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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) | 23-2994859 (I.R.S. Employer Identification Number) |
P.O. Box P
Wilkes-Barre, PA 18773-0016
(800) 822-8111
President and Chief Executive Officer
Penn Millers Holding Corporation
72 North Franklin Street
P.O. Box P
Wilkes-Barre, PA 18773-0016
(800) 822-8111
Wesley R. Kelso, Esquire | David L. Harbaugh, Esquire | |
John D. Talbot, Esquire | Morgan, Lewis & Bockius LLP | |
Stevens & Lee, P.C. | 1701 Market Street | |
620 Freedom Business Center, | Philadelphia, PA 19103 | |
Suite 200 | (215) 963-5751 | |
King of Prussia, PA 19406 | ||
(610) 205-6028 |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Title of Each Class | Proposed Maximum | Proposed Maximum | Amount of | |||||||||||||||||||
of Securities to be | Amount to be | Offering Price | Aggregate Offering | Registration | ||||||||||||||||||
Registered | Registered | Per Share | Price(1) | Fee(2) | ||||||||||||||||||
Common Stock, $0.01 par value per share | 2,932,500 shares | $10.00 | $29,325,000 | $1,152 | ||||||||||||||||||
(1) | Estimated solely for the purpose of calculating the registration fee. | |
(2) | Calculated in accordance with Rule 457(a). |
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• | policyholders of our insurance company subsidiary, Penn Millers Insurance Company, as of October 22, 2008; | ||
• | our employee stock ownership plan, which we refer to as our ESOP; and | ||
• | our officers, directors, and employees. |
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Price: $10.00 per share
Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
Number of shares offered | 1,950,750 | 2,295,000 | 2,639,250 | 2,932,500 | ||||||||||||
Gross offering proceeds | $ | 19,507,500 | $ | 22,950,000 | $ | 26,392,500 | $ | 29,325,000 | ||||||||
Less: Proceeds from ESOP shares (1) | $ | 1,950,750 | $ | 2,295,000 | $ | 2,639,250 | $ | 2,932,500 | ||||||||
Offering expenses (2) | $ | 2,307,387 | $ | 2,255,750 | $ | 2,204,113 | $ | 2,160,125 | ||||||||
Commissions (3)(4) | $ | 192,613 | $ | 244,250 | $ | 295,887 | $ | 339,875 | ||||||||
Net proceeds | $ | 15,056,750 | $ | 18,155,000 | $ | 21,253,250 | $ | 23,892,500 | ||||||||
Net proceeds per share | $ | 7.72 | $ | 7.91 | $ | 8.05 | $ | 8.15 |
(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) | The offering expenses are expected to be approximately $2,500,000 in the aggregate, and the legal fees paid to Stevens & Lee, an affiliate of Griffin Financial, decrease as the commissions paid to Griffin Financial in connection with the subscription and community offering increase. See “The Offering — Marketing and Underwriting Arrangements.” | |
(3) | Represents the amount to be paid to Griffin Financial, which is equal to 1.5% of the shares sold in the subscription offering and the community offering less $100,000. See “The Offering — Marketing and Underwriting Arrangements.” | |
(4) | Assumes that no shares are sold in a syndicated community offering. See “The Offering — Marketing and Underwriting Arrangements” for commissions to be paid in the event of a syndicated community offering. |
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(i)
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• | the terms “Penn Millers,” “we,” “us,” “our,” “the Company,” and similar references refer to Penn Millers Holding Corporation and all of its direct and indirect subsidiaries; and | ||
• | the term “offering” refers to the offering of up to 2,932,500 shares of our common stock to eligible subscribers under the plan of minority stock offering in a subscription offering and to the general public in a community offering and syndicated community offering. We expect to conduct the subscription offering and the community offering at the same time. The syndicated community offering may be conducted concurrently with or subsequent to the subscription offering and the community offering. |
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![(FLOW CHART)](https://capedge.com/proxy/S-1/0000893220-09-000101/w72350w7235002.gif)
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• | First, in 2009 we are introducing an insurance product called PennEdge that will enable us to write customized coverages on mid-size commercial accounts. PennEdge will provide property and liability coverage to accounts that currently do not meet the eligibility requirements for our traditional business owners or agribusiness products. PennEdge is specifically tailored to unique business and industry segments, including wholesalers, light manufacturing, hospitality, commercial laundries and dry cleaners, and printers. These segments were chosen based on the experience of our underwriting staff and the market opportunities available to our existing producers. | ||
• | Second, we have differentiated our products by entering into strategic alliances to offer equipment breakdown, employment practices liability, and miscellaneous professional liability coverage, and we are exploring a strategic alliance to offer environmental impairment liability coverage. Under such strategic alliances, we typically reinsure all of the risk of loss to the strategic partner and earn a ceding commission. |
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• | Third, we are currently represented by a small number of producers in a large geographic area. New producers are an important part of our growth strategy, and we intend to continue to add them in areas where we want to increase our market presence. |
• | first, to policyholders of Penn Millers Insurance Company as of October 22, 2008; | ||
• | second, to our employee stock ownership plan, or ESOP; and | ||
• | third, to our directors, officers and employees. |
• | licensed insurance agencies and/or brokers that have been appointed by or otherwise are under contract with Penn Millers Insurance Company to market and distribute our insurance products; | ||
• | policyholders under policies of insurance issued by Penn Millers Insurance Company after October 22, 2008; and | ||
• | natural persons and trusts for natural persons who are residents of Lackawanna or Luzerne Counties in Pennsylvania. |
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Shares Available | ||||
Offering | Eligible Purchasers | for Purchase | ||
Subscription Offering | Policyholders of Penn Millers Insurance Company at October 22, 2008; and | 2,639,250 shares | ||
Our officers, directors and employees (who may not, as a group, purchase more than 35% of the shares offered). | ||||
Community Offering | All members of the general public, with preference given to: | 2,639,250 shares, less shares subscribed for in the subscription offering | ||
• licensed insurance agencies and brokers appointed by or under contract with Penn Millers Insurance Company; | ||||
• policyholders of Penn Millers Insurance Company issued policies after October 22, 2008; and | ||||
• residents of Lackawanna or Luzerne Counties in Pennsylvania. | ||||
Syndicated Community Offering | All members of the general public | 2,639,250 shares, less shares subscribed for in the subscription offering and the community offering |
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Amount | ||||||||
Amount | at the adjusted | |||||||
at the minimum | maximum | |||||||
Use of Net Proceeds | ||||||||
Loan to ESOP | $ | 1,950,750 | $ | 2,932,500 | ||||
General corporate purposes | $ | 15,056,750 | $ | 23,892,500 | ||||
Total | $ | 17,007,500 | $ | 26,825,500 | ||||
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• | 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; | ||
• | a trust or estate in which such person or entity holds a substantial beneficial interest or serves in a fiduciary capacity; or | ||
• | any person acting in concert with any of the persons or entities listed above. |
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Shares at | % of issued | |||||||||||||||||||||||||||||||
Shares at | % of issued | Shares at | % of issued | Shares at | % of issued | the | and | |||||||||||||||||||||||||
the | and | the | and | the | and | adjusted | outstanding | |||||||||||||||||||||||||
minimum | outstanding | midpoint | outstanding | maximum | outstanding | maximum | shares at | |||||||||||||||||||||||||
of the | shares at | of the | shares at | of the | shares at | of the | the | |||||||||||||||||||||||||
offering | the | offering | the | offering | the | offering | adjusted | |||||||||||||||||||||||||
range | minimum | range | midpoint | range | maximum | range | maximum | |||||||||||||||||||||||||
Shares issued to Penn Millers Mutual Holding Company | 2,384,250 | 55.0 | % | 2,805,000 | 55.0 | % | 3,225,750 | 55.0 | % | 2,991,743 | 50.5 | % | ||||||||||||||||||||
Shares sold in offering (including shares sold to the ESOP) | 1,950,750 | 45.0 | % | 2,295,000 | 45.0 | % | 2,639,250 | 45.0 | % | 2,932,500 | 49.5 | % | ||||||||||||||||||||
Total | 4,335,000 | 100.0 | % | 5,100,000 | 100.0 | % | 5,865,000 | 100.0 | % | 5,924,243 | 100.0 | % | ||||||||||||||||||||
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• | that 2,639,250 shares will be sold in the offering; and | ||
• | that the value of the stock in the table is $10.00 per share. |
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Percent of | Value of Shares | |||||||||||||||
Individuals Eligible to | Shares issued | Number of | Based on $10.00 | |||||||||||||
Plan | Receive Awards | in the Offering | Shares | Share Price | ||||||||||||
ESOP | All eligible full-time employees | 10 | % | 263,925 | $ | 2,639,250 | ||||||||||
Shares available under the stock-based incentive plan for restricted stock awards | Directors and selected officers and employees | 4 | % | 105,570 | $ | 1,055,700 | ||||||||||
Shares available under the stock-based incentive plan for stock options | Directors and selected officers and employees | 10 | % | 263,925 | (1) |
(1) | Stock options will be awarded with a per share exercise price at least equal to the market price of our common stock on the date of award. 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 Commissioner must approve (i) the offering and the establishment of the employee stock ownership plan and stock-based incentive plan, and (ii) amend or waive certain provisions of the 1998 order approving Penn Millers Insurance Company’s conversion from mutual to stock form within a mutual holding company structure; and | ||
• | we must sell at least the minimum number of shares offered. |
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• | determining whether damages were caused by flooding versus wind; | ||
• | evaluating general liability and pollution exposures; | ||
• | estimating additional living expenses; | ||
• | the impact of increased demand for products and services necessary to repair or rebuild damaged properties; | ||
• | infrastructure disruption; | ||
• | fraud; | ||
• | the effect of mold damage; | ||
• | business interruption costs; and | ||
• | reinsurance collectability. |
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• | 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. |
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• | 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. |
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• | the availability of alternative products from our competitors; | ||
• | the price of our product relative to our competitors; | ||
• | the commissions paid to producers for the sale of our products relative to our competitors; | ||
• | the timing of our market entry; and | ||
• | our ability to market and distribute our products effectively. |
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• | 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; |
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• | licensing of insurers and their producers; | ||
• | advertising and marketing practices; | ||
• | restrictions on the nature, quality and concentration of investments; | ||
• | assessments by guaranty associations and mandatory pooling arrangements; | ||
• | restrictions on the ability to pay dividends; | ||
• | restrictions on transactions between affiliated companies; | ||
• | 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 reports of financial condition required to be filed; and | ||
• | requiring reserves for unearned premiums, losses and other purposes. |
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• | 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. |
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• | a classified board of directors divided into three classes serving for successive terms of three years each; | ||
• | the prohibition of cumulative voting in the election of directors; | ||
• | the requirement 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 ___ days or more than ___ days prior to the meeting; | ||
• | 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 of at least 80% of the members of the board of directors; and | ||
• | the requirement that certain provisions of our bylaws can only be amended 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. |
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• | first, as a dividend to the extent such distribution is deemed to be made out of Penn Millers Mutual Holding Company’s current or accumulated earnings and profits; | ||
• | second, if the aggregate fair market value of the subscription rights that are distributed to an eligible policyholder exceeds the amount of Penn Millers Mutual Holding Company’s current and accumulated earnings and profits that are deemed distributed to such eligible policyholder, that excess will be treated as a return of capital to such eligible policyholder to the extent of such eligible policyholder’s adjusted tax basis, if any, in its membership interests in Penn Millers Mutual Holding Company; and | ||
• | third, if the aggregate fair market value of the subscription rights that are distributed to an eligible policyholder exceeds the sum of the amount of Penn Millers Mutual Holding Company’s current and accumulated earnings and profits that are deemed distributed to such eligible policyholder and such eligible policyholder’s adjusted tax basis in its membership interests in Penn Millers Mutual Holding Company, that excess will be treated as gain from the sale or exchange of the eligible policyholder’s membership interests in Penn Millers Mutual Holding Company and generally should be treated as capital gain if such eligible policyholder holds its membership interests in Penn Millers Mutual Holding Company as a capital asset. |
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• | 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 markets in which we compete that 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 the jurisdictions where we do business; | ||
• | our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network; | ||
• | our ability to introduce and successfully market our new PennEdge commercial multi-peril policy; | ||
• | our ability to expand our agribusiness lines into new geographic areas, including the midwestern United States; | ||
• | 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 and a reduction in the value of our investment portfolio; | ||
• | heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new or existing competitors, resulting in 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; |
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• | the cost, availability and collectability of reinsurance; | ||
• | estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses; | ||
• | 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 Public Company Accounting Oversight Board or 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 | ||
• | adverse changes in 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. |
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At or for the nine months | At or for the years ended | |||||||||||||||||||||||||||
ended September 30, | December 31, | |||||||||||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
Direct premiums written | $ | 73,211 | $ | 70,377 | $ | 94,073 | $ | 84,544 | $ | 84,084 | $ | 89,041 | $ | 78,475 | ||||||||||||||
Net premiums written | 60,341 | 56,606 | 74,119 | 67,525 | 62,057 | 67,036 | 58,516 | |||||||||||||||||||||
Net premiums earned | 59,319 | 53,490 | 70,970 | 64,645 | 64,723 | 63,090 | 56,065 | |||||||||||||||||||||
Net investment income | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | 4,278 | 4,058 | |||||||||||||||||||||
Net realized investment gains (losses) | (1,259 | ) | 423 | (702 | ) | 349 | 424 | 936 | 833 | |||||||||||||||||||
Other revenue | 324 | 380 | 508 | 345 | 277 | 301 | 371 | |||||||||||||||||||||
Total revenue | $ | 62,460 | $ | 58,229 | $ | 76,100 | $ | 70,016 | $ | 69,868 | $ | 68,605 | $ | 61,327 | ||||||||||||||
Expenses | ||||||||||||||||||||||||||||
Loss and loss adjustment expense | $ | 42,261 | $ | 35,533 | $ | 49,783 | $ | 43,766 | $ | 40,242 | $ | 42,910 | $ | 35,822 | ||||||||||||||
Amortization of deferred acquisition costs | 17,401 | 16,385 | 21,930 | 20,080 | 21,556 | 20,464 | 18,512 | |||||||||||||||||||||
Underwriting and administrative expense | 2,383 | 2,672 | 2,233 | 3,216 | 7,665 | 3,895 | 4,399 | |||||||||||||||||||||
Interest expense | 116 | 100 | 125 | 222 | 195 | 84 | 73 | |||||||||||||||||||||
Other operating expenses | 190 | 109 | 184 | 314 | 266 | 82 | 101 | |||||||||||||||||||||
Total losses and expenses | $ | 62,351 | $ | 54,799 | $ | 74,255 | $ | 67,598 | $ | 69,924 | $ | 67,435 | $ | 58,907 | ||||||||||||||
Income (loss) from continuing operations, before income taxes | $ | 109 | $ | 3,430 | $ | 1,845 | $ | 2,418 | $ | (56 | ) | $ | 1,170 | $ | 2,420 | |||||||||||||
Income tax expense (benefit) | 140 | 1,001 | 396 | 506 | (296 | ) | (15 | ) | 581 | |||||||||||||||||||
Income (loss) from continuing operations | $ | (31 | ) | $ | 2,429 | $ | 1,449 | $ | 1,912 | $ | 240 | $ | 1,185 | $ | 1,839 | |||||||||||||
Income (loss) on discontinued operations | (2,454 | ) | 292 | (363 | ) | 168 | 234 | 199 | 208 | |||||||||||||||||||
Net income (loss) | $ | (2,485 | ) | $ | 2,721 | $ | 1,086 | $ | 2,080 | $ | 474 | $ | 1,384 | $ | 2,047 | |||||||||||||
Balance Sheet Data (at period end): | ||||||||||||||||||||||||||||
Total investments, cash and cash equivalents | $ | 131,632 | $ | 129,688 | $ | 136,296 | $ | 126,639 | $ | 116,881 | $ | 116,986 | $ | 112,771 | ||||||||||||||
Total assets | 219,583 | 220,230 | 219,784 | 207,939 | 198,067 | 192,004 | 185,450 | |||||||||||||||||||||
Unpaid loss and loss adjustment expenses | 103,278 | 95,989 | 95,956 | 89,405 | 83,849 | 73,287 | 69,463 | |||||||||||||||||||||
Unearned premiums | 47,753 | 46,392 | 46,595 | 43,294 | 39,984 | 42,798 | 38,090 | |||||||||||||||||||||
Total liabilities | 164,741 | 157,823 | 158,212 | 147,238 | 140,127 | 132,111 | 126,174 | |||||||||||||||||||||
Total shareholders’ equity | 54,842 | 62,407 | 61,572 | 60,701 | 57,940 | 59,893 | 59,276 | |||||||||||||||||||||
U.S. GAAP Ratios: |
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At or for the nine months | At or for the years ended | |||||||||||||||||||||||||||
ended September 30, | December 31, | |||||||||||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||
Loss and loss adjustment expense ratio (1) | 71.2 | % | 66.4 | % | 70.1 | % | 67.7 | % | 62.2 | % | 68.0 | % | 63.9 | % | ||||||||||||||
Underwriting expense ratio (2) | 32.7 | % | 35.0 | % | 33.3 | % | 35.1 | % | 39.2 | % | 38.0 | % | 40.8 | % | ||||||||||||||
Combined ratio (3) | 103.9 | % | 101.4 | % | 103.4 | % | 102.8 | % | 101.4 | % | 106.0 | % | 104.7 | % | ||||||||||||||
Return on average equity, continuing operations | (0.1 | %) | 3.9 | % | 2.4 | % | 3.2 | % | 0.4 | % | 2.0 | % | 3.2 | % | ||||||||||||||
Return on average equity | (4.3 | %) | 4.4 | % | 1.8 | % | 3.5 | % | 0.8 | % | 2.3 | % | 3.5 | % | ||||||||||||||
Statutory Data: | ||||||||||||||||||||||||||||
Statutory net income (loss) | $ | (397 | ) | $ | 2,087 | $ | 878 | $ | 1,374 | $ | 3,171 | $ | 634 | $ | 608 | |||||||||||||
Statutory surplus | 46,622 | 51,457 | 50,795 | 50,524 | 47,216 | 45,445 | 44,332 | |||||||||||||||||||||
Ratio of net premiums written to statutory surplus (4) | 172.6 | % | 146.7 | % | 145.9 | % | 133.6 | % | 131.4 | % | 147.5 | % | 132.0 | % |
(1) | Calculated by dividing loss and loss adjustment expenses by net premiums earned. | |
(2) | Calculated by dividing underwriting 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 making an underwriting profit. | |
(4) | Calculated for the periods ended September 30, 2008 and 2007 by annualizing net premiums written. |
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Adjusted | ||||||||
Minimum | Maximum | |||||||
Net Proceeds | ||||||||
Gross proceeds | $ | 19,507,500 | $ | 29,325,000 | ||||
Offering expenses | 2,500,000 | 2,500,000 | ||||||
Net proceeds before loan to ESOP | $ | 17,007,500 | $ | 26,825,000 | ||||
Use of Net Proceeds | ||||||||
Loan to ESOP | $ | 1,950,750 | $ | 2,932,500 | ||||
General corporate purposes | 15,056,750 | 23,892,500 | ||||||
Total | $ | 17,007,500 | $ | 26,825,000 | ||||
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MUTUAL HOLDING COMPANY TO STOCK FORM
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(In thousands, except per share data)
Penn Millers | ||||||||||||||||||||
Historical | ||||||||||||||||||||
Consolidated | Adjusted | |||||||||||||||||||
Capitalization | Minimum(1) | Midpoint(1) | Maximum(1) | Maximum(1) | ||||||||||||||||
Long term debt | $ | 1,510 | $ | 1,510 | $ | 1,510 | $ | 1,510 | $ | 1,510 | ||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Common stock, $0.01 par value per share; authorized shares 10,000,000 | $ | 1 | (2) | $ | 43 | $ | 51 | $ | 59 | $ | 59 | |||||||||
Additional paid in capital | — | 16,966 | 20,400 | 23,835 | 26,767 | |||||||||||||||
Retained earnings | 56,855 | 56,855 | 56,855 | 56,855 | 56,855 | |||||||||||||||
Accumulated other comprehensive income (loss), net of tax | (2,014 | ) | (2,014 | ) | (2,014 | ) | (2,014 | ) | (2,014 | ) | ||||||||||
Less: common stock to be acquired by ESOP(3) | — | (1,951 | ) | (2,295 | ) | (2,639 | ) | (2,933 | ) | |||||||||||
Total shareholders’ equity | $ | 54,842 | $ | 69,899 | $ | 72,997 | $ | 76,096 | $ | 78,734 | ||||||||||
(1) | No effect has been given to the issuance of additional shares of common stock pursuant to the proposed stock-based incentive plan. We intend to adopt a stock-based incentive plan and will submit such plan to shareholders at a meeting of shareholders to be held at least six months following completion of the offering. If the plan is approved by shareholders, an amount equal to 14% of the shares of common stock sold in the offering will be available for future issuance under such plan. Under such plan, 4% will be available for future restricted stock awards and 10% will be available for future stock option grants. Your ownership percentage would decrease by approximately 5.9% if shares were issued from our authorized but unissued shares upon the grant of all potential restricted stock awards and the exercise of all potential stock options, and if 2,295,000 shares were sold in the offering. No decrease in your ownership percentage will occur if the shares are purchased for the plan on the open market. See “Unaudited Pro Forma Financial Information — Additional Pro Forma Data” and “Management — Benefit Plans and Employment Agreements — Stock-Based Incentive Plan.” | |
(2) | At December 31, 2008, our articles of incorporation only authorized 1,000 shares of common stock with a par value of $1.00. Prior to completion of the offering, the articles of incorporation will be amended to authorize the issuance of 10,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of preferred stock, par value per share to be determined. |
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(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 Penn Millers. See Note 1 to the table set forth under “Unaudited Pro Forma Financial Information —Additional Pro Forma Data” and “Management — Benefit Plans and Employment Agreements — Employee Stock Ownership Plan.” |
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As of September 30, 2008
(In thousands, except per share data)
Penn Millers | Penn Millers | |||||||||||
Historical | Pro Forma | Pro Forma | ||||||||||
Consolidated | Adjustments | Consolidated | ||||||||||
Assets | ||||||||||||
Cash and invested assets | $ | 131,632 | $ | 15,057 | (1) | $ | 146,689 | |||||
Premiums receivable | 33,302 | — | 33,302 | |||||||||
Deferred acquisition costs | 11,278 | — | 11,278 | |||||||||
Reinsurance receivables | 20,223 | — | 20,223 | |||||||||
Prepaid reinsurance premiums | 4,355 | — | 4,355 | |||||||||
Income taxes receivable | 770 | — | 770 | |||||||||
Deferred income taxes | 4,317 | — | 4,317 | |||||||||
Accrued investment income | 1,287 | — | 1,287 | |||||||||
Property and equipment, net of accumulated depreciation | 4,212 | — | 4,212 | |||||||||
Other assets | 4,206 | — | 4,206 | |||||||||
Assets from discontinued operations | 4,001 | — | 4,001 | |||||||||
Total assets | $ | 219,583 | $ | 15,057 | $ | 234,640 | ||||||
Liabilities | ||||||||||||
Loss and loss adjustment expense reserves | $ | 103,278 | $ | — | $ | 103,278 | ||||||
Unearned premiums | 47,753 | — | 47,753 | |||||||||
Accounts payable and accrued expenses | 11,471 | — | 11,471 | |||||||||
Long-term debt | 1,510 | — | 1,510 | |||||||||
Liabilities from discontinued operations | 729 | — | 729 | |||||||||
Total liabilities | $ | 164,741 | — | $ | 164,741 | |||||||
Shareholders’ equity | ||||||||||||
Common stock | $ | 1 | $ | 42 | (1) | $ | 43 | |||||
Unearned compensation | — | (1,951 | )(2) | (1,951 | ) | |||||||
Additional paid in capital | — | 16,966 | (1) | 16,966 | ||||||||
Retained earnings | 56,855 | — | 56,855 | |||||||||
Accumulated other loss, net of deferred taxes | (2,014 | ) | — | (2,014 | ) | |||||||
Total shareholders’ equity | $ | 54,842 | $ | 15,057 | $ | 69,899 | ||||||
Total liabilities and shareholders’ equity | $ | 219,583 | $ | 15,057 | $ | 234,640 | ||||||
Pro forma shareholders’ equity per share | $ | 16.12 | ||||||||||
(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 our consolidated pro forma market value, as determined by the independent valuation of Curtis Financial. The unaudited pro forma condensed balance sheet is based upon the assumptions set forth under “Use of Proceeds.” |
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Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
(in thousands) | ||||||||||||||||
Gross proceeds from the offering | $ | 19,508 | $ | 22,950 | $ | 26,392 | $ | 29,325 | ||||||||
Less: common stock acquired by the ESOP | (1,951 | ) | (2,295 | ) | (2,639 | ) | (2,933 | ) | ||||||||
Less: offering expenses | (2,500 | ) | (2,500 | ) | (2,500 | ) | (2,500 | ) | ||||||||
Net proceeds from the offering | $ | 15,057 | $ | 18,155 | $ | 21,253 | $ | 23,892 | ||||||||
Total shares issued by Penn Millers in the offering | 1,950,750 | 2,295,000 | 2,639,250 | 2,932,500 |
(2) | Reflects the $1,950,750 loan from us to our ESOP, the proceeds of which will be used to purchase 10% of the common stock issued in the offering 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 $2,295,000, $2,639,250, and $2,932,500 if 2,295,000, 2,639,250, and 2,932,500 shares, respectively, are sold in the offering. The ESOP loan will bear interest at an annual rate equal to long-term Applicable Federal Rate with semi-annual compounding on the closing date of the offering. | |
The ESOP loan will require at least annual payments of principal and interest for a term of 10 years. Penn Millers Insurance Company 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, the shareholders’ equity of Penn Millers Holding Corporation will be increased. 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 — Benefit Plans and Employment Agreements.” |
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Year Ended December 31, 2007
(in thousands, except per share data)
Penn Millers | Penn Millers | |||||||||||
Historical | Pro Forma | Pro Forma | ||||||||||
Consolidated | Adjustments | Consolidated | ||||||||||
Revenue: | ||||||||||||
Net premiums earned | $ | 70,970 | $ | — | $ | 70,970 | ||||||
Net investment income | 5,324 | 602 | (1) | 5,926 | ||||||||
Realized investment losses, net | (702 | ) | — | (702 | ) | |||||||
Other income | 508 | — | 508 | |||||||||
Total revenue | 76,100 | 602 | 76,702 | |||||||||
Expenses: | ||||||||||||
Loss and loss adjustment expense | $ | 49,783 | $ | — | $ | 49,783 | ||||||
Amortization of deferred policy acquisition costs | 21,930 | — | 21,930 | |||||||||
Underwriting and administrative expenses | 2,233 | — | 2,233 | |||||||||
Interest expense | 125 | — | 125 | |||||||||
Other expenses, net | 184 | 195 | (2) | 379 | ||||||||
Total expenses | $ | 74,255 | $ | 195 | $ | 74,450 | ||||||
Income from continuing operations before income taxes | $ | 1,845 | $ | 407 | $ | 2,252 | ||||||
Income tax expense | 396 | 138 | (3) | 534 | ||||||||
Income from continuing operations | $ | 1,449 | $ | 269 | $ | 1,718 | ||||||
Earnings per share data: | ||||||||||||
Income from continuing operations per share of common stock | $ | 0.41 | ||||||||||
Shares considered outstanding in calculating pro forma net income per share(4) | 4,149,679 |
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Nine Months Ended September 30, 2008
(in thousands, except per share data)
Penn Millers | Penn Millers | |||||||||||
Historical | Pro Forma | Pro Forma | ||||||||||
Consolidated | Adjustments | Consolidated | ||||||||||
Revenue: | ||||||||||||
Net premiums earned | $ | 59,319 | $ | — | $ | 59,319 | ||||||
Net investment income | 4,076 | 339 | (1) | 4,415 | ||||||||
Realized investment losses, net | (1,259 | ) | — | (1,259 | ) | |||||||
Other income | 324 | — | 324 | |||||||||
Total revenue | $ | 62,460 | $ | 339 | $ | 62,799 | ||||||
Expenses: | ||||||||||||
Loss and loss adjustment expense | $ | 42,261 | $ | — | $ | 42,261 | ||||||
Amortization of deferred policy acquisition costs | 17,401 | — | 17,401 | |||||||||
Underwriting and administrative expenses | 2,383 | — | 2,383 | |||||||||
Interest expense | 116 | — | 116 | |||||||||
Other expenses, net | 190 | 146 | (2) | 336 | ||||||||
Total expenses | $ | 62,351 | $ | 146 | $ | 62,497 | ||||||
Income from continuing operations before income taxes | $ | 109 | $ | 193 | $ | 302 | ||||||
Income tax expense | 140 | 66 | (3) | 206 | ||||||||
Income (loss) from continuing operations | $ | (31 | ) | $ | 127 | $ | 96 | |||||
Earnings per share data: | ||||||||||||
Income from continuing operations per share of common stock(4) | $ | 0.03 | ||||||||||
Shares considered outstanding in calculating pro forma net income per share(5) | 4,147,240 |
(1) | Assumes that that the net proceeds from the offering were available for investment and received as of January 1, 2007 and January 1, 2008, and that they were invested with an average annual pre-tax rates of return of 4.0% and 3.0%, the respective investment yields of Penn Millers for the periods presented. | |
(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 $1,950,750 loan from us to the ESOP is repaid. The pro forma adjustment reflects the amounts repaid on the ESOP loan based on ten 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) | Calculated by annualizing income for September 30, 2008 and 2007 from continuing operations. | |
(5) | It is assumed that 10% of the shares issuable in the offering will be purchased by our ESOP. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the ESOP from Penn |
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Millers Holding Corporation. The amount to be borrowed is reflected as a reduction to shareholders’ equity. Penn Millers Insurance Company expects to make annual contributions to the ESOP in an amount at least equal to the principal and interest requirement of the debt. Annual payments of the ESOP debt is based upon ten 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 nine months ended September 30, 2008 and year ended December 31, 2007; (ii) that (A) 19,508, 22,950, 26,393, and 29,325 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, 2007, at an average fair value of $10.00 per share, (B) 14,631, 17,213, 19,794, and 21,994 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectfully, were committed to be released at the end of the nine months ended September 30, 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 185,321, 218,025, 250,729 and 278,587 at the minimum, midpoint, maximum and adjusted maximum of the offering range during the year ended December 31, 2007, and equal to 187,760, 220,894, 254,028, and 282,253 during the nine months ended September 30, 2008, were subtracted from total shares outstanding of 4,335,000, 5,100,000, 5,865,000, and 5,924,243 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such dates. |
• | Our ESOP will purchase an amount equal to 10% of the shares of common stock sold in the offering with a loan from us; and | ||
• | Expenses of the offering will be $2.5 million. |
• | 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 our ESOP; and | ||
• | Pro forma shareholders’ equity amounts have been calculated as if our common stock had been sold in the offering on September 30, 2008, and, accordingly, no effect has been given to the assumed earnings effect of the net proceeds from the offering. |
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At or For the Nine Months Ended September 30, 2008 | ||||||||||||||||
(In thousands, except for per share data) | ||||||||||||||||
2,932,500 shares | ||||||||||||||||
1,950,750 shares | 2,295,000 shares | 2,639,250 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 offering proceeds | ||||||||||||||||
Gross proceeds of public offering | $ | 19,508 | $ | 22,950 | $ | 26,393 | $ | 29,325 | ||||||||
Less offering expenses | (2,500 | ) | (2,500 | ) | (2,500 | ) | (2,500 | ) | ||||||||
Net proceeds | 17,008 | 20,450 | 23,893 | 26,825 | ||||||||||||
Less ESOP shares (1) | (1,951 | ) | (2,295 | ) | (2,639 | ) | (2,933 | ) | ||||||||
Net proceeds after ESOP shares | $ | 15,057 | $ | 18,155 | $ | 21,254 | $ | 23,892 | ||||||||
Pro forma shareholders’ equity | ||||||||||||||||
Historical equity of Penn Millers | $ | 54,842 | $ | 54,842 | $ | 54,842 | $ | 54,842 | ||||||||
Pro forma proceeds after ESOP shares | 15,057 | 18,155 | 21,254 | 23,892 | ||||||||||||
Pro forma shareholders’ equity (2) | $ | 69,899 | $ | 72,997 | $ | 76,096 | $ | 78,734 | ||||||||
Pro forma per share data | ||||||||||||||||
Total shares outstanding after the offering | 4,335,000 | 5,100,000 | 5,865,000 | 5,924,243 | ||||||||||||
Pro forma book value per share | $ | 16.12 | $ | 14.31 | $ | 12.97 | $ | 13.29 | ||||||||
Pro forma price-to-book value | 62.02 | % | 69.87 | % | 77.07 | % | 75.24 | % | ||||||||
Pro forma net income: | ||||||||||||||||
Historical loss from continuing operations | $ | (31 | ) | $ | (31 | ) | $ | (31 | ) | $ | (31 | ) | ||||
Loss on discontinued operations | (2,454 | ) | (2,454 | ) | (2,454 | ) | (2,454 | ) | ||||||||
Earnings on proceeds (3) | 224 | 270 | 316 | 355 | ||||||||||||
ESOP expense | (97 | ) | (114 | ) | (131 | ) | (145 | ) | ||||||||
Pro forma loss | $ | (2,358 | ) | $ | (2,329 | ) | $ | (2,300 | ) | $ | (2,275 | ) | ||||
Weighted average shares outstanding (4) | 4,147,240 | 4,879,106 | 5,610,972 | 5,641,990 | ||||||||||||
Pro forma loss per share (5) | $ | (0.76 | ) | $ | (0.64 | ) | $ | (0.55 | ) | $ | (0.54 | ) | ||||
Pro forma price to loss per share | (13.19 | ) | (15.71 | ) | (18.30 | ) | (18.60 | ) |
(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 us. 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 nine months ended September 30, 2008; and (ii) only the ESOP shares committed to be released were considered outstanding for purposes of the net income per share calculations. | |
(2) | 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 we intend to adopt. Under the stock-based incentive plan, an amount equal to the aggregate of 10% of the common stock sold in the offering, or 195,075, 229,500, 263,925, and 293,250 shares at the minimum, midpoint, maximum, and adjusted maximum of the estimated offering range, respectively, will be available 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 78,030, 91,800, 105,570, and 117,300 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 Penn Millers for the purposes of making restricted stock awards under the stock-based incentive plan. We expect to seek shareholder approval of the plan six months after completion of the offering. The issuance of authorized but unissued shares of our 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 |
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approximately 5.9% at the midpoint of the offering range. | ||
(3) | Assumes an average after-tax rate of return of 1.98% per annum on the net proceeds of the offering. | |
(4) | It is assumed that 10% of the shares issuable in the offering will be purchased by our ESOP. For purposes of this table, the funds used to acquire such shares are assumed to have been borrowed by the ESOP from Penn Millers Holding Corporation. The amount to be borrowed is reflected as a reduction to shareholders’ equity of Penn Millers Holding Corporation. 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 annual payment of the ESOP debt is based upon ten 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 nine months ended September 30, 2008; (ii) that 14,631, 17,213, 19,794, and 21,994 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the nine months ended September 30, 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 187,760, 220,894, 254,028 and 282,253 at the minimum, midpoint, maximum and adjusted maximum of the offering range during the nine months ended September 30, 2008, were subtracted from total shares outstanding of 4,335,000, 5,100,000, 5,865,000, and 5,924,243 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such dates. | |
(5) | Pro forma loss per share is annualized, based on pro forma net loss for the nine months ended September 30, 2008. |
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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• | the paid loss development method that utilizes historical loss payment patterns to estimate future losses; | ||
• | the incurred loss development method that utilizes historical incurred losses (the sum of cumulative historical loss payments plus outstanding case reserves) patterns to estimate future losses; and | ||
• | the frequency/severity method that combines estimates of ultimate claim counts and estimates of per claim ultimate loss severities to yield estimates of ultimate losses. |
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As of | As of | As of | ||||||||||
September 30, | December 31, | December 31, | ||||||||||
2008 | 2007 | 2006 | ||||||||||
Case reserves | $ | 55,505 | $ | 48,957 | $ | 44,241 | ||||||
IBNR reserves | 27,035 | 28,272 | 25,075 | |||||||||
Net unpaid loss and LAE | 82,540 | 77,229 | 69,316 | |||||||||
Reinsurance recoverables on unpaid loss and LAE | 20,738 | 18,727 | 20,089 | |||||||||
Reserves for unpaid loss and LAE | $ | 103,278 | $ | 95,956 | $ | 89,405 | ||||||
Reserve Range for Unpaid Losses and LAE | ||||
(in thousands) | ||||
Recorded | Low End | High End | ||
$82,540 | $69,615 | $87,101 |
• | The rate of increase in medical costs, material costs, and commodity prices that underlie insured risks; | ||
• | Development of risk associated with our expanding producer relationships, new classes of business, and our growth in states where we currently have small market share; | ||
• | Impact of unemployment rates on behavior of injured insured workers; | ||
• | Adequacy of current pricing in relatively soft insurance market; and | ||
• | Variability related to asbestos and environmental claims due to issues as to whether coverage exists, the definition of occurrence, the determination of ultimate damages, and the allocation of such damages to responsible parties. |
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Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of securities | value | losses | value | losses | value | losses | ||||||||||||||||||
September 30, 2008 (Unaudited): | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 3,899 | 94 | — | — | 3,899 | 94 | |||||||||||||||||
U.S. treasuries | 272 | 3 | — | — | 272 | 3 | ||||||||||||||||||
State and political subdivisions | 4,414 | 150 | 3,655 | 132 | 8,069 | 282 | ||||||||||||||||||
Mortgage-backed securities | 2,187 | 60 | 8,049 | 323 | 10,236 | 383 | ||||||||||||||||||
Corporate securities | 13,604 | 1,044 | 12,245 | 1,236 | 25,849 | 2,280 | ||||||||||||||||||
Total fixed maturities | 24,376 | 1,351 | 23,949 | 1,691 | 48,325 | 3,042 | ||||||||||||||||||
Total temporarily impaired securities | $ | 24,376 | 1,351 | 23,949 | 1,691 | 48,325 | 3,042 | |||||||||||||||||
December 31, 2007: | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | — | — | 4,199 | 7 | 4,199 | 7 | |||||||||||||||||
U.S. treasuries | — | — | — | — | — | — | ||||||||||||||||||
State and political subdivisions | 516 | 1 | 3,669 | 13 | 4,185 | 14 | ||||||||||||||||||
Mortgage-backed securities | 497 | — | 9,150 | 119 | 9,647 | 119 | ||||||||||||||||||
Corporate securities | 2,665 | 44 | 8,662 | 188 | 11,327 | 232 | ||||||||||||||||||
Total fixed maturities | 3,678 | 45 | 25,680 | 327 | 29,358 | 372 | ||||||||||||||||||
Equity securities | 760 | 43 | 326 | 1 | 1,086 | 44 | ||||||||||||||||||
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Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of securities | value | losses | value | losses | value | losses | ||||||||||||||||||
Total temporarily impaired securities | $ | 4,438 | 88 | 26,006 | 328 | 30,444 | 416 | |||||||||||||||||
2006: | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 1,749 | 4 | 13,924 | 177 | 15,673 | 181 | |||||||||||||||||
U.S. treasuries | 1,006 | — | 3,718 | 72 | 4,724 | 72 | ||||||||||||||||||
State and political subdivisions | 532 | 3 | 6,878 | 98 | 7,410 | 101 | ||||||||||||||||||
Mortgage-backed securities | 232 | 1 | 8,392 | 179 | 8,624 | 179 | ||||||||||||||||||
Corporate securities | 4,428 | 26 | 21,946 | 325 | 26,374 | 351 | ||||||||||||||||||
Total fixed maturities | 7,947 | 34 | 54,858 | 850 | 62,805 | 884 | ||||||||||||||||||
Equity securities | 480 | 9 | 367 | 28 | 847 | 37 | ||||||||||||||||||
Total temporarily impaired securities | $ | 8,427 | 43 | 55,225 | 878 | 63,652 | 921 | |||||||||||||||||
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September 30, | December 31, | |||||||||||
2008 | 2007 | 2006 | ||||||||||
Agribusiness segment | ||||||||||||
Deferred acquisition costs | $ | 6,514 | $ | 6,429 | $ | 6,252 | ||||||
Unearned premium reserves | $ | 27,770 | $ | 27,552 | $ | 26,686 | ||||||
Commercial business segment | ||||||||||||
Deferred acquisition costs | $ | 4,734 | $ | 4,579 | $ | 4,120 | ||||||
Unearned premium reserves | $ | 19,865 | $ | 19,021 | $ | 16,573 | ||||||
Other | ||||||||||||
Deferred acquisition costs | $ | 30 | $ | 6 | $ | 9 | ||||||
Unearned premium reserves | $ | 118 | $ | 22 | $ | 35 | ||||||
Total | ||||||||||||
Deferred acquisition costs | $ | 11,278 | $ | 11,014 | $ | 10,381 | ||||||
Unearned premium reserves | $ | 47,753 | $ | 46,595 | $ | 43,294 |
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Nine Months Ended | Years Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Premiums earned: | ||||||||||||||||||||
Agribusiness | $ | 33,536 | $ | 30,405 | $ | 40,245 | $ | 35,889 | $ | 36,022 | ||||||||||
Commercial Business | 24,546 | 21,935 | 29,260 | 26,761 | 26,142 | |||||||||||||||
Other | 1,237 | 1,150 | 1,465 | 1,995 | 2,559 | |||||||||||||||
Total premiums earned | $ | 59,319 | $ | 53,490 | $ | 70,970 | $ | 64,645 | $ | 64,723 | ||||||||||
Investment income, net of investment expense | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | |||||||||||||||
Realized investment (losses) gains, net | (1,259 | ) | 423 | (702 | ) | 349 | 424 | |||||||||||||
Other income | 324 | 380 | 508 | 345 | 277 | |||||||||||||||
Total revenues | $ | 62,460 | $ | 58,229 | $ | 76,100 | $ | 70,016 | $ | 69,868 | ||||||||||
Components of net income (loss): | ||||||||||||||||||||
Underwriting (loss) income: | ||||||||||||||||||||
Agribusiness | $ | (433 | ) | $ | 1,041 | $ | 441 | $ | 2 | $ | 93 | |||||||||
Commercial Business | (1,799 | ) | (1,158 | ) | (1,913 | ) | (678 | ) | 236 | |||||||||||
Other | (88 | ) | (629 | ) | (998 | ) | (1,106 | ) | (1,252 | ) | ||||||||||
Total underwriting losses | (2,320 | ) | (746 | ) | (2,470 | ) | (1,782 | ) | (923 | ) | ||||||||||
Investment income, net of investment expense | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | |||||||||||||||
Realized investment (losses) gains, net | (1,259 | ) | 423 | (702 | ) | 349 | 424 | |||||||||||||
Other income | 324 | 380 | 508 | 345 | 277 | |||||||||||||||
Corporate expense | (406 | ) | (354 | ) | (506 | ) | (635 | ) | (3,817 | ) | ||||||||||
Interest expense | (116 | ) | (100 | ) | (125 | ) | (222 | ) | (195 | ) | ||||||||||
Other expense, net | (190 | ) | (109 | ) | (184 | ) | (314 | ) | (266 | ) | ||||||||||
Income (loss) from continuing operations, before income taxes | 109 | 3,430 | 1,845 | 2,418 | (56 | ) | ||||||||||||||
Income tax (benefit) expense | 140 | 1,001 | 396 | 506 | (296 | ) | ||||||||||||||
Income (loss) from continuing operations | (31 | ) | 2,429 | 1,449 | 1,912 | 240 | ||||||||||||||
Discontinued Operations: | ||||||||||||||||||||
Income (loss) from discontinued operations, before income taxes | (2,470 | ) | 482 | (489 | ) | 292 | 385 | |||||||||||||
Income tax (benefit) expense | (16 | ) | 190 | (126 | ) | 124 | 151 | |||||||||||||
Income (loss) on discontinued operations | (2,454 | ) | 292 | (363 | ) | 168 | 234 | |||||||||||||
Net income (loss) | $ | (2,485 | ) | $ | 2,721 | $ | 1,086 | $ | 2,080 | $ | 474 | |||||||||
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Nine Months Ended | Year Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Average cash and invested assets | $ | 133,964 | $ | 128,164 | $ | 131,468 | $ | 121,760 | $ | 116,934 | ||||||||||
Net investment income | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | |||||||||||||||
Return on average cash and invested assets | 3.0 | % | 3.1 | % | 4.0 | % | 3.8 | % | 3.8 | % |
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Nine Months Ended September 30, | Years Ended December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Direct premiums written | $ | 43,254 | $ | 41,913 | $ | 55,965 | $ | 51,874 | $ | 51,413 | ||||||||||
Net premiums written | 33,825 | 31,416 | 41,402 | 38,350 | 33,818 | |||||||||||||||
Revenues: | ||||||||||||||||||||
Net premiums earned | 33,536 | 30,405 | 40,245 | 35,889 | 36,022 | |||||||||||||||
Other income | 150 | 185 | 245 | 115 | 57 | |||||||||||||||
Total revenues(1) | 33,686 | 30,590 | 40,490 | 36,004 | 36,079 | |||||||||||||||
Operating income (loss): | ||||||||||||||||||||
Underwriting (loss) income | (433 | ) | 1,041 | 441 | 2 | 93 | ||||||||||||||
Other income | 150 | 185 | 245 | 115 | 57 | |||||||||||||||
Interest & other expenses | (103 | ) | (48 | ) | (77 | ) | (150 | ) | (53 | ) | ||||||||||
Total operating income (loss) | $ | (386 | ) | $ | 1,178 | $ | 609 | $ | (33 | ) | $ | 97 | ||||||||
Loss and loss expense ratio | 70.8 | % | 63.4 | % | 67.9 | % | 66.3 | % | 61.7 | % | ||||||||||
Underwriting expense ratio | 30.5 | % | 33.2 | % | 31.0 | % | 33.7 | % | 38.1 | % | ||||||||||
GAAP combined ratio | 101.3 | % | 96.6 | % | 98.9 | % | 100.0 | % | 99.8 | % | ||||||||||
(1) | Revenues exclude net realized investment gains (losses). Operating income equals pre-tax net income from continuing operations excluding the impact of net realized investment gains (losses). |
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Nine Months Ended | Years Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
Amounts in thousands | 2008 | 2007 | 2007 | 2006 | 2005 | |||||||||||||||
Direct premiums written | $ | 29,755 | $ | 28,277 | $ | 37,860 | $ | 32,365 | $ | 32,375 | ||||||||||
Net premiums written | 25,182 | 24,002 | 31,266 | 27,144 | 25,852 | |||||||||||||||
Revenues: | ||||||||||||||||||||
Net premiums earned | 24,546 | 21,935 | 29,260 | 26,761 | 26,142 | |||||||||||||||
Other income | 174 | 196 | 263 | 230 | 219 | |||||||||||||||
Total revenues (1) | 24,720 | 22,131 | 29,523 | 26,991 | 26,361 | |||||||||||||||
Operating (loss) income: | ||||||||||||||||||||
Underwriting (loss) income | (1,799 | ) | (1,158 | ) | (1,913 | ) | (678 | ) | 236 | |||||||||||
Other income | 174 | 196 | 263 | 230 | 219 | |||||||||||||||
Interest & other expenses | (131 | ) | (74 | ) | (113 | ) | (257 | ) | (204 | ) | ||||||||||
Operating (loss) income | $ | (1,756 | ) | $ | (1,036 | ) | $ | (1,763 | ) | $ | (705 | ) | $ | 251 | ||||||
Loss and loss expense ratio | 71.7 | % | 68.1 | % | 70.3 | % | 65.5 | % | 57.8 | % | ||||||||||
Underwriting expense ratio | 35.6 | % | 37.2 | % | 36.2 | % | 37.0 | % | 41.3 | % | ||||||||||
GAAP Combined ratio | 107.3 | % | 105.3 | % | 106.5 | % | 102.5 | % | 99.1 | % | ||||||||||
(1) | Revenues exclude net realized investment gains (losses). Operating income equals pre-tax net income from continuing operations excluding the impact of net realized investment gains (losses). |
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Nine Months Ended September 30, | Years Ended December 31, | |||||||||||||||||||
Amounts in thousands | 2008 | 2007 | 2007 | 2006 | 2005 | |||||||||||||||
Assumed premiums written | $ | 1,334 | $ | 1,188 | $ | 1,451 | $ | 2,031 | $ | 2,387 | ||||||||||
Net premiums written | 1,334 | 1,188 | 1,451 | 2,031 | 2,387 | |||||||||||||||
Revenues: | ||||||||||||||||||||
Net premiums earned | 1,237 | 1,150 | 1,465 | 1,995 | 2,559 | |||||||||||||||
Total revenues | 1,237 | 1,150 | 1,465 | 1,995 | 2,559 | |||||||||||||||
Underwriting expenses | (88 | ) | (629 | (998 | ) | (1,106 | ) | (1,252 | ) | |||||||||||
Operating loss | $ | (88 | ) | $ | (629 | ) | $ | (998 | ) | $ | (1,106 | ) | $ | (1,252 | ) | |||||
Loss and loss expense ratio | 73.6 | % | 114.5 | % | 129.7 | % | 122.3 | % | 113.8 | % | ||||||||||
Underwriting expense ratio | 33.5 | % | 40.2 | % | 38.4 | % | 33.1 | % | 35.1 | % | ||||||||||
GAAP Combined ratio | 107.1 | % | 154.7 | % | 168.1 | % | 155.4 | % | 148.9 | % | ||||||||||
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Total Reserves | ||||
Including IBNR | ||||
As of 12/31/07 | ||||
Munich Re America Brokers, Inc (formerly American Re) | $ | 4,923,814 | ||
Mutual Reinsurance Bureau | 554,225 | |||
Association of Mill & Elevator Companies | 375,844 | |||
Total | $ | 5,853,883 | ||
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Nine Months Ended | Years Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
Amounts in thousands | 2008 | 2007 | 2007 | 2006 | 2005 | |||||||||||||||
Mandatory Assumed Reinsurance | $ | (244 | ) | $ | (157 | ) | $ | 95 | $ | (332 | ) | $ | (343 | ) | ||||||
Personal Lines — runoff | 299 | (64 | ) | (94 | ) | (98 | ) | (400 | ) | |||||||||||
Voluntary Assumed Reinsurance — runoff | (143 | ) | (408 | ) | (999 | ) | (676 | ) | (509 | ) | ||||||||||
Operating loss | $ | (88 | ) | $ | (629 | ) | $ | (998 | ) | $ | (1,106 | ) | $ | (1,252 | ) | |||||
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Nine Months Ended | Year Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Cash flows provided by operating activities | $ | 3,716 | $ | 3,970 | $ | 11,017 | $ | 11,711 | $ | 3,948 | ||||||||||
Cash flows provided by (used in) investing activities | (5,210 | ) | (12,882 | ) | (13,373 | ) | (6,592 | ) | (6,695 | ) | ||||||||||
Cash flows provided by (used in) financing activities | (235 | ) | (133 | ) | (562 | ) | (2,087 | ) | 1,336 | |||||||||||
Net (decrease) increase in cash and cash equivalents | $ | (1,729 | ) | $ | (9,045 | ) | $ | (2,918 | ) | $ | 3,032 | $ | (1,411 | ) | ||||||
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Payments due by period | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Contractual | Less than | More than | ||||||||||||||||||
Obligations | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Estimated gross loss & loss adjustment expense payments | $ | 95,956 | $ | 32,624 | $ | 33,585 | $ | 16,313 | $ | 13,434 | ||||||||||
Defined benefit plan obligations | 9,768 | 1,188 | 460 | 1,454 | 6,666 | |||||||||||||||
Long-term debt obligations | 2,290 | 583 | 1,707 | 0 | 0 | |||||||||||||||
Operating lease obligations | 1,457 | 337 | 557 | 378 | 185 | |||||||||||||||
Accrued severance costs | 851 | 257 | 460 | 42 | 92 | |||||||||||||||
Interest on long-term debt obligations | 239 | 121 | 118 | 0 | 0 | |||||||||||||||
Total | $ | 110,561 | $ | 35,110 | $ | 36,887 | $ | 18,187 | $ | 20,377 | ||||||||||
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Hypothetical Change in | Estimated Change | |||||||
Interest Rates | in Fair Value | Fair Value | ||||||
(dollars in thousands) | ||||||||
200 basis point increase | $ | (8,167 | ) | $ | 99,163 | |||
100 basis point increase | (4,140 | ) | 103,190 | |||||
No change | — | 107,330 | ||||||
100 basis point decrease | 3,969 | 111,299 | ||||||
200 basis point decrease | 7,849 | 115,179 |
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• | First, in 2009 we are introducing an insurance product called PennEdge that will enable us to write customized coverages on mid-size commercial accounts. PennEdge will provide |
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property and liability coverage to accounts that currently do not meet the eligibility requirements for our traditional business owners or agribusiness products. PennEdge is specifically tailored to unique business and industry segments, including wholesalers, light manufacturing, hospitality, commercial laundries and dry cleaners, and printers. These segments were chosen based on the experience of our underwriting staff and the market opportunities available to our existing producers. | |||
• | Second, we have differentiated our products by entering into strategic alliances to offer equipment breakdown, employment practices liability, and miscellaneous professional liability coverage, and we are exploring a strategic alliance to offer environmental impairment liability coverage. Under such strategic alliances, we typically reinsure all of the risk of loss to the strategic partner and earn a ceding commission. | ||
• | Third, we are currently represented by a small number of producers in a large geographic area. New producers are an important part of our growth strategy, and we intend to continue to add them in areas where we want to increase our market presence. |
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For the Nine Months Ended | For the Years Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Direct Premiums Written: | ||||||||||||||||||||
Property | $ | 16,071 | $ | 15,347 | $ | 20,263 | $ | 18,961 | $ | 18,613 | ||||||||||
Commercial Auto | 9,765 | 10,482 | 14,055 | 13,334 | 13,511 | |||||||||||||||
Liability | 7,249 | 6,214 | 8,635 | 8,029 | 8,732 | |||||||||||||||
Workers’ Compensation | 5,777 | 5,598 | 7,394 | 6,610 | 5,884 | |||||||||||||||
Other | 4,392 | 4,272 | 5,618 | 4,940 | 4,673 | |||||||||||||||
Total | $ | 43,254 | $ | 41,913 | $ | 55,965 | $ | 51,874 | $ | 51,413 | ||||||||||
Net Premiums Earned: | ||||||||||||||||||||
Property | $ | 12,127 | $ | 10,777 | $ | 13,772 | $ | 12,620 | $ | 13,195 | ||||||||||
Commercial Auto | 9,026 | 8,845 | 11,859 | 11,189 | 11,083 | |||||||||||||||
Liability | 6,566 | 5,502 | 7,540 | 6,768 | 7,222 | |||||||||||||||
Workers’ Compensation | 5,323 | 4,771 | 6,394 | 5,166 | 4,370 | |||||||||||||||
Other | 494 | 510 | 680 | 146 | 152 | |||||||||||||||
Total | $ | 33,536 | $ | 30,405 | $ | 40,245 | $ | 35,889 | $ | 36,022 | ||||||||||
Net Loss Ratios: | ||||||||||||||||||||
Property | 100.7 | % | 84.2 | % | 84.9 | % | 60.4 | % | 63.5 | % | ||||||||||
Commercial Auto | 51.8 | % | 37.3 | % | 48.5 | % | 62.7 | % | 41.0 | % | ||||||||||
Liability | 53.9 | % | 50.7 | % | 102.6 | % | 46.4 | % | 44.3 | % | ||||||||||
Workers’ Compensation | 61.6 | % | 71.7 | % | 54.2 | % | 113.8 | % | 139.5 | % | ||||||||||
Other | 10.2 | % | 136.1 | % | -196.2 | % | 92.0 | % | -0.1 | % | ||||||||||
Total | 70.8 | % | 63.4 | % | 67.9 | % | 66.3 | % | 61.7 | % | ||||||||||
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For the Nine Months Ended | For the Years Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Direct Premiums Written: | ||||||||||||||||||||
Property & Liability | $ | 16,724 | $ | 16,846 | $ | 22,474 | $ | 20,567 | $ | 20,922 | ||||||||||
Workers’ Compensation | 6,410 | 5,798 | 7,716 | 5,825 | 5,752 | |||||||||||||||
Commercial Auto | 4,041 | 3,740 | 4,914 | 3,983 | 3,825 | |||||||||||||||
Other | 2,580 | 1,893 | 2,756 | 1,990 | 1,876 | |||||||||||||||
Total | $ | 29,755 | $ | 28,277 | $ | 37,860 | $ | 32,365 | $ | 32,375 | ||||||||||
Net Premiums Earned: | ||||||||||||||||||||
Property & Liability | $ | 15,107 | $ | 14,044 | $ | 18,301 | $ | 18,076 | $ | 17,729 | ||||||||||
Workers’ Compensation | 5,669 | 4,641 | 6,524 | 5,077 | 4,896 | |||||||||||||||
Commercial Auto | 3,572 | 3,074 | 4,194 | 3,564 | 3,476 | |||||||||||||||
Other | 198 | 176 | 241 | 44 | 41 | |||||||||||||||
Total | $ | 24,546 | $ | 21,935 | $ | 29,260 | $ | 26,761 | $ | 26,142 | ||||||||||
Net Loss Ratios: | ||||||||||||||||||||
Property & Liability | 74.9 | % | 80.7 | % | 87.0 | % | 59.9 | % | 59.9 | % | ||||||||||
Workers’ Compensation | 53.5 | % | 40.0 | % | 37.1 | % | 74.0 | % | 44.5 | % | ||||||||||
Commercial Auto | 79.4 | % | 59.2 | % | 54.9 | % | 78.2 | % | 66.5 | % | ||||||||||
Other | 206.6 | % | (44.1 | %) | (35.3 | %) | 359.3 | % | 8.2 | % | ||||||||||
Total | 71.7 | % | 68.1 | % | 70.3 | % | 65.5 | % | 57.8 | % | ||||||||||
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• | 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. |
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Ceded Under | ||||||||
Reinsurance | ||||||||
Losses Incurred | Retained by Company | Treaties | ||||||
Up to $500,000 | 100 | % | 0 | % | ||||
$500,000 in excess of $500,000 | 75 | % | 25 | % | ||||
$4 million in excess of $1 million | 25 | % | 75 | % | ||||
$15 million in excess of $5 million | 0 | % | 100 | % |
Ceded Under | ||||||||
Reinsurance | ||||||||
Losses Incurred | Retained by Company | Treaties | ||||||
Up to $500,000 | 100 | % | 0 | % | ||||
$500,000 in excess of $500,000 | 75 | % | 25 | % | ||||
$4 million in excess of $1 million | 25 | % | 75 | % | ||||
$5 million in excess of $5 million | 0 | % | 100 | % |
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Loss & Loss | ||||||||||||
Expense | ||||||||||||
Recoverable | Percentage of | |||||||||||
On Unpaid | Total | A.M. Best | ||||||||||
Claims | Recoverable | Rating | ||||||||||
Swiss Reinsurance America Corp | $ | 6,391 | 34 | % | A+ | |||||||
Hannover Ruckericherungs | 3,809 | 20 | % | A | ||||||||
Partner Reinsurance Co. of the U.S. | 2,681 | 14 | % | A+ | ||||||||
Employers Mutual Casualty Co. | 1,956 | 10 | % | A- | ||||||||
Platinum Underwriters Reinsurance | 1,044 | 6 | % | A | ||||||||
Aspen Insurance UK | 939 | 5 | % | A | ||||||||
General Reinsurance | 574 | 3 | % | A++ | ||||||||
All Other | 1,333 | 8 | % | A- or better | ||||||||
Total | $ | 18,727 | 100 | % | ||||||||
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Nine Months Ended | Years Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance at January 1 | $ | 95,956 | $ | 89,405 | $ | 89,405 | $ | 83,849 | $ | 73,287 | ||||||||||
Reinsurance recoverable on unpaid losses and LAE | 18,727 | 20,089 | 20,089 | 22,817 | 17,483 | |||||||||||||||
Net balance at January 1 | 77,229 | 69,316 | 69,316 | 61,032 | 55,804 | |||||||||||||||
Losses and LAE incurred, net: | ||||||||||||||||||||
Current year | $ | 46,807 | 38,947 | 54,421 | 43,785 | 41,320 | ||||||||||||||
Prior years | (4,546 | ) | (3,414 | ) | (4,638 | ) | (19 | ) | (1,078 | ) | ||||||||||
Total incurred losses and LAE | 42,261 | 35,533 | 49,783 | 43,766 | 40,242 | |||||||||||||||
Less losses and LAE paid, net: | ||||||||||||||||||||
Current year | $ | 18,719 | 15,178 | 22,191 | 14,222 | 15,725 | ||||||||||||||
Prior years | 18,231 | 16,568 | 19,679 | 21,260 | 19,289 | |||||||||||||||
Total loss and LAE expenses paid | 36,950 | 31,746 | 41,870 | 35,482 | 35,014 | |||||||||||||||
Net reserves for unpaid losses and LAE, end of period | $ | 82,540 | $ | 73,103 | $ | 77,229 | $ | 69,316 | $ | 61,032 | ||||||||||
Reinsurance recoverable on unpaid losses and LAE | $ | 20,738 | $ | 22,886 | $ | 18,727 | $ | 20,089 | $ | 22,817 | ||||||||||
Reserve for unpaid losses and LAE at end of period | $ | 103,278 | $ | 95,989 | $ | 95,956 | $ | 89,405 | $ | 83,849 | ||||||||||
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Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Liability for unpaid losses and LAE, net of reinsurance recoverables | $ | 28,243 | $ | 31,185 | $ | 30,165 | $ | 29,476 | $ | 35,656 | $ | 42,731 | $ | 48,072 | $ | 55,804 | $ | 61,032 | $ | 69,316 | $ | 77,229 | ||||||||||||||||||||||
Cumulative amount of liability paid through | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 7,641 | 8,925 | 10,393 | 12,523 | 15,441 | 15,279 | 18,849 | 19,288 | 21,262 | 19,681 | — | |||||||||||||||||||||||||||||||||
Two years later | 13,035 | 13,312 | 15,977 | 20,032 | 23,640 | 25,731 | 27,719 | 28,977 | 32,372 | — | — | |||||||||||||||||||||||||||||||||
Three years later | 15,895 | 16,712 | 20,104 | 25,184 | 28,897 | 31,372 | 34,125 | 35,481 | — | — | — | |||||||||||||||||||||||||||||||||
Four years later | 18,045 | 19,542 | 23,386 | 28,118 | 32,311 | 35,104 | 37,135 | — | — | — | — | |||||||||||||||||||||||||||||||||
Five years later | 19,999 | 21,496 | 24,935 | 30,318 | 33,755 | 36,561 | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Six years later | 21,224 | 22,790 | 26,699 | 31,333 | 34,786 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Seven years later | 22,464 | 24,430 | 27,451 | 32,039 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Eight years later | 23,922 | 25,117 | 28,000 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Nine years later | 24,519 | 25,641 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Ten years later | 25,081 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Liability estimated as of | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 28,244 | 28,581 | 28,506 | 34,545 | 38,657 | 44,764 | 49,658 | 54,729 | 61,017 | 64,679 | — | |||||||||||||||||||||||||||||||||
Two years later | 26,605 | 25,883 | 31,763 | 34,864 | 40,138 | 44,591 | 48,718 | 54,948 | 61,081 | — | — | |||||||||||||||||||||||||||||||||
Three years later | 25,018 | 28,647 | 30,869 | 35,865 | 40,527 | 44,424 | 49,954 | 54,510 | — | — | — | |||||||||||||||||||||||||||||||||
Four years later | 28,119 | 27,906 | 30,885 | 36,594 | 40,416 | 45,405 | 49,617 | — | — | — | — | |||||||||||||||||||||||||||||||||
Five years later | 27,476 | 28,295 | 31,910 | 37,108 | 40,696 | 45,603 | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Six years later | 27,966 | 29,438 | 32,448 | 37,402 | 41,157 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Seven years later | 29,199 | 30,168 | 33,127 | 38,193 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Eight years later | 29,847 | 30,811 | 33,820 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Nine years later | 30,499 | 31,425 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Ten years later | 31,045 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Cumulative total redundancy (deficiency) | $ | (2,802 | ) | $ | (240 | ) | $ | (3,655 | ) | $ | (8,717 | ) | $ | (5,501 | ) | $ | (2,872 | ) | $ | (1,545 | ) | $ | 1,294 | $ | (49 | ) | $ | 4,637 | ||||||||||||||||
Gross liability — end of year | $ | 33,160 | $ | 37,574 | $ | 39,188 | $ | 37,056 | $ | 47,084 | $ | 53,462 | $ | 69,463 | $ | 73,287 | $ | 83,849 | $ | 89,405 | $ | 95,956 | ||||||||||||||||||||||
Reinsurance recoverables | 4,917 | 6,389 | 9,023 | 7,580 | 11,428 | 10,731 | 21,391 | 17,483 | 22,817 | 20,089 | 18,727 | |||||||||||||||||||||||||||||||||
Net liability — end of year | $ | 28,243 | $ | 31,185 | $ | 30,165 | $ | 29,476 | $ | 35,656 | $ | 42,731 | $ | 48,072 | $ | 55,804 | $ | 61,032 | $ | 69,316 | $ | 77,229 | ||||||||||||||||||||||
Gross reestimated liability — latest | $ | 39,118 | $ | 48,908 | $ | 54,807 | $ | 58,260 | $ | 62,184 | $ | 65,168 | $ | 67,800 | $ | 71,625 | $ | 85,943 | $ | 80,437 | $ | 95,956 | ||||||||||||||||||||||
Reestimated reinsurance recoverables — latest | 8,073 | $ | 17,483 | 20,987 | 20,067 | 21,027 | 19,565 | 18,183 | 17,115 | 24,862 | 15,758 | 18,867 | ||||||||||||||||||||||||||||||||
Net reestimated liability — latest | $ | 31,045 | $ | 31,425 | $ | 33,820 | $ | 38,193 | $ | 41,157 | $ | 45,603 | $ | 49,617 | $ | 54,510 | $ | 61,081 | $ | 64,679 | $ | 77,089 | ||||||||||||||||||||||
Gross cumulative redundancy (deficiency) | $ | (5,958 | ) | $ | (11,334 | ) | $ | (15,619 | ) | $ | (21,204 | ) | $ | (15,100 | ) | $ | (11,706 | ) | $ | 1,663 | $ | 1,662 | $ | (2,094 | ) | $ | 8,968 | $ | — | |||||||||||||||
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• | Commodities and futures contracts | ||
• | Options (except covered call options) | ||
• | Non-investment grade debt obligations at time of purchase | ||
• | Preferred stocks (except “trust preferred” securities) | ||
• | Interest-only, principal-only, and residual tranche collateralized mortgage obligations | ||
• | Private placements | ||
• | International debt obligations | ||
• | Foreign currency trading | ||
• | Limited partnerships | ||
• | Convertible securities | ||
• | Venture-capital investments | ||
• | Real estate properties (except real estate investment trusts) | ||
• | Securities lending | ||
• | Portfolio leveraging,i.e., margin transactions | ||
• | Short selling |
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At September 30, | At December 31, | |||||||||||||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||||
Cost or Amortized | Estimated Fair | Cost or Amortized | Estimated Fair | Cost or Amortized | Estimated Fair | Cost or Amortized | Estimated Fair | |||||||||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $14,522 | $14,677 | $18,523 | $18,888 | $18,657 | $18,602 | $16,751 | $16,769 | ||||||||||||||||||||||||
U.S. treasury securities | 7,010 | 7,296 | 7,837 | 8,096 | 8,852 | 8,859 | 11,084 | 11,194 | ||||||||||||||||||||||||
States, Territories and possessions | 15,223 | 15,520 | 15,310 | 15,771 | 14,919 | 15,236 | 13,949 | 14,305 | ||||||||||||||||||||||||
Special Revenue | 13,901 | 13,915 | 15,011 | 15,363 | 11,619 | 11,811 | 11,745 | 11,951 | ||||||||||||||||||||||||
Public Utilities | 5,422 | 5,257 | 2,516 | 2,580 | 3,033 | 3,081 | 3,051 | 3,147 | ||||||||||||||||||||||||
Industrial and Miscellaneous | 32,595 | 30,648 | 31,140 | 31,347 | 30,931 | 30,829 | 23,413 | 23,484 | ||||||||||||||||||||||||
Mortgage-Backed Securities | 20,266 | 20,017 | 20,636 | 20,724 | 11,618 | 11,488 | 13,887 | 13,699 | ||||||||||||||||||||||||
Total Debt Securities | 108,939 | 107,330 | 110,973 | 112,769 | 99,629 | 99,906 | 93,880 | 94,549 | ||||||||||||||||||||||||
Equity Securities | 15,913 | 15,913 | 10,525 | 13,409 | 10,476 | 13,697 | 10,510 | 12,328 | ||||||||||||||||||||||||
$124,852 | $123,243 | $121,498 | $126,178 | $110,105 | $113,603 | $104,390 | $106,877 | |||||||||||||||||||||||||
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Estimated | Percent | |||||||
Rating (1) | Fair Value | of Total (2) | ||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 14,677 | 13.7 | % | ||||
U.S. treasury securities | 7,296 | 6.8 | % | |||||
AAA | 38,580 | 35.9 | % | |||||
AA | 18,739 | 17.5 | % | |||||
A | 23,847 | 22.2 | % | |||||
BBB | 4,191 | 3.9 | % | |||||
Total | $ | 107,330 | 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. |
Amortized Cost | Estimated Fair Value (1) | |||||||
Less than one year | $ | 8,194 | $ | 7,978 | ||||
One though five years | 40,035 | 39,933 | ||||||
Five through ten years | 37,260 | 36,349 | ||||||
Greater than ten years | 3,184 | 3,053 | ||||||
Mortgaged-backed securities (2) | 20,266 | 20,017 | ||||||
Total debt securities | $ | 108,939 | $ | 107,330 | ||||
(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. 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. |
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September 30, 2008 | December 31, 2007 | |||||||||||||||
Average | Average | |||||||||||||||
Credit | Credit | |||||||||||||||
Fair Value | Rating | Fair Value | Rating | |||||||||||||
U.S. Agency guaranteed RMBS | $ | 15,671 | AAA | $ | 15,688 | AAA | ||||||||||
Non-Agency guaranteed RMBS | — | — | — | — | ||||||||||||
Prime First Lien | — | — | — | — | ||||||||||||
Prime Second Lien | — | — | — | — | ||||||||||||
Alt-A Loans | — | — | — | — | ||||||||||||
Subprime Loans | — | — | — | — | ||||||||||||
Total | $ | 15,671 | — | $ | 15,688 | — | ||||||||||
(Dollars in Thousands) | ||||||||||||||||
September 30, 2008 | December 31, 2007 | |||||||||||||||
Average | Average | |||||||||||||||
Credit | Credit | |||||||||||||||
Fair Value | Rating | Fair Value | Rating | |||||||||||||
Auto loan backed securities | $ | — | — | $ | — | — | ||||||||||
Home equity loan backed securities | — | — | — | — | ||||||||||||
Municipal bonds | $ | 22,245 | AA+ | $ | 23,258 | AAA |
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Fair Value at | Fair Value at | |||||||
Insurer | September 30, 2008 | December 31, 2007 | ||||||
AMBAC | $ | 3,676 | $ | 3,274 | ||||
FGIC | 2,692 | 2,735 | ||||||
FSA | 8,035 | 8,730 | ||||||
MBIA | 7,842 | 8,519 | ||||||
Total | $ | 22,245 | $ | 23,258 | ||||
Underlying Rating | Fair Value at | Fair Value at | ||||||
of Issuer | September 30, 2008 | December 31, 2007 | ||||||
AAA | $ | 9,656 | $ | 23,258 | ||||
AA | 11,543 | — | ||||||
A | 1,046 | — | ||||||
Total | $ | 22,245 | $ | 23,258 | ||||
Nine Months Ended | Year Ended | |||||||||||||||||||
September 30, | December 31, | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Average cash and invested assets | $ | 133,964 | $ | 128,164 | $ | 131,468 | $ | 121,760 | $ | 116,934 | ||||||||||
Net investment income | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | |||||||||||||||
Return on average cash and invested assets | 3.0 | % | 3.1 | % | 4.0 | % | 3.8 | % | 3.8 | % |
• | the company’s profitability, leverage and liquidity; | ||
• | its book of business; | ||
• | the adequacy and soundness of its reinsurance; |
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• | the quality and estimated fair 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. |
• | 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; |
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• | restrictions on the nature, quality and concentration of investments; | ||
• | assessments by guaranty associations; | ||
• | restrictions on the ability of Penn Millers Insurance Company to pay dividends to us; | ||
• | restrictions on transactions between Penn Millers Insurance Company and its 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 reports of financial condition required to be filed; and | ||
• | requiring reserves for unearned premiums, losses and other purposes. |
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• | audit committees; | ||
• | certification of financial statements by the chief executive officer and the chief financial officer; | ||
• | 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. |
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• | we may not conduct an initial public offering of our stock without the prior approval of the Commissioner; | ||
• | we may not create or issue preferred stock prior to or as part of an initial public offering without the prior approval of the Commissioner; | ||
• | Penn Millers Mutual Holding Company may not waive any dividend from Penn Millers Holding Corporation; | ||
• | we may not implement any plans involving the issuance of stock, warrants or rights without the prior approval of the Commissioner; and | ||
• | we may not lend any person funds to finance the purchase of any portion of a stock offering. |
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• | establishing an employee stock ownership plan and a stock-based incentive plan; | ||
• | lending the employee stock ownership plan a portion of the proceeds to purchase shares in the offering; | ||
• | amending our certificate of incorporation to create 1,000,000 shares of authorized preferred stock; and | ||
• | permitting Penn Millers Mutual Holding Company to waive any dividends from Penn Millers Holding Corporation. |
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• | policyholders under policies of insurance in place on October 22, 2008, referred to as “eligible members” in the plan of minority stock offering; | ||
• | our ESOP; and | ||
• | our directors, officers and employees who are not eligible policyholders under the category above. |
• | licensed insurance agencies and brokers that have been appointed by or are under contract with Penn Millers Insurance Company to market and distribute policies of insurance; | ||
• | policyholders under policies of insurance issued by Penn Millers Insurance Company after October 22, 2008; and |
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• | 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 Lackawanna or Luzerne Counties in Pennsylvania. |
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• | eligible policyholders, or “eligible members” (as they are referred to in the plan of minority stock offering), which means a person or entity who is the named insured under an insurance policy issued by Penn Millers Insurance Company that is issued and in force as of the close of business on October 22, 2008; | ||
• | our ESOP; and | ||
• | our directors, officers and employees as of the closing date of the offering. |
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• | licensed insurance agencies and brokers that have been appointed by or otherwise are under contract with Penn Millers Insurance Company to market and distribute policies of insurance; | ||
• | named insureds under policies of insurance issued by Penn Millers Insurance Company after October 22, 2008; and | ||
• | 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 Lackawanna or Luzerne Counties, Pennsylvania. |
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• | the present and projected operating results and financial condition of Penn Millers and current economic conditions; | ||
• | certain historical, financial and other information relating to Penn Millers; | ||
• | a comparative evaluation of the operating and financial statistics of Penn Millers 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 the common stock of Penn Millers Holding Corporation as determined by Curtis Financial; | ||
• | the impact of the minority stock offering on our net worth and earnings potential as determined by Curtis Financial; | ||
• | the trading market for securities of comparable institutions and general conditions in the market for such securities; and | ||
• | the value which Curtis Financial estimates to be necessary to attract a full subscription of our common stock. |
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LTM(1) | Total | |||||||||||||||||||||||
Total | Total | Total | Equity/ | LTM | LTM | |||||||||||||||||||
Assets | Equity | Revenue | Assets | ROAA(1) | ROAE(1) | |||||||||||||||||||
($000s) | ($000s) | ($000s) | (%) | (%) | (%) | |||||||||||||||||||
Comparative Group | ||||||||||||||||||||||||
21st Century Holding Company | 198,435 | 79,724 | 80,917 | 40.2 | 3.9 | 10.2 | ||||||||||||||||||
Baldwin & Lyons, Inc. | 838,653 | 343,851 | 195,232 | 41.0 | 1.8 | 4.0 | ||||||||||||||||||
CRM Holdings, Ltd. | 447,604 | 109,906 | 158,111 | 24.6 | 2.3 | 8.3 | ||||||||||||||||||
Donegal Group Inc. | 894,071 | 355,657 | 363,361 | 39.8 | 3.7 | 8.9 | ||||||||||||||||||
Eastern Insurance Holdings, Inc. | 390,597 | 156,138 | 139,217 | 40.0 | 2.2 | 5.2 | ||||||||||||||||||
EMC Insurance Group Inc. | 1,108,380 | 303,403 | 425,537 | 27.4 | 0.4 | 1.4 | ||||||||||||||||||
First Mercury Financial Corporation | 912,238 | 259,052 | 205,832 | 28.4 | 5.9 | 20.0 | ||||||||||||||||||
Hallmark Financial Services, Inc. | 549,680 | 189,506 | 277,431 | 34.5 | 4.0 | 11.9 | ||||||||||||||||||
Mercer Insurance Group, Inc. | 564,442 | 132,953 | 168,335 | 23.6 | 1.9 | 7.8 | ||||||||||||||||||
National Interstate Corporation | 990,475 | 204,817 | 295,364 | 20.7 | 2.2 | 9.8 | ||||||||||||||||||
National Security Group, Inc. | 140,762 | 35,106 | 64,001 | 24.9 | -3.4 | -10.2 | ||||||||||||||||||
NYMAGIC, INC. | 986,563 | 183,231 | 71,543 | 18.6 | -8.8 | -36.8 | ||||||||||||||||||
SeaBright Insurance Holdings, Inc. | 800,691 | 309,355 | 263,503 | 38.6 | 3.8 | 9.6 | ||||||||||||||||||
Unico American Corporation | 184,713 | 72,859 | 47,878 | 39.4 | 2.6 | 7.0 | ||||||||||||||||||
Comparative Group Mean | 643,379 | 195,397 | 196,876 | 31.5 | 1.6 | 4.1 | ||||||||||||||||||
Comparative Group Median | 682,567 | 186,369 | 181,784 | 31.4 | 2.3 | 8.1 | ||||||||||||||||||
Penn Millers | 219,583 | 54,842 | 80,331 | 37.4 | -0.5 | -1.7 |
(1) | LTM corresponds to last twelve months ended September 30, 2008. ROAA and ROAE utilize asset book values at September 30, 2007 and September 30, 2008 to derive calculations. |
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Total | Price/ | Price/ | Price/ | Price/ | Price/ | |||||||||||||||||||
Market | Book | Tang. | LTM | LTM | Total | |||||||||||||||||||
Value | Value | Book | EPS(1) | Rev.(1) | Assets | |||||||||||||||||||
($000s) | (%) | (%) | (x) | (x) | (%) | |||||||||||||||||||
Comparative Group | ||||||||||||||||||||||||
21st Century Holding Company | 33,979 | 42.6 | 42.6 | 4.04 | 0.31 | 17.1 | ||||||||||||||||||
Baldwin & Lyons, Inc. | 247,848 | 72.1 | 72.1 | 17.02 | 1.10 | 29.6 | ||||||||||||||||||
CRM Holdings, Ltd. | 18,607 | 16.9 | 17.4 | 2.02 | 0.13 | 4.2 | ||||||||||||||||||
Donegal Group Inc. | 367,245 | 103.3 | 103.4 | 11.67 | 1.09 | 41.1 | ||||||||||||||||||
Eastern Insurance Holdings, Inc. | 68,459 | 43.8 | 50.5 | 9.40 | 0.48 | 17.5 | ||||||||||||||||||
EMC Insurance Group Inc. | 292,956 | 96.6 | 96.9 | 64.24 | 0.66 | 26.4 | ||||||||||||||||||
First Mercury Financial Corporation | 210,109 | 81.1 | 108.5 | 4.33 | 1.09 | 23.0 | ||||||||||||||||||
Hallmark Financial Services, Inc. | 127,522 | 67.3 | 104.5 | 5.82 | 0.49 | 23.2 | ||||||||||||||||||
Mercer Insurance Group, Inc. | 78,185 | 58.8 | 61.3 | 7.42 | 0.50 | 13.9 | ||||||||||||||||||
National Interstate Corporation | 293,254 | 143.2 | 143.2 | 14.21 | 1.07 | 29.6 | ||||||||||||||||||
National Security Group, Inc. | 17,932 | 51.1 | 51.1 | Neg | 0.26 | 12.7 | ||||||||||||||||||
NYMAGIC, INC. | 125,328 | 68.4 | 68.4 | Neg | 0.60 | 12.7 | ||||||||||||||||||
SeaBright Insurance Holdings, Inc. | 219,033 | 70.8 | 71.9 | 7.43 | 0.91 | 27.4 | ||||||||||||||||||
Unico American Corporation | 40,501 | 55.6 | 55.6 | 8.13 | 0.79 | 21.9 | ||||||||||||||||||
Comparative Group Mean | 152,925 | 69.4 | 74.8 | 12.98 | 0.68 | 21.4 | ||||||||||||||||||
Comparative Group Median | 126,425 | 67.8 | 70.1 | 7.78 | 0.63 | 22.5 | ||||||||||||||||||
Penn Millers (Fully Converted) | ||||||||||||||||||||||||
Pro Forma Minimum | 43,350 | 47.5 | 48.9 | Neg | 0.53 | 16.9 | ||||||||||||||||||
Pro Forma Midpoint | 51,000 | 51.9 | 53.4 | Neg | 0.62 | 19.4 | ||||||||||||||||||
Pro Forma Maximum | 58,650 | 55.8 | 57.3 | Neg | 0.71 | 21.7 |
(1) | LTM EPS corresponds to earnings per share for the last twelve months ended September 30, 2008. LTM revenue corresponds to total revenue for the last twelve months ended September 30, 2008. |
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• | not timely received; | ||
• | improperly completed or executed; | ||
• | is not accompanied by payment in full for the shares of common stock subscribed for in the form; or | ||
• | submitted by a person who we believe is making false representations or who we believe may be violating, evading or circumventing the terms and conditions of the plan of minority stock offering. |
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Minimum | Maximum | |||||||
(1,950,750 shares) | (2,639,250 shares) | |||||||
Commissions | $292,613(1) | $395,887(1) |
(1) | Includes the $100,000 in fees already paid to Griffin Financial, which will be credited against any commissions payable to Griffin Financial. |
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• | No person or entity may purchase fewer than 25 shares of common stock in the offering. | ||
• | No purchaser may purchase more than 100,000 shares ($1,000,000) of common stock. | ||
• | No purchaser, together with such purchaser’s affiliates and associates or a group acting in concert, may purchase more than 100,000 shares ($1,000,000) of common stock. |
• | any corporation or organization (other than an affiliate of Penn Millers) of which you are an officer or partner or the beneficial owner of 10% or more of any class of equity securities; | ||
• | any trust or other estate in which you have a substantial beneficial interest or as to which you serve as trustee or in a similar fiduciary capacity; | ||
• | any of your relatives or your spouse, or any relative of your spouse, who lives at home with you; | ||
• | any person or entity who you control, who controls you, or who together with you is controlled by the same third party; | ||
• | any person or entity who is knowingly participating with you in a joint activity or interdependent conscious parallel action toward a common goal; or |
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• | any person or entity with whom you are combining or pooling voting or other interests in the securities of an issuer for a common purpose pursuant to any agreement or relationship. |
• | any corporation or organization (other than an affiliate of Penn Millers) of which the officer or director is an officer or partner or the beneficial owner of 10% or more of any class of equity securities; | ||
• | any trust or other estate in which the officer or director has a substantial beneficial interest or as to which he or she serves as trustee or in a similar fiduciary capacity; or | ||
• | any of the officer’s or director’s relatives or his or her spouse, or any relative of the spouse, who lives at home with the officer or director. |
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Name | Amount ($) | Number of Shares(1)(2) | Percent (3) | |||||||||
Directors: | ||||||||||||
Heather M. Acker | $ | 50,000 | 5,000 | * | ||||||||
F. Kenneth Ackerman, Jr. | 100,000 | 10,000 | * | |||||||||
Dorrance R. Belin | 50,000 | 5,000 | * | |||||||||
John L. Churnetski | 75,000 | 7,500 | * | |||||||||
John M. Coleman | 200,000 | 20,000 | 1.03 | % | ||||||||
Douglas A. Gaudet | 300,000 | 30,000 | 1.54 | % | ||||||||
Kim E. Michelstein | 50,000 | 5,000 | * | |||||||||
Robert A. Nearing, Jr. | 75,000 | 7,500 | * | |||||||||
James M. Revie | 50,000 | 5,000 | * | |||||||||
J. Harvey Sproul, Jr. | 100,000 | 10,000 | * | |||||||||
Executive Officers: | ||||||||||||
Michael O. Banks | 100,000 | 10,000 | * | |||||||||
Jonathan C. Couch | 20,000 | 2,000 | * | |||||||||
Harold Roberts | 50,000 | 5,000 | * | |||||||||
Kevin Higgins | 50,000 | 5,000 | * | |||||||||
Joseph Survilla | 10,000 | 1,000 | * | |||||||||
All Directors and Executive Officers as a Group (15 persons) | $ | 1,280,000 | 128,000 | 6.56 | % | |||||||
* | Less than one percent. | |
(1) | Does not include shares that will be allocated to employees under the ESOP. Under the ESOP, our employees will be allocated over time, in the aggregate, shares in an amount equal to 10% of the common stock issued in the offering (which equals between 195,075 shares if 1,950,750 shares are sold in the offering and 293,250 shares if 2,932,500 shares are sold in the offering). |
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(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 offering (which equals between 273,105 shares if 1,950,750 shares are sold in the offering, and 410,550 shares if 2,932,500 shares are sold in the offering). | |
(3) | Assumes that 1,950,750 shares are issued in the offering, including the shares purchased by the ESOP. |
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• | eligible policyholders (sometimes referred to in this prospectus as eligible members) that are U.S. Persons that hold their membership interests in Penn Millers Mutual Holding Company as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (which we refer to as the Code), of the receipt, exercise and lapse of subscription rights to purchase shares of common stock of Penn Millers Holding Corporation (which we refer to as our common stock) in the subscription offering; | ||
• | eligible policyholders that are U.S. Persons that purchase shares of our common stock in the subscription offering upon the exercise of subscription rights and hold shares of our common stock as a capital asset within the meaning of Section 1221 of the Code, of the acquisition, ownership and disposition of shares of our common stock purchased in the subscription offering; and | ||
• | other investors that are U.S. Persons that purchase shares of our common stock in the community offering or any syndicated community offering and hold shares of our common stock as a capital asset within the meaning of Section 1221 of the Code, of the acquisition, ownership and disposition of shares of our common stock purchased pursuant to the community offering. |
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• | a nontaxable distribution by Penn Millers Holding Corporation to Penn Millers Mutual Holding Company of rights to acquire shares of our common stock; followed by | ||
• | a distribution of such rights by Penn Millers Mutual Holding Company to its eligible policyholders, respectively, that will be taxable: |
• | to Penn Millers Mutual Holding Company, to the extent of the excess, if any, of (i) the aggregate fair market value of the distributed subscription rights on the date of the distribution of such rights by Penn Millers Mutual Holding Company to its eligible policyholders, over (ii) Penn Millers Mutual Holding Company’s aggregate adjusted tax basis, if any, in such rights on such date; and | ||
• | to each such eligible policyholder if the subscription rights are determined to have any ascertainable fair market value on the date of the distribution of such rights by Penn Millers Mutual Holding Company to its eligible policyholders, as follows: |
• | first, as a dividend to the extent such distribution is deemed to be made out of Penn Millers Mutual Holding Company’s current or accumulated earnings and profits; | ||
• | second, if the aggregate fair market value of the subscription rights that are distributed to an eligible policyholder exceeds the amount of Penn Millers Mutual Holding Company’s current and accumulated earnings and profits that are deemed distributed to such eligible policyholder, that excess will be |
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treated as a return of capital to such eligible policyholder to the extent of such eligible policyholder’s adjusted tax basis, if any, in its membership interests in Penn Millers Mutual Holding Company; and | |||
• | third, if the aggregate fair market value of the subscription rights that are distributed to an eligible policyholder exceeds the sum of the amount of Penn Millers Mutual Holding Company’s current and accumulated earnings and profits that are deemed distributed to such eligible policyholder and such eligible policyholder’s adjusted tax basis in its membership interests in Penn Millers Mutual Holding Company, that excess will be treated as gain from the sale or exchange of the eligible policyholder’s membership interests in Penn Millers Mutual Holding Company and generally should be treated as capital gain if such eligible policyholder holds its membership interests in Penn Millers Mutual Holding Company as a capital asset. |
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Age at December 31, | ||||||||||||
2008 | Director Since(1) | Position with Penn Millers | ||||||||||
Heather M. Acker | 56 | 2004 | Director | |||||||||
F. Kenneth Ackerman, Jr. | 69 | 1979 | Vice Chairman | |||||||||
Dorrance R. Belin | 70 | 1998 | Director | |||||||||
John L. Churnetski | 67 | 1997 | Director | |||||||||
John M. Coleman | 59 | 2007 | Director | |||||||||
Douglas A. Gaudet | 54 | 2005 | President and CEO | |||||||||
Kim E. Michelstein | 56 | 1998 | Director | |||||||||
Robert A. Nearing, Jr. | 65 | 1997 | Director | |||||||||
James M. Revie | 72 | 1990 | Director | |||||||||
J. Harvey Sproul, Jr. | 74 | 1990 | Chairman |
(1) | Indicates year first elected as a director of Penn Millers Insurance Company. |
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• | a director who is, or at any time during the past three years was, employed by us; | ||
• | a director who accepted or who has a spouse, parent, child or sibling, whether by blood, marriage or adoption, or any other person who resides in his home, hereinafter referred to as a “Family Member”, who accepted any compensation from us in excess of $120,000 during any period of twelve consecutive months within the three years preceding the determination of independence (other than compensation for board or board committee service; compensation paid to a Family Member who is an employee (other than an executive officer) of Penn Millers; or benefits under a tax-qualified retirement plan, or non-discretionary compensation). | ||
• | a director who is a Family Member of an individual who is, or at any time during the past three years was, employed by us as an executive officer; |
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• | a director who is, or has a Family Member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more (excluding payments arising solely from investments in our securities; or payments under non-discretionary charitable contribution matching programs). | ||
• | a director of Penn Millers who is, or has a Family Member who is, employed as an executive officer of another entity where at any time during the past three (3) years any of our executive officers served on the compensation committee of such other entity; or | ||
• | a director who is, or has a Family Member who is, a current partner of our outside auditor, or was a partner or employee of the company’s outside auditor who worked on our audit at any time during any of the past three (3) years. |
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Change in | ||||||||||||||||||||||||||||
Pension | ||||||||||||||||||||||||||||
Value and | ||||||||||||||||||||||||||||
Nonqualified | ||||||||||||||||||||||||||||
Fees Earned | Non-Equity | Deferred | ||||||||||||||||||||||||||
or Paid | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||
in Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||
($) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||||||
J. Harvey Sproul, Jr. | $ | 47,500 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 47,500 | ||||||||||||||
F. Kenneth Ackerman, Jr. | $ | 39,193 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 906 | $ | 40,099 | ||||||||||||||
Heather M. Acker | $ | 35,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 35,000 | ||||||||||||||
Dorrance R. Belin | $ | 36,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 36,000 | ||||||||||||||
John L. Churnetski | $ | 32,500 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 32,500 | ||||||||||||||
John M. Coleman | $ | 34,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 34,000 | ||||||||||||||
Kim E. Michelstein | $ | 36,750 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 36,750 | ||||||||||||||
Robert A. Nearing, Jr. | $ | 29,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 29,000 | ||||||||||||||
William A. Ray(1) | $ | 29,619 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 7,551 | $ | 37,170 | ||||||||||||||
James M. Revie | $ | 33,000 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 33,000 |
(1) | William A. Ray, age 65, had served as a Director since 2001 and resigned from the Board of Directors effective December 10, 2008. Mr. Ray retired from Towers Perrin Reinsurance in Philadelphia, Pennsylvania in 1999, where he was a Senior Vice President and Principal. |
• | review, evaluate and approve the compensation and benefit plans and policies of Penn Millers employees, including its officers; | ||
• | review, evaluate and approve the compensation and benefit plans and policies for our officers and directors; | ||
• | 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 our 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. |
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• | 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 Penn Millers 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. |
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• | make independent recommendations to the board of directors as to best practices for board governance and evaluation of board performance; | ||
• | 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. |
• | review investment policies, strategies, transactions and performance; | ||
• | review Penn Millers’ capital structure and provide recommendations regarding financial planning; | ||
• | conduct an annual financial review and assessment of proposed strategic plans and initiatives; | ||
• | conduct a financial review and assessment of proposed business transactions; and | ||
• | administer Penn Millers’ Pension Plan and 401(k) plans. |
• | oversee budget review; | ||
• | provide capital spending approval; | ||
• | propose capital structure policy; | ||
• | oversee merger, acquisition and divestiture review; | ||
• | provide debt issuance approval; and | ||
• | review qualification of commercial and investment bankers. |
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• | annual base salary; | ||
• | annual cash and deferred compensation bonuses which are discretionary; | ||
• | retirement benefits; and | ||
• | other perquisites and personal benefits. |
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Business Unit Level | Threshold ($) | Target ($) | Maximum ($) | |||||||||
Insurance Company | $ | 4,731,000 | $ | 6,121,000 | $ | 8,349,000 | ||||||
Commercial Business | $ | 1,812,000 | $ | 2,344,000 | $ | 3,198,000 | ||||||
Agribusiness | $ | 3,590,000 | $ | 4,645,000 | $ | 6,336,000 | ||||||
Holding Company(1) | $ | 4,313,000 | $ | 5,580,000 | $ | 7,611,000 |
(1) | Excludes operating income (loss) from Eastern Insurance Group and Penn Software. |
Penn | ||||||||||
Software and | ||||||||||
Insurance | Commercial | Holding | Technology | |||||||
Name | Company | Business | Agribusiness | Company | Services | |||||
Douglas A. Gaudet | — | — | — | 100% | — | |||||
Michael O. Banks | — | 25% | — | 75% | — | |||||
Frank Joanlanne | — | — | — | 75% | 25% | |||||
Harold W. Roberts | — | — | 25% | 75% | — | |||||
Kevin D. Higgins | 100% | — | — | — | — | |||||
Jonathan C. Couch | — | — | — | 100% | — |
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% of Base Salary as | % of Base Salary as | % of Base Salary as | ||||
Employee Title or | Bonus Opportunity | Bonus Opportunity | Bonus Opportunity | |||
Position | at Threshold | at Target | at Maximum | |||
Chief Executive Officer and President | 22.5% | 45.0% | 67.5% | |||
Executive Vice President & Senior Vice President | 20.0% | 40.0% | 60.0% | |||
Vice President | 17.5% | 35.0% | 52.5% | |||
Assistant Vice President | 10.0% | 20.0% | 30.0% | |||
Managers, Assistant Managers, and Supervisors | 6.0% | 12.0% | 18.0% | |||
All Other Employees | 2.5% | 5.0% | 7.5% |
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Non-Equity | Nonqualified Deferred | All Other | ||||||||||||||||||||||||||
Name and | Incentive Plan | Compensation | Compensation | |||||||||||||||||||||||||
Principal Position | Year | Salary ($) | Bonus ($) | Compensation | Earnings ($) | ($)(1) | Total | |||||||||||||||||||||
Douglas A. Gaudet | ||||||||||||||||||||||||||||
President and Chief Executive Officer | 2008 | 342,476 | — | — | — | 23,207 | $ | 365,683 | ||||||||||||||||||||
Michael O. Banks, | ||||||||||||||||||||||||||||
Executive Vice President and Chief Financial Officer | 2008 | 235,706 | — | — | — | 26,536 | $ | 262,242 | ||||||||||||||||||||
Frank Joanlanne, | ||||||||||||||||||||||||||||
Sr. Vice President (2) | 2008 | 198,633 | — | — | — | 16,353 | $ | 214,986 | ||||||||||||||||||||
Harold W. Roberts, | ||||||||||||||||||||||||||||
Chief Underwriting Officer | 2008 | 186,589 | — | — | — | 16,456 | $ | 203,045 | ||||||||||||||||||||
Kevin D. Higgins, Sr. | ||||||||||||||||||||||||||||
Vice President of Claims | 2008 | 162,983 | — | — | — | 15,425 | $ | 178,408 | ||||||||||||||||||||
Jonathan C. Couch | ||||||||||||||||||||||||||||
Vice President of Finance and Controller | 2008 | 133,524 | — | — | — | 4,162 | $ | 137,686 |
(1) | Consists of matching contributions to 401(k) plan, life insurance premiums, country club and car allowances on behalf of Messrs. Gaudet, Banks, Joanlanne, Roberts, Higgins and Couch. | |
(2) | Mr. Joanlanne’s employment with Penn Millers was terminated on December 1, 2008. |
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AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2008
Number of | ||||||||||||||
Years of | Present Value of | Payments | ||||||||||||
Credited | Accumulated | During Last | ||||||||||||
Name | Plan Name | Service (#) | Benefit($)(1) | Fiscal Year ($) | ||||||||||
Douglas A. Gaudet | Defined Benefit Pension Plan | 2 | $ | 14,872 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 2 | $ | 119,132 | $ | 0 | |||||||||
Michael O. Banks | Defined Benefit Pension Plan | 6 | $ | 47,108 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 6 | $ | 24,201 | $ | 0 | |||||||||
Frank Joanlanne(2) | Defined Benefit Pension Plan | 2 | $ | 22,680 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 2 | $ | 0 | $ | 0 | |||||||||
Harold W. Roberts | Defined Benefit Pension Plan | 32 | $ | 312,266 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 32 | $ | 208,032 | $ | 0 | |||||||||
Kevin D. Higgins, Sr. | Defined Benefit Pension Plan | 5 | $ | 36,481 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 5 | $ | 13,173 | $ | 0 | |||||||||
Jonathan C. Couch | Defined Benefit Pension Plan | 6 | $ | 15,795 | $ | 0 |
(1) | The present value of accumulated benefits were calculated with the following assumptions: |
• | Retirement occurs at age 65; | ||
• | At retirement, the participants take a lump sum based on the accrued benefit as of December 31, 2007; | ||
• | The lump sum is calculated using an interest rate of 6.4%; and | ||
• | The lump sum is discounted to December 31, 2007 at a rate of 6.4% per year. |
(2) | Although Mr. Joanlanne was eligible to participate in the SERP, his accumulated benefits were forfeited as a result of the termination of his employment. |
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AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2008
Executive | Registrant | Aggregate | Aggregate | |||||||||||||||||
Contributions | Contributions | Earnings | Aggregate | Balance at | ||||||||||||||||
in Last | in Last | in Last | Withdrawals/ | Last Fiscal | ||||||||||||||||
Name | Fiscal Year | Fiscal Year(1) | Fiscal Year(1) | Distributions | Year End | |||||||||||||||
Douglas A. Gaudet | $ | 0 | $ | 0 | $ | (8,437 | ) | $ | 0 | $ | 15,066 | |||||||||
Michael O. Banks | $ | 0 | $ | 0 | $ | (5,483 | ) | $ | 0 | $ | 8,966 | |||||||||
Frank Joanlanne | $ | 0 | $ | 0 | $ | (6,455 | ) | $ | 0 | $ | 1,447 | |||||||||
Harold W. Roberts | $ | 12,033 | $ | 0 | $ | (11,370 | ) | $ | 0 | $ | 23,645 | |||||||||
Kevin D. Higgins, Sr. | $ | 0 | $ | 0 | $ | (2,660 | ) | $ | 0 | $ | 5,462 | |||||||||
Jonathan C. Couch | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
(1) | Contribution amounts were not reported as earnings in the Summary Compensation Table. The participants in the plan had aggregate losses as of December 31, 2008. These losses were not reported in the Summary Compensation Table. |
• | the agreements for Messrs. Gaudet and Banks automatically renew when there is 2 years remaining on the agreement; | ||
• | the agreements for Messrs. Roberts and Higgins automatically renew when there is 1 year remaining on the agreement; and | ||
• | the agreement for Mr. Couch renews annually. |
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• | 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. |
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• | whether the transaction is fair and reasonable to us; | ||
• | the business reasons for the transaction; | ||
• | whether the transaction would impair the independence of a director; | ||
• | whether the transaction presents a conflict of interest, taking into account the size of the transaction, the financial position of the director, officer or employee, the nature of their interest in the transaction and the ongoing nature of the transaction; and | ||
• | whether the transaction is material, taking into account the significance of the transaction in light of all the circumstances. |
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Page | ||||
F-2 | ||||
Annual and Interim Financial Statements | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-7 | ||||
F-9 |
F-1
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Penn Millers Holding Corporation:
/s/ KPMG LLP | ||||
May 5, 2008, except for segment information discussed in note 18 and the effects of discontinued operations discussed in note 20, as to which the date is January 23, 2009
F-2
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December 31, 2007 and 2006
September 30, | December 31 | |||||||||||
2008 | 2007 | 2006 | ||||||||||
(Unaudited) | ||||||||||||
Assets | ||||||||||||
Investments: | ||||||||||||
Fixed maturities: | ||||||||||||
Available for sale, at fair value (amortized cost $108,939 in 2008 (unaudited), $110,973 in 2007, and $99,629 in 2006) | $ | 107,330 | 112,769 | 99,906 | ||||||||
Equity securities, at fair value (cost $15,913 in 2008 (unaudited), $10,525 in 2007, and $10,476 in 2006) | 15,913 | 13,409 | 13,697 | |||||||||
Total investments | 123,243 | 126,178 | 113,603 | |||||||||
Cash and cash equivalents | 8,389 | 10,118 | 13,036 | |||||||||
Premiums and fees receivable | 33,302 | 32,489 | 30,465 | |||||||||
Reinsurance receivables and recoverables | 20,223 | 15,640 | 18,886 | |||||||||
Deferred acquisition costs | 11,278 | 11,014 | 10,381 | |||||||||
Prepaid reinsurance premiums | 4,355 | 4,234 | 4,119 | |||||||||
Accrued investment income | 1,287 | 1,499 | 1,439 | |||||||||
Property and equipment, net of accumulated depreciation | 4,212 | 4,401 | 4,228 | |||||||||
Income taxes receivable | 770 | 1,056 | — | |||||||||
Deferred income taxes | 4,317 | 1,872 | 1,439 | |||||||||
Other | 4,206 | 3,972 | 2,812 | |||||||||
Assets held for sale | 4,001 | 7,311 | 7,531 | |||||||||
Total assets | $ | 219,583 | 219,784 | 207,939 | ||||||||
Liabilities and Stockholder’s Equity | ||||||||||||
Liabilities: | ||||||||||||
Loss and loss adjustment expense reserves | $ | 103,278 | 95,956 | 89,405 | ||||||||
Unearned premiums | 47,753 | 46,595 | 43,294 | |||||||||
Accounts payable and accrued expenses | 11,471 | 12,874 | 10,394 | |||||||||
Income taxes payable | — | — | 256 | |||||||||
Borrowings under line of credit | — | — | 250 | |||||||||
Long-term debt | 1,510 | 1,745 | 2,057 | |||||||||
Liabilities held for sale | 729 | 1,042 | 1,582 | |||||||||
Total liabilities | 164,741 | 158,212 | 147,238 | |||||||||
Stockholder’s equity: | ||||||||||||
Common stock, par value $1 per share. Authorized, issued, and outstanding 1,000 shares | 1 | 1 | 1 | |||||||||
Retained earnings | 56,855 | 59,463 | 58,377 | |||||||||
Accumulated other comprehensive (loss) income | (2,014 | ) | 2,108 | 2,323 | ||||||||
Total stockholder’s equity | 54,842 | 61,572 | 60,701 | |||||||||
Total liabilities and stockholder’s equity | $ | 219,583 | 219,784 | 207,939 | ||||||||
F-3
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years ended December 31, 2007, 2006, and 2005
Nine months ended | ||||||||||||||||||||
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Premiums earned | $ | 59,319 | 53,490 | 70,970 | 64,645 | 64,723 | ||||||||||||||
Investment income, net of investment expense | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | |||||||||||||||
Realized investment (losses) gains, net | (1,259 | ) | 423 | (702 | ) | 349 | 424 | |||||||||||||
Other income | 324 | 380 | 508 | 345 | 277 | |||||||||||||||
Total revenues | 62,460 | 58,229 | 76,100 | 70,016 | 69,868 | |||||||||||||||
Loss and expenses: | ||||||||||||||||||||
Loss and loss adjustment expenses | 42,261 | 35,533 | 49,783 | 43,766 | 40,242 | |||||||||||||||
Amortization of deferred policy acquisition costs | 17,401 | 16,385 | 21,930 | 20,080 | 21,556 | |||||||||||||||
Underwriting and administrative expenses | 2,383 | 2,672 | 2,233 | 3,216 | 7,665 | |||||||||||||||
Interest expense | 116 | 100 | 125 | 222 | 195 | |||||||||||||||
Other expense, net | 190 | 109 | 184 | 314 | 266 | |||||||||||||||
Total loss and expenses | 62,351 | 54,799 | 74,255 | 67,598 | 69,924 | |||||||||||||||
�� | ||||||||||||||||||||
Income (loss) from continuing operations, before income taxes | 109 | 3,430 | 1,845 | 2,418 | (56 | ) | ||||||||||||||
Income tax expense (benefit) | 140 | 1,001 | 396 | 506 | (296 | ) | ||||||||||||||
(Loss) income from continuing operations | (31 | ) | 2,429 | 1,449 | 1,912 | 240 | ||||||||||||||
Discontinued operations: | ||||||||||||||||||||
(Loss) income on discontinued operations, before income taxes | (2,470 | ) | 482 | (489 | ) | 292 | 385 | |||||||||||||
Income tax (benefit) expense | (16 | ) | 190 | (126 | ) | 124 | 151 | |||||||||||||
(Loss) income on discontinued operations | (2,454 | ) | 292 | (363 | ) | 168 | 234 | |||||||||||||
Net (loss) income | $ | (2,485 | ) | 2,721 | 1,086 | 2,080 | 474 | |||||||||||||
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years ended December 31, 2007, 2006, and 2005
Accumulated | ||||||||||||||||
other | ||||||||||||||||
Common | Retained | comprehensive | ||||||||||||||
stock | earnings | income (loss) | Total | |||||||||||||
Balance at December 31, 2004 | $ | 1 | 55,823 | 4,069 | 59,893 | |||||||||||
Net income | — | 474 | — | 474 | ||||||||||||
Other comprehensive loss, net of taxes: | ||||||||||||||||
Unrealized investment holding loss arising during period, net of related income tax benefit of $1,115 | — | — | (2,165 | ) | (2,165 | ) | ||||||||||
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $135 | — | — | (262 | ) | (262 | ) | ||||||||||
Net unrealized investment loss | (2,427 | ) | ||||||||||||||
Comprehensive loss | (1,953 | ) | ||||||||||||||
Balance at December 31, 2005 | 1 | 56,297 | 1,642 | 57,940 | ||||||||||||
Net income | — | 2,080 | — | 2,080 | ||||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||
Unrealized investment holding gain arising during period, net of related income tax expense of $470 | — | — | 913 | 913 | ||||||||||||
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $119 | — | — | (232 | ) | (232 | ) | ||||||||||
Net unrealized investment gain | 681 | |||||||||||||||
Comprehensive income | 2,761 | |||||||||||||||
Balance at December 31, 2006 | 1 | 58,377 | 2,323 | 60,701 | ||||||||||||
Net income | — | 1,086 | — | 1,086 | ||||||||||||
Other comprehensive income, net of taxes: | ||||||||||||||||
Unrealized investment holding gain arising during period, net of related income tax expense of $179 | — | — | 348 | 348 | ||||||||||||
Reclassification adjustment for realized losses included in net income, net of related income tax benefit of $222 | — | — | 431 | 431 | ||||||||||||
Net unrealized investment gain | 779 | |||||||||||||||
Comprehensive income | 1,865 | |||||||||||||||
Adjustment to initially adopt SFAS No. 158, net of related income taxes of $512 | — | — | (994 | ) | (994 | ) | ||||||||||
Balance at December 31, 2007 | 1 | 59,463 | 2,108 | 61,572 | ||||||||||||
Adjustment to initially adopt SAB No. 108, net of related income taxes of $64 (unaudited) | — | (123 | ) | — | (123 | ) | ||||||||||
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years ended December 31, 2007, 2006, and 2005
Accumulated | ||||||||||||||||
other | ||||||||||||||||
Common | Retained | comprehensive | ||||||||||||||
stock | earnings | income (loss) | Total | |||||||||||||
Net loss (unaudited) | $ | — | (2,485 | ) | — | (2,485 | ) | |||||||||
Other comprehensive loss, net of taxes: | ||||||||||||||||
Unrealized investment holding loss arising during period, net of related income tax benefit of $2,569 (unaudited) | — | — | (4,986 | ) | (4,986 | ) | ||||||||||
Reclassification adjustment for realized losses included in net income, net of related income tax benefit of $427 (unaudited) | — | — | 828 | 828 | ||||||||||||
Net unrealized investment loss (unaudited) | (4,158 | ) | ||||||||||||||
Defined benefit pension plan, net of related income tax expense of $18 (unaudited) | — | — | 36 | 36 | ||||||||||||
Comprehensive loss (unaudited) | (6,607 | ) | ||||||||||||||
Balance at September 30, 2008 (unaudited) | $ | 1 | 56,855 | (2,014 | ) | 54,842 | ||||||||||
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Table of Contents
years ended December 31, 2007, 2006, and 2005
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net (loss) income | $ | (2,485 | ) | 2,721 | 1,086 | 2,080 | 474 | |||||||||||||
Loss (income) on discontinued operations | 2,454 | (292 | ) | 363 | (168 | ) | (234 | ) | ||||||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||||||||||
Change in receivables, unearned premiums, and prepaid reinsurance | (4,316 | ) | (3,942 | ) | 4,470 | 3,318 | (7,904 | ) | ||||||||||||
Increase in loss and loss adjustment expense reserves | 7,322 | 6,678 | 6,551 | 5,556 | 10,562 | |||||||||||||||
Change in accounts payable and accrued expenses | (1,092 | ) | 209 | 56 | 598 | 1,734 | ||||||||||||||
Deferred income taxes | (281 | ) | (71 | ) | (208 | ) | (512 | ) | (766 | ) | ||||||||||
Change in deferred acquisition costs | (264 | ) | (614 | ) | (633 | ) | (735 | ) | 706 | |||||||||||
Amortization and depreciation | 518 | 573 | 783 | 766 | 952 | |||||||||||||||
Realized investment losses (gains), net | 1,259 | (423 | ) | 702 | (349 | ) | (424 | ) | ||||||||||||
Other, net | 601 | (869 | ) | (2,153 | ) | 1,157 | (1,152 | ) | ||||||||||||
Cash provided by operating activities —continuing operations | 3,716 | 3,970 | 11,017 | 11,711 | 3,948 | |||||||||||||||
Cash provided by operating activities — discontinued operations | 229 | 744 | 515 | 104 | 583 | |||||||||||||||
Net cash provided by operating activities | 3,945 | 4,714 | 11,532 | 11,815 | 4,531 | |||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Available-for-sale investments: | ||||||||||||||||||||
Purchases | (36,193 | ) | (23,605 | ) | (27,852 | ) | (27,777 | ) | (19,131 | ) | ||||||||||
Sales | 20,707 | 5,667 | 7,048 | 14,125 | 13,341 | |||||||||||||||
Maturities | 10,605 | 5,850 | 8,350 | 7,800 | 700 | |||||||||||||||
Purchases of property and equipment, net | (329 | ) | (794 | ) | (919 | ) | (740 | ) | (199 | ) | ||||||||||
Acquisitions | — | — | — | — | (1,406 | ) | ||||||||||||||
Cash used in investing activities — continuing operations | (5,210 | ) | (12,882 | ) | (13,373 | ) | (6,592 | ) | (6,695 | ) | ||||||||||
Cash used in investing activities — discontinued operations | (27 | ) | (256 | ) | (261 | ) | — | (374 | ) | |||||||||||
Net cash used in investing activities | (5,237 | ) | (13,138 | ) | (13,634 | ) | (6,592 | ) | (7,069 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Net borrowings (repayments) on line of credit | — | 50 | (250 | ) | 64 | (130 | ) | |||||||||||||
Borrowings under long-term debt | — | — | — | — | 1,760 | |||||||||||||||
Repayment of long-term debt | (235 | ) | (183 | ) | (312 | ) | (2,151 | ) | (294 | ) | ||||||||||
Net cash (used in) provided by financing activities — continuing operations | (235 | ) | (133 | ) | (562 | ) | (2,087 | ) | 1,336 |
F-7
Table of Contents
years ended December 31, 2007, 2006, and 2005
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Net cash used in financing activities —discontinued operations | $ | (260 | ) | (290 | ) | (290 | ) | (221 | ) | (14 | ) | |||||||||
Net cash (used in) provided by financing activities | (495 | ) | (423 | ) | (852 | ) | (2,308 | ) | 1,322 | |||||||||||
Net (decrease) increase in cash | (1,787 | ) | (8,847 | ) | (2,954 | ) | 2,915 | (1,216 | ) | |||||||||||
Cash and cash equivalents at beginning of year | 10,446 | 13,400 | 13,400 | 10,485 | 11,701 | |||||||||||||||
Cash and cash equivalents at end of year | 8,659 | 4,553 | 10,446 | 13,400 | 10,485 | |||||||||||||||
Less cash of discontinued operations at end of year | 270 | 562 | 328 | 364 | 481 | |||||||||||||||
Cash and cash equivalents of continuing operations at end of year | $ | 8,389 | 3,991 | 10,118 | 13,036 | 10,004 | ||||||||||||||
F-8
Table of Contents
December 31, 2007 and 2006
(1) | Description of Business | |
Penn Millers Holding Corporation and subsidiaries (the Company) are engaged in the marketing and sale of commercial property and liability insurance in 33 states throughout the United States. Coverage is written directly by the Company’s employees and through independent producers. | ||
Penn Millers Holding Corporation is a wholly owned subsidiary of Penn Millers Mutual Holding Company (PMMHC). Penn Millers Insurance Company (PMIC) is a property and casualty insurance company incorporated in Pennsylvania. PMIC is a wholly owned subsidiary of Penn Millers Holding Corporation, and the stock of PMIC is the most significant asset of Penn Millers Holding Corporation. American Millers Insurance Company (AMIC) is a property and casualty insurance company incorporated in Pennsylvania and is a wholly owned subsidiary of PMIC. Penn Millers Holding Corporation conducts no business other than acting as a holding company for PMIC. | ||
PMIC offers insurance products designed to meet the needs of certain segments of the agricultural industry in 33 states. PMIC also offers commercial insurance products designed to meet the needs of main street businesses in 8 states. The Company reports its operating results in three segments: agribusiness insurance, commercial business insurance, and a third segment, which is referred to as “other”. However, assets are not allocated to segments and are reviewed in the aggregate for decision-making purposes. The agribusiness insurance segment products include fire and allied lines, inland marine, general liability, commercial automobile, workers’ compensation, and umbrella liability insurance. This segment specializes in writing coverage for manufacturers, processors, and distributors of products for the agricultural industry. The commercial business insurance segment products consist of a business owner’s policy that combines property, liability, business interruption, and crime coverage for small businesses; workers’ compensation; commercial automobile; and umbrella liability coverage. The types of businesses this segment targets include retail, service, hospitality, wholesalers, light manufacturers, and printers. Both the commercial and agribusiness lines are marketed through independent producers. | ||
The Company owns Eastern Insurance Group (EIG), an insurance agency that places business with both PMIC and unaffiliated insurance companies. On March 1, 2005, EIG acquired Galland Steinhauer & Repa, Inc. (GSR), an insurance agency that also places business with PMIC and unaffiliated insurance companies. In 2008, the Company committed to a plan to sell EIG’s business and, therefore, the assets and liabilities have been classified as held-for-sale, with the results of operations reported as discontinued operations in the accompanying consolidated financial statements. Subsequent to quarter end, the Company executed a letter of intent to sell the agency (unaudited). | ||
Penn Software & Technology Services Inc. (PSTS) was owned by the Company and provided both hardware and computer programming services to its clients. In 2007, management made a decision to sell PSTS, and as such, reported the assets and liabilities of PSTS as held for sale with the results of its operations as discontinued operations in the accompanying financial statements. The sale of PSTS was completed in July 2008 (unaudited). | ||
On April 1, 1999, Pennsylvania Millers Mutual Insurance Company demutualized and became a stock insurance company, PMIC, within a mutual holding company structure, in accordance with a plan |
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December 31, 2007 and 2006
approved by the Commonwealth of Pennsylvania and Pennsylvania Millers Mutual Insurance Company’s policyholders under the Mutual Holding Company Demutualization Law. As part of this demutualization, PMMHC was formed as the ultimate controlling entity of PMHC and PMIC. The transaction was consummated with the purchase of 5,000,000 shares (100% of issued) of $1 par stock at $2 per share of PMIC by Penn Millers Holding Corporation. At the same time, PMIC paid a shareholders’ dividend of $10,100. Also, PMMHC purchased 1,000 shares (100% of issued) of $1 par stock at $1 per share of Penn Millers Holding Corporation. | ||
The Company owns all of the outstanding common stock of PMIC, which owns all of the outstanding common stock of Penn Millers Agency, Inc. and AMIC. | ||
(2) | Summary of Significant Accounting Policies |
(a) | Basis of Presentation | ||
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and include the accounts and operations of the Company and its subsidiaries. All material intercompany balances and accounts have been eliminated in consolidation. Certain reclassifications have been made to the prior years’ financial statements in order to conform to the current year presentation. The financial statements, along with related footnote disclosures, reflect the reclassification of EIG and PSTS as discontinued operations. See note 20 for additional disclosure related to discontinued operations. | |||
Notes have been updated for the nine months ended September 30, 2008 to provide an explanation of events and transactions that are significant to an understanding of the changes in the financial position of the Company since the year ended December 31, 2007. The financial information for the interim periods included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. | |||
(b) | Use of Estimates | ||
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including loss reserves, contingent assets and liabilities, tax valuation allowances, valuation of investments, including other-than-temporary impairment of investments and impairment of goodwill, at the date of the financial statements, and the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from these estimates. | |||
(c) | Assets Held for Sale and Discontinued Operations | ||
Discontinued operations represent components of the Company that have either been disposed of or are classified as held-for-sale if both the operations and cash flows of the components have been or will be eliminated from ongoing operations of the Company as a result of the disposal. The results of |
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December 31, 2007 and 2006
operations of reporting units classified as discontinued operations are done so for all periods presented. The Company classifies assets and liabilities of reporting units as held-for-sale when the criteria for held-for-sale accounting is met. At the time a reporting unit qualifies for held-for-sale accounting, the reporting unit is evaluated to determine whether or not the carrying value exceeds its fair value less costs to sell. Any loss resulting from carrying value exceeding fair value less cost to sell is recorded in the period the reporting unit meets held-for-sale accounting. Management judgment is required to (1) assess the criteria required to meet held-for-sale accounting and (2) estimate fair value. Changes to the fair value could result in an increase or decrease to previously recognized losses. | |||
The assets and liabilities of a disposed group, classified as held for sale, are presented separately in the appropriate asset and liability sections of the consolidated balance sheets for all periods presented. | |||
(d) | Concentration of Risk | ||
The Company’s business is subject to concentration of risk with respect to geographic concentration. Although the Company’s operating subsidiaries are licensed collectively in 33 states, direct premiums written for two states, New Jersey and Pennsylvania, accounted for more than 25% of the Company’s direct premium writings for the nine months ended September 30, 2008 (unaudited). Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company. | |||
Additionally, a significant portion of the Company’s direct premiums written for the nine months ended September 30, 2008 (unaudited) were produced by two brokers who produced more than 15% of the Company’s direct premium writings. No other brokers account for more than 5% of direct premium writings. | |||
(e) | Investments | ||
The Company classifies all of its equity investments and fixed maturity investments as “available-for-sale,” requiring that these investments be carried at fair value, with unrealized gains and losses, less related deferred income taxes, excluded from operations, and reported in stockholder’s equity as accumulated other comprehensive income (loss). Short-term investments are recorded at cost, which approximates fair value. Management values the Company’s fixed maturities using quoted values and other data provided by a nationally recognized independent pricing service as inputs into its process for determining fair values of its investments. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in markets that are active; quoted prices for similar securities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable. The fair value of equity securities is based on the quoted market prices at the balance sheet date. The fair value of mutual fund holdings is based on the closing fair value reported by the fund. | |||
Premiums and discounts on fixed income securities are amortized or accreted using the interest method. Mortgage-backed securities are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted |
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December 31, 2007 and 2006
as necessary to reflect actual prepayments and changes in expectations. Adjustments related to changes in prepayment assumptions are recognized on a retrospective basis. Dividends on equity securities are recognized in income when declared. Accrual of income is suspended on fixed maturities or mortgage backed securities that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in default is recognized only when payments are received. There are no investments included in the consolidated balance sheets that were not income-producing for the preceding 12 months. | |||
Realized investment gains and losses on the sale of investments are recognized on the specific identification basis as of the trade date. Realized losses also include losses for fair value declines that are considered to be other than temporary. Changes in unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in stockholders’ equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income (loss). | |||
The Company recognizes an impairment loss when an invested asset’s value declines below cost and the change is deemed to be other-than-temporary, or if it is determined that the Company will not be able to recover all amounts due pursuant to the issuer’s contractual obligations prior to sale or maturity. When the Company determines that an invested asset is other-than-temporarily impaired, the invested asset is written down to fair value, and the amount of the impairment is included in operations as a realized investment loss. The fair value then becomes the new cost basis of the investment, and any subsequent recoveries in fair value are recognized at disposition. | |||
Factors considered in determining whether a decline is other-than-temporary include the length of time and the extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. | |||
The Company’s process for reviewing invested assets for impairments during any quarter includes the following: |
• | identification and evaluation of investments that have possible indications of other-than-temporary impairment, which includes an analysis of investments with gross unrealized investment losses that have fair values less than 80% of cost for six consecutive months or more; | ||
• | review of portfolio manager recommendations for other-than-temporary impairments based on the investee’s current financial condition, liquidity, near-term recovery prospects and other factors; | ||
• | consideration of evidential matter, including an evaluation of factors or triggers that may cause individual investments to qualify as having other-than-temporary impairments; and | ||
• | determination of the status of each analyzed investment as other-than-temporary or not, with documentation of the rationale for the decision. |
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December 31, 2007 and 2006
A fixed maturity security is other-than-temporarily impaired if it is probable that the Company will not be able to collect all amounts due under the security’s contractual terms or where the Company does not have the intent to hold the security. Equity securities are other-than-temporarily impaired when it becomes apparent that the Company will not recover its cost over a reasonable period of time. | |||
The Company may, from time to time, sell invested assets subsequent to the balance sheet date that were considered temporarily impaired at the balance sheet date. Such sales are generally due to events occurring subsequent to the balance sheet date that result in a change in the Company’s intent or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in the Company’s liquidity needs, or changes in tax laws or the regulatory environment. | |||
The fair value of investments is reported in note 3. The fair value of other financial instruments, principally receivables, accounts payable and accrued expenses, and long-term debt approximates their September 30, 2008 (unaudited) and December 31, 2007 and 2006 carrying values. | |||
(f) | Derivative Instruments | ||
The Company has entered into an interest rate swap agreement in an effort to manage interest rate risk associated with its variable rate debt. The Company’s derivative instrument is executed with a financial institution (counterparty) and is subject to counterparty credit risk. Counterparty credit risk is the risk that the counterparty is unable to perform under the terms of the derivative instrument upon settlement of the derivative instrument. | |||
The derivative is recorded on the consolidated balance sheets at fair value with the associated gain/loss included in the consolidated statements of operations. | |||
(g) | Premium Revenue | ||
Premiums are earned pro rata over the terms of the policies, which are generally one year. Unearned premiums are calculated on the daily pro rata basis. The Company estimates audit premiums and records them as an adjustment to earned premiums. | |||
(h) | Fee Income | ||
PSTS fee income is derived from hardware and computer programming services performed on a per diem basis. Revenues from projects are recognized as the services are rendered. Fee income is being reported through discontinued operations. | |||
(i) | Commission Income | ||
EIG commission income is generally recognized as of the effective date of the insurance policy except for commissions billed on an installment basis, which are recognized periodically as billed. Contingent commissions are recognized in amounts and in the period when management believes |
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December 31, 2007 and 2006
receipt is probable and can be reasonably estimated. Commission income is being reported through discontinued operations. | |||
(j) | Policy Acquisition Costs | ||
Policy acquisition costs, such as commissions, premium taxes, and certain other underwriting expenses that vary with and are primarily related to the production of new and renewal business, have been deferred and are amortized over the effective period of the related insurance policies. The method followed in computing deferred policy acquisitions costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected loss and loss adjustment expenses, may require adjustments to deferred policy acquisition costs. If the estimation of net realizable value indicates that the acquisition costs are unrecoverable, further analyses are completed to determine if a reserve is required to provide for losses that may exceed the related unearned premiums. | |||
(k) | Losses and Loss Adjustment Expenses | ||
The liability for unpaid loss and loss adjustment expenses represents the estimated liability for claims reported to the Company plus claims incurred but not yet reported and the related estimated adjustment expenses. The liability for losses and related loss adjustment expenses is determined using case basis evaluations and statistical analyses. Although considerable variability is inherent in such estimates, management believes that the liabilities for unpaid loss and loss adjustment expenses are reasonable. These estimates are periodically reviewed and adjusted as necessary and such adjustments are reflected in current operations. | |||
The Company’s estimated liability for asbestos and environmental claims is $2,609 at September 30, 2008 (unaudited) and $2,764 and $2,620 at December 31, 2007 and 2006, respectively, a substantial portion of which results from the Company’s participation in assumed reinsurance pools. The estimation of the ultimate liability for these claims is difficult due to outstanding issues such as whether coverage exists, the definition of an occurrence, the determination of ultimate damages, and the allocation of such damages to financially responsible parties. Therefore, any estimation of these liabilities is subject to significantly greater than normal variation and uncertainty. | |||
(l) | Property and Equipment | ||
The costs of property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Maintenance, repairs, and minor renewals are charged to expense as incurred, while expenditures that substantially increase the useful life of the assets are capitalized. Fixed assets are depreciated over three to seven years. Property is depreciated over useful lives generally ranging from five to forty years. | |||
The Company follows the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,Accounting for the Costs of Computer Software |
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December 31, 2007 and 2006
Developed or Obtained for Internal Use. SOP 98-1 provides guidance for determining when computer software developed or obtained for internal use should be capitalized and what costs should be capitalized. It also provides guidance on the amortization of capitalized costs and the recognition of impairment. The Company capitalized costs of $0 in 2008 (unaudited), 2007, and 2006. Capitalized software costs are depreciated over periods ranging from three to five years. | |||
As required by Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company tests for impairment of property, plant, and equipment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As of September 30, 2008, the Company has not recorded an impairment under SFAS No. 144 (unaudited). | |||
(m) | Income Taxes | ||
The Company is included in the federal income tax return of PMMHC. Balances reported by the Company approximate balances reported by PMMHC. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using tax rates and laws that are expected to be in effect when the differences reverse. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. | |||
(n) | Reinsurance Accounting and Reporting | ||
The Company relies upon reinsurance agreements to limit its maximum net loss from large single risks or risks in concentrated areas, and to increase its capacity to write insurance. Reinsurance does not relieve the primary insurer from liability to its policyholders. To the extent that a reinsurer may be unable to pay losses for which it is liable under the terms of a reinsurance agreement, the Company is exposed to the risk of continued liability for such losses. Estimated amounts of reinsurance receivables, net of amounts payable that have the right of offset, are reported as assets in the accompanying consolidated balance sheets. The Company considers numerous factors in choosing reinsurers, the most important of which are the financial stability and creditworthiness of the reinsurer. | |||
(o) | Goodwill | ||
Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141,Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. PSTS and EIG |
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December 31, 2007 and 2006
have goodwill, which is classified as assets held for sale. The Company performed the impairment tests as of September 30, 2008 (unaudited) for EIG, and December 31, 2007, 2006, and 2005 for PSTS and EIG. Goodwill of EIG was tested as of September 30, 2008 (unaudited) due to sales offers and other circumstances that indicated that it was more likely than not that the fair value of the EIG reporting unit was below its carrying amount. Goodwill in PSTS was impaired by $160 as of December 31, 2007. PSTS was sold in July 2008, resulting in a loss on sale of $117 (unaudited). | |||
As of September 30, 2008, the Company determined that the carrying amount of the EIG reporting unit exceeds its fair value (unaudited). The Company has not yet completed the second step of the goodwill impairment test. However, as a goodwill impairment loss is probable and can be reasonably estimated, the Company recognized its best estimate of that loss as of September 30, 2008 (unaudited). The Company estimated that EIG goodwill of $4,747 (unaudited) was impaired by $2,435 (unaudited). The adjusted carrying amount of goodwill of $2,312 is in assets held for sale at September 30, 2008 (unaudited). Management estimated the fair value of the reporting unit based on various offers obtained during their process of selling EIG. The estimate is consistent with recent offers received subsequent to quarter end. The Company will complete step two of the goodwill impairment test in the fourth quarter, and record any necessary adjustment to the goodwill impairment write-down then. Finalization of the process of allocating the fair value of EIG to its net assets, including separately identifiable intangible assets, could cause the current estimates to change. | |||
(p) | Cash and Cash Equivalents | ||
Cash and cash equivalents consist of cash, bank drafts, balances on deposit with banks, and investments with maturity at date of purchase of three months or less in qualified banks and trust companies. | |||
(q) | Recent Accounting Pronouncements | ||
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes, which clarifies the accounting for income tax reserves and contingencies recognized in an enterprise’s financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. On January 1, 2008, the Company adopted FIN 48. The adoption of FIN 48 did not result in any adjustments to beginning retained earnings, nor did it have a significant effect on operations, financial condition, or liquidity. As of September 30, 2008, the Company has no material unrecognized tax benefits (unaudited). | |||
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108,Quantifying Financial Statement Misstatements. SAB No. 108 provides guidance on how to evaluate prior period financial statement misstatements for purposes of assessing their materiality in the current period. SAB No. 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. There are |
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December 31, 2007 and 2006
two widely recognized methods for quantifying the effects on the financial statements: the “rollover” or income statement method and the “iron curtain” or balance sheet method. Historically, the Company used the “rollover” method. Under this method, the Company quantified its financial statement misstatements based on the amount of errors originating in the current year income statement and as a result did not consider the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. SAB No. 108 now requires that the Company must consider both the rollover and iron curtain methods (dual method) when quantifying misstatements in the financial statements. The iron curtain method quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the timing of the misstatement’s origination. | |||
The Company had previously identified that it had incorrectly accounted for contingent commissions in connection with the acquisition of GSR in 2005. At the time, the Company allocated $187 received for contingent commissions subsequent to the acquisition, which were then passed through to the seller, pursuant to the contract, to the purchase price, and also recognized revenue for that amount. This resulted in a $187 overstatement of goodwill and revenue, net of $64 in related tax, for the twelve month period ending December 31, 2005. Prior to the adoption of SAB No. 108, the Company determined this misstatement was not material to the financial statements using the income statement approach. The error was considered material using the dual method approach. | |||
Upon initial application, SAB No. 108 permits the Company to adjust for the cumulative effect of errors that were previously considered immaterial under the rollover method that are now considered material under the dual method. Consequently, the Company recorded a decrease in goodwill in the amount of $187, an increase to income taxes receivable of $64, and a decrease in retained earnings of $123 as of January 1, 2008 (unaudited). | |||
In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a single employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. SFAS No. 158 also requires fiscal year-end measurement of defined benefit plan assets and benefit obligations. SFAS No. 158 amends SFAS Nos. 87, 88, 106, and 132(R). The requirement to recognize the funded status of a benefit plan and the disclosure requirements was effective for the Company’s fiscal year ended December 31, 2007. The Company recorded an adjustment of $994, net of $512 in related tax, to accumulated other comprehensive income (loss) upon adoption. The requirement to measure plan assets and benefit obligations as of the date of Company’s fiscal year-end balance sheet date is effective for the Company’s fiscal year ending December 31, 2008. This requirement had no effect on the Company (unaudited). | |||
In September 2006, FASB issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value but does not |
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December 31, 2007 and 2006
require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 establishes a fair value hierarchy to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets. The highest possible level should be used to measure fair value. The Company adopted SFAS No. 157 effective January 1, 2008. The Company’s adoption of SFAS No. 157 did not have a material effect on its results of operations, financial position, or liquidity (unaudited). | |||
In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2,Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities until January 1, 2009, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, the provisions of SFAS No. 157 were not applied to goodwill and other intangible assets held by the Company and measured annually for impairment testing purposes only. | |||
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates. Upon adoption, an entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Most of the provisions apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective on January 1, 2008 for the Company. The Company did not elect to use the fair value option for any assets or liabilities (unaudited). | |||
In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities and specifically requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The provisions of SFAS 161 are effective for the Company beginning January 1, 2009. The Company is currently evaluating the effect, if any, that the adoption of SFAS 161 will have on its financial statements (unaudited). | |||
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles(SFAS 162), to identify the sources of accounting principles and provide a framework for selecting the principles to be used in the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The hierarchy of authoritative accounting guidance is not expected to change current practice but is expected to facilitate the FASB’s plan to designate as authoritative its forthcoming codification of accounting standards. SFAS 162 is effective |
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December 31, 2007 and 2006
November 15, 2008. The Company’s adoption did not result in any significant financial statement impact (unaudited). |
(3) | Fair Value Measurements (Unaudited) | |
Effective January 1, 2008, upon adoption of SFAS No. 159, the Company did not elect the fair value option for any assets or liabilities that were not otherwise already carried at fair value in accordance with other accounting pronouncements. | ||
In accordance with SFAS No. 157, the Company’s financial assets and financial liabilities measured at fair value are categorized into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: | ||
Level 1 — Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access. | ||
Level 2 — Valuations based on observable inputs, other than quoted prices included in Level 1, for assets and liabilities traded in less active dealer or broker markets. Valuations are based on identical or comparable assets and liabilities. | ||
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections that are often unobservable in determining the fair value assigned to such assets or liabilities. | ||
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis. |
September 30, 2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(Unaudited) | ||||||||||||||||
Fixed maturities, available for sale | $ | 7,297 | 100,033 | — | 107,330 | |||||||||||
Equity securities | 15,913 | — | — | 15,913 | ||||||||||||
Total assets | $ | 23,210 | 100,033 | — | 123,243 | |||||||||||
Accounts payable and accrued expenses | $ | — | 29 | — | 29 | |||||||||||
Total liabilities | $ | — | 29 | — | 29 | |||||||||||
The Company uses quoted values and other data provided by a nationally recognized independent pricing service as inputs into its process for determining fair values of its investments. The pricing service covers more than 95% of the Company’s securities. Its evaluations represent an exit price; a good faith opinion as |
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December 31, 2007 and 2006
to what a buyer in the marketplace would pay for a security in a current sale. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in markets that are active, quoted prices for similar securities at the measurement date, quoted prices in markets that are not active, or other inputs that are observable. | ||
The Company classifies U.S. Treasury debt securities as level 1. | ||
The fair values for securities included in level 2 are primarily based upon a model which uses standard inputs including (listed in order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data. The model is a multidimensional relational model and uses the Option Adjusted Spread (OAS) process to develop prepayment and interest rate scenarios for securities that have prepayment features. Management and the pricing service also monitor market indicators and industry and economic events. | ||
Included in accounts payable and accrued expenses is an interest rate swap agreement (see note 14). Management estimates the fair value of the interest rate swap based on information obtained from a third-party financial institution counterparty. Management also considers the prevailing interest rate environment as a key input into the valuation of the swap. |
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December 31, 2007 and 2006
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
September 30, 2008 (unaudited): | ||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 14,522 | 249 | 94 | 14,677 | |||||||||||
U.S. treasuries | 7,010 | 289 | 3 | 7,296 | ||||||||||||
State and political subdivisions | 29,124 | 593 | 282 | 29,435 | ||||||||||||
Mortgage-backed securities | 20,266 | 134 | 383 | 20,017 | ||||||||||||
Corporate securities | 38,017 | 168 | 2,280 | 35,905 | ||||||||||||
Total fixed maturities | $ | 108,939 | 1,433 | 3,042 | 107,330 | |||||||||||
Total equity securities | $ | 15,913 | — | — | 15,913 | |||||||||||
December 31, 2007: | ||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 18,523 | 372 | 7 | 18,888 | |||||||||||
U.S. treasuries | 7,837 | 259 | — | 8,096 | ||||||||||||
State and political subdivisions | 30,321 | 827 | 14 | 31,134 | ||||||||||||
Mortgage-backed securities | 20,636 | 207 | 119 | 20,724 | ||||||||||||
Corporate securities | 33,656 | 503 | 232 | 33,927 | ||||||||||||
Total fixed maturities | $ | 110,973 | 2,168 | 372 | 112,769 | |||||||||||
Total equity securities | $ | 10,525 | 2,928 | 44 | 13,409 | |||||||||||
December 31, 2006: | ||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 18,657 | 126 | 181 | 18,602 | |||||||||||
U.S. treasuries | 8,852 | 79 | 72 | 8,859 | ||||||||||||
State and political subdivisions | 26,538 | 610 | 101 | 27,047 | ||||||||||||
Mortgage-backed securities | 11,618 | 49 | 179 | 11,488 | ||||||||||||
Corporate securities | 33,964 | 297 | 351 | 33,910 | ||||||||||||
Total fixed maturities | $ | 99,629 | 1,161 | 884 | 99,906 | |||||||||||
Total equity securities | $ | 10,476 | 3,258 | 37 | 13,697 | |||||||||||
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December 31, 2007 and 2006
September 30, 2008 | December 31, 2007 | |||||||||||||||
(Unaudited) | ||||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
cost | fair value | cost | fair value | |||||||||||||
Due in one year or less | $ | 8,194 | 7,978 | 12,704 | 12,715 | |||||||||||
Due after one year through five years | 40,035 | 39,933 | 47,751 | 48,811 | ||||||||||||
Due after five years through ten years | 37,260 | 36,349 | 27,954 | 28,567 | ||||||||||||
Due after ten years | 3,184 | 3,053 | 1,928 | 1,952 | ||||||||||||
88,673 | 87,313 | 90,337 | 92,045 | |||||||||||||
Mortgage-backed securities | 20,266 | 20,017 | 20,636 | 20,724 | ||||||||||||
$ | 108,939 | 107,330 | 110,973 | 112,769 | ||||||||||||
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Interest on fixed maturities | $ | 4,068 | 3,807 | 5,157 | 4,519 | 4,345 | ||||||||||||||
Dividends on equity securities | 215 | 176 | 251 | 247 | 312 | |||||||||||||||
Interest on cash and cash equivalents | 182 | 361 | 456 | 413 | 269 | |||||||||||||||
Total investments income | 4,465 | 4,344 | 5,864 | 5,179 | 4,926 | |||||||||||||||
Investment expense | (389 | ) | (408 | ) | (540 | ) | (502 | ) | (482 | ) | ||||||||||
Investment income, net of investment expense | $ | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | ||||||||||||||
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December 31, 2007 and 2006
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Fixed maturity securities: | ||||||||||||||||||||
Available for sale: | ||||||||||||||||||||
Gross gains | $ | 78 | — | — | 2 | 43 | ||||||||||||||
Gross losses | (108 | ) | (77 | ) | (77 | ) | (16 | ) | (40 | ) | ||||||||||
Equity securities: | ||||||||||||||||||||
Gross gains | 1,808 | 522 | 524 | 453 | 664 | |||||||||||||||
Gross losses | (112 | ) | — | (480 | ) | (87 | ) | (129 | ) | |||||||||||
Other-than-temporary impairment charges | (2,922 | ) | — | (620 | ) | — | (141 | ) | ||||||||||||
Other | (3 | ) | (22 | ) | (49 | ) | (3 | ) | 27 | |||||||||||
Realized investment (losses) gains, net | $ | (1,259 | ) | 423 | (702 | ) | 349 | 424 | ||||||||||||
Change in difference between fair value and cost of investments: | ||||||||||||||||||||
Fixed maturity securities | $ | (3,405 | ) | 66 | 1,519 | (392 | ) | (2,442 | ) | |||||||||||
Equity securities | (2,884 | ) | (190 | ) | (337 | ) | 1,423 | (1,236 | ) | |||||||||||
Total | $ | (6,289 | ) | (124 | ) | 1,182 | 1,031 | (3,678 | ) | |||||||||||
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Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of securities | value | losses | value | losses | value | losses | ||||||||||||||||||
September 30, 2008 (unaudited): | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 3,899 | 94 | — | — | 3,899 | 94 | |||||||||||||||||
U.S. treasuries | 272 | 3 | — | — | 272 | 3 | ||||||||||||||||||
State and political subdivisions | 4,414 | 150 | 3,655 | 132 | 8,069 | 282 | ||||||||||||||||||
Mortgage-backed securities | 2,187 | 60 | 8,049 | 323 | 10,236 | 383 | ||||||||||||||||||
Corporate securities | 13,604 | 1,044 | 12,245 | 1,236 | 25,849 | 2,280 | ||||||||||||||||||
Total fixed maturities | 24,376 | 1,351 | 23,949 | 1,691 | 48,325 | 3,042 | ||||||||||||||||||
Total temporarily impaired securities | $ | 24,376 | 1,351 | 23,949 | 1,691 | 48,325 | 3,042 | |||||||||||||||||
December 31, 2007: | �� | |||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | — | — | 4,199 | 7 | 4,199 | 7 | |||||||||||||||||
U.S. treasuries | — | — | — | — | — | — | ||||||||||||||||||
State and political subdivisions | 516 | 1 | 3,669 | 13 | 4,185 | 14 | ||||||||||||||||||
Mortgage-backed securities | 497 | — | 9,150 | 119 | 9,647 | 119 | ||||||||||||||||||
Corporate securities | 2,665 | 44 | 8,662 | 188 | 11,327 | 232 | ||||||||||||||||||
Total fixed maturities | 3,678 | 45 | 25,680 | 327 | 29,358 | 372 | ||||||||||||||||||
Equity securities | 760 | 43 | 326 | 1 | 1,086 | 44 | ||||||||||||||||||
Total temporarily impaired securities | $ | 4,438 | 88 | 26,006 | 328 | 30,444 | 416 | |||||||||||||||||
December 31, 2006: | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 1,749 | 4 | 13,924 | 177 | 15,673 | 181 | |||||||||||||||||
U.S. treasuries | 1,006 | — | 3,718 | 72 | 4,724 | 72 | ||||||||||||||||||
State and political subdivisions | 532 | 3 | 6,878 | 98 | 7,410 | 101 | ||||||||||||||||||
Mortgage-backed securities | 232 | 1 | 8,392 | 178 | 8,624 | 179 | ||||||||||||||||||
Corporate securities | 4,428 | 26 | 21,946 | 325 | 26,374 | 351 | ||||||||||||||||||
Total fixed maturities | 7,947 | 34 | 54,858 | 850 | 62,805 | 884 | ||||||||||||||||||
Equity securities | 480 | 9 | 367 | 28 | 847 | 37 | ||||||||||||||||||
Total temporarily impaired securities | $ | 8,427 | 43 | 55,225 | 878 | 63,652 | 921 | |||||||||||||||||
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December 31, 2007 and 2006
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December 31, 2007 and 2006
Impairment charges of $2,922 and $0, for the nine months ended September 30, 2008 and 2007 (unaudited), and $620, $0, and $141 for the years ended December 31, 2007, 2006, and 2005, respectively, were recorded within realized net investment (losses) gains on the accompanying consolidated statements of operations. See the Company policy for recording an impairment loss in note 2. | ||
The Company does not engage in subprime residential mortgage lending. The only securitized financial assets that the Company owns are mortgage backed securities of high credit quality. The Company’s exposure to subprime lending is limited to investments in corporate bonds of banks, which may contain some subprime loans on their balance sheets. These bonds are reported at fair value. As of September 30, 2008, fixed income securities issued by banks accounted for only 2.3% of the bond portfolio’s book value (unaudited). None of the Company’s fixed income securities have defaulted or required an impairment charge due to the subprime credit crisis (unaudited). | ||
(5) | Comprehensive Income | |
Comprehensive (loss) income for the nine months ended September 30, 2008 and 2007 and the years ended December 31, 2007, 2006, and 2005 consisted of the following: |
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Net (loss) income | $ | (2,485 | ) | 2,721 | 1,086 | 2,080 | 474 | |||||||||||||
Other comprehensive (loss) income: | ||||||||||||||||||||
Unrealized (losses) gains on securities: | ||||||||||||||||||||
Unrealized investment holding (losses) gains arising during period | (4,986 | ) | 214 | 348 | 913 | (2,165 | ) | |||||||||||||
Less: | ||||||||||||||||||||
Reclassification adjustment for losses (gains) included in net income | 828 | (294 | ) | 431 | (232 | ) | (262 | ) | ||||||||||||
Net unrealized investment (losses) gains | (4,158 | ) | (80 | ) | 779 | 681 | (2,427 | ) | ||||||||||||
Defined benefit pension plans: | ||||||||||||||||||||
Recognized net actuarial gain | 36 | — | — | — | — | |||||||||||||||
Other comprehensive (loss) income | (4,122 | ) | (80 | ) | 779 | 681 | (2,427 | ) | ||||||||||||
Comprehensive (loss)income | $ | (6,607 | ) | 2,641 | 1,865 | 2,761 | (1,953 | ) | ||||||||||||
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Accumulated other comprehensive (loss) income at September 30, 2008 and December 31, 2007 and 2006 consisted of the following amounts: |
September 30, | December 31, | December 31, | ||||||||||
2008 | 2007 | 2006 | ||||||||||
(Unaudited) | ||||||||||||
Unrealized investment (losses) gains, net of tax | $ | (1,056 | ) | 3,102 | 2,323 | |||||||
Defined benefit pension plan — net actuarial loss | (958 | ) | (994 | ) | — | |||||||
Accumulated other comprehensive (loss) income | $ | (2,014 | ) | 2,108 | 2,323 | |||||||
(6) | Deferred Policy Acquisition Costs | |
Changes in deferred policy acquisition costs for the nine months ended September 30, 2008 and 2007 and the years ended December 31, 2007, 2006, and 2005 are as follows: |
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Balance, January 1 | $ | 11,014 | 10,381 | 10,381 | 9,646 | 10,352 | ||||||||||||||
Acquisition costs deferred | 17,665 | 17,000 | 22,563 | 20,815 | 20,850 | |||||||||||||||
Amortization charged to earnings | (17,401 | ) | (16,385 | ) | (21,930 | ) | (20,080 | ) | (21,556 | ) | ||||||||||
Balance, December 31 | $ | 11,278 | 10,996 | 11,014 | 10,381 | 9,646 | ||||||||||||||
(7) | Property and Equipment | |
Property and equipment consisted of land and buildings with a cost of $5,592 and $5,538 and equipment, capitalized software costs, and other items with a cost of $8,625 and $7,760 at December 31, 2007 and 2006, respectively. Accumulated depreciation related to such assets was $9,816 and $9,070 at December 31, 2007 and 2006, respectively. | ||
Rental expense under leases amounted to $540, $509, and $539 for 2007, 2006, and 2005, respectively. |
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At December 31, 2007, the minimum aggregate rental and lease commitments for continuing operations are as follows: |
2008 | $ | 132 | ||
2009 | 116 | |||
2010 | 57 | |||
2011 | 10 | |||
Total | $ | 315 | ||
(8) | Long-Term Debt | |
Long-term debt related to continuing operations at September 30, 2008 and December 31, 2007 and 2006 consisted of the following: |
September 30, | December 31, | |||||||||||
2008 | 2007 | 2006 | ||||||||||
(Unaudited) | ||||||||||||
Term loan agreement — due 2010 | $ | 1,510 | 1,745 | 2,057 | ||||||||
Long-term debt | $ | 1,510 | 1,745 | 2,057 | ||||||||
Long-term debt, recorded within liabilities held for sale, at September 30, 2008 and December 31, 2007 and 2006 consisted of the following: |
September 30, | December 31, | |||||||||||
2008 | 2007 | 2006 | ||||||||||
(Unaudited) | ||||||||||||
Acquisition payables | $ | 285 | 545 | 835 | ||||||||
Long-term debt | $ | 285 | 545 | 835 | ||||||||
The Company has a term loan agreement due in 2010. The term loan requires monthly principal payments of $26, plus interest, based on a five-year amortization schedule. Interest is based on the London Interbank Offered Rate (5.2% at December 31, 2007) plus a spread of 105 basis points through its maturity in July 2010. The term loan agreement subjects the Company to certain covenants and restrictions, including limitations on additional borrowing arrangements, encumbrances, and sales of assets. Covenants also include maintenance of various financial ratios and amounts. The Company was in compliance with these covenants at September 30, 2008 (unaudited) and December 31, 2007 and 2006. |
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As further discussed in note 17, installment payments relating to the acquisition of GSR are due in four installments over a four-year term under the purchase agreement. At September 30, 2008, one payment totaling $285, net of imputed interest computed at a 5.5% interest rate, remains and will be paid by March 1, 2009. | ||
The following is a schedule of maturities of the long-term debt from continuing operations as of September 30, 2008 (unaudited): |
2008 | $ | 78 | ||
2009 | 312 | |||
2010 | 1,120 | |||
Total | $ | 1,510 | ||
Interest paid for the nine months ended September 30, 2008 and 2007 was $70 and $93 (unaudited), respectively, and $108, $218, and $167 as of December 2007, 2006, and 2005, respectively. |
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(9) | Employee Benefit Plans | |
The Company has a noncontributory defined benefit pension plan covering substantially all employees. Retirement benefits are a function of both the years of service and level of compensation. It is the Company’s policy to fund the plan in amounts equal to the amount deductible for federal income tax purposes. The Company also sponsors a nonqualifying Supplemental Executive Retirement Plan (SERP). The SERP, which is unfunded, provides defined pension benefits outside of the qualified defined benefit pension plan to eligible executives based on average earnings, years of service, and age at retirement. |
(a) | Obligations and Funded Status at December 31 |
2007 | 2006 | |||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 9,552 | 8,935 | |||||
Service cost | 656 | 618 | ||||||
Interest cost | 582 | 512 | ||||||
Benefit payments | (699 | ) | (501 | ) | ||||
Administrative expenses | (26 | ) | (44 | ) | ||||
Actuarial (gain) loss | (297 | ) | 32 | |||||
Benefit obligation at end of year | $ | 9,768 | 9,552 | |||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 6,476 | 6,044 | |||||
Employer contributions | 455 | 197 | ||||||
Benefit payments | (699 | ) | (501 | ) | ||||
Administrative expenses | (26 | ) | (44 | ) | ||||
Actuarial return on plan assets | 33 | 780 | ||||||
Fair value of plan assets at end of year | $ | 6,239 | 6,476 | |||||
Reconciliation of funded status at end of year: | ||||||||
Funded status | $ | (3,529 | ) | (3,076 | ) | |||
Unrecognized prior service cost | — | 874 | ||||||
Unrecognized net loss | — | 543 | ||||||
Net liability recognized | $ | (3,529 | ) | (1,659 | ) | |||
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December 31, 2007 and 2006
2007 | 2006 | |||||||
Accrued benefit cost | $ | (3,529 | ) | (2,058 | ) | |||
Intangible assets | — | 399 | ||||||
Net amount recognized | $ | (3,529 | ) | (1,659 | ) | |||
2007 | ||||
Unrecognized prior service cost | $ | 811 | ||
Unrecognized net gain | 695 | |||
Accumulated other comprehensive income | $ | 1,506 | ||
The accumulated benefit obligation for the qualified defined benefit pension plan was $6,126 and $7,914 at December 31, 2007 and 2006, respectively. | ||
The accumulated benefit obligation and projected benefit obligation of the SERP were $1,870 and $2,193, respectively, at December 31, 2007 and $1,787 and $2,001, respectively, at December 31, 2006. |
(b) | Components of Net Periodic Benefit Cost |
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Service cost | $ | 538 | 481 | 656 | 618 | 3,025 | ||||||||||||||
Interest cost | 463 | 426 | 582 | 512 | 404 | |||||||||||||||
Expected return on plan assets | (388 | ) | (367 | ) | (489 | ) | (440 | ) | (500 | ) | ||||||||||
Amortization of prior service costs | 47 | 47 | 62 | 62 | 22 | |||||||||||||||
Amortization of net loss | 7 | 5 | 7 | 36 | — | |||||||||||||||
Net periodic pension expense | $ | 667 | 592 | 818 | 788 | 2,951 | ||||||||||||||
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(c) | Assumptions |
Weighted average assumptions used to determine benefit obligations at December 31, 2007 and 2006 are as follows: |
2007 | 2006 | |||||||
Discount rate | 6.40 | % | 6.40 | % | ||||
Expected long-term return on plan assets | 4.00 | % | 4.00 | % |
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2007 and 2006 are as follows: |
2007 | 2006 | |||||||
Discount rate | 6.00 | % | 5.75 | % | ||||
Expected long-term return on plan assets | 7.50 | % | 7.50 | % | ||||
Rate of compensation increase | 4.00 | % | 4.00 | % |
Discount rates are selected considering yields available on high quality debt instruments at durations that approximate the timing of the benefit payments for the pension liabilities at the measurement date. The expected rate of return reflects the Company’s long term expectation of earnings on the assets held in the plan trust, taking into account asset allocations, investment strategy, the views of the asset managers, and the historical performance. |
(d) | Plan Assets |
The pension plan’s asset allocation at December 31, 2007 and 2006, by asset category, is as follows: |
Plan assets at December 31 | ||||||||
2007 | 2006 | |||||||
Asset | ||||||||
Equity securities | 57 | % | 68 | % | ||||
Fixed income securities | 41 | 22 | ||||||
Cash and cash equivalents | 2 | 10 | ||||||
Total | 100 | % | 100 | % | ||||
The Company maintains an investment policy for the pension plan. The overall investment strategy is to maintain appropriate liquidity to meet the cash requirements of the short-term plan obligations and to maximize the plan’s return while adhering to the policy’s objectives and risk guidelines, as well as the regulations set forth by various government entities. The policy sets forth asset allocation guidelines that emphasize U.S. investments with strong credit quality and restrict traditionally risky |
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investments. Currently, the targeted allocation is 60% U.S. common stocks, 33% corporate bonds (A rated or better), 5% U.S. government and agency securities, and 2% cash. |
(e) | Cash Flows |
Estimated Future Benefit Payments |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: |
2008 | $ | 1,188 | ||
2009 | 247 | |||
2010 | 213 | |||
2011 | 405 | |||
2012 | 1049 | |||
2013 — 2015 | 3,760 |
The Company made contributions of $1,399 for the nine months ended September 30, 2008 (unaudited). The Company’s 2009 contribution to the plan is expected to increase due to changes in the fair value of plan assets and regulatory changes affecting the plan. |
The Company has a defined contribution benefit plan sponsored by PMIC covering all employees who have attained age 21. Eligible employees may contribute up to 30% of their salary to the plan, subject to statutory limits. The Company matches 50% of employee contributions up to 3% of employee compensation. Amounts charged to operations for the nine months ended September 30, 2008 and 2007 were $192 and $176 (unaudited), respectively, and $242, $219, and $205 for the twelve months ended December 31, 2007, 2006, and 2005, respectively. |
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(10) | Federal Income Tax | |
Components of the provision for income tax expense (benefit) from continuing operations for the nine months ended September 30, 2008 and 2007 and the years ended December 31, 2007, 2006 and 2005 are as follows: |
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Current expense: | ||||||||||||||||||||
Federal | $ | 421 | 1,072 | 604 | 1,018 | 470 | ||||||||||||||
Deferred benefit: | ||||||||||||||||||||
Federal | (281 | ) | (71 | ) | (208 | ) | (512 | ) | (766 | ) | ||||||||||
Total tax expense (benefit) | $ | 140 | 1,001 | 396 | 506 | (296 | ) | |||||||||||||
The Company’s net payments (refunds) for income taxes for the nine months ended September 30, 2008 and 2007 were $45 and $1,963 (unaudited), respectively, and $1,963, $(20), and $1,615 for the years ended December 31, 2007, 2006, and 2005, respectively. |
A reconciliation of the expected and actual federal income tax expense (benefit) from continuing operations for the nine months ended September 30, 2008 and 2007 and the years ended December 31, 2007, 2006, and 2005 is as follows: |
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Expected tax at 34% | $ | 37 | 1,166 | 627 | 822 | (32 | ) | |||||||||||||
Nontaxable investment income | (309 | ) | (276 | ) | (378 | ) | (355 | ) | (299 | ) | ||||||||||
Accrual adjustment | 20 | 73 | 96 | 8 | — | |||||||||||||||
Deferred tax asset valuation reserve | 403 | — | — | — | — | |||||||||||||||
Other items, net | (11 | ) | 38 | 51 | 31 | 35 | ||||||||||||||
Total tax expense (benefit) | $ | 140 | 1,001 | 396 | 506 | (296 | ) | |||||||||||||
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Deferred income taxes reflect the tax effect of temporary differences between the amounts of assets and liabilities for financial reporting and the amounts for income tax purposes. Components of the Company’s deferred tax assets and liabilities from continuing operations for the nine months ended September 30, 2008 and the years ended December 31, 2007 and 2006 are as follows: |
September 30, | December 31 | |||||||||||
2008 | 2007 | 2006 | ||||||||||
(Unaudited) | ||||||||||||
Deferred tax assets: | ||||||||||||
Unearned premium reserve | $ | 2,951 | 2,881 | 2,664 | ||||||||
Discounting of unpaid losses | 3,259 | 2,961 | 2,756 | |||||||||
Accrued retirement benefit | 933 | 918 | 596 | |||||||||
Unrealized investment losses | 547 | — | — | |||||||||
Investment impairments | 993 | 258 | 48 | |||||||||
Guaranty fund liability | 488 | 442 | 406 | |||||||||
Accrued severance costs | 185 | 271 | 206 | |||||||||
Accrued vacation expense | 102 | 92 | 83 | |||||||||
Bad debt reserve | 86 | 100 | 85 | |||||||||
Other items | 92 | 50 | 28 | |||||||||
Total deferred tax assets | 9,636 | 7,973 | 6,872 | |||||||||
Valuation reserve | (403 | ) | — | — | ||||||||
Deferred tax assets after valuation allowance | 9,233 | 7,973 | 6,872 | |||||||||
Deferred tax liabilities: | ||||||||||||
Deferred policy acquisition costs | 3,835 | 3,745 | 3,530 | |||||||||
Stop loss benefit | 245 | — | — | |||||||||
Unrealized investment gains | — | 1,598 | 1,197 | |||||||||
Depreciation and amortization | 181 | 88 | 126 | |||||||||
Accrued Premium tax credits | 189 | 189 | 189 | |||||||||
Company-owned life insurance | 103 | 88 | 39 | |||||||||
Prepaid expenses | 223 | 109 | 82 | |||||||||
Other items | 140 | 284 | 270 | |||||||||
Total deferred tax liabilities | 4,916 | 6,101 | 5,433 | |||||||||
Net deferred tax asset | $ | 4,317 | 1,872 | 1,439 | ||||||||
A valuation reserve is required to be established for any portion of the deferred tax asset that management believes more likely than not will not be realized. Based on the level of capital losses incurred by the Company in 2008, the Company believes it is more likely than not that a portion of the deferred tax asset |
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associated with certain losses will not be realized. As of September 30, 2008, the Company recorded a valuation reserve of $403 (unaudited) associated with these items. | ||
Effective January 1, 2008, the Company adopted FIN 48. As of January 1, 2008 and September 30, 2008 (unaudited), the Company had no material unrecognized tax benefits or accrued interest and penalties. The Company’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. Federal tax years 2005 through 2007 were open for examination as of September 30, 2008 (unaudited). | ||
(11) | Reinsurance | |
Reinsurance is ceded by the Company on pro rata and excess of loss basis, with the Company’s retention generally at $500 per occurrence in 2007 and 2006, respectively, and $300 per occurrence in 2005. The Company purchased catastrophe excess-of-loss reinsurance with a retention of $2,000 per event in 2007 and $1,500 and $1,000 in 2006 and 2005, respectively. | ||
Effective January 1, 2008, the Company renewed its reinsurance coverage with a number of changes. The Company continues to retain $500 on any individual property and casualty risk. However, in 2008, the Company now retains 75% of losses in excess of $500 to $1,000 and 25% of losses in excess of $1,000 to $5,000. As a complement to this increased retention, the Company entered into a whole account, accident year aggregate excess of loss contract that covers accident years 2008 and 2009. The reinsurance contract provides coverage in the event that the accident year loss ratio exceeds 72% (unaudited). | ||
The Company’s assumed reinsurance relates primarily to its participation in various involuntary pools and associations and the runoff of the Company’s participation in voluntary reinsurance agreements that have been terminated. | ||
The effect of reinsurance, with respect to premiums and losses, for the nine months ended September 30, 2008 and 2007 and the year ended December 31, 2007, 2006, and 2005 is as follows: |
Nine months ended | ||||||||||||||||||||||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||||||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||||||||||||||
Direct | $ | 73,211 | 72,166 | 70,377 | 67,319 | 94,073 | 90,796 | 84,544 | 81,223 | 84,084 | 86,667 | |||||||||||||||||||||||||||||
Assumed | 1,132 | 1,034 | 1,001 | 962 | 1,203 | 1,215 | 1,725 | 1,693 | 2,091 | 2,260 | ||||||||||||||||||||||||||||||
Ceded | (14,002 | ) | (13,881 | ) | (14,772 | ) | (14,791 | ) | (21,157 | ) | (21,041 | ) | (18,744 | ) | (18,271 | ) | (24,118 | ) | (24,204 | ) | ||||||||||||||||||||
Net | $ | 60,341 | 59,319 | 56,606 | 53,490 | 74,119 | 70,970 | 67,525 | 64,645 | 62,057 | 64,723 | |||||||||||||||||||||||||||||
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December 31, 2007 and 2006
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Direct | $ | 49,822 | 45,754 | 59,245 | 49,629 | 49,962 | ||||||||||||||
Assumed | 1,120 | 1,317 | 1,845 | 3,085 | 3,269 | |||||||||||||||
Ceded | (8,681 | ) | (11,538 | ) | (11,307 | ) | (8,948 | ) | (12,989 | ) | ||||||||||
Net | $ | 42,261 | 35,533 | 49,783 | 43,766 | 40,242 | ||||||||||||||
Nine months | ||||||||||||||||
ended | ||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||
2008 | 2007 | 2006 | 2005 | |||||||||||||
(Unaudited) | ||||||||||||||||
Direct | $ | 47,637 | 46,576 | 43,262 | 39,984 | |||||||||||
Assumed | 116 | 19 | 32 | — | ||||||||||||
Prepaid reinsurance (ceded) | (4,355 | ) | (4,234 | ) | (4,119 | ) | (3,645 | ) | ||||||||
Net | $ | 43,398 | 42,361 | 39,175 | 36,339 | |||||||||||
Nine months | ||||||||||||||||
ended | ||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||
2008 | 2007 | 2006 | 2005 | |||||||||||||
(Unaudited) | ||||||||||||||||
Direct | $ | 93,029 | 85,614 | 79,338 | 74,318 | |||||||||||
Assumed | 10,249 | 10,342 | 10,067 | 9,531 | ||||||||||||
Gross | $ | 103,278 | 95,956 | 89,405 | 83,849 | |||||||||||
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December 31, 2007 and 2006
Nine months ended | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Balance at January 1 | $ | 95,956 | 89,405 | 89,405 | 83,849 | 73,287 | ||||||||||||||
Less reinsurance recoverables | 18,727 | 20,089 | 20,089 | 22,817 | 17,483 | |||||||||||||||
Net liability at January 1 | 77,229 | 69,316 | 69,316 | 61,032 | 55,804 | |||||||||||||||
Incurred related to: | ||||||||||||||||||||
Current year | 46,807 | 38,947 | 54,421 | 43,785 | 41,320 | |||||||||||||||
Prior years | (4,546 | ) | (3,414 | ) | (4,638 | ) | (19 | ) | (1,078 | ) | ||||||||||
Total incurred | 42,261 | 35,533 | 49,783 | 43,766 | 40,242 | |||||||||||||||
Paid related to: | ||||||||||||||||||||
Current year | 18,719 | 15,178 | 22,191 | 14,222 | 15,725 | |||||||||||||||
Prior years | 18,231 | 16,568 | 19,679 | 21,260 | 19,289 | |||||||||||||||
Total paid | 36,950 | 31,746 | 41,870 | 35,482 | 35,014 | |||||||||||||||
Net liability at period-end | 82,540 | 73,103 | 77,229 | 69,316 | 61,032 | |||||||||||||||
Add reinsurance recoverables | 20,738 | 22,886 | 18,727 | 20,089 | 22,817 | |||||||||||||||
Balance at period-end | $ | 103,278 | 95,989 | 95,956 | 89,405 | 83,849 | ||||||||||||||
The Company recognized favorable development in the provision for insured events of prior years of $4,638, $19, and $1,078 in 2007, 2006, and 2005, respectively. Development for the nine months ended September 30, 2008 and 2007 was favorable in the amount of $4,546 and $3,414 (unaudited), respectively. Increases or decreases of this nature occur as the result of claim settlements during the current year, and as additional information is received regarding individual claims, causing changes from the original estimates of the cost of these claims. Recent loss development trends are also taken into account in evaluating the overall adequacy of unpaid losses and loss adjustment expenses. | ||
The favorable development for the nine-month period ended September 30, 2008 is primarily attributable to decreases in severity in the workers’ compensation and other liability lines of business. The fire and allied lines also experienced favorable development as prior year reported claims settled for less than originally estimated (unaudited). | ||
The development for the nine- (unaudited) and twelve-month periods of 2007 is primarily attributable to a decrease in frequency and severity in commercial auto liability and decreasing severity in workers compensation. The fire and allied and product liability lines also experienced favorable development as |
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December 31, 2007 and 2006
prior year claims settled for less than originally estimated. This favorable development was partly offset by unfavorable development in commercial multiple peril, which saw an increase in newly reported claims for the 2005 accident year and other liability, which experienced reductions in the estimate for ultimate ceded losses. | ||
The 2006 development is attributable to a reduction in workers compensation and other liability severity, which was partly offset by unfavorable development in fire lines on 2005 claims and in commercial multiperil lines due to greater than expected claims severity on paid losses and loss adjustment expenses in the 2002 and 2003 accident years. | ||
The 2005 development is primarily attributable to improved loss experience in the commercial auto liability and commercial multiperil lines of business. | ||
(13) | Line of Credit | |
In August 2007, the Company amended its bank agreement to decrease the unsecured line of credit from $4,000 to $2,500. At December 31, 2007 and 2006, a total of $0 and $250, respectively, was outstanding with the remaining $2,500 at December 31, 2007 from the line of credit unused and available for general corporate purposes. In October 2008, the Company amended the bank agreement to decrease the unsecured line of credit from $2,500 to $500 (unaudited). | ||
The credit line bears interest at a rate equal to the London Interbank Offered Rate (5.2% at December 31, 2007) plus a spread of 105 basis points. Any balances outstanding under the line of credit at July 1, following the date in which the loan is taken will be converted into a term loan. The term shall not exceed five years. | ||
The bank credit agreements subject the Company to certain covenants and restrictions, including limitations on additional borrowing arrangements, encumbrances, and sales of assets. Covenants also include maintenance of various financial ratios and amounts. The Company was in compliance with these covenants at September 30, 2008 (unaudited) and December 31, 2007 and 2006. | ||
The line-of-credit agreement expires on June 30, 2010. | ||
Interest paid for the nine months ended September 30, 2008 and 2007 and the twelve months ended December 31, 2007, 2006, and 2005 relating to this unsecured bank credit agreement was $0 and $10 (unaudited), $14, $6, and $32, respectively. | ||
In December 2008, the Company entered into a bank agreement for $2,000 in an unsecured line of credit, all of which is available to finance temporary increased working capital needs primarily associated with costs for a minority public offering (unaudited). | ||
The credit line bears interest at a rate equal to the London Interbank Offered Rate plus a spread of 211 basis points. Accrued interest on the outstanding balance will commence on December 31, 2008. In any event, all principal and accrued interest is due and payable on July 31, 2009 (unaudited). |
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December 31, 2007 and 2006
(14) | Interest Rate Swap Agreement | |
The Company entered into an interest rate swap agreement in 2005 to manage interest rate risk associated with its variable rate debt. The fixed interest rate as a result of the agreement is 5.55% for the full five-year term of the debt. The notional amount of the swap is $1,510 at September 30, 2008 (unaudited), and $1,745 and $2,057 at December 31, 2007 and 2006, respectively. Investment losses of $3 and $22 were recorded within net realized investment (losses) gains on the consolidated statements of operations at September 30, 2008 and 2007, respectively (unaudited). Investment losses of $49 and $3 and a gain of $27 were recorded within net realized investment (losses) gains on the consolidated statements of operations in 2007, 2006, and 2005, respectively. | ||
(15) | Commitments and Contingencies | |
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse impact on the Company’s financial position or results of operations. | ||
In 2005, the Company recorded retirement expenses of $3,035 within underwriting and administrative expenses on the consolidated statements of operations relating to the departure of the President and Chief Executive Officer of which, $507 of this expense was unpaid as of December 31, 2006. In 2007, the Company incurred additional retirement and severance expense of $663. Total retirement and severance expense of $851 was unpaid as of December 31, 2007. As of September 30, 2008, the Company incurred additional retirement and severance expense of $75 (unaudited). Total retirement and severance expense of $709 was unpaid as of September 30, 2008 (unaudited). | ||
(16) | Guaranty Fund and Other Insurance Related Assessments | |
The Company records its estimated future payment related to guaranty fund assessments and its estimated ultimate exposure related to other insurance-related assessments in accordance with SOP No. 97-3,Accounting by Insurance and Other Enterprises for Insurance Related Assessments. The Company’s net accrued liability for guaranty fund and other insurance related assessments is $1,565 for September 30, 2008 (unaudited) and $1,485 and $1,459 at December 31, 2007 and 2006, respectively. The accrual is expected to be paid as assessments are made over the next several years. | ||
(17) | Acquisition of Business | |
On March 1, 2005, EIG acquired 100% of GSR, an insurance agency. The results of GSR’s operations have been included in the consolidated financial statements since that date and are included within discontinued operations. | ||
The aggregate purchase price of $2,462 included $1,224 of net cash payments and the issuance of $1,238 in notes payable, net of imputed interest. Of the total notes payable, $818 is guaranteed and $420 is contingent on GSR attaining certain revenue objectives. Installment payments are due under the purchase agreement to former shareholders in four installments over a four-year term, commencing on March 1, |
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December 31, 2007 and 2006
2006. EIG has accrued for these contingent installment payments, as management believes they are determinable beyond a reasonable doubt. | ||
In 2005, EIG recorded $2,462 of goodwill and intangible assets in connection with the acquisition. These assets consist of $2,007 in goodwill, $400 for purchased customer relationships, and $55 for noncompete agreements. The weighted average useful lives of the above-acquired intangible assets are as follows: purchased customer relationships — ten years and noncompete agreements — five years. During 2007, 2006, and 2005, $51, $51, and $43, respectively, of amortization expense for these intangible assets was recorded within underwriting and administrative expenses on the consolidated statements of operations. Total accumulated amortization at December 31, 2007 and 2006 was $145 and $94, respectively. | ||
On April 10, 2007, EIG acquired a book of business for $213. EIG recorded $213 of intangible assets in connection with the acquisition for these purchased customer relationships and is amortizing the book over a period of 15 years. During 2007, $11 of amortization expense for these intangible assets was recorded within underwriting and administrative expenses on the consolidated statements of operations. Total accumulated amortization at December 31, 2007 was $11. | ||
As discussed in note 1, EIG’s assets and liabilities have been classified as held for sale on the consolidated balance sheets. In accordance with SFAS No. 144, the long-lived assets to be disposed of should be measured at the lower of its carrying amount or fair value less costs to sell and requires amortization of the related intangibles to cease. As of September 30, 2008, the Company has ceased all amortization of intangibles in EIG (unaudited). | ||
(18) | Segment Information | |
The Company’s operations are organized into three segments: Agribusiness, Commercial Business, and other. These segments reflect the manner in which the Company currently manages and represents an aggregation of products and services based on type of customer, how the business is marketed, and the manner in which risks are underwritten. | ||
The other segment includes the runoff of discontinued lines of insurance business and the results of mandatory-assigned risk reinsurance programs that the Company must participate in as a cost of doing business in the states in which the Company operates. The discontinued lines of insurance business include personal lines, which the Company began exiting in 2001, and assumed reinsurance contracts for which the Company participated on a voluntary basis. Participation in these assumed reinsurance contracts ceased in the 1980s and early 1990s. |
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December 31, 2007 and 2006
Segment information for the nine-month periods ended September 30, 2008 and 2007 and the years ended December 31, 2007, 2006 and 2005 is as follows: |
Nine months ended | ||||||||||||||||||||
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Premiums earned: | ||||||||||||||||||||
Agribusiness | $ | 33,536 | 30,405 | 40,245 | 35,889 | 36,022 | ||||||||||||||
Commercial Business | 24,546 | 21,935 | 29,260 | 26,761 | 26,142 | |||||||||||||||
Other | 1,237 | 1,150 | 1,465 | 1,995 | 2,559 | |||||||||||||||
Total premiums earned | 59,319 | 53,490 | 70,970 | 64,645 | 64,723 | |||||||||||||||
Investment income, net of investment expense | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | |||||||||||||||
Realized investment (losses) gains, net | (1,259 | ) | 423 | (702 | ) | 349 | 424 | |||||||||||||
Other income | 324 | 380 | 508 | 345 | 277 | |||||||||||||||
Total revenues | $ | 62,460 | 58,229 | 76,100 | 70,016 | 69,868 | ||||||||||||||
Components of net (loss) income: | ||||||||||||||||||||
Underwriting (loss) income: | ||||||||||||||||||||
Agribusiness | $ | (433 | ) | 1,041 | 441 | 2 | 93 | |||||||||||||
Commercial Business | (1,799 | ) | (1,158 | ) | (1,913 | ) | (678 | ) | 236 | |||||||||||
Other | (88 | ) | (629 | ) | (998 | ) | (1,106 | ) | (1,252 | ) | ||||||||||
Total underwriting losses | (2,320 | ) | (746 | ) | (2,470 | ) | (1,782 | ) | (923 | ) | ||||||||||
Investment income, net of investment expense | 4,076 | 3,936 | 5,324 | 4,677 | 4,444 | |||||||||||||||
Realized investment (losses) gains, net | (1,259 | ) | 423 | (702 | ) | 349 | 424 | |||||||||||||
Other income | 324 | 380 | 508 | 345 | 277 | |||||||||||||||
Corporate expense | (406 | ) | (354 | ) | (506 | ) | (635 | ) | (3,817 | ) | ||||||||||
Interest expense | (116 | ) | (100 | ) | (125 | ) | (222 | ) | (195 | ) | ||||||||||
Other expense, net | (190 | ) | (109 | ) | (184 | ) | (314 | ) | (266 | ) | ||||||||||
Income (loss) from continuing operations, before income taxes | 109 | 3,430 | 1,845 | 2,418 | (56 | ) | ||||||||||||||
Income tax expense (benefit) | 140 | 1,001 | 396 | 506 | (296 | ) | ||||||||||||||
(Loss) income from continuing operations | (31 | ) | 2,429 | 1,449 | 1,912 | 240 | ||||||||||||||
Discontinued operations: | ||||||||||||||||||||
(Loss) income on discontinued operations, before income taxes | (2,470 | ) | 482 | (489 | ) | 292 | 385 | |||||||||||||
Income tax (benefit) expense | (16 | ) | 190 | (126 | ) | 124 | 151 | |||||||||||||
(Loss) income on discontinued operations | (2,454 | ) | 292 | (363 | ) | 168 | 234 | |||||||||||||
Net (loss) income | $ | (2,485 | ) | 2,721 | 1,086 | 2,080 | 474 | |||||||||||||
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December 31, 2007 and 2006
December 31 | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net income: | ||||||||||||
Statutory net income | $ | 878 | 1,374 | 3,171 | ||||||||
Deferred policy acquisition costs | 633 | 735 | (706 | ) | ||||||||
Deferred federal income taxes | 208 | 512 | 766 | |||||||||
Other, including noninsurance amounts | (270 | ) | (709 | ) | (2,991 | ) | ||||||
Discontinued operations | (363 | ) | 168 | 234 | ||||||||
GAAP net income | $ | 1,086 | 2,080 | 474 | ||||||||
Surplus: | ||||||||||||
Statutory capital and surplus | $ | 50,795 | 50,524 | 47,216 | ||||||||
Stockholder’s equity of noninsurance entities | 566 | 1,908 | 2,191 | |||||||||
Deferred policy acquisition costs | 11,014 | 10,381 | 9,646 | |||||||||
Deferred federal income taxes | (3,700 | ) | (4,023 | ) | (3,690 | ) | ||||||
Nonadmitted assets | 1,598 | 1,533 | 2,264 | |||||||||
Prepaid pension assets | — | — | 53 | |||||||||
Unrealized gains on fixed maturities, net of tax | 1,185 | 183 | 442 | |||||||||
Other items, net | 114 | 195 | (182 | ) | ||||||||
GAAP stockholder’s equity | $ | 61,572 | 60,701 | 57,940 | ||||||||
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Nine months ended, | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Net revenue | $ | 719 | 1,101 | 1,458 | 1,825 | 2,536 | ||||||||||||||
(Loss) income on discontinued operations, before income taxes | $ | (52 | ) | 60 | (196 | ) | 125 | 131 | ||||||||||||
Income tax (benefit) expense | (18 | ) | 23 | (59 | ) | 50 | 53 | |||||||||||||
(Loss) income from discontinued operations | $ | (34 | ) | 37 | (137 | ) | 75 | 78 | ||||||||||||
December 31 | ||||||||
2007 | 2006 | |||||||
Assets: | ||||||||
Cash | $ | 191 | 256 | |||||
Receivables | 140 | 174 | ||||||
Other assets | 229 | 391 | ||||||
Total assets | $ | 560 | 821 | |||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 196 | 120 | |||||
Other liabilities | 32 | 98 | ||||||
Total liabilities | $ | 228 | 218 | |||||
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Nine months ended, | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Net revenue | $ | 2,696 | 3,243 | 4,130 | 4,282 | 4,413 | ||||||||||||||
(Loss) income on discontinued operations, before income taxes | $ | (2,418 | ) | 422 | (293 | ) | 167 | 254 | ||||||||||||
Income tax expense (benefit) | 2 | 167 | (67 | ) | 74 | 98 | ||||||||||||||
(Loss) income from discontinued operations | $ | (2,420 | ) | 255 | (226 | ) | 93 | 156 | ||||||||||||
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September 30, | December 31 | |||||||||||
2008 | 2007 | 2006 | ||||||||||
(Unaudited) | ||||||||||||
Assets: | ||||||||||||
Cash | $ | 250 | 137 | 108 | ||||||||
Receivables | 717 | 951 | 1,099 | |||||||||
Goodwill | 2,312 | 4,934 | 4,937 | |||||||||
Intangible assets | 464 | 513 | 361 | |||||||||
Other assets | 258 | 216 | 205 | |||||||||
Total assets | $ | 4,001 | 6,751 | 6,710 | ||||||||
Liabilities: | ||||||||||||
Accounts payable and accrued expenses | $ | 444 | 269 | 529 | ||||||||
Other liabilities | 285 | 545 | 835 | |||||||||
Total liabilities | $ | 729 | 814 | 1,364 | ||||||||
Nine months ended, | ||||||||||||||||||||
September 30 | Year ended December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Net revenue | $ | 3,415 | 4,344 | 5,588 | 6,107 | 6,949 | ||||||||||||||
(Loss) income on discontinued operations, before income taxes | $ | (2,470 | ) | 482 | (489 | ) | 292 | 385 | ||||||||||||
Income tax (benefit) expense | (16 | ) | 190 | (126 | ) | 124 | 151 | |||||||||||||
(Loss) income from discontinued operations | $ | (2,454 | ) | 292 | (363 | ) | 168 | 234 | ||||||||||||
F-46
Table of Contents
December 31, 2007 and 2006
September 30, | December 31 | |||||||||||
2008 | 2007 | 2006 | ||||||||||
(Unaudited) | ||||||||||||
Assets: | ||||||||||||
Cash | $ | 250 | 328 | 364 | ||||||||
Receivables | 717 | 1,091 | 1,273 | |||||||||
Goodwill | 2,312 | 4,934 | 4,937 | |||||||||
Intangible assets | 464 | 513 | 361 | |||||||||
Other assets | 258 | 445 | 596 | |||||||||
Total assets | $ | 4,001 | 7,311 | 7,531 | ||||||||
Liabilities: | ||||||||||||
Accounts payable and accrued expenses | $ | 444 | 465 | 649 | ||||||||
Other liabilities | 285 | 577 | 933 | |||||||||
Total liabilities | $ | 729 | 1,042 | 1,582 | ||||||||
F-47
Table of Contents
December 31, 2007 and 2006
F-48
Table of Contents
SEC registration fee | $ | 1,152 | ||
CUSIP assignment fee | $ | 124 | ||
Printing, postage and mailing | $ | 250,000 | ||
Legal fees and expenses | $ | 950,000 | ||
Underwriting expenses | $ | 360,000 | ||
Accounting fees and expenses | $ | 650,000 | ||
Valuation fees and expenses | $ | 150,000 | ||
Transfer and offering agent fees and expenses | $ | 50,000 | ||
Miscellaneous | $ | 88,724 | ||
Total | $ | 2,500,000 |
II-1
Table of Contents
1.1 | Form of Agency Agreement among Penn Millers Holding Corporation, Penn Millers Insurance Company and Griffin Financial Group, LLC* | ||
2.1 | Plan of Minority Stock Offering of Penn Millers Holding Corporation, dated as of October 22, 2008, and amended and restated on December 10, 2008 | ||
3.1 | Amended and Restated Articles of Incorporation of Penn Millers Holding Corporation* | ||
3.2 | Bylaws of Penn Millers Holding Corporation* | ||
4.1 | Form of certificate evidencing shares of common stock of Penn Millers Holding Corporation* | ||
5.1 | Opinion of Stevens & Lee regarding stock of Penn Millers Holding Corporation being issued* | ||
8.1 | Opinion of Stevens & Lee regarding certain United States federal income tax issues* | ||
10.1 | Stock-based incentive plan of Penn Millers Holding Corporation* | ||
10.2 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Douglas A. Gaudet* | ||
10.3 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Michael O. Banks* | ||
10.4 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Kevin D. Higgins* | ||
10.5 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Harold W. Roberts* | ||
10.6 | Employment Agreement, between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Frank Joanlanne | ||
10.7 | Separation and General Release Agreement between Penn Millers Insurance Company, its affiliates and Frank Joanlanne | ||
10.8 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Jonathan C. Couch* | ||
10.9 | Separation and General Release Agreement between Eastern Insurance Group, Penn Millers Insurance Company, its affiliates and William H. Spencer, Jr. | ||
10.10 | Property Third Excess of Loss Reinsurance Agreement* |
II-2
Table of Contents
10.11 | Property Catastrophe Excess of Loss Reinsurance Agreement* | ||
10.12 | Property & Casualty Excess of Loss Reinsurance Agreement* | ||
10.13 | Casualty Excess of Loss Reinsurance Agreement* | ||
10.14 | Umbrella Quota Share Reinsurance Contract* | ||
10.15 | Property Excess of Loss Reinsurance Contract* | ||
10.16 | Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 2006 | ||
10.17 | Nonqualified Deferred Compensation and Company Incentive Plan, effective June 1, 2006 | ||
10.18 | Success Sharing Bonus Plan, effective January 1, 2006* | ||
10.19 | Penn Millers Holding Corporation Employee Stock Ownership Plan | ||
21.1 | Subsidiaries of Penn Millers Holding Corporation | ||
23.1 | Consent of KPMG LLP | ||
23.2 | Consent of Curtis Financial Group LLC. | ||
23.3 | Consent of Stevens & Lee (contained in Exhibits 5.1 and 8.1)* | ||
24.1 | Power of Attorney (contained on signature page) | ||
99.1 | Pro Forma Appraisal Report, dated as of November 17, 2008, prepared for Penn Millers Insurance Company by Curtis Financial Group LLC. | ||
99.2 | Letter dated January 22, 2009, to Penn Millers Insurance Company from Curtis Financial Group LLC regarding fair market value of subscription rights | ||
99.3 | Stock Order Form* | ||
99.4 | Question and Answer Brochure* | ||
99.5 | Letters to prospective purchasers of stock in offering* | ||
99.6 | Escrow Agreement, dated as of , 200___, between Penn Millers Holding Corporation and .* |
* | To be filed by amendment. |
II-3
Table of Contents
II-4
Table of Contents
December 31, 2007 and 2006
September 30, | December 31 | |||||||||||
Assets | 2008 | 2007 | 2006 | |||||||||
(Unaudited) | ||||||||||||
Cash and cash equivalents | $ | 58 | 84 | 123 | ||||||||
Due from affiliates | 118 | 108 | 120 | |||||||||
Loans receivable from affiliates | 2,744 | 2,744 | — | |||||||||
Property and equipment, net | — | — | 4 | |||||||||
Investments in common stock of subsidiaries (equity method) | 56,340 | 63,762 | 64,341 | |||||||||
Income taxes receivable | 66 | 477 | 159 | |||||||||
Deferred tax asset | 1,219 | 1,302 | 850 | |||||||||
Other assets | 193 | 93 | 144 | |||||||||
Total assets | $ | 60,738 | 68,570 | 65,741 | ||||||||
Liabilities and Stockholder’s Equity | ||||||||||||
Due to affiliates | $ | 600 | 557 | — | ||||||||
Accounts payable and accrued expenses | 3,786 | 4,696 | 2,733 | |||||||||
Borrowings under line of credit | — | — | 250 | |||||||||
Long-term debt | 1,510 | 1,745 | 2,057 | |||||||||
Total liabilities | 5,896 | 6,998 | 5,040 | |||||||||
Common stock and additional paid-in capital | 1 | 1 | 1 | |||||||||
Retained earnings | 56,855 | 59,463 | 58,377 | |||||||||
Accumulated other comprehensive (loss) income | (2,014 | ) | 2,108 | 2,323 | ||||||||
Total stockholder’s equity | 54,842 | 61,572 | 60,701 | |||||||||
Total liabilities and stockholder’s equity | $ | 60,738 | 68,570 | 65,741 | ||||||||
II-5
Table of Contents
years ended December 31, 2007, 2006, and 2005
Nine months ended | ||||||||||||||||||||
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||
Realized investment (losses) gain, net | $ | (4 | ) | (22 | ) | (49 | ) | (2 | ) | 27 | ||||||||||
Other income | 87 | 99 | 126 | 10 | 20 | |||||||||||||||
Total revenue | 83 | 77 | 77 | 8 | 47 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Administrative expenses | 535 | 426 | 1,176 | 645 | 3,879 | |||||||||||||||
Other expense, net | 70 | 89 | 118 | 180 | 200 | |||||||||||||||
Total expenses | 605 | 515 | 1,294 | 825 | 4,079 | |||||||||||||||
Loss, before taxes | (522 | ) | (438 | ) | (1,217 | ) | (817 | ) | (4,032 | ) | ||||||||||
Income tax benefit | (177 | ) | (149 | ) | (413 | ) | (317 | ) | (1,323 | ) | ||||||||||
Net loss before equity in income of subsidiaries | (345 | ) | (289 | ) | (804 | ) | (500 | ) | (2,709 | ) | ||||||||||
Equity in income of subsidiaries | (2,140 | ) | 3,010 | 1,890 | 2,580 | 3,183 | ||||||||||||||
Net (loss) income | $ | (2,485 | ) | 2,721 | 1,086 | 2,080 | 474 | |||||||||||||
II-6
Table of Contents
years ended December 31, 2007, 2006, and 2005
Nine months ended | ||||||||||||||||||||
September 30 | December 31 | |||||||||||||||||||
2008 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net (loss) income | $ | (2,485 | ) | 2,721 | 1,086 | 2,080 | 474 | |||||||||||||
Dividends from subsidiaries | 1,000 | 1,150 | 1,150 | — | 1,850 | |||||||||||||||
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||||||||||||||
Equity in net loss (income) of subsidiaries | 2,140 | (3,010 | ) | (1,890 | ) | (2,580 | ) | (3,183 | ) | |||||||||||
Change in amounts due from or to affiliates, net | 33 | 159 | 569 | (242 | ) | 122 | ||||||||||||||
Change in accounts payable and accrued expenses | (873 | ) | (338 | ) | 323 | 217 | 1,967 | |||||||||||||
Deferred income taxes | 83 | (581 | ) | (452 | ) | (591 | ) | (254 | ) | |||||||||||
Amortization and depreciation | — | 4 | 4 | 10 | 20 | |||||||||||||||
Other, net | 311 | 112 | (267 | ) | 934 | (1,093 | ) | |||||||||||||
Net cash provided by (used in) operating activities | 209 | 217 | 523 | (172 | ) | (97 | ) | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Acquisitions | — | — | — | — | (1,406 | ) | ||||||||||||||
Net cash used in investing activities | — | — | — | — | (1,406 | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Net borrowings (repayments) on line of credit | — | 50 | (250 | ) | 64 | (130 | ) | |||||||||||||
Borrowings under long-term debt | — | — | — | — | 1,760 | |||||||||||||||
Repayment of long term debt | (235 | ) | (234 | ) | (312 | ) | (313 | ) | — | |||||||||||
Net cash (used in) provided by financing activities | (235 | ) | (184 | ) | (562 | ) | (249 | ) | 1,630 | |||||||||||
Net (decrease) increase in cash | (26 | ) | 33 | (39 | ) | (421 | ) | 127 | ||||||||||||
Cash, beginning balance | 84 | 123 | 123 | 544 | 417 | |||||||||||||||
Cash, ending balance | $ | 58 | 156 | 84 | 123 | 544 | ||||||||||||||
II-7
Table of Contents
years ended December 31, 2007, 2006, and 2005
Future policy | ||||||||||||||||||||
benefits, losses, | Other policy claims | |||||||||||||||||||
Deferred policy | claims and loss | and benefits | ||||||||||||||||||
Segment | acquisition costs | expenses | Unearned premiums | payable | Net premium earned | |||||||||||||||
September 30, 2008 (unaudited) | ||||||||||||||||||||
Agribusiness | $ | 6,514 | 47,360 | 27,770 | — | 33,536 | ||||||||||||||
Commercial Business | 4,734 | 45,127 | 19,865 | — | 24,546 | |||||||||||||||
Other | 30 | 10,791 | 118 | — | 1,237 | |||||||||||||||
Total | $ | 11,278 | 103,278 | 47,753 | — | 59,319 | ||||||||||||||
September 30, 2007 (unaudited) | ||||||||||||||||||||
Agribusiness | $ | 6,397 | 46,051 | 27,545 | — | 30,405 | ||||||||||||||
Commercial Business | 4,579 | 38,718 | 18,774 | — | 21,935 | |||||||||||||||
Other | 20 | 11,220 | 73 | — | 1,150 | |||||||||||||||
Total | $ | 10,996 | 95,989 | 46,392 | — | 53,490 | ||||||||||||||
December 31, 2007 | ||||||||||||||||||||
Agribusiness | $ | 6,429 | 42,881 | 27,552 | — | 40,245 | ||||||||||||||
Commercial Business | 4,579 | 41,805 | 19,021 | — | 29,260 | |||||||||||||||
Other | 6 | 11,270 | 22 | — | 1,465 | |||||||||||||||
Total | $ | 11,014 | 95,956 | 46,595 | — | 70,970 | ||||||||||||||
December 31, 2006 | ||||||||||||||||||||
Agribusiness | $ | 6,252 | 40,391 | 26,686 | — | 35,889 | ||||||||||||||
Commercial Business | 4,120 | 37,771 | 16,573 | — | 26,761 | |||||||||||||||
Other | 9 | 11,243 | 35 | — | 1,995 | |||||||||||||||
Total | $ | 10,381 | 89,405 | 43,294 | — | 64,645 | ||||||||||||||
December 31, 2005 | ||||||||||||||||||||
Agribusiness | $ | 5,618 | 34,268 | 23,845 | — | 36,022 | ||||||||||||||
Commercial Business | 4,028 | 38,290 | 16,139 | — | 26,142 | |||||||||||||||
Other | — | 11,291 | — | — | 2,559 | |||||||||||||||
Total | $ | 9,646 | 83,849 | 39,984 | — | 64,723 | ||||||||||||||
II-8
Table of Contents
years ended December 31, 2007, 2006, and 2005
Benefits, claims, | ||||||||||||||||||||
Net investment | losses and | Amortization | Other operating | |||||||||||||||||
income | settlement expenses | of DPAC | expenses | Premiums written | ||||||||||||||||
September 30, 2008 (unaudited) | ||||||||||||||||||||
Agribusiness | $ | 23,749 | 9,856 | 33,825 | ||||||||||||||||
Commercial Business | 17,602 | 7,185 | 25,182 | |||||||||||||||||
Other | 910 | 360 | 1,334 | |||||||||||||||||
Total | $ | 4,076 | 42,261 | 17,401 | 2,383 | 60,341 | ||||||||||||||
September 30, 2007 (unaudited) | ||||||||||||||||||||
Agribusiness | $ | 19,276 | 9,313 | 31,416 | ||||||||||||||||
Commercial Business | 14,940 | 6,719 | 24,002 | |||||||||||||||||
Other | 1,317 | 353 | 1,188 | |||||||||||||||||
Total | $ | 3,936 | 35,533 | 16,385 | 2,672 | 56,606 | ||||||||||||||
December 31, 2007 | ||||||||||||||||||||
Agribusiness | $ | 27,313 | 12,436 | 41,402 | ||||||||||||||||
Commercial Business | 20,570 | 9,042 | 31,266 | |||||||||||||||||
Other | 1,900 | 452 | 1,451 | |||||||||||||||||
Total | $ | 5,324 | 49,783 | 21,930 | 2,233 | 74,119 | ||||||||||||||
December 31, 2006 | ||||||||||||||||||||
Agribusiness | $ | 23,795 | 11,148 | 38,350 | ||||||||||||||||
Commercial Business | 17,531 | 8,313 | 27,144 | |||||||||||||||||
Other | 2,440 | 619 | 2,031 | |||||||||||||||||
Total | $ | 4,677 | 43,766 | 20,080 | 3,216 | 67,525 | ||||||||||||||
December 31, 2005 | ||||||||||||||||||||
Agribusiness | $ | 21,353 | 11,997 | 33,818 | ||||||||||||||||
Commercial Business | 15,112 | 8,707 | 25,852 | |||||||||||||||||
Other | 3,777 | 852 | 2,387 | |||||||||||||||||
Total | $ | 4,444 | 40,242 | 21,556 | 7,665 | 62,057 | ||||||||||||||
II - 9
Table of Contents
years ended December 31, 2007, 2006, and 2005
Percentage of | ||||||||||||||||||||
Ceded to other | Assumed from other | amount assumed to | ||||||||||||||||||
Premiums earned | Gross amount | companies | companies | Net amount | net | |||||||||||||||
For the period ended September 30, 2008 (unaudited) | $ | 72,166 | 13,881 | 1,034 | 59,319 | 1.74 | % | |||||||||||||
For the period ended September 30, 2007 (unaudited) | 67,319 | 14,791 | 962 | 53,490 | 1.80 | |||||||||||||||
For the year ended December 31, 2007 | 90,796 | 21,041 | 1,215 | 70,970 | 1.71 | |||||||||||||||
For the year ended December 31, 2006 | 81,223 | 18,271 | 1,693 | 64,645 | 2.62 | |||||||||||||||
For the year ended December 31, 2005 | 86,667 | 24,204 | 2,260 | 64,723 | 3.49 |
II-10
Table of Contents
years ended December 31, 2007, 2006, and 2005
September 30, | December 31 | |||||||||||||||
2008 | 2007 | 2006 | 2005 | |||||||||||||
(Unaudited) | ||||||||||||||||
Beginning balance | $ | 295 | 250 | 147 | 187 | |||||||||||
Additions | 244 | 202 | 173 | 254 | ||||||||||||
Deletions | (284 | ) | (157 | ) | (70 | ) | (294 | ) | ||||||||
Ending balance | $ | 255 | 295 | 250 | 147 | |||||||||||
II-11
Table of Contents
years ended December 31, 2007, 2006, and 2005
Deferred | Reserve for | |||||||||||||||||||||||
policy | Losses and | Discount if | Net | |||||||||||||||||||||
acquisition | loss adj. | any deducted | Unearned | Net earned | investment | |||||||||||||||||||
Affiliation with registrant | costs | expenses | in column C | premium | premiums | income | ||||||||||||||||||
For the period ended September 30, 2008 (unaudited) | $ | 11,278 | 103,278 | — | 47,753 | 59,319 | 4,076 | |||||||||||||||||
For the period ended September 30, 2007 (unaudited) | 10,996 | 95,989 | 46,392 | 53,490 | 3,936 | |||||||||||||||||||
For the year ended December 31, 2007 | 11,014 | 95,956 | 46,595 | 70,970 | 5,324 | |||||||||||||||||||
For the year ended December 31, 2006 | 10,381 | 89,405 | 43,294 | 64,645 | 4,677 | |||||||||||||||||||
For the year ended December 31, 2005 | 9,646 | 83,849 | 39,984 | 64,723 | 4,444 |
Paid losses | ||||||||||||||||||||
and | ||||||||||||||||||||
Losses and LAE Incurred | Amortization | adjustment | Net written | |||||||||||||||||
Current year | Prior year | of DPAC | expenses | premiums | ||||||||||||||||
For the period ended September 30, 2008 (unaudited) | $ | 46,807 | (4,546 | ) | 17,401 | 36,950 | 60,341 | |||||||||||||
For the period ended September 30, 2007 (unaudited) | 38,947 | (3,414 | ) | 16,385 | 31,746 | 56,606 | ||||||||||||||
For the year ended December 31, 2007 | 54,421 | (4,638 | ) | 21,930 | 41,870 | 74,119 | ||||||||||||||
For the year ended December 31, 2006 | 43,785 | (19 | ) | 20,080 | 35,482 | 67,525 | ||||||||||||||
For the year ended December 31, 2005 | 41,320 | (1,078 | ) | 21,556 | 35,014 | 62,057 |
II-12
Table of Contents
II-13
Table of Contents
PENN MILLERS HOLDING CORPORATION | ||||
By: | /s/ Douglas A. Gaudet. | |||
Douglas A. Gaudet, President and | ||||
Chief Executive Officer | ||||
II-14
Table of Contents
Signature | Capacity | Date | ||
/s/ Douglas A. Gaudet | Director President and Chief Executive Officer | January 22, 2009 | ||
/s/ J. Harvey Sproul, Jr. | Director and Chairman | January 22, 2009 | ||
/s/ F. Kenneth Ackerman, Jr. | Director and Vice Chairman | January 22, 2009 | ||
/s/ Heather M. Acker | Director | January 22, 2009 | ||
/s/ Dorrance R. Belin, Esq. | Director | January 22, 2009 | ||
/s/ John L. Churnetski | Director | January 22, 2009 | ||
/s/ John M. Coleman | Director | January 22, 2009 | ||
/s/ Kim E. Michelstein | Director | January 22, 2009 | ||
/s/ Robert A. Nearing, Jr. | Director | January 22, 2009 | ||
/s/ James M. Revie | Director | January 22, 2009 | ||
/s/ Michael O. Banks | Treasurer and Chief Financial Officer and Chief Accounting Officer | January 22, 2009 |
II-15
Table of Contents
1.1 | Form of Agency Agreement among Penn Millers Holding Corporation, Penn Millers Insurance Company and Griffin Financial Group, LLC* | |
2.1 | Plan of Minority Stock Offering of Penn Millers Holding Corporation, dated as of October 22, 2008, and amended and restated on December 10, 2008 | |
3.1 | Amended and Restated Articles of Incorporation of Penn Millers Holding Corporation* | |
3.2 | Bylaws of Penn Millers Holding Corporation* | |
4.1 | Form of certificate evidencing shares of common stock of Penn Millers Holding Corporation* | |
5.1 | Opinion of Stevens & Lee regarding stock of Penn Millers Holding Corporation being issued* | |
8.1 | Opinion of Stevens & Lee regarding certain United States federal income tax issues* | |
10.1 | Stock-based incentive plan of Penn Millers Holding Corporation* | |
10.2 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Douglas A. Gaudet* | |
10.3 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Michael O. Banks* | |
10.4 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Kevin D. Higgins* | |
10.5 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Harold W. Roberts* | |
10.6 | Employment Agreement, between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Frank Joanlanne | |
10.7 | Separation and General Release Agreement between Penn Millers Insurance Company, its affiliates and Frank Joanlanne | |
10.8 | Employment Agreement between Penn Millers Mutual Holding Company, Penn Millers Holding Corporation, Penn Millers Insurance Company and Jonathan C. Couch* | |
10.9 | Separation and General Release Agreement between Eastern Insurance Group, Penn Millers Insurance Company, its affiliates and William H. Spencer, Jr. | |
10.10 | Property Third Excess of Loss Reinsurance Agreement* | |
10.11 | Property Catastrophe Excess of Loss Reinsurance Agreement* |
II-16
Table of Contents
10.12 | Property & Casualty Excess of Loss Reinsurance Agreement* | |
10.13 | Casualty Excess of Loss Reinsurance Agreement* | |
10.14 | Umbrella Quota Share Reinsurance Contract* | |
10.15 | Property Excess of Loss Reinsurance Contract* | |
10.16 | Supplemental Executive Retirement Plan, as amended and restated, effective January 1, 2006 | |
10.17 | Nonqualified Deferred Compensation and Company Incentive Plan, effective June 1, 2006 | |
10.18 | Success Sharing Bonus Plan, effective January 1, 2006* | |
10.19 | Penn Millers Holding Corporation Employee Stock Ownership Plan | |
21.1 | Subsidiaries of Penn Millers Holding Corporation | |
23.1 | Consent of KPMG LLP | |
23.2 | Consent of Curtis Financial Group LLC | |
23.3 | Consent of Stevens & Lee (contained in Exhibits 5.1 and 8.1)* | |
24.1 | Power of Attorney (contained on signature page) | |
99.1 | Pro Forma Appraisal Report, dated as of November 17, 2008, prepared for Penn Millers Insurance Company by Curtis Financial Group LLC. | |
99.2 | Letter dated January 22, 2009, to Penn Millers Insurance Company from Curtis Financial Group LLC regarding fair market value of subscription rights | |
99.3 | Stock Order Form* | |
99.4 | Question and Answer Brochure* | |
99.5 | Letters to prospective purchasers of stock in offering* | |
99.6 | Escrow Agreement, dated as of , 200 , between Penn Millers Holding Corporation and .* |
* | To be filed by amendment |
II-17