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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
David L. Harbaugh, Esquire | Wesley R. Kelso, Esquire | |
Morgan, Lewis & Bockius LLP | John D. Talbot, Esquire | |
1701 Market Street | Stevens & Lee, P.C. | |
Philadelphia, PA 19103 | 620 Freedom Business Center, | |
(215) 963-5751 | Suite 200 | |
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 |
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• | eligible members of Penn Millers Mutual, who were the policyholders of Penn Millers Insurance Company, as of April 22, 2009. | ||
• | our employee stock ownership plan, which we refer to as our ESOP; and | ||
• | officers, directors and employees of Penn Millers Mutual and its subsidiaries. | ||
Price: $10.00 per share
Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
Number of shares offered | 4,505,000 | 5,300,000 | 6,095,000 | 6,772,221 | ||||||||||||
Gross offering proceeds | $ | 45,050,000 | $ | 53,000,000 | $ | 60,950,000 | $ | 67,722,210 | ||||||||
Less: Proceeds from ESOP shares (1) | $ | 4,504,990 | $ | 5,299,990 | $ | 6,094,990 | $ | 6,772,210 | ||||||||
Conversion and offering expenses | $ | 2,570,000 | $ | 2,570,000 | $ | 2,570,000 | $ | 2,570,000 | ||||||||
Commissions (2)(3) | $ | 675,750 | $ | 795,000 | $ | 914,250 | $ | 1,015,833 | ||||||||
Net proceeds | $ | 37,299,260 | $ | 44,335,010 | $ | 51,370,760 | $ | 57,364,167 | ||||||||
Net proceeds per share | $ | 8.28 | $ | 8.37 | $ | 8.43 | $ | 8.47 |
(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 9.99% of the total number of shares sold in the offering. | |
(2) | 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. See “The Conversion and Offering — Marketing and Underwriting Arrangements.” | |
(3) | Assumes that no shares are sold in a syndicated community offering phase. See “The Conversion and Offering — Marketing and Underwriting Arrangements” for commissions to be paid in the event of a syndicated community offering phase. | |
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(i)
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• | “Penn Millers,” “the Company,” “we,” “us” and “our” refer to the registrant, Penn Millers Holding Corporation, as well as Penn Millers Mutual Holding Company, which we refer to as Penn Millers Mutual, PMHC Corp., Penn Millers Insurance Company and any of its subsidiaries; | ||
• | the “conversion” refers to a series of transactions by which Penn Millers Mutual will convert from a mutual holding company to a stock holding company and become a subsidiary of Penn Millers Holding Corporation; | ||
• | the “offering” and the “conversion offering” refer to the offering of up to 6,772,221 shares of our common stock under the plan of conversion to eligible subscribers 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; and | ||
• | “members” refers to members of Penn Millers Mutual, who are either (i) the named insureds under an individual insurance policy issued by Penn Millers Insurance Company or (ii) the named insureds under a group insurance policy issued by Penn Millers Insurance Company. | ||
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• | First, in 2009 we introduced 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. Currently, the PennEdge product is approved in seven states. | ||
• | 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 the eligible members of Penn Millers Mutual, who were the policyholders of Penn Millers Insurance Company at April 22, 2009; | ||
• | second, to our employee stock ownership plan, or ESOP; and | ||
• | third, to the directors, officers and employees of Penn Millers. | ||
• | 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 April 22, 2009 (who are also members of Penn Millers Mutual); 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 | Eligible members of Penn Millers Mutual, who were the policyholders of Penn Millers Insurance Company at April 22, 2009; and | 6,095,000 shares | ||
Penn Millers’ 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: | 6,095,000 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 April 22, 2009, who are also members of Penn Millers Mutual; and | ||||
• residents of Lackawanna or Luzerne Counties in Pennsylvania. | ||||
Syndicated Community Offering | All members of the general public | 6,095,000 shares, less shares subscribed for in the subscription offering and the community offering |
![(FLOW CHART)](https://capedge.com/proxy/S-1A/0000950123-09-018836/w74385a2w7438528.gif)
![(FLOW CHART)](https://capedge.com/proxy/S-1A/0000950123-09-018836/w74385a2w7438527.gif)
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Amount | ||||||||
Amount | at the adjusted | |||||||
at the minimum | maximum | |||||||
Use of Net Proceeds | ||||||||
Loan to ESOP | $ | 4,504,990 | $ | 6,772,210 | ||||
Commissions | $ | 675,750 | $ | 1,015,833 | ||||
General corporate purposes | $ | 37,299,260 | $ | 57,364,167 | ||||
Total | $ | 42,480,000 | $ | 65,152,210 | ||||
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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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• | that 6,095,000 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 | 9.99 | % | 609,499 | $ | 6,094,990 | ||||||||||
Shares available under the stock-based incentive plan for restricted stock awards | Directors and selected officers and employees | 4 | % | 243,800 | $ | 2,438,000 | ||||||||||
Shares available under the stock-based incentive plan for stock options | Directors and selected officers and employees | 10 | % | 609,500 | (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. |
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• | determining whether damages were caused by flooding versus wind; | ||
• | evaluating general liability and pollution exposures; | ||
• | 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 requirements for minimum capital and surplus, and for risk-based capital. | ||
• | classifying assets as admissible for purposes of determining solvency and compliance with minimum capital and surplus requirements; | ||
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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 prohibition on a person, including a group acting in concert, from acquiring voting control of more than 10% of our outstanding stock without prior approval of the board of directors; | ||
• | 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 90 days prior to the meeting; | ||
• | the prohibition of shareholders’ action without a meeting and of shareholders’ right to call a special meeting; | ||
• | unless otherwise waived by the board of directors, to be elected as a director, a person must be a shareholder of Penn Millers Holding Corporation for the lesser of one year or the time that has elapsed since the completion of the conversion; | ||
• | the requirement imposing a mandatory tender offering requirement on a shareholder that has a combined voting power of 25% or more of the votes that our shareholders are entitled to cast; | ||
• | 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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• | 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 three months ended | At or for the years ended | ||||||||||||||||||||||||||||
March 31, | December 31, | ||||||||||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | 2005(4) | 2004 | |||||||||||||||||||||||
(unaudited) | (Dollars in thousands) | ||||||||||||||||||||||||||||
Statement of Operations Data: | |||||||||||||||||||||||||||||
Direct premiums written | $ | 22,754 | $ | 22,510 | $ | 94,985 | $ | 94,073 | $ | 84,544 | $ | 84,084 | $ | 89,041 | |||||||||||||||
Net premiums written | $ | 18,082 | $ | 19,252 | $ | 77,367 | $ | 74,119 | $ | 67,525 | $ | 62,057 | $ | 67,036 | |||||||||||||||
Net premiums earned | $ | 18,457 | $ | 19,867 | $ | 78,737 | $ | 70,970 | $ | 64,645 | $ | 64,723 | $ | 63,090 | |||||||||||||||
Net investment income | 1,359 | 1,396 | 5,335 | 5,324 | 4,677 | 4,444 | 4,278 | ||||||||||||||||||||||
Net realized investment gains (losses) | 29 | 1,837 | (5,819 | ) | (702 | ) | 349 | 424 | 936 | ||||||||||||||||||||
Other revenue | 20 | 149 | 411 | 508 | 345 | 277 | 301 | ||||||||||||||||||||||
Total revenue | $ | 19,865 | $ | 23,249 | $ | 78,664 | $ | 76,100 | $ | 70,016 | $ | 69,868 | $ | 68,605 | |||||||||||||||
Expenses | |||||||||||||||||||||||||||||
Loss and loss adjustment expense | $ | 11,970 | $ | 13,017 | $ | 57,390 | $ | 49,783 | $ | 43,766 | $ | 40,242 | $ | 42,910 | |||||||||||||||
Amortization of deferred acquisition costs | 5,506 | 5,574 | 23,081 | 21,930 | 20,080 | 21,556 | 20,464 | ||||||||||||||||||||||
Underwriting and administrative expense | 1,126 | 1,206 | 3,481 | 2,233 | 3,216 | 7,662 | 3,895 | ||||||||||||||||||||||
Interest expense | 76 | 47 | 184 | 125 | 222 | 195 | 84 | ||||||||||||||||||||||
Other operating expenses | 47 | 36 | 365 | 184 | 314 | 266 | 82 | ||||||||||||||||||||||
Total losses and expenses | $ | 18,725 | $ | 19,880 | $ | 84,501 | $ | 74,255 | $ | 67,598 | $ | 69,921 | $ | 67,435 | |||||||||||||||
Income (loss) from continuing operations, before income taxes | $ | 1,140 | $ | 3,369 | $ | (5,837 | ) | $ | 1,845 | $ | 2,418 | $ | (53 | ) | $ | 1,170 | |||||||||||||
Income tax expense (benefit) | 289 | 985 | (1,378 | ) | 396 | 506 | (295 | ) | (21 | ) | |||||||||||||||||||
Income (loss) from continuing operations | $ | 851 | $ | 2,384 | $ | (4,459 | ) | $ | 1,449 | $ | 1,912 | $ | 242 | $ | 1,191 | ||||||||||||||
Income (loss) on discontinued operations | (820 | ) | (4 | ) | (2,920 | ) | (363 | ) | 168 | 47 | 199 | ||||||||||||||||||
Net income (loss) | $ | 31 | $ | 2,380 | $ | (7,379 | ) | $ | 1,086 | $ | 2,080 | $ | 289 | $ | 1,390 | ||||||||||||||
Balance Sheet Data (at period end): | |||||||||||||||||||||||||||||
Total investments, cash and cash equivalents | $ | 143,993 | $ | 135,562 | $ | 133,873 | $ | 136,312 | $ | 126,655 | $ | 116,898 | $ | 117,002 | |||||||||||||||
Total assets | 228,415 | 221,455 | 220,524 | 219,613 | 207,768 | 197,897 | 192,020 | ||||||||||||||||||||||
Unpaid loss and loss adjustment expenses | 116,775 | 100,481 | 108,065 | 95,956 | 89,405 | 83,849 | 73,287 | ||||||||||||||||||||||
Unearned premiums | 44,811 | 45,680 | 45,322 | 46,595 | 43,294 | 39,984 | 42,798 | ||||||||||||||||||||||
Total liabilities | 177,254 | 159,283 | 169,769 | 158,212 | 147,238 | 140,128 | 132,114 | ||||||||||||||||||||||
Equity | 51,161 | 62,172 | 50,755 | 61,401 | 60,530 | 57,769 | 59,906 | ||||||||||||||||||||||
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At or for the three months ended | At or for the years ended | ||||||||||||||||||||||||||||
March 31, | December 31, | ||||||||||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | 2005(4) | 2004 | |||||||||||||||||||||||
(unaudited) | (Dollars in thousands) | ||||||||||||||||||||||||||||
U.S. GAAP Ratios: | |||||||||||||||||||||||||||||
Loss and loss adjustment expense ratio (1) | 64.9 | % | 65.5 | % | 72.9 | % | 70.1 | % | 67.7 | % | 62.2 | % | 68.0 | % | |||||||||||||||
Underwriting expense ratio (2) | 35.8 | % | 33.3 | % | 32.8 | % | 33.3 | % | 35.1 | % | 39.2 | % | 38.0 | % | |||||||||||||||
Combined ratio (3) | 100.7 | % | 98.8 | % | 105.7 | % | 103.4 | % | 102.8 | % | 101.4 | % | 106.0 | % | |||||||||||||||
Return on average equity, continuing operations | 1.7 | % | 3.9 | % | (8.0 | %) | 2.4 | % | 3.2 | % | 0.4 | % | 2.0 | % | |||||||||||||||
Return on average equity | 0.1 | % | 3.9 | % | (13.2 | %) | 1.8 | % | 3.5 | % | 0.5 | % | 2.3 | % | |||||||||||||||
Statutory Data: | |||||||||||||||||||||||||||||
Statutory net income (loss) | $ | 1,813 | $ | 2,834 | $ | (4,718 | ) | $ | 878 | $ | 1,374 | $ | 3,171 | $ | 634 | ||||||||||||||
Statutory surplus | 43,525 | 49,037 | 42,569 | 50,795 | 50,524 | 47,216 | 45,445 | ||||||||||||||||||||||
Ratio of net premiums written to statutory surplus | 41.5 | % | 39.3 | % | 181.7 | % | 145.9 | % | 133.6 | % | 131.4 | % | 147.5 | % |
(1) | Calculated by dividing loss and loss adjustment expenses by net premiums earned. | |
(2) | Calculated by dividing amortization of deferred policy acquisition costs and net underwriting and administrative expenses (attributable to insurance operations) 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) | In conjunction with the offering, 2005 has been adjusted, as of January 1, 2005, to reflect the adoption of Staff Accounting Bulletin (SAB) No. 108,Quantifying Financial Statement Misstatements. | |
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Adjusted | ||||||||
Minimum | Maximum | |||||||
Net Proceeds | ||||||||
Gross proceeds | $ | 45,050,000 | $ | 67,722,210 | ||||
Conversion and offering expenses | 2,570,000 | 2,570,000 | ||||||
Net proceeds before loan to ESOP | $ | 42,480,000 | $ | 65,152,210 | ||||
Use of Net Proceeds | ||||||||
Loan to ESOP | $ | 4,504,990 | $ | 6,772,210 | ||||
Commissions | $ | 675,750 | $ | 1,015,833 | ||||
General corporate purposes | 37,299,260 | 57,364,167 | ||||||
Total | $ | 42,480,000 | $ | 65,152,210 | ||||
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(In thousands, except share and per share data)
Penn Millers | ||||||||||||||||||||
Historical | ||||||||||||||||||||
Consolidated | Adjusted | |||||||||||||||||||
Capitalization | Minimum | Midpoint | Maximum | Maximum | ||||||||||||||||
Long term debt and lines of credit | $ | 3,037 | $ | 1,354 | $ | 1,354 | $ | 1,354 | $ | 1,354 | ||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Common stock, $0.01 par value per share; authorized shares 10,000,000 | $ | — | $ | 45 | $ | 53 | $ | 61 | $ | 68 | ||||||||||
Additional paid in capital | — | 41,759 | 49,582 | 57,405 | 64,068 | |||||||||||||||
Retained earnings | 51,945 | 51,945 | 51,945 | 51,945 | 51,945 | |||||||||||||||
Accumulated other comprehensive income (loss), net of tax | (784 | ) | (784 | ) | (784 | ) | (784 | ) | (784 | ) | ||||||||||
Less: common stock to be acquired by ESOP(2) | — | (4,505 | ) | (5,300 | ) | (6,095 | ) | (6,772 | ) | |||||||||||
Total shareholders’ equity | $ | 51,161 | $ | 88,460 | $ | 95,496 | $ | 102,532 | $ | 108,525 | ||||||||||
(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 for their approval 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 12.3% 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 5,300,000 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.” | |
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(2) | Assumes that 9.99% 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 March 31, 2009
(In thousands)
Penn Millers | Penn Millers | |||||||||||
Historical | Pro Forma | Pro Forma | ||||||||||
Consolidated | Adjustments | Consolidated | ||||||||||
Assets | ||||||||||||
Cash and invested assets | $ | 143,993 | $ | 35,616 | (1) | $ | 179,609 | |||||
Premiums and fees receivable | 28,753 | — | 28,753 | |||||||||
Reinsurance receivables and recoverables | 25,064 | — | 25,064 | |||||||||
Deferred policy acquisition costs | 10,522 | — | 10,522 | |||||||||
Prepaid reinsurance premiums | 4,170 | — | 4,170 | |||||||||
Accrued investment income | 1,391 | — | 1,391 | |||||||||
Property and equipment, net of accumulated depreciation | 4,071 | — | 4,071 | |||||||||
Income taxes receivable | 1,294 | — | 1,294 | |||||||||
Deferred income taxes | 3,656 | — | 3,656 | |||||||||
Other assets | 4,058 | — | 4,058 | |||||||||
Deferred offering costs | 1,443 | — | 1,443 | |||||||||
Assets held for sale | — | — | — | |||||||||
Total assets | $ | 228,415 | $ | 35,616 | $ | 264,031 | ||||||
Liabilities | ||||||||||||
Losses and loss adjustment expense reserves | $ | 116,775 | $ | — | $ | 116,775 | ||||||
Unearned premiums | 44,811 | — | 44,811 | |||||||||
Accounts payable and accrued expenses | 12,631 | — | 12,631 | |||||||||
Borrowings under line of credit | 1,683 | (1,683 | )(2) | — | ||||||||
Long-term debt | 1,354 | — | 1,354 | |||||||||
Liabilities held for sale | — | — | — | |||||||||
Total liabilities | $ | 177,254 | $ | (1,683 | ) | $ | 175,571 | |||||
Shareholders’ equity | ||||||||||||
Common stock | $ | — | $ | 45 | (1) | $ | 45 | |||||
Unearned compensation | — | (4,505 | )(3) | (4,505 | ) | |||||||
Additional paid in capital | — | 41,759 | (1) | 41,759 | ||||||||
Retained earnings | 51,945 | — | 51,945 | |||||||||
Accumulated other comprehensive loss, net of deferred taxes | (784 | ) | — | (784 | ) | |||||||
Total shareholders’ equity | $ | 51,161 | $ | 37,299 | $ | 88,460 | ||||||
Total liabilities and shareholders’ equity | $ | 228,415 | $ | 35,616 | $ | 264,031 | ||||||
(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.” | |
(2) | We intend to repay in full the outstanding principal balance under our lines of credit with proceeds from the offering. | |
(3) | Reflects the $4,504,990 loan from us to our ESOP, the proceeds of which will be used to purchase 9.99% 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 net proceeds to determine the estimated funds available for investment. The amount of the ESOP loan will increase to $5,299,990, $6,094,990, and $6,772,210 if 5,300,000, 6,095,000, and 6,772,221 shares, respectively, are sold in the offering. The ESOP loan will bear interest at an annual rate equal to the current long-term Applicable Federal Rate with semi-annual compounding in effect on the closing date of the offering. | |
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Adjusted | ||||||||||||||||
Minimum | Midpoint | Maximum | Maximum | |||||||||||||
(in thousands, except share data) | ||||||||||||||||
Gross proceeds from the offering | $ | 45,050 | $ | 53,000 | $ | 60,950 | $ | 67,722 | ||||||||
Less: common stock acquired by the ESOP | (4,505 | ) | (5,300 | ) | (6,095 | ) | (6,772 | ) | ||||||||
Less: offering expenses | (2,570 | ) | (2,570 | ) | (2,570 | ) | (2,570 | ) | ||||||||
Less: underwriting commissions | (676 | ) | (795 | ) | (914 | ) | (1,016 | ) | ||||||||
Net proceeds from the offering | $ | 37,299 | $ | 44,335 | $ | 51,371 | $ | 57,364 | ||||||||
Total shares issued by Penn Millers in the offering | 4,505,000 | 5,300,000 | 6,095,000 | 6,772,221 |
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, 2008
(in thousands, except share and per share data)
Penn Millers | Penn Millers | |||||||||||
Historical | Pro Forma | Pro Forma | ||||||||||
Consolidated | Adjustments | Consolidated | ||||||||||
Revenue: | ||||||||||||
Premiums earned | $ | 78,737 | $ | — | $ | 78,737 | ||||||
Investment income, net of investment expense | 5,335 | — | (1) | 5,335 | ||||||||
Realized investment losses, net | (5,819 | ) | — | (5,819 | ) | |||||||
Other income | 411 | — | 411 | |||||||||
Total revenues | 78,664 | — | 78,664 | |||||||||
Expenses: | ||||||||||||
Losses and loss adjustment expenses | $ | 57,390 | $ | — | $ | 57,390 | ||||||
Amortization of deferred policy acquisition costs | 23,081 | — | 23,081 | |||||||||
Underwriting and administrative expenses | 3,481 | — | 3,481 | |||||||||
Interest expense | 184 | — | 184 | |||||||||
Other expense, net | 365 | 451 | (2) | 816 | ||||||||
Total losses and expenses | 84,501 | 451 | 84,952 | |||||||||
Loss from continuing operations before income taxes | $ | (5,837 | ) | $ | (451 | ) | $ | (6,288 | ) | |||
Income tax (benefit) expense | (1,378 | ) | (153 | )(3) | (1,531 | ) | ||||||
Loss from continuing operations | $ | (4,459 | ) | $ | (298 | ) | $ | (4,757 | ) | |||
Earnings per share data: | ||||||||||||
Basic and diluted loss per common share from continuing operations | $ | — | $ | (1.17 | ) | |||||||
Weighted average basic and diluted common shares outstanding | — | 4,077,025 |
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Three Months Ended March 31, 2009
(in thousands, except share and per share data)
Penn Millers | Penn Millers | |||||||||||
Historical | Pro Forma | Pro Forma | ||||||||||
Consolidated | Adjustments | Consolidated | ||||||||||
Revenue: | ||||||||||||
Premiums earned | $ | 18,457 | $ | — | $ | 18,457 | ||||||
Investment income, net of investment expense | 1,359 | — | (1) | 1,359 | ||||||||
Realized investment gains, net | 29 | — | 29 | |||||||||
Other income | 20 | — | 20 | |||||||||
Total revenues | 19,865 | — | 19,865 | |||||||||
Losses and expenses: | ||||||||||||
Losses and loss adjustment expenses | $ | 11,970 | $ | — | $ | 11,970 | ||||||
Amortization of deferred policy acquisition costs | 5,506 | — | 5,506 | |||||||||
Underwriting and administrative expenses | 1,126 | — | 1,126 | |||||||||
Interest expense | 76 | — | 76 | |||||||||
Other expense, net | 47 | 113 | (2) | 160 | ||||||||
Total losses and expenses | 18,725 | 113 | 18,838 | |||||||||
Income from continuing operations before income taxes | $ | 1,140 | $ | (113 | ) | $ | 1,027 | |||||
Income tax expense (benefit) | 289 | (38 | )(3) | 251 | ||||||||
Income from continuing operations | $ | 851 | $ | (75 | ) | $ | 776 | |||||
Earnings per share data: | ||||||||||||
Basic and diluted loss per common share from continuing operations | $ | — | $ | 0.19 | ||||||||
Weighted average basic and diluted common shares outstanding | — | 4,060,132 |
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(1) | We anticipate that we would earn approximately $1.3 million of investment income assuming the net proceeds were available for investment and received as of January 1, 2009 and January 1, 2008, respectively, and that they were invested with an average annual pre-tax rate of return of 3.47%. | |
(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 $4,504,990 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 of principal and interest. | |
(3) | Adjustments to reflect the federal income tax effects of (1) — (2) above assuming an effective federal income tax rate of 34%. | |
(4) | It is assumed that 9.99% 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 three months ended March 31, 2009 and for the year ended December 31, 2008, respectively; (ii) (A) that 11,262, 13,250, 15,237, and 16,931 shares at the minimum, the midpoint, the maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the three months ended March 31, 2009, at an average fair value of $10.00 per share, in accordance with SOP 93-6, (B) that 45,050, 53,000, 60,950, and 67,722 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the year ended December 31, 2008, at an average fair value of $10.00 per share, in accordance with SOP 93-6; and (C) 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 427,975, 503,500, 579,025 and 643,361 at the minimum, midpoint, maximum and adjusted maximum of the offering range during the year ended December 31, 2008, and equal to 444,868, 523,374, 601,880, and 668,756 during the three months ended March 31, 2009, were subtracted from total shares outstanding of 4,505,000, 5,300,000, 6,095,000, and 6,772,221 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such dates. | ||
• | Our ESOP will purchase an amount equal to 9.99% of the shares of common stock sold in the offering with a loan from us; | ||
• | Expenses of the conversion and offering will be $2.57 million; and | ||
• | Underwriting commissions will equal 1.5% of the gross proceeds of the offering and that no shares will be sold in the syndicated offering. | ||
• | Pro forma earnings have been calculated assuming the stock had been sold at the beginning of the period; | ||
• | 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 March 31, 2009, 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 Three Months Ended March 31, 2009 | ||||||||||||||||
(In thousands, except for share and per share data) | ||||||||||||||||
6,772,221 shares | ||||||||||||||||
4,505,000 shares | 5,300,000 shares | 6,095,000 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 | $ | 45,050 | $ | 53,000 | $ | 60,950 | $ | 67,722 | ||||||||
Less offering expenses and commissions | (3,246 | ) | (3,365 | ) | (3,484 | ) | (3,586 | ) | ||||||||
Net proceeds | 41,804 | 49,635 | 57,466 | 64,136 | ||||||||||||
Less ESOP shares (1) | (4,505 | ) | (5,300 | ) | (6,095 | ) | (6,772 | ) | ||||||||
Net proceeds after ESOP shares | $ | 37,299 | $ | 44,335 | $ | 51,371 | $ | 57,364 | ||||||||
Pro forma shareholders’ equity | ||||||||||||||||
Historical equity of Penn Millers | 51,161 | 51,161 | 51,161 | 51,161 | ||||||||||||
Pro forma proceeds after ESOP shares | 37,299 | 44,335 | 51,371 | 57,364 | ||||||||||||
Pro forma shareholders’ equity (2) | $ | 88,460 | $ | 95,496 | $ | 102,532 | $ | 108,525 | ||||||||
Pro forma per share data | ||||||||||||||||
Total shares outstanding after the offering | 4,505,000 | 5,300,000 | 6,095,000 | 6,772,221 | ||||||||||||
Pro forma book value per share | $ | 19.64 | $ | 18.02 | $ | 16.82 | $ | 16.02 | ||||||||
Pro forma price-to-book value | 50.92 | % | 55.49 | % | 59.45 | % | 62.42 | % | ||||||||
Pro forma net income: | ||||||||||||||||
Historical income from continuing operations | $ | 851 | $ | 851 | $ | 851 | $ | 851 | ||||||||
Loss on discontinued operations | (820 | ) | (820 | ) | (820 | ) | (820 | ) | ||||||||
ESOP expense | (75 | ) | (87 | ) | (101 | ) | (112 | ) | ||||||||
Pro forma income | $ | (44 | ) | $ | (56 | ) | $ | (70 | ) | $ | (81 | ) | ||||
Weighted average shares outstanding (3) | 4,060,132 | 4,776,626 | 5,493,120 | 6,103,465 | ||||||||||||
Pro forma loss per share | $ | (.01 | ) | $ | (.01 | ) | $ | (.01 | ) | $ | (.01 | ) |
(1) | It is assumed that 9.99% 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 three months ended March 31, 2009; 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 450,500, 530,000, 609,500, and 677,221 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 180,200, 212,000, 243,800 and 270,889 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 issued by 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 12.3% at the midpoint of the offering range. | ||
(3) | It is assumed that 9.99% 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 three months ended March 31, 2009; (ii) that 11,262, 13,250, 15,237, and 16,931 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, were committed to be released at the end of the three months ended March 31, 2009, 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 444,868, 523,374, 601,880, and 668,756 and at the minimum, midpoint, maximum and adjusted maximum of the offering range during the three months ended March 31, 2009, were subtracted from total shares outstanding of 4,505,000, 5,300,000, 6,095,000, and 6,772,221 at the minimum, midpoint, maximum and adjusted maximum of the offering range on such dates. | |
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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46
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• | 2, 3, 4, and 5-Year Averages (straight averages and loss-weighted averages) | ||
• | 5-Year Average Excluding Highest and Lowest LDFs | ||
• | All-Year average (straight average and loss-weighted average) | ||
• | Selected LDF Pattern (LDFs are selected for each evaluation based on the actuaries’ review of the historical development) | ||
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As of | As of | As of | ||||||||||
March 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Case reserves | $ | 61,516 | $ | 57,976 | $ | 48,957 | ||||||
IBNR reserves | 26,346 | 27,464 | 28,272 | |||||||||
Net unpaid loss and LAE | 87,862 | 85,440 | 77,229 | |||||||||
Reinsurance recoverables on unpaid loss and LAE | 28,913 | 22,625 | 18,727 | |||||||||
Reserves for unpaid loss and LAE | $ | 116,775 | $ | 108,065 | $ | 95,956 | ||||||
Reserve Range for Unpaid Loss and LAE | ||||||||
(in thousands) | ||||||||
Low End | Recorded | High End | ||||||
$82,385 | $87,862 | $92,519 |
• | The rate of increase in labor costs, medical costs, material costs, and commodity prices that underlie insured risks; | ||
• | Development of risk associated with our expanding producer relationships, new classes of business, and our growth in states where we currently have small market share; | ||
• | Impact of unemployment rates on behavior of injured insured workers; | ||
• | Impact of changes in laws or regulations; | ||
• | Adequacy of current pricing in relatively soft insurance markets; and | ||
• | Variability related to asbestos and environmental claims due to issues as to whether coverage exists, the definition of occurrence, the determination of ultimate damages, and the allocation of such damages to responsible parties. | ||
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Actuarially Determined Range of Estimates | ||||||||||||||||||||
Total | ||||||||||||||||||||
($ in thousands) | Case Reserves | IBNR Reserves | Reserves | Low | High | |||||||||||||||
Commercial auto liability | $ | 8,374 | $ | 3,508 | $ | 11,882 | $ | 11,219 | $ | 12,350 | ||||||||||
Workers’ compensation | 11,296 | 4,681 | 15,977 | 15,356 | 16,796 | |||||||||||||||
Commercial multi-peril | 16,398 | 6,170 | 22,568 | 22,029 | 23,529 | |||||||||||||||
Liability | 11,057 | 7,373 | 18,430 | 16,483 | 18,963 | |||||||||||||||
Fire & allied | 8,006 | 102 | 8,108 | 8,025 | 8,208 | |||||||||||||||
Assumed | 4,571 | 4,199 | 8,770 | 7,513 | 9,893 | |||||||||||||||
Other | 1,814 | 313 | 2,127 | 1,760 | 2,780 | |||||||||||||||
Total net reserves | 61,516 | 26,346 | 87,862 | $ | 82,385 | $ | 92,519 | |||||||||||||
Reinsurance recoverables | 13,308 | 15,605 | 28,913 | |||||||||||||||||
Gross reserves | $ | 74,824 | $ | 41,951 | $ | 116,775 | ||||||||||||||
Actuarially Determined Range of Estimates | ||||||||||||||||||||
Total | ||||||||||||||||||||
($ in thousands) | Case Reserves | IBNR Reserves | Reserves | Low | High | |||||||||||||||
Commercial auto liability | $ | 7,698 | $ | 4,214 | $ | 11,912 | $ | 11,116 | $ | 12,404 | ||||||||||
Workers’ compensation | 11,108 | 4,489 | 15,597 | 14,870 | 16,395 | |||||||||||||||
Commercial multi-peril | 16,696 | 6,381 | 23,077 | 22,420 | 24,062 | |||||||||||||||
Liability | 9,840 | 7,689 | 17,529 | 15,447 | 18,235 | |||||||||||||||
Fire & allied | 5,857 | 26 | 5,883 | 5,837 | 5,883 | |||||||||||||||
Assumed | 5,027 | 4,517 | 9,544 | 8,207 | 10,810 | |||||||||||||||
Other | 1,750 | 148 | 1,898 | 1,524 | 2,369 | |||||||||||||||
Total net reserves | 57,976 | 27,464 | 85,440 | $ | 79,421 | $ | 90,158 | |||||||||||||
Reinsurance recoverables | 11,634 | 10,991 | 22,625 | |||||||||||||||||
Gross reserves | $ | 69,610 | $ | 38,455 | $ | 108,065 | ||||||||||||||
Total | ||||||||||||||||||||
($ in thousands) | Case Reserves | IBNR Reserves | Reserves | |||||||||||||||||
Commercial auto liability | $ | 6,340 | $ | 5,592 | $ | 11,932 | ||||||||||||||
Workers’ compensation | 9,449 | 6,027 | 15,476 | |||||||||||||||||
Commercial multi-peril | 14,581 | 5,608 | 20,189 | |||||||||||||||||
Liability | 6,721 | 5,282 | 12,003 | |||||||||||||||||
Fire & allied | 4,507 | 823 | 5,330 | |||||||||||||||||
Assumed | 5,198 | 4,573 | 9,771 | |||||||||||||||||
Other | 2,161 | 367 | 2,528 | |||||||||||||||||
Total net reserves | 48,957 | 28,272 | 77,229 | |||||||||||||||||
Reinsurance recoverables | 13,159 | 5,568 | 18,727 | |||||||||||||||||
Gross reserves | $ | 62,116 | $ | 33,840 | $ | 95,956 | ||||||||||||||
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Dollars in thousands | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||||
As originally estimated | $ | 42,731 | $ | 48,072 | $ | 55,804 | $ | 61,032 | $ | 69,316 | $ | 77,229 | ||||||||||||
As estimated at December 31, 2008 | 45,744 | 49,284 | 54,411 | 59,884 | 63,847 | 72,004 | ||||||||||||||||||
Net cumulative redundancy (deficiency) | $ | (3,013 | ) | $ | (1,212 | ) | $ | 1,393 | $ | 1,148 | $ | 5,469 | $ | 5,225 | ||||||||||
% redundancy (deficiency) | (7.1 | )% | (2.5 | )% | 2.5 | % | 1.9 | % | 7.9 | % | 6.8 | % |
Reserve Range for Unpaid | Aggregate Loss and | Percentage Change (1) | ||||||
Loss and LAE | LAE Reserve | in Equity | ||||||
Low End | $ | 82,385 | 7.1 | % | ||||
Recorded | $ | 87,862 | — | |||||
High End | $ | 92,519 | (6.0 | %) |
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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 | ||||||||||||||||||
March 31, 2009 : | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 566 | $ | 5 | $ | — | $ | — | $ | 566 | $ | 5 | ||||||||||||
State and political subdivisions | 1,081 | 4 | 2,130 | 55 | 3,211 | 59 | ||||||||||||||||||
Mortgage-backed securities | 1,742 | 239 | 2,108 | 408 | 3,850 | 647 | ||||||||||||||||||
Corporate securities | 13,795 | 1,453 | 7,164 | 872 | 20,959 | 2,325 | ||||||||||||||||||
Total fixed maturities | 17,184 | 1,701 | 11,402 | 1,335 | 28,586 | 3,036 | ||||||||||||||||||
Total temporarily impaired securities | $ | 17,184 | $ | 1,701 | $ | 11,402 | $ | 1,335 | $ | 28,586 | $ | 3,036 | ||||||||||||
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 | ||||||||||||||||||
December 31, 2008: | ||||||||||||||||||||||||
State and political subdivisions | $ | 2,934 | $ | 56 | $ | 515 | $ | 54 | $ | 3,449 | $ | 110 | ||||||||||||
Mortgage-backed securities | 2,203 | 297 | 1,645 | 373 | 3,848 | 670 | ||||||||||||||||||
Corporate securities | 10,732 | 1,008 | 9,907 | 1,083 | 20,639 | 2,091 | ||||||||||||||||||
Total fixed maturities | 15,869 | 1,361 | 12,067 | 1,510 | 27,936 | 2,871 | ||||||||||||||||||
Total temporarily impaired securities | $ | 15,869 | $ | 1,361 | $ | 12,067 | $ | 1,510 | $ | 27,936 | $ | 2,871 | ||||||||||||
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 | ||||||||||||||||||
December 31, 2007: | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | — | $ | — | $ | 4,199 | $ | 7 | $ | 4,199 | $ | 7 | ||||||||||||
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 | ||||||||||||
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March 31, | December 31, | ||||||||||||||
2009 | 2008 | 2007 | 2006 | ||||||||||||
Agribusiness segment | |||||||||||||||
Deferred acquisition costs | $ | 6,332 | $ | 5,981 | $ | 6,429 | $ | 6,252 | |||||||
Unearned premium reserves | $ | 28,272 | $ | 27,352 | $ | 27,552 | $ | 26,686 | |||||||
Commercial business segment | |||||||||||||||
Deferred acquisition costs | $ | 4,187 | $ | 4,616 | $ | 4,579 | $ | 4,120 | |||||||
Unearned premium reserves | $ | 16,527 | $ | 17,957 | $ | 19,021 | $ | 16,573 | |||||||
Other | |||||||||||||||
Deferred acquisition costs | $ | 3 | $ | 4 | $ | 6 | $ | 9 | |||||||
Unearned premium reserves | $ | 12 | $ | 13 | $ | 22 | $ | 35 | |||||||
Total | |||||||||||||||
Deferred acquisition costs | $ | 10,522 | $ | 10,601 | $ | 11,014 | $ | 10,381 | |||||||
Unearned premium reserves | $ | 44,811 | $ | 45,322 | $ | 46,595 | $ | 43,294 |
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Three Months Ended March 31, | Years Ended December 31, | |||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Premiums earned: | ||||||||||||||||||||
Agribusiness | $ | 10,968 | $ | 11,387 | $ | 45,298 | $ | 40,245 | $ | 35,889 | ||||||||||
Commercial Business | 7,185 | 8,167 | 31,805 | 29,260 | 26,761 | |||||||||||||||
Other | 304 | 313 | 1,634 | 1,465 | 1,995 | |||||||||||||||
Total premiums earned | 18,457 | 19,867 | 78,737 | 70,970 | 64,645 | |||||||||||||||
Investment income, net of investment expense | 1,359 | 1,396 | 5,335 | 5,324 | 4,677 | |||||||||||||||
Realized investment gains (losses), net | 29 | 1,837 | (5,819 | ) | (702 | ) | 349 | |||||||||||||
Other income | 20 | 149 | 411 | 508 | 345 | |||||||||||||||
Total revenues | $ | 19,865 | $ | 23,249 | $ | 78,664 | $ | 76,100 | $ | 70,016 | ||||||||||
Components of net income (loss): | ||||||||||||||||||||
Underwriting (loss) income: | ||||||||||||||||||||
Agribusiness | $ | (512 | ) | $ | 601 | $ | 313 | $ | 441 | $ | 2 | |||||||||
Commercial Business | 250 | (247 | ) | (5,046 | ) | (1,913 | ) | (678 | ) | |||||||||||
Other | 150 | (116 | ) | 288 | (998 | ) | (1,106 | ) | ||||||||||||
Total underwriting (losses) income | (112 | ) | 238 | (4,445 | ) | (2,470 | ) | (1,782 | ) | |||||||||||
Investment income, net of investment expense | 1,359 | 1,396 | 5,335 | 5,324 | 4,677 | |||||||||||||||
Realized investment gains (losses), net | 29 | 1,837 | (5,819 | ) | (702 | ) | 349 | |||||||||||||
Other income | 20 | 149 | 411 | 508 | 345 | |||||||||||||||
Corporate expense | (33 | ) | (168 | ) | (770 | ) | (506 | ) | (635 | ) | ||||||||||
Interest expense | (76 | ) | (47 | ) | (184 | ) | (125 | ) | (222 | ) | ||||||||||
Other expense, net | (47 | ) | (36 | ) | (365 | ) | (184 | ) | (314 | ) | ||||||||||
Income (loss) from continuing operations, before income taxes | 1,140 | 3,369 | (5,837 | ) | 1,845 | 2,418 | ||||||||||||||
Income tax expense (benefit) | 289 | 985 | (1,378 | ) | 396 | 506 | ||||||||||||||
Income (loss) from continuing operations | 851 | 2,384 | (4,459 | ) | 1,449 | 1,912 | ||||||||||||||
Discontinued Operations: | ||||||||||||||||||||
(Loss) income from discontinued operations, before income taxes | (16 | ) | (2 | ) | (3,090 | ) | (489 | ) | 292 | |||||||||||
Income tax expense (benefit) | 804 | 2 | (170 | ) | (126 | ) | 124 | |||||||||||||
(Loss) income on discontinued operations | (820 | ) | (4 | ) | (2,920 | ) | (363 | ) | 168 | |||||||||||
Net income (loss) | $ | 31 | $ | 2,380 | $ | (7,379 | ) | $ | 1,086 | $ | 2,080 | |||||||||
For the three months ended March 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Written | Earned | Written | Earned | |||||||||||||
Direct | $ | 22,754 | $ | 23,302 | $ | 22,510 | $ | 23,423 | ||||||||
Assumed | 222 | 222 | 246 | 248 | ||||||||||||
Ceded | (4,894 | ) | (5,067 | ) | (3,504 | ) | (3,804 | ) | ||||||||
Net | $ | 18,082 | $ | 18,457 | $ | 19,252 | $ | 19,867 | ||||||||
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Year Ended | ||||||||||||||||||||
Three Months Ended March 31, | December 31, | |||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
Average cash and invested assets | $ | 138,993 | $ | 135,937 | $ | 135,093 | $ | 131,484 | $ | 121,777 | ||||||||||
Net investment income | 1,359 | 1,396 | 5,335 | 5,324 | 4,677 | |||||||||||||||
Return on average cash and invested assets | 1.0 | % | 1.0 | % | 3.9 | % | 4.0 | % | 3.8 | % |
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Three Months Ended March 31, | Years Ended December 31, | ||||||||||||||||||||||
Dollar amounts in thousands | 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||||
Direct premiums written | $ | 15,299 | $ | 13,275 | $ | 57,281 | $ | 55,965 | $ | 51,874 | |||||||||||||
Net premiums written | 11,934 | 10,959 | 45,110 | 41,402 | 38,350 | ||||||||||||||||||
Revenues: | |||||||||||||||||||||||
Net premiums earned | $ | 10,968 | $ | 11,387 | $ | 45,298 | $ | 40,245 | $ | 35,889 | |||||||||||||
Other income | (27 | ) | 55 | 182 | 245 | 115 | |||||||||||||||||
Total revenues(1) | $ | 10,941 | $ | 11,442 | $ | 45,480 | 40,490 | 36,004 | |||||||||||||||
Operating income (loss): | |||||||||||||||||||||||
Underwriting (loss) income | $ | (512 | ) | $ | 601 | $ | 313 | $ | 441 | $ | 2 | ||||||||||||
Other income | (27 | ) | 55 | 182 | 245 | 115 | |||||||||||||||||
Interest & other expenses | (43 | ) | (28 | ) | (202 | ) | (77 | ) | (150 | ) | |||||||||||||
Total operating income (loss) | $ | (582 | ) | $ | 628 | $ | 293 | $ | 609 | $ | (33 | ) | |||||||||||
Loss and loss expense ratio | 73.0 | % | 64.1 | % | 68.7 | % | 67.9 | % | 66.3 | % | |||||||||||||
Underwriting expense ratio | 31.6 | % | 30.6 | % | 30.6 | % | 31.0 | % | 33.7 | % | |||||||||||||
GAAP combined ratio | 104.6 | % | 94.7 | % | 99.3 | % | 98.9 | % | 100.0 | % | |||||||||||||
(1) | Revenues exclude net realized investment gains (losses) and net investment income. Operating income equals pre-tax net income from continuing operations excluding the impact of net realized investment gains (losses) and net investment income. |
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Three Months ended | Years Ended | ||||||||||||||||||||
March 31, | December 31, | ||||||||||||||||||||
Dollar amounts in thousands | 2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
Direct premiums written | $ | 7,373 | $ | 9,170 | $ | 37,458 | $ | 37,860 | $ | 32,365 | |||||||||||
Net premiums written | 5,844 | 7,982 | 30,632 | 31,266 | 27,144 | ||||||||||||||||
Revenues: | |||||||||||||||||||||
Net premiums earned | $ | 7,185 | $ | 8,167 | $ | 31,805 | $ | 29,260 | $ | 26,761 | |||||||||||
Other income | 48 | 94 | 229 | 263 | 230 | ||||||||||||||||
Total revenues (1) | $ | 7,233 | $ | 8,261 | $ | 32,034 | $ | 29,523 | $ | 26,991 | |||||||||||
Operating income (loss): | |||||||||||||||||||||
Underwriting income (loss) | $ | 250 | $ | (247 | ) | $ | (5,046 | ) | $ | (1,913 | ) | $ | (678 | ) | |||||||
Other income | 48 | 94 | 229 | 263 | 230 | ||||||||||||||||
Interest & other expenses | (52 | ) | (32 | ) | (247 | ) | (113 | ) | (257 | ) | |||||||||||
Operating income (loss) | $ | 246 | $ | (185 | ) | $ | (5,064 | ) | $ | (1,763 | ) | $ | (705 | ) | |||||||
Loss and loss expense ratio | 54.8 | % | 66.0 | % | 80.1 | % | 70.3 | % | 65.5 | % | |||||||||||
Underwriting expense ratio | 41.7 | % | 37.0 | % | 35.8 | % | 36.2 | % | 37.0 | % | |||||||||||
GAAP Combined ratio | 96.5 | % | 103.0 | % | 115.9 | % | 106.5 | % | 102.5 | % | |||||||||||
(1) | Revenues exclude net realized investment gains (losses) and net investment income. Operating income equals pre-tax net income from continuing operations excluding the impact of net realized investment gains (losses) and net investment income. |
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Three Months Ended March 31, | Years Ended December 31, | |||||||||||||||||||
Dollar amounts in thousands | 2009 | 2008 | 2008 | 2007 | 2006 | |||||||||||||||
Assumed premiums written | $ | 304 | $ | 311 | $ | 1,625 | $ | 1,451 | $ | 2,031 | ||||||||||
Net premiums written | 304 | 311 | 1,625 | 1,451 | 2,031 | |||||||||||||||
Revenues: | ||||||||||||||||||||
Net premiums earned | $ | 304 | $ | 313 | $ | 1,634 | $ | 1,465 | $ | 1,995 | ||||||||||
Total revenues | $ | 304 | $ | 313 | $ | 1,634 | $ | 1,465 | $ | 1,995 | ||||||||||
Underwriting income (loss) | $ | 150 | $ | (116 | ) | $ | 288 | $ | (998 | ) | $ | (1,106 | ) | |||||||
Operating income (loss) | $ | 150 | $ | (116 | ) | $ | 288 | $ | (998 | ) | $ | (1,106 | ) | |||||||
Loss and loss expense ratio | 6.6 | % | 102.6 | % | 47.3 | % | 129.7 | % | 122.3 | % | ||||||||||
Underwriting expense ratio | 44.1 | % | 34.5 | % | 35.1 | % | 38.4 | % | 33.1 | % | ||||||||||
GAAP Combined ratio | 50.7 | % | 137.1 | % | 82.4 | % | 168.1 | % | 155.4 | % | ||||||||||
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Total Reserves | ||||
Including IBNR | ||||
As of December 31, | ||||
2008 | ||||
Munich Re America Brokers, Inc (formerly American Re) | $ | 5,012 | ||
Mutual Reinsurance Bureau | 363 | |||
Association of Mill & Elevator Companies | 288 | |||
Total | $ | 5,663 | ||
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Years Ended | ||||||||||||||||||||
Three Months Ended March 31, | December 31, | |||||||||||||||||||
Amounts in thousands | 2009 | 2008 | 2008 | 2007 | 2006 | |||||||||||||||
Mandatory Assumed Reinsurance | $ | 245 | $ | (197 | ) | $ | 239 | $ | 95 | $ | (332 | ) | ||||||||
Personal Lines — runoff | (11 | ) | 126 | 335 | (94 | ) | (98 | ) | ||||||||||||
Voluntary Assumed Reinsurance — runoff | (84 | ) | (45 | ) | (286 | ) | (999 | ) | (676 | ) | ||||||||||
Operating income (loss) | $ | 150 | $ | (116 | ) | $ | 288 | $ | (998 | ) | $ | (1,106 | ) | |||||||
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Year Ended | ||||||||||||||||||||
Three Months Ended March 31, | December 31, | |||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
Cash flows provided by (used in) operating activities | $ | 7,113 | $ | (78 | ) | $ | 7,383 | $ | 11,017 | $ | 11,711 | |||||||||
Cash flows used in investing activities | (3,202 | ) | (2,558 | ) | (5,702 | ) | (13,373 | ) | (6,592 | ) | ||||||||||
Cash flows provided by (used in) financing activities | (175 | ) | (78 | ) | 144 | (562 | ) | (2,087 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 3,736 | $ | (2,714 | ) | $ | 1,825 | $ | (2,918 | ) | $ | 3,032 | ||||||||
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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 | $ | 108,065 | $ | 36,743 | $ | 38,903 | $ | 17,290 | $ | 15,129 | ||||||||||
Defined benefit plan obligations | 9,773 | 295 | 697 | 1,445 | 7,336 | |||||||||||||||
Long-term debt obligations and lines of credit | 2,667 | 1,047 | 1,320 | 200 | 100 | |||||||||||||||
Operating lease obligations | 246 | 123 | 118 | 5 | 0 | |||||||||||||||
Accrued severance costs | 831 | 471 | 251 | 30 | 79 | |||||||||||||||
Interest on long-term debt obligations and lines of credit | 94 | 50 | 39 | 4 | 1 | |||||||||||||||
Total | $ | 121,676 | $ | 38,729 | $ | 41,328 | $ | 18,974 | $ | 22,645 | ||||||||||
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Hypothetical Change in | Estimated Change | |||||||
Interest Rates | in Fair Value | Fair Value | ||||||
(dollars in thousands) | ||||||||
200 basis point increase | $ | (9,278 | ) | $ | 119,020 | |||
100 basis point increase | (4,412 | ) | 123,886 | |||||
No change | — | 128,298 | ||||||
100 basis point decrease | 4,328 | 132,626 | ||||||
200 basis point decrease | 9,198 | 137,496 |
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• | First, in 2009 we introduced 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 product offerings 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 Years Ended | ||||||||||||||||||||
For the Three Months Ended March 31, | December 31, | |||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
Direct Premiums Written: | ||||||||||||||||||||
Property | $ | 5,582 | $ | 4,286 | $ | 20,831 | $ | 20,263 | $ | 18,961 | ||||||||||
Commercial Auto | 3,409 | 3,147 | 12,919 | 14,055 | 13,334 | |||||||||||||||
Liability | 3,202 | 2,465 | 9,615 | 8,635 | 8,029 | |||||||||||||||
Workers’ Compensation | 1,792 | 1,566 | 8,064 | 7,394 | 6,610 | |||||||||||||||
Other | 1,314 | 1,811 | 5,852 | 5,618 | 4,940 | |||||||||||||||
Total | $ | 15,299 | $ | 13,275 | $ | 57,281 | $ | 55,965 | $ | 51,874 | ||||||||||
Net Premiums Earned: | ||||||||||||||||||||
Property | $ | 3,885 | $ | 4,216 | $ | 16,412 | $ | 13,772 | $ | 12,620 | ||||||||||
Commercial Auto | 2,806 | 3,187 | 12,119 | 11,859 | 11,189 | |||||||||||||||
Liability | 2,381 | 2,184 | 8,795 | 7,540 | 6,768 | |||||||||||||||
Workers’ Compensation | 1,728 | 1,634 | 7,310 | 6,394 | 5,166 | |||||||||||||||
Other | 168 | 166 | 662 | 680 | 146 | |||||||||||||||
Total | $ | 10,968 | $ | 11,387 | $ | 45,298 | $ | 40,245 | $ | 35,889 | ||||||||||
Net Loss Ratios: | ||||||||||||||||||||
Property | 87.6 | % | 63.4 | % | 86.1 | % | 84.9 | % | 60.4 | % | ||||||||||
Commercial Auto | 65.2 | % | 59.5 | % | 41.9 | % | 48.5 | % | 62.7 | % | ||||||||||
Liability | 67.4 | % | 51.5 | % | 90.1 | % | 102.6 | % | 46.4 | % | ||||||||||
Workers’ Compensation | 67.8 | % | 72.5 | % | 51.4 | % | 54.2 | % | 113.8 | % | ||||||||||
Other | 0.0 | % | 0.0 | % | 37.7 | % | -196.2 | % | 92.0 | % | ||||||||||
Total | 73.0 | % | 64.1 | % | 68.7 | % | 67.9 | % | 66.3 | % | ||||||||||
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For the Years Ended | |||||||||||||||||||||
For the Three Months Ended March 31, | December 31, | ||||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | |||||||||||||||||
Direct Premiums Written: | |||||||||||||||||||||
Property & Liability | $ | 4,172 | $ | 5,242 | $ | 21,056 | $ | 22,474 | $ | 20,567 | |||||||||||
Workers’ Compensation | 1,219 | 1,876 | 8,031 | 7,716 | 5,825 | ||||||||||||||||
Commercial Auto | 1,275 | 1,307 | 5,068 | 4,914 | 3,983 | ||||||||||||||||
Other | 707 | 745 | 3,303 | 2,756 | 1,990 | ||||||||||||||||
Total | $ | 7,373 | $ | 9,170 | $ | 37,458 | $ | 37,860 | $ | 32,365 | |||||||||||
Net Premiums Earned: | |||||||||||||||||||||
Property & Liability | $ | 4,384 | $ | 5,080 | $ | 19,428 | $ | 18,301 | $ | 18,076 | |||||||||||
Workers’ Compensation | 1,583 | 1,856 | 7,451 | 6,524 | 5,077 | ||||||||||||||||
Commercial Auto | 1,152 | 1,168 | 4,659 | 4,194 | 3,564 | ||||||||||||||||
Other | 66 | 63 | 267 | 241 | 44 | ||||||||||||||||
Total | $ | 7,185 | $ | 8,167 | $ | 31,805 | $ | 29,260 | $ | 26,761 | |||||||||||
Net Loss Ratios: | |||||||||||||||||||||
Property & Liability | 64.2 | % | 71.6 | % | 99.0 | % | 87.0 | % | 59.9 | % | |||||||||||
Workers’ Compensation | 62.1 | % | 29.9 | % | 54.5 | % | 37.1 | % | 74.0 | % | |||||||||||
Commercial Auto | 12.3 | % | 56.3 | % | 45.9 | % | 54.9 | % | 78.2 | % | |||||||||||
Other | (0.5 | %) | 403.6 | % | 17.2 | % | (35.3 | %) | 359.3 | % | |||||||||||
Total | 54.8 | % | 66.0 | % | 80.1 | % | 70.3 | % | 65.5 | % |
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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 | 52.5 | % | 47.5 | % | ||||
$4 million in excess of $1 million | 0 | % | 100 | % | ||||
$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 | 52.5 | % | 47.5 | % | ||||
$4 million in excess of $1 million | 0 | % | 100 | % | ||||
$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 | ||||||||||
Hannover Ruckericherungs | $ | 5,381 | 24 | % | A | |||||||
Swiss Reinsurance America Corp | 4,311 | 19 | % | A | ||||||||
XL Reinsurance America | 2,575 | 11 | % | A | ||||||||
Transatlantic Reinsurance Company | 2,095 | 9 | % | A | ||||||||
Partner Reinsurance Co. of the U.S. | 1,948 | 9 | % | A+ | ||||||||
Hannover Reinsurance (Ireland) | 1,717 | 8 | % | A | ||||||||
Employers Mutual Casualty Co. | 1,100 | 5 | % | A- | ||||||||
Platinum Underwriters Reinsurance | 848 | 4 | % | A | ||||||||
Aspen Insurance UK | 676 | 3 | % | A | ||||||||
General Reinsurance | 541 | 2 | % | A++ | ||||||||
All Other | 1,433 | 6 | % | A- or better | ||||||||
Total | $ | 22,625 | 100 | % | ||||||||
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Three Months Ended | Years Ended | |||||||||||||||||||
March 31, | December 31, | |||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Balance at January 1 | $ | 108,065 | $ | 95,956 | $ | 95,956 | $ | 89,405 | $ | 83,849 | ||||||||||
Reinsurance recoverable on unpaid loss and LAE | 22,625 | 18,727 | 18,727 | 20,089 | 22,817 | |||||||||||||||
Net liability at January 1 | 85,440 | 77,229 | 77,229 | 69,316 | 61,032 | |||||||||||||||
Loss and LAE incurred, net: | ||||||||||||||||||||
Current year | $ | 13,431 | $ | 14,482 | $ | 62,612 | $ | 54,421 | $ | 43,785 | ||||||||||
Prior years | (1,461 | ) | (1,465 | ) | (5,222 | ) | (4,638 | ) | (19 | ) | ||||||||||
Total incurred loss and LAE | 11,970 | 13,017 | 57,390 | 49,783 | 43,766 | |||||||||||||||
Less loss and LAE paid, net: | ||||||||||||||||||||
Current year | $ | 2,105 | $ | 2,373 | $ | 26,578 | $ | 22,191 | $ | 14,222 | ||||||||||
Prior years | 7,443 | 8,340 | 22,601 | 19,679 | 21,260 | |||||||||||||||
Total loss and LAE expenses paid | 9,548 | 10,713 | 49,179 | 41,870 | 35,482 | |||||||||||||||
Net liability for unpaid loss and LAE, at end of period | $ | 87,862 | $ | 79,533 | $ | 85,440 | $ | 77,229 | $ | 69,316 | ||||||||||
Reinsurance recoverable on unpaid losses and LAE | 28,913 | 20,948 | 22,625 | 18,727 | 20,089 | |||||||||||||||
Reserve for unpaid losses and LAE at end of period | $ | 116,775 | $ | 100,481 | $ | 108,065 | $ | 95,956 | $ | 89,405 | ||||||||||
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Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Liability for unpaid loss and LAE, net of reinsurance recoverables | $ | 31,185 | $ | 30,165 | $ | 29,476 | $ | 35,656 | $ | 42,731 | $ | 48,072 | $ | 55,804 | $ | 61,032 | $ | 69,316 | $ | 77,229 | $ | 85,440 | ||||||||||||||||||||||
Cumulative amount of liability paid through | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 8,925 | 10,393 | 12,523 | 15,441 | 15,279 | 18,849 | 19,288 | 21,262 | 19,681 | 22,591 | — | |||||||||||||||||||||||||||||||||
Two years later | 13,312 | 15,977 | 20,032 | 23,640 | 25,731 | 27,719 | 28,977 | 32,372 | 31,974 | — | — | |||||||||||||||||||||||||||||||||
Three years later | 16,712 | 20,104 | 25,184 | 28,897 | 31,372 | 34,125 | 35,481 | 40,950 | — | — | — | |||||||||||||||||||||||||||||||||
Four years later | 19,542 | 23,386 | 28,118 | 32,311 | 35,104 | 37,135 | 41,365 | — | — | — | — | |||||||||||||||||||||||||||||||||
Five years later | 21,496 | 24,935 | 30,318 | 33,755 | 36,561 | 39,446 | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Six years later | 22,790 | 26,699 | 31,333 | 34,786 | 37,978 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Seven years later | 24,430 | 27,451 | 32,039 | 35,847 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Eight years later | 25,117 | 28,000 | 33,002 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Nine years later | 25,641 | 28,755 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Ten years later | 26,387 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
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Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Liability estimated as of | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 28,581 | 28,506 | 34,545 | 38,657 | 44,764 | 49,658 | 54,729 | 61,017 | 64,679 | 72,004 | — | |||||||||||||||||||||||||||||||||
Two years later | 25,883 | 31,763 | 34,864 | 40,138 | 44,591 | 48,718 | 54,948 | 61,081 | 63,847 | — | — | |||||||||||||||||||||||||||||||||
Three years later | 28,647 | 30,869 | 35,865 | 40,527 | 44,424 | 49,954 | 54,510 | 59,884 | — | — | — | |||||||||||||||||||||||||||||||||
Four years later | 27,906 | 30,885 | 36,594 | 40,416 | 45,405 | 49,617 | 54,411 | — | — | — | — | |||||||||||||||||||||||||||||||||
Five years later | 28,295 | 31,910 | 37,108 | 40,696 | 45,603 | 49,284 | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Six years later | 29,438 | 32,448 | 37,402 | 41,157 | 45,744 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Seven years later | 30,168 | 33,127 | 38,193 | 41,513 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Eight years later | 30,811 | 33,820 | 38,590 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Nine years later | 31,425 | 34,273 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Ten years later | 31,942 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Cumulative total redundancy (deficiency) | $ | (757 | ) | $ | (4,108 | ) | $ | (9,114 | ) | $ | (5,857 | ) | $ | (3,013 | ) | $ | (1,212 | ) | $ | 1,393 | $ | 1,148 | $ | 5,469 | $ | 5,225 | — | |||||||||||||||||
Gross liability — end of year | $ | 37,574 | $ | 39,188 | $ | 37,056 | $ | 47,084 | $ | 53,462 | $ | 69,463 | $ | 73,287 | $ | 83,849 | $ | 89,405 | $ | 95,956 | $ | 108,065 | ||||||||||||||||||||||
Reinsurance recoverables | 6,389 | 9,023 | 7,580 | 11,428 | 10,731 | 21,391 | 17,483 | 22,817 | 20,089 | 18,727 | 22,625 | |||||||||||||||||||||||||||||||||
Net liability — end of year | $ | 31,185 | $ | 30,165 | $ | 29,476 | $ | 35,656 | $ | 42,731 | $ | 48,072 | $ | 55,804 | $ | 61,032 | $ | 69,316 | $ | 77,229 | $ | 85,440 | ||||||||||||||||||||||
Gross reestimated liability — latest | $ | 47,068 | $ | 55,110 | $ | 58,413 | $ | 62,206 | $ | 65,091 | $ | 67,034 | $ | 71,114 | $ | 84,443 | $ | 80,647 | $ | 91,772 | ||||||||||||||||||||||||
Reestimated reinsurance recoverables — latest | $ | 15,126 | 20,837 | 19,823 | 20,693 | 19,347 | 17,750 | 16,703 | 24,559 | 16,800 | 19,768 | |||||||||||||||||||||||||||||||||
Net reestimated liability — latest | $ | 31,942 | $ | 34,273 | $ | 38,590 | $ | 41,513 | $ | 45,744 | $ | 49,284 | $ | 54,411 | $ | 59,884 | $ | 63,847 | $ | 72,004 | ||||||||||||||||||||||||
Gross cumulative redundancy (deficiency) | $ | (9,494 | ) | $ | (15,922 | ) | $ | (21,357 | ) | $ | (15,122 | ) | $ | (11,629 | ) | $ | 2,429 | $ | 2,173 | $ | (594 | ) | $ | 8,758 | $ | 4,184 | ||||||||||||||||||
• | 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 March 31, | At December 31, | |||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Cost or Amortized | Estimated Fair | Cost or Amortized | Estimated Fair | Cost or Amortized | Estimated Fair | |||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 15,994 | $ | 16,937 | $ | 14,929 | $ | 16,089 | $ | 18,523 | $ | 18,888 | ||||||||||||
U.S. treasury securities | 8,540 | 9,126 | 8,530 | 9,310 | 7,837 | 8,096 | ||||||||||||||||||
States, Territories and possessions | 15,718 | 16,674 | 15,753 | 16,475 | 15,310 | 15,771 | ||||||||||||||||||
Special Revenue | 16,511 | 17,258 | 16,022 | 16,482 | 15,011 | 15,363 | ||||||||||||||||||
Public Utilities | 5,040 | 5,092 | 5,419 | 5,396 | 2,516 | 2,580 | ||||||||||||||||||
Industrial and Miscellaneous | 40,180 | 38,594 | 34,511 | 32,857 | 31,140 | 31,347 | ||||||||||||||||||
Mortgage-Backed Securities | 24,431 | 24,617 | 25,374 | 25,305 | 20,636 | 20,724 | ||||||||||||||||||
Total Debt Securities | 126,414 | 128,298 | 120,538 | 121,914 | 110,973 | 112,769 | ||||||||||||||||||
Equity Securities | — | — | — | — | 10,525 | 13,409 | ||||||||||||||||||
Total | $ | 126,414 | $ | 128,298 | $ | 120,538 | $ | 121,914 | $ | 121,498 | $ | 126,178 | ||||||||||||
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March 31, 2009 | December 31, 2008 | ||||||||||||||
Estimated | Percent | Estimated | Percent | ||||||||||||
Rating (1) | Fair Value | of Total (2) | Fair Value | of Total (2) | |||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 15,864 | 12.4 | % | $ | 16,089 | 13.2 | % | |||||||
U.S. treasury securities | 9,126 | 7.1 | % | 9,310 | 7.6 | % | |||||||||
AAA | 43,946 | 34.2 | % | 44,452 | 36.5 | % | |||||||||
AA | 24,143 | 18.8 | % | 17,866 | 14.7 | % | |||||||||
A | 30,381 | 23.7 | % | 29,409 | 24.1 | % | |||||||||
BBB | 4,478 | 3.5 | % | 4,788 | 3.9 | % | |||||||||
BB | 360 | 0.3 | % | — | 0.0 | % | |||||||||
Total | $ | 128,298 | 100.0 | % | $ | 121,914 | 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 National Association of Insurance Commissioners (NAIC) were used where available. | |
(2) | Represents percent of fair value for classification as a percent of the total portfolio. |
March 31, 2009 | December 31, 2008 | |||||||||||||||
Amortized Cost | Estimated Fair Value (1) | Amortized Cost | Estimated Fair Value (1) | |||||||||||||
Less than one year | $ | 8,230 | $ | 8,367 | $ | 8,321 | $ | 8,439 | ||||||||
One though five years | 47,562 | 48,263 | 42,747 | 43,356 | ||||||||||||
Five through ten years | 39,608 | 40,201 | 39,299 | 39,824 | ||||||||||||
Greater than ten years | 6,583 | 6,850 | 4,797 | 4,990 | ||||||||||||
Mortgaged-backed securities (2) | 24,431 | 24,617 | 25,374 | 25,305 | ||||||||||||
Total debt securities | $ | 126,414 | $ | 128,298 | $ | 120,538 | $ | 121,914 | ||||||||
(1) | Debt securities are carried at fair value in our financial statements beginning on page F-2. | |
(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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March 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||
Credit | Credit | Credit | ||||||||||||||||||||
Fair Value | Rating | Fair Value | Rating | Fair Value | Rating | |||||||||||||||||
U.S. Agency guaranteed RMBS | $ | 20,672 | AAA | $ | 21,373 | AAA | $ | 15,688 | AAA | |||||||||||||
Non-Agency guaranteed RMBS | — | — | — | — | — | — | ||||||||||||||||
Prime First Lien | — | — | — | — | — | — | ||||||||||||||||
Prime Second Lien | — | — | — | — | — | — | ||||||||||||||||
Alt-A Loans | — | — | — | — | — | — | ||||||||||||||||
Subprime Loans | — | — | — | — | — | — | ||||||||||||||||
Total | $ | 20,672 | — | $ | 21,373 | — | $ | 15,688 | — | |||||||||||||
(Dollars in Thousands) | |||||||||||||||||||||||
March 31, 2009 | December 31, 2008 | December 31, 2007 | |||||||||||||||||||||
Average | Average | Average | |||||||||||||||||||||
Credit | Credit | Credit | |||||||||||||||||||||
Fair Value | Rating | Fair Value | Rating | Fair Value | Rating | ||||||||||||||||||
Auto loan backed securities | $ | — | — | $ | — | — | $ | — | — | ||||||||||||||
Home equity loan backed securities | — | — | — | — | — | — | |||||||||||||||||
Municipal bonds | $ | 23,136 | AA+ | $ | 22,864 | AA+ | $ | 23,258 | AAA |
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Fair Value at | Fair Value at | Fair Value at | |||||||||
Insurer | March 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||
AMBAC | $ | 3,309 | $ | 3,259 | $ | 3,274 | |||||
FGIC | 5,524 | 2,772 | 2,735 | ||||||||
FSA | 8,915 | 8,829 | 8,730 | ||||||||
MBIA | 5,388 | 8,004 | 8,519 | ||||||||
Total | $ | 23,136 | $ | 22,864 | $ | 23,258 | |||||
At March 31, 2009 | At December 31, 2008 | At December 2007 | |||||||||||
Rating | With Guarantee Fair Value | Without Guarantee Fair Value | With Guarantee Fair Value | With Guarantee Fair Value | |||||||||
AAA | $ | 8,918 | $ | 1,108 | $ | 22,864 | $ | 23,258 | |||||
AA | 12,025 | 16,612 | — | — | |||||||||
A | 2,193 | 5,416 | — | — | |||||||||
Total | $ | 23,136 | $ | 23,136 | $ | 22,864 | $ | 23,258 | |||||
Year Ended | ||||||||||||||||||||
Three Months Ended March 31, | December 31, | |||||||||||||||||||
2009 | 2008 | 2008 | 2007 | 2006 | ||||||||||||||||
Average cash and invested assets | $ | 138,993 | $ | 135,937 | $ | 135,093 | $ | 131,484 | $ | 121,777 | ||||||||||
Net investment income | 1,359 | 1,396 | 5,335 | 5,324 | 4,677 | |||||||||||||||
Return on average cash and invested assets | 1.0 | % | 1.0 | % | 3.9 | % | 4.0 | % | 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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• | eligible members of Penn Millers Mutual, who are defined in the plan of conversion as the policyholders of Penn Millers Insurance Company under policies of insurance in place as of April 22, 2009; | ||
• | our ESOP; and | ||
• | the directors, officers and employees of Penn Millers 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 April 22, 2009; 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 in Pennsylvania. |
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• | “eligible members” (as they are referred to in the plan of conversion), 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 April 22, 2009; | ||
• | our ESOP; and | ||
• | the directors, officers and employees of Penn Millers 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 April 22, 2009; 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 conversion 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 | 204,676 | 76,228 | 62,937 | 37.2 | -3.2 | -8.1 | ||||||||||||||||||
Baldwin & Lyons, Inc. | 765,729 | 325,649 | 167,677 | 42.5 | 0.3 | 0.7 | ||||||||||||||||||
CRM Holdings, Ltd. | 452,951 | 101,677 | 134,533 | 22.4 | -3.5 | -13.5 | ||||||||||||||||||
Donegal Group Inc. | 890,379 | 368,350 | 378,007 | 41.4 | 2.2 | 5.3 | ||||||||||||||||||
Eastern Insurance Holdings, Inc. | 385,487 | 137,234 | 129,820 | 35.6 | -5.4 | -13.5 | ||||||||||||||||||
EMC Insurance Group Inc. | 1,105,584 | 286,182 | 406,030 | 25.9 | -0.4 | -1.3 | ||||||||||||||||||
First Mercury Financial Corporation | 985,641 | 274,384 | 231,115 | 27.8 | 4.4 | 15.2 | ||||||||||||||||||
Hallmark Financial Services, Inc. | 551,279 | 190,555 | 267,758 | 34.6 | 2.3 | 6.5 | ||||||||||||||||||
Mercer Insurance Group, Inc. | 566,221 | 141,843 | 158,581 | 25.1 | 1.5 | 6.3 | ||||||||||||||||||
National Interstate Corporation | 1,025,934 | 224,907 | 295,232 | 21.9 | 1.4 | 6.4 | ||||||||||||||||||
National Security Group, Inc. | 125,054 | 35,045 | 59,538 | 28.0 | -3.4 | -11.5 | ||||||||||||||||||
NYMAGIC, INC. | 977,190 | 171,154 | 102,751 | 17.5 | -7.1 | -35.5 | ||||||||||||||||||
SeaBright Insurance Holdings, Inc. | 896,537 | 333,196 | 269,751 | 37.2 | 2.7 | 7.1 | ||||||||||||||||||
Unico American Corporation | 182,340 | 76,226 | 45,089 | 41.8 | 2.9 | 7.3 | ||||||||||||||||||
Comparative Group Mean | 651,072 | 195,902 | 193,487 | 31.4 | -0.4 | -2.0 | ||||||||||||||||||
Comparative Group Median | 665,975 | 180,855 | 163,129 | 31.3 | 0.8 | 3.0 | ||||||||||||||||||
Penn Millers | 228,415 | 51,161 | 75,280 | 22.4 | -2.7 | -10.6 |
(1) | LTM corresponds to last twelve months ended March 31, 2009. Return on average assets (ROAA), which is the ratio of net income to total average assets, and the return on average equity (ROAE), which is the ratio of net income to total average equity, utilize net income for the LTM period and asset book values at March 31, 2009 and 2008 to derive such ratios. | |
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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 | 27,087 | 35.5 | 35.5 | Neg | 0.43 | 13.2 | ||||||||||||||||||
Baldwin & Lyons, Inc. | 309,369 | 95.0 | 95.0 | 130.94 | 1.85 | 40.4 | ||||||||||||||||||
CRM Holdings, Ltd. | 19,609 | 19.3 | 19.9 | Neg | 0.15 | 4.3 | ||||||||||||||||||
Donegal Group Inc. | 405,745 | 110.2 | 110.4 | 20.91 | 1.07 | 45.6 | ||||||||||||||||||
Eastern Insurance Holdings, Inc. | 85,767 | 62.5 | 72.8 | Neg | 0.66 | 22.2 | ||||||||||||||||||
EMC Insurance Group Inc. | 288,182 | 100.7 | 101.0 | Neg | 0.71 | 26.1 | ||||||||||||||||||
First Mercury Financial Corporation | 252,444 | 92.0 | 120.1 | 6.51 | 1.09 | 25.6 | ||||||||||||||||||
Hallmark Financial Services, Inc. | 145,694 | 76.5 | 120.2 | 12.03 | 0.54 | 26.4 | ||||||||||||||||||
Mercer Insurance Group, Inc. | 94,742 | 66.8 | 69.4 | 11.26 | 0.60 | 16.7 | ||||||||||||||||||
National Interstate Corporation | 323,002 | 143.6 | 143.6 | 23.51 | 1.09 | 31.5 | ||||||||||||||||||
National Security Group, Inc. | 21,213 | 60.5 | 60.5 | Neg | 0.36 | 17.0 | ||||||||||||||||||
NYMAGIC, INC. | 126,620 | 74.0 | 74.0 | Neg | 1.23 | 13.0 | ||||||||||||||||||
SeaBright Insurance Holdings, Inc. | 201,575 | 60.5 | 61.3 | 9.01 | 0.75 | 22.5 | ||||||||||||||||||
Unico American Corporation | 43,085 | 56.5 | 56.5 | 8.09 | 0.96 | 23.6 | ||||||||||||||||||
Comparative Group Mean | 167,438 | 75.3 | 81.5 | 27.78 | 0.82 | 23.4 | ||||||||||||||||||
Comparative Group Median | 136,157 | 70.4 | 73.4 | 11.65 | 0.73 | 23.1 | ||||||||||||||||||
Penn Millers (Fully Converted) | ||||||||||||||||||||||||
Pro Forma Minimum | 45,050 | 50.9 | 50.9 | Neg | 0.59 | 17.0 | ||||||||||||||||||
Pro Forma Midpoint | 53,000 | 55.5 | 55.5 | Neg | 0.69 | 19.4 | ||||||||||||||||||
Pro Forma Maximum | 60,950 | 59.4 | 59.4 | Neg | 0.79 | 21.8 |
(1) | LTM EPS corresponds to earnings per share for the last twelve months ended March 31, 2009. LTM revenue corresponds to total revenue for the last twelve months ended March 31, 2009. | |
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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 conversion. | ||
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Minimum | Maximum | |||||||
(4,505,000 shares) | (6,095,000 shares) | |||||||
Commissions | $675,750(1) | $914,250(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 5% of the total shares of common stock sold in the offering; and | ||
• | No purchaser, together with such purchaser’s affiliates and associates or a group acting in concert, may purchase more than 5% of the total shares of common stock sold in the offering. |
• | 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 | * | |||||||||
Douglas A. Gaudet | 300,000 | 30,000 | * | |||||||||
Kim E. Michelstein | 50,000 | 5,000 | * | |||||||||
Robert A. Nearing, Jr. | 75,000 | 7,500 | * | |||||||||
Donald A. Pizer | 50,000 | 5,000 | * | |||||||||
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 (16 persons) | $ | 1,330,000 | 133,000 | 2.95 | % | |||||||
* | 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 9.99% of the common stock issued in the offering (which equals between 450,499 shares if 4,505,000 shares are sold in the offering and 677,222 shares if 6,772,221 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 630,700 shares if 4,505,000 shares are sold in the offering, and 948,111 shares if 6,772,221 shares are sold in the offering). | |
(3) | Assumes that 4,505,000 shares are issued in the offering, including the shares purchased by the ESOP. | |
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• | Penn Millers Mutual of the conversion of Penn Millers Mutual from a mutual holding company to a stock holding company; | ||
• | eligible members that are U.S. Persons that hold their membership interests in Penn Millers Mutual 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 the common stock of Penn Millers Holding Corporation (which we refer to as our common stock) in the subscription offering; | ||
• | eligible members that are U.S. Persons that purchase shares of our common stock in the subscription offering upon the exercise of subscription rights and hold their 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 and hold their 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 community offering. |
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• | the conversion of Penn Millers Mutual from a mutual holding company to a stock holding company will be a reorganization within the meaning of Section 368(a)(1)(E) of the Code; | ||
• | Penn Millers Mutual in its post-conversion stock form will constitute one and the same taxable entity as Penn Millers Mutual in its pre-conversion mutual form; | ||
• | neither Penn Millers Mutual in its pre-conversion mutual form nor Penn Millers Mutual in its post-conversion stock form will recognize gain or loss as a result of the conversion; and | ||
• | the tax attributes of Penn Millers Mutual in its pre-conversion mutual form will remain unchanged as tax attributes of Penn Millers Mutual in its post-conversion stock form. Thus, Penn Millers Mutual’s basis in its assets, holding period for its assets, net operating loss carryovers, if any, capital loss carryovers, if any, earnings and profits and accounting methods will not be changed by reason of the conversion. |
• | eligible members will be treated as transferring their membership interests in Penn Millers Mutual to Penn Millers Holding Corporation in exchange for subscription rights to purchase Penn Millers Holding Corporation common stock; | ||
• | any gain realized by an eligible member as a result of the receipt of a subscription right with a fair market value must be recognized, whether or not such right is exercised; | ||
• | the amount of gain that must be recognized by an eligible member as a result of the receipt of a subscription right will equal the fair market value of such subscription right; | ||
• | any gain recognized by an eligible member as a result of the receipt of a subscription right with a fair market value should constitute a capital gain, which will be long term capital gain if the eligible member has held its membership interests for more than one year; and | ||
• | if an eligible member is required to recognize gain on the receipt of a subscription right and does not exercise such subscription right, (i) the eligible member should recognize a corresponding loss upon the expiration or lapse of such member’s unexercised subscription right, (ii) the amount of that loss should equal the gain previously recognized upon receipt of the unexercised subscription right, and (iii) if the common stock that an eligible member would have received upon exercise of the lapsed subscription right would have constituted a capital asset in the hands of that eligible member, the resulting loss upon expiration of the subscription right should constitute a capital loss. |
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Age at June 26, | ||||||||||||
2009 | Director Since(1) | Position with Penn Millers | ||||||||||
Heather M. Acker | 57 | 2004 | Director | |||||||||
F. Kenneth Ackerman, Jr. | 70 | 1979 | Vice Chairman | |||||||||
Dorrance R. Belin | 71 | 1998 | Director | |||||||||
John L. Churnetski | 68 | 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. | 66 | 1997 | Director | |||||||||
Donald A. Pizer | 64 | 2009 | 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 objectives for Eastern Insurance Group and Penn Software. | |
Eastern | ||||||||||
Insurance | Commercial | Holding | Insurance | |||||||
Name | Company | Business | Agribusiness | Company | Group, Inc | |||||
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% |
Performance | ||||||||||||||||
Measure | Threshold | Target | Maximum | Weight | ||||||||||||
ROAE | 3.00 | % | 5.25 | % | 7.87 | % | 60 | % | ||||||||
Gross Premium Growth Rate | 1.50 | % | 2.60 | % | 3.80 | % | 20 | % | ||||||||
Operating Expense | $ | 16,000,000 | $ | 15,700,000 | $ | 15,000,000 | 20 | % |
Title | Threshold | Target | Maximum | |||||||||
Chief Executive Officer | 11.25 | % | 45.0 | % | 67.5 | % | ||||||
Executive Vice President & Senior Vice President | 10.00 | % | 40.0 | % | 60.0 | % | ||||||
Vice President | 8.75 | % | 35.0 | % | 52.5 | % | ||||||
Assistant Vice President | 5.00 | % | 20.0 | % | 30.0 | % | ||||||
Manager, Assistant Manager & Supervisor | 3.00 | % | 12.0 | % | 18.0 | % | ||||||
Staff Employees | 1.25 | % | 5.0 | % | 7.5 | % |
Title | Threshold | Target | Maximum | |||||||||
Douglas A. Gaudet | $ | 38,528 | $ | 154,114 | $ | 231,171 | ||||||
Michael O. Banks | $ | 23,571 | $ | 94,282 | $ | 141,424 | ||||||
Frank Joanlanne | $ | 0 | $ | 0 | $ | 0 | ||||||
Harold W. Roberts | $ | 18,659 | $ | 74,636 | $ | 111,953 | ||||||
Kevin D. Higgins | $ | 14,261 | $ | 57,044 | $ | 85,566 | ||||||
Jonathan C. Couch | $ | 11,683 | $ | 46,733 | $ | 70,100 |
• | Was calculated based on the achievement of financial results that were subsequently restated; | ||
• | The restatement was caused in whole or in part by the intentional misconduct of the executive officer; and | ||
• | Had the financial results been properly reported, the amount awarded under the plan would have been lower than the amount actually rewarded. | ||
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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 | 3 | $ | 25,000 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 3 | $ | 185,000 | $ | 0 | |||||||||
Michael O. Banks | Defined Benefit Pension Plan | 6 | $ | 66,000 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 6 | $ | 26,000 | $ | 0 | |||||||||
Frank Joanlanne(2) | Defined Benefit Pension Plan | 5 | $ | 31,000 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 5 | $ | 0 | $ | 0 | |||||||||
Harold W. Roberts | Defined Benefit Pension Plan | 33 | $ | 409,000 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 33 | $ | 223,000 | $ | 0 | |||||||||
Kevin D. Higgins | Defined Benefit Pension Plan | 6 | $ | 50,000 | $ | 0 | ||||||||
Supplemental Executive Retirement Plan | 6 | $ | 25,000 | $ | 0 | |||||||||
Jonathan C. Couch | Defined Benefit Pension Plan | 6 | $ | 22,000 | $ | 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, 2008; | ||
• | The lump sum is calculated using an interest rate of 6.16% for the pension and 6.56% for the SERP; and | ||
• | The lump sum is discounted to December 31, 2008 at a rate of 6.16% and 6.56% per year, for the pension and SERP, respectively | ||
(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 on December 1, 2008. |
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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(2) | $ | 0 | $ | 0 | $ | (6,455 | ) | $ | 0 | $ | 1,447 | |||||||||
Harold W. Roberts | $ | 12,033 | $ | 0 | $ | (11,370 | ) | $ | 0 | $ | 23,645 | |||||||||
Kevin D. Higgins | $ | 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. | |
(2) | Mr. Joanlanne’s employment with Penn Millers was terminated on December 1, 2008. |
• | 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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The report of the independent registered public accounting firm covering the December 31, 2008 financial statements refers to Penn Millers Mutual Holding Company and subsidiary’s adoption of the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2007, and Securities and Exchange Commission Staff Accounting Bulletin No. 108, Quantifying Financial Statement Misstatements, in 2008.
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Page | ||||
Interim Financial Statements (Unaudited) | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
Report of Independent Accounting Firm | F-23 | |||
Financial Statements | ||||
Consolidated Balance Sheets (As of December 31, 2009 and 2008) | F-24 | |||
Consolidated Statements of Operations (Years ended December 31, 2009, 2008 and 2007) | F-25 | |||
Consolidated Statements of Equity (Years ended December 31, 2009, 2008 and 2007) | F-26 | |||
Consolidated Statements of Cash Flows (Years ended December 31, 2009, 2008 and 2007) | F-27 | |||
Notes to Consolidated Financial Statements | F-28 | |||
Schedules to Consolidated Financial Statements | F-66 |
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March 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturities investments: | ||||||||
Available for sale, at fair value (amortized cost $126,414 in 2009 (unaudited) and $120,538 in 2008) | $ | 128,298 | 121,914 | |||||
Cash and cash equivalents | 15,695 | 11,959 | ||||||
Premiums and fees receivable | 28,753 | 31,080 | ||||||
Reinsurance receivables and recoverables | 25,064 | 20,637 | ||||||
Deferred policy acquisition costs | 10,522 | 10,601 | ||||||
Prepaid reinsurance premiums | 4,170 | 4,342 | ||||||
Accrued investment income | 1,391 | 1,431 | ||||||
Property and equipment, net of accumulated depreciation | 4,071 | 4,231 | ||||||
Income taxes receivable | 1,294 | 1,508 | ||||||
Deferred income taxes | 3,656 | 4,728 | ||||||
Other | 4,058 | 3,864 | ||||||
Deferred offering costs | 1,443 | 1,015 | ||||||
Assets held for sale | — | 3,214 | ||||||
Total assets | $ | 228,415 | 220,524 | |||||
Liabilities and Equity | ||||||||
Liabilities: | ||||||||
Losses and loss adjustment expense reserves | $ | 116,775 | 108,065 | |||||
Unearned premiums | 44,811 | 45,322 | ||||||
Accounts payable and accrued expenses | 12,631 | 13,353 | ||||||
Borrowings under line of credit | 1,683 | 950 | ||||||
Long-term debt | 1,354 | 1,432 | ||||||
Liabilities held for sale | — | 647 | ||||||
Total liabilities | 177,254 | 169,769 | ||||||
Equity: | ||||||||
Retained earnings | 51,945 | 51,914 | ||||||
Accumulated other comprehensive loss | (784 | ) | (1,159 | ) | ||||
Total equity | 51,161 | 50,755 | ||||||
Total liabilities and equity | $ | 228,415 | 220,524 | |||||
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2009 | 2008 | |||||||
Revenues: | ||||||||
Premiums earned | $ | 18,457 | 19,867 | |||||
Investment income, net of investment expense | 1,359 | 1,396 | ||||||
Realized investment gains, net | 29 | 1,837 | ||||||
Other income | 20 | 149 | ||||||
Total revenues | 19,865 | 23,249 | ||||||
Losses and expenses: | ||||||||
Losses and loss adjustment expenses | 11,970 | 13,017 | ||||||
Amortization of deferred policy acquisition costs | 5,506 | 5,574 | ||||||
Underwriting and administrative expenses | 1,126 | 1,206 | ||||||
Interest expense | 76 | 47 | ||||||
Other expense, net | 47 | 36 | ||||||
Total losses and expenses | 18,725 | 19,880 | ||||||
Income from continuing operations, before income taxes | 1,140 | 3,369 | ||||||
Income tax expense | 289 | 985 | ||||||
Income from continuing operations | 851 | 2,384 | ||||||
Discontinued Operations: | ||||||||
Loss on discontinued operations, before income taxes | (16 | ) | (2 | ) | ||||
Income tax expense | 804 | 2 | ||||||
Loss on discontinued operations | (820 | ) | (4 | ) | ||||
Net income | $ | 31 | 2,380 | |||||
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Accumulated | ||||||||||||
other | ||||||||||||
Retained | comprehensive | |||||||||||
earnings | income (loss) | Total | ||||||||||
Balance at December 31, 2007 | $ | 59,293 | 2,108 | 61,401 | ||||||||
Net income | 2,380 | — | 2,380 | |||||||||
Other comprehensive loss, net of taxes: | ||||||||||||
Unrealized investment holding loss arising during period, net of related income tax benefit of $197 | — | (382 | ) | (382 | ) | |||||||
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $638 | — | (1,239 | ) | (1,239 | ) | |||||||
Net unrealized investment loss | (1,621 | ) | ||||||||||
Defined benefit pension plan, net of related income tax expense of $6 | — | 12 | 12 | |||||||||
Comprehensive income | 771 | |||||||||||
Balance at March 31, 2008 | 61,673 | 499 | 62,172 | |||||||||
Balance at December 31, 2008 | $ | 51,914 | (1,159 | ) | 50,755 | |||||||
Net income | 31 | — | 31 | |||||||||
Other comprehensive income, net of taxes: | ||||||||||||
Unrealized investment holding gain arising during period, net of related income tax expense of $184 | — | 357 | 357 | |||||||||
Reclassification adjustment for realized gains included in net income, net of related income tax expense of $9 | — | (17 | ) | (17 | ) | |||||||
Net unrealized investment gain | 340 | |||||||||||
Defined benefit pension plan, net of related income tax expense of $18 | — | 35 | 35 | |||||||||
Comprehensive income | 406 | |||||||||||
Balance at March 31, 2009 | $ | 51,945 | (784 | ) | 51,161 | |||||||
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2009 | 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 31 | 2,380 | |||||
Loss on discontinued operations | 820 | 4 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Change in receivables, unearned premiums, and prepaid reinsurance | (2,019 | ) | (3,770 | ) | ||||
Increase in losses and loss adjustment expense reserves | 8,710 | 4,525 | ||||||
Change in accounts payable and accrued expenses | (629 | ) | (2,755 | ) | ||||
Deferred income taxes | 910 | 153 | ||||||
Change in deferred acquisition costs | 79 | 157 | ||||||
Amortization and depreciation | 172 | 176 | ||||||
Realized investment gains, net | (29 | ) | (1,837 | ) | ||||
Other, net | (932 | ) | 889 | |||||
Cash provided by (used in) operating activities — continuing operations | 7,113 | (78 | ) | |||||
Cash provided by operating activities — discontinued operations | — | 501 | ||||||
Net cash provided by operating activities | 7,113 | 423 | ||||||
Cash flows from investing activities: | ||||||||
Available-for-sale investments: | ||||||||
Purchases | (9,983 | ) | (23,912 | ) | ||||
Sales | 2,066 | 15,258 | ||||||
Maturities | 2,000 | 6,105 | ||||||
Proceeds on sale of net assets of subsidiary | 2,576 | — | ||||||
Purchases of property and equipment, net | 139 | (9 | ) | |||||
Cash used in investing activities — continuing operations | (3,202 | ) | (2,558 | ) | ||||
Cash provided by (used in) investing activities — discontinued operations | 285 | (12 | ) | |||||
Net cash used in investing activities | (2,917 | ) | (2,570 | ) | ||||
Cash flows from financing activities: | ||||||||
Initial public offering costs paid | (830 | ) | — | |||||
Net borrowings on line of credit | 733 | — | ||||||
Repayment of long-term debt | (78 | ) | (78 | ) | ||||
Net cash used in financing activities — continuing operations | (175 | ) | (78 | ) | ||||
Net cash used in financing activities — discontinued operations | (285 | ) | (260 | ) | ||||
Net cash used in financing activities | (460 | ) | (338 | ) | ||||
Net increase (decrease) in cash | 3,736 | (2,485 | ) | |||||
Cash and cash equivalents at beginning of period | 11,959 | 10,462 | ||||||
Cash and cash equivalents at end of period | 15,695 | 7,977 | ||||||
Less cash of discontinued operations at end of period | — | 476 | ||||||
Cash and cash equivalents of continuing operations at end of period | $ | 15,695 | 7,501 | |||||
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(1) | Basis of Presentation | |
Penn Millers Mutual Holding Company and subsidiary (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 (PMHC), which was renamed PMHC Corp. on April 22, 2009, is a wholly own 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 PMHC, and the stock of PMIC is the most significant asset of PMHC. American Millers Insurance Company (AMIC) is a property and casualty insurance company incorporated in Pennsylvania and is a wholly owned subsidiary of PMIC. PMHC conducts no business other than acting as a holding company for PMIC. | ||
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. | ||
These financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2008 included in the Company’s 2008 Financial Statements filed with the U.S. Securities and Exchange Commission as part of Form S-1. | ||
(2) | Use of Estimates | |
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) 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 defined benefit pension obligations, valuation of investments, including other-than-temporary impairment of investments and impairment of goodwill and the disclosure of contingent assets and liabilities, 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. | ||
(3) | Concentration of Risk | |
The Company’s business is subject to concentration of risk with respect to geographic concentration. Although the PMHC’s operating subsidiaries are licensed collectively in 33 states, direct premiums written for two states, New Jersey and Pennsylvania, accounted for more than 24% of the Company’s direct premium writings as of March 31, 2009. Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company. | ||
Additionally, one producer, Arthur J. Gallagher Risk Management Services, which writes business for the Company through nine offices, accounted for 10.5% of the Company’s direct premiums written as of March 31, 2009. Only two other producers accounted for more than 5% of the Company’s 2009 direct premium writings. No other brokers account for more than 5% of direct premium writings. |
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(4) | Deferred Offering Costs | |
In accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) Topic 5A,Expenses of Offering, the Company has deferred offering costs consisting principally of legal, underwriting and audit fees incurred through the balance sheet date that are related to the proposed offering and that will be charged to equity upon the completion of the proposed offering or charged to expense if the proposed offering is not completed. | ||
Deferred offering costs of $1,443 and $1,015 are reported separately on the consolidated balance sheets at March 31, 2009 and December 31, 2008. | ||
(5) | Recent Accounting Pronouncements | |
In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 161,Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, which 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 No. 161 were effective for the Company beginning January 1, 2009. The adoption of SFAS No. 161 did not impact the Company’s results of operations or financial condition. | ||
In May 2009, the FASB issued SFAS No. 165,Subsequent Events. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. These standards include the evaluation time period, circumstances when an entity should recognize a subsequent event and the necessary disclosures. This SFAS is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of SFAS No. 165 is currently being evaluated and is not expected to have a material impact on the Company’s results of operations or financial position. | ||
(6) | Fair Value Measurements | |
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement was effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of this statement as of January 1, 2008 did not have an impact on the Company’s results of operations or financial condition. The Company has adopted FASB Staff Position (FSP) No. 157-2, which allowed us to defer the effective date of SFAS No. 157 for certain non-financial assets and liabilities to January 1, 2009. As of January 1, 2009, the Company adopted SFAS No. 157 for these non-financial assets and liabilities. The company has no non-financial assets or liabilities measured at fair value at March 31, 2009 or December 31, 2008. | ||
The fair value of a financial asset or financial liability is the amount at which that asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidated |
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sale. 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. The Company classifies U.S. Treasury debt securities as Level 1. | ||
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. The Company classifies all securities, other than U.S. Treasury debt securities, as Level 2. | ||
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 as of March 31, 2009. |
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Fixed maturities, available for sale | $ | 9,126 | 119,172 | — | 128,298 | |||||||||||
Total assets | $ | 9,126 | 119,172 | — | 128,298 | |||||||||||
Accounts payable and accrued expenses | $ | — | 63 | — | 63 | |||||||||||
Total liabilities | $ | — | 63 | — | 63 | |||||||||||
Included in accounts payable and accrued expenses is an interest rate swap agreement (see note 13). Management estimates the fair value of the interest rate swap based on information obtained from a third-party financial institution counterparty. Management considers the prevailing interest rate environment as a key input into the valuation of the swap. | ||
The Company uses quoted values and other data provided by a nationally recognized independent pricing service in its process for determining fair values of its investments. As of March 31, 2009, all of the Company’s fixed maturity investments were priced using this one primary service; and the pricing service provides to us one quote per instrument. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing |
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service utilizes include (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 on markets, industry, and the economy. Additionally, the independent pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios. | ||
The independent pricing services provided a fair value estimate for all of the Company’s investments at March 31, 2009, which is utilized, among other resources, in reaching a conclusion as to the fair value of investments. Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. The Company reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in various common blocks or sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than “A” by Moody’s or S&P. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. The classification within the fair value hierarchy of SFAS No. 157 is then confirmed based on the final conclusions from the pricing review. The Company did not have any such discrepancies at March 31, 2009. | ||
(7) | Investments | |
The fair value and unrealized losses for securities temporarily impaired as of March 31, 2009 are as follows: |
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Description of securities | Fair value | losses | Fair value | losses | Fair value | losses | ||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | 566 | 5 | — | — | 566 | 5 | |||||||||||||||||
State and political subdivisions | 1,081 | 4 | 2,130 | 55 | 3,211 | 59 | ||||||||||||||||||
Mortgage-backed securities | 1,742 | 239 | 2,108 | 408 | 3,850 | 647 | ||||||||||||||||||
Corporate securities | 13,795 | 1,453 | 7,164 | 872 | 20,959 | 2,325 | ||||||||||||||||||
Total fixed maturities | 17,184 | 1,701 | 11,402 | 1,335 | 28,586 | 3,036 | ||||||||||||||||||
Total temporarily impaired securities | $ | 17,184 | 1,701 | 11,402 | 1,335 | 28,586 | 3,036 | |||||||||||||||||
The Company invests in high credit quality bonds and has the ability and intent to hold them until maturity to realize all the future cash flows but classifies them as available for sale. Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates which generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions. Most of the decline in our fixed maturity portfolio has been in corporate bonds |
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(8) | Comprehensive Income | |
Comprehensive income for the three months ended March 31, 2009 and 2008 consisted of the following: |
For the three months | ||||||||
ended March 31, | ||||||||
2009 | 2008 | |||||||
Net income | $ | 31 | 2,380 | |||||
Other comprehensive income (loss): | ||||||||
Unrealized gains (losses) on securities: | ||||||||
Unrealized investment holding gains (losses) arising during period | 357 | (382 | ) | |||||
Less: | ||||||||
Reclassification adjustment for gains included in net income | (17 | ) | (1,239 | ) | ||||
Net unrealized investment gains (losses) | 340 | (1,621 | ) | |||||
Defined benefit pension plans: | ||||||||
Amortization | 35 | 12 | ||||||
Other comprehensive income (loss) | 375 | (1,609 | ) | |||||
Comprehensive income | $ | 406 | 771 | |||||
Accumulated other comprehensive loss at March 31, 2009 and December 31, 2008 consisted of the following amounts: |
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
Unrealized investment gains for continuing operations, net of tax | $ | 1,243 | 908 | |||||
Unrealized investment losses for discontinued operations, net of tax | — | (5 | ) | |||||
Defined benefit pension plan — net actuarial loss, net of tax | (2,027 | ) | (2,062 | ) | ||||
Accumulated other comprehensive loss | $ | (784 | ) | (1,159 | ) | |||
(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 SERP. The SERP, which is unfunded, provides defined pension |
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benefits outside of the qualified defined benefit pension plan to eligible executives based on average earnings, years of service, and age at retirement. | ||
The net periodic pension cost for the plan consists of the following components: |
For the three months | ||||||||
ended March 31, | ||||||||
2009 | 2008 | |||||||
Components of net periodic pension cost: | ||||||||
Service cost | $ | 170 | 179 | |||||
Interest cost | 147 | 154 | ||||||
Expected return on plan assets | (93 | ) | (129 | ) | ||||
Amortization of prior service costs | 10 | 16 | ||||||
Amortization of net loss | 43 | 2 | ||||||
Net periodic pension expense | $ | 277 | 222 | |||||
The Company expects to contribute $547 to the plans in 2009. As of March 31, 2009, no contributions have been made. The Company’s 2010 contribution to the plan is expected to increase due to changes in the fair value of plan assets and regulatory changes affecting the plan. | ||
(10) | Income Tax | |
The Company has recorded income tax expense of $804 on discontinued operations, which relates primarily to the tax expense recorded on the sale of the net assets of EIG, whose book basis exceeded their tax basis. Separately, the Company has reviewed the potential of a tax position regarding a worthless stock deduction for its investment in EIG. The Company determined that the more-likely-than-not recognition threshold would not be met. Therefore, if the Company were to conclude to take a tax return position on the 2009 federal income tax return, the benefit would need to be recorded as an uncertain tax position, with no current | ||
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benefit recognized. The maximum impact of a tax deduction is estimated to be $900, with reasonable possibility that the tax return position will not be taken. | ||
As of March 31, 2009, 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 2008 were open for examination as of March 31, 2009. | ||
There were no cash tax payments in the first quarter of 2009 and 2008. | ||
(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 2009 and 2008. The Company purchased catastrophe excess-of-loss reinsurance with a retention of $2,000 per event in 2009 and 2008. | ||
Effective January 1, 2009, the Company modified its reinsurance program in which the Company lowered its participation in the per-risk reinsurance treaty. Losses between $500 and $1,000 are retained at 52.5% in 2009 versus a 75% retention rate in 2008. Losses between $1,000 and $5,000 are retained at 0% in 2009 versus 25% in 2008. | ||
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, is as follows: |
(a) | Premiums |
For the three months ended March 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Written | Earned | Written | Earned | |||||||||||||
Direct | $ | 22,754 | 23,302 | 22,510 | 23,423 | |||||||||||
Assumed | 222 | 222 | 246 | 248 | ||||||||||||
Ceded | (4,894 | ) | (5,067 | ) | (3,504 | ) | (3,804 | ) | ||||||||
Net | $ | 18,082 | 18,457 | 19,252 | 19,867 | |||||||||||
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(b) | Losses and Loss Adjustment Expenses |
For the three months | ||||||||
ended March 31, | ||||||||
2009 | 2008 | |||||||
Direct | $ | 19,799 | 15,218 | |||||
Assumed | (31 | ) | 409 | |||||
Ceded | (7,798 | ) | (2,610 | ) | ||||
Net | $ | 11,970 | 13,017 | |||||
(c) | Unearned Premiums |
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
Direct | $ | 44,800 | 45,310 | |||||
Assumed | 11 | 12 | ||||||
Prepaid reinsurance (ceded) | (4,170 | ) | (4,342 | ) | ||||
$ | 40,641 | 40,980 | ||||||
(d) | Loss and Loss Adjustment Expense Reserves |
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
Direct | $ | 107,432 | 98,366 | |||||
Assumed | 9,343 | 9,699 | ||||||
Gross | $ | 116,775 | 108,065 | |||||
(12) | Lines of Credit | |
The Company currently maintains two unsecured lines of credit. | ||
The first unsecured line of credit is available for general corporate purposes. No additional borrowing arrangements were made after year-end. | ||
The second unsecured line of credit for $2,000 was established in December 2008 and is available to finance temporary increased working capital needs primarily associated with costs for a planned public offering. At March 31, 2009 and December 31, 2008, a total of $1,183 and $450, respectively, was outstanding. | ||
In order to provide for short term cash availability and operational flexibility, in July 2009 the Company expects to execute a refinancing of the two lines of credit by entering into a new four year $3,000 |
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revolving line of credit agreement with a commercial bank. A commitment letter has been received for an agreement that will require monthly payments of accrued interest, with principal due no later than the maturity of the loan agreement, four years from the inception date. The refinancing is expected to occur in July 2009 and the initial interest rate on outstanding borrowings will be LIBOR plus 175 basis points. This rate will be adjusted annually at each anniversary of the loan agreement by an additional 25 basis points. | ||
(13) | 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 $1,354 and $1,432 at March 31, 2009 and December 31, 2008, respectively. | ||
The Company accounts for its interest rate swap in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities. On January 1, 2009, the Company adopted SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133, which changes the disclosure requirements for derivative instruments and hedging activities. The adoption of SFAS No. 161 did not impact the Company’s results of operations or financial condition. | ||
The Company has designated the interest rate swap as a non-hedge instrument. Accordingly, the Company recognizes the fair value of the interest rate swap as an asset or a liability on the consolidated balance sheets with the changes in fair value recognized in the consolidated statements of operations. An investment gain of $3 and loss of $40 were recorded within net realized investment gains on the consolidated statements of operations at March 31, 2009 and 2008, respectively. | ||
By using hedging financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to market and credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. Credit risk is the failure of the counterparty to perform under the terms of the contract. When the fair value of a contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a contract is negative, the Company owes the counterparty and, therefore, credit risk is not present. |
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A summary of the fair value of the interest rate swap outstanding as of March 31, 2009 and December 31, 2008 follows: |
March 31, 2009 | December 31, 2008 | |||||||||||
Balance Sheet | Fair value | Balance Sheet | Fair value | |||||||||
Location | liability | Location | liability | |||||||||
Interest rate swaps: | ||||||||||||
Wachovia Bank, N.A. | Accounts payable and accrued expenses | $ | 63 | Accounts payable and accrued expenses | $ | 66 | ||||||
Total derivatives | $ | 63 | $ | 66 | ||||||||
A summary of the effect of the interest rate swap on the consolidated statements of operations for the three months ended March 31, 2009 and 2008 follows: | ||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||
Location of Gain | Amount of Gain | Location of (Loss) | Amount of (Loss) | |||||||||
Recognized in | Recognized in | Recognized in | Recognized in | |||||||||
Income | Income | Income | Income | |||||||||
Interest rate swaps: | ||||||||||||
Wachovia Bank, N.A. | Realized investment gains | $ | 3 | Realized investment losses | $ | (40 | ) | |||||
Total derivatives | $ | 3 | $ | (40 | ) | |||||||
(14) | 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 the business based on type of customer, how the business is marketed, and the manner in which risks are underwritten. Within each segment, the Company underwrites and markets its insurance products through a packaged offering of coverages sold to generally consistent types of customers. | ||
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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Segment information for the three months ended March 31, 2009 and 2008 is as follows: |
For the three months | ||||||||
ended March 31, | ||||||||
2009 | 2008 | |||||||
Revenues: | ||||||||
Premiums earned: | ||||||||
Agribusiness | $ | 10,968 | 11,387 | |||||
Commercial business | 7,185 | 8,167 | ||||||
Other | 304 | 313 | ||||||
Total premiums earned | 18,457 | 19,867 | ||||||
Investment income, net of investment expense | 1,359 | 1,396 | ||||||
Realized investment gains, net | 29 | 1,837 | ||||||
Other income | 20 | 149 | ||||||
Total revenues | $ | 19,865 | 23,249 | |||||
Components of net (loss) income: | ||||||||
Underwriting (loss) income: | ||||||||
Agribusiness | $ | (512 | ) | 601 | ||||
Commercial business | 250 | (247 | ) | |||||
Other | 150 | (116 | ) | |||||
Total underwriting (losses) income | (112 | ) | 238 | |||||
Investment income, net of investment expense | 1,359 | 1,396 | ||||||
Realized investment gains, net | 29 | 1,837 | ||||||
Other income | 20 | 149 | ||||||
Corporate expense | (33 | ) | (168 | ) | ||||
Interest expense | (76 | ) | (47 | ) | ||||
Other expense, net | (47 | ) | (36 | ) | ||||
Income from continuing operations, before income taxes | 1,140 | 3,369 | ||||||
Income tax expense | 289 | 985 | ||||||
Income from continuing operations | $ | 851 | 2,384 | |||||
Discontinued operations: | ||||||||
Loss on discontinued operations, before income taxes | $ | (16 | ) | (2 | ) | |||
Income tax expense | 804 | 2 | ||||||
Loss on discontinued operations | (820 | ) | (4 | ) | ||||
Net income | $ | 31 | 2,380 | |||||
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For the three months | ||||||||
ended March 31, | ||||||||
2009 | 2008 | |||||||
Net premiums earned: | ||||||||
Agribusiness | ||||||||
Property | $ | 3,885 | 4,216 | |||||
Commercial auto | 2,806 | 3,187 | ||||||
Liability | 2,381 | 2,184 | ||||||
Workers’ compensation | 1,728 | 1,634 | ||||||
Other | 168 | 166 | ||||||
Agribusiness subtotal | 10,968 | 11,387 | ||||||
Commercial lines | ||||||||
Property & liability | 4,384 | 5,080 | ||||||
Workers’ compensation | 1,583 | 1,856 | ||||||
Commercial auto | 1,152 | 1,168 | ||||||
Other | 66 | 63 | ||||||
Commercial lines subtotal | 7,185 | 8,167 | ||||||
Other | 304 | 313 | ||||||
Total net premiums earned | $ | 18,457 | 19,867 | |||||
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(15) | Equity | |
PMHC’s insurance subsidiaries are required by law to maintain certain minimum surplus on a statutory basis, are subject to risk-based capital requirements, and are subject to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. As of March 31, 2009, the Company was in compliance with its risk-based capital requirements. Applying the current regulatory restrictions as of March 31, 2009, approximately $4,353 would be available for distribution to the Company during 2009 without prior approval. | ||
(16) | Discontinued Operations | |
In 2007, the Company’s board of directors approved a plan to pursue the sale of Penn Software & Technology Services (PSTS) in order to better focus on its core competency within the insurance business. | ||
In July 2008, the Company entered into an asset purchase agreement and sold those assets of PSTS for $150. The assets sold included customer lists and related client information. The Company received cash of $50 at the time of sale and can receive up to $100 after one year, based on the retention of the book of business that was sold. The Company will recognize the $100 contingent portion of sale price as it is earned in future periods. The Company recorded a pretax loss on sale of $117. | ||
The results of operations for PSTS were reported within discontinued operations in the accompanying consolidated statements of operations for all periods presented. | ||
Operating results from PSTS for the three months ended March 31, 2009 and 2008 are as follows: |
2009 | 2008 | |||||||
Net revenue | $ | — | 265 | |||||
Income on discontinued operations, before income taxes | $ | — | 34 | |||||
Income tax expense | — | 14 | ||||||
Income from discontinued operations | $ | — | 20 | |||||
In 2008, the Company’s board of directors approved a plan to explore the sale of Eastern Insurance Group (EIG). The decision resulted from continued evaluation of the Company’s long term strategic plans and the role that the insurance brokerage segment played in that strategy. In the third quarter of 2008, the board approved a plan for a minority public offering and, at the same time, fully committed to the sale of EIG in order to concentrate solely on insurance underwriting as a long term core competency. | ||
At September 30, 2008, the Company tested the goodwill carrying value of EIG for impairment. The possibility of impairment was evident based on non-binding offers obtained in the selling process, which were less than the carrying amount, and the deterioration of local and national economic conditions. As a result of the impairment test, the Company recognized an impairment to goodwill of $2,435 within |
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discontinued operations at September 30, 2008 (unaudited), which represented its best estimate. The Company completed the sale of EIG on February 2, 2009. Pursuant to the asset purchase agreement, the Company sold substantially all of EIG’s assets and liabilities for proceeds of $3,109, less costs to sell of $248. Based on the fair value determined by the final terms of the sale and finalization of step 2 of the goodwill impairment test, the Company recorded an additional write down of goodwill at December 31, 2008 of $165. In the first quarter of 2009, the Company recorded a pretax loss of $16. A portion of the proceeds of the sale was used to pay off $285 of acquisition payables in liabilities held for sale. | ||
The results of operations for EIG were reported within discontinued operations in the accompanying consolidated statements of operations, and prior-period consolidated statements of operations have been reclassified to conform to this presentation. | ||
EIG’s operating results for the three months ended March 31, 2009 and 2008 are as follows: |
2009 | 2008 | |||||||
Net revenue | $ | — | 829 | |||||
Loss on discontinued operations, before income taxes | $ | (16 | ) | (36 | ) | |||
Income tax expense (benefit) | 804 | (12 | ) | |||||
Loss from discontinued operations | $ | (820 | ) | (24 | ) | |||
Assets and liabilities of EIG as of December 31, 2008, which are included in assets and liabilities held for sale on the consolidated balance sheets, comprise the following: |
2008 | ||||
Assets: | ||||
Cash | $ | — | ||
Receivables | 420 | |||
Goodwill | 2,147 | |||
Intangible assets | 464 | |||
Other assets | 183 | |||
Total assets | $ | 3,214 | ||
Liabilities: | ||||
Accounts payable and accrued expenses | $ | 362 | ||
Acquisition payables | 285 | |||
Total liabilities | $ | 647 | ||
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EIG may continue to place insurance policies with PMIC. PMIC will continue to pay commissions to EIG for this business. Currently, commissions paid by PMIC to EIG represent less than 5% of EIG’s total revenue. The Company does not expect a material increase in this level of commissions. Operating results from total discontinued operations for the three months ended March 31, 2009 and 2008 are presented below. |
2009 | 2008 | |||||||
Net revenue | $ | — | 1,094 | |||||
Loss on discontinued operations, before income taxes | $ | (16 | ) | (2 | ) | |||
Income tax expense | 804 | 2 | ||||||
Loss from discontinued operations | $ | (820 | ) | (4 | ) | |||
Total assets and liabilities held for sale as of December 31, 2008 comprise the following: |
2008 | ||||
Assets: | ||||
Cash | $ | — | ||
Receivables | 420 | |||
Goodwill | 2,147 | |||
Intangible assets | 464 | |||
Other assets | 183 | |||
Total assets | $ | 3,214 | ||
Liabilities: | ||||
Accounts payable and accrued expenses | $ | 362 | ||
Other liabilities | 285 | |||
Total liabilities | $ | 647 | ||
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(17) | Plan of Conversion | |
On April 22, 2009, the PMMHC’s board of directors adopted a Plan of conversion from Mutual to Stock Form (the Plan). | ||
Under the Plan, the Company will offer shares of common stock in a public offering expected to commence in 2009. The number of shares to be offered will be based on an independent appraisal of the estimated pro forma market value of the Company on a consolidated basis. | ||
The offering contemplated by the Plan is subject to the approval of the Pennsylvania Department of Insurance, pursuant to the Pennsylvania Insurance Commissioner’s 1998 order approving the creation of the Company’s current mutual holding company structure. The offering will be made only by means of a prospectus in accordance with the Securities Act of 1933, as amended, and all applicable state securities laws. | ||
On April 22, 2009, the PMHC’s board of directors changed the name of Penn Millers Holding Corporation to PMHC Corp. |
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Penn Millers Mutual Holding Company:
/s/ KPMG LLP | ||||
April 22, 2009
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Consolidated Balance Sheets
December 31, 2008 and 2007
(Dollars in thousands)
2008 | 2007 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed maturities: | ||||||||
Available for sale, at fair value (amortized cost $120,538 in 2008 and $110,973 in 2007) | $ | 121,914 | 112,769 | |||||
Equity securities, at fair value (cost $0 in 2008 and $10,525 in 2007) | — | 13,409 | ||||||
Total investments | 121,914 | 126,178 | ||||||
Cash and cash equivalents | 11,959 | 10,134 | ||||||
Premiums and fees receivable | 31,080 | 32,489 | ||||||
Reinsurance receivables and recoverables | 20,637 | 15,640 | ||||||
Deferred policy acquisition costs | 10,601 | 11,014 | ||||||
Prepaid reinsurance premiums | 4,342 | 4,234 | ||||||
Accrued investment income | 1,431 | 1,499 | ||||||
Property and equipment, net of accumulated depreciation | 4,231 | 4,401 | ||||||
Income taxes receivable | 1,508 | 1,056 | ||||||
Deferred income taxes | 4,728 | 1,872 | ||||||
Other | 3,864 | 3,972 | ||||||
Deferred offering costs | 1,015 | — | ||||||
Assets held for sale | 3,214 | 7,124 | ||||||
Total assets | $ | 220,524 | 219,613 | |||||
Liabilities and Equity | ||||||||
Liabilities: | ||||||||
Losses and loss adjustment expense reserves | $ | 108,065 | 95,956 | |||||
Unearned premiums | 45,322 | 46,595 | ||||||
Accounts payable and accrued expenses | 13,353 | 12,874 | ||||||
Borrowings under line of credit | 950 | — | ||||||
Long-term debt | 1,432 | 1,745 | ||||||
Liabilities held for sale | 647 | 1,042 | ||||||
Total liabilities | 169,769 | 158,212 | ||||||
Equity: | ||||||||
Retained earnings | 51,914 | 59,293 | ||||||
Accumulated other comprehensive (loss) income | (1,159 | ) | 2,108 | |||||
Total equity | 50,755 | 61,401 | ||||||
Total liabilities and equity | $ | 220,524 | 219,613 | |||||
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Consolidated Statements of Operations
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)
2008 | 2007 | 2006 | ||||||||||
Revenues: | ||||||||||||
Premiums earned | $ | 78,737 | 70,970 | 64,645 | ||||||||
Investment income, net of investment expense | 5,335 | 5,324 | 4,677 | |||||||||
Realized investment (losses) gains, net | (5,819 | ) | (702 | ) | 349 | |||||||
Other income | 411 | 508 | 345 | |||||||||
Total revenues | 78,664 | 76,100 | 70,016 | |||||||||
Losses and expenses: | ||||||||||||
Losses and loss adjustment expenses | 57,390 | 49,783 | 43,766 | |||||||||
Amortization of deferred policy acquisition costs | 23,081 | 21,930 | 20,080 | |||||||||
Underwriting and administrative expenses | 3,481 | 2,233 | 3,216 | |||||||||
Interest expense | 184 | 125 | 222 | |||||||||
Other expense, net | 365 | 184 | 314 | |||||||||
Total losses and expenses | 84,501 | 74,255 | 67,598 | |||||||||
(Loss) income from continuing operations, before income taxes | (5,837 | ) | 1,845 | 2,418 | ||||||||
Income tax (benefit) expense | (1,378 | ) | 396 | 506 | ||||||||
(Loss) income from continuing operations | (4,459 | ) | 1,449 | 1,912 | ||||||||
Discontinued operations: | ||||||||||||
(Loss) income on discontinued operations, before income taxes | (3,090 | ) | (489 | ) | 292 | |||||||
Income tax (benefit) expense | (170 | ) | (126 | ) | 124 | |||||||
(Loss) income on discontinued operations | (2,920 | ) | (363 | ) | 168 | |||||||
Net (loss) income | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
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Consolidated Statements of Equity
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)
Accumulated | ||||||||||||
other | ||||||||||||
Retained | comprehensive | |||||||||||
earnings | income (loss) | Total | ||||||||||
Balance at December 31, 2005, as restated for the adoption of SAB No. 108 (note 2 (s)) | $ | 56,127 | 1,642 | 57,769 | ||||||||
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 | 58,207 | 2,323 | 60,530 | |||||||||
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 | 59,293 | 2,108 | 61,401 | |||||||||
Net loss | (7,379 | ) | — | (7,379 | ) | |||||||
Other comprehensive loss, net of taxes: | ||||||||||||
Unrealized investment holding loss arising during period, net of related income tax benefit of $3,097 | — | (6,012 | ) | (6,012 | ) | |||||||
Reclassification adjustment for realized losses included in net income, net of related income tax benefit of $1,965 | — | 3,813 | 3,813 | |||||||||
Net unrealized investment loss | (2,199 | ) | ||||||||||
Defined benefit pension plan, net of related income tax benefit of $551 | — | (1,068 | ) | (1,068 | ) | |||||||
Comprehensive loss | (10,646 | ) | ||||||||||
Balance at December 31, 2008 | $ | 51,914 | (1,159 | ) | 50,755 | |||||||
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Consolidated Statements of Cash Flows
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)
2008 | 2007 | 2006 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net (loss) income | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
Loss (income) on discontinued operations | 2,920 | 363 | (168 | ) | ||||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||
Change in receivables, unearned premiums, and prepaid reinsurance | (4,787 | ) | 4,470 | 3,318 | ||||||||
Increase in loss and loss adjustment expense reserves | 12,109 | 6,551 | 5,556 | |||||||||
Change in accounts payable and accrued expenses | (1,737 | ) | 56 | 598 | ||||||||
Deferred income taxes | (1,068 | ) | (208 | ) | (512 | ) | ||||||
Change in deferred acquisition costs | 413 | (633 | ) | (735 | ) | |||||||
Amortization and depreciation | 710 | 783 | 766 | |||||||||
Realized investment losses (gains), net | 5,819 | 702 | (349 | ) | ||||||||
Other, net | 383 | (2,153 | ) | 1,157 | ||||||||
Cash provided by operating activities — continuing operations | 7,383 | 11,017 | 11,711 | |||||||||
Cash (used in) provided by operating activities — discontinued operations | (20 | ) | 515 | 104 | ||||||||
Net cash provided by operating activities | 7,363 | 11,532 | 11,815 | |||||||||
Cash flows from investing activities: | ||||||||||||
Available-for-sale investments: | ||||||||||||
Purchases | (50,075 | ) | (27,852 | ) | (27,777 | ) | ||||||
Sales | 32,927 | 7,048 | 14,125 | |||||||||
Maturities | 11,970 | 8,350 | 7,800 | |||||||||
Purchases of property and equipment, net | (524 | ) | (919 | ) | (740 | ) | ||||||
Cash used in investing activities — continuing operations | (5,702 | ) | (13,373 | ) | (6,592 | ) | ||||||
Cash used in investing activities — discontinued operations | (48 | ) | (261 | ) | — | |||||||
Net cash used in investing activities | (5,750 | ) | (13,634 | ) | (6,592 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Initial public offering costs paid | (493 | ) | — | — | ||||||||
Net borrowings (repayments) on line of credit | 950 | (250 | ) | 64 | ||||||||
Repayment of long-term debt | (313 | ) | (312 | ) | (2,151 | ) | ||||||
Net cash provided by (used in) financing activities — continuing operations | 144 | (562 | ) | (2,087 | ) | |||||||
Net cash used in financing activities —discontinued operations | $ | (260 | ) | (290 | ) | (221 | ) | |||||
Net cash used in financing activities | (116 | ) | (852 | ) | (2,308 | ) | ||||||
Net increase (decrease) in cash | 1,497 | (2,954 | ) | 2,915 | ||||||||
Cash and cash equivalents at beginning of year | 10,462 | 13,416 | 10,501 | |||||||||
Cash and cash equivalents at end of year | 11,959 | 10,462 | 13,416 | |||||||||
Less cash of discontinued operations at end of year | — | 328 | 364 | |||||||||
Cash and cash equivalents of continuing operations at end of year | $ | 11,959 | 10,134 | 13,052 | ||||||||
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(1) | Description of Business | |
Penn Millers Mutual Holding Company and subsidiary (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 (PMHC), which was renamed PMHC Corp. on April 22, 2009, 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 PMHC, and the stock of PMIC is the most significant asset of PMHC. American Millers Insurance Company (AMIC) is a property and casualty insurance company incorporated in Pennsylvania and is a wholly owned subsidiary of PMIC. PMHC 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 markets its products in a bundled offering that includes 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 product consists 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 “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 condition of doing business in the states in which it operates. | ||
The Company owned Eastern Insurance Group (EIG), an insurance agency that placed business with both PMIC and unaffiliated insurance companies. On March 1, 2005, EIG acquired Galland Steinhauer & Repa, Inc. (GSR), an insurance agency that also placed 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. The Company sold substantially all of the assets of EIG in February 2009 (see note 20). | ||
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 consolidated financial statements. The Company sold substantially all of the assets of PSTS in July 2008 (see note 20). | ||
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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approved by the Commonwealth of Pennsylvania and Pennsylvania Millers Mutual Insurance Company’s policyholders under the Insurance Company Mutual-to-Stock Conversion Act. 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 PMHC. 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 PMHC. | ||
PMHC 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 subsidiary. All material intercompany balances and accounts have been eliminated in consolidation. Certain reclassifications have been made to the prior years’ consolidated financial statements in order to conform to the current year presentation. The consolidated financial statements, along with related notes, reflect the reclassification of EIG and PSTS as assets and liabilities held for sale and discontinued operations. See note 20 for additional disclosure related to discontinued operations. | |||
(b) | Use of Estimates | ||
The preparation of consolidated financial statements in conformity with GAAP 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 defined benefit pension obligations, valuation of investments, including other-than-temporary impairment of investments and impairment of goodwill and the disclosure of contingent assets and liabilities at the date of consolidated the financial statements, and the reported amounts of revenues and expenses, during the reporting period. Actual results could differ from these estimates. | |||
(c) | Discontinued Operations and Assets Held for Sale | ||
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 and when the criteria for discontinued operations have been met. The results of | |||
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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 are 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 initially 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. Subsequent to initial classification as held for sale, the reporting unit is carried at the lower of its carrying amount or fair value less the cost to sell. 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 PMHC’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 2008. Consequently, changes in the New Jersey or Pennsylvania legal, regulatory, or economic environment could adversely affect the Company. | |||
Additionally, one producer, Arthur J. Gallagher Risk Management Services, which writes business for the Company through nine offices, accounted for 12% of the Company’s direct premiums written for 2008. Only one other producer accounted for more than 5% of the Company’s 2008 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 securities 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 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; or other inputs that are observable. The fair value of equity securities is based on the quoted market prices from an active market at the balance sheet date. | |||
Premiums and discounts on fixed maturity 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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as necessary to reflect actual prepayments and changes in expectations. Adjustments related to changes in prepayment assumptions are recognized on a retrospective basis. Dividends and interest on securities are recognized in operations when declared and earned, respectively. 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 after principal is paid and 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 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 in operations 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, regardless of the duration in unrealized loss position; and | ||
• | determination of the status of each analyzed investment as other-than-temporarily impaired or not, with documentation of the rationale for the decision. | ||
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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 to recovery, which may be maturity. 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 evaluates its mortgage backed securities for such characteristics as delinquency and foreclosure levels, credit enhancement, projected losses and coverage, and an analysis of the cash flows. It is possible that the underlying collateral of these securities will perform worse than current expectations, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future would include but are not limited to deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity. | |||
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 December 31, 2008 and 2007 carrying values. | |||
The severe downturn in the public debt and equity markets, reflecting uncertainties associated with the mortgage crisis, worsening economic conditions, widening of credit spreads, bankruptcies and government intervention in large financial institutions, has resulted in significant realized and unrealized losses in the Company’s investment portfolio. Depending on market conditions going forward, the Company could incur additional realized and unrealized losses in future periods. | |||
(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 in accounts payable and accrued expenses in the consolidated balance sheets at fair value with the associated gain/loss included in the consolidated statements of operations. | |||
(g) | Premium Revenue | ||
Insurance premiums on property and casualty insurance contracts are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies. The reserve for unearned premiums on these contracts represents the portion of premiums written relating to the unexpired terms of coverage. The Company estimates earned but unbilled (EBUB) audit premiums and records them as an adjustment to earned premiums. The estimation of EBUB is based on a quantitative analysis of the Company’s historical audit experience. | |||
(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 as billed. Contingent commissions are recognized in amounts and in the period when management believes | |||
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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 deferred acquisition costs are not recoverable, they would be written off. | |||
(k) | Losses and Loss Adjustment Expenses | ||
The liability for unpaid losses 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 losses 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 $2,502 and $2,764 at December 31, 2008 and 2007, respectively, a substantial portion of which results from the Company’s participation in assumed reinsurance pools. The Company estimates this liability based on its pro rata share of asbestos and environmental case reserves reported by the pools and an additional estimate of incurred but not reported losses and loss adjustment expenses based on actuarial analysis of the historical development patterns. 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 continually monitors the reasonableness of the estimated useful lives and adjusts them as necessary. | |||
The Company follows the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 98-1,Accounting for the Costs of Computer Software | |||
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Developed or Obtained for Internal Use (SOP 98-1). 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 and 2007. 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 December 31, 2008, an impairment under SFAS No. 144 is not considered necessary. | |||
(m) | Income Taxes | ||
The Company and its subsidiary file a consolidated federal income tax return. 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 and recoverables, net of amounts payable that have the right of offset, are reported as assets in the accompanying consolidated balance sheets. Prepaid reinsurance premiums represent the unexpired portion of premiums ceded to reinsurers. 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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have goodwill, which is classified as assets held for sale. The Company performed the impairment tests as of December 31, 2008, 2007, and 2006 for PSTS and EIG. Goodwill of EIG was also tested as of September 30, 2008 as non-binding offers obtained in the selling process at prices less than carrying amount and the further deterioration of economic conditions 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 pretax loss on sale of $117. | |||
As of September 30, 2008, the Company determined that the carrying amount of the EIG reporting unit exceeded its fair value. The Company had not completed the second step of the goodwill impairment test, as of September 30, 2008. However, as a goodwill impairment loss was probable and could be reasonably estimated, the Company recognized its best estimate of that loss as of September 30, 2008. The Company estimated that EIG goodwill of $4,747 was impaired by $2,435 (unaudited). Management estimated the fair value of the reporting unit at September 30, 2008 based on various offers obtained during their process of selling EIG. The estimate was consistent with offers received subsequent to the end of the third quarter 2008. | |||
The Company completed step two of the goodwill impairment test in the fourth quarter 2008 and recorded an additional adjustment of $165 to the goodwill impairment write-down that was recorded at September 30, 2008. The fair value of the reporting unit was based on the actual selling price of EIG as executed on February 2, 2009. The adjusted carrying amount of goodwill of $2,147 is in assets held for sale at December 31, 2008. | |||
The Company completed the sale of substantially all of EIG’s assets and liabilities on February 2, 2009 and received proceeds of $3,109 less the estimated costs to sell of $231. In the first quarter of 2009, the Company recorded a pretax loss on sale of $6. The Company expects to incur approximately $908 of income tax expense on the sale in the first quarter of 2009. Much of the tax expense is expected to be available to offset capital losses incurred in 2008. | |||
(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) | Employee Benefit Plans | ||
The Company records annual amounts relating to its defined benefit pension plan and nonqualified Supplemental Executive Retirement Plan (SERP) based on calculations that include various actuarial assumptions, such as discount rates, mortality, rates of return and compensation increases. These estimates are highly susceptible to change from period to period based on the performance of plan assets, demographic changes and market conditions. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. The Company believes that the assumptions used in recording its defined benefit pension plan and SERP obligations are reasonable based on its experience, market conditions and input from its actuaries and investment advisors. | |||
The Company utilizes the corridor method of amortizing actuarial gains and losses. The amortization of experience gains and losses is recognized only to the extent that the cumulative unamortized net actuarial gain or loss exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets at the beginning of the year. When required, the excess of the cumulative gain or loss balance is amortized over the expected average remaining service life of the employees covered by the plan. On December 31, 2007, the Company adopted the provisions SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB statements No. 87, 88, 106 and 132(R). This statement requires recognition of the deferrals on the balance sheet with a corresponding charge to accumulated other comprehensive income (loss). | |||
(r) | Deferred Offering Costs | ||
In accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) Topic 5A, Expenses of Offering, the Company has deferred offering costs consisting principally of legal, underwriting and audit fees incurred through the balance sheet date that are related to the proposed offering and that will be charged to equity upon the completion of the proposed offering or charged to expense if the proposed offering is not completed. | |||
Deferred offering costs of $1,015 are reported separately on the consolidated balance sheets at December 31, 2008. | |||
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(s) | Recent Accounting Pronouncements | ||
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes— an interpretation of FSAB statement No. 109, 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 December 31, 2008, the Company has no material unrecognized tax benefits. | |||
In September 2006, the SEC issued 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 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 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. | |||
The Company restated their 2005 financial statements to adopt the provisions of SAB No. 108. As a result, the balance of retained earnings at December 31, 2005, as presented in the consolidated statements of equity presented herein, was reduced by $187 and goodwill was reduced by the same amount. | |||
In September 2006, the FASB issued SFAS No. 158. 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 (loss) 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 was effective for the Company’s fiscal year ending December 31, 2008. This requirement had no effect on the Company. | |||
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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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. | |||
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 operations 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. | |||
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 March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS No. 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 No. 161 are effective for the Company beginning January 1, 2009. The adoption of this standard will have no impact on the Company’s financial condition or results of operations, but may result in additional disclosures. | |||
In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles, 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 GAAP. 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 No. 162 is effective | |||
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November 15, 2008. The Company’s adoption did not result in any financial statement impact. | ||
In May 2008, the FASB issued SFAS No. 163,Accounting for Financial Guarantee Insurance Contracts—an intrepretation of FASB Statement No. 60, requiring that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement also clarifies how SFAS No. 60,Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. Expanded disclosures of financial guarantee insurance contracts are also required. SFAS No. 163 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, except for some disclosures about the insurance enterprise’s risk-management activities. Disclosures about the risk-management activities of the insurance enterprise are effective for the first period (including interim periods) beginning after issuance of this statement. Except for those disclosures, earlier application is not permitted. SFAS No. 163 will be effective for the Company as of January 1, 2009, except for disclosures about the insurance enterprise’s risk-management activities. The adoption of this standard will have no impact on the Company’s financial condition or results of operations. | ||
In October 2008, the FASB issued FSP FAS 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP FAS 157-3 clarifies the application of SFAS No. 157 and provides an example to illustrate considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 allows for the use of the reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates when relevant observable inputs are not available to determine the fair value for a financial asset in a dislocated market. The Company’s adoption of FSP FAS 157-3 had no impact on the financial condition or results of operations as of or for the year ended December 31, 2008. | ||
In December 2008, the FASB issued FSP FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets. FSP FAS 132R-1 was issued to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS 132R-1 requires an employer to disclose information about how investment allocation decisions are made, including factors that are pertinent to an understanding of investment policies and strategies. An employer will also need to disclose separately for pension plans and other postretirement benefit plans the fair value of each major category of plan assets based on the nature and risks of the assets as of each annual reporting date for which a statement of financial position is presented. FSP FAS 132R-1 also requires the disclosure of information that enables financial statement users to assess the inputs and valuation techniques used to develop fair value measurements of plan assets at the annual reporting date. For fair value measurements using significant unobservable inputs (Level 3), an employer will be required to disclose the effect of the measurements on changes in plan assets for the period. Furthermore, an employer is required to provide financial statement users with an understanding of significant concentrations of risk in plan assets. FSP FAS 132R-1 should be applied for fiscal years ending after December 15, 2009. Upon initial application, the provisions of FSP FAS 132R-1 are not required for earlier periods that are presented for comparative purposes. Earlier application is permitted. The Company is still evaluating the provisions of FSP FAS 132R-1 and intends to comply with its disclosure requirements. | ||
In January 2009, the FASB issued FSP Emerging Issues Task Force (EITF) Issue 99-20-1,Amendments to the Impairment Guidance of EITF Issue No. 99-20. EITF 99-20-1 provides guidance on determining other-than-temporary impairments on securities subject to EITF Issue No. 99-20,Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets.The provisions of EITF 99-20-1 are required to be applied prospectively for interim periods and fiscal years ending after December 15, 2008. The Company’s adoption of EITF 99-20-1 did not result in any significant financial statement impact. | ||
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157, Fair Value Measurements. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009. The Company currently is evaluating the impact of adopting FSP FAS 157-4. | ||
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP FAS 115-2 and FAS 124-2 provide guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on debt and equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for interim and annual periods ending after March 15, 2009. The Company currently is evaluating the impact of adopting FSP FAS 115-2 and FAS 124-2. | ||
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 and APB 28-1 will require a company to disclose in its interim financial statements the fair value of all financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009. Earlier application is permitted for periods ending after March 15, 2009, but only if the Company also adopts both FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. The Company currently is evaluating the impact of adopting FSP FAS 107-1. | ||
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(3) | Fair Value Measurements | |
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. The Company classifies U.S. Treasury debt securities as Level 1. | ||
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. The Company classifies all securities, other than U.S. Treasury debt securities, as Level 2. | ||
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. |
December 31, 2008 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Fixed maturities, available for sale | $ | 9,310 | 112,604 | — | 121,914 | |||||||||||
Equity securities | — | — | — | — | ||||||||||||
Total assets | $ | 9,310 | 112,604 | — | 121,914 | |||||||||||
Accounts payable and accrued expenses | $ | — | 66 | — | 66 | |||||||||||
Total liabilities | $ | — | 66 | — | 66 | |||||||||||
The Company uses quoted values and other data provided by a nationally recognized independent pricing service in its process for determining fair values of its investments. Its evaluations represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. | ||
As of December 31, 2008, all of the Company’s fixed maturity investments were priced using this one primary service. For fixed maturity securities that have quoted prices in active markets, market quotations are provided. For fixed maturity securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes may include (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 on markets, industry, and the economy. Additionally, the independent pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios. | ||
The independent pricing service provided a fair value estimate for all of the Company’s investments at December 31, 2008, which is utilized, among other resources, in reaching a conclusion as to the fair value of investments. Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. The Company reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in various common blocks or sectors, durations, and credit ratings. This review will also include all fixed maturity securities rated lower than “A” by Moody’s or S&P. If, after this review, management does not believe that the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. The classification within the fair value hierarchy of SFAS No. 157 is then confirmed based on the final conclusions from the pricing review. The Company did not have any such discrepancies at December 31, 2008. | ||
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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Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
December 31, 2008: | ||||||||||||||||
U.S. treasuries | $ | 8,530 | 780 | — | 9,310 | |||||||||||
Agencies not backed by the full faith and credit of the U.S. government | 14,929 | 1,160 | — | 16,089 | ||||||||||||
State and political subdivisions | 31,775 | 1,292 | 110 | 32,957 | ||||||||||||
Mortgage-backed securities | 25,374 | 601 | 670 | 25,305 | ||||||||||||
Corporate securities | 39,930 | 414 | 2,091 | 38,253 | ||||||||||||
Total fixed maturities | $ | 120,538 | 4,247 | 2,871 | 121,914 | |||||||||||
Total equity securities | $ | — | — | — | — | |||||||||||
December 31, 2007: | ||||||||||||||||
U.S. treasuries | $ | 7,837 | 259 | — | 8,096 | |||||||||||
Agencies not backed by the full faith and credit of the U.S. government | 18,523 | 372 | 7 | 18,888 | ||||||||||||
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 | |||||||||||
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Amortized | Estimated | |||||||
cost | fair value | |||||||
Due in 1 year or less | $ | 8,321 | 8,439 | |||||
Due after 1 year through 5 years | 42,747 | 43,356 | ||||||
Due after 5 years through 10 years | 39,299 | 39,824 | ||||||
Due after 10 years | 4,797 | 4,990 | ||||||
95,164 | 96,609 | |||||||
Mortgage-backed securities | 25,374 | 25,305 | ||||||
$ | 120,538 | 121,914 | ||||||
2008 | 2007 | 2006 | ||||||||||
Interest on fixed maturities | $ | 5,425 | 5,157 | 4,519 | ||||||||
Dividends on equity securities | 215 | 251 | 247 | |||||||||
Interest on cash and cash equivalents | 209 | 456 | 413 | |||||||||
Total investments income | 5,849 | 5,864 | 5,179 | |||||||||
Investment expense | (514 | ) | (540 | ) | (502 | ) | ||||||
Investment income, net of investment expense | $ | 5,335 | 5,324 | 4,677 | ||||||||
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2008 | 2007 | 2006 | ||||||||||
Fixed maturity securities: | ||||||||||||
Available for sale: | ||||||||||||
Gross gains | $ | 80 | — | 2 | ||||||||
Gross losses | (109 | ) | (77 | ) | (16 | ) | ||||||
Equity securities: | ||||||||||||
Gross gains | 2,211 | 524 | 453 | |||||||||
Gross losses | 7,960 | ) | (1,100 | ) | (87 | ) | ||||||
Realized investment (losses) gains, net | (5,778 | ) | (653 | ) | 352 | |||||||
Change in value of interest rate swap | (41 | ) | (49 | ) | (3 | ) | ||||||
Realized investment (losses) gains after change in value of interest rate swap, net | $ | (5,819 | ) | (702 | ) | 349 | ||||||
Change in difference between fair value and cost of investments: | ||||||||||||
Fixed maturity securities for continuing operations | $ | (420 | ) | 1,519 | (392 | ) | ||||||
Equity securities for continuing operations | (2,884 | ) | (337 | ) | 1,403 | |||||||
Total for continuing operations | $ | (3,304 | ) | 1,182 | 1,011 | |||||||
Equity securities for discontinued operations | (28 | ) | (2 | ) | 20 | |||||||
Total including discontinued operations | $ | (3,332 | ) | 1,180 | 1,031 | |||||||
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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 | ||||||||||||||||||
2008: | ||||||||||||||||||||||||
State and political subdivisions | $ | 2,934 | 56 | 515 | 54 | 3,449 | 110 | |||||||||||||||||
Mortgage-backed securities | 2,203 | 297 | 1,645 | 373 | 3,848 | 670 | ||||||||||||||||||
Corporate securities | 10,732 | 1,008 | 9,907 | 1,083 | 20,639 | 2,091 | ||||||||||||||||||
Total fixed maturities | 15,869 | 1,361 | 12,067 | 1,510 | 27,936 | 2,871 | ||||||||||||||||||
Total temporarily impaired securities | $ | 15,869 | 1,361 | 12,067 | 1,510 | 27,936 | 2,871 | |||||||||||||||||
2007: | ||||||||||||||||||||||||
Agencies not backed by the full faith and credit of the U.S. government | $ | — | — | 4,199 | 7 | 4,199 | 7 | |||||||||||||||||
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 | |||||||||||||||||
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(Dollars in thousands, except share data)
The Company does not engage in subprime residential mortgage lending. The only securitized financial assets that the Company owns are residential and commercial 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 December 31, 2008, fixed maturity securities issued by banks accounted for 7.8% of the bond portfolio’s book value. None of the Company’s fixed maturity securities have defaulted or required an impairment charge due to the subprime credit crisis. | ||
(5) | Comprehensive Income (Loss) | |
Comprehensive (loss) income for the years ended December 31, 2008, 2007, and 2006 consisted of the following: | ||
2008 | 2007 | 2006 | ||||||||||
Net (loss) income | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
Other comprehensive (loss) income: | ||||||||||||
Unrealized (losses) gains on securities: | ||||||||||||
Unrealized investment holding (losses) gains arising during period | (6,012 | ) | 348 | 913 | ||||||||
Less: | ||||||||||||
Reclassification adjustment for losses (gains) included in net income (loss) | 3,813 | 431 | (232 | ) | ||||||||
Net unrealized investment (losses) gains | (2,199 | ) | 779 | 681 | ||||||||
Defined benefit pension plans: | ||||||||||||
Recognized net actuarial loss | (1,068 | ) | — | — | ||||||||
Other comprehensive (loss) income | (3,267 | ) | 779 | 681 | ||||||||
Comprehensive (loss) income | $ | (10,646 | ) | 1,865 | 2,761 | |||||||
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Accumulated other comprehensive (loss) income at December 31, 2008 and 2007 consisted of the following amounts: | ||
2008 | 2007 | |||||||
Unrealized investment gains for continuing operations, net of tax | $ | 908 | 3,088 | |||||
Unrealized investment (losses) gains for discontinued operations, net of tax | (5 | ) | 14 | |||||
Defined benefit pension plan — net actuarial loss, net of tax | (2,062 | ) | (994 | ) | ||||
Accumulated other comprehensive (loss) income | $ | (1,159 | ) | 2,108 | ||||
(6) | Deferred Policy Acquisition Costs | |
Changes in deferred policy acquisition costs for the years ended December 31, 2008, 2007, and 2006 are as follows: |
2008 | 2007 | 2006 | ||||||||||
Balance, January 1 | $ | 11,014 | 10,381 | 9,646 | ||||||||
Acquisition costs deferred | 22,668 | 22,563 | 20,815 | |||||||||
Amortization charged to operations | (23,081 | ) | (21,930 | ) | (20,080 | ) | ||||||
Balance, December 31 | $ | 10,601 | 11,014 | 10,381 | ||||||||
(7) | Property and Equipment | |
Property and equipment consisted of land and buildings with a cost of $5,677 and $5,592 and equipment, capitalized software costs, and other items with a cost of $9,064 and $8,625 at December 31, 2008 and 2007, respectively. Accumulated depreciation related to such assets was $10,510, $9,816 and $9,070 at December 31, 2008, 2007 and 2006, respectively. | ||
Rental expense under leases for continuing operations amounted to $140, $245, and $206 for 2008, 2007, and 2006, respectively. |
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At December 31, 2008, the minimum aggregate rental and lease commitments for continuing operations are as follows: | ||
2009 | $ | 123 | ||
2010 | 81 | |||
2011 | 37 | |||
2012 | 5 | |||
Total | $ | 246 | ||
(8) | Long-Term Debt | |
Long-term debt related to continuing operations at December 31, 2008 and 2007 consisted of the following: | ||
2008 | 2007 | |||||||
Term loan agreement — due 2010 | $ | 1,432 | 1,745 | |||||
Long-term debt | $ | 1,432 | 1,745 | |||||
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 (0.45% at December 31, 2008) 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 December 31, 2008 and 2007. | ||
The following is a schedule of maturities of the long-term debt from continuing operations as of December 31, 2008: | ||
2009 | $ | 312 | ||
2010 | 1,120 | |||
Total | $ | 1,432 | ||
Interest paid was $90, $108, and $218 as of December 31, 2008, 2007, and 2006, respectively. | ||
Long-term debt, recorded within liabilities held for sale, at December 31, 2008 and 2007 consisted of the following: | ||
2008 | 2007 | |||||||
Acquisition payables | $ | 285 | 545 | |||||
Long-term debt | $ | 285 | 545 | |||||
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 December 31, 2008, one payment totaling $285, net of imputed interest computed at a 5.5% interest rate, remains and was paid in March 2009. | ||
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(Dollars in thousands, except share data)
(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 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. | ||
As a result of the classification of EIG as held for sale, the Company has recognized a curtailment of its defined benefit pension plan in accordance with SFAS No. 88,Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. According to SFAS No. 88, a curtailment loss should be recognized when the curtailment is probable and the loss can be reasonably estimated. The EIG employees, who are part of the sale and represent a significant number of participants within the plan, stopped accruing benefits as of their termination on February 2, 2009, the date of the sale. The Company recognized a curtailment loss in the fourth quarter 2008 when it became probable, as the Company executed a letter of intent to sell EIG on January 7, 2009. The recognized curtailment loss represents the balance of unrecognized prior service cost associated with the EIG employees, in the amount of $222. A reduction in projected benefit obligation of $123 was recognized at the same time. | ||
(a) | Obligations and Funded Status at December 31 | ||
2008 | 2007 | |||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 9,768 | 9,552 | |||||
Service cost | 664 | 656 | ||||||
Interest cost | 573 | 582 | ||||||
Benefit payments | (1,408 | ) | (699 | ) | ||||
Administrative expenses | (41 | ) | (26 | ) | ||||
Actuarial loss (gain) | 340 | (297 | ) | |||||
Curtailment | (123 | ) | — | |||||
Benefit obligation at end of year | $ | 9,773 | 9,768 | |||||
Change in plan assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 6,239 | 6,476 | |||||
Employer contributions | 1,402 | 455 | ||||||
Benefit payments | (1,408 | ) | (699 | ) | ||||
Administrative expenses | (41 | ) | (26 | ) | ||||
Actual return on plan assets | (1,251 | ) | 33 | |||||
Fair value of plan assets at end of year | $ | 4,941 | 6,239 | |||||
Funded status (net liability recognized) | $ | (4,832 | ) | (3,529 | ) | |||
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2008 | 2007 | |||||||
Unrecognized prior service cost | $ | (527 | ) | (811 | ) | |||
Unrecognized net loss | (2,598 | ) | (695 | ) | ||||
Accumulated other comprehensive loss | $ | (3,125 | ) | (1,506 | ) | |||
The accumulated benefit obligation for the qualified defined benefit pension plan was $6,894 and $6,126 at December 31, 2008 and 2007, respectively. | ||
The accumulated benefit obligation and projected benefit obligation of the SERP were $1,024 and $1,353, respectively, at December 31, 2008 and $1,870 and $2,193, respectively, at December 31, 2007. | ||
(b) | Components of Net Periodic Benefit Cost |
2008 | 2007 | 2006 | ||||||||||
Service cost | $ | 664 | 656 | 618 | ||||||||
Interest cost | 573 | 582 | 512 | |||||||||
Expected return on plan assets | (462 | ) | (489 | ) | (440 | ) | ||||||
Amortization of prior service costs | 62 | 62 | 62 | |||||||||
Amortization of net loss | 27 | 7 | 36 | |||||||||
Net periodic pension expense | 864 | 818 | 788 | |||||||||
Curtailment loss | 222 | — | — | |||||||||
Net periodic pension expense and additional amounts recognized | $ | 1,086 | 818 | 788 | ||||||||
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(Dollars in thousands, except share data)
(c) | Assumptions | ||
Weighted average assumptions used to determine benefit obligations at December 31, 2008 and 2007 are as follows: | |||
Pension Plan | SERP | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Discount rate | 6.16 | % | 6.40 | % | 6.56 | % | 6.40 | % | ||||||||
Rate of compensation increase | 4.00 | 4.00 | 5.00 | 5.00 |
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31, 2008 and 2007 are as follows: | |||
Pension Plan | SERP | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Discount rate | 6.40 | % | 6.00 | % | 6.40 | % | 6.00 | % | ||||||||
Expected long-term return on plan assets | 7.50 | 7.50 | N/A | N/A | ||||||||||||
Rate of compensation increase | 4.00 | 4.00 | 5.00 | 5.00 |
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, 2008 and 2007, by asset category, is as follows: | |||
Percentage of Plan Assets | ||||||||
2008 | 2007 | |||||||
Asset: | ||||||||
Equity securities | 52.8 | % | 57.3 | % | ||||
Fixed maturity securities | 47.0 | 41.0 | ||||||
Cash and cash equivalents | 0.2 | 1.7 | ||||||
Total | 100.0 | % | 100.0 | % | ||||
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. | |||
To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension plan portfolio. This resulted in the selection of the 7.5% long-term rate of return on assets assumption. | |||
(e) | Cash Flows |
Estimated Future Benefit Payments |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: |
2009 | $ | 295 | ||
2010 | 233 | |||
2011 | 464 | |||
2012 | 1,048 | |||
2013 | 397 | |||
2014 — 2018 | 3,885 |
The Company expects to contribute $547 to the plans in 2009. The Company’s 2010 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 were $225, $242, and $219 for 2008, 2007, and 2006, respectively. | |||
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(10) | Federal Income Tax | |
Components of the provision for income tax (benefit) expense from continuing operations for the years ended December 31, 2008, 2007 and 2006 are as follows: |
2008 | 2007 | 2006 | ||||||||||
Current expense: | ||||||||||||
Federal | $ | (310 | ) | 604 | 1,018 | |||||||
Deferred benefit: | ||||||||||||
Federal | (1,068 | ) | (208 | ) | (512 | ) | ||||||
Total tax (benefit) expense | $ | (1,378 | ) | 396 | 506 | |||||||
The Company’s net payments (refunds) for income taxes in 2008, 2007 and 2006 were $23, $1,963, and $(20), respectively. | |||
A reconciliation of the expected and actual federal income tax (benefit) expense from continuing operations for the years ended December 31, 2008, 2007, and 2006 is as follows: | |||
2008 | 2007 | 2006 | ||||||||||
Expected tax at 34% | $ | (1,985 | ) | 627 | 822 | |||||||
Nontaxable investment income | (397 | ) | (378 | ) | (355 | ) | ||||||
Accrual adjustment | (58 | ) | 96 | 8 | ||||||||
Increase in valuation reserve | 1,026 | — | — | |||||||||
Other items, net | 36 | 51 | 31 | |||||||||
Total tax (benefit) expense | $ | (1,378 | ) | 396 | 506 | |||||||
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(Dollars in thousands, except share data)
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 years ended December 31, 2008 and 2007 are as follows: | |||
2008 | 2007 | |||||||
Deferred tax assets: | ||||||||
Discounting of unpaid losses | $ | 3,261 | 2,881 | |||||
Unearned premium reserve | 2,787 | 2,961 | ||||||
Capital losses carried forward | 1,936 | — | ||||||
SFAS No. 158 pension benefit | 1,063 | 512 | ||||||
Guaranty fund liability | 456 | 442 | ||||||
Accrued retirement benefit | 399 | 406 | ||||||
Accrued severance costs | 245 | 271 | ||||||
Bad debt reserve | 124 | 100 | ||||||
Accrued vacation expense | 92 | 92 | ||||||
Disallowed contributions deductible in future periods | 62 | — | ||||||
Alternative minimum tax recoverable in future periods | 39 | — | ||||||
Investment impairments | — | 258 | ||||||
Other items | 75 | 50 | ||||||
Gross deferred tax assets | 10,539 | 7,973 | ||||||
Valuation reserve | (1,026 | ) | — | |||||
Net deferred tax assets after valuation reserve | 9,513 | 7,973 | ||||||
Deferred tax liabilities: | ||||||||
Deferred policy acquisition costs | 3,604 | 3,745 | ||||||
Unrealized investment gains, net | 466 | 1,598 | ||||||
Depreciation and amortization | 195 | 88 | ||||||
Accrued premium tax credits | 191 | 189 | ||||||
Prepaid expenses | 115 | 109 | ||||||
Company-owned life insurance | 79 | 88 | ||||||
Other items | 135 | 284 | ||||||
Gross deferred tax liabilities | 4,785 | 6,101 | ||||||
Net deferred tax asset | $ | 4,728 | 1,872 | |||||
During 2008, a deferred tax benefit of $57 was recorded as a component of the income tax benefit included within discontinued operations. | |||
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 realized by the Company in 2008, the Company does not expect to be able to generate enough capital gains during the next five years to offset all of these capital losses in its tax return. | |||
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(Dollars in thousands, except share data)
The tax benefit on these realized capital losses has only been recognized to the extent that the losses can be offset in the 2008 tax return against capital gains on current and prior years’ tax returns and offset against taxable capital gains generated from the sale of EIG in 2009. A valuation reserve of $1,026 has been established for the portion of these capital losses that the Company does not expect to recover as of December 31, 2008. | |||
Effective January 1, 2008, the Company adopted FIN No. 48. As of January 1, 2008 and December 31, 2008, 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 2008 were open for examination as of December 31, 2008. | |||
(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 2008, 2007 and 2006. The Company purchased catastrophe excess-of-loss reinsurance with a retention of $2,000 per event in 2008 and 2007 and $1,500 per event in 2006. | |||
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%. | |||
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 years ended December 31, 2008, 2007, and 2006 is as follows: | |||
(a) | Premiums | ||
2008 | 2007 | 2006 | ||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Direct | $ | 94,985 | 96,239 | 94,073 | 90,796 | 84,544 | 81,223 | |||||||||||||||||
Assumed | 1,379 | 1,387 | 1,203 | 1,215 | 1,725 | 1,693 | ||||||||||||||||||
Ceded | (18,997 | ) | (18,889 | ) | (21,157 | ) | (21,041 | ) | (18,744 | ) | (18,271 | ) | ||||||||||||
Net | $ | 77,367 | 78,737 | 74,119 | 70,970 | 67,525 | 64,645 | |||||||||||||||||
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(Dollars in thousands, except share data)
2008 | 2007 | 2006 | ||||||||||
Direct | $ | 70,442 | 59,245 | 49,629 | ||||||||
Assumed | 1,003 | 1,845 | 3,085 | |||||||||
Ceded | (14,055 | ) | (11,307 | ) | (8,948 | ) | ||||||
Net | $ | 57,390 | 49,783 | 43,766 | ||||||||
2008 | 2007 | 2006 | ||||||||||
Direct | $ | 45,310 | 46,576 | 43,262 | ||||||||
Assumed | 12 | 19 | 32 | |||||||||
Prepaid reinsurance (ceded) | (4,342 | ) | (4,234 | ) | (4,119 | ) | ||||||
Net | $ | 40,980 | 42,361 | 39,175 | ||||||||
2008 | 2007 | 2006 | ||||||||||
Direct | $ | 98,366 | 85,614 | 79,338 | ||||||||
Assumed | 9,699 | 10,342 | 10,067 | |||||||||
Gross | $ | 108,065 | 95,956 | 89,405 | ||||||||
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(Dollars in thousands, except share data)
(12) | Liability for Losses and Loss Adjustment Expenses | ||
Activity in the liability for losses and loss adjustment expenses is summarized as follows: | |||
2008 | 2007 | 2006 | ||||||||||
Balance at January 1 | $ | 95,956 | 89,405 | 83,849 | ||||||||
Less reinsurance recoverables | 18,727 | 20,089 | 22,817 | |||||||||
Net liability at January 1 | 77,229 | 69,316 | 61,032 | |||||||||
Incurred related to: | ||||||||||||
Current year | 62,612 | 54,421 | 43,785 | |||||||||
Prior years | (5,222 | ) | (4,638 | ) | (19 | ) | ||||||
Total incurred | 57,390 | 49,783 | 43,766 | |||||||||
Paid related to: | ||||||||||||
Current year | 26,578 | 22,191 | 14,222 | |||||||||
Prior years | 22,601 | 19,679 | 21,260 | |||||||||
Total paid | 49,179 | 41,870 | 35,482 | |||||||||
�� | ||||||||||||
Net liability at period-end | 85,440 | 77,229 | 69,316 | |||||||||
Add reinsurance recoverables | 22,625 | 18,727 | 20,089 | |||||||||
Balance at period-end | $ | 108,065 | 95,956 | 89,405 | ||||||||
The Company recognized favorable development in the provision for insured events of prior years of $5,222, $4,638 and $19 in 2008, 2007, and 2006, 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. Our evaluation of the significant drivers behind our loss development focuses on the broad accident year trends in frequency and severity that have developed on claim-specific losses in the major lines of business. A significant portion of our ultimate loss and loss adjustment expense reserve estimates are not directly associated with claim counts, primarily our Other segment and the Adjusting and Other category of loss adjustment expenses. Therefore, the definitive quantification of the relative impact of changes in frequency and severity on our development is impracticable. | |||
The development in 2008 is primarily attributable to favorable development in the fire and allied ($2,229), workers’ compensation ($1,652), and commercial auto liability ($1,124) lines of business. The fire and allied lines development was the result of prior years’ claims settling for less than originally estimated. The development in the workers’ compensation and commercial auto lines was due to the general observation of declines in claims severity on prior accident years. | |||
The development in 2007 is primarily attributable to the workers’ compensation ($2,757), commercial auto liability ($2,525), and fire and allied lines ($1,064). The Company broadly observed some decreasing frequency and severity in the commercial auto liability line and decreasing severity in the workers’ compensation line. The fire and allied lines development was attributable to claims settling for less than originally reserved. | |||
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(Dollars in thousands, except share data)
This development for 2007 was partly offset by $1,493 of unfavorable development in the commercial multi-peril line and reserve strengthening of $374 related to asbestos claims assumed from a terminated reinsurance pool. The commercial multi-peril line experienced an increase in newly reported claims for the 2005 accident year. | |||
In 2006, the Company recognized net favorable development of $19. The primary lines of business experiencing favorable development were the workers compensation ($633) and other liability ($660) lines due to decreasing severity. | |||
This favorable development in 2006 was partially offset by unfavorable development in the fire line ($474) on 2005 claims and in the commercial multi-peril ($245) line due to greater than expected claims severity on paid losses and loss adjustment expenses in the 2002 and 2003 accident years. Additional unfavorable development of $404 was attributable to reserve strengthening related to asbestos claims assumed from a terminated reinsurance pool. | |||
(13) | Lines of Credit | ||
The Company currently maintains two unsecured lines of credit. | |||
The first unsecured line of credit is available for general corporate purposes. In August 2007, the Company amended its bank agreement to decrease the unsecured line of credit from $4,000 to $2,500. In October 2008, the Company amended the bank agreement to decrease the unsecured line of credit from $2,500 to $500. At December 31, 2008 and 2007, a total of $500 and $0, respectively, was outstanding. | |||
The credit line bears interest at a rate equal to the London Interbank Offered Rate (0.45% at December 31, 2008) 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 December 31, 2008 and 2007. | |||
The line-of-credit agreement expires on June 30, 2010. | |||
Interest paid for the twelve months ended December 31, 2008, 2007, and 2006 relating to this unsecured bank credit agreement was $3, $14 and $6, respectively. | |||
The second unsecured line of credit for $2,000 was established in December 2008 and is available to finance temporary increased working capital needs primarily associated with costs for a planned public offering. At December 31, 2008, a total of $450 was outstanding. | |||
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. All principal and accrued interest is due and payable on July 31, 2009. | |||
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(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 $1,432 and $1,745 at December 31, 2008 and 2007, respectively. Investment losses of $41, $49 and $3 were recorded within net realized investment (losses) gains on the consolidated statements of operations in 2008, 2007, and 2006, 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 December 31, 2008, the Company incurred additional retirement and severance expense of $254. Total retirement and severance expense of $831 was unpaid as of December 31, 2008. | ||
(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. Estimates are based on historical assessment and payment patterns, the Company’s historical premium volume, and known industry developments that affect these assessments, such as insurance company insolvencies and industry loss and pricing trends. The Company’s net accrued liability for guaranty fund and other insurance related assessments is $1,528 and $1,485 at December 31, 2008 and 2007, 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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2006. EIG accrued for these contingent installment payments, as management believed they were determinable beyond a reasonable doubt. The Company made the final installment payment in March 2009. | ||
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 2008, 2007, and 2006, $38, $51 and $51, respectively, of amortization expense for these intangible assets was recorded within discontinued operations on the consolidated statements of operations. Total accumulated amortization at December 31, 2008 and 2007 was $183 and $145, respectively. | ||
On April 10, 2007, EIG acquired a book of business for $213. EIG recorded $213 of intangible assets in connection with the acquisition of these purchased customer relationships and is amortizing the book over a period of 15 years. During 2008 and 2007, $10 and $11 of amortization expense, respectively, for these intangible assets was recorded within discontinued operations on the consolidated statements of operations. Total accumulated amortization at December 31, 2008 and 2007 was $21 and $11, respectively. | ||
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 ceased all amortization of intangibles in EIG. | ||
(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 the business based on type of customer, how the business is marketed, and the manner in which risks are underwritten. Within each segment, the Company underwrites and markets its insurance products through a packaged offering of coverages sold to generally consistent types of customers. | ||
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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2008 | 2007 | 2006 | ||||||||||
Revenues: | ||||||||||||
Premiums earned: | ||||||||||||
Agribusiness | $ | 45,298 | 40,245 | 35,889 | ||||||||
Commercial Business | 31,805 | 29,260 | 26,761 | |||||||||
Other | 1,634 | 1,465 | 1,995 | |||||||||
Total premiums earned | 78,737 | 70,970 | 64,645 | |||||||||
Investment income, net of investment expense | 5,335 | 5,324 | 4,677 | |||||||||
Realized investment (losses) gains, net | (5,819 | ) | (702 | ) | 349 | |||||||
Other income | 411 | 508 | 345 | |||||||||
Total revenues | $ | 78,664 | 76,100 | 70,016 | ||||||||
Components of net (loss) income: | ||||||||||||
Underwriting (loss) income: | ||||||||||||
Agribusiness | $ | 313 | 441 | 2 | ||||||||
Commercial Business | (5,046 | ) | (1,913 | ) | (678 | ) | ||||||
Other | 288 | (998 | ) | (1,106 | ) | |||||||
Total underwriting losses | (4,445 | ) | (2,470 | ) | (1,782 | ) | ||||||
Investment income, net of investment expense | 5,335 | 5,324 | 4,677 | |||||||||
Realized investment (losses) gains, net | (5,819 | ) | (702 | ) | 349 | |||||||
Other income | 411 | 508 | 345 | |||||||||
Corporate expense | (770 | ) | (506 | ) | (635 | ) | ||||||
Interest expense | (184 | ) | (125 | ) | (222 | ) | ||||||
Other expense, net | (365 | ) | (184 | ) | (314 | ) | ||||||
Income (loss) from continuing operations, before income taxes | (5,837 | ) | 1,845 | 2,418 | ||||||||
Income tax (benefit) expense | (1,378 | ) | 396 | 506 | ||||||||
(Loss) income from continuing operations | (4,459 | ) | 1,449 | 1,912 | ||||||||
Discontinued operations: | ||||||||||||
(Loss) income on discontinued operations, before income taxes | $ | (3,090 | ) | (489 | ) | 292 | ||||||
Income tax (benefit) expense | (170 | ) | (126 | ) | 124 | |||||||
(Loss) income on discontinued operations | (2,920 | ) | (363 | ) | 168 | |||||||
Net (loss) income | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
2008 | 2007 | 2006 | ||||||||||
Net premiums earned: | ||||||||||||
Agribusiness | ||||||||||||
Property | $ | 16,412 | 13,772 | 12,620 | ||||||||
Commercial Auto | 12,119 | 11,859 | 11,189 | |||||||||
Liability | 8,795 | 7,540 | 6,768 | |||||||||
Workers’ Compensation | 7,310 | 6,394 | 5,166 | |||||||||
Other | 662 | 680 | 146 | |||||||||
Agribusiness subtotal | 45,298 | 40,245 | 35,889 | |||||||||
Commercial lines | ||||||||||||
Property & liability | 19,428 | 18,301 | 18,076 | |||||||||
Workers’ Compensation | 7,451 | 6,524 | 5,077 | |||||||||
Commercial Auto | 4,659 | 4,194 | 3,564 | |||||||||
Other | 267 | 241 | 44 | |||||||||
Commercial lines subtotal | 31,805 | 29,260 | 26,761 | |||||||||
Other | 1,634 | 1,465 | 1,995 | |||||||||
Total net premiums earned | $ | 78,737 | 70,970 | 64,645 | ||||||||
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2008 | 2007 | 2006 | ||||||||||
Net (loss) income: | ||||||||||||
Statutory net (loss) income | $ | (4,718 | ) | 878 | 1,374 | |||||||
Deferred policy acquisition costs | (413 | ) | 633 | 735 | ||||||||
Deferred federal income taxes | 1,068 | 208 | 512 | |||||||||
Other, including noninsurance amounts | (396 | ) | (270 | ) | (709 | ) | ||||||
Discontinued operations | (2,920 | ) | (363 | ) | 168 | |||||||
GAAP net (loss) income | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
Surplus: | ||||||||||||
Statutory capital and surplus | $ | 42,569 | 50,795 | 50,524 | ||||||||
Equity of noninsurance entities | (2,827 | ) | 379 | 1,721 | ||||||||
Deferred policy acquisition costs | 10,601 | 11,014 | 10,381 | |||||||||
Deferred federal income taxes | (4,111 | ) | (3,700 | ) | (4,023 | ) | ||||||
Nonadmitted assets | 3,342 | 1,598 | 1,533 | |||||||||
Unrealized gains on fixed maturities, net of tax | 908 | 1,185 | 183 | |||||||||
Other items, net | 273 | 130 | 211 | |||||||||
GAAP equity | $ | 50,755 | 61,401 | 60,530 | ||||||||
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2008 | 2007 | 2006 | ||||||||||
Net revenue | $ | 720 | 1,458 | 1,825 | ||||||||
(Loss) income on discontinued operations, before income taxes | $ | (53 | ) | (196 | ) | 125 | ||||||
Income tax (benefit) expense | (18 | ) | (59 | ) | 50 | |||||||
(Loss) income from discontinued operations | $ | (35 | ) | (137 | ) | 75 | ||||||
2007 | ||||
Assets: | ||||
Cash | $ | 191 | ||
Receivables | 140 | |||
Other assets | 229 | |||
Total assets | $ | 560 | ||
Liabilities: | ||||
Accounts payable and accrued expenses | $ | 196 | ||
Other liabilities | 32 | |||
Total liabilities | $ | 228 | ||
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EIG’s operating results for the years ended December 31, 2008, 2007 and 2006 are as follows:
2008 | 2007 | 2006 | ||||||||||
Net revenue | $ | 3,437 | 4,130 | 4,282 | ||||||||
(Loss) income on discontinued operations, before income taxes | $ | (3,037 | ) | (293 | ) | 167 | ||||||
Income tax (benefit) expense | (152 | ) | (67 | ) | 74 | |||||||
(Loss) income from discontinued operations | $ | (2,885 | ) | (226 | ) | 93 | ||||||
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2008 | 2007 | |||||||
Assets: | ||||||||
Cash | $ | — | 137 | |||||
Receivables | 420 | 951 | ||||||
Goodwill | 2,147 | 4,747 | ||||||
Intangible assets | 464 | 513 | ||||||
Other assets | 183 | 216 | ||||||
Total assets | $ | 3,214 | 6,564 | |||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 362 | 269 | |||||
Acquisition payables | 285 | 545 | ||||||
Total liabilities | $ | 647 | 814 | |||||
2008 | 2007 | 2006 | ||||||||||
Net revenue | $ | 4,157 | 5,588 | 6,107 | ||||||||
(Loss) income on discontinued operations, before income taxes | $ | (3,090 | ) | (489 | ) | 292 | ||||||
Income tax (benefit) expense | (170 | ) | (126 | ) | 124 | |||||||
(Loss) income from discontinued operations | $ | (2,920 | ) | (363 | ) | 168 | ||||||
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2008 | 2007 | |||||||
Assets: | ||||||||
Cash | $ | — | 328 | |||||
Receivables | 420 | 1,091 | ||||||
Goodwill | 2,147 | 4,747 | ||||||
Intangible assets | 464 | 513 | ||||||
Other assets | 183 | 445 | ||||||
Total assets | $ | 3,214 | 7,124 | |||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 362 | 465 | |||||
Other liabilities | 285 | 577 | ||||||
Total liabilities | $ | 647 | 1,042 | |||||
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Schedule II — Financial Information of Parent Company
Balance Sheets
December 31, 2008 and 2007
(Dollars in thousands)
2008 | 2007 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 16 | 16 | |||||
Investments in common stock of subsidiary (equity method) | 50,739 | 61,385 | ||||||
Total assets | $ | 50,755 | 61,401 | |||||
Liabilities and Equity | ||||||||
Total liabilities | $ | — | — | |||||
Retained earnings | 51,914 | 59,293 | ||||||
Accumulated other comprehensive (loss) income | (1,159 | ) | 2,108 | |||||
Total equity | 50,755 | 61,401 | ||||||
Total liabilities and equity | $ | 50,755 | 61,401 | |||||
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Schedule II — Financial Information of Parent Company
Statements of Operations
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)
2008 | 2007 | 2006 | ||||||||||
Equity in (loss) income of subsidiary | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
Net (loss) income | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
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Schedule II — Financial Information of Parent Company
Statements of Cash Flows
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)
2008 | 2007 | 2006 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net (loss) income | $ | (7,379 | ) | 1,086 | 2,080 | |||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | ||||||||||||
Equity in net loss (income) of subsidiary | 7,379 | (1,086 | ) | (2,080 | ) | |||||||
Net cash (used in) provided by operating activities | — | — | — | |||||||||
Net change in cash | — | — | — | |||||||||
Cash, beginning balance | 16 | 16 | 16 | |||||||||
Cash, ending balance | $ | 16 | 16 | 16 | ||||||||
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Schedule III — Supplemental Insurance Information
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)
Future policy | ||||||||||||||||||||
benefits, losses, | Other policy claims | |||||||||||||||||||
Deferred policy | claims and loss | and benefits | ||||||||||||||||||
acquisition costs | expenses | Unearned premiums | payable | Net premium earned | ||||||||||||||||
December 31, 2008 | ||||||||||||||||||||
Agribusiness | $ | 5,981 | 47,212 | 27,352 | — | 45,298 | ||||||||||||||
Commercial Business | 4,616 | 50,680 | 17,957 | — | 31,805 | |||||||||||||||
Other | 4 | 10,173 | 13 | — | 1,634 | |||||||||||||||
Total | $ | 10,601 | 108,065 | 45,322 | — | 78,737 | ||||||||||||||
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 | ||||||||||||||
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Schedule III — Supplemental Insurance Information
Years ended December 31, 2008, 2007, and 2006
(Dollars in thousands)
Benefits, claims, | ||||||||||||||||||||
Net investment | losses and | Amortization | Other operating | |||||||||||||||||
income | settlement expenses | of DPAC | expenses | Premiums written | ||||||||||||||||
December 31, 2008 | ||||||||||||||||||||
Agribusiness | $ | 31,137 | 13,024 | 45,110 | ||||||||||||||||
Commercial Business | 25,480 | 9,628 | 30,632 | |||||||||||||||||
Other | 773 | 429 | 1,625 | |||||||||||||||||
Total | $ | 5,335 | 57,390 | 23,081 | 3,481 | 77,367 | ||||||||||||||
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 | ||||||||||||||
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Percentage of | ||||||||||||||||||||
Ceded to other | Assumed from other | amount assumed to | ||||||||||||||||||
Premiums earned | Gross amount | companies | companies | Net amount | net | |||||||||||||||
2008 | $ | 96,239 | 18,889 | 1,387 | 78,737 | 1.76 | % | |||||||||||||
2007 | 90,796 | 21,041 | 1,215 | 70,970 | 1.71 | |||||||||||||||
2006 | 81,223 | 18,271 | 1,693 | 64,645 | 2.62 |
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2008 | 2007 | 2006 | ||||||||||||||
Beginning balance | $ | 295 | 250 | 147 | ||||||||||||
Additions | 335 | 202 | 173 | |||||||||||||
Deletions | (266 | ) | (157 | ) | (70 | ) | ||||||||||
Ending balance | $ | 364 | 295 | 250 | ||||||||||||
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Deferred | Reserve for | |||||||||||||||||||||||
policy | Losses and | Discount if | Net | |||||||||||||||||||||
acquisition | loss adj. | any deducted | Unearned | Net earned | investment | |||||||||||||||||||
costs | expenses | in column C | premium | premiums | income | |||||||||||||||||||
2008 | $ | 10,601 | 108,065 | — | 45,322 | 78,737 | 5,335 | |||||||||||||||||
2007 | 11,014 | 95,956 | 46,595 | 70,970 | 5,324 | |||||||||||||||||||
2006 | 10,381 | 89,405 | 43,294 | 64,645 | 4,677 |
Paid losses | ||||||||||||||||||||
and | ||||||||||||||||||||
Losses and LAE Incurred | Amortization | adjustment | Net written | |||||||||||||||||
Current year | Prior year | of DPAC | expenses | premiums | ||||||||||||||||
2008 | $ | 62,612 | (5,222 | ) | 23,081 | 49,179 | 77,367 | |||||||||||||
2007 | 54,421 | (4,638 | ) | 21,930 | 41,870 | 74,119 | ||||||||||||||
2006 | 43,785 | (19 | ) | 20,080 | 35,482 | 67,525 |
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SEC registration fee | $ | 3,779 | ||
CUSIP assignment fee | 124 | |||
Printing, postage and mailing | 205,000 | |||
Legal fees and expenses | 900,000 | |||
Underwriting expenses | 5,000 | |||
Accounting fees and expenses | 750,000 | |||
Valuation fees and expenses | 200,000 | |||
Transfer and offering agent fees and expenses | 60,000 | |||
Miscellaneous | 196,097 | |||
Total | $ | 2,320,000 | ||
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Table of Contents
1.1 | Form of Agency Agreement among Penn Millers Holding Corporation, Penn Millers Mutual Holding Company, PMHC Corp., Penn Millers Insurance Company and Griffin Financial Group, LLC* | ||
2.1 | Plan of Conversion from mutual to stock form of Penn Millers Mutual Holding Company, dated as of April 22, 2009* | ||
3.1 | 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 | Whole Account Accident Year Aggregate Excess of Loss Reinsurance Contract* | ||
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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 | ||
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 Valuation Appraisal Report, dated as of June 5, 2009, prepared for Penn Millers Mutual Holding Company by Curtis Financial Group LLC. | ||
99.2 | Letter dated April 22, 2009, to Penn Millers Mutual Holding 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 , 2009, between Penn Millers Holding Corporation and Christiana Bank & Trust Company.** | ||
99.7 | Penn Millers Mutual Holding Company Member Proxy Materials | ||
99.8 | Power of Attorney by Donald A. Pizer | ||
* | Previously filed. | |
** | To be filed by amendment. | |
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II-4
Table of Contents
II-5
Table of Contents
PENN MILLERS HOLDING CORPORATION | ||||
By: | /s/ Douglas A. Gaudet | |||
Douglas A. Gaudet, President and | ||||
Chief Executive Officer | ||||
II-6
Table of Contents
Signature | Capacity | Date | ||
/s/ Douglas A. Gaudet | Director President and Chief Executive Officer (Principal Executive Officer) | June 26, 2009 | ||
/s/ J. Harvey Sproul, Jr. * | Director and Chairman | June 26, 2009 | ||
/s/ F. Kenneth Ackerman, Jr. * | Director and Vice Chairman | June 26, 2009 | ||
/s/ Heather M. Acker * | Director | June 26, 2009 | ||
/s/ Dorrance R. Belin, Esq. * | Director | June 26, 2009 | ||
/s/ John L. Churnetski * | Director | June 26, 2009 | ||
/s/ John M. Coleman * | Director | June 26, 2009 | ||
/s/ Kim E. Michelstein * | Director | June 26, 2009 | ||
/s/ Robert A. Nearing, Jr. * | Director | June 26, 2009 | ||
/s/ Donald A. Pizer * | Director | June 26, 2009 | ||
/s/ James M. Revie * | Director | June 26, 2009 | ||
/s/ Michael O. Banks | Treasurer and Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer) | June 26, 2009 | ||
* | By Michael O. Banks As Attorney In Fact /s/ Michael O. Banks |
II-7
Table of Contents
1.1 | Form of Agency Agreement among Penn Millers Holding Corporation, Penn Millers Mutual Holding Company, PMHC Corp., Penn Millers Insurance Company and Griffin Financial Group, LLC* | |
2.1 | Plan of Conversion from mutual to stock form of Penn Millers Mutual Holding Company, dated as of April 22, 2009* | |
3.1 | 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 | Whole Account Accident Year Aggregate Excess of Loss Reinsurance Contract* | |
10.11 | Property Catastrophe Excess of Loss Reinsurance Agreement* |
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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 | |
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 Valuation Appraisal Report, dated as of June 5, 2009, prepared for Penn Millers Mutual Holding Company by Curtis Financial Group LLC. | |
99.2 | Letter dated April 22, 2009, to Penn Millers Mutual Holding 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 , 2009, between Penn Millers Holding Corporation and Christiana Bank & Trust Company.** | |
99.7 | Penn Millers Mutual Holding Company Member Proxy Materials | |
99.8 | Power of Attorney by Donald A. Pizer |
* | Previously filed. | |
** | To be filed by amendment. |
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