock, and | ||
• | the provisions that no shareholder shall have preemptive rights. |
147
Table of Contents
(1) | the effects of any action upon any or all groups affected by such action, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located, | ||
(2) | the short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation, | ||
(3) | the resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation, and | ||
(4) | all other pertinent factors; |
148
Table of Contents
149
Table of Contents
150
Table of Contents
151
Table of Contents
152
Page | ||||
F-2 | ||||
Financial Statements | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 |
F-1
Table of Contents
Lebanon Mutual Insurance Company
Cleona, Pennsylvania
Harrisburg, Pennsylvania
F-2
Table of Contents
2008 | 2007 | |||||||
Assets | ||||||||
Investments: | ||||||||
Debt securities (amortized cost, 2008 $15,498,487; 2007 $16,010,819) | $ | 15,190,953 | $ | 15,979,094 | ||||
Equity securities (cost, 2008 $187,251; 2007 $5,250) | 154,501 | 361,243 | ||||||
Convertible securities (cost, 2008 $3,907,546 2007 $4,626,004) | 3,323,945 | 4,683,017 | ||||||
18,669,399 | 21,023,354 | |||||||
Cash and cash equivalents | 972,329 | 194,598 | ||||||
Premiums receivable | 2,006,182 | 2,246,102 | ||||||
Reinsurance receivables and recoverables | 2,230,981 | 1,838,576 | ||||||
Deferred acquisition costs | 1,220,000 | 1,356,000 | ||||||
Deferred income taxes | 587,376 | 54,949 | ||||||
Accrued investment income | 147,763 | 162,916 | ||||||
Property and equipment, cost less accumulated depreciation | 314,433 | 457,962 | ||||||
Other assets | 472,162 | 466,360 | ||||||
Total Assets | $ | 26,620,625 | $ | 27,800,817 | ||||
Liabilities and Equity | ||||||||
Liabilities | ||||||||
Unpaid losses and loss adjustment expenses | $ | 6,281,459 | $ | 6,644,954 | ||||
Unearned premiums | 6,093,146 | 6,610,019 | ||||||
Advance premiums | 200,068 | 148,955 | ||||||
Accounts payable and accrued expenses | 1,026,533 | 744,956 | ||||||
Other liabilities | 325,604 | 577,846 | ||||||
Total Liabilities | 13,926,810 | 14,726,730 | ||||||
Equity | ||||||||
Retained earnings | 12,918,402 | 12,860,070 | ||||||
Accumulated other comprehensive income (loss) | (224,587 | ) | 214,017 | |||||
Total Equity | 12,693,815 | 13,074,087 | ||||||
Total Liabilities and Equity | $ | 26,620,625 | $ | 27,800,817 | ||||
F-3
Table of Contents
2008 | 2007 | |||||||
Revenues | ||||||||
Net premiums earned | $ | 8,445,258 | $ | 9,883,459 | ||||
Net investment income | 540,449 | 580,868 | ||||||
Net realized investment gains (losses) | (970,032 | ) | 54,593 | |||||
Other revenues | 81,838 | 92,534 | ||||||
Total Revenues | 8,097,513 | 10,611,454 | ||||||
Losses and Expenses | ||||||||
Losses and loss adjustment expenses | 4,065,993 | 5,776,579 | ||||||
Salaries and benefits | 1,601,206 | 1,247,864 | ||||||
Commissions | 1,323,404 | 1,601,137 | ||||||
Other operating expenses | 1,083,799 | 1,176,233 | ||||||
Total Losses and Expenses | 8,074,402 | 9,801,813 | ||||||
Income before Income Taxes | 23,111 | 809,641 | ||||||
Income Tax Expense (Benefit) | (35,221 | ) | 226,663 | |||||
Net Income | 58,332 | 582,978 | ||||||
Other Comprehensive Income (Loss) | ||||||||
Unrealized holding gain (loss) on securities arising during the period, net of deferred income tax (expense) benefit of $117,588 and ($30,483) | (228,259 | ) | 59,174 | |||||
Reclassification adjustment for net realized (gains) losses included in net income, net of deferred income tax (expense) benefit of ($108,359) and $14,376 | (210,345 | ) | 27,907 | |||||
Other Comprehensive Income (Loss) | (438,604 | ) | 87,081 | |||||
Total Comprehensive Income (Loss) | $ | (380,272 | ) | $ | 670,059 | |||
F-4
Table of Contents
Accumulated | ||||||||||||
Other | ||||||||||||
Retained | Comprehensive | |||||||||||
Earnings | Income (Loss) | Total | ||||||||||
Balance — December 31, 2006 | $ | 12,277,092 | $ | 126,936 | $ | 12,404,028 | ||||||
Net income | 582,978 | — | 582,978 | |||||||||
Other comprehensive income | — | 87,081 | 87,081 | |||||||||
Balance — December 31, 2007 | $ | 12,860,070 | $ | 214,017 | $ | 13,074,087 | ||||||
Net income | 58,332 | — | 58,332 | |||||||||
Other comprehensive loss | — | (438,604 | ) | (438,604 | ) | |||||||
Balance — December 31, 2008 | $ | 12,918,402 | ($224,587 | ) | $ | 12,693,815 | ||||||
F-5
Table of Contents
2008 | 2007 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 58,332 | $ | 582,978 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 184,344 | 198,797 | ||||||
Net amortization of bond premium | 132,329 | 122,810 | ||||||
Net realized investment (gains) losses on sales of debt and equity securities | (318,704 | ) | 42,283 | |||||
Net realized investment (gains) losses on convertible securities | 1,288,736 | (96,876 | ) | |||||
Deferred income taxes | (306,480 | ) | (231,750 | ) | ||||
Change in assets and liabilities: | ||||||||
Premiums receivable | 239,920 | (52,968 | ) | |||||
Reinsurance receivable and recoverable | (392,405 | ) | 1,896,665 | |||||
Deferred acquisition costs | 136,000 | 13,000 | ||||||
Accrued investment income | 15,153 | (3,448 | ) | |||||
Other assets | (5,802 | ) | (179,410 | ) | ||||
Unpaid losses and loss adjustment expenses | (363,495 | ) | (2,450,941 | ) | ||||
Unearned premiums | (516,873 | ) | (464,399 | ) | ||||
Advance premiums | 51,113 | (56,815 | ) | |||||
Reinsurance premiums payable | — | (68,878 | ) | |||||
Accounts payable and accrued expenses | 281,577 | 45,590 | ||||||
Other liabilities | (252,242 | ) | 170,217 | |||||
Net Cash Provided by (Used in) Operating Activities | 231,503 | (533,145 | ) | |||||
Cash Flows from Investing Activities | ||||||||
Proceeds from: | ||||||||
Sales of debt securities | 1,667,781 | 760,479 | ||||||
Maturities of debt securities | 2,284,900 | 1,876,019 | ||||||
Sale of equity securities | 328,875 | — | ||||||
Sales of convertible securities | 2,318,894 | 3,501,637 | ||||||
Sales of property and equipment | — | 50,183 | ||||||
Purchases of: | ||||||||
Debt securities | (3,598,741 | ) | (3,642,721 | ) | ||||
Equity securities | (152,063 | ) | — | |||||
Convertible securities | (2,262,609 | ) | (2,900,969 | ) | ||||
Property and equipment | (40,809 | ) | (98,465 | ) | ||||
Net Cash Provided by (Used in) Investing Activities | 546,228 | (453,837 | ) | |||||
Net Increase (Decrease) in Cash and Cash Equivalents | 777,731 | (986,982 | ) | |||||
Cash and Cash Equivalents — Beginning of Year | 194,598 | 1,181,580 | ||||||
Cash and Cash Equivalents — End of Year | $ | 972,329 | $ | 194,598 | ||||
Supplemental Cash Flow Information | ||||||||
Income taxes paid | $ | 271,260 | $ | 573,800 | ||||
Supplemental Schedule of Noncash Investing Activities | ||||||||
Noncash conversions of convertible securities | $ | 624,421 | $ | 59,519 | ||||
F-6
Table of Contents
F-7
Table of Contents
December 31, 2008 and 2007
F-8
Table of Contents
December 31, 2008 and 2007
F-9
Table of Contents
December 31, 2008 and 2007
F-10
Table of Contents
December 31, 2008 and 2007
2008 | ||||||||||||||||
Cost or | Gross | Gross | ||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Debt securities: | ||||||||||||||||
Obligations of U.S. Government corporations and agencies | $ | 150,973 | $ | 10,142 | $ | — | $ | 161,115 | ||||||||
States, territories and possessions | 1,317,359 | 31,788 | 22,079 | 1,327,068 | ||||||||||||
Special revenue | 2,684,284 | 67,580 | — | 2,751,864 | ||||||||||||
Public utilities | 73,795 | 297 | — | 74,092 | ||||||||||||
Industrial and miscellaneous | 3,351,459 | 11,924 | 316,234 | 3,047,149 | ||||||||||||
Mortgage-backed securities | 7,920,617 | 124,224 | 215,176 | 7,829,665 | ||||||||||||
Total Debt Securities | 15,498,487 | 245,955 | 553,489 | 15,190,953 | ||||||||||||
Equity securities | 187,251 | 17,820 | 50,570 | 154,501 | ||||||||||||
$ | 15,685,738 | $ | 263,775 | $ | 604,059 | $ | 15,345,454 | |||||||||
2007 | ||||||||||||||||
Debt securities: | ||||||||||||||||
Obligations of U.S. Government corporations and agencies | $ | 201,574 | $ | 1,986 | $ | — | $ | 203,560 | ||||||||
States, territories and possessions | 1,182,196 | 3,846 | 5,284 | 1,180,758 | ||||||||||||
Special revenue | 2,980,930 | 8,184 | 13,999 | 2,975,115 | ||||||||||||
Public utilities | 73,283 | 517 | — | 73,800 | ||||||||||||
Industrial and miscellaneous | 3,327,706 | 19,926 | 32,375 | 3,315,257 | ||||||||||||
Mortgage-backed securities | 8,245,130 | 37,964 | 52,490 | 8,230,604 | ||||||||||||
Total Debt Securities | 16,010,819 | 72,423 | 104,148 | 15,979,094 | ||||||||||||
Equity securities | 5,250 | 355,993 | — | 361,243 | ||||||||||||
$ | 16,016,069 | $ | 428,416 | $ | 104,148 | $ | 16,340,337 | |||||||||
F-11
Table of Contents
December 31, 2008 and 2007
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less | $ | 1,232,436 | $ | 1,237,092 | ||||
Due after one year through five years | 4,867,861 | 4,729,601 | ||||||
Due after five years through ten years | 2,027,962 | 1,903,135 | ||||||
Due after ten years | 3,357,157 | 2,815,405 | ||||||
Mortgage-backed securities | 7,920,617 | 7,829,665 | ||||||
$ | 19,406,033 | $ | 18,514,898 | |||||
2008 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
States, territories and possessions | $ | 158,940 | $ | 7,269 | $ | 198,000 | $ | 14,810 | $ | 356,940 | $ | 22,079 | ||||||||||||
Industrial and miscellaneous | 1,425,285 | 161,337 | 1,042,575 | 154,897 | 2,467,860 | 316,234 | ||||||||||||||||||
Mortgage-backed securities | 1,888,701 | 118,551 | 920,918 | 96,625 | 2,809,619 | 215,176 | ||||||||||||||||||
Total Debt Securities | 3,472,926 | 287,157 | 2,161,493 | 266,332 | 5,634,419 | 553,489 | ||||||||||||||||||
Equity Securities | 131,431 | 50,570 | — | — | 131,431 | 50,570 | ||||||||||||||||||
Total | $ | 3,604,357 | $ | 337,727 | $ | 2,161,493 | $ | 266,332 | $ | 5,765,850 | $ | 604,059 | ||||||||||||
2007 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||
States, territories and possessions | $ | — | $ | — | $ | 211,600 | $ | 5,284 | $ | 211,600 | $ | 5,284 | ||||||||||||
Special revenue | — | — | 1,559,669 | 13,999 | 1,559,669 | 13,999 | ||||||||||||||||||
Industrial and miscellaneous | 476,393 | 12,564 | 1,171,039 | 19,811 | 1,647,432 | 32,375 | ||||||||||||||||||
Mortgage-backed securities | 167,331 | 1,199 | 4,258,864 | 51,291 | 4,426,195 | 52,490 | ||||||||||||||||||
Total | $ | 643,724 | $ | 13,763 | $ | 7,201,172 | $ | 90,385 | $ | 7,844,896 | $ | 104,148 | ||||||||||||
F-12
Table of Contents
December 31, 2008 and 2007
F-13
Table of Contents
December 31, 2008 and 2007
2008 | 2007 | |||||||
Debt securities | $ | 738,125 | $ | 742,348 | ||||
Equity securities | 55,793 | 47,069 | ||||||
Cash and cash equivalents | 15,608 | 45,435 | ||||||
Other | 1,928 | 3,071 | ||||||
Investment income | 811,454 | 837,923 | ||||||
Investment expense | 271,005 | 257,055 | ||||||
Net Investment Income | $ | 540,449 | $ | 580,868 | ||||
2008 | 2007 | |||||||
Balance, beginning of year | $ | 1,356,000 | $ | 1,369,000 | ||||
Acquisition costs deferred | 2,501,000 | 2,857,000 | ||||||
Amortization charged to earnings | 2,637,000 | 2,870,000 | ||||||
Balance, end of year | $ | 1,220,000 | $ | 1,356,000 | ||||
F-14
Table of Contents
December 31, 2008 and 2007
Depreciable | ||||||||||||
2008 | 2007 | Lives | ||||||||||
Land | $ | 98,308 | $ | 98,308 | ||||||||
Building and improvements | 624,825 | 623,545 | 5 to 33 years | |||||||||
Furniture and equipment | 392,634 | 392,634 | 3 to 7 years | |||||||||
Data processing equipment | 2,096,593 | 2,077,514 | 3 years | |||||||||
Automobiles | 78,329 | 57,873 | 5 years | |||||||||
3,290,689 | 3,249,874 | |||||||||||
Accumulated depreciation | (2,976,256 | ) | (2,791,912 | ) | ||||||||
$ | 314,433 | $ | 457,962 | |||||||||
2008 | 2007 | |||||||
Balance — January 1 | $ | 6,644,954 | $ | 9,095,895 | ||||
Less reinsurance recoverable | 1,779,874 | 3,704,671 | ||||||
Net Balance, January 1 | 4,865,080 | 5,391,224 | ||||||
Losses and LAE incurred, net: | ||||||||
Current year | 4,238,643 | 5,714,671 | ||||||
Prior years | (172,650 | ) | 61,908 | |||||
Total Losses and LAE Incurred, Net | 4,065,993 | 5,776,579 | ||||||
Losses and LAE paid, net: | ||||||||
Current year | 2,401,405 | 3,663,537 | ||||||
Prior years | 2,086,624 | 2,639,186 | ||||||
Total Losses and LAE Paid, Net | 4,488,029 | 6,302,723 | ||||||
Net balance, December 31 | 4,443,044 | 4,865,080 | ||||||
Reinsurance recoverable | 1,838,415 | 1,779,874 | ||||||
Balance — December 31 | $ | 6,281,459 | $ | 6,644,954 | ||||
F-15
Table of Contents
December 31, 2008 and 2007
F-16
Table of Contents
December 31, 2008 and 2007
2008 | 2007 | |||||||||||||||
Written | Earned | Written | Earned | |||||||||||||
Direct | $ | 12,038,744 | $ | 12,555,618 | $ | 13,642,319 | $ | 14,106,718 | ||||||||
Ceded | 4,147,478 | 4,110,360 | 4,023,950 | 4,223,259 | ||||||||||||
$ | 7,891,266 | $ | 8,445,258 | $ | 9,618,369 | $ | 9,883,459 | |||||||||
2008 | 2007 | |||||||
Current | $ | 271,259 | $ | 458,413 | ||||
Deferred | (306,480 | ) | (231,750 | ) | ||||
$ | (35,221 | ) | $ | 226,663 | ||||
2008 | 2007 | |||||||
Provision for federal income taxes at the statutory rate | $ | 7,858 | $ | 275,278 | ||||
Dividends received deduction | (13,279 | ) | (9,628 | ) | ||||
Tax-exempt interest | (38,655 | ) | (26,010 | ) | ||||
Other | 8,855 | (12,977 | ) | |||||
$ | (35,221 | ) | $ | 226,663 | ||||
F-17
Table of Contents
December 31, 2008 and 2007
2008 | 2007 | |||||||
Deferred tax assets: | ||||||||
Unearned premiums | $ | 403,411 | $ | 441,083 | ||||
Losses and loss adjustment expenses discounting | 151,882 | 172,501 | ||||||
Net unrealized loss on investment securities | 115,696 | - | ||||||
Net unrealized loss on convertible securities | 198,424 | - | ||||||
Depreciation | 38,494 | 20,390 | ||||||
Other | 99,226 | 18,408 | ||||||
Total Deferred Tax Assets | $ | 1,007,133 | 652,382 | |||||
Deferred tax liabilities: | ||||||||
Deferred acquisition costs | 414,800 | 461,040 | ||||||
Net unrealized gain on investment securities | — | 110,251 | ||||||
Net unrealized gain on convertible securities | — | 19,384 | ||||||
Salvage and subrogation | 4,957 | 6,758 | ||||||
Total Deferred Tax Liabilities | 419,757 | 597,433 | ||||||
Net Deferred Tax Asset | $ | 587,376 | $ | 54,949 | ||||
F-18
Table of Contents
December 31, 2008 and 2007
F-19
Table of Contents
December 31, 2008 and 2007
a. | Quoted prices for similar assets or liabilities in active markets | ||
b. | Quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the assets or liabilities, the prices are not current, or price quotations vary substantially either over time or among market makers (for example, some brokered markets) or in which little information is released publicly (for example, a principal-to-principal market) | ||
Fair Value Measurement Inputs | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
Investments available for sale: | ||||||||||||||||
Debt securities | $ | — | $ | 15,190,953 | $ | — | $ | 15,190,953 | ||||||||
Equity securities | 19,523 | 134,978 | — | 154,501 | ||||||||||||
Convertible securities | — | 3,323,945 | — | 3,323,945 | ||||||||||||
Total Assets | $ | 19,523 | $ | 18,649,876 | $ | — | $ | 18,669,399 | ||||||||
F-20
Table of Contents
December 31, 2008 and 2007
F-21
Table of Contents
December 31, 2008 and 2007
2008 | 2007 | |||||||
Revenues | ||||||||
Net premiums earned: | ||||||||
Commercial lines | $ | 5,631,819 | $ | 6,721,837 | ||||
Personal lines | 2,813,439 | 3,161,622 | ||||||
Total Net Premiums Earned | 8,445,258 | 9,883,459 | ||||||
Expenses | ||||||||
Losses and loss adjustment expenses: | ||||||||
Commercial lines | 2,574,689 | 3,631,427 | ||||||
Personal lines | 1,491,304 | 2,145,152 | ||||||
Total Losses and Loss Adjustment Expenses | 4,065,993 | 5,776,579 | ||||||
Other operating expenses: | ||||||||
Commercial lines | 2,743,284 | 2,726,125 | ||||||
Personal lines | 1,265,125 | 1,299,109 | ||||||
Total Other Operating Expenses | 4,008,409 | 4,025,234 | ||||||
Total Losses and Expenses | 8,074,402 | 9,801,813 | ||||||
Operating Gain (Loss) | ||||||||
Commercial lines | 313,846 | 364,285 | ||||||
Personal lines | 57,010 | (282,639 | ) | |||||
Total Operating Gain | 370,856 | 81,646 | ||||||
Net investment income | 540,449 | 580,868 | ||||||
Net realized investment gains (losses) | (970,032 | ) | 54,593 | |||||
Other revenues | 81,838 | 92,534 | ||||||
Income Before Income Taxes | $ | 23,111 | $ | 809,641 | ||||
F-22
Table of Contents
December 31, 2008 and 2007
Three Months Ended | ||||||||||||||||
March 30 | June 30 | September 30 | December 31 | |||||||||||||
2008 | ||||||||||||||||
Total revenues | $ | 2,259,184 | $ | 2,195,045 | $ | 1,896,186 | $ | 1,747,098 | ||||||||
Income (loss) before income taxes | 80,951 | 66,955 | (125,603 | ) | 808 | |||||||||||
Net income (loss) | 56,475 | 48,538 | (89,178 | ) | 42,497 | |||||||||||
2007 | ||||||||||||||||
Total revenues | $ | 2,775,678 | $ | 2,827,806 | $ | 2,795,551 | $ | 2,212,419 | ||||||||
Income before income taxes | 345,009 | 322,322 | 482,015 | (339,705 | ) | |||||||||||
Net income (loss) | 239,145 | 228,124 | 341,399 | (225,690 | ) |
F-23
Table of Contents
Table of Contents
SEC registration fee | $ | 887 | ||
CUSIP assignment fee | 276 | |||
Printing, postage and mailing | 200,000 | |||
Legal fees and expenses | 1,245,000 | |||
Financial advisory fees and expenses | 600,000 | |||
Blue sky fees and expenses | 5,000 | |||
Accounting fees and expenses | 250,000 | |||
Valuation fees and expenses | 125,000 | |||
Transfer and conversion agent fees and expenses | 50,000 | |||
Miscellaneous | 23,837 | |||
Total | $ | 2,500,000 | ||
* | Estimated |
II-1
Table of Contents
II-2
Table of Contents
II-3
Table of Contents
* | To be filed by amendment. | |
** | Previously filed | |
II-4
Table of Contents
II-5
Table of Contents
LEBANON INSURANCE GROUP, INC. | ||||
By: | /s/ Rollin P. Rissinger, Jr. | |||
Rollin P. Rissinger, Jr., President and | ||||
Chief Executive Officer | ||||
Signature | Capacity | Date | ||
/s/ Rollin P. Rissinger, Jr. | Director President and Chief Executive Officer | April 16, 2009 | ||
/s/ Keith A. Ulsh | Director Treasurer and Chief Financial Officer and Chief Accounting Officer | April 16, 2009 | ||
/s/ Darwin G. Glick* | Director and Chairman | April 16, 2009 | ||
/s/ S. Bruce Kurtz* | Director and Vice Chairman | April 16, 2009 | ||
Director | April 16, 2009 | |||
/s/ Joseph F. Lauck* | Director | April 16, 2009 | ||
/s/ Warren L. Lewis* | Director | April 16, 2009 | ||
*By | Jeffrey P. Waldron, Esquire as Attorney in Fact | |||||
/s/ Jeffrey P. Waldron, Esquire |
II-6
Table of Contents
II-7
Table of Contents
II-8
Table of Contents
* | To be filed to be amendment. | |
** | Previously filed | |
II-9