Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| |
|
|
| (Mark One) |
|
|
|
þ
|
|
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| |
|
For the fiscal year ended December 31, 2004 |
| |
|
OR |
| |
|
o
|
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| |
|
For the transition period
from to . |
Commission file number 000-51124
SeaBright Insurance Holdings, Inc.
(Exact name of registrant as specified in its charter)
| |
|
|
|
Delaware
|
|
56-2393241 |
|
(State or other jurisdiction of incorporation or
organization) |
|
(IRS Employer Identification No.) |
| |
2101 4th Avenue, Suite 1600
Seattle, Washington
(Address of principal executive offices) |
|
98121
(Zip code) |
Registrant’s telephone number, including area code:
(206) 269-8500
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Securities Exchange
Act of
1934). Yes o No þ
The registrant consummated its initial public offering on
January 26, 2005. Accordingly, as of June 30, 2004,
the last day of the registrant’s most recently completed
second fiscal quarter, the registrant’s common equity was
not publicly traded. As of March 18, 2005, the aggregate
market value of the registrant’s common stock, par value
$0.01 per share, held by non-affiliates of the registrant
was approximately $103,256,839. For this purpose, all shares
held by directors, executive officers and shareholders
beneficially owning five percent or more of the
registrant’s common stock have been treated as held by
affiliates.
The number of shares of the registrant’s common stock
outstanding as of March 18, 2005 was 16,402,808.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SEABRIGHT INSURANCE HOLDINGS, INC.
INDEX TO FORM 10-K
1
PART I
In this annual statement:
|
|
|
| |
• |
references to the “Acquisition” refer to the series
of transactions that occurred on September 30, 2003
described under the heading “Our History” in
Item 1 of this Part I; |
| |
| |
• |
references to our “predecessor,” for periods prior
to the date of the Acquisition, refer collectively to PointSure
Insurance Services, Inc, Eagle Pacific Insurance Company and
Pacific Eagle Insurance Company; |
| |
| |
• |
references to the “Company,” “we,”
“us” or “our” refer to SeaBright Insurance
Holdings, Inc. and its subsidiaries, SeaBright Insurance Company
and PointSure Insurance Services, Inc., and prior to the date of
the Acquisition, include references to our predecessor; |
| |
| |
• |
the term “our business” refers to the business
conducted by the Company since October 1, 2003 and with
respect to periods prior to October 1, 2003, to the
business conducted by our predecessor; and |
| |
| |
• |
references to “SeaBright” refer solely to SeaBright
Insurance Holdings, Inc., unless the context suggests
otherwise. |
Overview
We are a specialty provider of multi-jurisdictional
workers’ compensation insurance. We are domiciled in
Illinois, commercially domiciled in California and headquartered
in Seattle, Washington. We are licensed in 43 states and
the District of Columbia to write workers’ compensation
insurance. Traditional providers of workers’ compensation
insurance provide coverage to employers under one or more state
workers’ compensation laws, which prescribe benefits that
employers are obligated to provide to their employees who are
injured arising out of or in the course of employment. We focus
on employers with complex workers’ compensation exposures
and provide coverage under multiple state and federal acts,
applicable common law or negotiated agreements. We also provide
traditional state act coverage in markets we believe are
underserved. Our workers’ compensation policies are issued
to employers who also pay the premiums. The policies provide
payments to covered, injured employees of the policyholder for,
among other things, temporary or permanent disability benefits,
death benefits and medical and hospital expenses. The benefits
payable and the duration of such benefits are set by statute,
and vary by jurisdiction and with the nature and severity of the
injury or disease and the wages, occupation and age of the
employee.
SeaBright Insurance Holdings, Inc. (“SeaBright” or the
“Company”) was formed in 2003 by members of our
current management and entities affiliated with Summit Partners,
a leading private equity and venture capital firm, for the
purpose of completing a management-led buyout that closed on
September 30, 2003, which we refer to as the Acquisition.
In the Acquisition, we acquired the renewal rights and
substantially all of the operating assets and employees of Eagle
Pacific Insurance Company and Pacific Eagle Insurance Company,
which we collectively refer to as Eagle or the Eagle Entities.
Eagle Pacific began writing specialty workers’ compensation
insurance almost 20 years ago. The Acquisition gave us
renewal rights to an existing portfolio of business,
representing a valuable asset given the renewal nature of our
business, and a fully-operational infrastructure that would have
taken many years to develop. These renewal rights gave us access
to Eagle’s customer lists and the right to seek to renew
Eagle’s continuing in-force insurance contracts.
Industry Background
Workers’ compensation is a statutory system under which an
employer is required to pay for its employees’ medical,
disability, vocational rehabilitation and death benefits costs
for work-related injuries or illnesses. Most employers comply
with this requirement by purchasing workers’ compensation
insurance. The principal concept underlying workers’
compensation laws is that an employee injured in the course of
2
his or her employment has only the legal remedies available
under workers’ compensation law and does not have any other
recourse against his or her employer. Generally, workers are
covered for injuries that occur in the course and within the
scope of their employment. An employer’s obligation to pay
workers’ compensation does not depend on any negligence or
wrongdoing on the part of the employer and exists even for
injuries that result from the negligence or wrongdoings of
another person, including the employee.
Workers’ compensation insurance policies generally provide
that the carrier will pay all benefits that the insured employer
may become obligated to pay under applicable workers’
compensation laws. Each state has a regulatory and adjudicatory
system that quantifies the level of wage replacement to be paid,
determines the level of medical care required to be provided and
the cost of permanent impairment and specifies the options in
selecting healthcare providers available to the injured employee
or the employer. Coverage under the United States Longshore and
Harbor Workers’ Compensation Act (“USL&H” or
the “USL&H Act”) is similar to the state statutory
system, but is administered on a federal level by the
U.S. Department of Labor. This coverage is required for
maritime employers with employees working on or near the
waterfront in coastal areas of the United States and its inland
waterways. As benefits under the USL&H Act are generally
more generous than in the individual state systems, the rates
charged for this coverage are higher than those charged for
comparable land-based employment. These state and federal laws
generally require two types of benefits for injured employees:
(1) medical benefits, which include expenses related to
diagnosis and treatment of the injury, as well as any required
rehabilitation and (2) indemnity payments, which consist of
temporary wage replacement, permanent disability payments and
death benefits to surviving family members. To fulfill these
mandated financial obligations, virtually all employers are
required to purchase workers’ compensation insurance or, if
permitted by state law or approved by the U.S. Department
of Labor, to self-insure. The employers may purchase
workers’ compensation insurance from a private insurance
carrier, a state-sanctioned assigned risk pool or a
self-insurance fund (an entity that allows employers to obtain
workers’ compensation coverage on a pooled basis, typically
subjecting each employer to joint and several liability for the
entire fund).
Our History
On July 14, 2003, SeaBright entered into a purchase
agreement with Kemper Employers Group, Inc., Lumbermens Mutual
Casualty Company (“LMC”) and the Eagle Entities.
Pursuant to the purchase agreement, we acquired 100% of the
issued and outstanding capital stock of Kemper Employers
Insurance Company (“KEIC”) and PointSure Insurance
Services, Inc. (“PointSure”), a wholesale insurance
broker and third party claims administrator, and acquired
tangible assets, specified contracts, renewal rights and
intellectual property rights from LMC and the Eagle Entities. We
acquired KEIC, a shell company with no in-force policies or
employees, solely for the purpose of acquiring its workers’
compensation licenses in 43 states and the District of
Columbia and for its certification with the United States
Department of Labor. SeaBright paid approximately
$6.5 million for KEIC’s insurance licenses,
Eagle’s renewal rights, internally developed software and
other assets and PointSure and approximately $9.2 million
for KEIC’s statutory surplus and capital, for a total
purchase price of $15.7 million. At the closing,
$4.0 million of the purchase price was placed into escrow
and will be distributed in accordance with the escrow agreement
described below. In accordance with the purchase price
adjustment provisions in the purchase agreement, we agreed in
September 2004 to pay to LMC a purchase price adjustment in the
amount of $771,116. Following this payment, neither we nor LMC
have any further obligations to each other under these
provisions.
The Acquisition was completed on September 30, 2003, at
which time entities affiliated with Summit Partners, certain
co-investors and members of our management team invested
approximately $45.0 million in SeaBright and received
convertible preferred stock in return. See “Item 13.
Certain Relationships and Related Transactions.” These
proceeds were used to pay for the assets under the purchase
agreement and to contribute additional capital to KEIC, which
was renamed “SeaBright Insurance Company.” SeaBright
Insurance Company received an “A-” (Excellent) rating
from A.M. Best following the completion of the Acquisition.
3
Following the completion of the Acquisition, our corporate
structure is as follows:
SeaBright Insurance Company is our insurance company subsidiary
and a specialty provider of multi-jurisdictional workers’
compensation insurance. PointSure acts primarily as an in-house
wholesale broker and third party administrator for SeaBright
Insurance Company.
|
|
|
Arrangements to Minimize Exposure |
Prior to the Acquisition, KEIC had a limited operating history
in California writing small business workers’ compensation
policies with an average annual premium size of approximately
$4,100 per customer. KEIC had established loss reserves in
the amount of approximately $16.0 million for these
policies at September 30, 2003. In light of the
deteriorating financial condition of LMC and its affiliates, we
entered into a number of protective arrangements in connection
with the Acquisition for the purpose of minimizing our exposure
to this past business underwritten by KEIC and any adverse
developments to KEIC’s loss reserves as they existed at the
date of the Acquisition. One of our primary objectives in
establishing these arrangements was to create security at the
time of the Acquisition with respect to LMC’s potential
obligations to us as opposed to having a mere future contractual
right against LMC with respect to these obligations. The
protective arrangements we established include a commutation
agreement, an adverse development cover, a collateralized
reinsurance trust and a $4.0 million escrow.
Commutation Agreement. Prior to the Acquisition, LMC and
KEIC had entered into a reinsurance agreement requiring LMC to
reinsure 80% of certain risks insured by KEIC in exchange for a
premium paid to LMC. To help insulate us from the effects of a
potential insolvency of LMC and the possibility that LMC may not
continue to have the ability to make reinsurance payments to
KEIC in the future, in connection with the Acquisition, KEIC
entered into a commutation agreement with LMC to terminate the
previously established reinsurance agreement. Under the
commutation agreement, LMC paid KEIC approximately
$13.0 million in cash in exchange for being released from
its obligations under the reinsurance agreement, and KEIC
reassumed all of the risks previously reinsured by LMC.
Adverse Development Cover. At the time of the
Acquisition, KEIC had loss reserves in the amount of
approximately $16.0 million. In connection with the
Acquisition, we entered into an agreement with LMC under which
we both agreed to indemnify each other with respect to
developments in these loss reserves over a period of
approximately eight years. December 31, 2011 is the date to
which the parties will look to determine whether the loss
reserves with respect to KEIC’s insurance policies in
effect at the date of the Acquisition have increased or
decreased from the $16.0 million amount existing at the
date of the Acquisition. If the loss reserves have increased,
LMC must indemnify us in the amount of the increase. If they
have decreased, we must indemnify LMC in the amount of the
decrease.
Collateralized Reinsurance Trust. Because of the poor
financial condition of LMC and its affiliates, we required LMC
to fund a trust account in connection with the Acquisition. The
funds in the trust account serve as current security for
potential future obligations of LMC under the adverse
development cover. The minimum amount that must be maintained in
the trust account is equal to the greater of
(a) $1.6 million or (b) 102% of the then-existing
quarterly estimate of LMC’s total obligations under the
adverse development cover, requiring LMC to fund additional
amounts into the trust account on a
4
quarterly basis, if necessary based on a quarterly review of
LMC’s obligations. We are entitled to access the funds in
the trust account from time to time to satisfy LMC’s
obligations under the adverse development cover in the event
that LMC fails to satisfy its obligations.
As of December 31, 2004, we had recorded a receivable of
approximately $2.9 million for adverse loss development
under the adverse development cover since the date of the
Acquisition. In September 2004, we and LMC retained an
independent actuary to determine the appropriate amount of loss
reserves that are subject to the adverse development cover as of
September 30, 2004. In accordance with the terms of the
adverse development cover and the collateralized reinsurance
trust, on December 23, 2004, LMC deposited into the trust
account an additional approximately $3.2 million, resulting
in a total balance in the trust account of approximately
$4.8 million. We and LMC are currently reviewing the
results of the final report received from the independent
actuary in February 2005.
$4.0 Million Escrow. In connection with the
Acquisition, $4.0 million of the purchase price was placed
into escrow in an account at Wells Fargo Bank for a period of
two years. These funds are available to us as security for the
obligations of LMC and its affiliates under the commutation
agreement, the adverse development cover, the collateralized
reinsurance trust and the indemnification provisions of the
purchase agreement. The escrow agent will release funds
remaining in the escrow account to Kemper Employers Group, Inc.
on October 2, 2005.
In addition to these arrangements, we also entered into services
agreements with LMC and certain of its affiliates that require
us to provide certain service functions for the Eagle Entities
in exchange for fee income. The services that we are required to
provide to the Eagle Entities under these agreements include
administrative services, such as underwriting services, billing
and collections services, safety services and accounting
services, and claims services, including claims administration,
claims investigation and loss adjustment and settlement
services. For the year ended December 31, 2004, we received
approximately $3.5 million in service fee income from LMC
and its affiliates under these services arrangements.
We have entered into a service agreement with Broadspire
Services, Inc., a third-party claims administrator and former
subsidiary of LMC, pursuant to which Broadspire provides us with
claims services for the claims that we acquired from KEIC in
connection with the Acquisition in exchange for certain
servicing fees.
|
|
|
Issues Relating to a Potential LMC Receivership |
LMC and its affiliates have traditionally offered a wide array
of personal, risk management and commercial property and
casualty insurance products. However, due to the distressed
financial situation of LMC and its affiliates, LMC is no longer
writing new business and is now operating under a three-year run
off plan which has been approved by the Illinois Department of
Financial and Professional Regulation, Division of Insurance.
“Run off” is the professional management of an
insurance company’s discontinued, distressed or non-renewed
lines of insurance and associated liabilities outside of a
judicial proceeding. Under the run off plan, LMC will attempt to
buy back some of its commercial line policies and institute
aggressive expense control measures in order to reduce its
future loss exposure and allow it to meet its obligations to
current policyholders.
In the event that LMC is placed into receivership, a receiver
may seek to recover certain payments made by LMC to us in
connection with the Acquisition under applicable voidable
preference and fraudulent transfer laws. However, we believe
that there are factors that would mitigate the risk to us
resulting from a potential voidable preference or fraudulent
conveyance action brought by a receiver of LMC, including the
fact that we believe LMC and KEIC were solvent at the time of
the Acquisition and that the Acquisition was negotiated at arms
length and for fair value, and the Director of the Illinois
Department of Financial and Professional Regulation, Division of
Insurance approved the Acquisition notwithstanding LMC’s
financial condition.
5
In addition, if LMC is placed into receivership, various
arrangements that we established with LMC in connection with the
Acquisition, including the servicing arrangements, the adverse
development cover, the collateralized reinsurance trust and the
commutation agreement, could be adversely affected. For a
discussion of the risks relating to a potential LMC
receivership, see the risks described below under “Factors
That May Affect Our Business, Future Operating Results and
Financial Condition — In the event LMC is placed into
receivership, we could lose our rights to fee income and
protective arrangements that were established in connection with
the Acquisition, our reputation and credibility could be
adversely affected and we could be subject to claims under
applicable voidable preference and fraudulent transfer
laws.”
Competitive Strengths
We believe we enjoy the following competitive strengths:
|
|
|
| |
• |
Niche Product Offering. Our specialized workers’
compensation insurance products in maritime, alternative dispute
resolution and selected state act markets enable us to address
the needs of an underserved market. Our management team and
staff have extensive experience serving the specific and complex
needs of these customers. |
| |
| |
• |
Specialized Underwriting Expertise. We identify
individual risks with complex workers’ compensation needs,
such as multi-jurisdictional coverage, and negotiate customized
coverage plans to meet those needs. Our underwriters average
over 15 years of experience underwriting workers’
compensation coverage. Our specialized underwriting expertise
enables us to align our interests with those of our insureds by
encouraging the insured to bear a portion of the losses
sustained under the policy. Approximately 35.8% of our gross
premiums written for the year ended December 31, 2004 came
from such arrangements. We have achieved a net loss ratio of
65.1% for the year ended December 31, 2004. |
| |
| |
• |
Focus on Larger Accounts. We target a relatively small
number of larger, more safety-conscious employers (businesses
with 50 to 400 employees) within our niche markets. We have
approximately 288 customers, with an average estimated annual
premium size of approximately $440,000 at December 31,
2004. We believe this focus, together with our specialized
underwriting expertise, increases the profitability of our book
of business primarily because the more extensive loss history of
larger customers enables us to better predict future losses,
allowing us to price our policies more accurately. In addition,
larger customers tend to purchase policies whose premiums vary
based on loss experience and, therefore, have aligned interests
with us. Our focus on larger accounts also enables us to provide
individualized attention to our customers, which we believe
leads to higher satisfaction and long-term loyalty. |
| |
| |
• |
Proactive Loss Control and Claims Management. We consult
with employers on workplace safety, accident and illness
prevention and safety awareness training. We also offer
employers medical and disability management tools that help
injured employees return to work more quickly. These tools
include access to a national network of physicians, case
management nurses and a national discounted pharmacy benefit
program. Our chief medical officer, Marc B. Miller, M.D.,
assists our policyholders and our claims staff in achieving the
best possible medical outcome while strategically managing our
medical costs. Our strong focus on proven claims management
practices helps to minimize attorney involvement and to expedite
the settlement of valid claims. In addition, our branch office
network affords us extensive local knowledge of claims and legal
environments, further enhancing our ability to achieve favorable
results on claims. Our claims managers and claims examiners are
highly experienced, with an average of over 17 years in the
workers’ compensation insurance industry. |
| |
| |
• |
Established Book of Business Without Associated
Liabilities. In the Acquisition, we acquired renewal rights
with respect to policies written by the Eagle Entities; we did
not acquire any in-force Eagle policies or historical
liabilities associated with those policies. Although we did not
write our first policy until October 2003, we have been able to
create an established book of business |
6
|
|
|
| |
|
comprised primarily of policies with customers with whom we have
long-standing relationships and with operations and claims
histories that we know well. We believe this knowledge has
allowed us to more appropriately price our policies. |
| |
| |
• |
Experienced Management Team. The members of our senior
management team, consisting of John G. Pasqualetto, Richard J.
Gergasko, Joseph S. De Vita, Richard W. Seelinger, Marc B.
Miller, M.D. and Jeffrey C. Wanamaker, average over
25 years of insurance industry experience, and over
20 years of workers’ compensation insurance experience. |
| |
| |
• |
Strong Distribution Network. We market our products
through independent brokers and through PointSure, our in-house
wholesale broker and third party administrator. This two-tiered
distribution system provides us with flexibility in originating
premiums and managing our commission expense. PointSure produced
approximately 21.5% of our direct premiums written and 17.5% of
our customers in the year ended December 31, 2004. We are
highly selective in establishing relationships with independent
brokers. As of December 31, 2004, we had appointed 74
independent brokers to represent our products. In addition, we
negotiate commissions for the placement of all risks that we
underwrite, either through independent brokers or through
PointSure. For the year ended December 31, 2004, our ratio
of commissions to net premiums earned was 6.8%. |
Strategy
We plan to pursue profitable growth and favorable returns on
equity through the following strategies:
|
|
|
| |
• |
Expand Business in Core Markets. We wrote approximately
62.1% of our direct premiums in California, 27.2% in Hawaii,
Washington and Alaska and 7.1% in Pennsylvania, Texas and
Louisiana for the year ended December 31, 2004. We believe
that the proceeds from the initial public offering of our common
stock, completed in January 2005, will provide us with the
additional capital that we need to increase the amount of
insurance business that we are able to write in these and other
markets. We believe that our product offerings, together with
our specialized underwriting expertise and niche market focus,
will position us to increase our market share of the business
that we write in our core and other target markets. |
| |
| |
• |
Expand Territorially. We wrote approximately 89.3% of our
direct premiums for the year ended December 31, 2004 in the
top four states where we do business. We believe that our
insurance products and services offer the potential for strong
demand beyond these states. We believe our experience with
maritime coverage issues in the states in which we now operate
can be readily applied to other areas of the country that we do
not now serve, and ten other states in addition to California
have enabling legislation for collectively bargained alternative
dispute resolution that is similar to the alternative dispute
resolution (“ADR”) legislation in California. We plan
to expand our business by writing premiums in several of the
states in which we are licensed but do not currently write
business, particularly in the Great Lakes and the East Coast
regions. |
| |
| |
• |
Generate Fee and Commission Income. We intend to expand
our ability to generate non-risk bearing fee and commission
income by utilizing the expertise of our in-house wholesale
broker and third party administrator, PointSure, to serve
additional insurance companies. |
| |
| |
• |
Focus on Profitability. We intend to continue our focus
on underwriting discipline and profitability. We plan to do so
by selecting risks prudently, by pricing our products
appropriately and by focusing on larger accounts in our target
markets. |
| |
| |
• |
Continue Making Technological Improvements. Our in-house
technology department has developed effective, customized
analytical tools that we believe significantly enhance our
ability to write profitable business and cost-effectively
administer claims. In addition, these tools also allow for
seamless connectivity with our branch offices. We intend to
continue making investments in advanced and reliable
technological infrastructure. Our technology is scalable and can
be modified at minimal cost to accommodate our growth. |
7
Customers
We currently provide workers’ compensation insurance to the
following types of customers:
|
|
|
| |
• |
Maritime employers with complex coverage needs over land, shore
and navigable waters. This involves underwriting liability
exposures subject to various state and federal statutes and
applicable maritime common law. Our customers in this market are
engaged primarily in ship building and repair, pier and marine
construction and stevedoring. |
| |
| |
• |
Employers, particularly in the construction industry in
California, who are party to collectively bargained
workers’ compensation agreements that provide for
settlement of claims out of court in a negotiated process. |
| |
| |
• |
Employers who are obligated to pay insurance benefits
specifically under state workers’ compensation laws. We
primarily target employers in states that we believe are
underserved, such as California, Hawaii and Alaska. |
Providing workers’ compensation insurance to maritime
customers with multi-jurisdictional liability exposures was the
core of the business of Eagle Pacific Insurance Company, which
began writing specialty workers’ compensation insurance
almost 20 years ago, and remains a key component of our
business today. We are authorized by the U.S. Department of
Labor to write maritime coverage under the USL&H Act in all
federal districts, and believe we are one of the most capable
underwriters in this niche in the United States. The USL&H
Act is a federal law that allows for compensation to
“longshoremen” employees if an injury or death occurs
upon navigable waters in the United States, including any
adjoining pier, wharf, dry dock, terminal, building-way, marine
railway or other adjoining area customarily used by an employer
in loading, unloading, repairing, dismantling or building a
vessel. We also write maritime employers’ liability
coverage under the Jones Act. The Jones Act is a federal law,
the maritime employer provisions of which provide injured
offshore workers, or seamen, with a remedy against their
employer for injuries arising from negligent acts of the
employer or co-workers during the course of employment on a ship
or vessel.
The availability of maritime coverage has declined in recent
years due to several factors, including market tightening and
insolvency of insurers providing this type of insurance.
Offshore mutual organizations have increasingly become the
default mechanism for insuring exposures for maritime employers
due to the withdrawal of several traditional insurance carriers
from this market segment. Maritime employers that obtain
coverage through offshore mutual organizations are not able to
rely on the financial security of a rated domestic insurance
carrier. Accordingly, these employers are exposed to
joint-and-several liability along with other members of the
mutual organization. We offer maritime employers
cost-competitive insurance coverage (usually under one policy)
for liabilities under various state and federal statutes and
applicable maritime common law without the uncertain financial
exposure associated with joint-and-several liability. We believe
we have very few competitors who focus on maritime employers
with multi-jurisdictional liability exposures.
We also provide coverage for exposures under The Outer
Continental Shelf Lands Act (the “OCSLA”). The OCSLA
is a federal workers’ compensation act that also provides
access to the benefits defined in the USL&H Act for maritime
employers with employees working on an off-shore drilling
platform on the Outer Continental Shelf.
In the year ended December 31, 2004, we received
approximately 26.9% of our direct premiums written from our
maritime customers. We define a maritime customer as a customer
whose total workers’ compensation exposure consists of at
least 10% of maritime exposure. When we use the term maritime
exposure in this annual report, we refer to exposure under the
USL&H Act, the Jones Act or both. Not all of the gross
premiums written from our maritime customers are for maritime
exposures. For the year ended December 31, 2004,
approximately 69.6% of our direct premiums written for maritime
customers were for maritime exposures. Our experience writing
maritime coverage attracts maritime customers for whom we can
also write state act and ADR coverage.
8
|
|
|
Employers Party to Collectively Bargained Workers’
Compensation Agreements |
We also provide workers’ compensation coverage for
employers, particularly in the construction industry in
California, that are party to collectively bargained
workers’ compensation agreements with trade unions, also
known as alternative dispute resolution, or ADR, programs. These
programs use informal arbitration instead of litigation to
resolve disputes out of court in a negotiated process.
Alternative dispute resolution insurance programs in California
were made possible by legislation passed in 1993 and expanded by
legislation passed in 2003. In 2003, these alternative dispute
resolution programs became available to all unionized employees
in California, where previously they were available only to
unionized employees in the construction industry. We are
recognized by twelve union programs as authorized to provide
coverage for employers that are party to collectively bargained
workers’ compensation agreements with trade unions. Ten
states in addition to California have enabling legislation
allowing for the creation of alternative dispute resolution
insurance programs.
The primary objectives of an alternative dispute resolution
program are to reduce litigation costs, improve the quality of
medical care, improve the delivery of benefits, promote safety
and increase the productivity of union workers by reducing
workers’ compensation costs. The ADR process is generally
handled by an ombudsman, who is typically experienced in the
workers’ compensation system. The ombudsman gathers the
facts and evidence in a dispute and attempts to use his or her
experience to resolve the dispute among the employer, employee
and insurance carrier. If the ombudsman is unable to resolve the
dispute, the case goes to mediation or arbitration.
Alternative dispute resolution programs have had many positive
effects on the California workers’ compensation process.
For example, a 2004 study conducted by the California
Workers’ Compensation Institute revealed that attorney
involvement decreased by 72% for claims handled under ADR
programs as opposed to claims handled under California’s
statutory workers’ compensation system. In addition, our
own studies have revealed that the average lifespan of a non-ADR
time loss claim with class codes matching ADR claims in
California is reduced by 53.1% for claims handled under an ADR
program. The average lifespan of a claim is a key measure of the
likely cost of the claim. We are one of the few insurance
companies that offers this product in the markets that we serve.
For the year ended December 31, 2004, we received
approximately 36.5% of our direct premiums written from
customers who participate in alternative dispute resolution
programs. We define an ADR customer as any customer who pays us
a premium for providing the customer with insurance coverage in
connection with an ADR program. Not all of the gross premiums
written from our ADR customers are for ADR exposures. For the
year ended December 31, 2004, approximately 69.6% of our
direct premiums written for ADR customers were for ADR
exposures. Our experience writing ADR coverage attracts ADR
customers for whom we can also write state act and maritime
coverage.
We also provide workers’ compensation insurance to other
employers who are obligated to pay benefits to employees under
state workers’ compensation laws. We provide this coverage
primarily for customers in the states of California, Hawaii and
Alaska. We provide coverage under state statutes that prescribe
the benefits that employers are required to provide to their
employees who may be injured in the course of their employment.
Our policies are issued to employers. The policies provide
payments to covered, injured employees of the policyholder for,
among other things, temporary or permanent disability benefits,
death benefits, medical benefits and hospital expenses. The
benefits payable and the duration of these benefits are set by
statute and vary by state and with the nature and severity of
the injury or disease and the wages, occupation and age of the
employee. We are one of a few insurance carriers that have a
local claim office in Alaska and Hawaii and, as such, we do not
need to rely on third party administrators in these two markets.
In the year ended December 31, 2004, we received
approximately 36.6% of our direct premiums written from state
act customers. We define a state act customer as a customer
whose state act exposure
9
arises only under state workers’ compensation laws and who
is not a maritime customer or an ADR customer.
As of December 31, 2004, our largest customer had annual
direct premiums written of approximately $4.5 million, or
3.4% of our total gross premiums written. We are not dependent
on any single customer which would have a material adverse
effect on our business if we lost the customer. As of
December 31, 2004, we had in-force premiums of
$126.7 million. In-force premiums refers to our current
annual gross premiums written for all customers that have active
or unexpired policies, and represents premiums from our total
customer base. Our three largest customers have annual gross
premiums written of $12.6 million, or 9.9% of our total
in-force premiums as of December 31, 2004. We do not expect
the size of our largest customers to increase significantly over
time. Accordingly, as we grow in the future, we believe our
largest customers will account for a decreasing percentage of
our total gross premiums written.
Distribution
We distribute our products primarily by identifying independent
brokers with well-established maritime or construction
expertise. We currently have a network of approximately 74
insurance brokers. We do not employ sales representatives or use
third-party managing general agents. The licensed insurance
brokers with whom we contract are compensated by a commission
set as percentage of premiums. As of December 31, 2004, we
had 16 brokers that participated in our broker bonus
program, which was discontinued in 2005. This profit sharing
program was initially developed in early 2001 by our predecessor
to further relationships with brokers and to compete with other
carriers with similar programs. Following the Acquisition, we
continued the program to maintain those broker relationships. In
all cases, we initiate the program arrangement with the broker.
The program was offered on a selective basis to only those
brokers that qualified based on the amount of the brokers’
business in our specialized market niches, the professional
reputation and product knowledge enjoyed by the broker in the
local insurance community and the broker’s demonstrated
interest in working with our underwriters over the long term.
The agreements we have with these brokers provide for the
payment of additional commissions in the event that the broker
produces profitable business achieving a calendar year loss
ratio less than targets set forth in the applicable agreement.
In addition to achieving the loss ratio target, the broker also
had to achieve certain volume targets in order to qualify for
the additional commissions. The terms of the agreements with
different brokers are the same, with only the target levels
varying. Our standard broker agreement does not contain a
commission schedule because all commissions are specifically
negotiated as part of our underwriting process. Our ratio of
commissions to net premiums earned for the year ended
December 31, 2004 was 6.8%. For the year ended
December 31, 2004, the accounts for 29 of our customers
were written with no commissions, constituting 15.0% of our
direct premiums written for that period. The brokers do not have
authority to underwrite or bind coverage on our behalf, and they
are contractually bound by our broker agreement.
We also distribute our products through PointSure, our licensed
in-house underwriting agency, wholesale broker and third-party
administrator. PointSure is a wholly-owned subsidiary of
SeaBright. PointSure has approximately 348 sub-producer
agreements as of December 31, 2004 and is authorized to act
as an agent under firm licenses or licenses held by one of its
officers in 47 states. In addition to enhancing our
distribution process by providing us with the flexibility to
avoid the costly and time consuming process of appointing
brokers, PointSure serves as a cost-effective source of business
production for us and conducts product research and development
for us.
PointSure acts in a variety of capacities for us and for third
parties. PointSure provides marketing, sales and distribution
services for SeaBright Insurance Company to non-appointed
brokers. PointSure also serves as the program administrator for
SeaBright Insurance Company in its capacity as the current
servicing carrier for the maritime assigned risk plan for the
State of Washington. For the year ended December 31, 2004,
approximately 40.5% of PointSure’s total revenue after
intercompany eliminations was derived from fees associated with
the operation and administration of this plan. In addition,
PointSure
10
performs services for third parties unaffiliated with us. For
example, PointSure acts as a third party claims administrator
for self-insured employers and as a wholesale insurance broker
for non-affiliated companies. For services provided to us,
PointSure receives flat fees as opposed to commissions, and
these fees are dependent on the type of business produced. For
services provided to certain other non-affiliated carriers,
PointSure may receive incentive commissions based on the
achievement of certain premium growth, retention and
profitability objectives. As a matter of policy, PointSure
discloses to its sub-producers that it may earn incentive
commissions and offers to provide further information upon
request. PointSure produced approximately 21.5% of our direct
premiums written and approximately 17.5% of our customers for
the year ended December 31, 2004.
SeaBright Insurance Company and PointSure have entered into a
five year agency services agreement pursuant to which PointSure
provides insurance services with respect to the servicing of
insurance policies written by SeaBright Insurance Company,
including underwriting services, collection of premium services,
endorsement services, cancellation services and marketing
services. All services provided by PointSure under the agreement
are subject to the ultimate review and control of the board of
directors of SeaBright Insurance Company. In exchange for the
services it provides through May 31, 2005, under the
Agreement, PointSure is entitled to receive fees equal to
(1) 7.5% of direct premiums produced for business written
and serviced by PointSure, (2) 2.5% of the estimated annual
premium for underwriting support for business written by
SeaBright Insurance Company and (3) 1.75% of the estimated
annual premium for the marketing and management of alternative
dispute resolution programs. However, with respect to services
rendered through May 31, 2005 in connection with the
Washington USL&H Act assigned risk plan, PointSure is
entitled to receive 15% of direct premiums written. Under the
agreement, this compensation arrangement changes to compensation
on a cost incurred basis for all services PointSure provides
SeaBright Insurance Company from June 1, 2005 through the
remaining term of the agreement. We have received regulatory
approvals for the agency services agreement by the Illinois
Department of Financial and Professional Regulation, Division of
Insurance and the California Department of Insurance, effective
retroactively to October 1, 2003.
11
The following table provides the geographic distribution of our
risks insured as represented by direct premiums written by
product for the year ended December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Direct Premiums Written | |
|
|
| |
|
| |
|
|
| |
|
|
|
Alternative | |
|
|
|
|
| |
|
|
|
Dispute | |
|
|
|
Percent of | |
| State |
|
Maritime | |
|
Resolution | |
|
State Act | |
|
Total | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Alaska
|
|
$ |
1,700.8 |
|
|
$ |
— |
|
|
$ |
14,668.3 |
|
|
$ |
16,369.1 |
|
|
|
12.7 |
% |
|
Alabama
|
|
|
2.6 |
|
|
|
— |
|
|
|
104.1 |
|
|
|
106.7 |
|
|
|
* |
|
|
Arizona
|
|
|
34.9 |
|
|
|
— |
|
|
|
209.2 |
|
|
|
244.1 |
|
|
|
* |
|
|
California
|
|
|
5,560.0 |
|
|
|
33,988.6 |
|
|
|
40,688.3 |
|
|
|
80,236.9 |
|
|
|
62.1 |
|
|
Colorado
|
|
|
— |
|
|
|
— |
|
|
|
94.6 |
|
|
|
94.6 |
|
|
|
* |
|
|
Florida
|
|
|
274.9 |
|
|
|
— |
|
|
|
583.1 |
|
|
|
858.0 |
|
|
|
* |
|
|
Hawaii
|
|
|
1,986.2 |
|
|
|
— |
|
|
|
8,697.8 |
|
|
|
10,684.0 |
|
|
|
8.3 |
|
|
Illinois
|
|
|
— |
|
|
|
— |
|
|
|
182.9 |
|
|
|
182.9 |
|
|
|
* |
|
|
Louisiana
|
|
|
1,865.2 |
|
|
|
— |
|
|
|
714.1 |
|
|
|
2,579.3 |
|
|
|
2.0 |
|
|
Mississippi
|
|
|
19.0 |
|
|
|
— |
|
|
|
49.9 |
|
|
|
68.9 |
|
|
|
* |
|
|
New Jersey
|
|
|
242.1 |
|
|
|
— |
|
|
|
489.6 |
|
|
|
731.7 |
|
|
|
* |
|
|
Nevada
|
|
|
— |
|
|
|
— |
|
|
|
986.1 |
|
|
|
986.1 |
|
|
|
* |
|
|
Oregon
|
|
|
1,309.0 |
|
|
|
— |
|
|
|
114.5 |
|
|
|
1,423.5 |
|
|
|
1.1 |
|
|
Pennsylvania
|
|
|
3,140.8 |
|
|
|
— |
|
|
|
534.4 |
|
|
|
3,675.2 |
|
|
|
2.8 |
|
|
South Carolina
|
|
|
— |
|
|
|
— |
|
|
|
29.2 |
|
|
|
29.2 |
|
|
|
* |
|
|
Texas
|
|
|
549.6 |
|
|
|
— |
|
|
|
2,407.6 |
|
|
|
2,957.2 |
|
|
|
2.3 |
|
|
Utah
|
|
|
— |
|
|
|
— |
|
|
|
17.2 |
|
|
|
17.2 |
|
|
|
* |
|
|
Washington
|
|
|
8,024.1 |
|
|
|
— |
|
|
|
— |
|
|
|
8,024.1 |
|
|
|
6.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Direct Premiums Written
|
|
$ |
24,709.2 |
|
|
$ |
33,988.6 |
|
|
$ |
70,570.9 |
|
|
$ |
129,268.7 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total
|
|
|
19.1 |
% |
|
|
26.3 |
% |
|
|
54.6 |
% |
|
|
|
|
|
|
|
|
|
|
| * |
Represents less than 1% of total. |
Underwriting
We underwrite business on a guaranteed-cost basis and we also
underwrite loss sensitive plans that make use of
retrospective-rating plans and deductible plans. Guaranteed cost
plans allow for fixed premium rates for the term of the
insurance policy. Although the premium rates are fixed, the
final premium on a guaranteed cost plan will vary based on the
difference between the estimated term payroll at the time the
policy is issued and the final audited payroll of the customer
after the policy expires. Loss sensitive plans, on the other
hand, provide for a variable premium rate for the policy term.
The variable premium is based on the customer’s actual loss
experience for claims occurring during the policy period,
subject to a minimum and maximum premium. The final premium for
the policy may not be known for five to seven years after the
expiration of the policy, because the premium is recalculated in
12-month intervals following the expiration of the policy to
reflect development on reported claims. Our loss sensitive plans
allow our customers to choose to actively manage their insurance
premium costs by sharing risk with us. For the year ended
December 31, 2004, approximately 64.2% of our direct
premiums written came from customers on guaranteed cost plans,
with the remaining 35.8% of our direct premiums written coming
from customers on loss sensitive plans.
As opposed to using a class underwriting approach, which targets
specific classes of business or industries and where the
acceptability of a risk is determined by the entire class or
industry, our underwriting strategy is to identify and target
individual risks with specialized workers’ compensation
12
needs. We negotiate individual coverage plans to meet those
needs with competitive pricing and supportive underwriting, risk
management and service. Our underwriting is tailored to each
individual risk, and involves a financial evaluation, loss
exposure analysis and review of management control and
involvement. Each account that we underwrite is evaluated for
its acceptability, coverage, pricing and program design. We do
not underwrite books or blocks of business. We make significant
use of risk sharing (or loss sensitive) plans to align our
interests with those of the insured. Our underwriting department
monitors the performance of each account throughout the coverage
period, and upon renewal, the profitability of each account is
reviewed and integrated into the terms and conditions of
coverage going forward.
The underwriting of each piece of business begins with the
selection process. All of our underwriting submissions are
initially sent to the local underwriting office based on the
location of the producer. A submission is an application for
insurance coverage by a broker on behalf of a prospective
policyholder. Our underwriting professionals screen each
submission to ensure that the potential customer is a maritime
employer, an employer involved in an alternative dispute
resolution program, or another employer governed by a state
workers’ compensation act with a record of successfully
controlling higher hazard workers’ compensation exposures.
The submission must generate a minimum premium size and must not
involve prohibited operations. We deem diving, ship breaking,
employee leasing and asbestos and lead abatement to be
prohibited operations that we generally do not insure. Once a
submission passes the initial clearance hurdle, members of our
loss control and underwriting departments jointly determine
whether to ultimately accept the account. If our underwriting
department preliminarily determines to accept the account, our
loss control department conducts a prospect survey. We require a
positive loss control survey before any piece of new business is
bound, unless otherwise approved by our underwriting department
management. Our loss control consultants independently verify
the information contained in the submission and meet with our
underwriters to confirm the decision to accept the account.
To determine the premium on a particular account, we use a
customized loss-rating model developed by our predecessor’s
actuaries with input from our underwriting management. We
compare the loss history of each customer to the expected losses
underlying the rates in each state and jurisdiction. Our loss
projections are based on comparing actual losses to expected
losses. We estimate the annual premium by adding our expenses
and profit to the loss projection selected by our underwriters.
This process helps to ensure that the premiums we charge are
adequate for the risk insured.
Our underwriting department is managed by experienced
underwriters who specialize in maritime and construction
exposures. We have underwriting offices in Seattle, Washington;
Orange, California; Anchorage, Alaska; and Houston, Texas. We
also maintain a resident underwriting professional in
San Francisco, California and Slidell, Louisiana to better
serve our client base. As of December 31, 2004, we had a
total of 28 employees in our underwriting department, consisting
of 15 underwriting professionals and 13 support-level
staff members. The average length of underwriting experience of
our current underwriting professionals exceeds 15 years. We
use audits and “authority letters” to help ensure the
quality of our underwriting decisions. Our authority letters set
forth the underwriting authority for each individual
underwriting staff member based on their level of experience and
demonstrated knowledge of the product and market. We also
maintain a table of underwriting authority controls in our
custom-built quote and issue system that is designed to prevent
the release of quotes that are outside an underwriter’s
authority. These controls compare the underwriter’s
authority for premium size, commission level, pricing deviation,
plan design and coverage jurisdiction to the terms that are
being proposed for the specific policyholder. This system
prevents the release of final insurance proposals that are
outside an underwriter’s authority without appropriate
review and confirmation from our senior underwriting personnel,
allowing our senior underwriting personnel to mentor and manage
the individual performance of our underwriters and to monitor
the selection of new accounts.
Loss Control
We place a strong emphasis on our loss control function as an
integral part of the underwriting process as well as a
competitive differentiator. Our loss control department delivers
risk level evaluations to our underwriters with respect to the
degree of an employer’s management commitment to safety and
acts
13
as a resource for our customers to effectively support the
promotion of a safe workplace. Our loss control staff has
extensive experience developed from years of servicing the
maritime and construction industries. Our loss control staff
consists of seven employees as of December 31, 2004,
averaging 19 years of experience in the industry and eight
years of experience with us. We believe that this experience
benefits us by allowing us to serve our customers more
efficiently and effectively. Specifically, our loss control
staff grades each prospective customer’s safety program
elements and key loss control measures, supported with
explanations in an internal report to the appropriate
underwriter. Our loss control staff prepares risk improvement
recommendations as applicable and provides a loss control
opinion of risk with supporting comments. Our loss control staff
also prepares a customized loss control service plan for each
policyholder based upon identified servicing needs.
Our loss control staff works closely with Marc B.
Miller, M.D., our chief medical officer who joined us in
August 2004, to assist our customers in developing tailored
medical cost management strategies. We believe that by analyzing
our loss data, our medical management needs and the current
legal and regulatory environment, our chief medical officer
helps us reduce our payments for medical costs and improve the
delivery of medical care to our policyholders’ employees.
Our loss control staff conducts large loss investigation visits
on site for traumatic or fatal incidents whenever possible. Our
loss control staff also conducts a comprehensive re-evaluation
visit prior to the expiration of a policy term to assist the
underwriter in making decisions on coverage renewal.
We have loss control staff located in Seattle, Washington;
Orange, California; Houston, Texas; Baton Rouge, Louisiana; and
Honolulu, Hawaii. A network of independent consultants provides
supplemental loss control service support in Alaska, Hawaii,
California, Washington, Pennsylvania and Florida.
Pricing
We use a loss-rating approach when pricing our products. Our
underwriting department determines expected ultimate losses for
each of our prospective accounts and renewals using a customized
loss-rating model developed by actuaries. This loss-rating model
projects expected losses for future policy periods by weighing
expected losses underlying specific workers’ compensation
class codes against our customer’s historical payroll and
loss information. Our underwriting department uses these
projections to produce an expected loss amount for each account.
This loss amount provides the foundation for developing overall
pricing terms for the account. After the ultimate expected
losses are calculated, our underwriting department determines
the appropriate premium for the risk after adding specific
expense elements to the expected loss amount, including loss
control expenses, commissions, reinsurance cost, taxes and
underwriting margins.
We also own a customized pricing model developed completely
in-house that we use to calculate insurance terms for our loss
sensitive plans. This program uses industry-published excess
loss factors and tables of insurance charges, as well as
company-specific expenses, to calculate the appropriate pricing
terms. As discussed above under the heading
“Underwriting,” our loss sensitive plans align our
interests with our customers’ interests by providing our
customers with the opportunity to earn a premium that would
otherwise be higher than under a guaranteed cost plan if they
are able to keep their losses below an expected level. The
premiums for our retrospective rating loss sensitive plans are
reflective of the customer’s loss experience because,
beginning six months after the expiration of the relevant
insurance policy, and annually thereafter, we recalculate the
premium payable during the policy term based on the current
value of the known losses that occurred during the policy term.
Because of the long duration of our loss sensitive plans, there
is a risk that the customer will fail to pay the additional
premium. Accordingly, we obtain collateral in the form of
letters of credit to mitigate credit risk associated with our
loss sensitive plans.
We monitor the overall price adequacy of all new and renewal
policies using a weekly price monitoring report. For 2001, 2002
and the nine months ended September 30, 2003, the Eagle
Entities achieved renewal rate increases of 12.6%, 13.8% and
16.5%, respectively. For the three months ended
December 31, 2003, SeaBright achieved renewal rate
increases of 12.0%. For the year ended December 31,
14
2004, our rates upon renewal were down approximately 2.9%. The
reduction in rates for 2004 was driven by our California
business. Rates in California were decreased in 2004 to reflect
the projected reduction in loss costs due to recently enacted
legislative reform bills (A.B. 227/ S.B. 228).
Claims
We believe we are particularly well qualified to handle
multi-jurisdictional workers’ compensation claims. Our
claims operation is organized around our unique product mix and
customer needs. We believe that we can achieve quality claims
outcomes because of our niche market focus, our local market
knowledge and our superior claims handling practices. We have
claims staff located in Seattle, Washington; Orange, California;
Anchorage, Alaska; Honolulu, Hawaii; and Houston, Texas. We also
maintain resident claim examiners in San Diego, California,
South Carolina and Western Washington to better serve our client
base.
Our maritime claims are handled in our Seattle office. Upon
completion of a thorough investigation, our maritime claims
staff is able to promptly determine the appropriate jurisdiction
for the claim and initiate benefit payments to the injured
worker. We believe our ability to handle both USL&H Act and
Jones Act claims in one integrated process results in reduced
legal costs for our customers and improved benefit delivery to
injured workers.
Claims for our alternative dispute resolution product are
handled in our Orange, California office. By centralizing these
claims in one location, we have developed tailored claim
handling processes, systems and procedures. We believe this
claims centralization also results in enhanced focus and
improved claims execution.
Claims for our state act products are handled in our regional
claims offices located in Anchorage, Alaska; Honolulu, Hawaii;
Orange, California; and Houston, Texas. We believe in
maintaining a local market presence for our claims handling
process. Our regional claims staff has developed a thorough
knowledge of the local medical and legal community, enabling
them to make more informed claims handling decisions.
We seek to maintain an effective claims management strategy
through the application of sound claims handling practices. We
are devoted to maintaining a quality, professional staff with a
high level of technical proficiency. We practice a team approach
to claims management, seeking to distribute each claim to the
most appropriate level of technical expertise in order to obtain
the best possible outcome. Our claims examiners are supported by
claims assistants, at a ratio of approximately one claims
assistant for every two claims examiners. Claims assistants
perform a variety of routine tasks to assist our claims
examiners. This support enables our claims examiners to focus on
the more complex tasks associated with our unique products,
including analyzing jurisdictional issues; investigating,
negotiating and settling claims; considering causal connection
issues; and managing the medical, disability, litigation and
benefit delivery aspects of the claims process. We believe that
it is critical for our claims professionals to have regular
customer contact, to develop relationships with owners and risk
management personnel of the maritime employer and to be familiar
with the activities of the employer.
Having a highly experienced claims staff with manageable work
loads is an integral part of our business model. Our claims
staff is experienced in the markets in which we compete. As of
December 31, 2004, we had a total of 39 employees in our
claims department, including 30 claims managers, examiners and
representatives and nine support-level staff members.
Our claims managers and examiners average 20 years of
experience in the insurance industry and over 17 years of
experience with workers’ compensation coverage. In
addition, our in-house claims examiners maintain manageable work
loads so they can more fully investigate individual claims, with
each claims examiner handling, on average, 112 cases at one
time, as of December 31, 2004.
Our claims examiners are focused on early return to work, timely
and effective medical treatment and prompt claim resolution.
Newly-hired examiners are assigned to experienced supervisors
who monitor all activity and decision-making to verify skill
levels. Like our underwriting department, we use audits and
15
“authority letters” in our claims department to help
ensure the quality of our claims decisions. The authority
letters set forth the claims handling authority for each
individual claims professional based on their level of
experience and demonstrated knowledge of the product and market.
We believe that our audits are a valuable tool in measuring
execution against performance standards and the resulting impact
on our business. Our home office audit function conducts an
annual review of each claims office for compliance with our best
claims handling practices, policies and procedures.
Our claims staff also works closely with Marc B.
Miller, M.D., our chief medical officer, to better manage
medical costs. Our chief medical officer performs a variety of
functions for us, including providing counsel and direction on
cases involving complex medical issues and assisting with the
development and implementation of innovative medical cost
management strategies tailored to the unique challenges of our
market niches.
We have a modern electronic claims management system that we
believe enables us to provide prompt, responsive service to our
customers. We offer a variety of claim reporting options,
including telephone, facsimile, e-mail and online reporting from
our website.
In those states where we do not have claims staff, we have made
arrangements with local third party administrators to handle
state act claims only. As of December 31, 2004,
approximately 95% of our total claims were being handled
in-house as opposed to being handled by third party
administrators. To help ensure the appropriate level of claims
expertise, we allow only our own claims personnel to handle
maritime claims, regardless of where the claim occurs.
Broadspire Services, a third party claims administrator,
services a small book of claims for us which we acquired in the
Acquisition. As of December 31, 2004, there were 257 open
claims in the book of claims being serviced by Broadspire.
Loss Reserves
We maintain amounts for the payment of claims and expenses
related to adjusting those claims. Unpaid losses are estimates
at a given point in time of amounts that an insurer expects to
pay for claims which have been reported and for claims which
have occurred but are unreported. We take into consideration the
facts and circumstances for each claim file as then known by our
claims department, as well as actuarial estimates of aggregate
unpaid losses and loss expense.
Our unpaid losses consist of case amounts, which are for
reported claims, and amounts for claims that have been incurred
but have not yet been reported as well as adjustments to case
amounts for ultimate expected losses (sometimes referred to as
IBNR). The amount of unpaid loss for reported claims is based
primarily upon a claim-by-claim evaluation of coverage,
liability or injury severity, and any other information
considered pertinent to estimating the exposure presented by the
claim. The amounts for unreported claims and unpaid loss
adjustment expenses are determined using historical information
as adjusted to current conditions. Unpaid loss adjustment
expense is intended to cover the ultimate cost of settling
claims, including investigation and defense of lawsuits
resulting from such claims. The amount of loss reserves is
determined by us on the basis of industry information,
historical loss information and anticipated future conditions.
Because loss reserves are an estimate of the ultimate cost of
settling claims, they are closely monitored by us on a quarterly
basis. We have engaged an independent actuary for these
quarterly reviews as well as to prepare a complete actuarial
opinion at the end of each year concerning the adequacy of loss
reserves.
16
|
|
|
Reconciliation of Loss Reserves |
The table below shows the reconciliation of our loss reserves
and the loss reserves of our predecessor on a gross and net
basis for the periods indicated, reflecting changes in losses
incurred and paid losses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Predecessor | |
| |
|
| |
|
| |
| |
|
|
|
June 19, 2003 | |
|
Nine Months | |
|
|
| |
|
Year Ended | |
|
(Inception) to | |
|
Ended | |
|
Year Ended | |
| |
|
December 31, | |
|
December 31, | |
|
September 30, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance, beginning of year
|
|
$ |
29,733 |
|
|
$ |
— |
|
|
$ |
153,469 |
|
|
$ |
166,342 |
|
|
Balance acquired at October 1, 2003
|
|
|
— |
|
|
|
25,891 |
|
|
|
— |
|
|
|
— |
|
|
Less reinsurance recoverables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
From LMC
|
|
|
— |
|
|
|
— |
|
|
|
(100,670 |
) |
|
|
(114,247 |
) |
| |
From unaffiliated reinsurers
|
|
|
(11,238 |
) |
|
|
(9,938 |
) |
|
|
(34,233 |
) |
|
|
(36,294 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total recoverables
|
|
|
(11,238 |
) |
|
|
(9,938 |
) |
|
|
(134,903 |
) |
|
|
(150,541 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, beginning of year
|
|
|
18,495 |
|
|
|
15,953 |
|
|
|
18,566 |
|
|
|
15,801 |
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
53,594 |
|
|
|
3,024 |
|
|
|
26,895 |
|
|
|
13,324 |
|
| |
Prior years
|
|
|
451 |
|
|
|
2,468 |
|
|
|
(1,500 |
) |
|
|
(8,332 |
) |
| |
Receivable under adverse development cover
|
|
|
(385 |
) |
|
|
(2,468 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total incurred
|
|
|
53,660 |
|
|
|
3,024 |
|
|
|
25,395 |
|
|
|
4,992 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
(11,401 |
) |
|
|
(1,061 |
) |
|
|
(4,283 |
) |
|
|
(3,398 |
) |
| |
Prior years
|
|
|
(5,493 |
) |
|
|
(1,889 |
) |
|
|
(3,706 |
) |
|
|
1,171 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total paid
|
|
|
(16,894 |
) |
|
|
(2,950 |
) |
|
|
(7,989 |
) |
|
|
(2,227 |
) |
| |
Receivable under adverse development cover
|
|
|
385 |
|
|
|
2,468 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance, end of year
|
|
|
55,646 |
|
|
|
18,495 |
|
|
|
35,972 |
|
|
|
18,566 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus reinsurance recoverables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
From LMC
|
|
|
— |
|
|
|
— |
|
|
|
87,677 |
|
|
|
100,670 |
|
| |
From unaffiliated reinsurers
|
|
|
12,582 |
|
|
|
11,238 |
|
|
|
37,889 |
|
|
|
34,233 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total recoverables
|
|
|
12,582 |
|
|
|
11,238 |
|
|
|
125,566 |
|
|
|
134,903 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
68,228 |
|
|
$ |
29,733 |
|
|
$ |
161,538 |
|
|
$ |
153,469 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Our practices for determining loss reserves are designed to set
amounts that in the aggregate are adequate to pay all claims at
their ultimate settlement value. Our loss reserves are not
discounted for inflation or other factors.
The columns labeled “Company” in the above table
include the development of the KEIC loss reserves from
September 30, 2003 (the date of the Acquisition) through
December 31, 2004. See the discussion under the heading
“Our History” in this Item 1. Prior to the
Acquisition, KEIC had a limited operating history in California
writing small business workers’ compensation policies and
had established loss reserves in the amount of approximately
$16.0 million for these policies at September 30,
2003. In an effort to minimize our exposure to this past
business underwritten by KEIC and any adverse developments to
KEIC’s loss reserves as they existed at the date of the
Acquisition, we entered into various protective arrangements in
connection with the Acquisition, including the adverse
development cover and the
17
collateralized reinsurance trust. See the discussion under the
heading “Our History — Arrangements to Minimize
Exposure” in this Item 1. For a discussion of the loss
reserve development of KEIC’s loss reserves and related
matters, see the discussion under the heading “KEIC Loss
Reserves” in this Item 1.
|
|
|
SeaBright Insurance Company Loss Reserves |
SeaBright Insurance Company began writing insurance policies on
October 1, 2003 and has claim activity for accident years
2003 and 2004. Reserves for this business were established at
December 31, 2003 for $2.1 million. As of
December 31, 2004, the re-estimated liability for those
reserves was $2.8 million. The $0.7 million adverse
development is due to the small base of claims and losses
assumed from the National Council for Compensation Insurance
pool.
Shown below is the loss development related to KEIC policies
written from 2000 through 2002. The last direct policy written
by KEIC was effective in May 2002 and expired in May 2003. KEIC
has claim activity in accident years 2000, 2001, 2002 and 2003.
The first line of the table shows, for the years indicated, the
gross liability including the incurred but not reported losses
as originally estimated. For example, as of December 31,
2001 it was estimated that $14.5 million would be
sufficient to settle all claims not already settled that had
occurred prior to December 31, 2001, whether reported or
unreported. The next section of the table shows, by year, the
cumulative amounts of loss reserves paid as of the end of each
succeeding year. For example, with respect to the gross loss
reserves of $14.5 million as of December 31, 2001, by
December 31, 2004 (three years later) $8.1 million had
actually been paid in settlement of the claims which pertain to
the liabilities as of December 31, 2001. The next section
of the table sets forth the re-estimates in later years of
incurred losses, including payments, for the years indicated.
The “cumulative redundancy/(deficiency)” represents,
as of December 31, 2004, the difference between the latest
re-estimated liability and the amounts as originally estimated.
A redundancy means the original estimate was higher than the
current estimate; a deficiency means that the current estimate
is higher than the original estimate.
Analysis of KEIC Loss Reserve Development
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Gross liability as originally estimated:
|
|
$ |
3,258 |
|
|
$ |
14,458 |
|
|
$ |
30,748 |
|
|
$ |
27,677 |
|
|
$ |
22,248 |
|
|
Gross cumulative payments as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
723 |
|
|
|
7,525 |
|
|
|
(4,130 |
) |
|
|
6,815 |
|
|
|
|
|
|
Two years later
|
|
|
2,070 |
|
|
|
4,443 |
|
|
|
2,283 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
1,438 |
|
|
|
8,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
1,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
3,013 |
|
|
|
19,562 |
|
|
|
23,374 |
|
|
|
29,063 |
|
|
|
|
|
|
Two years later
|
|
|
3,426 |
|
|
|
17,523 |
|
|
|
23,321 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
3,329 |
|
|
|
18,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
3,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy/(deficiency):
|
|
|
23 |
|
|
|
(3,680 |
) |
|
|
7,427 |
|
|
|
(1,386 |
) |
|
|
|
|
Prior to the Acquisition, KEIC had a limited operating history
in California writing small business workers’ compensation
policies. As of September 30, 2003, the acquired book of
business related to KEIC had gross reserves of
$25.9 million and net reserves of $16.0 million. See
the discussion under the heading “Our History —
Arrangements to Minimize Exposure” in this Item 1. The
gross and net liabilities re-
18
estimated as of December 31, 2004 are $32.2 million
and $18.9 million, respectively. The adverse development on
gross reserves of $6.3 million and net reserves of
$2.9 million has been recorded subsequent to
September 30, 2003. The adverse development on the net
reserves is subject to the adverse development cover. See the
discussion under the heading “Our History —
Arrangements to Minimize Exposure” in this Item 1.
As of December 31, 2004, the acquired book of business
related to KEIC had gross reserves of $22.2 million. These
reserves represent a potential liability to us if the protective
arrangements that we have established prove to be inadequate.
Our initial source of protection is our external reinsurance,
which is described under the heading “Reinsurance” in
this Item 1. The total reserves net of external reinsurance
at December 31, 2004 are $11.5 million. The ceded
reserves of $10.7 million are subject to collection from
our external reinsurers. To the extent we are not able to
collect on our reinsurance recoverables, these liabilities
become our responsibility. See the discussion under the heading
“Factors That May Affect Our Business, Future Operating
Results and Financial Condition — Our loss reserves
are based on estimates and may be inadequate to cover our actual
losses” in this Item 1.
The net reserves as of December 31, 2004 of
$11.5 million are subject to the various protective
arrangements that we entered into in connection with the
Acquisition. These protective arrangements were established
specifically for the purpose of minimizing our exposure to past
business underwritten by KEIC and any adverse developments to
KEIC’s loss reserves as they existed at the date of the
Acquisition. One of our primary objectives in establishing these
arrangements was to create security at the time of the
Acquisition with respect to LMC’s potential obligations to
us as opposed to having a mere future contractual right against
LMC with respect to these obligations in the event that LMC was
subsequently placed into receivership or was otherwise unwilling
or unable to satisfy its obligations to us. The protective
arrangements we established include a commutation agreement, an
adverse development cover, a collateralized reinsurance trust
and a $4.0 million escrow. These protective arrangements,
which are described in detail under the heading “Our
History — Arrangements to Minimize Exposure,” are
summarized as follows:
|
|
|
| |
• |
Under the commutation agreement, in order to help insulate us
from the possibility that LMC may not continue to have the
ability to make reinsurance payments to KEIC in the future, KEIC
released LMC from reinsurance obligations to KEIC of
approximately $13.0 million in exchange for an equivalent
amount of cash and investments. Although LMC would have paid its
obligations to KEIC over a period of several years if the
reinsurance agreement between LMC and KEIC had remained in
effect, the payment received by KEIC under the commutation
agreement was on a dollar-for-dollar basis with no present value
discount. This $13.0 million represented net reserves to
KEIC and was added to the net reserves of approximately
$3.0 million already carried by KEIC to arrive at the total
net reserves of $16.0 million as of September 30, 2003. |
| |
| |
• |
Under the adverse development cover, we and LMC are required to
indemnify each other with respect to developments in KEIC’s
loss reserves as they existed at the date of the Acquisition.
Accordingly, if KEIC’s loss reserves increase, LMC must
indemnify us in the amount of the increase. |
| |
| |
• |
To support LMC’s obligations under the adverse development
cover, LMC funded a trust account at the time of the
Acquisition. The minimum amount that must be maintained in the
trust account is equal to the greater of
(a) $1.6 million or (b) 102% of the then-existing
quarterly estimate of LMC’s total obligations under the
adverse development cover. As of September 30, 2004, we had
recorded a receivable of approximately $2.5 million for
adverse loss development under the adverse development cover
since the date of the Acquisition. In September 2004, we and LMC
retained an independent actuary to determine the appropriate
amount of loss reserves that are subject to the adverse
development cover as of September 30, 2004. In accordance
with the terms of the adverse development cover and the
collateralized reinsurance trust, on December 23, 2004, LMC
deposited into the trust account an additional approximately
$3.2 million, resulting in a total balance in the |
19
|
|
|
| |
|
trust account of approximately $4.8 million. We and LMC are
currently reviewing the results of the final report received
from the independent actuary in February 2005. |
| |
| |
• |
We also established an escrow account to hold $4.0 million
of the purchase price for a period of two years following the
Acquisition. These funds are available to us as security for the
obligations of LMC and its affiliates under the commutation
agreement, the adverse development cover, the collateralized
reinsurance trust and the indemnification provisions of the
purchase agreement. |
Due to the distressed financial condition of LMC and its
affiliates, LMC is no longer writing new business and is now
operating under a three-year run off plan which has been
approved by the Illinois Department of Financial and
Professional Regulation, Division of Insurance. If LMC is placed
into receivership, various of the protective arrangements
described above, including the adverse development cover, the
collateralized reinsurance trust and the commutation agreement,
could be adversely affected. If LMC is placed into receivership
and the amount held in the collateralized reinsurance trust is
inadequate to satisfy the obligations of LMC to us under the
adverse development cover, it is unlikely that we would recover
any future amounts owed by LMC to us under the adverse
development cover in excess of the amounts currently held in
trust because the director of the Illinois Department of
Financial and Professional Regulation, Division of Insurance
would have control of the assets of LMC. In addition, it is
possible that a receiver or creditor could assert a claim
seeking to unwind or recover the $13.0 million payment made
by LMC to us under the commutation agreement or the funds
deposited by LMC into the collateralized reinsurance trust under
applicable voidable preference or fraudulent transfer laws. See
the discussion under the heading “Factors That May Affect
Our Business, Future Operating Results and Financial
Condition — In the event LMC is placed into
receivership, we could lose our rights to fee income and
protective arrangements that were established in connection with
the Acquisition, our reputation and credibility could be
adversely affected and we could be subject to claims under
applicable voidable preference and fraudulent transfer
laws” in this Item 1.
If LMC is placed into receivership in the near future, we will
be responsible for the amount of any adverse development of
KEIC’s loss reserves in excess of the collateral that is
currently available to us, including the $4.8 million on
deposit under the collateralized reinsurance trust and the
$4.0 million escrow. For example, if LMC is placed into
receivership at a time when the amount on deposit in the
collateralized reinsurance trust is deficient by
$1.0 million, then the amount of adverse development that
is not absorbed by the $4.8 million currently on deposit
under the collateralized reinsurance trust will have to be taken
from our $4.0 million escrow. If there is adverse
development on KEIC’s loss reserves subsequent to the
expiration of the $4.0 million escrow on October 1,
2005 and LMC is placed into receivership before addressing a
deficiency in the collateralized reinsurance trust in accordance
with the terms of the adverse development cover, we would have
to absorb the amount of adverse development which exceeds the
amount on deposit in the collateralized reinsurance trust.
Because the $13.0 million that we received under the
commutation agreement was not discounted for present value at
the time of payment, the earnings on these funds, if any, will
help us to absorb any adverse development on KEIC’s loss
reserves in excess of amounts on deposit under the
collateralized reinsurance trust and under the $4.0 million
escrow. We believe that there are several factors that would
mitigate the risk to us resulting from a potential voidable
preference or fraudulent conveyance action brought by a
receiver, but if a receiver is successful under applicable
voidable preference and fraudulent transfer laws in recovering
from us the collateral that we received in connection with the
Acquisition, those funds would not be available to us to offset
any adverse development in KEIC’s loss reserves. See the
discussion under the heading “Our History —
Issues Relating to a Potential LMC Receivership” in this
Item 1.
|
|
|
Predecessor Loss Development |
Shown below is the loss development for business written by our
predecessor each year from 1993 through September 30, 2003.
Because SeaBright was only recently formed in September 2003, as
described under the heading “Our History” in this
Item 1, and because the table below shows the loss
development only for business written by our predecessor, the
primary significance of the table is to show how our senior
management handled the loss reserves of our predecessor from the
time that it took control
20
of our predecessor’s book of business at the end of 1998.
The table portrays the changes in our predecessor’s loss
reserves in subsequent years from the prior loss estimates based
on experience as of the end of each succeeding year on a GAAP
basis. The loss development table does not reflect the loss
development for business written by KEIC prior to the
Acquisition.
The first line of the table shows, for the years indicated, our
predecessor’s gross liability including the incurred but
not reported losses as originally estimated. For example, as of
December 31, 1996 it was estimated that $117.0 million
would be sufficient to settle all claims not already settled
that had occurred prior to December 31, 1996, whether
reported or unreported. The next section of the table shows, by
year, the cumulative amounts of loss reserves paid as of the end
of each succeeding year. For example, with respect to the gross
loss reserves of $117.0 million as of December 31,
1996, by September 30, 2003 (almost seven years later)
$114.7 million had actually been paid in settlement of the
claims which pertain to liabilities as of December 31,
1996. The next section of the table sets forth the re-estimates
in later years of incurred losses, including payments, for the
years indicated.
The “cumulative redundancy/(deficiency)” represents,
as of September 30, 2003, the difference between the latest
re-estimated liability and the amounts as originally estimated.
A redundancy means the original estimate was higher than the
current estimate; a deficiency means that the current estimate
is higher than the original estimate.
Analysis of Predecessor Loss Reserve Development
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
1993 | |
|
1994 | |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
Gross Liability as originally estimated:
|
|
|
123,092 |
|
|
|
119,691 |
|
|
|
112,807 |
|
|
|
117,003 |
|
|
|
114,152 |
|
|
|
145,047 |
|
|
|
207,817 |
|
|
|
186,343 |
|
|
|
166,342 |
|
|
|
153,469 |
|
|
|
161,538 |
* |
|
Gross cumulative payments as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
35,986 |
|
|
|
34,888 |
|
|
|
33,840 |
|
|
|
37,467 |
|
|
|
39,512 |
|
|
|
50,515 |
|
|
|
50,709 |
|
|
|
40,648 |
|
|
|
44,519 |
|
|
|
34,939 |
* |
|
|
|
|
|
Two years later
|
|
|
59,056 |
|
|
|
58,286 |
|
|
|
55,451 |
|
|
|
61,950 |
|
|
|
69,571 |
|
|
|
84,365 |
|
|
|
76,690 |
|
|
|
69,669 |
|
|
|
67,064 |
* |
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
74,399 |
|
|
|
72,649 |
|
|
|
69,410 |
|
|
|
82,333 |
|
|
|
90,525 |
|
|
|
99,472 |
|
|
|
96,059 |
|
|
|
83,654 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
83,236 |
|
|
|
82,235 |
|
|
|
82,921 |
|
|
|
97,998 |
|
|
|
99,040 |
|
|
|
112,292 |
|
|
|
106,814 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
90,395 |
|
|
|
92,832 |
|
|
|
89,725 |
|
|
|
103,677 |
|
|
|
107,732 |
|
|
|
119,476 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
97,700 |
|
|
|
98,052 |
|
|
|
93,948 |
|
|
|
110,821 |
|
|
|
112,248 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
101,463 |
|
|
|
101,036 |
|
|
|
98,178 |
|
|
|
114,740 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
104,142 |
|
|
|
103,938 |
|
|
|
101,470 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
106,745 |
|
|
|
106,485 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
108,979 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
126,076 |
|
|
|
121,746 |
|
|
|
115,477 |
|
|
|
118,750 |
|
|
|
133,688 |
|
|
|
190,595 |
|
|
|
194,563 |
|
|
|
168,320 |
|
|
|
146,898 |
|
|
|
152,178 |
* |
|
|
|
|
|
Two years later
|
|
|
126,740 |
|
|
|
122,909 |
|
|
|
113,360 |
|
|
|
129,091 |
|
|
|
158,966 |
|
|
|
186,101 |
|
|
|
173,470 |
|
|
|
145,451 |
|
|
|
145,808 |
* |
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
125,052 |
|
|
|
118,947 |
|
|
|
119,234 |
|
|
|
151,412 |
|
|
|
161,078 |
|
|
|
171,872 |
|
|
|
155,115 |
|
|
|
142,226 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
120,263 |
|
|
|
123,969 |
|
|
|
131,861 |
|
|
|
151,814 |
|
|
|
154,907 |
|
|
|
159,383 |
|
|
|
152,180 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
124,929 |
|
|
|
132,899 |
|
|
|
132,133 |
|
|
|
149,471 |
|
|
|
146,790 |
|
|
|
156,395 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
131,560 |
|
|
|
134,222 |
|
|
|
131,072 |
|
|
|
147,749 |
|
|
|
143,744 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
134,369 |
|
|
|
133,195 |
|
|
|
128,946 |
|
|
|
145,273 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
133,444 |
|
|
|
129,843 |
|
|
|
126,912 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
131,118 |
|
|
|
128,431 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
130,242 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
1993 | |
|
1994 | |
|
1995 | |
|
1996 | |
|
1997 | |
|
1998 | |
|
1999 | |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
Cumulative redundancy/(deficiency)*:
|
|
|
(7,150 |
) |
|
|
(8,740 |
) |
|
|
(14,105 |
) |
|
|
(28,270 |
) |
|
|
(29,592 |
) |
|
|
(11,348 |
) |
|
|
55,637 |
|
|
|
44,117 |
|
|
|
20,534 |
|
|
|
1,291 |
|
|
|
|
|
|
% redundancy/(deficiency) reported as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(17 |
) |
|
|
(31 |
) |
|
|
6 |
|
|
|
10 |
|
|
|
12 |
|
|
|
1 |
|
|
|
|
|
|
Two years later
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(0 |
) |
|
|
(10 |
) |
|
|
(39 |
) |
|
|
(28 |
) |
|
|
17 |
|
|
|
22 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
(2 |
) |
|
|
1 |
|
|
|
(6 |
) |
|
|
(29 |
) |
|
|
(41 |
) |
|
|
(18 |
) |
|
|
25 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
2 |
|
|
|
(4 |
) |
|
|
(17 |
) |
|
|
(30 |
) |
|
|
(36 |
) |
|
|
(10 |
) |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
(1 |
) |
|
|
(11 |
) |
|
|
(17 |
) |
|
|
(28 |
) |
|
|
(29 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
(7 |
) |
|
|
(12 |
) |
|
|
(16 |
) |
|
|
(26 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
(9 |
) |
|
|
(11 |
) |
|
|
(14 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
(8 |
) |
|
|
(8 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
(7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
As of September 30, 2003 |
On a gross basis, our predecessor’s records reflect
significant increases in IBNR on December 31, 1998 and
December 31, 1999. Gross loss reserves at December 31,
1999 were increased by $62.8 million to reflect
management’s best estimates of the ultimate losses. As
demonstrated in the above table, as of September 30, 2003,
the December 31, 1997 re-estimated loss reserves were
inadequate by $29.6 million. While the inadequacy was
reduced by December 31, 1998, the re-estimated amounts were
still inadequate by $11.3 million. By December 31,
1999 the re-estimated amounts were redundant by
$55.6 million. The re-estimated redundancy declined to
$44.1 million by December 31, 2000, and to
$20.5 million by December 31, 2001. This fluctuation
resulted primarily from the actions taken by our management team
on the book of business that it took over in 1999. Our
management team aggressively re-underwrote the book of business
during the year and increased loss reserves by the end of 1999
to reflect its best estimate of the ultimate losses at that
time. The decision to re-underwrite the book of business was
based on findings by our management team that Eagle Pacific
Insurance Company had written large amounts of new business by
expanding into smaller premium size, severity-prone risks in
Louisiana. This was not a class of business that had been
traditionally underwritten by our predecessor in prior years and
it caused a substantial and fundamental change in the portfolio
of insured employers. Due to the nature of these new accounts,
our management team believed that the accounts were subject to a
greater volatility of risk than the core book of business of our
predecessor, and initial loss reserve amounts were established
reflecting this higher level of risk by the end of 1999. At
December 31, 2002, an actuarial evaluation was performed
for the 2002 and prior accident years, which concluded that the
actual loss development on this business was not as great as had
been expected. This, coupled with the more recent emphasis on
writing larger, less volatile accounts using stricter
underwriting standards, led our management to decrease the loss
reserves for the prior accident years. Although the loss
reserves have proven to be redundant, we believe the actions of
management were prudent at the time and demonstrate
management’s commitment to achieving adequate loss reserve
levels as quickly as possible.
Investments
We derive investment income from our invested assets. We invest
our statutory surplus and funds to support our loss reserves and
our unearned premiums. As of December 31, 2004, the
amortized cost of our investment portfolio was
$104.8 million and the fair market value of the portfolio
was $105.7 million.
22
The following table shows the market values of various
categories of invested assets, the percentage of the total
market value of our invested assets represented by each category
and the tax equivalent book yield based on market value of each
category of invested assets as of December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Percent of | |
|
|
| Category |
|
Market Value | |
|
Total | |
|
Yield | |
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
U.S. Treasury securities
|
|
$ |
8,693 |
|
|
|
8.2 |
% |
|
|
3.0 |
% |
|
U.S. government sponsored agency securities
|
|
|
5,962 |
|
|
|
5.6 |
|
|
|
3.2 |
|
|
Corporate securities
|
|
|
20,927 |
|
|
|
19.8 |
|
|
|
4.0 |
|
|
Tax-exempt municipal securities
|
|
|
55,242 |
|
|
|
52.3 |
|
|
|
3.9 |
|
|
Mortgage pass-through securities
|
|
|
10,979 |
|
|
|
10.4 |
|
|
|
4.9 |
|
|
Collateralized mortgage obligations
|
|
|
1,167 |
|
|
|
1.1 |
|
|
|
3.6 |
|
|
Asset-backed securities
|
|
|
2,691 |
|
|
|
2.6 |
|
|
|
2.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
105,661 |
|
|
|
100.0 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
The average credit rating for our fixed maturity portfolio,
using ratings assigned by Standard and Poor’s, was AA+ at
December 31, 2004. The following table shows the ratings
distribution of our fixed income portfolio as of
December 31, 2004, as a percentage of total market value.
| |
|
|
|
|
| |
|
Percentage of | |
| |
|
Total Market | |
| Rating |
|
Value | |
| |
|
| |
|
“AAA”
|
|
|
68.8 |
% |
|
“AA”
|
|
|
15.5 |
|
|
“A”
|
|
|
15.7 |
|
| |
|
|
|
|
Total
|
|
|
100.0 |
% |
| |
|
|
|
The following table shows the composition of our investment
portfolio by remaining time to maturity at December 31,
2004. For securities that are redeemable at the option of the
issuer and have a market price that is greater than par value,
the maturity used for the table below is the earliest redemption
date. For securities that are redeemable at the option of the
issuer and have a market price that is less than par value, the
maturity used for the table below is the final maturity date.
For mortgage-backed securities, mortgage prepayment assumptions
are utilized to project the expected principal redemptions for
each security, and the maturity used in the table below is the
average life based on those projected redemptions.
| |
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, 2004 | |
| |
|
| |
| |
|
|
|
Percentage of | |
| |
|
|
|
Total Market | |
| Remaining Time to Maturity |
|
Market Value | |
|
Value | |
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
Due in one year or less
|
|
$ |
7,659 |
|
|
|
7.2 |
% |
|
Due after one year through five years
|
|
|
13,193 |
|
|
|
12.5 |
|
|
Due after five years through ten years
|
|
|
56,319 |
|
|
|
53.3 |
|
|
Due after ten years
|
|
|
13,653 |
|
|
|
12.9 |
|
|
Securities not due at a single maturity date
|
|
|
14,837 |
|
|
|
14.1 |
|
| |
|
|
|
|
|
|
| |
Total investment securities available-for-sale
|
|
$ |
105,661 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
Our investment strategy is to conservatively manage our
investment portfolio by investing primarily in readily
marketable, investment grade fixed income securities. Prior to
March 2005, we did not invest in common equity securities and we
had no exposure to foreign currency risk. In February 2005, our
investment policy was revised to allow for the investment of up
to 2% of our investment portfolio in foreign fixed income
securities. Prior to January 2005, our investment portfolio was
managed exclusively by Prime Advisors, Inc., a registered
investment advisory firm focused
23
exclusively on managing investment grade fixed income securities
for insurance companies. In January 2005, we engaged the
registered investment advisory firm of Goldman, Sachs &
Co. to manage approximately $74.8 million of proceeds from
the initial public offering of our common stock. We pay Prime
Advisors and Goldman, Sachs a variable fee based on assets under
management. Our board of directors has established investment
guidelines and periodically reviews portfolio performance for
compliance with our guidelines.
We regularly review our portfolio for declines in value. If a
decline in value is deemed temporary, we record the decline as
an unrealized loss in accumulated other comprehensive income on
our consolidated balance sheet. If the decline is deemed
“other-than-temporary,” we write down the carrying
value of the investment and record a realized loss in our
consolidated statement of operations. As of December 31,
2004, we had an unrealized gain of $0.8 million on our
invested assets. There were no other-than-temporary declines in
the fair value of our securities at December 31, 2004.
Reinsurance
We purchase reinsurance to reduce our net liability on
individual risks and to protect against possible catastrophes.
Reinsurance involves an insurance company transferring, or
“ceding,” a portion of its exposure on a risk to
another insurer, the reinsurer. The reinsurer assumes the
exposure in return for a portion of the premium. The cost and
limits of reinsurance we purchase can vary from year to year
based upon the availability of quality reinsurance at an
acceptable price and our desired level of retention. Retention
refers to the amount of risk that we retain for our own account.
In excess of loss reinsurance, losses in excess of the retention
level up to the upper limit of the program, if any, are paid by
the reinsurer.
Regardless of type, reinsurance does not legally discharge the
ceding insurer from primary liability for the full amount due
under the reinsured policies. However, the assuming reinsurer is
obligated to indemnify the ceding company to the extent of the
coverage ceded. To protect us from the possibility of a
reinsurer becoming unable to fulfill its obligations under the
reinsurance contracts, we attempt to select financially strong
reinsurers with an A.M. Best rating of “A-”
(Excellent) or better and continue to evaluate their financial
condition and monitor various credit risks to minimize our
exposure to losses from reinsurer insolvencies.
|
|
|
Our Excess of Loss Reinsurance Treaty Program |
Excess of loss reinsurance is reinsurance that indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified amount,
which is called an “attachment level” or
“retention.” Excess of loss reinsurance may be written
in layers, in which a reinsurer or group of reinsurers accepts a
band of coverage up to a specified amount. Any liability
exceeding the upper limit of the program reverts to the ceding
company, or the company seeking reinsurance. The ceding company
also bears the credit risk of a reinsurer’s insolvency. We
entered into a new workers’ compensation and
employers’ liability excess of loss reinsurance treaty
program effective October 1, 2004, whereby our reinsurers
are liable for 100% of the ultimate net losses in excess of
$500,000 for the business we write, up to a $100.0 million
limit. The agreements for the current reinsurance program expire
on October 1, 2005, at which time we expect to renew the
program. We have the right to terminate the reinsurers’
shares in the program under various circumstances including a
downgrade in a reinsurer’s A.M. Best rating below
“A-” (Excellent). The program provides coverage in
several layers.
The first layer affords coverage up to $500,000 for each loss
occurrence in excess of $500,000 for each loss occurrence and
applies to policies classified by us as workers’
compensation and employers’ liability business (including
USL&H Act and Jones Act business) and maritime
employers’ liability written or renewed through us. We
retain losses of $500,000 for each loss occurrence. Under the
first layer, our reinsurers will not be liable for losses with
respect to intentional nuclear detonation, reaction, radiation
or radioactive contamination or any intentional chemical or
biological release. Under the first layer, we are required to
pay our reinsurers a deposit premium of $5.7 million for
the term of the agreement, to be paid
24
in the amount of $1.425 million on the first day of each
calendar quarter. Our reinsurers’ liability under the first
layer will never exceed $500,000 in respect of any one loss
occurrence and is further limited to $10.0 million during
the term of the agreement by reason of any and all claims
arising under the agreement. In order for coverage to attach
under the first layer, we must report all losses to our
reinsurers before October 1, 2015.
The second layer affords coverage up to $4.0 million for
each loss occurrence in excess of $1.0 million for each
loss occurrence and applies to policies classified by us as
workers’ compensation and employers’ liability
business (including USL&H Act and Jones Act business) and
maritime employers’ liability written or renewed through
us. The aggregate limit for all claims under the second layer is
$16.0 million. In addition, under the second layer of
reinsurance, there is a sub-limit of $8.0 million for
losses caused by terrorism and a sub-limit of $4.0 million
for losses caused by occupational disease or other disease or
cumulative trauma. Under the second layer, we are required to
pay our reinsurers a deposit premium of $4,320,232 for the term
of the agreement, to be paid in the amount of $1,080,058 on the
first day of each calendar quarter. In order for coverage to
attach under the second layer, we must report all losses to our
reinsurers before October 1, 2012.
The third layer affords coverage up to $5.0 million for
each loss occurrence in excess of $5.0 million for each
loss occurrence and applies to policies classified by us as
workers’ compensation and employers’ liability
business (including USL&H Act and Jones Act business) and
maritime employers’ liability in force, written or renewed
through us. The third layer does not cover losses caused by any
act of terrorism, as defined in the Terrorism Risk Insurance Act
of 2002 (the “Terrorism Risk Act”). Under the third
layer, we are required to pay our reinsurers a deposit premium
of $1,542,940 for the term of the agreement, to be paid in the
amount of $385,735 on the first day of each calendar quarter.
Our reinsurers’ liability under the third layer will never
exceed $5.0 million in respect of any one loss occurrence
and is further limited to $15.0 million during the term of
the agreement by reason of any and all claims arising under the
agreement. In order for coverage to attach under the third
layer, we must report all losses to our reinsurers before
October 1, 2012.
The fourth layer in our excess of loss reinsurance treaty
program affords coverage up to $90.0 million for each loss
occurrence in excess of $10.0 million for each loss
occurrence and applies to policies classified by us as
workers’ compensation business, including USL&H Act
business, in force, written or renewed through us. The fourth
layer is divided into three sub-layers. The first sub-layer
affords coverage up to $10.0 million for each loss
occurrence in excess of $10.0 million for each loss
occurrence, subject to an aggregate limit of $20.0 million.
Under the first sub-layer, we are required to pay our reinsurers
a deposit premium of $1,012,168 for the term of the agreement,
to be paid in the amount of $253,042 on the first day of each
calendar quarter. The second sub-layer affords coverage up to
$30.0 million for each loss occurrence in excess of
$20.0 million for each loss occurrence, subject to an
aggregate limit of $60.0 million. Under the second
sub-layer, we are required to pay our reinsurers a deposit
premium of $1,234,352 for the term of the agreement, to be paid
in the amount of $308,588 on the first day of each calendar
quarter. The third sub-layer affords coverage up to
$50.0 million for each loss occurrence in excess of
$50.0 million for each loss occurrence, subject to an
aggregate limit of $100.0 million. Under the third
sub-layer, we are required to pay our reinsurers a deposit
premium of $1,234,352 for the term of the agreement, to be paid
in the amount of $308,588 on the first day of each calendar
quarter. The fourth layer does not cover losses caused by any
act of terrorism, as defined in the Terrorism Risk Act. In
addition, the fourth layer does not cover loss sustained by
commercial airline personnel on board the aircraft and arising
while the aircraft is in flight or loss arising from
professional sports teams. In order for coverage to attach under
the fourth layer, we must report all losses to our reinsurers
before October 1, 2012.
Under each layer of our reinsurance treaty program, we may
terminate any reinsurer’s share under the applicable
agreement at any time by giving written notice to the reinsurer
in the event certain specified circumstances occur, including
(1) if the reinsurer’s policyholders’ surplus at
the inception of the agreement has been reduced by more than 25%
of the amount of surplus 12 months prior to that date,
(2) if the reinsurer’s A.M. Best rating is downgraded
below “A-” and/or its Standard & Poor’s
rating is
25
downgraded below “A-” or (3) if the reinsurer
voluntarily ceases assuming new and renewal property and
casualty treaty reinsurance business. Each layer of our
reinsurance treaty program includes various exclusions in
addition to the specific exclusions described above, including
an exclusion for war in specified circumstances and an exclusion
for reinsurance assumed. Under the first three layers of our
reinsurance treaty program, we are required to pay to our
reinsurers the pro rata share of the amount, if any, by which
any financial assistance paid to us under the Terrorism Risk Act
for acts of terrorism occurring during any one program year,
combined with our total private-sector reinsurance recoveries
for those acts of terrorism, exceeds the amount of insured
losses paid by us for those acts of terrorism.
Our current excess of loss reinsurance treaties are placed with
Arch Reinsurance Company, rated “A-” (Excellent) by
A.M. Best, Aspen Insurance UK Limited, rated “A”
(Excellent) by A.M. Best, AXIS Specialty Ltd., rated
“A” (Excellent) by A.M. Best, Endurance Specialty
Insurance Ltd., rated “A” (Excellent) by A.M. Best,
Hannover Rueckversicherung AG, rated “A” (Excellent)
by A.M. Best, Hannover Re (Bermuda) Ltd, rated “A”
(Excellent) by A.M. Best, syndicates from Lloyd’s of
London, rated “A” (Excellent) by A.M. Best, Max Re
Ltd., rated “A-” (Excellent) by A.M. Best, Odyssey
America Reinsurance Corporation, rated “A” (Excellent)
by A.M. Best and Platinum Underwriters Reinsurance, Inc., rated
“A” (Excellent) by A.M. Best.
The following is a summary of our top ten reinsurers, based on
net amount recoverable, as of December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net Amount | |
| |
|
|
|
Recoverable as of | |
| |
|
A.M. Best | |
|
December 31, | |
| Reinsurer |
|
Rating | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Argonaut Insurance Company
|
|
A |
|
|
$ |
4,588.3 |
|
|
Swiss Reinsurance Company
|
|
A+ |
|
|
|
2,986.6 |
|
|
General Reinsurance Corporation*
|
|
A++ |
|
|
|
1,595.7 |
|
|
Hannover Rueckversicherung AG*
|
|
A |
|
|
|
1,415.6 |
|
|
Max Re Ltd.*
|
|
A- |
|
|
|
439.5 |
|
|
Scor Reinsurance Company
|
|
B++ |
|
|
|
609.2 |
|
|
American Re-insurance Company
|
|
A+ |
|
|
|
560.3 |
|
|
Alea Europe Limited
|
|
A- |
|
|
|
373.5 |
|
|
ACE Property & Casualty Insurance Company
|
|
A |
|
|
|
342.3 |
|
|
Berkley Insurance Company
|
|
A |
|
|
|
217.7 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
$ |
13,128.7 |
|
| |
|
|
|
|
|
|
|
|
| * |
Participant in current excess of loss reinsurance treaty program
or individual risk reinsurance placements. |
|
|
|
Reinsurance Arrangements Established in Connection with
Past Transactions |
In addition to the reinsurance program described above, we have
existing reinsurance arrangements which were established in
connection with past transactions into which we have entered. In
March 2002, KEIC sold the assets and business of its commercial
compensation specialty operation to Argonaut Insurance Company.
In connection with the sale, KEIC entered into a reinsurance
agreement effective March 31, 2002 with Argonaut pursuant
to which KEIC ceded and Argonaut assumed a 100% quota share
participation in the transferred insurance policies. Certain
reinsurance-type arrangements, including the commutation
agreement and the adverse development cover, were also
established with LMC in connection with the Acquisition. See the
discussion under the heading “Our History” in this
Item 1.
26
The Terrorism Risk Act is effective for the period from
November 26, 2002 until December 31, 2005. The
Terrorism Risk Act may provide us with reinsurance protection
under certain circumstances and subject to certain limitations.
The Secretary of the Treasury must certify an act for it to
constitute an act of terrorism. The definition of terrorism
excludes domestic acts of terrorism or acts of terrorism
committed in the course of a war declared by Congress. Losses
arising from an act of terrorism must exceed $5.0 billion
to qualify for reimbursement. If an event is certified, the
federal government will reimburse losses not to exceed
$100.0 billion in any year. Each insurance company is
responsible for a deductible based on a percentage of direct
earned premiums in the previous calendar year. For losses in
excess of the deductible, the federal government will reimburse
90% of the insurer’s loss, up to the insurer’s
proportionate share of the $100.0 billion. See the
discussion under the heading “Regulation” in this
Item 1. We did not pay a deductible for this program in
2003 or 2004 because we did not experience losses arising from
an act of terrorism. As stated above, the second layer of our
reinsurance program contains an $8.0 million sublimit for
terrorism coverage and the third and fourth layers of our
reinsurance program do not cover losses caused by an act of
terrorism, as defined in the Terrorism Risk Act.
Competition
We operate in niche markets where we believe we have few
competitors with a similar focus. The insurance industry in
general is highly competitive and there is significant
competition in the national workers’ compensation industry.
Competition in the insurance business is based on many factors,
including perceived market strength of the insurer, pricing and
other terms and conditions, services provided, the speed of
claims payment, the reputation and experience of the insurer and
ratings assigned by independent rating organizations such as
A.M. Best. Most of the insurers with which we compete have
significantly greater financial, marketing and management
resources and experience than we do. We may also compete with
new market entrants in the future.
While more than 300 insurance companies participate in the
national workers’ compensation market, our competitors are
relatively few in number because we operate in niche markets,
and two of our primary competitors are non-domestic entities.
Our primary competitors vary slightly depending on the type of
product. For our maritime product, our primary competitors are
AIG, Alaska National Insurance Company, American Longshore
Mutual Association, Liberty Northwest, Majestic Insurance
Company, Signal Mutual Indemnity Association Ltd. (based in
Bermuda), Zurich and WFT, Inc. (based in London). For our ADR
product, our primary competitors are AIG, Majestic Insurance
Company, Zurich and the State Compensation Insurance Fund of
California.
We believe our competitive advantages are our strong reputation
in our niche markets, our local knowledge in the markets where
we operate, our specialized underwriting expertise, our
client-driven claims and loss control service capabilities, our
focus on niche markets, our loyal brokerage distribution, our
low operating expense ratio and our customized systems. In
addition to these competitive advantages, as discussed above, we
offer our maritime customers regulated insurance coverage
without the joint-and-several liability associated with coverage
provided by offshore mutual organizations.
Ratings
Many insurance buyers, agents and brokers use the ratings
assigned by A.M. Best and other rating agencies to assist them
in assessing the financial strength and overall quality of the
companies from which they are considering purchasing insurance.
We were assigned a letter rating of “A-” (Excellent)
by A.M. Best following the completion of the Acquisition. An
“A-” rating is the fourth highest of 15 rating
categories used by A.M. Best. In evaluating a company’s
financial and operating performance, A.M. Best reviews the
company’s profitability, indebtedness and liquidity, as
well as its book of business, the adequacy and soundness of its
reinsurance, the quality and estimated market value of its
assets, the adequacy of its loss reserves, the adequacy of its
surplus, its capital structure, the experience and competence of
its management and its market presence. This rating is intended
to provide an independent
27
opinion of an insurer’s ability to meet its obligations to
policyholders and is not an evaluation directed at investors.
Regulation
|
|
|
Holding Company Regulation |
As an insurance holding company, we, as well as SeaBright
Insurance Company, our insurance company subsidiary, are subject
to regulation by the states in which our insurance company
subsidiary is domiciled or transacts business. SeaBright
Insurance Company is domiciled in Illinois and is considered to
be commercially domiciled in California. An insurer is deemed
“commercially domiciled” in California if, during the
three preceding fiscal years, or a lesser period of time if the
insurer has not been licensed in California for three years, the
insurer has written an average of more gross premiums in
California than it has written in its state of domicile, and
such gross premiums written constitute 33 percent or more
of its total gross premiums written in the United States for
such period. Pursuant to the insurance holding company laws of
Illinois and California, SeaBright is required to register with
the Illinois Department of Financial and Professional
Regulation, Division of Insurance and the California Department
of Insurance. In addition, SeaBright Insurance Company is
required to periodically report certain financial, operational
and management data to the Illinois Department of Financial and
Professional Regulation, Division of Insurance and the
California Department of Insurance. All transactions within a
holding company system affecting an insurer must have fair and
reasonable terms, charges or fees for services performed must be
reasonable, and the insurer’s policyholder surplus
following any transaction must be both reasonable in relation to
its outstanding liabilities and adequate for its needs. Notice
to regulators is required prior to the consummation of certain
affiliated and other transactions involving SeaBright Insurance
Company.
In addition, the insurance holding company laws of Illinois and
California require advance approval by the Illinois Department
of Financial and Professional Regulation, Division of Insurance
and the California Department of Insurance of any change in
control of SeaBright Insurance Company. “Control” is
generally presumed to exist through the direct or indirect
ownership of 10% or more of the voting securities of a domestic
insurance company or of any entity that controls a domestic
insurance company. In addition, insurance laws in many states
contain provisions that require prenotification to the insurance
commissioners of a change in control of a non-domestic insurance
company licensed in those states. Any future transactions that
would constitute a change in control of SeaBright Insurance
Company, including a change of control of us, would generally
require the party acquiring control to obtain the prior approval
by the Illinois Department of Financial and Professional
Regulation, Division of Insurance and the California Department
of Insurance and may require pre-acquisition notification in
applicable states that have adopted pre-acquisition notification
provisions. Obtaining these approvals may result in a material
delay of, or deter, any such transaction.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of SeaBright,
including through transactions, and in particular unsolicited
transactions, that some or all of the stockholders of SeaBright
might consider to be desirable.
|
|
|
State Insurance Regulation |
Insurance companies are subject to regulation and supervision by
the department of insurance in the state in which they are
domiciled and, to a lesser extent, other states in which they
conduct business. SeaBright Insurance Company is primarily
subject to regulation and supervision by the Illinois Department
of Financial and Professional Regulation, Division of Insurance
and the California Department of Insurance. These state agencies
have broad regulatory, supervisory and administrative powers,
including, among other things, the power to grant and revoke
licenses to transact business; license agents; set the standards
of solvency to be met and maintained; determine the nature of,
and limitations on, investments and dividends; approve policy
forms and rates in some states; periodically examine financial
statements;
28
determine the form and content of required financial statements;
and periodically examine market conduct. On March 7, 2005,
the Alaska Department of Community and Economic Development,
Division of Insurance began the field portion of a limited scope
market conduct examination of the underwriting in our Anchorage
office. To date, we have not received a draft report from the
Division.
Detailed annual and quarterly financial statements and other
reports are required to be filed with the departments of
insurance of the states in which we are licensed to transact
business. The financial statements of SeaBright Insurance
Company are subject to periodic examination by the Illinois
Department of Financial and Professional Regulation, Division of
Insurance and the California Department of Insurance.
In addition, many states have laws and regulations that limit an
insurer’s ability to withdraw from a particular market. For
example, states may limit an insurer’s ability to cancel or
not renew policies. Furthermore, certain states prohibit an
insurer from withdrawing one or more lines of business from the
state, except pursuant to a plan that is approved by the state
insurance department. The state insurance department may
disapprove a plan that may lead to market disruption. Laws and
regulations that limit cancellation and non-renewal and that
subject program withdrawals to prior approval requirements may
restrict our ability to exit unprofitable markets.
|
|
|
Federal Laws and Regulations |
As a provider of maritime workers’ compensation insurance,
we are subject to the USL&H Act, which generally covers
exposures on the navigable waters of the United States and in
adjoining waterfront areas, including exposures resulting from
loading and unloading vessels, and the Jones Act, which covers
exposures at sea. We are also subject to regulations related to
the USL&H Act and the Jones Act.
The USL&H Act, which is administered by the
U.S. Department of Labor, provides medical benefits,
compensation for lost wages and rehabilitation services to
longshoremen, harbor workers and other maritime workers who are
injured during the course of employment or suffer from diseases
caused or worsened by conditions of employment. The Department
of Labor has the authority to require us to make deposits to
serve as collateral for losses incurred under the USL&H Act.
Several other statutes extend the provisions of the USL&H
Act to cover other classes of private-industry workers. These
include workers engaged in the extraction of natural resources
from the outer continental shelf, employees on American defense
bases, and those working under contracts with the
U.S. government for defense or public-works projects,
outside of the continental United States. Our authorizations to
issue workers’ compensation insurance from the various
state departments of insurance regulating SeaBright Insurance
Company are augmented by our U.S. Department of Labor
certificates of authority to ensure payment of compensation
under the USL&H Act and extensions of the USL&H Act,
including the OCSLA and the Nonappropriated
Fund Instrumentalities Act. This coverage, which we write
as an endorsement to workers’ compensation and employers
liability insurance policies, provides employment-injury and
occupational disease protection to workers who are injured or
contract occupational diseases occurring on the navigable waters
of the United States, or in adjoining areas, and for certain
other classes of workers covered by the extensions of the
USL&H Act.
The Jones Act is a federal law, the maritime employer provisions
of which provide injured offshore workers, or seamen, with the
right to seek compensation for injuries resulting from the
negligence of their employers or co-workers during the course of
their employment on a ship or vessel. In addition, an injured
offshore worker may make a claim against a vessel owner on the
basis that the vessel was not seaworthy. Our authorizations to
issue workers’ compensation insurance from the various
state departments of insurance regulating SeaBright Insurance
Company allow us to write Jones Act coverage for our maritime
customers. We are not required to have a certificate from the
U.S. Department of Labor to write Jones Act coverage.
We also offer extensions of coverage under the OCSLA, a federal
workers’ compensation act that provides workers’
compensation coverage for the death or disability of an employee
resulting from any
29
injury occurring as a result of working on an off-shore drilling
platform on the Outer Continental Shelf, where required by a
prospective policyholder.
In 1999, the United States Congress enacted the
Gramm-Leach-Bliley Act, which, among other things, protects
consumers from the unauthorized dissemination of certain
personal information. Subsequently, a majority of states have
implemented additional regulations to address privacy issues.
These laws and regulations apply to all financial institutions,
including insurance and finance companies, and require us to
maintain appropriate procedures for managing and protecting
certain personal information of our customers and to fully
disclose our privacy practices to our customers. We may also be
exposed to future privacy laws and regulations, which could
impose additional costs and impact our results of operations or
financial condition. A recent NAIC initiative that impacted the
insurance industry in 2001 was the adoption in 2000 of the
Privacy of Consumer Financial and Health Information Model
Regulation, which assisted states in promulgating regulations to
comply with the Gramm-Leach-Bliley Act. In 2002, to further
facilitate the implementation of the Gramm-Leach-Bliley Act, the
NAIC adopted the Standards for Safeguarding Customer Information
Model Regulation. Several states have now adopted similar
provisions regarding the safeguarding of customer information.
Our insurance subsidiary has established procedures to comply
with the Gramm-Leach-Bliley related privacy requirements.
|
|
|
Federal and State Legislative and Regulatory
Changes |
From time to time, various regulatory and legislative changes
have been proposed in the insurance industry. Among the
proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation
in addition to, or in lieu of, the current system of state
regulation of insurers and proposals in various state
legislatures (some of which proposals have been enacted) to
conform portions of their insurance laws and regulations to
various model acts adopted by the NAIC. We are unable to predict
whether any of these laws and regulations will be adopted, the
form in which any such laws and regulations would be adopted, or
the effect, if any, these developments would have on our
operations and financial condition.
On November 26, 2002, in response to the tightening of
supply in certain insurance and reinsurance markets resulting
from, among other things, the September 11, 2001 terrorist
attacks, the Terrorism Risk Act was enacted. The Terrorism Risk
Act is designed to ensure the availability of insurance coverage
for losses resulting from acts of terror in the United States of
America. This law established a federal assistance program
through the end of 2005 to help the property and casualty
insurance industry cover claims related to future
terrorism-related losses and requires such companies to offer
coverage for certain acts of terrorism. As a result, any
terrorism exclusions in policies in force prior to the enactment
of the Terrorism Risk Act are void and, absent authorization or
failure of the insured to pay increased premiums resulting from
the terrorism coverage, we are prohibited from adding certain
terrorism exclusions to the policies written by SeaBright
Insurance Company. Although SeaBright Insurance Company is
protected by federally funded terrorism reinsurance as provided
for in the Terrorism Risk Act, there is a substantial deductible
that must be met, the payment of which could have an adverse
effect on our results of operations. Potential future changes to
the Terrorism Risk Act, including a decision by Congress not to
extend it past December 31, 2005, could also adversely
affect us by causing our reinsurers to increase prices or
withdraw from certain markets where terrorism coverage is
required.
Collectively bargained workers’ compensation insurance
programs in California were enabled by S.B. 983, the
workers’ compensation reform bill passed in 1993, and
greatly expanded by the passage of S.B. 228 in 2003. Among
other things, this legislation amended the California Labor Code
to include the specific requirements for the creation of an
alternative dispute resolution program for the delivery of
workers’ compensation benefits. The passage of
S.B. 228 made these programs available to all unionized
employees, where previously they were available only to
unionized employees in the construction industry.
30
Our workers’ compensation operations are subject to
legislative and regulatory actions. In California, where we have
our largest concentration of business, significant workers’
compensation legislation was enacted twice in recent years.
Effective January 1, 2003, legislation became effective
which provides for increases in indemnity benefits to injured
workers. Benefits were increased by an average of approximately
6% in 2003, followed by further increases of approximately 7% in
2004 and will be increased by a further 2% in 2005. In September
2003 and April 2004, workers’ compensation legislation was
enacted in California with the principal objective of reducing
costs. The legislation contains provisions which primarily seek
to reduce medical costs and does not directly impact indemnity
payments to injured workers. The principal changes in the
legislation that impact medical costs are as follows: 1) a
reduction in the reimbursable amount for certain physician fees,
outpatient surgeries, pharmaceutical products and certain
durable medical equipment; 2) a limitation on the number of
chiropractor or physical therapy office visits; 3) the
introduction of medical utilization guidelines; 4) a
requirement for second opinions on certain spinal surgeries; and
5) a repeal of the presumption of correctness afforded to
the treating physician, except where the employee has
pre-designated a treating physician. The major risk factor
associated with these recent legislative changes is whether the
current rates we are using for our workers’ compensation
policies are justified by the estimated savings in the
legislation.
|
|
|
The National Association of Insurance Commissioners |
The NAIC is a group formed by state Insurance Commissioners to
discuss issues and formulate policy with respect to regulation,
reporting and accounting of insurance companies. Although the
NAIC has no legislative authority and insurance companies are at
all times subject to the laws of their respective domiciliary
states and, to a lesser extent, other states in which they
conduct business, the NAIC is influential in determining the
form in which such laws are enacted. Model Insurance Laws,
Regulations and Guidelines (the “Model Laws”) have
been promulgated by the NAIC as a minimum standard by which
state regulatory systems and regulations are measured. Adoption
of state laws which provide for substantially similar
regulations to those described in the Model Laws is a
requirement for accreditation by the NAIC. The NAIC provides
authoritative guidance to insurance regulators on current
statutory accounting issues by promulgating and updating a
codified set of statutory accounting practices in its Accounting
Practices and Procedures Manual. The Illinois Department of
Financial and Professional Regulation, Division of Insurance and
the California Department of Insurance have adopted these
codified statutory accounting practices.
Illinois and California have also adopted laws substantially
similar to the NAIC’s “risk based capital”
(“RBC”) laws, which require insurers to maintain
minimum levels of capital based on their investments and
operations. These RBC requirements provide a standard by which
regulators can assess the adequacy of an insurance
company’s capital and surplus relative to its operations.
Among other requirements, an insurance company must maintain
capital and surplus of at least 200% of the RBC computed by the
NAIC’s RBC model (known as the “Authorized Control
Level” of RBC). At December 31, 2004, the capital and
surplus of SeaBright Insurance Company exceeded the minimum
Authorized Control Level of RBC.
The NAIC’s Insurance Regulatory Information System
(“IRIS”) key financial ratios, developed to assist
insurance departments in overseeing the financial condition of
insurance companies, are reviewed by experienced financial
examiners of the NAIC and state insurance departments to select
those companies that merit highest priority in the allocation of
the regulators’ resources. IRIS identifies twelve industry
ratios and specifies “usual values” for each ratio.
Departure from the usual values on four or more of the ratios
can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurer’s
business. The 2004 IRIS results for SeaBright Insurance Company
showed four results outside the “usual” range for such
ratios, as such range is determined by the NAIC. These results
were attributable to various factors. For example, one IRIS
ratio measures a company’s “change in net
writings.” This IRIS ratio is not considered
“usual” if a company’s net premiums written
fluctuates upward or downward by 33% or more in any given year.
Following the contribution of approximately $30.0 million
to SeaBright Insurance Company’s surplus at the time of the
Acquisition and the new
31
business plan of our management team, our net premiums written
for 2004 increased by more than 33% compared to the sum of the
net premiums written by KEIC during the nine months ended
September 30, 2003 and the net premiums written by
SeaBright Insurance Company during the three months ended
December 31, 2003. This increase in net premiums written
caused our “change in net writings” IRIS ratio for
2004 to fall outside of the “usual” range. Another
IRIS ratio measures a company’s “change in
policyholders’ surplus.” This IRIS ratio is not
considered “usual” if a company’s surplus is
reduced by more than 10% or increased by more than 50% in any
given year. Due to the issuance of $12.0 million in surplus
notes and a contribution of approximately $5.2 million to
SeaBright Insurance Company’s surplus, our “change in
policyholders’ surplus” IRIS Ratio fell outside the
“usual” range. SeaBright Insurance Company’s 2004
IRIS results for “Investment Yield” was outside the
“usual” range as a result of significant investments
in tax-exempt securities. The Company’s “Two-Year
Reserve Development to Policyholders’ Surplus” was
outside the “usual” range as a result of adverse
development on the unpaid loss and loss adjustment expenses
acquired in the Acquisition. This adverse development is
protected under the adverse development cover and collateralized
reinsurance trust agreements discussed under the heading
“Our History — Arrangements to Minimize
Exposure” in this Item 1.
SeaBright Insurance Company’s ability to pay dividends is
subject to restrictions contained in the insurance laws and
related regulations of Illinois and California. The insurance
holding company laws in these states require that ordinary
dividends be reported to the Illinois Department of Financial
and Professional Regulation, Division of Insurance and the
California Department of Insurance prior to payment of the
dividend and that extraordinary dividends be submitted for prior
approval. An extraordinary dividend is generally defined as a
dividend that, together with all other dividends made within the
past 12 months, exceeds the greater of 10% of its statutory
policyholders’ surplus as of the preceding year end or the
net income of the company for the preceding year. Statutory
policyholders’ surplus, as determined under statutory
accounting principles, is the amount remaining after all
liabilities, including loss and loss adjustment expenses, are
subtracted from all admitted assets. Admitted assets are assets
of an insurer prescribed or permitted by a state insurance
regulator to be recognized on the statutory balance sheet.
Insurance regulators have broad powers to prevent the reduction
of statutory surplus to inadequate levels, and there is no
assurance that extraordinary dividend payments will be permitted.
|
|
|
Statutory Accounting Practices |
Statutory accounting practices (“SAP”) are a basis of
accounting developed to assist insurance regulators in
monitoring and regulating the solvency of insurance companies.
SAP is primarily concerned with measuring an insurer’s
surplus to policyholders. Accordingly, statutory accounting
focuses on valuing assets and liabilities of insurers at
financial reporting dates in accordance with appropriate
insurance law and regulatory provisions applicable in each
insurer’s domiciliary state.
Generally accepted accounting principles (“GAAP”) are
concerned with a company’s solvency, but such principles
are also concerned with other financial measurements, such as
income and cash flows. Accordingly, GAAP gives more
consideration to appropriate matching of revenue and expenses
and accounting for management’s stewardship of assets than
does SAP. As a direct result, different assets and liabilities
and different amounts of assets and liabilities will be
reflected in financial statements prepared in accordance with
GAAP as opposed to SAP.
Statutory accounting practices established by the NAIC and
adopted, in part, by the Illinois and California regulators,
determine, among other things, the amount of statutory surplus
and statutory net income of SeaBright Insurance Company and thus
determine, in part, the amount of funds it has available to pay
dividends to us.
32
|
|
|
Guaranty Fund Assessments |
In Illinois, California and in most of the states where
SeaBright Insurance Company is licensed to transact business,
there is a requirement that property and casualty insurers doing
business within each such state participate in a guaranty
association, which is organized to pay contractual benefits owed
pursuant to insurance policies issued by impaired, insolvent or
failed insurers. These associations levy assessments, up to
prescribed limits, on all member insurers in a particular state
on the basis of the proportionate share of the premium written
by member insurers in the lines of business in which the
impaired, insolvent or failed insurer is engaged. Some states
permit member insurers to recover assessments paid through full
or partial premium tax offsets.
Property and casualty insurance company insolvencies or failures
may result in additional security fund assessments to SeaBright
Insurance Company at some future date. At this time we are
unable to determine the impact, if any, such assessments may
have on the financial position or results of operations of
SeaBright Insurance Company. We have established liabilities for
guaranty fund assessments with respect to insurers that are
currently subject to insolvency proceedings.
The brokerage and third party administrator activities of
PointSure are subject to licensing requirements and regulation
under the laws of each of the jurisdictions in which it
operates. PointSure is authorized to act as an agent under firm
licenses or licenses held by one of its officers in
47 states and the District of Columbia. PointSure’s
business depends on the validity of, and continued good standing
under, the licenses and approvals pursuant to which it operates,
as well as compliance with pertinent regulations. PointSure
therefore devotes significant effort toward maintaining its
licenses to ensure compliance with a diverse and complex
regulatory structure.
Licensing laws and regulations vary from state to state. In all
states, the applicable licensing laws and regulations are
subject to amendment or interpretation by regulatory
authorities. Generally such authorities are vested with
relatively broad and general discretion as to the granting,
renewing and revoking of licenses and approvals. Licenses may be
denied or revoked for various reasons, including the violation
of such regulations, conviction of crimes and the like. Possible
sanctions which may be imposed include the suspension of
individual employees, limitations on engaging in a particular
business for specified periods of time, revocation of licenses,
censures, redress to clients and fines. In some instances,
PointSure follows practices based on interpretations of laws and
regulations generally followed by the industry, which may prove
to be different from the interpretations of regulatory
authorities.
Employees
As of December 31, 2004, we had 117 full-time
equivalent employees. We have employment agreements with some of
our executive officers, which are described under the heading
“Employment Contracts and Termination of Employment and
Change-in-Control Arrangements” in Part III,
Item 11 of this annual report. We believe that our employee
relations are good.
Directors, Executive Officers and Key Employees
Our directors, officers and key employees are discussed in
Part III, Item 10 of this annual report.
Corporate Website
Through our Internet website at www.sbic.com, we provide free
access to our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and
all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (the
“SEC”). A copy of the materials will be mailed to you
free of charge upon request to SeaBright Insurance Holdings,
Inc., Investor Relations, 2101 4th Avenue,
33
Suite 1600, Seattle, WA 98121. The following corporate
governance materials are also available on the Company’s
website.
|
|
|
| |
• |
Audit Committee, Compensation Committee, and Nominating and
Corporate Governance Committee charters; |
| |
| |
• |
Code of Ethics for Senior Financial Employees; |
| |
| |
• |
Conflict of Interest & Code of Conduct Policy; and |
| |
| |
• |
Insider Trading Policy. |
If we waive any material provision of our Code of Ethics for
Senior Financial Employees or substantively change the code, we
will disclose that fact on our website within four business days
of the waiver or change.
Note on Forward-Looking Statements
Some of the statements in this Item 1, including statements
under the heading “Factors That May Affect Our Business,
Future Operating Results and Financial Condition,” some of
the statements under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in Part II, Item 7 of this annual
report and statements elsewhere in this annual report, may
include forward-looking statements that reflect our current
views with respect to future events and financial performance.
These statements include forward-looking statements both with
respect to us specifically and the insurance sector in general.
Statements that include the words “expect,”
“intend,” “plan,” “believe,”
“project,” “estimate,” “may,”
“should,” “anticipate,” “will” and
similar statements of a future or forward-looking nature
identify forward-looking statements for purposes of the federal
securities laws or otherwise.
All forward-looking statements address matters that involve
risks and uncertainties. Accordingly, there are or will be
important factors that could cause our actual results to differ
materially from those indicated in these statements. We believe
that these factors include but are not limited to the following:
|
|
|
| |
• |
ineffectiveness or obsolescence of our business strategy due to
changes in current or future market conditions; |
| |
| |
• |
increased competition on the basis of pricing, capacity,
coverage terms or other factors; |
| |
| |
• |
greater frequency or severity of claims and loss activity,
including as a result of natural or man-made catastrophic
events, than our underwriting, reserving or investment practices
anticipate based on historical experience or industry data; |
| |
| |
• |
the effects of acts of terrorism or war; |
| |
| |
• |
developments in financial and capital markets that adversely
affect the performance of our investments; |
| |
| |
• |
changes in regulations or laws applicable to us, our
subsidiaries, brokers or customers; |
| |
| |
• |
our dependency on a concentrated geographic market; |
| |
| |
• |
changes in the availability, cost or quality of reinsurance and
failure of our reinsurers to pay claims timely or at all; |
| |
| |
• |
decreased demand for our insurance products; |
| |
| |
• |
loss of the services of any of our executive officers or other
key personnel; |
| |
| |
• |
the effects of mergers, acquisitions and divestitures that we
may undertake; |
| |
| |
• |
changes in rating agency policies or practices; |
| |
| |
• |
changes in legal theories of liability under our insurance
policies; |
34
|
|
|
| |
• |
changes in accounting policies or practices; and |
| |
| |
• |
changes in general economic conditions, including inflation and
other factors. |
The foregoing factors should not be construed as exhaustive and
should be read in conjunction with the other cautionary
statements that are included in this annual report. We undertake
no obligation to publicly update or review any forward-looking
statement, whether as a result of new information, future
developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we
project. Any forward-looking statements you read in this annual
report reflect our views as of the date of this annual report
with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. Before
making an investment decision, you should carefully consider all
of the factors identified in this annual report that could cause
actual results to differ.
Factors That May Affect Our Business, Future Operating
Results and Financial Condition
You should carefully consider the risks described below,
together with all of the other information included in this
annual report. The risks and uncertainties described below are
not the only ones facing our company. If any of the following
risks actually occurs, our business, financial condition or
operating results could be harmed. Any of the risks described
below could result in a significant or material adverse effect
on our financial condition or results of operations, and a
corresponding decline in the market price of our common stock.
You could lose all or part of your investment. The risks
discussed below also include forward-looking statements and our
actual results may differ substantially from those discussed in
those forward-looking statements. Please refer to the discussion
under the heading “Note on Forward-Looking Statements”
in this Item 1.
Risks Related to Our Business
|
|
|
Our loss reserves are based on estimates and may be
inadequate to cover our actual losses. |
If we fail to accurately assess the risks associated with the
businesses that we insure, our loss reserves may be inadequate
to cover our actual losses and we may fail to establish
appropriate premium rates. We establish loss reserves in our
financial statements that represent an estimate of amounts
needed to pay and administer claims with respect to insured
events that have occurred, including events that have not yet
been reported to us. Loss reserves are estimates and are
inherently uncertain; they do not and cannot represent an exact
measure of liability. Accordingly, our loss reserves may prove
to be inadequate to cover our actual losses. Any changes in
these estimates are reflected in our results of operations
during the period in which the changes are made, with increases
in our loss reserves resulting in a charge to our earnings.
Our loss reserve estimates are based on estimates of the
ultimate cost of individual claims and on actuarial estimation
techniques. Several factors contribute to the uncertainty in
establishing these estimates. Judgment is required in actuarial
estimation to ascertain the relevance of historical payment and
claim settlement patterns under current facts and circumstances.
Key assumptions in the estimation process are the average cost
of claims over time, which we refer to as severity trends,
including the increasing level of medical, legal and
rehabilitation costs, and costs associated with fraud or other
abuses of the medical claim process. If there are unfavorable
changes in severity trends, we may need to increase our loss
reserves, as described above.
35
|
|
|
Our geographic concentration ties our performance to the
business, economic and regulatory conditions in California,
Hawaii and Alaska. Any single catastrophe or other condition
affecting losses in these states could adversely affect our
results of operations. |
Our business is concentrated in California (62.1% of direct
premiums written for the year ended December 31, 2004),
Alaska (12.7% of direct premiums written for the same period)
and Hawaii (8.3% of direct premiums written for the same
period). Accordingly, unfavorable business, economic or
regulatory conditions in those states could negatively impact
our business. For example, California, Hawaii and Alaska are
states that are susceptible to severe natural perils, such as
tsunamis, earthquakes and hurricanes, along with the possibility
of terrorist acts. Accordingly, we could suffer losses as a
result of catastrophic events in those states. Although
geographic concentration has not adversely affected our business
in the past, we may in the future be exposed to economic and
regulatory risks or risks from natural perils that are greater
than the risks faced by insurance companies that conduct
business over a greater geographic area. This concentration of
our business could have a material adverse effect on our
financial condition or results of operations.
|
|
|
If we are unable to obtain or collect on our reinsurance
protection, our business, financial condition and results of
operations could be materially adversely affected. |
We buy reinsurance protection to protect us from the impact of
large losses. Reinsurance is an arrangement in which an
insurance company, called the ceding company, transfers
insurance risk by sharing premiums with another insurance
company, called the reinsurer. Conversely, the reinsurer
receives or assumes reinsurance from the ceding company. We
currently participate in a workers’ compensation and
employers’ liability excess of loss reinsurance treaty
program covering all of the business that we write pursuant to
which our reinsurers are liable for 100% of the ultimate net
losses in excess of $500,000 for the business we write, up to a
$100.0 million limit. The treaty program provides coverage
in several layers. See the discussion under the heading
“Reinsurance” in this Item 1. The availability,
amount and cost of reinsurance depend on market conditions and
may vary significantly. As a result of catastrophic events, such
as the events of September 11, 2001, we may incur
significantly higher reinsurance costs, more restrictive terms
and conditions, and decreased availability. For example, the
second layer of our current excess of loss reinsurance treaty
program provides for a sub-limit on our reinsurers’ maximum
liability in the amount of $8.0 million for losses caused
by acts determined by the U.S. Office of Homeland Security
to be terrorist acts, and the third and fourth layers of our
reinsurance program expressly do not cover losses caused by any
act of terrorism, as defined in the Terrorism Risk Act. Because
of these sub-limits and exclusions, which are common in the wake
of the events of September 11, 2001, we have significantly
greater exposure to losses resulting from acts of terrorism. The
incurrence of higher reinsurance costs and more restrictive
terms could materially adversely affect our business, financial
condition and results of operations.
The agreements for our current workers’ compensation excess
of loss reinsurance treaty program expire on October 1,
2005. Although we currently expect to renew the program upon its
expiration, any decrease in the amount of our reinsurance at the
time of renewal, whether caused by the existence of more
restrictive terms and conditions or decreased availability, will
also increase our risk of loss and, as a result, could
materially adversely affect our business, financial condition
and results of operations. We have not experienced difficulty in
qualifying for or obtaining sufficient reinsurance to
appropriately cover our risks in the past. We currently have
10 reinsurers participating in our excess of loss
reinsurance treaty program, and believe that this is a
sufficient number of reinsurers to provide us with reinsurance
in the volume that we require. However, it is possible that one
or more of our current reinsurers could cancel participation, or
we could find it necessary to cancel the participation of one of
our reinsurers, in our excess of loss reinsurance treaty
program. In either of those events, if our reinsurance broker is
unable to spread the cancelled or terminated reinsurance among
the remaining reinsurers in the program, we estimate that it
could take approximately one to three weeks to identify and
negotiate appropriate documentation with a replacement
reinsurer. During this time, we would be exposed to an increased
risk of loss, the extent of which would depend on the volume of
cancelled reinsurance.
36
In addition, we are subject to credit risk with respect to our
reinsurers. Reinsurance protection that we receive does not
discharge our direct obligations under the policies we write. We
remain liable to our policyholders, even if we are unable to
make recoveries to which we believe we are entitled under our
reinsurance contracts. Losses may not be recovered from our
reinsurers until claims are paid, and, in the case of long-term
workers’ compensation cases, the creditworthiness of our
reinsurers may change before we can recover amounts to which we
are entitled. Although we have not experienced problems in the
past resulting from the failure of a reinsurer to pay our claims
in a timely manner, if we experience these problems in the
future, our costs would increase and our revenues would decline.
As of December 31, 2004, we had $13.5 million of
amounts recoverable from our reinsurers that we would be
obligated to pay if our reinsurers failed to pay us.
|
|
|
The insurance business is subject to extensive regulation
and legislative changes, which impact the manner in which we
operate our business. |
Our insurance business is subject to extensive regulation by the
applicable state agencies in the jurisdictions in which we
operate, perhaps most significantly by the Illinois Department
of Financial and Professional Regulation, Division of Insurance
and the California Department of Insurance. These state agencies
have broad regulatory powers designed to protect policyholders,
not stockholders or other investors. These powers include, among
other things, the ability to:
|
|
|
| |
• |
place limitations on our ability to transact business with our
affiliates; |
| |
| |
• |
regulate mergers, acquisitions and divestitures involving our
insurance company subsidiary; |
| |
| |
• |
require SeaBright Insurance Company and PointSure to comply with
various licensing requirements and approvals that affect our
ability to do business; |
| |
| |
• |
approve or reject our policy coverage and endorsements; |
| |
| |
• |
place limitations on our investments and dividends; |
| |
| |
• |
set standards of solvency to be met and maintained; |
| |
| |
• |
regulate rates pertaining to our business; |
| |
| |
• |
require assessments for the provision of funds necessary for the
settlement of covered claims under certain policies provided by
impaired, insolvent or failed insurance companies; |
| |
| |
• |
require us to comply with medical privacy laws; and |
| |
| |
• |
prescribe the form and content of, and examine, our statutory
financial statements. |
For example, our ability to transact business with our
affiliates and to enter into mergers, acquisitions and
divestitures involving our insurance company subsidiary is
limited by the requirements of the insurance holding company
laws of Illinois and California. To comply with these laws, we
are required to file notices with the Illinois Department of
Financial and Professional Regulation, Division of Insurance and
the California Department of Insurance to seek their respective
approvals at least 30 days before engaging in any
intercompany transactions, such as sales, purchases, exchanges
of assets, loans, extensions of credit, cost sharing
arrangements and extraordinary dividends or other distributions
to shareholders. Under these holding company laws, any change of
control transaction also requires prior notification and
approval. Because these governmental agencies may not take
action or give approval within the 30 day period, these
notification and approval requirements may subject us to
business delays and additional business expense. If we fail to
give these notifications, we may be subject to significant fines
and penalties and damaged working relations with these
governmental agencies.
In addition, workers’ compensation insurance is statutorily
provided for in all of the states in which we do business. State
laws and regulations provide for the form and content of policy
coverage and the rights and benefits that are available to
injured workers, their representatives and medical providers.
For example, in California, on January 1, 2003,
workers’ compensation legislation became effective that
provides for
37
increases in the benefits payable to injured workers. Also, in
California, workers’ compensation legislation intended to
reduce certain costs was enacted in September 2003 and April
2004. Among other things, this legislation established an
independent medical review process for resolving medical
disputes, tightened standards for determining impairment ratings
by applying specific medical treatment guidelines, capped
temporary total disability payments to 104 weeks from first
payment and enables injured workers to access immediate medical
care up to $10,000 but requires them to get medical care through
a network of doctors chosen by the employer. The implementation
of these reforms affects the manner in which we coordinate
medical care costs with employers and the manner in which we
oversee treatment plans.
Our business is also affected by federal laws, including the
USL&H Act, which is administered by the Department of Labor,
and the Merchant Marine Act of 1920, or Jones Act. See the
discussion under the heading “Regulation” in this
Item 1. The USL&H Act contains various provisions
affecting our business, including the nature of the liability of
employers of longshoremen, the rate of compensation to an
injured longshoreman, the selection of physicians, compensation
for disability and death and the filing of claims. Currently,
builders of recreational boats over 65 feet in length are
subject to the USL&H Act. A proposed amendment to the
USL&H Act would eliminate builders of recreational boats
from the reach of the USL&H Act. If this proposed amendment
is adopted, we expect that we would lose a total of
approximately $3.0 million in annual direct written premium
from policies currently providing USL&H Act coverage. The
proposed amendment would not have a material impact on our
policies providing coverage under the Jones Act, which gives
certain employees at sea the right to sue their employers if
such employees are injured.
In addition, we are impacted by the Terrorism Risk Act, as
discussed earlier, and by the Gramm Leach Bliley Act of 2002
related to disclosure of personal information. Moreover, changes
in federal tax laws could also impact our business.
This extensive regulation of our business may affect the cost or
demand for our products and may limit our ability to obtain rate
increases or to take other actions that we might desire to
increase our profitability. In addition, we may be unable to
maintain all required approvals or comply fully with the wide
variety of applicable laws and regulations, which are
continually undergoing revision, or the relevant
authority’s interpretation of such laws and regulations.
|
|
|
A downgrade in the A.M. Best rating of our insurance
subsidiary could reduce the amount of business we are able to
write. |
Rating agencies rate insurance companies based on each
company’s ability to pay claims. Our insurance company
subsidiary currently has a rating of “A-” (Excellent)
from A.M. Best, which is the rating agency that we believe has
the most influence on our business. The ratings of A.M. Best are
subject to periodic review using, among other things,
proprietary capital adequacy models, and are subject to revision
or withdrawal at any time. Insurance ratings are directed toward
the concerns of policyholders and insurance agents and are not
intended for the protection of investors or as a recommendation
to buy, hold or sell any of our securities. Our competitive
position relative to other companies is determined in part by
our A.M. Best rating. We believe that our business is
particularly sensitive to our A.M. Best rating because we focus
on larger customers which tend to give substantial weight to the
A.M. Best rating of their insurers. We expect that any reduction
in our A.M. Best rating below “A-” would cause a
reduction in the number of policies we write and could have a
material adverse effect on our results of operations and our
financial position.
|
|
|
The effects of emerging claim and coverage issues on our
business are uncertain. |
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or
size of claims. In some instances, these changes may not become
apparent until some time after we have issued insurance
contracts that are affected by the changes. As a result, the
full extent of liability under
38
our insurance contracts may not be known for many years after a
contract is issued. For example, the number or nature of
existing occupational diseases may expand beyond our
expectation. In addition, medical costs associated with
permanent and partial disabilities may inflate more rapidly or
higher than we currently expect. Expansions of this nature may
expose us to more claims than we anticipated when we wrote the
underlying policy.
|
|
|
Intense competition could adversely affect our ability to
sell policies at rates we deem adequate. |
In most of the states in which we operate, we face significant
competition which, at times, is intense. If we are unable to
compete effectively, our business and financial condition could
be materially adversely affected. Competition in our businesses
is based on many factors, including premiums charged, services
provided, financial strength ratings assigned by independent
rating agencies, speed of claims payments, reputation, perceived
financial strength and general experience. We compete with
regional and national insurance companies and state-sponsored
insurance funds, as well as potential insureds that have decided
to self-insure. Our principal competitors include American
International Group, Inc. (“AIG”), Majestic Insurance
Company, Alaska National Insurance Company, Signal Mutual
Indemnity Association Ltd., Zurich and the State Compensation
Insurance Fund of California. Based on our internal calculations
using information available to us, we estimate that the State
Compensation Insurance Fund of California, AIG, Zurich and
Signal Mutual Indemnity Association Ltd. have approximate market
shares in the niche markets in which we operate of 16%, 9%, 5%
and 1%, respectively. We also estimate, based on these internal
calculations, that Majestic Insurance Company and Alaska
National Insurance Company have market shares of less than 1% in
our targeted niche markets. We estimate our own market share in
our targeted niche markets to be approximately 1%. Many of our
competitors have substantially greater financial and marketing
resources than we do, and some of our competitors, including the
State Compensation Insurance Fund of California, benefit
financially by not being subject to federal income tax. Intense
competitive pressure on prices can result from the actions of
even a single large competitor, such as the State Compensation
Insurance Fund in California or AIG.
In addition, our competitive advantage may be limited due to the
small number of insurance products that we offer. Some of our
competitors, such as AIG, have additional competitive leverage
because of the wide array of insurance products that they offer.
For example, it may be more convenient for a potential customer
to purchase numerous different types of insurance products from
one insurance carrier. We do not offer a wide array of insurance
products due to our targeted market niches, and we may lose
potential customers to our larger more diverse competitors as a
result.
|
|
|
If we are unable to realize our investment objectives, our
financial condition may be adversely affected. |
Investment income is an important component of our revenues and
net income. The ability to achieve our investment objectives is
affected by factors that are beyond our control. For example,
United States participation in hostilities with other countries
and large-scale acts of terrorism may adversely affect the
economy generally, and our investment income could decrease.
Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international
economic and political conditions. These and other factors also
affect the capital markets, and, consequently, the value of the
securities we own. Any significant decline in our investment
income as a result of rising interest rates or general market
conditions would have an adverse effect on our net income and,
as a result, on our stockholders’ equity and our
policyholders’ surplus.
The outlook for our investment income is dependent on the future
direction of interest rates and the amount of cash flows from
operations that are available for investment. The fair values of
fixed maturity investments that are
“available-for-sale” fluctuate with changes in
interest rates and cause fluctuations in our stockholders’
equity.
39
|
|
|
We could be adversely affected by the loss of one or more
principal employees or by an inability to attract and retain
staff. |
Our success will depend in substantial part upon our ability to
attract and retain qualified executive officers, experienced
underwriting talent and other skilled employees who are
knowledgeable about our business. We rely substantially upon the
services of our senior management team and key employees,
consisting of John G. Pasqualetto, Chairman, President and Chief
Executive Officer; Richard J. Gergasko, Executive Vice
President; Joseph S. De Vita, Senior Vice President, Chief
Financial Officer and Assistant Secretary; Richard W. Seelinger,
Senior Vice President — Claims; Marc B.
Miller, M.D., Senior Vice President and Chief Medical
Officer; Jeffrey C. Wanamaker, Vice President —
Underwriting; D. Drue Wax, Senior Vice President, General
Counsel and Secretary; James L. Borland, III, Vice
President and Chief Information Officer; M. Philip Romney, Vice
President — Finance, Principal Accounting Officer and
Assistant Secretary; and Chris A. Engstrom,
President — PointSure. Although we are not aware of
any planned departures or retirements, if we were to lose the
services of members of our management team, our business could
be adversely affected. Many of our principal employees possess
skills and extensive experience relating to our market niches.
Were we to lose any of these employees, it may be challenging
for us to attract a replacement employee with comparable skills
and experience in our market niches. We have employment
agreements with some of our executive officers, which are
described under the heading “Employment Contracts and
Termination of Employment and Change-in-Control
Arrangements” in Part III, Item 11 of this annual
report. We do not currently maintain key man life insurance
policies with respect to any member of our senior management
team or other employees.
|
|
|
We may require additional capital in the future, which may
not be available or only available on unfavorable terms. |
Our future capital requirements depend on many factors,
including our ability to write new business successfully and to
establish premium rates and loss reserves at levels sufficient
to cover losses. To the extent that the funds generated by this
offering are insufficient to support future operating
requirements and/or cover claim losses, we may need to raise
additional funds through financings or curtail our growth. We
believe that the net proceeds to us from the initial public
offering of our common stock, completed in January 2005, will
satisfy our capital requirements for the foreseeable future.
However, because the timing and amount of our future needs for
capital will depend on our growth and profitability, we cannot
provide any assurance in that regard. If we had to raise
additional capital, equity or debt financing may not be
available at all or may be available only on terms that are not
favorable to us. In the case of equity financings, dilution to
our stockholders could result, and in any case such securities
may have rights, preferences and privileges that are senior to
those applicable to our existing shareholders. If we cannot
obtain adequate capital on favorable terms or at all, we may be
unable to support future growth or operating requirements and,
accordingly, our business, financial condition or results of
operations could be materially adversely affected.
|
|
|
Our status as an insurance holding company with no direct
operations could adversely affect our ability to pay dividends
in the future. |
SeaBright is a holding company that transacts its business
through its operating subsidiaries, SeaBright Insurance Company
and PointSure. Our primary assets are the stock of these
operating subsidiaries. Our ability to pay expenses and
dividends depends, in the long run, upon the surplus and
earnings of our subsidiaries and the ability of our subsidiaries
to pay dividends to us. Payment of dividends by SeaBright
Insurance Company is restricted by state insurance laws,
including laws establishing minimum solvency and liquidity
thresholds, and could be subject to contractual restrictions in
the future, including those imposed by indebtedness we may incur
in the future. SeaBright Insurance Company is required to report
any ordinary dividends to the Illinois Department of Financial
and Professional Regulation, Division of Insurance and the
California Department of Insurance prior to the payment of the
dividend. In addition, SeaBright Insurance Company is not
authorized to pay any extraordinary dividends to SeaBright under
Illinois or California insurance laws without prior regulatory
approval from the Illinois
40
Department of Financial and Professional Regulation, Division of
Insurance or the California Department of Insurance. See the
discussion under the heading “Regulation —
Dividend Limitations” in this Item 1. As a result, at
times, we may not be able to receive dividends from SeaBright
Insurance Company and we may not receive dividends in amounts
necessary to pay dividends on our capital stock. In addition,
the payment of dividends by us is within the discretion of our
board of directors and will depend on numerous factors,
including our financial condition, our capital requirements and
other factors that our board of directors considers relevant.
Currently, we do not intend to pay dividends on our capital
stock.
|
|
|
We rely on independent insurance brokers to distribute our
products. |
Our business depends in part on the efforts of independent
insurance brokers to market our insurance programs successfully
and produce business for us and on our ability to offer
insurance programs and services that meet the requirements of
the clients and customers of these brokers. The majority of the
business in our workers’ compensation operations is
produced by a group of approximately 74 licensed insurance
brokers. Brokers are not obligated to promote our insurance
programs and may sell competitors’ insurance programs.
Several of our competitors, including AIG and Zurich, offer a
broader array of insurance programs than we do. Accordingly, our
brokers may find it easier to promote the broader range of
programs of our competitors than to promote our niche selection
of insurance products. If our brokers fail or choose not to
market our insurance programs successfully or to produce
business for us, our growth may be limited and our financial
condition and results of operations may be negatively affected.
|
|
|
We have a limited operating history as a stand-alone
entity and may experience difficulty in transitioning to an
independent public company. |
We commenced operations in October 2003 after acquiring KEIC,
the renewal rights from, and substantially all of the operating
assets, systems and employees of, the Eagle Entities and
PointSure, a wholesale insurance broker and third party claims
administrator affiliated with the Eagle Entities. See the
discussion under the heading “Our History” in this
Item 1. Although our management team is the same management
team that operated the Eagle Entities and PointSure for
approximately five years prior to the Acquisition, we have a
limited operating history as a stand-alone entity and do not
have the same resources available to us that the Eagle Entities
and PointSure had prior to the Acquisition. Accordingly, our
future results of operations or financial condition as a
stand-alone entity may vary from the results realized by the
Eagle Entities and PointSure prior to the Acquisition. An
investor in our common stock should consider that our history as
a stand-alone entity is relatively short and that there is a
limited basis for evaluating our performance.
In addition, upon completion of our initial public offering in
January 2005, we became a publicly traded company and are now
responsible for complying with the various federal and legal
regulatory requirements applicable to public companies. We will
incur increased costs as a result of being a public company,
particularly in light of recently enacted and proposed changes
in laws, regulations and listing requirements, including those
related to the Sarbanes-Oxley Act of 2002. Our business and
financial condition may be adversely affected if we are unable
to effectively manage these increased costs.
|
|
|
Assessments and other surcharges for guaranty funds and
second injury funds and other mandatory pooling arrangements may
reduce our profitability. |
Virtually all states require insurers licensed to do business in
their state to bear a portion of the unfunded obligations of
impaired or insolvent insurance companies. These obligations are
funded by assessments that are expected to continue in the
future as a result of insolvencies. Assessments are levied by
guaranty associations within the state, up to prescribed limits,
on all member insurers in the state on the basis of the
proportionate share of the premium written by member insurers in
the lines of business in which the impaired, insolvent or failed
insurer is engaged. See the discussion under the heading
“Regulation” in this Item 1. Accordingly, the
assessments levied on us may increase as we increase our
premiums written. Many states also have laws that established
second injury funds to provide compensation to injured employees
for aggravation of a prior condition or injury, which are funded
by
41
either assessments based on paid losses or premium surcharge
mechanisms. For example, Alaska requires insurers to contribute
to its second injury fund annually an amount equal to the
compensation the injured employee is owed multiplied by a
contribution rate based on the fund’s reserve rate. In
addition, as a condition of the ability to conduct business in
some states, including California, insurance companies are
required to participate in mandatory workers’ compensation
shared market mechanisms or pooling arrangements, which provide
workers’ compensation insurance coverage from private
insurers. Although we price our products to account for the
obligations that we may have under these pooling arrangements,
we may not be successful in estimating our liability for these
obligations. Accordingly, our prices may not fully account for
our liabilities under pooling arrangements, which may cause a
decrease in our profits. In 2004, we recorded a net loss of
approximately $311,000 for our required participation in these
pooling arrangements from October 1, 2003 through
December 31, 2004 in Alaska, Arizona, Nevada and Oregon. As
we write policies in new states that have pooling arrangements,
we will be required to participate in additional pooling
arrangements. Further, the insolvency of other insurers in these
pooling arrangements would likely increase the liability for
other members in the pool. The effect of these assessments and
mandatory shared market mechanisms or changes in them could
reduce our profitability in any given period or limit our
ability to grow our business.
|
|
|
In the event LMC is placed into receivership, we could
lose our rights to fee income and protective arrangements that
were established in connection with the Acquisition, our
reputation and credibility could be adversely affected and we
could be subject to claims under applicable voidable preference
and fraudulent transfer laws. |
The assets that SeaBright acquired in the Acquisition were
acquired from LMC, and certain of its affiliates. LMC and its
insurance company affiliates are currently operating under a
three-year “run off” plan approved by the Illinois
Department of Financial and Professional Regulation, Division of
Insurance. “Run off” is the professional management of
an insurance company’s discontinued, distressed or
non-renewed lines of insurance and associated liabilities
outside of a judicial proceeding. Under the run off plan, LMC
will attempt to buy back some of its commercial line policies
and institute aggressive expense control measures in order to
reduce its future loss exposure and allow it to meet its
obligations to current policyholders. According to LMC’s
statutory financial statements as of and for the year ended
December 31, 2004, LMC had a statutory surplus of
$171.4 million, a decrease of approximately
$31.0 million from its surplus of $202.4 million as of
December 31, 2003. On an operating basis, LMC lost
approximately $66.0 million in the year ended
December 31, 2004. In connection with the Acquisition, we
established various arrangements with LMC and certain of its
affiliates, including (1) servicing arrangements entitling
us to fee income for providing claims administration services
for Eagle and (2) other protective arrangements designed to
minimize our exposure to any past business underwritten by KEIC,
the shell entity that we acquired from LMC for its insurance
licenses, and any adverse developments in KEIC’s loss
reserves as they existed at the date of the Acquisition. See the
discussion under the heading “Our History” in this
Item 1. In the event LMC is placed into receivership, our
business could be adversely affected in the following ways.
|
|
|
| |
• |
A receiver could seek to reject or terminate one or more of the
services agreements that were established in connection with the
Acquisition between us and LMC or its affiliates, including
Eagle. In that event, we could lose the revenue we currently
receive under these services agreements. Our projected revenue
under these agreements is approximately $1.5 million in
2005 and $0.9 million in 2006. |
| |
| |
• |
As discussed under the heading “Our History” in this
Item 1, to minimize our exposure to any past business
underwritten by KEIC, we entered into an arrangement with LMC at
the time of the Acquisition requiring LMC to indemnify us in the
event of adverse development of the loss reserves in KEIC’s
balance sheet as they existed on the date of closing of the
Acquisition. We refer to this arrangement as the adverse
development cover. To support LMC’s obligations under the
adverse development cover, LMC funded a trust account at the
time of the Acquisition. The minimum amount that must be
maintained in the trust account is equal to the greater of
(a) $1.6 million or |
42
|
|
|
| |
|
(b) 102% of the then-existing quarterly estimate of
LMC’s total obligations under the adverse development
cover. We refer to this trust account as the collateralized
reinsurance trust because the funds on deposit in the trust
account serve as collateral for LMC’s potential future
obligations to us under the adverse development cover. At
December 31, 2004, the liability of LMC under the adverse
development cover was approximately $2.9 million. LMC
initially funded the trust account with $1.6 million to
support its obligations under the adverse development cover. In
September 2004, we and LMC retained an independent actuary to
determine the appropriate amount of loss reserves that are
subject to the adverse development cover as of
September 30, 2004. In accordance with the terms of the
protective arrangements that we have established with LMC, on
December 23, 2004, LMC deposited into a trust account an
additional approximately $3.2 million, resulting in a total
balance in the trust account of approximately $4.8 million.
We and LMC are currently reviewing the results of the final
report received from the independent actuary in February 2005.
If LMC is placed in receivership and the amount held in the
collateralized reinsurance trust is inadequate to satisfy the
obligations of LMC to us under the adverse development cover, it
is unlikely that we would recover any future amounts owed by LMC
to us under the adverse development cover in excess of the
amounts currently held in trust because the director of the
Illinois Department of Financial and Professional Regulation,
Division of Insurance would have control of the assets of LMC. |
| |
| |
• |
Some of our customers are insured under Eagle insurance policies
that we service pursuant to the claims administration servicing
agreement described above. Although SeaBright is a separate
legal entity from LMC and its affiliates, including Eagle,
Eagle’s policyholders may not readily distinguish SeaBright
from Eagle and LMC if those policies are not honored in the
event LMC is found to be insolvent and placed into court-ordered
liquidation. If that were to occur, our market reputation and
credibility and ability to renew the underlying policies could
be adversely affected. |
| |
| |
• |
In connection with the Acquisition, LMC and its affiliates made
various transfers and payments to SeaBright, including
approximately $13.0 million under the commutation agreement
and approximately $4.8 million to fund the collateralized
reinsurance trust. In the event that LMC is placed into
receivership, it is possible that a receiver or creditor could
assert a claim seeking to unwind or recover these payments under
applicable voidable preference and fraudulent transfer laws. |
Risks Related to Our Industry
|
|
|
Recent investigations into insurance brokerage practices
could cause volatility in our stock and adversely affect our
business. |
On October 14, 2004, the Attorney General of the State of
New York filed a well-publicized civil complaint against a large
insurance broker concerning, among other things, allegations
that so-called contingent commissions conflicted with the
broker’s duties to customers, that the broker steered
unsuspecting commercial clients to insurers with which the
broker had lucrative contingent commission arrangements, and
that the broker and several insurers for whom it produced
business engaged in bid-rigging in connection with insurance
premium quotes for commercial property and casualty insurance.
According to press reports, the New York Attorney General’s
investigation of the insurance industry has expanded to include
tying practices in connection with the purchase of reinsurance
through brokers as well as brokerage commissions paid in
connection with producing group life and health insurance
business. As a result of the complaint and the attendant
publicity and expectations that the New York Attorney
General’s investigation will include additional companies
and practices, and because other states’ attorneys general
and insurance regulators have also initiated their own
investigation of industry practices relating to broker
compensation, stock prices of companies in the insurance
industry have experienced substantial volatility and may
experience continued volatility for the foreseeable future.
The Illinois Department of Financial and Professional
Regulation, Division of Insurance is among the regulators
investigating insurance industry practices in the wake of the
New York Attorney General’s investigation. Our insurance
company subsidiary, which is incorporated in Illinois, has
received and
43
responded to a subpoena from the Illinois Department of
Financial and Professional Regulation, Division of Insurance
requesting answers to interrogatories and production of certain
documents relating to the Department’s investigation of
producer compensation arrangements. We have been informed that
these inquiries were made to all domestic Illinois insurers and
major brokerages who transact business in Illinois. We
anticipate that officials from other jurisdictions in which we
do business may also initiate investigations into similar
matters and, accordingly, we could receive additional subpoenas
and requests for information with respect to these matters. The
volatility caused by the many developments relating to broker
compensation may affect the price of our stock regardless of our
practices in dealing with brokers.
Additionally, proposed legislation or new regulatory
requirements are expected to be imposed on the insurance
industry and will impact our business and the manner in which we
compensate our brokers. On December 29, 2004, the National
Association of Insurance Commissioners (the “NAIC”)
approved model producer compensation amendments to the model
Producer Licensing Act. The brokerage provision is based on a
producer: (1) receiving compensation from the customer or
(2) representing the customer in the placement of the
business. The producer is required to obtain the customer’s
consent in order to receive compensation from the insurer and to
disclose the amount of that compensation or, if that is not
known, the method by which compensation will be determined with
a reasonable estimate of the amount, where possible. In the
agent provision, which also may apply to some brokerage
situations, the producer must disclose to the customer that the
producer will be receiving compensation from the insurer, or
that the producer represents the insurer and may provide
services to the customer for the insurer. The NAIC also directed
the Executive Task Force on Broker Activities to give further
consideration to the development of additional requirements for
recognition of a fiduciary responsibility of producers,
disclosure of all quotes received by a broker and disclosures
relating to agent-owned reinsurance arrangements. On
March 14, 2005, the NAIC received comments in a public
hearing on these additional requirements and extended to
March 22, 2005 its invitation for written responses to
questions raised. Such questions included what types of
financial or other interests in an insurer or reinsurer should a
producer be required to disclose at the time of the transaction,
and whether insurance companies should be required to state all
compensation paid to a producer on all quote letters and
declaration pages of policies.
The California Department of Insurance has also proposed new
regulations concerning brokers. If adopted as currently written,
the regulations would apply to all insurance transactions, would
impose a fiduciary duty on the broker with respect to its client
and would require brokers to disclose to clients the receipt or
potential receipt of any income from a third party if that
income derives from the broker’s transaction with the
client. In addition, the Oregon Department of Consumer and
Business Services, Insurance Division is considering new
regulations that would require written agreements between
insurance producers and prospective insureds and written
agreements between wholesale insurance producers and their
retail sub-producers to contain detailed disclosures about
services fees charged.
Although PointSure, our in-house wholesale broker, currently
provides disclosure to its customers regarding any contingent
compensation arrangements it may receive, PointSure may become
subject to additional disclosure requirements under the proposed
regulations, and it is unclear how these regulations, which
primarily target retail brokers, will be applied to wholesale
brokers. The New York Attorney General’s investigation and
all developing regulatory responses related to the investigation
represent an evolving area of law, and we cannot, at this point,
predict its consequences for the industry or for us.
|
|
|
We may face substantial exposure to losses from terrorism
for which we are required by law to provide coverage. |
Under our workers’ compensation policies, we are required
to provide workers’ compensation benefits for losses
arising from acts of terrorism. The impact of any terrorist act
is unpredictable, and the ultimate impact on us would depend
upon the nature, extent, location and timing of such an act.
Notwithstanding the protection provided by the reinsurance we
have purchased and any protection provided by the Terrorism Risk
Act, the risk of severe losses to us from acts of terrorism has
not been eliminated because, as discussed above, our excess of
loss reinsurance treaty program contains various sub-limits and
exclusions limiting our reinsurers’ obligation to cover
losses caused by acts of terrorism. Accordingly, events may not
44
be covered by, or may exceed the capacity of, our reinsurance
protection. Thus, any acts of terrorism could materially
adversely affect our business and financial condition.
|
|
|
The threat of terrorism and military and other actions may
result in decreases in our net income, revenue and assets under
management and may adversely affect our investment
portfolio. |
The threat of terrorism, both within the United States and
abroad, and military and other actions and heightened security
measures in response to these types of threats, may cause
significant volatility and declines in the equity markets in the
United States and abroad, as well as loss of life, property
damage, additional disruptions to commerce and reduced economic
activity. Actual terrorist attacks could cause a decrease in our
stockholders’ equity, net income and/or revenue. The
effects of these changes may result in a decrease in our stock
price. In addition, some of the assets in our investment
portfolio may be adversely affected by declines in the bond
markets and declines in economic activity caused by the
continued threat of terrorism, ongoing military and other
actions and heightened security measures.
We cannot predict at this time whether and the extent to which
industry sectors in which we maintain investments may suffer
losses as a result of potential decreased commercial and
economic activity, or how any such decrease might impact the
ability of companies within the affected industry sectors to pay
interest or principal on their securities, or how the value of
any underlying collateral might be affected.
We can offer no assurances that terrorist attacks or the threat
of future terrorist events in the United States and abroad or
military actions by the United States will not have a material
adverse effect on our business, financial condition or results
of operations.
|
|
|
Our results of operations and revenues may fluctuate as a
result of many factors, including cyclical changes in the
insurance industry, which may cause the price of our common
stock to be volatile. |
The results of operations of companies in the insurance industry
historically have been subject to significant fluctuations and
uncertainties. Our profitability can be affected significantly
by:
|
|
|
| |
• |
competition; |
| |
| |
• |
rising levels of loss costs that we cannot anticipate at the
time we price our products; |
| |
| |
• |
volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or terrorist
attacks; |
| |
| |
• |
changes in the level of reinsurance capacity and capital
capacity; |
| |
| |
• |
changes in the amount of loss reserves resulting from new types
of claims and new or changing judicial interpretations relating
to the scope of insurers’ liabilities; and |
| |
| |
• |
fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested assets and may impact the ultimate payout of losses. |
The supply of insurance is related to prevailing prices, the
level of insured losses and the level of industry surplus which,
in turn, may fluctuate in response to changes in rates of return
on investments being earned in the insurance industry. As a
result, the insurance business historically has been a cyclical
industry characterized by periods of intense price competition
due to excessive underwriting capacity as well as periods when
shortages of capacity permitted favorable premium levels. During
1998, 1999 and 2000, the workers’ compensation insurance
industry experienced substantial pricing competition, and this
pricing competition greatly affected the ability of our
predecessor to increase premiums. Beginning in 2001 we witnessed
a decrease in pricing competition in the industry, which enabled
us to raise our rates. Although rates for many products have
increased in recent years, the supply of insurance may increase,
either by capital provided by new entrants or by the commitment
of additional capital by existing insurers, which may cause
prices to decrease. Any of these factors could lead to a
significant reduction in premium rates, less favorable policy
terms and fewer submissions for our underwriting services. In
addition to these considerations, changes in the frequency and
severity of losses suffered by insureds and insurers may affect
45
the cycles of the insurance business significantly, and we
expect to experience the effects of such cyclicality. This
cyclicality may cause the price of our securities to be volatile.
Risks Related to Our Common Stock
|
|
|
The price of our common stock may decrease. |
The trading price of shares of our common stock may decline for
many reasons, some of which are beyond our control, including,
among others:
|
|
|
| |
• |
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 of claims against us by third parties; |
| |
| |
• |
changes in law and regulation; |
| |
| |
• |
results of operations that vary from those expected by
securities analysts and investors; and |
| |
| |
• |
future sales of shares of our common stock. |
In addition, the stock market in recent years has experienced
substantial price and volume fluctuations that sometimes have
been unrelated or disproportionate to the operating performance
of companies whose shares are traded. As a result, the trading
price of shares of our common stock may be below the initial
public offering price and you may not be able to sell your
shares at or above the price you pay to purchase them.
|
|
|
Future sales of shares of our common stock may affect
their market price and the future exercise of options may
depress our stock price and will result in immediate and
substantial dilution. |
We cannot predict what effect, if any, future sales of shares of
our common stock, or the availability of shares for future sale,
will have on the market price of our common stock. Sales of
substantial amounts of our common stock in the public market, or
the perception that such sales could occur, could adversely
affect the market price of our common stock and may make it more
difficult for you to sell your shares at a time and price which
you deem appropriate.
As of March 18, 2005, there were 16,402,808 shares of
our common stock outstanding. Moreover, 789,859 additional
shares of our common stock will be issuable upon the full
exercise or conversion of options outstanding at
December 31, 2004 or granted in connection with our initial
public offering. In the event that any outstanding options are
exercised, you will suffer dilution of your investment.
|
|
|
Applicable insurance laws may make it difficult to effect
a change of control of our company. |
Our insurance company subsidiary is domiciled in the state of
Illinois and commercially domiciled in the state of California.
The insurance holding company laws of Illinois and California
require advance approval by the Illinois Department of Financial
and Professional Regulation, Division of Insurance and the
California Department of Insurance of any change in control of
SeaBright Insurance Company. “Control” is generally
presumed to exist through the direct or indirect ownership of
10% or more of the voting securities of a domestic insurance
company or of any entity that controls a domestic insurance
company. In addition, insurance laws in many states contain
provisions that require prenotification to the insurance
commissioners of a change in control of a non-domestic insurance
company licensed in those states. Any future transactions that
would constitute a change in control of SeaBright Insurance
Company, including a change of control of SeaBright, would
generally require the party acquiring control to obtain the
prior approval by the Illinois Department of Financial and
Professional Regulation, Division of Insurance and the
California Department of Insurance and may require
pre-acquisition notification in applicable states that have
adopted pre-acquisition notification provisions. Obtaining these
approvals may
46
result in a material delay of, or deter, any such transaction.
See the discussion under the heading “Regulation” in
this Item 1.
These laws may discourage potential acquisition proposals and
may delay, deter or prevent a change of control of SeaBright,
including through transactions, and in particular unsolicited
transactions, that some or all of the stockholders of SeaBright
might consider to be desirable.
|
|
|
Entities affiliated with Summit Partners have the ability
to significantly influence our business, which may be
disadvantageous to other stockholders and adversely affect the
trading price of our common stock. |
Following the completion of the initial public offering of our
common stock in January 2005, entities affiliated with Summit
Partners, collectively, beneficially own approximately 46.6% of
our outstanding common stock. As a result, these stockholders,
acting together, will have the ability to exert substantial
influence over all matters requiring approval by our
stockholders, including the election and removal of directors
and any proposed merger, consolidation or sale of all or
substantially all of our assets and other corporate
transactions. In addition, these stockholders may have interests
that are different from ours. Under our amended and restated
certificate incorporation, none of the Summit entities or any
director, officer, stockholder, member, manager or employee of
the Summit entities has any duty to refrain from engaging
directly or indirectly in the same or similar business
activities or lines of business that we do. In the event that
any Summit entity acquires knowledge of a potential transaction
or matter which may be a corporate opportunity for itself and
us, the Summit entity will not have any duty to communicate or
offer such opportunity to us and will not be liable to us or our
stockholders for breach of any fiduciary duty relating to such
corporate opportunity. Our officers, directors and principal
stockholders could delay or prevent an acquisition or merger
even if the transaction would benefit other stockholders.
Moreover, this concentration of stock ownership may make it
difficult for stockholders to replace management. In addition,
this significant concentration of stock ownership may adversely
affect the trading price for our common stock because investors
often perceive disadvantages in owning stock in companies with
significant or controlling stockholders. This concentration
could be disadvantageous to other stockholders with interests
different from those of our officers, directors and principal
stockholders and the trading price of shares of our common stock
could be adversely affected.
|
|
|
Anti-takeover provisions in our amended and restated
certificate of incorporation and by-laws and under the laws of
the State of Delaware could impede an attempt to replace or
remove our directors or otherwise effect a change of control of
our company, which could diminish the value of our common
stock. |
Our amended and restated certificate of incorporation and
by-laws contain provisions that may make it more difficult for
stockholders to replace directors even if the stockholders
consider it beneficial to do so. In addition, these provisions
could delay or prevent a change of control that a stockholder
might consider favorable. For example, these provisions may
prevent a stockholder from receiving the benefit from any
premium over the market price of our common stock offered by a
bidder in a potential takeover. Even in the absence of an
attempt to effect a change in management or a takeover attempt,
these provisions may adversely affect the prevailing market
price of our common stock if they are viewed as discouraging
takeover attempts in the future. In addition, Section 203
of the Delaware General Corporation Law may limit the ability of
an “interested stockholder” to engage in business
combinations with us. An interested stockholder is defined to
include persons owning 15% or more of any class of our
outstanding voting stock.
Our amended and restated certificate of incorporation and
by-laws contain the following provisions that could have an
anti-takeover effect:
|
|
|
| |
• |
stockholders have limited ability to call stockholder meetings
and to bring business before a meeting of stockholders; |
| |
| |
• |
stockholders may not act by written consent; and |
47
|
|
|
| |
• |
our board of directors may authorize the issuance of preferred
stock with such rights, powers and privileges as the board deems
appropriate. |
These provisions may make it difficult for stockholders to
replace management and could have the effect of discouraging a
future takeover attempt which is not approved by our board of
directors but which individual stockholders might consider
favorable.
Our principal executive offices are located in approximately
17,200 square feet of leased office space in Seattle,
Washington. As of December 31, 2004, we also lease branch
offices consisting of approximately 3,200 square feet in
Honolulu, Hawaii; 1,700 square feet in Anchorage, Alaska;
5,000 square feet in Orange, California; and
3,400 square feet in Houston, Texas. We conduct claims and
underwriting operations in our branch offices, with the
exception of our Honolulu office where we conduct only claims
operations. We do not own any real property. We consider our
leased facilities to be adequate for our current operations.
|
|
| Item 3. |
Legal Proceedings. |
We are, from time to time, involved in various legal proceedings
in the ordinary course of business. We believe we have
sufficient loss reserves and reinsurance to cover claims under
policies issued by us. Accordingly, we do not believe that the
resolution of any currently pending legal proceedings, either
individually or taken as a whole, will have a material adverse
effect on our business, results of operations or financial
condition.
|
|
| Item 4. |
Submission of Matters to a Vote of Security
Holders. |
In anticipation of our initial public offering, in December 2004
we asked our shareholders to approve several items by written
consent in lieu of a special meeting. At the time, we had no
common stock outstanding and we had 508,365.25 shares of
convertible preferred stock outstanding, 98.4% of which was
owned by entities affiliated with Summit Partners, L.P.
On December 6, 2004, we asked our stockholders to approve
by written consent in lieu of a special meeting an amendment to
our certificate of incorporation in order to effect a
7.649832-for-one stock split with respect to the common stock
underlying our convertible preferred stock and to increase the
number of authorized shares of our common stock. The consent was
executed on December 6, 2004 by Summit Partners and by
Joseph S. De Vita, our senior vice president and chief financial
officer. These stockholders held an aggregate of 98.6% of our
outstanding convertible preferred stock at the time of the
consent.
On December 22, 2004, we asked our stockholders to approve
by written consent in lieu of a special meeting an amended and
restated certificate of incorporation, amended and restated
by-laws, the SeaBright Insurance Holdings, Inc. 2005 Long-Term
Equity Incentive Plan and the selection of KPMG LLP as our
independent public accountant for the fiscal year ended
December 31, 2004. The consent was executed on
December 22, 2004 by Summit Partners. Copies of our amended
and restated certificate of incorporation and amended and
restated by-laws were filed as exhibits to our Form S-8
Registration Statement (File No. 333-123319) filed on
March 15, 2005 and are incorporated into this annual report
by reference to such filing. A copy of our 2005 Long-Term Equity
Incentive Plan was filed as an exhibit to Amendment No. 4
to our Registration Statement on Form S-1 filed on
January 3, 2005 and is incorporated into this annual report
by reference to such filing.
In addition, on January 20, 2005, subsequent to the end of
the fourth quarter of our fiscal year ended December 31,
2004, Summit Partners executed a written consent in accordance
with the terms of our then-existing certificate of incorporation
in order to effect the automatic conversion of all of our
outstanding convertible preferred stock into common stock
effective as of the consummation of our initial public offering.
48
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. |
Market Information and Holders
Our common stock has been quoted on the Nasdaq National Market
under the symbol “SEAB” since January 21, 2005.
Prior to that time, there was no public market for our common
stock. The initial public offering price of our common stock was
$10.50 per share, and the initial public offering closed on
January 26, 2005. The closing sales price of our common
stock on the Nasdaq National Market was $11.96 per share on
March 18, 2005. From January 21, 2005 through
March 18, 2005, the range of the high and low sales prices
of our common stock was $11.00 to $12.60 per share. As of
March 18, 2005, there were approximately 18 holders of
record of our common stock.
Dividend Policy
We do not expect to pay any cash dividends on our common stock
for the foreseeable future. We currently intend to retain any
additional future earnings to finance our operations and growth.
Any future determination to pay cash dividends on our common
stock will be at the discretion of our board of directors and
will be dependent on our earnings, financial condition,
operating results, capital requirements, any contractual
restrictions, regulatory and other restrictions on the payment
of dividends by our subsidiaries to us, and other factors that
our board of directors deems relevant.
We are a holding company and have no direct operations. Our
ability to pay dividends in the future depends on the ability of
our operating subsidiaries to pay dividends to us. Our
subsidiary, SeaBright Insurance Company, is a regulated
insurance company and therefore is subject to significant
regulatory restrictions limiting its ability to declare and pay
dividends.
SeaBright Insurance Company’s ability to pay dividends is
subject to restrictions contained in the insurance laws and
related regulations of Illinois and California. The insurance
holding company laws in these states require that ordinary
dividends be reported to the Illinois Department of Financial
and Professional Regulation, Division of Insurance and the
California Department of Insurance prior to payment of the
dividend and that extraordinary dividends be submitted for prior
approval.
For information regarding restrictions on the payment of
dividends by us and SeaBright Insurance Company, see the
discussion under the heading “Liquidity and Capital
Resources” in Part II, Item 7 and the discussion
under the heading “Business” in Part I,
Item 1 of this annual report.
Unregistered Sales of Equity Securities
In June 2004, prior to our initial public offering, we issued
51,615.25 shares of our convertible preferred stock to our
preferred stockholders and certain members of our management for
an aggregate purchase price of $5,161,525. These issuances of
preferred stock were exempt from registration under
Regulation D and Rule 701 under the Securities Act. In
January 2005, each outstanding share of our preferred stock was
converted into 15.299664 shares of common stock in
connection with our initial public offering.
In addition, during 2004, we granted options to
purchase 107,102 shares of our common stock at an
exercise price of $6.54 per share (as adjusted for a
7.649832-for-one stock split declared by our board of directors
in December 2004), to employees and directors pursuant to our
Amended and Restated 2003 Stock Option Plan. Of these options,
options to purchase 3,825 shares have been canceled
without being exercised and options to
purchase 103,277 shares remain outstanding. The sale
and issuance of these securities were exempt from registration
under the Securities Act pursuant to Rule 701 promulgated
thereunder on the basis that these options were offered and sold
pursuant to a written compensatory benefit plan.
49
Use of Proceeds
We consummated our initial public offering on January 26,
2005 with the sale of 8,625,000 of common stock, including
shares issued pursuant to the underwriters’ over-allotment
option. The shares were registered under the Securities Act of
1933, as amended, under a Registration Statement on
Form S-1 (Registration No. 333-119111) which was
declared effective by the SEC on January 19, 2005. The
public offering price for the common stock was $10.50 per
share. The managing underwriters in the offering were Friedman,
Billings, Ramsey & Co., Inc., Piper Jaffray &
Co. and Cochran, Caronia & Co.
Our net proceeds, after accounting for $6.3 million in
underwriting discounts and commissions and approximately
$3.4 million in other expenses relating to the offering,
were approximately $80.8 million. On the closing date of
our initial public offering, we contributed approximately
$74.8 million of the net proceeds to SeaBright Insurance
Company, our insurance company subsidiary. We intend to use the
remaining net proceeds for general corporate purposes, including
supporting the growth of PointSure Insurance Services, Inc., our
non-insurance subsidiary and in-house underwriting agency. Our
use of proceeds from the offering does not represent a material
change from the use of proceeds described in the prospectus
which was included in our Registration Statement on
Form S-1. These amounts described in this paragraph
represent reasonable estimates instead of the actual amounts.
Except for the contribution of proceeds to SeaBright Insurance
Company, no proceeds or expenses were paid to our directors,
officers, ten percent shareholders or affiliates.
Securities Authorized for Issuance Under Equity Compensation
Plans
A discussion of our securities authorized for issuance under
equity compensation plan is set forth under the heading
“Equity Compensation Plan Information” in
Part III, Item 12 of this annual report.
Purchases of Equity Securities
We did not purchase any of our equity securities during 2004.
50
|
|
| Item 6. |
Selected Financial Data. |
The following table sets forth selected historical financial
information for the Company and its predecessor for the periods
ended and as of the dates indicated. The selected income
statement data for the year ended December 31, 2004 and the
three months ended December 31, 2003 and the balance sheet
data as of December 31, 2004 and 2003 are derived from our
audited consolidated financial statements included elsewhere in
this annual report. The selected income statement data for the
nine months ended December 31, 2003 and the years ended
December 31, 2002 and 2001 and the balance sheet data as of
December 31, 2002 are derived from our predecessor’s
audited combined financial statements. We derived the selected
income statement data for the year ended December 31, 2000
and the balance sheet data as of December 31, 2001 and 2000
from our predecessor’s unaudited financial statements which
are not included in this annual report. These historical results
are not necessarily indicative of future results. You should
read the following selected financial information along with
other information contained in this report, including
Part II, Item 7 of this annual report entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the combined and
consolidated financial statements and related notes and the
reports of the independent registered public accounting firm
included elsewhere in this report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Predecessor | |
| |
|
| |
|
| |
| |
|
|
|
Three Months | |
|
Nine Months | |
|
|
| |
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended December 31, | |
| |
|
December 31, | |
|
December 31, | |
|
September 30, | |
|
| |
| |
|
2004 | |
|
2003(1) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
| |
|
($ in thousands, except per share data) | |
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
|
$ |
135,682 |
|
|
$ |
22,154 |
|
|
$ |
70,717 |
|
|
$ |
106,051 |
|
|
$ |
73,194 |
|
|
$ |
62,878 |
|
|
Ceded premiums written
|
|
|
16,067 |
|
|
|
2,759 |
|
|
|
4,079 |
|
|
|
86,983 |
|
|
|
59,509 |
|
|
|
47,472 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$ |
119,615 |
|
|
$ |
19,395 |
|
|
$ |
66,638 |
|
|
$ |
19,068 |
|
|
$ |
13,685 |
|
|
$ |
15,406 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned
|
|
$ |
77,960 |
|
|
$ |
3,134 |
|
|
$ |
36,916 |
|
|
$ |
17,058 |
|
|
$ |
12,638 |
|
|
$ |
8,264 |
|
|
Net investment income
|
|
|
2,468 |
|
|
|
313 |
|
|
|
1,735 |
|
|
|
3,438 |
|
|
|
3,388 |
|
|
|
2,512 |
|
|
Net realized gain (loss)
|
|
|
38 |
|
|
|
(4 |
) |
|
|
14 |
|
|
|
(4,497 |
) |
|
|
(484 |
) |
|
|
7 |
|
|
Claim service income
|
|
|
2,916 |
|
|
|
663 |
|
|
|
698 |
|
|
|
1,169 |
|
|
|
954 |
|
|
|
— |
|
|
Other service income
|
|
|
794 |
|
|
|
561 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other revenue
|
|
|
2,493 |
|
|
|
655 |
|
|
|
1,514 |
|
|
|
1,152 |
|
|
|
3,773 |
|
|
|
6,035 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total revenues
|
|
|
86,669 |
|
|
|
5,322 |
|
|
|
40,877 |
|
|
|
18,320 |
|
|
|
20,269 |
|
|
|
16,818 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expenses
|
|
|
53,660 |
|
|
|
3,024 |
|
|
|
25,395 |
|
|
|
4,992 |
|
|
|
8,464 |
|
|
|
4,496 |
|
|
Underwriting, acquisition, and insurance expenses(2)
|
|
|
17,854 |
|
|
|
1,789 |
|
|
|
6,979 |
|
|
|
3,681 |
|
|
|
3,409 |
|
|
|
2,975 |
|
|
Other expenses
|
|
|
4,929 |
|
|
|
812 |
|
|
|
1,791 |
|
|
|
3,339 |
|
|
|
2,123 |
|
|
|
5,522 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total expenses
|
|
|
76,443 |
|
|
|
5,625 |
|
|
|
34,165 |
|
|
|
12,012 |
|
|
|
13,996 |
|
|
|
12,993 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before federal income taxes
|
|
|
10,226 |
|
|
|
(303 |
) |
|
|
6,712 |
|
|
|
6,308 |
|
|
|
6,273 |
|
|
|
3,825 |
|
|
Federal income tax expense (benefit)
|
|
|
3,020 |
|
|
|
(101 |
) |
|
|
1,996 |
|
|
|
3,018 |
|
|
|
2,676 |
|
|
|
1,384 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
7,206 |
|
|
$ |
(202 |
) |
|
$ |
4,716 |
|
|
$ |
3,290 |
(7) |
|
$ |
3,597 |
|
|
$ |
2,441 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filly diluted earnings per common share equivalents
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average of common share equivalents outstanding
|
|
|
7,387,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Predecessor | |
| |
|
| |
|
| |
| |
|
|
|
Three Months | |
|
Nine Months | |
|
|
| |
|
Year Ended | |
|
Ended | |
|
Ended | |
|
Year Ended December 31, | |
| |
|
December 31, | |
|
December 31, | |
|
September 30, | |
|
| |
| |
|
2004 | |
|
2003(1) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
Selected Insurance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accident year loss ratio(3)
|
|
|
65.0 |
% |
|
|
75.3 |
% |
|
|
71.0 |
% |
|
|
71.3 |
% |
|
|
68.9 |
% |
|
|
103.9 |
% |
|
Prior accident year loss ratio(4)
|
|
|
0.1 |
% |
|
|
— |
|
|
|
(4.1 |
)% |
|
|
(48.8 |
)% |
|
|
(9.4 |
)% |
|
|
(49.5 |
)% |
|
Net loss ratio
|
|
|
65.1 |
% |
|
|
75.3 |
% |
|
|
66.9 |
% |
|
|
22.5 |
% |
|
|
59.5 |
% |
|
|
54.4 |
% |
|
Net underwriting expense ratio(5)
|
|
|
21.9 |
% |
|
|
39.2 |
% |
|
|
18.9 |
% |
|
|
21.6 |
% |
|
|
27.0 |
% |
|
|
36.0 |
% |
|
Net combined ratio(6)
|
|
|
87.0 |
% |
|
|
114.5 |
% |
|
|
85.8 |
% |
|
|
44.1 |
% |
|
|
86.5 |
% |
|
|
90.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Company | |
|
Predecessor | |
| |
|
| |
|
| |
| |
|
December 31, | |
|
|
|
December 31, | |
| |
|
| |
|
September 30, | |
|
| |
| |
|
2004 | |
|
2003(1) | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
| |
|
(In thousands) | |
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for sale, at fair market value
|
|
$ |
105,661 |
|
|
$ |
51,881 |
|
|
$ |
46,338 |
|
|
$ |
55,891 |
|
|
$ |
65,730 |
|
|
$ |
31,079 |
|
|
Cash and cash equivalents
|
|
|
8,279 |
|
|
|
5,008 |
|
|
|
52,271 |
|
|
|
30,015 |
|
|
|
10,367 |
|
|
|
36,221 |
|
|
Reinsurance recoverables
|
|
|
13,484 |
|
|
|
12,050 |
|
|
|
39,676 |
|
|
|
36,617 |
|
|
|
38,145 |
|
|
|
53,961 |
|
|
Reinsurance recoverables from parent
|
|
|
— |
|
|
|
— |
|
|
|
117,942 |
|
|
|
102,107 |
|
|
|
126,584 |
|
|
|
139,934 |
|
|
Prepaid reinsurance
|
|
|
5,254 |
|
|
|
2,340 |
|
|
|
5,037 |
|
|
|
34,672 |
|
|
|
26,680 |
|
|
|
21,438 |
|
|
Total assets
|
|
|
226,112 |
|
|
|
106,080 |
|
|
|
321,537 |
|
|
|
316,821 |
|
|
|
314,082 |
|
|
|
332,540 |
|
|
Unpaid loss and loss adjustment expense
|
|
|
68,228 |
|
|
|
29,733 |
|
|
|
161,538 |
|
|
|
153,469 |
|
|
|
166,342 |
|
|
|
186,343 |
|
|
Unearned premium
|
|
|
67,626 |
|
|
|
18,602 |
|
|
|
40,657 |
|
|
|
47,604 |
|
|
|
34,918 |
|
|
|
34,460 |
|
|
Total stockholders’ equity
|
|
|
58,370 |
|
|
|
45,605 |
|
|
|
92,856 |
|
|
|
87,772 |
|
|
|
86,825 |
|
|
|
84,271 |
|
|
|
| (1) |
There was no activity for SeaBright from June 19, 2003, its
date of inception, through September 30, 2003. |
| |
| (2) |
Includes acquisition expenses such as commissions, premium taxes
and other general administrative expenses related to
underwriting operations in our insurance subsidiary and are
included in the amortization of deferred policy acquisition
costs. |
| |
| (3) |
The current accident year loss ratio is calculated by dividing
loss and loss adjustment expenses for the current accident year
less claims service income by the current year’s net
premiums earned. |
| |
| (4) |
The prior accident year loss ratio is calculated by dividing the
change in the loss and loss adjustment expenses for the prior
accident years by the current year’s net premiums earned. |
| |
| (5) |
The underwriting expense ratio is calculated by dividing the net
underwriting expenses less other service income by the current
year’s net premiums earned. |
| |
| (6) |
The net combined ratio is the sum of the net loss ratio and the
net underwriting expense ratio. |
| |
| (7) |
Net income before change in accounting principle. Our
predecessor adopted Statement of Financial Accounting Standards
(“SFAS”) No. 142 on January 1, 2002. Upon
adoption of SFAS No. 142 our predecessor recognized an
impairment loss of $4,731,000 related to goodwill. |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operation. |
The following discussion of our financial condition and
results of operations should be read in conjunction with our
financial statements and the notes to those statements included
elsewhere in this annual report. The discussion and analysis
below includes forward-looking statements that are subject to
risks, uncertainties and other factors described in
“Factors That May Affect our Business, Future Operating
52
Results and Financial Condition” that could cause our
actual results of operations, performance and business prospects
and opportunities in 2004 and beyond to differ materially from
those expressed in, or implied by those forward-looking
statements. See “Note on Forward-Looking Statements”
in Part I, Item 1 of this annual report.
Overview
We provide workers’ compensation insurance coverage for
prescribed benefits that employers are required to provide to
their employees who may be injured in the course of their
employment. We currently provide workers’ compensation
insurance to customers in the maritime, alternative dispute
resolution and state act markets.
On September 30, 2003, SeaBright acquired PointSure and the
renewal rights and substantially all of the operating assets,
systems and employees of, the Eagle entities from LMC, their
ultimate parent. We refer to Eagle Pacific, Pacific Eagle and
PointSure collectively as our predecessor. In connection with
the Acquisition, SeaBright also purchased KEIC, a shell company
in run off that was acquired from LMC for its workers’
compensation licenses in 43 states and the District of
Columbia. The Acquisition was accounted for using the purchase
method of accounting. The Acquisition will prospectively affect
our results of operations in certain respects. The aggregate
acquisition costs, including the transaction costs, of
approximately $15.7 million have been allocated to the
tangible and intangible assets acquired based upon estimates of
their respective fair values as of the Acquisition date and will
result in increased depreciation and amortization expense.
In connection with the Acquisition, to minimize our exposure to
any past business underwritten by KEIC, we entered into the
adverse development cover. See the discussion under the heading
“Our History” in Part I, Item 1 of this
annual report. To support LMC’s obligations under the
adverse development cover, LMC funded a trust account at the
time of the Acquisition in the amount of $1.6 million as
collateral for LMC’s potential future obligations to us
under the adverse development cover. The amount on deposit in
the trust account was increased to $4.8 million on
December 23, 2004. If LMC is placed in receivership and the
amount held in the collateralized reinsurance trust is
inadequate to satisfy the obligations of LMC to us under the
adverse development cover, it is unlikely that we would recover
any future amounts owing by LMC to us.
For periods ended on or before September 30, 2003, the
financial information of our predecessor discussed below
represents the combined financial results of Eagle Pacific,
Pacific Eagle and PointSure. For periods ended after
September 30, 2003, the financial information presented
below represents the consolidated financial results of SeaBright
and its subsidiaries, SeaBright Insurance Company and PointSure.
Our premiums before the Acquisition are generally not comparable
to our premiums after the Acquisition because we acquired
renewal rights and not the underlying policies as of the date of
the Acquisition. Aspects of our business that are comparable
with the business of our predecessor include the loss ratio and
expense ratio. We believe that our loss ratio is comparable to
that of our predecessor because we are insuring accounts with
the same type of risk exposure in essentially the same
jurisdictions as our predecessor, and we are using the same risk
selection rules, underwriting guidelines and pricing models that
our predecessor used. We believe that our expense ratio is
comparable to that of our predecessor because we acquired the
work force and substantially all of the operating assets of our
predecessor, and we are following the same business model as our
predecessor, which was developed by our current management.
Aspects of our business that are not comparable with the
business of our predecessor include: premiums earned, investment
income and service income. For example, our net premiums earned
for the periods immediately following the Acquisition were lower
than the net premiums earned for the periods immediately prior
to the Acquisition because we did not earn any premium on any of
our predecessor’s policies that were in force at
September 30, 2003. Our investment income is not comparable
to the investment income of our predecessor because our
predecessor had a significant portion of investments in cash and
cash equivalents for the years presented in the selected
financial information
53
table. In contrast, our investment portfolio consists mostly of
investment grade fixed income securities, which have higher
yields than cash and cash equivalents. Our service income is not
comparable to the service income of our predecessor because our
predecessor provided only limited claims handling services for
certain affiliates of LMC. In contrast, we are providing claims
handling as well as policy administration and accounting
services for our predecessor.
Principal Revenue and Expense Items
We derive our revenue from premiums earned, service fee income,
net investment income and net realized gains (losses) from
investments.
Gross premiums written include all premiums billed and unbilled
by an insurance company during a specified policy period.
Premiums are earned over the term of the related policies. At
the end of each accounting period, the portion of the premiums
that are not yet earned are included in unearned premiums and
are realized as revenue in subsequent periods over the remaining
term of the policy. Our policies typically have a term of
12 months. Thus, for example, for a policy that is written
on July 1, 2004, one-half of the premiums would be earned
in 2004 and the other half would be earned in 2005.
Premiums earned are the earned portion of our net premiums
written. Net premiums written is the difference between gross
premiums written and premiums ceded or paid to reinsurers (ceded
premiums written). Our gross premiums written is the sum of both
direct premiums and assumed premiums before the effect of ceded
reinsurance. Assumed premiums are premiums that we have received
from another company under a reinsurance agreement or from an
authorized state mandated pool.
We earn our direct premiums written from our maritime, ADR and
state act customers. We also earn a small portion of our direct
premiums written from employers who participate in the
Washington Maritime Assigned Risk Plan. We immediately cede 100%
of those premiums, net of our expenses, and 100% of the losses
in connection with that business to the plan. We do not include
premiums from the Washington Maritime Assigned Risk Plan in our
direct premiums written because it is not indicative of our core
business or material to our results of operation.
|
|
|
Net Investment Income and Realized Gains and Losses on
Investments |
We invest our statutory surplus and the funds supporting our
insurance liabilities (including unearned premiums and unpaid
loss and loss adjustment expenses) in cash, cash equivalents and
fixed income securities. Our investment income includes interest
earned on our invested assets. Realized gains and losses on
invested assets are reported separately from net investment
income. We earn realized gains when invested assets are sold for
an amount greater than their amortized cost in the case of fixed
maturity securities and recognize realized losses when
investment securities are written down as a result of an
other-than-temporary impairment or sold for an amount less than
their carrying cost.
Substantially all of our claims service income is from contracts
we have with LMC to provide claims handling services for the
policies written by the Eagle entities prior to the Acquisition.
The claims service income we receive for providing these
services approximates our costs and will substantially decrease
over the next several years as transactions related to the Eagle
entities diminish.
Following the Acquisition, we entered into servicing
arrangements with LMC to provide policy administration and
accounting services for the policies written by the Eagle
entities prior to the Acquisition. The fee income we receive for
providing these services approximates our costs and will
substantially decrease over the next several years as
transactions related to the Eagle entities diminish.
54
Our expenses consist primarily of:
|
|
|
Loss and Loss Adjustment Expenses |
Loss and loss adjustment expenses represent our largest expense
item and include (1) claim payments made,
(2) estimates for future claim payments and changes in
those estimates for current and prior periods and (3) costs
associated with investigating, defending and adjusting claims.
|
|
|
Underwriting, Acquisition and Insurance Expenses |
In our insurance subsidiary, we refer to the expenses that we
incur to underwrite risks as underwriting, acquisition and
insurance expenses. Underwriting expenses consist of commission
expenses, premium taxes and fees and other underwriting expenses
incurred in writing and maintaining our business.
We pay commission expense in our insurance subsidiary to our
brokers for the premiums that they produce for us.
We pay state and local taxes based on premiums, licenses and
fees, assessments and contributions to workers’
compensation security funds.
|
|
|
Other Underwriting Expenses |
Other underwriting expenses consist of general administrative
expenses such as salaries, rent, office supplies, depreciation
and all other operating expenses not otherwise classified
separately, and boards, bureaus and assessments of statistical
agencies for policy service and administration items such as
rating manuals, rating plans and experience data.
Included in other expense is interest expense we incur on
$12.0 million in surplus notes that our insurance
subsidiary issued in May 2004. The interest expense is paid
quarterly in arrears. The interest expense for each interest
payment period is based on the three-month LIBOR rate two London
banking days prior to the interest payment period plus
400 basis points.
Results of Operations
|
|
|
Year Ended December 31, 2004 Compared to Three Months
Ended December 31, 2003 and Predecessor Nine Months Ended
September 30, 2003 |
The results for the year ended December 31, 2004 and the
three month period ended December 31, 2003 are the results
of operations of the Company, while the results for the nine
months ended September 30, 2003 are the results of
operations of our predecessor. In certain respects, our
predecessor’s results of operations before the Acquisition
are not comparable to our results after the Acquisition, because
we acquired renewal rights and not the underlying policies as of
the date of the Acquisition. See
“— Overview.” From January 1, 2004
through December 31, 2004, we had 90 customers renew under
the renewal rights that we acquired in the Acquisition. The
customers who exercised their renewal rights represent
approximately 83.3% of those that were offered renewal terms,
and accounted for approximately $49.7 million in direct
written premium for the year ended December 31, 2004.
Policies are generally written for a twelve-month period with
policy premium included in revenue in proportion to the amount
of insurance protection provided. Our predecessor’s 2003
results include premiums earned in 2003 on policies written in
2003 and prior.
55
Gross Premiums Written. Gross premiums written were
$135.7 million for the year ended December 31, 2004
compared to our predecessor’s $70.7 million for the
nine months ended September 30, 2003 and our
$22.2 million for the three months ended December 31,
2003, representing a period-over-period increase of
$42.8 million, or 46.1%. We began writing new insurance
contracts on October 1, 2003 and began renewing some of the
existing contracts of our predecessor expiring after that date.
The increase in gross premiums written was due primarily to our
“A-” (Excellent) rating from A.M. Best in 2004, in
comparison to our predecessor’s rating of “B++”
(Very Good) in the prior period and our expansion in California
state act contractor business.
Net Premiums Written. Net premiums written totaled
$119.6 million for the year ended December 31, 2004
compared to our predecessor’s $66.6 million for the
nine months ended September 30, 2003 and our
$19.4 million for the three months ended December 31,
2003, representing a period-over-period increase of
$33.6 million, or 39.1%. Net premiums written are affected
by premiums ceded under reinsurance agreements. Ceded written
premiums for the year ended December 31, 2004 totaled
$16.1 million, or 11.9% of gross premiums written. Our
predecessors ceded written premiums for the nine months ended
September 30, 2003 totaled $4.1 million, or 5.8% of
gross premiums written. Our predecessor’s premiums ceded
were impacted by the quota share reinsurance agreement with LMC.
Our reinsurance contracts provide for the ceding of premiums on
both a gross premiums written and gross premiums earned basis.
Net Premiums Earned. Net premiums earned were
$78.0 million for the year ended December 31, 2004
compared to our predecessor’s $36.9 million for the
nine months ended September 30, 2003 and our
$3.1 million for the three months ended December 31,
2003, representing a period-over-period increase of
$38.0 million, or 95.0%. As previously discussed, we
believe this increase is due primarily to the additional
business we were able to write as a result of our improved A.M.
Best rating over that held by our predecessor and our expansion
in California state act contractor business.
We record the entire annual policy premium as unearned premium
when written and earn the premium over the life of the policy,
which is generally twelve months. Because we acquired renewal
rights and not policies in the Acquisition, our actual results
for the year ended December 31, 2004 and the three months
ended December 31, 2003 do not reflect premiums earned on
any policies written prior to September 30, 2003, the date
of the Acquisition.
Net Investment Income. Net investment income was
$2.5 million for the year ended December 31, 2004
compared to our predecessor’s $1.7 million for the
nine months ended September 30, 2003 and our
$0.3 million for the three months ended December 31,
2003, resulting in a period-over-period increase of
$0.5 million, or 25.0%. Our predecessor had
$6.8 million more in average invested assets for the nine
months ended September 30, 2003 than we had for the year
ended December 31, 2004. However, as a result of our
predecessor’s realignment of its portfolio in 2003 from
fixed income securities to more short term investments, our
predecessor’s yield on average invested assets for the nine
months ended September 30, 2003 was approximately 1.9%
compared to our yield on average invested assets for the year
ended December 31, 2004 of approximately 2.9%.
Service Income. Service income was $3.7 million for
the year ended December 31, 2004 compared to our
predecessor’s $0.7 million for the nine months ended
September 30, 2003 and our $1.2 million for the three
months ended December 31, 2003, representing a
period-over-period increase of $1.8 million, or 94.7%. Our
service income results from service arrangements we have with
LMC for claims processing services, policy administration and
administrative services we perform for the Eagle entities’
insurance policies. Average monthly fees are declining as the
volume of work required for policy administration decreases as a
result of the run off of our predecessor’s business. Our
predecessor’s service income resulted from claim service
fees for handling policyholder claims for certain LMC
subsidiaries in Alaska and Hawaii where those subsidiaries did
not have claims offices.
Other Revenue. Other revenue was $2.5 million for
the year ended December 31, 2004 compared to our
predecessor’s $1.5 million for the nine months ended
September 30, 2003 and our $0.7 million for the three
months ended December 31, 2003, representing a
period-over-period increase of $0.3 million, or
56
13.6%. Our other revenue as well as our predecessor’s other
revenue results primarily from the operations of our
non-insurance subsidiary.
Loss and Loss Adjustment Expenses. Loss and loss
adjustment expenses totaled $53.7 million for the year
ended December 31, 2004 compared to our predecessor’s
$25.4 million for the nine months ended September 30,
2003 and our $3.0 million for the three months ended
December 31, 2003, representing a period-over-period
increase of $25.3 million, or 89.1%. The higher loss and
loss adjustment expenses for the year ended December 31,
2004 are attributable to the increase in premiums earned for the
period. Our loss ratio for the year ended December 31, 2004
was 65.1%, compared to our predecessor’s loss ratio of
66.9% for the nine months ended September 30, 2003 and our
loss ratio of 75.3% for the three months ended December 31,
2003. Our loss ratio decreased from 75.3% in the three months
ended December 31, 2003 to 65.1% in the year ended
December 31, 2004. Because we acquired substantially all of
the workforce of our predecessor in connection with the
Acquisition but none of our predecessor’s existing
premiums, the costs to operate our claims department as a
percentage of net premiums earned, in our initial stages of
growth, are greater than they would have been had we been in
existence for a full 12 months. As of December 31,
2004, we had recorded a receivable of approximately
$2.9 million for adverse loss development under the adverse
development cover since the date of the Acquisition. We do not
expect this receivable to have any material effect on our future
cash flows if LMC fails to perform its obligations under the
adverse development cover. At December 31, 2004, we have
access to approximately $4.8 million under the
collateralized reinsurance trust in the event that LMC fails to
satisfy its obligations under the adverse development cover. See
the discussion under the heading “Our History” in
Part I, Item 1 of this annual report.
Underwriting Expenses. Underwriting expenses totaled
$17.9 million for the year ended December 31, 2004,
compared to our predecessor’s $7.0 million for the
nine months ended September 30, 2003 and our
$1.8 million for the three months ended December 31,
2003, representing an increase of $9.1 million, or 103.4%.
Our underwriting expense ratio for the year ended
December 31, 2004 was 21.9%, compared to our
predecessor’s underwriting expense ratio of 18.9% for the
nine months ended September 30, 2003. The increase in the
underwriting expense ratio resulted primarily from the fact that
we have increased our staffing levels and related expenses in
preparation for anticipated growth of our business. Our
predecessor’s operations during the nine months ended
September 30, 2003 were not expanding, as the future of the
company at that time was uncertain.
Other Expenses. Other expenses totaled $4.9 million
for the year ended December 31, 2004, compared to our
predecessor’s other expenses of $1.8 million for the
nine months ended September 30, 2003 and our
$0.8 million for the three months ended December 30,
2003, representing a period-over-period increase of
$2.3 million, or 88.5%. The increase resulted primarily
from the amortization of intangible assets acquired in
connection with the Acquisition, higher expenses associated with
the operations of PointSure, our non-insurance company
subsidiary, and interest expense on $12.0 million of
surplus notes issued by our insurance subsidiary in May 2004.
Our predecessor’s other expenses consist primarily of
operating expenses for PointSure.
Federal Income Tax Expense. The effective tax rate for
the year ended December 31, 2004 was 29.5%, compared to our
predecessor’s effective tax rate of 29.4% for the nine
months ended September 30, 2003. Our effective tax rate for
the year ended December 31, 2004 was lower than the
statutory tax rate of 34.0% primarily as a result of tax exempt
interest income. Our predecessor’s effective tax rate was
lower than the statutory tax rate of 34.0% primarily as a result
of a decrease in the deferred tax valuation allowance.
Net Income. Net income was $7.2 million for the year
ended December 31, 2004, compared to our predecessor’s
$4.7 million for the nine months ended September 30,
2003 and our net loss of $0.2 million for the three months
ended December 31, 2003. The 2004 increase in net income
resulted primarily from the increase in premiums earned and
investment income for the period, offset by related increases in
loss and loss adjustment expenses; underwriting acquisition and
insurance expenses; and other expenses, including interest
expense related to the surplus notes and amortization expense
related to intangible assets acquired in the Acquisition.
57
|
|
|
Predecessor Nine Months Ended September 30, 2003
Compared to Predecessor Year Ended December 31, 2002 |
Gross Premiums Written. Our predecessor’s gross
premiums written was $70.7 million for the nine months
ended September 30, 2003, compared to $106.1 million
in gross premiums written for the year ended December 31,
2002. Our predecessor’s average monthly gross premiums
decreased 11.1% in the nine months ended September 30, 2003
compared to 2002. The decrease represents the net of the
positive impact of our predecessor’s price increases
averaging 16.5% for the nine months ended September 30,
2003, offset by the negative impact of our predecessor’s
A.M. Best financial strength rating downgrade to “B++”
in December 2002.
Net Premiums Written. Our predecessor had
$66.6 million in net premiums written for the nine months
ended September 30, 2003, compared to $19.1 million
for the year ended December 31, 2002. Our
predecessor’s average monthly net premiums written of
$7.4 million for the nine months ended September 30,
2003 compared to $1.6 million in average monthly net
premiums written for the year ended December 31, 2002. This
increase was attributable to the termination on January 1,
2003 of our predecessor’s inter-company quota share
reinsurance agreements with LMC, which required our predecessor
to cede to LMC 80.0% of the premiums written after external
reinsurance, 80.0% of the net retained liabilities, after
application of all external reinsurance, and 80.0% of
underwriting expenses for all policies written by our
predecessor from January 1, 1999 through December 31,
2002.
Net Premiums Earned. Our predecessor had net premiums
earned of $36.9 million for the nine months ended
September 30, 2003 compared to $17.1 million for the
year ended December 31, 2002. Our predecessor’s
average monthly net premiums earned of $4.1 million for the
nine months ended September 30, 2003 compared to
$1.4 million in average monthly net premiums earned for the
year ended December 31, 2002. The increase was attributable
to the termination on January 1, 2003 of our
predecessor’s inter-company quota share reinsurance
agreements with LMC. For policies incepting January 1, 2003
and thereafter, since our predecessor was no longer ceding 80%
of premium to LMC, our predecessor recorded the entire annual
policy premium when the premium was written, but earned the
premium over the life of the policy, generally twelve months.
Since net premiums earned are relatively low until a company has
been writing policies for a full policy cycle, the difference
between written and earned is significant in the early stages.
Net Investment Income. Our predecessor’s net
investment income was $1.7 million for the nine months
ended September 30, 2003 compared to $3.4 million for
the year ended December 31, 2002. The average net yield
declined from 4.2% in 2002 to 1.9% for the nine months ended
September 30, 2003. This decline in yield was due primarily
to the realignment of our predecessor’s portfolio in 2003
from fixed income securities to more short term investments,
which carry lower interest rates than fixed income securities.
Cash and short-term investments made up approximately 53.0% of
our predecessor’s portfolio at September 30, 2003,
compared to 34.9% at December 31, 2002.
Net Realized Gains (Losses) on Investments. Our
predecessor’s realized gain on investments was $14,000 for
the nine months ended September 30, 2003, compared to
$4.5 million in realized losses for the year ended
December 31, 2002. In 2002 our predecessor realigned its
portfolio with a greater emphasis on cash and short-term
investments, which resulted in approximately $0.8 million
in realized losses from the sale of securities with values that
had declined substantially below their cost. In addition, our
predecessor adjusted the carrying value of investments in equity
securities by $3.6 million for other-than-temporary
impairments.
Claims Service Income. Our predecessor’s claims
service income was $698,000 for the nine months ended
September 30, 2003, compared to approximately
$1.2 million for the year ended December 31, 2002. The
approximate 20% decline in average monthly service fee income
resulted from a decline in claims serviced for LMC, as LMC
stopped writing new business in 2003 and the existing claims
inventory declined as claims were settled and closed.
58
Other Revenue. For the nine months ended
September 30, 2003, our predecessor’s other revenue
was $1.5 million compared to $1.2 million for the year
ended December 31, 2002. The $1.5 and $1.2 million
result primarily from the operations of our predecessor’s
non-insurance subsidiary, which acted as a managing general
underwriter for our predecessor. In 2003 our predecessor’s
gross premiums were affected by the A.M. Best financial strength
rating downgrade to B++ and as a result fees to its
non-insurance subsidiary declined.
Loss and Loss Adjustment Expenses. For the nine months
ended September 30, 2003, the loss and loss adjustment
expenses of our predecessor were $25.4 million, compared to
$5.0 million for the twelve months ended December 31,
2002. The loss ratio increased from 22.5% in 2002 to 66.9% for
the nine months ended September 30, 2003. During 2003, our
predecessor reported favorable development of $1.5 million
on prior years’ incurred losses, which was substantially
below the favorable development of $8.3 million recorded in
2002.
Underwriting, Acquisition and Insurance Expenses. For the
nine months ended September 30, 2003, our
predecessor’s underwriting, acquisition and insurance
expenses were $7.0 million, compared to $3.7 million
for the year ended December 31, 2002. The underwriting
expense ratio decreased from 21.6% in 2002 to 18.9% in the 2003
period. The expenses and ratios are not comparable because of
the 80% quota share reinsurance treaties with LMC, which were
cancelled effective January 1, 2003 for all policies
incepting after December 31, 2002. On a direct basis the
expenses were $10.5 million for the nine months ended
September 30, 2003 or, $1.1 million per month,
compared to $17.1 million for the year ended
December 31, 2002, or $1.4 million per month. The
decline in average monthly expenses is due to expense control
initiatives instituted in 2002 plus reduced acquisition expenses
in 2003 associated with declining monthly premium volume in 2003
compared to 2002.
Other Expenses. For the nine months ended
September 30, 2003, our predecessor’s other expenses
were $1.8 million compared to $3.3 million for the
year ended December 31, 2002. In 2003 our
predecessor’s other expenses consisted primarily of
operating expenses for its non-insurance company subsidiary. For
the twelve months ended December 31, 2002, our
predecessor’s other expenses were primarily attributable to
the operating expenses of its non-insurance subsidiary and to
the method of recording the amortization of the deferred gain
under our predecessor’s loss portfolio transfer agreements
with LMC.
Federal Income Tax Expense. Our predecessor’s
effective tax rate was 29.4% for the nine months ended
September 30, 2003, compared to 47.9% for the year ended
December 31, 2002. Our predecessor’s 2003 tax rate was
affected by the dividends received deduction and a decrease in
the valuation allowance established for deferred tax assets. The
2002 tax rate was affected by the dividends received deduction
and an increase in the valuation allowance established for
deferred tax assets.
Net Income Before Cumulative Effect of Change in Accounting
Principle. Our predecessor’s net income before
cumulative effect of change in accounting principle for the nine
months ended September 30, 2003 was $4.7 million,
compared to $3.3 million for the year ended
December 31, 2002.
Net Income (Loss). Our predecessor’s net income for
the nine months ended September 30, 2003 was
$4.7 million, compared to a loss of $1.4 million for
the year ended December 31, 2002, due primarily to the
impact of the impairment charge of $4.7 million recorded in
conjunction with the adoption of SFAS No. 142,
“Goodwill and Other Intangibles.”
|
|
|
Predecessor Year Ended December 31, 2002 Compared to
Predecessor Year Ended December 31, 2001 |
Gross Premiums Written. Gross premiums written increased
$32.9 million, or 44.9%, to $106.1 million for the
year ended December 31, 2002, compared to
$73.2 million for the year ended December 31, 2001.
This increase was due primarily to increased market penetration
and price increases of 13.8%. Favorable market conditions
beginning in 2001 and continuing throughout 2002 resulted in an
influx of new business and enabled our predecessor to increase
prices.
59
Net Premiums Written. Net premiums written for the twelve
months ended December 31, 2002 were $19.1 million,
representing an increase of $5.4 million, or 39.3%, from
the $13.7 million in net premiums written for the same
period in 2001. The increase resulted from price increases and
market penetration, which generated greater gross premiums
written.
Premiums Earned. Premiums earned were $17.1 million
for the twelve months ended December 31, 2002, compared to
$12.6 million for the same period in 2001. The increase in
net premiums earned in 2002 was attributable to market
penetration and price increases in 2002, which generated greater
gross premiums written.
Net Investment Income. Our predecessor’s net
investment income was $3.4 million for the years ended
December 31, 2002 and 2001. The yield was 4.2% in 2002
compared to 4.7% in 2001. This decline was due primarily to the
realignment of our predecessor’s portfolio in 2002 from
fixed income securities to cash and short-term investments,
which made up 34.9% of the portfolio in 2002 compared to 13.6%
in 2001.
Net Realized Gains (Losses) on Investments. Our
predecessor realized net losses of $4.5 million for the
year ended December 31, 2002, compared to net losses of
$484,000 for the comparable period in 2001. In 2002, our
predecessor realigned its portfolio with a greater emphasis on
cash and short-term investments, which resulted in approximately
$0.8 million in realized losses from the sale of securities
with values that had declined substantially below their cost. In
addition, our predecessor adjusted the carrying value of
investments in equity securities by $3.6 million for
other-than-temporary impairments.
Claims Service Income. Our predecessor’s claims
service income was $1.2 million for the year ended
December 31, 2002, compared to $1.0 million for the
year ended December 31, 2001 as the volume of claims
serviced by our predecessor for LMC increased.
Other Revenue. For the year ended December 31, 2002,
other revenue was $1.2 million compared to
$3.8 million for the year ended December 31, 2001. In
2002, the $1.2 million is primarily from the operations of
our predecessor’s non-insurance subsidiary, which acted as
a managing general underwriter for our predecessor. Our
predecessor’s other revenue for the year ended
December 31, 2001 consisted primarily from the operations
of our predecessor’s non-insurance subsidiary and from the
amortization of the deferred gain under the loss portfolio
transfer agreements. Under the loss portfolio transfer
agreements, our predecessor utilized the recovery method for
recording the deferred gain, which considers the amounts
received in relation to the ultimate incurred loss and loss
adjustment expenses under the agreements and applies that ratio
to the total deferred gain. The amortized portion of the
deferred gain is adjusted accordingly in the current period. In
2002, there was an accretion to the deferred gain, which was
recorded in other expense. Our predecessor’s other revenue
for the year ended December 31, 2001 was $3.8 million
as a result of the amortization of the deferred gain under the
loss portfolio transfer agreements.
Loss and Loss Adjustment Expenses. Loss and loss
adjustment expenses were $5.0 million for the year ended
December 31, 2002, compared to $8.5 million for the
year ended December 31, 2001. Net loss and loss adjustment
expense ratios for 2002 and 2001 were 22.5% and 59.5%,
respectively. In 2002, our predecessor reduced 2001 and prior
accident year unpaid loss and loss adjustment expense levels by
$8.3 million. In prior policy periods, Eagle Pacific
Insurance Company wrote a large number of accounts with smaller
average premiums than our core book of business. Due to the
nature of these accounts there was an expectation that they were
subject to a greater volatility of risk than our core book of
business and initial unpaid loss and loss adjustment amounts
were established reflecting this higher level of risk. An
actuarial evaluation was performed for the 2002 and prior
accident years, which concluded that the actual loss development
on this business was not as great as expected. This, coupled
with the more recent emphasis of writing larger, less volatile
accounts using stricter underwriting standards, led management
to decrease the unpaid loss and loss adjustment expenses for the
prior accident years. Included in the $8.3 million
reduction was $7.0 million relating to the loss portfolio
transfer, which reduced our predecessor’s unpaid loss and
loss adjustment expenses dollar for dollar because it was not
part of the quota share reinsurance treaties. As a result of the
$7.0 million reduction to the unpaid loss and loss
adjustment expenses under the loss portfolio treaties, our
predecessor recorded an accretion to the deferred
60
gain under the recovery method for recording the deferred gain,
which considers the amounts received in relation to the ultimate
incurred loss and loss adjustment expenses under the agreement
and applies that ratio to the total deferred gain.
Underwriting, Acquisition and Insurance Expenses. Our
predecessor’s underwriting, acquisition and insurance
expenses were $3.7 million for the year ended
December 31, 2002, compared to $3.4 million for the
year ended December 31, 2001. The increase in underwriting
expenses in 2002 was primarily attributable to increased
expenses, as our predecessor’s gross premiums written grew
from $73.2 million in 2001 to $106.1 million in 2002.
However, the underwriting expense ratio dropped to 21.6% in 2002
compared to 27% in 2001, as our predecessor reduced staffing and
contained expense spending levels.
Other Expenses. For the year ended December 31,
2002, our predecessor’s other expenses were
$3.3 million, compared to $2.1 million in other
expenses for the year ended December 31, 2001. The increase
was primarily attributable to the operating expenses of our
predecessor’s non-insurance company subsidiary and to the
amortization of the deferred gain under our predecessor’s
loss portfolio transfer agreements with LMC. The amortized
portion of the deferred gain is adjusted accordingly in the
current period. In 2002 there was an accretion to the deferred
gain, which was recorded as other expenses.
Federal Income Tax Expense. Our predecessor’s
effective tax rate was 47.9% for the year ended
December 31, 2002, compared to 42.7% for the year ended
December 31, 2001. The 2002 tax rate was affected by the
dividends received deduction and an increase in the valuation
allowance established for deferred tax assets. The 2001 tax rate
was affected by the dividends received deduction and the
amortization of goodwill, which was not tax deductible.
Change in Accounting Principle. Our predecessor adopted
the provisions of SFAS No. 142, “Goodwill and
Other Intangible Assets,” as of January 1, 2002. Under
SFAS No. 142, goodwill and other intangible assets
acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but are
instead tested for impairment at least annually in accordance
with the provisions for SFAS No. 142. An impairment
loss of $4,731,000 related to goodwill was recognized upon
adoption of SFAS No. 142. Prior to the adoption of
SFAS No. 142, goodwill was amortized on a
straight-line basis over 10 years. The recorded goodwill
was periodically assessed for recoverability by determining
whether the amortization of the goodwill balance over its
remaining life could be recovered through undiscounted future
operating cash flows of the acquired operation as compared to
the fair valve method required under SFAS No. 142.
Net Income Before Cumulative Effect of Change in Accounting
Principle. Net income before the cumulative effect of a
change in accounting principle was $3.3 million for the
year ended December 31, 2002, compared to $3.6 million
for the same period in 2001.
Liquidity and Capital Resources
Our principal sources of funds are underwriting operations,
investment income and proceeds from sales and maturities of
investments. Our primary use of funds is to pay claims and
operating expenses and to purchase investments.
Our investment portfolio is structured so that investments
mature periodically over time in reasonable relation to current
expectations of future claim payments. Since we have a limited
claims history, we have derived our expected future claim
payments from industry and predecessor trends and included a
provision for uncertainties. Our investment portfolio as of
December 31, 2004 has an effective duration of
5.89 years with individual maturities extending out to
29 years. Currently, we make claim payments from positive
cash flow from operations and invest excess cash in securities
with appropriate maturity dates to balance against anticipated
future claim payments. As these securities mature, we intend to
invest any excess funds with appropriate durations to match
against expected future claim payments.
Our ability to adequately provide funds to pay claims comes from
our disciplined underwriting and pricing standards and the
purchase of reinsurance to protect us against severe claims and
catastrophic events. Effective October 1, 2004, our
reinsurance program provides us with 100% reinsurance protection
61
for each loss occurrence in excess $500,000, up to
$100.0 million. See the discussion under the heading
“Reinsurance” in Part I, Item 1 of this
annual report. Given industry and predecessor trends, we believe
we are sufficiently capitalized to retain the first $500,000 of
each loss occurrence.
At December 31, 2004, our portfolio is made up almost
entirely of investment grade fixed income securities with market
values subject to fluctuations in interest rates. Prior to 2005,
we did not invest in common equity securities and we had no
exposure to foreign currency risk. In February 2005, our
investment policy was revised to allow for the investment of up
to 2% of our investment portfolio in foreign fixed income
securities. While we have structured our investment portfolio to
provide an appropriate matching of maturities with anticipated
claim payments, if we decide or are required in the future to
sell securities in a rising interest rate environment, we would
expect to incur losses from such sales.
Our insurance subsidiary is required by law to maintain a
certain minimum level of surplus on a statutory basis. Surplus
is calculated by subtracting total liabilities from total
admitted assets. The National Association of Insurance
Commissioners has a risk-based capital standard designed to
identify property and casualty insurers that may be inadequately
capitalized based on inherent risks of each insurer’s
assets and liabilities and its mix of net premiums written.
Insurers falling below a calculated threshold may be subject to
varying degrees of regulatory action. As of December 31,
2004, the statutory surplus of our insurance subsidiary was in
excess of the prescribed risk-based capital requirements that
correspond to any level of regulatory action.
SeaBright has minimal revenue and expenses. Currently there are
no plans to have our insurance subsidiary or PointSure pay a
dividend to SeaBright.
Our consolidated net cash provided by operating activities for
the year ended December 31, 2004 was $41.0 million,
compared to our cash flow from operations of $0.5 million
for the three months ended December 31, 2003. The increase
is mainly attributable to increases in unpaid loss and loss
adjustment expense and amortization of deferred policy
acquisition costs, offset by increases in policy acquisition
costs deferred and balances related to reinsurance recoverables,
all as a result of our growth.
We used net cash of $54.3 million for investing activities
for the year ended December 31, 2004, compared to
$41.2 million for the three months ended December 31,
2003. The difference between periods is primarily attributable
to the fact that we invested the net proceeds of
$30.0 million from our initial capital infusion immediately
after the Acquisition, as well as proceeds of $5.2 million
from the sale of additional shares of convertible preferred
stock in June 2004.
For the year ended December 31, 2004, financing activities
provided cash of $5.2 million from the sale of additional
convertible preferred stock in June 2004. Additionally, in May
2004, our insurance subsidiary issued an aggregate principal
amount of $12.0 million in floating rate surplus notes due
2034 to ICONS, LTD in a transaction in which Morgan
Stanley & Co. Incorporated and Cochran Caronia
Securities LLC acted as placement agents. Quarterly interest
payments at the rate of LIBOR plus 4% are expected to be made
from cash flow from operations.
On January 26, 2005, we closed the initial public offering
of 8,625,000 shares of our common stock, including the
underwriters’ over-allotment option, at a price of
$10.50 per share for net proceeds of approximately
$80.8 million, after deducting underwriters’ fees,
commissions and offering costs totaling approximately
$9.7 million. On January 26, 2005, we contributed
approximately $74.8 million of the net proceeds to
SeaBright Insurance Company. We intend to use the remaining net
proceeds for general corporate purposes, including supporting
the growth of PointSure. In connection with the initial public
offering, all 508,365.25 outstanding shares of our Series A
preferred stock were converted into 7,777,808 shares of
common stock.
62
Contractual Obligations and Commitments
The following table identifies our contractual obligations by
payment due period as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
Less than | |
|
|
|
More than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Long term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Surplus notes
|
|
$ |
12,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
12,000 |
|
| |
Loss and loss adjustment expenses
|
|
|
68,228 |
|
|
|
9,757 |
|
|
|
32,886 |
|
|
|
9,825 |
|
|
|
15,760 |
|
|
Operating and lease obligations
|
|
|
2,307 |
|
|
|
544 |
|
|
|
1,436 |
|
|
|
327 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
82,535 |
|
|
$ |
10,301 |
|
|
$ |
34,322 |
|
|
$ |
10,152 |
|
|
$ |
27,760 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loss and loss adjustment expense payments due by period in
the table above are based upon the loss and loss adjustment
expense estimates as of December 31, 2004 and actuarial
estimates of expected payout patterns and are not contractual
liabilities as to time certain. Our contractual liability is to
provide benefits under the policies. As a result, our
calculation of loss and loss adjustment expense payments due by
period is subject to the same uncertainties associated with
determining the level of unpaid loss and loss adjustment
expenses generally and to the additional uncertainties arising
from the difficulty of predicting when claims (including claims
that have not yet been reported to us) will be paid. For a
discussion of our unpaid loss and loss adjustment expense
process, see the heading “Loss Reserves” in
Part I, Item 1 of this annual report. Actual payments
of loss and loss adjustment expenses by period will vary,
perhaps materially, from the above table to the extent that
current estimates of loss and loss adjustment expenses vary from
actual ultimate claims amounts and as a result of variations
between expected and actual payout patterns. See the discussion
under the heading “Factors That May Affect Our Business,
Future Operating Results and Financial Condition —
Loss reserves are based on estimates and may be inadequate to
cover our actual losses” in Part I, Item 1 of
this annual report for a discussion of the uncertainties
associated with estimating unpaid loss and loss adjustment
expenses.
Off-Balance Sheet Arrangements
As of December 31, 2004, we have no off-balance sheet
arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies, Estimates and Judgments
It is important to understand our accounting policies in order
to understand our financial statements. Management considers
some of these policies to be critical to the presentation of our
financial results, since they require management to make
estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the financial reporting date
and throughout the period being reported upon. Some of the
estimates result from judgments that can be subjective and
complex, and consequently, actual results reflected in future
periods might differ from these estimates.
The most critical accounting policies involve the reporting of
unpaid loss and loss adjustment expenses including losses that
have occurred but were not reported to the Company by the
financial reporting date, the amount and recoverability of
reinsurance recoverable balances, accounting for our adverse
development cover, deferred policy acquisition costs, deferred
taxes, goodwill, intangibles, retrospective premiums, earned but
unbilled premiums and the impairment of investments. The
following should be read in conjunction with the notes to our
financial statements.
63
|
|
|
Unpaid Loss and Loss Adjustment Expenses |
Unpaid loss and loss adjustment expenses represent our estimate
of the expected cost of the ultimate settlement and
administration of losses, based on known facts and
circumstances. Included in unpaid loss and loss adjustment
expenses are amounts for case-based claims, including estimates
of future developments on these claims, and claims incurred but
not yet reported to us, second injury fund, allocated claim
adjustment expenses and unallocated claim adjustment expenses.
We use actuarial methodologies to assist us in establishing
these estimates, including judgments relative to estimates of
future claims severity and frequency, length of time to achieve
ultimate resolution, judicial theories of liability and other
third-party factors that are often beyond our control. Due to
the inherent uncertainty associated with the cost of unsettled
and unreported claims, the ultimate liability may differ from
the original estimate. These estimates are regularly reviewed
and updated and any resulting adjustments are included in the
current period’s operating results. Because of the relative
immaturity of our unpaid loss and loss adjustment expenses,
actuarial techniques are applied that use the historical
experience of our predecessor as well as industry information in
the analysis of our unpaid loss and loss adjustment expenses.
Reinsurance recoverables on paid and unpaid losses represent the
portion of the loss and loss adjustment expenses that is assumed
by reinsurers. These recoverables are reported on our balance
sheet separately as assets, as reinsurance does not relieve us
of our legal liability to policyholders and ceding companies. We
are required to pay losses even if a reinsurer fails to meet its
obligations under the applicable reinsurance agreement.
Reinsurance recoverables are determined based in part on the
terms and conditions of reinsurance contracts, which could be
subject to interpretations that differ from ours based on
judicial theories of liability. In addition, we bear credit risk
with respect to the reinsurers, which can be significant
considering that some of the unpaid loss and loss adjustment
expenses remain outstanding for an extended period of time.
|
|
|
Adverse Development Cover |
The unpaid loss and loss adjustment expense subject to the
adverse development cover with LMC is calculated on a quarterly
basis using generally accepted actuarial methodologies. Amounts
recoverable in excess of acquired reserves at September 30,
2003 are recorded gross in unpaid loss and loss adjustment
expense in accordance with SFAS No. 141,
“Business Combinations,” with a corresponding amount
receivable from the seller. Amounts are shown net in the income
statement.
|
|
|
Deferred Policy Acquisition Costs |
We defer commissions, premium taxes and certain other costs that
vary with and are primarily related to the acquisition of
insurance contracts. These costs are capitalized and charged to
expense in proportion to the recognition of premiums earned. The
method followed in computing deferred policy acquisition costs
limits the amount of these deferred costs to their estimated
realizable value, which gives effect to the premium to be
earned, related investment income, anticipated losses and
settlement expenses and certain other costs we expect to incur
as the premium is earned. Judgments as to ultimate
recoverability of these deferred costs are highly dependent upon
estimated future costs associated with the premiums written.
We use the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in the income statement in the period that
includes the enactment date.
64
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. If necessary,
we would establish a valuation allowance to reduce the deferred
tax assets to the amounts more likely than not to be realized.
|
|
|
Goodwill and Other Intangible Assets |
Goodwill represents the excess of costs over fair value of
assets of businesses acquired. Goodwill and other intangible
assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized,
but are instead tested for impairment at least annually.
Intangible assets with estimable useful lives are amortized over
their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets.”
Retrospective premiums for primary and reinsured risks are
included in income as earned on a pro rata basis over the
effective period of the respective policies. Earned premiums on
retrospectively rated policies are based on the Company’s
estimate of loss experience as of the measurement date. Unearned
premiums are deferred and include that portion of premiums
written that is applicable to the unexpired period of the
policies in force and estimated adjustments of premiums on
policies that have retrospective rating endorsements.
Approximately 35.8% of premiums written in 2004 relate to
retrospectively rated policies.
|
|
|
Earned But Unbilled Premiums |
We estimate the amount of premiums that have been earned but are
unbilled at the end of the period by analyzing historical earned
premium adjustments made and applying an adjustment percentage
against premiums earned for the period.
|
|
|
Impairment of Investment Securities |
Impairment of investment securities results in a charge to
operations when the market value of a security declines to below
our cost and is deemed to be other-than-temporary. We regularly
review our fixed maturity portfolio to evaluate the necessity of
recording impairment losses for other-than-temporary declines in
the fair value of investments. A number of criteria are
considered during this process, including but not limited to the
current fair value as compared to amortized cost or cost, as
appropriate, of the security, the length of time the
security’s fair value has been below amortized cost, our
intent and ability to retain the investment for a period of time
sufficient to allow for an anticipated recovery in value and
specific credit issues related to the issuer and current
economic conditions. In general, we focus on those securities
whose fair value was less than 80% of their amortized cost or
cost, as appropriate, for six or more consecutive months.
Other-than-temporary impairment losses result in a permanent
reduction of the carrying amount of the underlying investment.
Significant changes in the factors considered when evaluating
investments for impairment losses could result in a significant
change in impairment losses reported in the financial statements.
Recent Accounting Pronouncements
SFAS No. 123 (revised 2004), “Share Based
Payment,” was issued in December 2004. Statement
No. 123(R) is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.” Statement
No. 123(R) supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends
SFAS No. 95, “Statement of Cash Flows.”
Generally, the approach in Statement No. 123(R) is similar
to
65
the approach described in Statement No. 123. However,
Statement No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
Statement No. 123(R) must be adopted no later than
July 1, 2005, and we expect to adopt the Statement on that
date. As permitted by Statement No. 123, the Company
currently accounts for share based payments to employees using
the intrinsic value method as detailed in Opinion No. 25
and, as such, generally recognizes no compensation cost for
employee stock options. Accordingly, the adoption of Statement
No. 123(R)’s fair value method will have an impact on
our results of operations, although it will have no impact on
our overall financial position. The impact of adoption of
Statement No. 123(R) cannot be predicted at this time
because it will depend on levels of share based payments granted
in the future. However, had we adopted Statement No. 123(R)
in prior periods, the impact of the standard would have
approximated the impact of Statement No. 123 as described
in Note 2.n. of the Notes to Consolidated Financial
Statements included in Item 8 of this annual report.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk. |
Market risk is the potential economic loss principally arising
from adverse changes in the fair value of financial instruments.
The major components of market risk affecting us are credit risk
and interest rate risk.
Credit Risk
Credit Risk is the potential economic loss principally arising
from adverse changes in the financial condition of a specific
debt issuer. We address this risk by investing in fixed-income
securities which are rated “A” or higher by
Standard & Poor’s. We also independently, and
through our outside investment managers, monitor the financial
condition of all of the issuers of fixed-income securities in
the portfolio. To limit our exposure to risk we employ stringent
diversification rules that limit the credit exposure to any
single issuer or business sector.
Interest Rate Risk
We had fixed-income investments with a fair value of
$105.7 million at December 31, 2004 that are subject
to interest rate risk. We manage the exposure to interest rate
risk through a disciplined asset/liability matching and capital
management process. In the management of this risk, the
characteristics of duration, credit and variability of cash
flows are critical elements. These risks are assessed regularly
and balanced within the context of the liability and capital
position.
The table below summarizes our interest rate risk. It
illustrates the sensitivity of the fair value of fixed-income
investments to selected hypothetical changes in interest rates
as of December 31, 2004. The selected scenarios are not
predictions of future events, but rather illustrate the effect
that such events may have on the fair value of our fixed-income
portfolio and shareholders’ equity.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Hypothetical | |
| |
|
|
|
|
|
Percentage | |
| |
|
|
|
|
|
Increase | |
| |
|
Estimated | |
|
|
|
(Decrease) in | |
| |
|
Change in | |
|
|
|
Shareholders’ | |
| Hypothetical Change in Interest Rates |
|
Fair Value | |
|
Fair Value | |
|
Equity | |
| |
|
| |
|
| |
|
| |
| |
|
($ in thousands) | |
|
200 basis point increase
|
|
$ |
(12,874 |
) |
|
$ |
92,787 |
|
|
|
(12.2 |
)% |
|
100 basis point increase
|
|
|
(6,333 |
) |
|
|
99,328 |
|
|
|
(6.0 |
)% |
|
No change
|
|
|
— |
|
|
|
105,661 |
|
|
|
— |
|
|
100 basis point decrease
|
|
|
6,333 |
|
|
|
111,994 |
|
|
|
6.0 |
% |
|
200 basis point decrease
|
|
|
12,874 |
|
|
|
118,535 |
|
|
|
12.2 |
% |
66
|
|
| Item 8. |
Financial Statements and Supplementary Data. |
Index to Financial Statements
| |
|
|
|
|
|
| |
|
Page | |
| |
|
| |
|
|
|
|
|
|
| |
|
|
|
68 |
|
| |
|
|
|
69 |
|
| |
|
|
|
70 |
|
| |
|
|
|
71 |
|
| |
|
|
|
72 |
|
| |
|
|
|
73 |
|
|
|
|
|
|
|
| |
|
|
|
95 |
|
| |
|
|
|
96 |
|
| |
|
|
|
97 |
|
| |
|
|
|
98 |
|
| |
|
|
|
99 |
|
| |
|
|
|
100 |
|
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
SeaBright Insurance Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
SeaBright Insurance Holdings, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, changes in stockholders’ equity
and comprehensive income (loss), and cash flows for the year
ended December 31, 2004 and for the period from
June 19, 2003 (inception) through December 31,
2003. These consolidated financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of SeaBright Insurance Holdings, Inc. and subsidiaries
as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the year ended
December 31, 2004 and for the period from June 19,
2003 (inception) through December 31, 2003, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Seattle, Washington
March 22, 2005
68
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
ASSETS |
|
Investment securities available-for-sale, at fair value
|
|
$ |
105,661 |
|
|
$ |
51,881 |
|
|
Cash and cash equivalents
|
|
|
8,279 |
|
|
|
5,008 |
|
|
Accrued investment income
|
|
|
1,096 |
|
|
|
486 |
|
|
Premiums receivable, net of allowance
|
|
|
7,397 |
|
|
|
5,263 |
|
|
Deferred premiums
|
|
|
59,243 |
|
|
|
14,555 |
|
|
Retrospective premiums accrued
|
|
|
1,086 |
|
|
|
— |
|
|
Federal income tax recoverable
|
|
|
397 |
|
|
|
— |
|
|
Service income receivable
|
|
|
304 |
|
|
|
1,224 |
|
|
Reinsurance recoverables
|
|
|
13,484 |
|
|
|
12,050 |
|
|
Receivable under adverse development cover
|
|
|
2,853 |
|
|
|
2,468 |
|
|
Prepaid reinsurance
|
|
|
5,254 |
|
|
|
2,340 |
|
|
Property and equipment, net
|
|
|
493 |
|
|
|
340 |
|
|
Deferred federal income taxes, net
|
|
|
3,604 |
|
|
|
991 |
|
|
Deferred policy acquisition costs, net
|
|
|
7,588 |
|
|
|
1,936 |
|
|
Intangible assets, net
|
|
|
2,093 |
|
|
|
2,824 |
|
|
Goodwill
|
|
|
1,821 |
|
|
|
2,062 |
|
|
Other assets
|
|
|
5,459 |
|
|
|
2,652 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
226,112 |
|
|
$ |
106,080 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| |
|
Liabilities:
|
|
|
|
|
|
|
|
|
| |
Unpaid loss and loss adjustment expense
|
|
$ |
68,228 |
|
|
$ |
29,733 |
|
| |
Unearned premiums
|
|
|
67,626 |
|
|
|
18,602 |
|
| |
Reinsurance funds withheld and balances payable
|
|
|
1,553 |
|
|
|
2,807 |
|
| |
Premiums payable
|
|
|
3,128 |
|
|
|
3,976 |
|
| |
Accrued expenses and other liabilities
|
|
|
15,207 |
|
|
|
5,196 |
|
| |
Federal income tax payable
|
|
|
— |
|
|
|
161 |
|
| |
Surplus notes
|
|
|
12,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
167,742 |
|
|
|
60,475 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Series A preferred stock, $0.01 par value;
750,000 shares authorized; issued and
outstanding — 508,265.25 shares at
December 31, 2004 and 456,750 shares at
December 31, 2003
|
|
|
5 |
|
|
|
5 |
|
| |
Undesignated preferred stock, $0.01 par value;
authorized — 10,000,000 shares at
December 31, 2004 and no shares at December 31, 2003;
no shares issued and outstanding at December 31, 2004 and
2003
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.01 par value; authorized —
10,000,000 shares at December 31, 2004 and
750,000 shares at December 31, 2003; no shares issued
and outstanding at December 31, 2004 and 2003
|
|
|
— |
|
|
|
— |
|
| |
Paid-in capital
|
|
|
50,831 |
|
|
|
45,670 |
|
| |
Accumulated other comprehensive income
|
|
|
530 |
|
|
|
132 |
|
| |
Retained earnings (accumulated deficit)
|
|
|
7,004 |
|
|
|
(202 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
58,370 |
|
|
|
45,605 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
226,112 |
|
|
$ |
106,080 |
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
69
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Period from | |
| |
|
|
|
June 19, 2003 | |
| |
|
|
|
(Inception) | |
| |
|
Year Ended | |
|
Through | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except income | |
| |
|
per share information) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
| |
Premiums earned
|
|
$ |
77,960 |
|
|
$ |
3,134 |
|
| |
Net investment income
|
|
|
2,468 |
|
|
|
313 |
|
| |
Net realized gain (loss)
|
|
|
38 |
|
|
|
(4 |
) |
| |
Claims service income
|
|
|
2,916 |
|
|
|
663 |
|
| |
Other service income
|
|
|
794 |
|
|
|
561 |
|
| |
Other income
|
|
|
2,493 |
|
|
|
655 |
|
| |
|
|
|
|
|
|
| |
|
|
86,669 |
|
|
|
5,322 |
|
| |
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
| |
Loss and loss adjustment expenses
|
|
|
53,660 |
|
|
|
3,024 |
|
| |
Underwriting, acquisition and insurance expenses
|
|
|
17,854 |
|
|
|
1,789 |
|
| |
Other expenses
|
|
|
4,929 |
|
|
|
812 |
|
| |
|
|
|
|
|
|
| |
|
|
76,443 |
|
|
|
5,625 |
|
| |
|
|
|
|
|
|
| |
|
Income (loss) before federal income taxes
|
|
|
10,226 |
|
|
|
(303 |
) |
| |
|
|
|
|
|
|
|
Federal income tax expense (benefit):
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
5,850 |
|
|
|
123 |
|
| |
Deferred
|
|
|
(2,830 |
) |
|
|
(224 |
) |
| |
|
|
|
|
|
|
| |
|
|
3,020 |
|
|
|
(101 |
) |
| |
|
|
|
|
|
|
| |
|
Net income (loss)
|
|
$ |
7,206 |
|
|
$ |
(202 |
) |
| |
|
|
|
|
|
|
|
Fully diluted income per common share equivalent
|
|
$ |
0.98 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Weighted average common share equivalents outstanding
|
|
|
7,387,276 |
|
|
|
|
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
70
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
AND COMPREHENSIVE INCOME (LOSS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
Outstanding Shares | |
|
|
|
|
|
|
|
Other | |
|
Retained | |
|
|
| |
|
| |
|
|
|
|
|
|
|
Comprehensive | |
|
Earnings | |
|
Total | |
| |
|
Preferred | |
|
Common | |
|
Preferred | |
|
Common |
|
Paid-in | |
|
Income | |
|
(Accumulated | |
|
Stockholders’ | |
| |
|
Stock | |
|
Stock | |
|
Stock | |
|
Stock |
|
Capital | |
|
(Loss) | |
|
Deficit) | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at June 19, 2003 (inception)
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(202 |
) |
|
|
(202 |
) |
| |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $1
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(3 |
) |
| |
|
Increase in unrealized gain on investment securities
available-for-sale, net of tax of $69
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
135 |
|
|
|
— |
|
|
|
135 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(70 |
) |
|
Sale of preferred stock
|
|
|
457 |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
45,670 |
|
|
|
— |
|
|
|
— |
|
|
|
45,675 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
457 |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
45,670 |
|
|
|
132 |
|
|
|
(202 |
) |
|
|
45,605 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,206 |
|
|
|
7,206 |
|
| |
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Reclassification adjustment for realized losses recorded into
income, net of tax of $12
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
|
|
21 |
|
| |
|
Increase in unrealized gain on investment securities
available-for-sale, net of tax of $205
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
377 |
|
|
|
— |
|
|
|
377 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,604 |
|
|
Sale of preferred stock
|
|
|
51 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,161 |
|
|
|
— |
|
|
|
— |
|
|
|
5,161 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
508 |
|
|
|
— |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
50,831 |
|
|
$ |
530 |
|
|
$ |
7,004 |
|
|
$ |
58,370 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
71
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Period from | |
| |
|
|
|
June 19, 2003 | |
| |
|
|
|
(Inception) | |
| |
|
Year Ended | |
|
Through | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities, net of effect of
acquisition:
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
7,206 |
|
|
$ |
(202 |
) |
| |
Adjustments to reconcile net loss to cash used in operating
activities, net of effect of acquisition:
|
|
|
|
|
|
|
|
|
| |
|
Amortization of deferred policy acquisition costs
|
|
|
9,985 |
|
|
|
322 |
|
| |
|
Policy acquisition costs deferred
|
|
|
(15,637 |
) |
|
|
(2,258 |
) |
| |
|
Provision for depreciation and amortization
|
|
|
1,602 |
|
|
|
320 |
|
| |
|
Net realized (gain) loss on investments
|
|
|
(33 |
) |
|
|
4 |
|
| |
|
Gain on sale of fixed assets
|
|
|
(5 |
) |
|
|
— |
|
| |
|
Benefit for deferred federal income taxes
|
|
|
(2,830 |
) |
|
|
(262 |
) |
| |
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Federal income taxes payable
|
|
|
(558 |
) |
|
|
161 |
|
| |
|
Unpaid loss and loss adjustment expense
|
|
|
38,495 |
|
|
|
1,374 |
|
| |
|
Reinsurance recoverables, net of reinsurance withheld
|
|
|
(5,987 |
) |
|
|
(1,426 |
) |
| |
|
Unearned premiums, net of deferred premiums and premiums
receivable
|
|
|
1,116 |
|
|
|
2,170 |
|
| |
|
Accrued investment income
|
|
|
(610 |
) |
|
|
(372 |
) |
| |
|
Other assets and other liabilities
|
|
|
8,284 |
|
|
|
670 |
|
| |
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
41,028 |
|
|
|
501 |
|
| |
|
|
|
|
|
|
|
Cash flows from investing activities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
| |
Purchases of investments
|
|
|
(78,096 |
) |
|
|
(41,901 |
) |
| |
Sales of investments
|
|
|
20,206 |
|
|
|
5,840 |
|
| |
Maturities and other
|
|
|
3,877 |
|
|
|
182 |
|
| |
Purchases of property and equipment
|
|
|
(314 |
) |
|
|
(267 |
) |
| |
Cash paid for acquisition, net of cash acquired
|
|
|
— |
|
|
|
(5,022 |
) |
| |
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(54,327 |
) |
|
|
(41,168 |
) |
| |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
| |
Proceeds from issuance of surplus notes, net of debt issuance
costs
|
|
|
11,409 |
|
|
|
— |
|
| |
Proceeds from issuance of preferred stock
|
|
|
5,161 |
|
|
|
45,675 |
|
| |
|
|
|
|
|
|
| |
|
|
Net cash provided by financing activities
|
|
|
16,570 |
|
|
|
45,675 |
|
| |
|
|
|
|
|
|
| |
|
|
Net increase in cash and cash equivalents
|
|
|
3,271 |
|
|
|
5,008 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,008 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
8,279 |
|
|
$ |
5,008 |
|
| |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow activities:
|
|
|
|
|
|
|
|
|
| |
Increase in accrued liabilities incurred due to acquisition of
assets
|
|
$ |
— |
|
|
$ |
476 |
|
| |
Federal income taxes paid
|
|
|
6,336 |
|
|
|
— |
|
| |
Interest paid on surplus notes
|
|
|
335 |
|
|
|
— |
|
| |
Purchase price adjustment
|
|
|
771 |
|
|
|
— |
|
See accompanying notes to consolidated financial statements.
72
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeaBright Insurance Holdings, Inc. (“SIH” or the
“Company”), a Delaware corporation, was formed in June
2003. On July 14, 2003, SIH entered into a purchase
agreement, effective September 30, 2003, with Kemper
Employers Group, Inc. (“KEG”), Eagle Insurance
Companies (“Eagle”), and Lumbermens Mutual Casualty
Company (“LMC”), all ultimately owned by Kemper
Insurance Companies (“KIC”) (the
“Acquisition”). Under this agreement, SIH acquired
Kemper Employers Insurance Company (“KEIC”), PointSure
Insurance Services, Inc. (“PointSure”), and certain
assets of Eagle, primarily renewal rights as further discussed
in Note 17.
KEIC is licensed to write workers’ compensation insurance
in 43 states and the District of Columbia. Domiciled in the
State of Illinois and commercially domiciled in the State of
California, it writes both state act workers’ compensation
insurance and United States Longshore and Harborworkers’
Compensation insurance (“USL&H”). Prior to the
Acquisition, beginning in 2000, KEIC wrote business only in
California. In May 2002, KEIC ceased writing business and by
December 31, 2003, all premiums related to business prior
to the Acquisition were 100% earned. As further discussed in
Note 17, in connection with the Acquisition, KEIC and LMC
entered into an agreement to indemnify each other with respect
to developments in KEIC’s unpaid loss and loss adjustment
expenses over a period of approximately eight years.
December 31, 2011 is the date to which the parties will
look to determine whether the loss and loss adjustment expenses
with respect to KEIC’s insurance policies in effect at the
date of the Acquisition have increased or decreased from the
amount existing at the date of the Acquisition.
PointSure is engaged primarily in administrative and brokerage
activities. Eagle consists of Eagle Pacific Insurance Company,
Inc. and Pacific Eagle Insurance Company, Inc., both writers of
state act workers’ compensation insurance and USL&H
that are in run-off as of December 31, 2004.
KEIC resumed writing business effective October 1, 2003,
primarily targeting policy renewals for former Eagle business in
the States of California, Hawaii, and Alaska. In November 2003,
permission was granted by the Illinois Department of Financial
and Professional Regulation, Division of Insurance (the
“Illinois Division of Insurance”) for KEIC to change
its name to SeaBright Insurance Company (“SBIC”).
|
|
| 2. |
Summary of Significant Accounting Policies |
The accompanying consolidated financial statements include the
accounts of SIH and its wholly owned subsidiaries, PointSure and
SBIC, (collectively, the “Company”). All significant
intercompany transactions among these affiliated entities have
been eliminated in consolidation.
The consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) and include amounts
based on the best estimates and judgment of management. Such
estimates and judgments could change in the future, as more
information becomes known which could impact the amounts
reported and disclosed herein.
In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 131, “Disclosures About
Segments of an Enterprise and Related Information,” the
Company considers an operating segment to be any component of
its business whose operating results are regularly reviewed by
the Company’s chief operating decision maker to make
decisions about resources to be allocated to the segment and
assess its performance. Currently, the Company has one operating
segment, workers’ compensation insurance and related
services.
73
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Investment securities are classified as available-for-sale and
carried at fair value, adjusted for other-than-temporary
declines in fair value, with changes in unrealized gains and
losses recorded directly in other comprehensive income, net of
applicable income taxes. The estimated fair value of investments
in available-for-sale securities is generally based on quoted
market value prices for securities traded in the public
marketplace. A decline in the market value of any
available-for-sale security below cost that is deemed to be
other-than-temporary results in a reduction in the carrying
amount of the security to fair value. The impairment is charged
to earnings and a new cost basis for the security is established.
Mortgage-backed securities represent participating interests in
pools of first mortgage loans originated and serviced by the
issuers of securities. These securities are carried at the
unpaid principal balances, adjusted for unamortized premiums and
unearned discounts. Premiums and discounts are amortized using a
method that approximates the level yield method over the
remaining period to contractual maturity, adjusted for
anticipated prepayments. To the extent that the estimated lives
of such securities change as a result of changes in prepayment
rates, the adjustment is also included in net investment income.
Prepayment assumptions used for mortgage-backed and asset-backed
securities were obtained from an external securities information
service and are consistent with the current interest rate and
economic environment.
For the purpose of determining realized gains and losses, which
arise principally from the sale of investments, the cost of
securities sold is based on specific-identification.
|
|
|
c. Cash and Cash Equivalents |
Cash and cash equivalents, which consist primarily of amounts
deposited in banks and financial institutions, and all highly
liquid investments with maturity of 90 days or less when
purchased, are stated at cost.
The preparation of the consolidated financial statements in
conformity with GAAP requires management of the Company to make
a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could
differ from those estimates. The Company has used significant
estimates in determining the unpaid loss and loss adjustment
expenses, goodwill and other intangibles, earned premiums on
retrospectively rated policies, earned but unbilled premiums,
federal income taxes and amounts related to reinsurance.
Premiums receivable are recorded at the invoiced amount. The
allowance for doubtful accounts is the Company’s best
estimate of the amount of uncollected premium in the
Company’s existing premiums receivable balance. Account
balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery
is considered remote.
|
|
|
f. Deferred Policy Acquisition Costs |
Acquisition costs related to premiums written are deferred and
amortized over the periods in which the premiums are earned.
Such acquisition costs include commissions, premium taxes, and
certain underwriting and policy issuance costs. Deferred policy
acquisition costs are limited to amounts recoverable from
unearned premiums and anticipated investment income.
74
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
|
g. Property and Equipment |
Furniture and equipment are recorded at cost and depreciated
using the straight-line method over their estimated useful
lives, which range from three to five years. Depreciation
expense for the year ended December 31, 2004 and period
from inception through December 31, 2003 was approximately
$166,000 and $20,000, respectively.
|
|
|
h. Goodwill and Other Intangible Assets |
Goodwill represents the excess of costs over fair value of
assets of businesses acquired. Goodwill and other intangible
assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized,
but are instead tested for impairment at least annually.
Intangible assets with estimable useful lives are amortized over
their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
SFAS No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets.”
Premiums for primary and reinsured risks are included in revenue
over the life of the contract in proportion to the amount of
insurance protection provided (i.e., ratably over the policy
period). The portion of the premium that is applicable to the
unexpired period of the policies in-force is not included in
revenue and is deferred and recorded as unearned premium in the
liability section of the balance sheet. Deferred premiums
represent the unbilled portion of annual premiums.
Earned premiums on retrospectively rated policies are based on
the Company’s estimate of loss experience as of the
measurement date. Loss experience includes known losses
specifically identifiable to a retrospective policy as well as
provisions for future development on known losses and for losses
incurred but not yet reported using actuarial loss development
factors and is consistent with how the Company projects losses
in general. For retrospectively rated policies, the governing
contractual minimum and maximum rates are established at policy
inception and are made a part of the insurance contract. While
the typical retrospectively rated policy has five annual
adjustment or measurement periods, premium adjustments continue
until mutual agreement to cease future adjustments is reached
with the policyholder. As of December 31, 2004 and 2003,
approximately 35.8% and 43.8%, respectively, of premiums written
relates to retrospectively rated policies.
The Company estimates the amount of premiums that have been
earned but are unbilled at the end of the period by analyzing
historical earned premium adjustments made and applying an
adjustment percentage against premiums earned for the period.
Included in deferred premiums at December 31, 2004 and 2003
and premiums earned for the periods then ended are accruals for
earned but unbilled premiums of $1.7 million and $0,
respectively.
Service income generated from various underwriting and claims
service agreements with third parties is recognized as income in
the period in which services are performed.
|
|
|
j. Unpaid Loss and Loss Adjustment Expense |
Unpaid loss and loss adjustment expenses represent estimates of
the ultimate net cost of all unpaid losses incurred through the
specified period. Loss adjustment expenses are estimates of
unpaid expenses to be incurred in settlement of the claims
included in the liability for unpaid losses. These liabilities,
which anticipate salvage and subrogation recoveries and are
presented gross of amounts recoverable from reinsurers, include
estimates of future trends in claim severity and frequency and
other factors that could vary as the losses are ultimately
settled. In connection with the Acquisition, KEIC and LMC
entered into an adverse development cover agreement to indemnify
each other with respect to developments in KEIC’s
75
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
unpaid loss and loss adjustment expenses over a period of
approximately eight years. December 31, 2011 is the date to
which the parties will look to determine whether the loss and
loss adjustment expenses with respect to KEIC’s insurance
policies in effect at the date of the Acquisition have increased
or decreased from the amount existing at the date of the
Acquisition.
We use independent actuaries to assist in the evaluation of the
adequacy of our reserve for unpaid loss and loss adjustment
expense. In light of the Company’s short operating history,
and uncertainties concerning the effects of legislative reform
specifically as it relates to the Company’s California
workers compensation class of business, actuarial techniques are
applied that use the historical experience of the Company’s
predecessor as well as industry information in the analysis of
unpaid loss and loss adjustment expense. These techniques
recognize, among other factors:
|
|
|
| |
• |
the Company’s claims experience and that of its predecessor; |
| |
| |
• |
the industry’s claims experience; |
| |
| |
• |
historical trends in reserving patterns and loss payments; |
| |
| |
• |
the impact of claim inflation; |
| |
| |
• |
the pending level of unpaid claims; |
| |
| |
• |
the cost of claim settlements; |
| |
| |
• |
legislative reforms affecting workers’
compensation; and |
| |
| |
• |
the environment in which insurance companies operate. |
Although it is not possible to measure the degree of variability
inherent in such estimates, management believes that the
reserves for unpaid loss and loss adjustment expenses are
adequate. The estimates are reviewed periodically and any
necessary adjustments are included in the results of operations
of the period in which the adjustment is determined.
The Company protects itself from excessive losses by reinsuring
certain levels of risk in various areas of exposure with
nonaffiliated reinsurers. Reinsurance premiums, commissions,
expense reimbursements and reserves related to ceded business
are accounted for on a basis consistent with those used in
accounting for original policies issued and the terms of the
reinsurance contracts. The unpaid loss and loss adjustment
expense subject to the adverse development cover with LMC is
calculated on a quarterly basis using generally accepted
actuarial methodology for estimating unpaid loss and loss
adjustment expense liabilities, including an incurred loss
development method and a paid loss development. Amounts
recoverable in excess of acquired reserves at September 30,
2003 are recorded gross in unpaid loss and loss adjustment
expense in accordance with SFAS No. 141,
“Business Combinations,” with a corresponding amount
receivable from the seller. Amounts are shown net in the income
statement. Premiums ceded to other companies are reported as a
reduction of premiums written and earned. Reinsurance
recoverables are determined based on the terms and conditions of
the reinsurance contracts.
The asset and liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse, net of any
applicable valuation allowances.
76
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following table provides the reconciliation of weighted
average common share equivalents outstanding used in calculating
earnings per share for the year ended December 31, 2004:
| |
|
|
|
|
|
|
Diluted:
|
|
|
|
|
| |
Basic weighted average shares outstanding
|
|
|
— |
|
| |
Weighted average shares issuable upon conversion of preferred
stock
|
|
|
7,387,276 |
|
| |
|
|
|
|
Weighted average common share equivalents outstanding
|
|
|
7,387,276 |
|
| |
|
|
|
Earnings per share is not presented for the period ended
December 31, 2003 as there are not issued and outstanding
shares of common stock and the Company had a net loss. Any
common stock equivalents would be anti-dilutive. Outstanding
options to purchase shares of our common stock are excluded
above because they are not dilutive.
|
|
|
n. Stock Based Compensation |
The Company measures its employee stock-based compensation
arrangements using the provisions outlined in Accounting
Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” which is
an intrinsic value-based method of recognizing compensation
costs. The Company has adopted the disclosure-only provisions of
SFAS No. 123, “Accounting for Stock-based
Compensation.” None of the Company’s stock options has
an intrinsic value at grant date and, accordingly, no
compensation cost has been recognized for its stock option plan
activity.
The following table illustrates the effect on net income (loss)
for the year ended December 31, 2004 and for the three
month period ended December 31, 2003 as if the Company had
applied the fair value recognition provisions of
SFAS No. 123 to stock based compensation:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Year Ended | |
|
Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Net income (loss):
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
7,206 |
|
|
$ |
(202 |
) |
| |
Less SFAS No. 123 compensation costs, net of taxes
|
|
|
(80 |
) |
|
|
(17 |
) |
| |
|
|
|
|
|
|
| |
|
Pro forma net income (loss)
|
|
$ |
7,126 |
|
|
$ |
(219 |
) |
| |
|
|
|
|
|
|
|
Fully diluted income per common share equivalent, as reported
|
|
$ |
0.98 |
|
|
|
|
|
|
Less SFAS No. 123 compensation costs, net of taxes
|
|
|
(0.01 |
) |
|
|
|
|
| |
|
|
|
|
|
|
| |
Pro forma fully diluted income per common share equivalent
|
|
$ |
0.97 |
|
|
|
|
|
| |
|
|
|
|
|
|
The compensation expense included in the pro forma net income
(loss) is not likely to be representative of the effect on
reported net income for future years because options vest over
several years and additional awards may be made each year.
77
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The per-share weighted average grant date fair value of options
granted was $1.09 in 2004 and $1.06 in 2003. The fair value of
stock options granted was estimated on the date of grant using
the Black-Scholes option pricing model. The following weighted
average assumptions were used to perform the calculations:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Year Ended | |
|
Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Expected dividend yield
|
|
|
— |
|
|
|
— |
|
|
Risk-free interest rate
|
|
|
2.61 |
% |
|
|
2.54 |
% |
|
Expected life (years)
|
|
|
7.0 |
|
|
|
7.0 |
|
|
Volatility
|
|
|
— |
|
|
|
— |
|
|
|
|
o. Recent Accounting Statements |
SFAS No. 123 (revised 2004), “Share Based
Payment,” was issued in December 2004. Statement
No. 123(R) is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.” Statement
No. 123(R) supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and amends
SFAS No. 95, “Statement of Cash Flows.”
Generally, the approach in Statement No. 123(R) is similar
to the approach described in Statement No. 123. However,
Statement No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative.
Statement No. 123(R) must be adopted no later than
July 1, 2005, and we expect to adopt the Statement on that
date. As permitted by Statement No. 123, the Company
currently accounts for share based payments to employees using
the intrinsic value method as detailed in Opinion No. 25
and, as such, generally recognizes no compensation cost for
employee stock options. Accordingly, the adoption of Statement
No. 123(R)’s fair value method will have an impact on
our results of operations, although it will have no impact on
our overall financial position. The impact of adoption of
Statement No. 123(R) cannot be predicted at this time
because it will depend on levels of share based payments granted
in the future. However, had we adopted Statement No. 123(R)
in prior periods, the impact of the standard would have
approximated the impact of Statement No. 123 as described
in the disclosure of pro forma net income and earnings per share
discussed above.
78
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The consolidated cost or amortized cost, gross unrealized gains
and losses, and estimated fair value of investment securities
available-for-sale at December 31, 2004 and 2003 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost or | |
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
(In thousands) | |
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. Treasury securities
|
|
$ |
8,763 |
|
|
$ |
2 |
|
|
$ |
(72 |
) |
|
$ |
8,693 |
|
| |
Government sponsored agency securities
|
|
|
5,999 |
|
|
|
3 |
|
|
|
(40 |
) |
|
|
5,962 |
|
| |
Corporate securities
|
|
|
20,612 |
|
|
|
327 |
|
|
|
(12 |
) |
|
|
20,927 |
|
| |
Tax-exempt municipal securities
|
|
|
54,653 |
|
|
|
648 |
|
|
|
(59 |
) |
|
|
55,242 |
|
| |
Mortgage pass-through securities
|
|
|
10,943 |
|
|
|
58 |
|
|
|
(22 |
) |
|
|
10,979 |
|
| |
Collateralized mortgage obligations
|
|
|
1,177 |
|
|
|
— |
|
|
|
(10 |
) |
|
|
1,167 |
|
| |
Asset-backed securities
|
|
|
2,698 |
|
|
|
2 |
|
|
|
(9 |
) |
|
|
2,691 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total investment securities available-for-sale
|
|
$ |
104,845 |
|
|
$ |
1,040 |
|
|
$ |
(224 |
) |
|
$ |
105,661 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. Treasury securities
|
|
$ |
15,611 |
|
|
$ |
9 |
|
|
$ |
(99 |
) |
|
$ |
15,521 |
|
| |
U.S. government sponsored agency securities
|
|
|
2,030 |
|
|
|
7 |
|
|
|
(8 |
) |
|
|
2,029 |
|
| |
Corporate securities
|
|
|
11,367 |
|
|
|
58 |
|
|
|
(5 |
) |
|
|
11,420 |
|
| |
Tax-exempt municipal securities
|
|
|
8,320 |
|
|
|
192 |
|
|
|
(4 |
) |
|
|
8,508 |
|
| |
Mortgage pass-through securities
|
|
|
9,399 |
|
|
|
51 |
|
|
|
— |
|
|
|
9,450 |
|
| |
Collateralized mortgage obligations
|
|
|
1,840 |
|
|
|
— |
|
|
|
(6 |
) |
|
|
1,834 |
|
| |
Asset-backed securities
|
|
|
3,113 |
|
|
|
6 |
|
|
|
— |
|
|
|
3,119 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total investment securities available-for-sale
|
|
$ |
51,680 |
|
|
$ |
323 |
|
|
$ |
(122 |
) |
|
$ |
51,881 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 and 2003, the unrealized loss on
temporarily impaired investments totaled $224,000 and $122,000,
respectively, for investment securities available-for-sale with
a fair value of $29.8 million and $17.6 million,
respectively. All were impaired for less than one year. The
majority of the impairment on investment securities
available-for-sale was in U.S. treasury notes and
government sponsored agency obligations, which accounted for 50%
of the total impairment. Temporarily impaired securities are a
result of market value changes and are expected to regain the
lost value with market shifts. Other-than-temporarily impaired
securities are a result of contractual failure by the issuer,
are not expected to rebound and, therefore, are considered not
collectable.
The Company evaluated investment securities with
December 31, 2004 fair values less than amortized cost and
has determined that the decline in value is temporary and is
related to the change in market interest rates since purchase.
The Company anticipates full recovery of amortized costs with
respect to these securities at maturity or sooner in the event
of a more favorable market interest rate environment.
79
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The amortized cost and estimated fair value of investment
securities available-for-sale at December 31, 2004, by
contractual maturity, are set forth below. Actual maturities may
differ from contractual maturities because certain borrowers
have the right to call or prepay obligations with or without
call or prepayment penalties.
| |
|
|
|
|
|
|
|
|
|
| |
|
Cost or | |
|
Estimated | |
| Maturity |
|
Amortized Cost | |
|
Fair Value | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Due in one year or less
|
|
$ |
7,673 |
|
|
$ |
7,659 |
|
|
Due after one year through five years
|
|
|
13,230 |
|
|
|
13,193 |
|
|
Due after five years through ten years
|
|
|
55,717 |
|
|
|
56,319 |
|
|
Due after ten years
|
|
|
13,407 |
|
|
|
13,653 |
|
|
Securities not due at a single maturity date
|
|
|
14,818 |
|
|
|
14,837 |
|
| |
|
|
|
|
|
|
| |
Total investment securities available-for-sale
|
|
$ |
104,845 |
|
|
$ |
105,661 |
|
| |
|
|
|
|
|
|
The consolidated amortized cost of investment securities
available-for-sale deposited with various regulatory authorities
was $26.8 million and $13.0 million at
December 31, 2004 and 2003, respectively.
Major categories of consolidated net investment income are
summarized as follows for the year ended December 31, 2004
and the three month period ended December 31, 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Year Ended | |
|
Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Investments securities available-for-sale
|
|
$ |
2,609 |
|
|
$ |
333 |
|
|
Cash and short-term investments
|
|
|
111 |
|
|
|
21 |
|
| |
|
|
|
|
|
|
| |
Total gross investment income
|
|
|
2,720 |
|
|
|
354 |
|
|
Less investment expenses
|
|
|
(252 |
) |
|
|
(41 |
) |
| |
|
|
|
|
|
|
| |
Net investment income
|
|
$ |
2,468 |
|
|
$ |
313 |
|
| |
|
|
|
|
|
|
The consolidated proceeds and related gross realized gains and
losses received from sales of investments were as follows for
the year ended December 31, 2004 and the three month period
ended December 31, 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross Realized | |
|
Gross Realized | |
| |
|
Proceeds | |
|
Gains | |
|
Losses | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales
|
|
$ |
20,206 |
|
|
$ |
99 |
|
|
$ |
(66 |
) |
| |
Maturities and other
|
|
|
3,877 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
24,083 |
|
|
$ |
99 |
|
|
$ |
(66 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales
|
|
$ |
5,840 |
|
|
$ |
— |
|
|
$ |
(4 |
) |
| |
Maturities and other
|
|
|
182 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
6,022 |
|
|
$ |
— |
|
|
$ |
(4 |
) |
| |
|
|
|
|
|
|
|
|
|
80
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
| 4. |
Fair Value of Financial Instruments |
Estimated fair value amounts, defined as the quoted market price
of a financial instrument, have been determined using available
market information and other appropriate valuation
methodologies. However, considerable judgment is required in
developing the estimates of fair value. Accordingly, these
estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of
different market assumptions or estimating methodologies may
have an effect on the estimated fair value amounts.
The following methods and assumptions were used by the Company
in estimating the fair value disclosures for financial
instruments in the accompanying financial statements and notes:
|
|
|
| |
• |
Cash and cash equivalents, premiums receivable, and accrued
expenses and other liabilities: The carrying amounts for
these financial instruments as reported in the accompanying
balance sheets approximate their fair values. |
| |
| |
• |
Investment securities: The estimated fair values for
available-for-sale securities generally represent quoted market
value prices for securities traded in the public marketplace or
analytically determined values for securities not traded in the
public marketplace. Additional data with respect to fair values
of the Company’s investment securities are disclosed in
Note 3. |
Other financial instruments qualify as insurance-related
products and are specifically exempted from fair value
disclosure requirements.
Direct premiums written totaled $134.5 million for the year
ended December 31, 2004 and $22.2 million for the
three month period ended December 31, 2003.
Premiums receivable consist of the following at
December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Premiums receivable
|
|
$ |
8,068 |
|
|
$ |
5,285 |
|
|
Allowance for doubtful accounts
|
|
|
(671 |
) |
|
|
(22 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
7,397 |
|
|
$ |
5,263 |
|
| |
|
|
|
|
|
|
The activity in the allowance for doubtful accounts for the year
ended December 31, 2004 and for the period from
June 19, 2003 (inception) through December 31,
2003 is as follows (in thousands):
| |
|
|
|
|
|
|
Balance at June 19, 2003
|
|
$ |
— |
|
|
Additions charged to bad debt expense
|
|
|
(64 |
) |
|
Write offs charged against allowance
|
|
|
42 |
|
| |
|
|
|
| |
Balance at December 31, 2003
|
|
|
(22 |
) |
|
Additions charged to bad debt expense
|
|
|
(764 |
) |
|
Write offs charged against allowance
|
|
|
115 |
|
| |
|
|
|
| |
Balance at December 31, 2004
|
|
$ |
(671 |
) |
| |
|
|
|
81
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
| 6. |
Property and Equipment |
Property and equipment at December 31, 2004 and 2003 are
summarized as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Furniture and equipment
|
|
$ |
678 |
|
|
$ |
360 |
|
|
Less accumulated depreciation and amortization
|
|
|
(185 |
) |
|
|
(20 |
) |
| |
|
|
|
|
|
|
| |
Property and equipment, net
|
|
$ |
493 |
|
|
$ |
340 |
|
| |
|
|
|
|
|
|
|
|
| 7. |
Deferred Policy Acquisition costs |
The following reflects the amounts of policy acquisition costs
deferred and amortized for the year ended December 31, 2004
and the three months ended December 31, 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Year Ended | |
|
Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Beginning balance
|
|
$ |
1,936 |
|
|
$ |
— |
|
|
Policy acquisition costs deferred
|
|
|
15,637 |
|
|
|
2,258 |
|
|
Amortization of deferred policy acquisition costs
|
|
|
(9,985 |
) |
|
|
(322 |
) |
| |
|
|
|
|
|
|
| |
Ending balance
|
|
$ |
7,588 |
|
|
$ |
1,936 |
|
| |
|
|
|
|
|
|
Under reinsurance agreements, the Company cedes various amounts
of risk to nonaffiliated insurance companies for the purpose of
limiting the maximum potential loss arising from the underlying
insurance risks.
Effective October 1, 2004, the Company entered into
reinsurance agreements wherein it retains the first $500,000 of
each loss occurrence. Losses in excess of $500,000 up to
$100.0 million are 100% reinsured with nonaffiliated
reinsurers.
Effective from October 1, 2003 through October 1,
2004, the Company entered into reinsurance agreements wherein it
retains the first $500,000 of each loss occurrence. The next
$500,000 of such loss occurrence is 50% retained by SBIC after
meeting a $1.5 million aggregate deductible. Losses in
excess of $1.0 million up to $100.0 million are 100%
reinsured with nonaffiliated reinsurers.
SBIC has in place a series of reinsurance agreements that were
entered into prior to its acquisition by SIH which are as
follows: Effective from January 1, 1999 through
January 1, 2001, SBIC retains the first $250,000 of each
loss occurrence; the next $750,000 of such loss occurrence is
100% reinsured with nonaffiliated reinsurers. Losses in excess
of $1.0 million up to $4.0 million for this time
period are 100% reinsured with nonaffiliated reinsurers.
Effective July 1, 2000 through July 1, 2002, SBIC
retains the first $500,000 of each loss occurrence; the next
$500,000 of such loss occurrence is 100% reinsured with
nonaffiliated reinsurers. Effective January 1, 2001 through
January 1, 2002, SBIC retains the first $1.0 million
of each loss occurrence; losses up to $5.0 million are 100%
reinsured with nonaffiliated reinsurers. Effective
October 1, 2000 through October 1, 2001 SBIC has a
quota-share agreement whereby 10% of the first $250,000 loss
plus a pro-rata share of expenses are 100% reinsured with Swiss
Reinsurance
82
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Company. Effective January 1, 2002 through May 31,
2002, 100% of all losses are 100% quota-shared to Argonaut
Insurance Company.
As part of the purchase of SBIC, SIH, and LMC entered into an
adverse development excess of loss reinsurance agreement (the
“Agreement”). The Agreement, after taking into account
any recoveries from third party reinsurers, calls for LMC to
reimburse SBIC 100% of the excess of the actual loss at
December 31, 2011 over the initial loss reserves at
September 30, 2003. The Agreement also calls for SBIC to
reimburse LMC 100% of the excess of the initial loss reserves at
September 30, 2003 over the actual loss results at
December 31, 2011. The amount of adverse loss development
under the Agreement was $2.9 million at December 31,
2004 and $2.5 million at December 31, 2003. The
increase in the amount receivable from LMC is netted against
loss and loss adjustment expense in the accompanying
consolidated statements of operations.
As part of the Agreement, LMC placed into trust (the
“Trust”) an amount equal to 10% of the balance sheet
reserves of SBIC at the date of sale. Thereafter, the Trust
shall be adjusted each quarter, if warranted, to an amount equal
to 102% of LMC’s obligations under the Agreement. Initial
loss reserves were $16.0 million. The balance of the Trust
was $4.8 million at December 31, 2004 and
$1.6 million at December 31, 2003.
The Company assumes business from the National Council for
Compensation Insurance in the states of Alaska, Nevada and
Oregon as part of the Residual Market Pool program.
|
|
|
c. Reinsurance Recoverables and Income Statement
Effects |
Balances affected by reinsurance transactions are reported gross
of reinsurance in the balance sheets. Reinsurance recoverables
are comprised of the following amounts at December 31, 2004
and 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Reinsurance recoverables on unpaid loss and loss adjustment
expenses
|
|
$ |
12,582 |
|
|
$ |
11,238 |
|
|
Reinsurance recoverables on paid losses
|
|
|
902 |
|
|
|
812 |
|
| |
|
|
|
|
|
|
| |
Total reinsurance recoverables
|
|
$ |
13,484 |
|
|
$ |
12,050 |
|
| |
|
|
|
|
|
|
The Company recorded no write-offs of uncollectible reinsurance
recoverables in the year ended December 31, 2004 or the
three month period ended December 31, 2003.
83
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The effects of reinsurance on income statements amounts are as
follows for the year ended December 31, 2004 and the three
month period ended December 31, 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Year Ended | |
|
Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Reinsurance assumed:
|
|
|
|
|
|
|
|
|
| |
Written premiums
|
|
$ |
1,162 |
|
|
$ |
— |
|
| |
Earned premiums
|
|
|
999 |
|
|
|
— |
|
| |
Losses and loss adjustment expenses incurred
|
|
|
851 |
|
|
|
— |
|
|
Reinsurance ceded:
|
|
|
|
|
|
|
|
|
| |
Written premiums
|
|
$ |
16,067 |
|
|
$ |
2,759 |
|
| |
Earned premiums
|
|
|
13,153 |
|
|
|
419 |
|
| |
Losses and loss adjustment expenses incurred
|
|
|
2,972 |
|
|
|
2,117 |
|
The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from
activities or economic characteristics of the reinsurers to
minimize its exposure to losses from reinsurer insolvencies. In
the event a reinsurer is unable to meet its obligations, the
Company would be liable for the losses under the agreement.
The Company did not commute any reinsurance agreements in the
year ended December 31, 2004 or the three month period
ended December 31, 2003.
84
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
| 9. |
Unpaid Loss and Loss Adjustment Expenses |
The following table summarizes the activity in unpaid loss and
loss adjustment expense for the year ended December 31,
2004 and the three month period ended December 31, 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Year Ended | |
|
Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Beginning balance
|
|
$ |
18,495 |
|
|
$ |
— |
|
|
Balance acquired at October 1, 2003, net of reinsurance
recoverables of $9,938
|
|
|
— |
|
|
|
15,953 |
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
| |
Current period
|
|
|
53,594 |
|
|
|
3,024 |
|
| |
Prior periods
|
|
|
451 |
|
|
|
2,468 |
|
| |
Receivable under adverse development cover
|
|
|
(385 |
) |
|
|
(2,468 |
) |
| |
|
|
|
|
|
|
| |
|
Total incurred
|
|
|
53,660 |
|
|
|
3,024 |
|
| |
|
|
|
|
|
|
| |
Paid related to:
|
|
|
|
|
|
|
|
|
| |
|
Current period
|
|
|
(11,401 |
) |
|
|
(1,061 |
) |
| |
|
Prior periods
|
|
|
(5,493 |
) |
|
|
(1,889 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total paid
|
|
|
(16,894 |
) |
|
|
(2,950 |
) |
|
Receivable under adverse development cover
|
|
|
385 |
|
|
|
2,468 |
|
| |
|
|
|
|
|
|
| |
Ending balance, net of reinsurance recoverables of $12,582 in
2004 and $11,238 in 2003
|
|
$ |
55,646 |
|
|
$ |
18,495 |
|
| |
|
|
|
|
|
|
As a result of changes in estimates of insured events in prior
periods, the unpaid loss and loss adjustment expenses increased
by approximately $451,000 in the period due to development on
previously reported claims. LMC is obligated to reimburse the
Company for $385,000 of the prior period development. In
connection with the Acquisition, KEIC and LMC entered into an
agreement to indemnify each other with respect to developments
in KEIC’s unpaid loss and loss adjustment expenses over a
period of approximately eight years. December 31, 2011 is
the date to which the parties will look to determine whether the
loss and loss adjustment expenses with respect to KEIC’s
insurance policies in effect at the Acquisition have increased
or decreased from the amount existing at the date of the
Acquisition.
On May 26, 2004, SBIC issued in a private placement
$12.0 million in subordinated floating rate Surplus Notes
due in 2034. The transaction was underwritten by Morgan
Stanley & Company and Cochran & Caronia
Securities, LLC. The noteholder is ICONS, Ltd. and Wilmington
Trust Company acts as Trustee. Interest, paid quarterly in
arrears, is calculated at the beginning of the interest payment
period using the 3-month LIBOR rate plus 400 basis points.
The quarterly interest rate cannot exceed the initial interest
rate by more than 10% per year, cannot exceed the corporate
base (prime) rate by more than 2% and cannot exceed the
highest rate permitted by New York law. The interest rate at
December 31, 2004 was 6.36%. Interest and principal may
only be paid upon the prior approval of the Illinois Division of
Insurance. In the event of default, as defined, or failure to
pay interest due to lack of Illinois Division of Insurance
approval, the Company cannot pay dividends on its capital stock,
is limited in its ability to redeem, purchase or acquire any of
its capital stock and cannot make payments of interest
85
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
or principal on any debt issued by the Company which ranks equal
with or junior to the Surplus Notes. If an event of default
occurs and is continuing, the principal and accrued interest can
become immediately due and payable. Interest expense for the
year ended December 31, 2004 was $415,000.
The notes are redeemable prior to 2034 by the Company, in whole
or in part, from time to time, on or after May 24, 2009 on
an interest payment date or at any time prior to May 24,
2009, in whole but not in part, upon the occurrence and
continuation of a tax event as defined in the agreement. The
Company may not exercise its option to redeem with respect to a
tax event unless it pays a premium in addition to the redemption
price.
Issuance costs of $591,000 incurred in connection with the
Surplus Notes are being amortized over the life of the notes
using the effective interest method. Amortization expense for
the year ended December 31, 2004 was $20,000.
The operations of SIH and its subsidiaries are included in a
consolidated federal income tax return.
The following is a reconciliation of the difference between the
“expected” income tax computed by applying the federal
statutory income tax rate to income before income taxes and the
total federal income taxes reflected on the books for the
initial year ended December 31, 2004 and the three month
period ended December 31, 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months | |
| |
|
Year Ended | |
|
Ended | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Expected federal income tax expense (benefit)
|
|
$ |
3,579 |
|
|
$ |
(103 |
) |
|
Tax exempt bond interest income
|
|
|
(508 |
) |
|
|
— |
|
|
Change in tax rate from 34% to 35%
|
|
|
(65 |
) |
|
|
— |
|
|
Meals and entertainment
|
|
|
14 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
| |
Total federal income tax expense (benefit)
|
|
$ |
3,020 |
|
|
$ |
(101 |
) |
| |
|
|
|
|
|
|
86
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Deferred federal income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and those amounts
used for federal income tax reporting purposes. The significant
components of the deferred tax assets and liabilities at
December 31, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Unpaid loss and loss adjustment expenses
|
|
$ |
2,865 |
|
|
$ |
995 |
|
| |
Unearned premium
|
|
|
4,201 |
|
|
|
1,106 |
|
| |
Net operating loss carryforward
|
|
|
— |
|
|
|
117 |
|
| |
Bad debt reserves
|
|
|
193 |
|
|
|
22 |
|
| |
Amortizable assets
|
|
|
229 |
|
|
|
— |
|
| |
Other
|
|
|
84 |
|
|
|
35 |
|
| |
|
|
|
|
|
|
| |
|
Total gross deferred tax assets
|
|
|
7,572 |
|
|
|
2,275 |
|
| |
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Fixed assets
|
|
|
(112 |
) |
|
|
(67 |
) |
| |
Prepaid expenses
|
|
|
(160 |
) |
|
|
— |
|
| |
Debt issuance costs
|
|
|
(200 |
) |
|
|
— |
|
| |
State insurance licenses
|
|
|
(408 |
) |
|
|
(408 |
) |
| |
Deferred acquisition costs
|
|
|
(2,657 |
) |
|
|
(658 |
) |
| |
Unrealized net gain on investment securities
|
|
|
(368 |
) |
|
|
(151 |
) |
| |
Other
|
|
|
(63 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total deferred tax liabilities
|
|
|
(3,968 |
) |
|
|
(1,284 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
3,604 |
|
|
$ |
991 |
|
| |
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. Based upon
the projections of future taxable income over the periods in
which the deferred taxes are deductible, management believes it
is more likely than not that the Company will realize the
benefits of these deductible differences.
At December 31, 2003, the Company had a net operating loss
carryforward of $343,000, which management fully utilized as an
offset against the Company’s federal taxable income for its
first full year of operations in calendar year 2004.
Consequently, the Company has no net operating loss carry
forward at December 31, 2004.
|
|
| 12. |
Statutory Net Income and Stockholder’s Equity |
SBIC is required to file annually with state regulatory
insurance authorities financial statements prepared on an
accounting basis as prescribed or permitted by such authorities
(statutory basis accounting or “SAP”). Statutory net
income and capital and surplus (stockholder’s equity)
differ from amounts reported in accordance with GAAP, primarily
because policy acquisition costs are expensed when incurred,
87
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
certain assets designated as “nonadmitted” for
statutory purposes are charged to surplus, fixed-income
securities are reported primarily at amortized cost or fair
value based on their rating by the National Association of
Insurance Commissioners (“NAIC”), policyholders’
dividends are expensed as declared rather than accrued as
incurred, income tax expense reflects only taxes paid or
currently payable, and any change in the admitted net deferred
tax asset is offset to equity. Following is a summary of the
Company’s statutory net loss for the year ended
December 31, 2004 and the three month period ended
December 31, 2003 and capital and surplus as of
December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Statutory net loss
|
|
$ |
(1,735 |
) |
|
$ |
(2,955 |
) |
|
Statutory capital and surplus
|
|
|
54,499 |
|
|
|
35,858 |
|
The maximum amount of dividends which can be paid by insurance
companies domiciled in the State of Illinois to shareholders
without prior approval of regulatory authorities is restricted,
if such dividend together with other distributions during the 12
preceding months would exceed the greater of 10% of the
insurer’s statutory surplus as regards policyholders as of
the preceding December 31, or the statutorily adjusted net
income for the preceding calendar year. If the limitation is
exceeded, then such proposed dividend must be reported to the
Director of Insurance at least 30 days prior to the
proposed payment date and may be paid only if not disapproved.
The Illinois insurance laws also permit payment of dividends
only out of earned surplus, exclusive of most unrealized gains.
At December 31, 2004, the Company had negative statutory
earned surplus of $2.5 million. Consequently, SBIC will not
be able to pay any shareholder dividends in 2005 without the
prior approval of the regulators. KEIC was last examined by the
Illinois Division of Insurance as of December 31, 2000. The
State of Illinois imposes minimum risk-based capital
requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of
risk. Regulatory compliance is determined by a ratio of the
enterprise’s regulatory total adjusted capital to certain
minimum capital amounts as defined by the NAIC. Enterprises
below specified trigger points or ratios are classified within
certain levels, each of which requires specified corrective
action. At December 31, 2004 and 2003, the Company exceeded
the minimum risk-based capital requirements.
The Company leases certain office space for its headquarters and
regional offices under agreements that are accounted for as
operating leases. Lease expense for the year ended
December 31, 2004 and the three month period ended
December 31, 2003 totaled $571,000 and $158,000,
respectively. Future minimum payments required under the
agreements are as follows:
| |
|
|
|
|
| |
|
Operating | |
| |
|
Leases | |
| |
|
| |
| |
|
(In thousands) | |
|
2005
|
|
$ |
544 |
|
|
2006
|
|
|
524 |
|
|
2007
|
|
|
464 |
|
|
2008
|
|
|
448 |
|
|
2009
|
|
|
304 |
|
|
Thereafter
|
|
|
23 |
|
| |
|
|
|
| |
|
$ |
2,307 |
|
| |
|
|
|
88
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The Company maintains a defined contribution retirement plan
covering substantially all of its employees. The amount of
annual contribution is 1% of gross salaries and must be approved
by the board of directors. Any additional contribution must be
requested by the President and CEO and approved by the
Compensation Committee. Contribution expense for the year ended
December 31, 2004 and for the three month period ended
December 31, 2003 was $316,000 and $60,000, respectively.
a. SBIC is subject to guaranty fund and other
assessments by the states in which it writes business. Guaranty
fund assessments should be accrued at the time premiums are
written. Other assessments are accrued either at the time of
assessment or in the case of premium-based assessments, at the
time the premiums are written, or in the case of loss-based
assessments, at the time the losses are incurred. SBIC has
accrued a liability for guaranty fund and other assessments of
$2.0 million at December 31, 2004 and has no related
asset for premium offset or policy surcharges. This amount
represents management’s best estimate based on information
received from the states in which it writes business and may
change due to many factors including the Company’s share of
the ultimate cost of current insolvencies. The majority of
assessments are paid out in the year following the premium
written or the losses are paid.
b. The Company is involved in various claims and
lawsuits arising in the ordinary course of business. Management
believes the outcome of these matters will not have a material
adverse effect on the Company’s financial position.
c. In May 2004, the Company was notified of a claim
for damages brought by an individual against PointSure for
breach of contract. The Company believes PointSure has valid
defenses to this claim and has not established any liability in
connection with this claim. No litigation has been commenced.
|
|
| 16. |
Retrospectively Rated Contracts |
On October 1, 2003, the Company began selling workers’
compensation insurance policies for which the premiums vary
based on loss experience. Accrued retrospective premiums are
determined based upon loss experience on business subject to
such experience rating adjustment. Accrued retrospective rated
premiums are determined by or allocated to individual
policyholder accounts. Accrued retrospective premiums and return
retrospective premiums are recorded as additions to and
reductions from written premium, respectively. Approximately
35.8% of the Company’s direct premiums written for the year
ended December 31, 2004 related to retrospectively rated
contracts and approximately 43.8% of direct premiums written for
the three month period ended December 31, 2003 related to
such contracts. The Company accrued $1.1 million for
retrospective premiums payable and $593,000 for return
retrospective premiums at December 31, 2004. No such
amounts were recorded at December 31, 2003.
On July 14, 2003, SIH entered into a purchase agreement,
effective September 30, 2003, with KEG, Eagle and LMC, all
ultimately owned by KIC. In the Acquisition, SIH acquired
PointSure, KEIC, and the renewal rights and substantially all of
the operating assets and employees of Eagle Pacific Insurance
Company and Pacific Eagle Insurance Company. Eagle Pacific
Insurance Company began writing specialty workers’
compensation insurance approximately 20 years ago. The
Acquisition gave SIH renewal rights to an existing portfolio of
business, representing a valuable asset given the renewal nature
of the workers’ compensation insurance business, and a
fully-operational infrastructure that would have taken many
years to develop. These renewal rights gave the Company access
to customer lists and the right to seek to renew
89
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
its continuing in-force insurance contracts. In addition, KEIC
provided the requisite insurance licenses needed to write
business.
The initial aggregate purchase price, including acquisition
costs of $1.3 million, was $16.0 million. The acquired
assets and liabilities were recorded on the Company’s books
at their respective fair values as of the date of Acquisition.
Goodwill, the excess of the purchase price over the net fair
value of the assets and liabilities acquired, was
$2.1 million. The consolidated statements of operations for
the year ended December 31, 2004 and for the three month
period ended December 31, 2003 include the operations of
KEIC and PointSure since October 1, 2003.
The Company and LMC negotiated a final purchase price adjustment
settlement on September 28, 2004. Included in the original
purchase price allocation was an estimated purchase price
settlement amount of $1.1 million. The final purchase price
adjustment settlement of $771,000 reduced the October 1,
2003 balance of reinsurance recoverables by $155,000 and
increased the reserve for unpaid loss and loss adjustment
expenses by $226,000. The Company was required to pay interest
expense of $30,000 related to the settlement period. In
addition, the Company recorded an entry to increase other assets
and reduce goodwill by $241,000.
The following table summarizes the estimated fair value of
assets acquired and liabilities assumed in the Acquisition.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
As Originally | |
| |
|
As Adjusted | |
|
Recorded | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Assets:
|
|
|
|
|
|
|
|
|
| |
Investment securities available-for-sale, at fair value
|
|
$ |
15,923 |
|
|
$ |
15,923 |
|
| |
Cash and cash equivalents
|
|
|
10,511 |
|
|
|
10,511 |
|
| |
Accrued investment income
|
|
|
113 |
|
|
|
113 |
|
| |
Premiums receivable, net of allowance
|
|
|
3,386 |
|
|
|
3,386 |
|
| |
Reinsurance recoverables
|
|
|
10,807 |
|
|
|
10,962 |
|
| |
Deferred federal income taxes
|
|
|
797 |
|
|
|
797 |
|
| |
Intangible assets
|
|
|
3,007 |
|
|
|
3,007 |
|
| |
Goodwill
|
|
|
1,821 |
|
|
|
2,062 |
|
| |
Other assets
|
|
|
1,594 |
|
|
|
1,353 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
|
47,959 |
|
|
|
48,114 |
|
| |
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
| |
Unpaid loss and loss adjustment expenses
|
|
|
26,117 |
|
|
|
25,891 |
|
| |
Reinsurance funds withheld and balances payable
|
|
|
805 |
|
|
|
805 |
|
| |
Accrued expenses and other liabilities
|
|
|
5,225 |
|
|
|
5,410 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
32,147 |
|
|
|
32,106 |
|
| |
|
|
|
|
|
|
|
Net assets acquired
|
|
$ |
15,812 |
|
|
$ |
16,008 |
|
| |
|
|
|
|
|
|
As part of the purchase of KEIC, SIH and LMC entered into an
adverse development excess of loss reinsurance agreement (the
“Agreement”). The Agreement, after taking into account
any recoveries from third party reinsurers, calls for LMC to
reimburse SBIC 100% of the excess of the actual loss result at
December 31, 2011 over the initial loss reserves at
September 30, 2003. The Agreement also calls for SBIC to
reimburse LMC 100% of the excess of the initial loss result at
September 30, 2003 over the actual loss reserves at
December 31, 2011.
90
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
As part of the Agreement, LMC placed into trust (the
“Trust”) an amount equal to 10% of the balance sheet
reserves of KEIC at the date of sale. Thereafter, the Trust
shall be adjusted each quarter, if warranted, to an amount equal
to 102% of LMC’s obligations under the Agreement. The
initial estimate of KEIC’s loss reserves was approximately
$16.0 million.
In addition to the final purchase price adjustment settlement,
the Company and LMC agreed to hire an outside actuary to
determine the unpaid loss and loss adjustment expenses at
September 30, 2004 related to the adverse development cover
agreement with LMC, agreeing that, if necessary, LMC would place
additional funds into the Trust account to increase the amount
to 102% of any determined obligation. In accordance with the
terms of adverse development cover agreement and the agreement
governing the Trust account, on December 23, 2004, LMC
deposited into the Trust account an additional
$3.2 million. At December 31, 2004, the Company was
waiting to receive a final report from the outside actuary as to
the final amount required to be held in the trust account as of
September 30, 2004 (see Note 21). The balance of the
Trust was $4.8 million at December 31, 2004 and
$1.6 million at December 31, 2003.
The following 2003 pro forma consolidated results of operations
(unaudited) have been prepared as if the Acquisition had
occurred on January 1, 2003:
| |
|
|
|
|
| |
|
(In thousands, | |
| |
|
except earnings | |
| |
|
per share) | |
|
Total revenue
|
|
$ |
58,959 |
|
|
Net income
|
|
|
4,774 |
|
|
Fully diluted earnings per common share equivalent outstanding
|
|
|
5.23 |
|
Intangible assets, other than goodwill, consist of the following
at December 31, 2004 and 2003 (dollar amounts in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accumulated Amortization | |
| |
|
|
|
|
|
| |
| |
|
Gross Carrying | |
|
Amortization | |
|
December 31, | |
|
December 31, | |
| |
|
Amount | |
|
Period (years) | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
State insurance licenses
|
|
$ |
1,200 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Renewal rights
|
|
|
783 |
|
|
|
2 |
|
|
|
489 |
|
|
|
98 |
|
| |
Internally developed software
|
|
|
944 |
|
|
|
3 |
|
|
|
393 |
|
|
|
78 |
|
| |
Trademark
|
|
|
50 |
|
|
|
5 |
|
|
|
13 |
|
|
|
3 |
|
| |
Customer relations
|
|
|
30 |
|
|
|
2 |
|
|
|
19 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
3,007 |
|
|
|
|
|
|
$ |
914 |
|
|
$ |
183 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense was $731,000 for the year ended
December 31, 2004 and $183,000 for the three month period
ended December 31, 2003. Estimated remaining amortization
expense is $629,500 in 2005, $246,000 in 2006, $10,000 in 2007
and $7,500 in 2008.
The valuation of renewal rights was developed using the income
approach, which focuses on the income-producing capability of
the renewal rights asset by measuring the present value of the
after tax cash flows over the life of the renewal rights.
91
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
|
|
|
a. Convertible Preferred Stock |
In September 2003, the Company’s board of directors
authorized 750,000 shares of convertible preferred stock,
all of which were designated as Series A preferred stock.
In September 2003, the Company sold 456,750 shares of
Series A preferred stock for cash proceeds, net of issuance
costs, of $45.7 million. In June 2004, the Company sold an
additional 51,615.25 shares of Series A preferred
stock to current preferred stockholders and certain members of
Company management for an aggregate purchase price of
$5.2 million. Each share of Series A preferred stock
is convertible into 15.299664 shares of the Company’s
common stock, after giving effect to a two-for-one split of the
Company’s common stock in February 2004 and a further
7.649832-for-one split of the Company’s common stock in
December 2004. All references to numbers of shares in the
consolidated financial statements and accompanying notes have
been adjusted to reflect the stock splits on a retroactive
basis. As explained in Note 21, all outstanding shares of
Series A preferred stock were converted into
7,777,808 shares of common stock in connection with the
initial public offering of the Company’s common stock in
January 2005.
In September 2003, the Company’s board of directors
authorized 750,000 shares of common stock with a par value
$0.01 per share. The number of authorized shares of common
stock was increased to 1.1 million in March 2004,
1.2 million in August 2004, 10.0 million in December
2004 and 75.0 million in January 2005. The board of
directors declared a two-for-one common stock split in February
2004 and a further 7.649832-for-one common stock split in
December 2004. As explained in Note 21, the Company
completed the initial public offering of its common stock in
January 2005, issuing 8,625,000 shares of common stock at a
price of $10.50 per share for total gross proceeds of
$90.6 million and converting all outstanding shares of its
Series A preferred stock into 7,777,808 shares of
common stock.
The stockholders and board of directors approved the 2003 Stock
Option Plan (the “2003 Plan”) in September 2003 and
the 2005 Long-Term Equity Incentive Plan (the “2005
Plan” and, together with the 2003 Plan, the “Stock
Option Plans”) in December 2004. Following completion of
the Company’s initial public offering in January 2005, the
Company anticipates that all future option grants will be made
under the 2005 Plan, and does not intend to issue any further
options under the 2003 Plan.
The board of directors has the authority to determine all
matters relating to options to be granted under the Stock Option
Plans, including designation as incentive or nonqualified stock
options, the selection of individuals to be granted options, the
number of shares subject to each grant, the exercise price, the
term and vesting period, if any. Generally, options vest evenly
over four years and expire ten years from the date of grant. The
board of directors reserved an initial total of
1,047,755 shares of common stock under the 2005 Plan, plus
an automatic annual increase, to be added on the first day of
the Company’s fiscal year beginning in 2006 and ending in
2015, equal to the lesser of (i) 2% of the shares of common
stock outstanding on the last day of the immediately preceding
fiscal year or; (ii) such lesser number of shares as
determined by the board of directors.
92
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
At December 31, 2004, the Company reserved
776,458 shares of common stock for issuance under the 2003
Plan, of which options to purchase 491,508 shares had
been granted, and 1,047,755 shares for issuance under the
2005 Plan. No options had been granted under the 2005 Plan as of
December 31, 2004. The following table summarizes stock
option activity:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted Average | |
| |
|
Number of | |
|
Exercise Price | |
| |
|
Shares | |
|
per Share | |
| |
|
| |
|
| |
|
Beginning balance
|
|
|
— |
|
|
$ |
— |
|
| |
Options granted
|
|
|
388,231 |
|
|
|
6.54 |
|
| |
Options forfeited
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
— |
|
|
Balance at December 31, 2003
|
|
|
388,231 |
|
|
|
6.54 |
|
| |
Options granted
|
|
|
107,102 |
|
|
|
6.54 |
|
| |
Options forfeited
|
|
|
(3,825 |
) |
|
|
6.54 |
|
| |
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
491,508 |
|
|
|
6.54 |
|
| |
|
|
|
|
|
|
The following table summarizes stock option information at
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
|
|
|
| |
|
| |
|
|
| |
|
|
|
Weighted-Average | |
|
|
|
Options Exercisable | |
| |
|
|
|
Remaining | |
|
|
|
| |
| |
|
Number | |
|
Contractual Life | |
|
Weighted-Average | |
|
Number | |
|
Weighted-Average | |
| Exercise Price |
|
Outstanding | |
|
(Years) | |
|
Exercise Price | |
|
Outstanding | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$6.54
|
|
|
491,508 |
|
|
|
8.88 |
|
|
$ |
6.54 |
|
|
|
97,058 |
|
|
$ |
6.54 |
|
|
|
| 20. |
Quarterly Financial Information (unaudited) |
The following table summarizes selected unaudited quarterly
financial data for each quarter of the year ended
December 31, 2004 and for the quarter ended
December 31, 2003, the only quarter in 2003 in which the
Company was operational.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except earnings per share) | |
|
Fiscal year 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Premiums earned
|
|
$ |
8,513 |
|
|
$ |
15,651 |
|
|
$ |
24,038 |
|
|
$ |
29,758 |
|
| |
Loss and loss adjustment expenses
|
|
|
6,598 |
|
|
|
11,371 |
|
|
|
16,854 |
|
|
|
18,837 |
|
| |
Underwriting, acquisition and insurance expenses
|
|
|
2,547 |
|
|
|
3,669 |
|
|
|
4,291 |
|
|
|
7,347 |
|
| |
Net income
|
|
|
354 |
|
|
|
967 |
|
|
|
2,695 |
|
|
|
3,190 |
|
| |
Fully diluted income per common share equivalent
|
|
$ |
0.06 |
|
|
$ |
0.15 |
|
|
$ |
0.36 |
|
|
$ |
0.41 |
|
|
Fiscal year 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Premiums earned
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,134 |
|
| |
Loss and loss adjustment expenses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,024 |
|
| |
Underwriting, acquisition and insurance expenses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,789 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(202 |
) |
| |
Fully diluted loss per common share equivalent
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
93
SEABRIGHT INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
In January 2005, the Company amended and restated its
certificate of incorporation to increase to 75.0 million
the number of shares of common stock authorized to be issued.
On January 26, 2005, the Company closed its initial public
offering of 8,625,000 shares of common stock, including the
underwriters’ over-allotment option, at a price of
$10.50 per share for net proceeds of approximately
$80.8 million, after deducting underwriters’ fees,
commissions and offering costs totaling approximately
$9.7 million. On January 26, 2005, the Company
contributed approximately $74.8 million of the net proceeds
to SeaBright Insurance Company. As part of the initial public
offering, all 508,365.25 outstanding shares of the
Company’s Series A preferred stock were converted into
7,777,808 shares of the Company’s common stock.
Included in other assets at December 31, 2004 is
approximately $1.3 million of offering costs associated
with the initial public offering. These costs were deducted from
the gross proceeds of the offering at closing.
In February 2005, the Company received from the outside actuary
the final report of unpaid loss and loss adjustment expenses at
September 30, 2004 related to the adverse development cover
agreement with LMC (see Note 17). The Company is currently
reviewing the results of the final report.
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
SeaBright Insurance Holdings, Inc.:
We have audited the combined balance sheet of Predecessor as of
December 31, 2002, and the related combined statements of
operations, changes in stockholder’s equity and
comprehensive income, and cash flows for the nine months ended
September 30, 2003 and for the year ended December 31,
2002. These combined financial statements are the responsibility
of the Predecessor’s management. Our responsibility is to
express an opinion on these combined financial statements based
on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of the Predecessor as of December 31, 2002 and the
results of its operations and its cash flows for the nine months
ended September 30, 2003 and for the year ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in notes 2(i) and 17 to the combined financial
statements, effective January 1, 2002 the Predecessor
adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets.
/s/ KPMG LLP
Seattle, Washington
September 14, 2004
95
PREDECESSOR
COMBINED BALANCE SHEET
DECEMBER 31, 2002
(In thousands)
| |
|
|
|
|
|
|
|
ASSETS |
|
Investment securities available for sale, at fair value
|
|
$ |
55,891 |
|
|
Cash and cash equivalents
|
|
|
30,015 |
|
|
Accrued investment income
|
|
|
498 |
|
|
Premiums receivable, net of allowance
|
|
|
8,694 |
|
|
Deferred premiums
|
|
|
35,228 |
|
|
Retrospective premiums accrued
|
|
|
5,668 |
|
|
Reinsurance recoverables
|
|
|
36,617 |
|
|
Reinsurance recoverables from parent
|
|
|
102,107 |
|
|
Prepaid reinsurance
|
|
|
34,672 |
|
|
Property and equipment, net
|
|
|
133 |
|
|
Deferred federal income taxes, net
|
|
|
4,416 |
|
|
Deferred policy acquisition costs, net
|
|
|
1,422 |
|
|
Intangible assets
|
|
|
921 |
|
|
Other assets
|
|
|
539 |
|
| |
|
|
|
| |
|
Total assets
|
|
$ |
316,821 |
|
| |
|
|
|
| |
|
LIABILITIES AND STOCKHOLDER’S EQUITY |
|
Liabilities:
|
|
|
|
|
| |
Unpaid loss and loss adjustment expense
|
|
$ |
153,469 |
|
| |
Unearned premiums
|
|
|
47,604 |
|
| |
Reinsurance funds withheld and balances payable
|
|
|
756 |
|
| |
Deferred retroactive reinsurance gain
|
|
|
6,682 |
|
| |
Accrued expenses and other liabilities
|
|
|
18,109 |
|
| |
Federal income tax payable to parent
|
|
|
2,429 |
|
| |
|
|
|
| |
|
Total liabilities
|
|
|
229,049 |
|
| |
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
Stockholder’s equity:
|
|
|
|
|
| |
Common stock
|
|
|
7,766 |
|
| |
Paid-in capital
|
|
|
103,259 |
|
| |
Accumulated deficit
|
|
|
(24,349 |
) |
| |
Accumulated other comprehensive income
|
|
|
1,096 |
|
| |
|
|
|
| |
|
Total stockholder’s equity
|
|
|
87,772 |
|
| |
|
|
|
| |
|
Total liabilities and stockholder’s equity
|
|
$ |
316,821 |
|
| |
|
|
|
See accompanying notes to combined financial statements.
96
PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
| |
Premiums earned
|
|
$ |
36,916 |
|
|
$ |
17,058 |
|
| |
Net investment income
|
|
|
1,735 |
|
|
|
3,438 |
|
| |
Net realized gains (losses)
|
|
|
14 |
|
|
|
(4,497 |
) |
| |
Service income
|
|
|
698 |
|
|
|
1,169 |
|
| |
Other income
|
|
|
1,514 |
|
|
|
1,152 |
|
| |
|
|
|
|
|
|
| |
|
|
40,877 |
|
|
|
18,320 |
|
| |
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
| |
Loss and loss adjustment expenses
|
|
|
25,395 |
|
|
|
4,992 |
|
| |
Underwriting, acquisition, and insurance expenses
|
|
|
6,979 |
|
|
|
3,681 |
|
| |
Other expenses
|
|
|
1,791 |
|
|
|
3,339 |
|
| |
|
|
|
|
|
|
| |
|
|
34,165 |
|
|
|
12,012 |
|
| |
|
|
|
|
|
|
| |
|
Income before federal income taxes
|
|
|
6,712 |
|
|
|
6,308 |
|
| |
|
|
|
|
|
|
|
Federal income tax expense (benefit):
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
3,541 |
|
|
|
2,429 |
|
| |
Deferred
|
|
|
(1,545 |
) |
|
|
589 |
|
| |
|
|
|
|
|
|
| |
|
|
1,996 |
|
|
|
3,018 |
|
| |
|
|
|
|
|
|
| |
|
Net income before cumulative effect of change in accounting
principle
|
|
|
4,716 |
|
|
|
3,290 |
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
— |
|
|
|
(4,731 |
) |
| |
|
|
|
|
|
|
| |
|
Net income (loss)
|
|
$ |
4,716 |
|
|
$ |
(1,441 |
) |
| |
|
|
|
|
|
|
See accompanying notes to combined financial statements.
97
PREDECESSOR
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY AND
COMPREHENSIVE INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
| |
|
|
|
|
|
Retained | |
|
Other | |
|
|
| |
|
|
|
|
|
Earnings | |
|
Comprehensive | |
|
|
| |
|
Common | |
|
Paid-In | |
|
(Accumulated | |
|
Income | |
|
|
| |
|
Stock | |
|
Capital | |
|
Deficit) | |
|
(Loss) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at December 31, 2001
|
|
$ |
7,766 |
|
|
$ |
103,259 |
|
|
$ |
(22,908 |
) |
|
$ |
(1,293 |
) |
|
$ |
86,824 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
(1,441 |
) |
|
|
— |
|
|
|
(1,441 |
) |
| |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reclassification adjustment for realized losses recorded into
income, net of tax of $1,299
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,415 |
|
|
|
2,415 |
|
| |
Increase in unrealized gains, net of tax of $(14)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(26 |
) |
|
|
(26 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
7,776 |
|
|
|
103,259 |
|
|
|
(24,349 |
) |
|
|
1,096 |
|
|
|
87,772 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
4,716 |
|
|
|
— |
|
|
|
4,716 |
|
| |
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reclassification adjustment for realized gains recorded into
income, net of tax of $(5)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
|
(9 |
) |
| |
Increase in unrealized gains, net of tax of $203
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
377 |
|
|
|
377 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,084 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2003
|
|
$ |
7,766 |
|
|
$ |
103,259 |
|
|
$ |
(19,633 |
) |
|
$ |
1,464 |
|
|
$ |
92,856 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
|
|
Issued and | |
|
|
|
Issued and | |
| |
|
Authorized | |
|
Outstanding | |
|
Authorized | |
|
Outstanding | |
| |
|
| |
|
| |
|
| |
|
| |
|
Eagle Pacific Insurance Company Common Stock, $810 par value
|
|
|
6,500 |
|
|
|
6,500 |
|
|
|
6,500 |
|
|
|
6,500 |
|
|
Pacific Eagle Insurance Company Common Stock, $50 par value
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
50,000 |
|
|
PointSure Insurance Services, Inc. Common Stock, $1 par
value
|
|
|
50,000 |
|
|
|
500 |
|
|
|
50,000 |
|
|
|
500 |
|
See accompanying notes to combined financial statements.
98
PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
Year | |
| |
|
Ended | |
|
Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
4,716 |
|
|
$ |
(1,441 |
) |
| |
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
| |
|
Amortization of deferred policy acquisition costs
|
|
|
3,797 |
|
|
|
1,574 |
|
| |
|
Policy acquisition costs deferred
|
|
|
(6,688 |
) |
|
|
(2,093 |
) |
| |
|
Provision for depreciation and amortization
|
|
|
416 |
|
|
|
432 |
|
| |
|
Net realized loss on investments
|
|
|
(14 |
) |
|
|
4,497 |
|
| |
|
Gain on sale of fixed assets
|
|
|
— |
|
|
|
2 |
|
| |
|
Provision (benefit) for deferred federal income taxes
|
|
|
(1,545 |
) |
|
|
589 |
|
| |
|
Cumulative effect on change in accounting principle
|
|
|
— |
|
|
|
4,731 |
|
| |
|
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
| |
|
|
Accrued investment income
|
|
|
104 |
|
|
|
233 |
|
| |
|
|
Unpaid loss and loss adjustment expense
|
|
|
8,069 |
|
|
|
(12,873 |
) |
| |
|
|
Unearned premiums, net of premiums receivable
|
|
|
(5,048 |
) |
|
|
(4,660 |
) |
| |
|
|
Reinsurance recoverables, net of reinsurance funds withheld
|
|
|
11,326 |
|
|
|
18,463 |
|
| |
|
|
Deferred gain on retroactive reinsurance transaction
|
|
|
(1,631 |
) |
|
|
(5,464 |
) |
| |
|
|
Federal income taxes payable
|
|
|
3,080 |
|
|
|
863 |
|
| |
|
|
Other assets and other liabilities
|
|
|
(4,079 |
) |
|
|
6,280 |
|
| |
|
|
|
|
|
|
| |
|
|
|
Net cash provided by operating activities
|
|
|
12,503 |
|
|
|
11,133 |
|
| |
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
| |
Purchases of investments
|
|
|
(5,794 |
) |
|
|
(29,943 |
) |
| |
Sales, maturities and redemption of investments
|
|
|
15,603 |
|
|
|
38,488 |
|
| |
Purchases of property and equipment
|
|
|
(56 |
) |
|
|
(42 |
) |
| |
Sales of property and equipment
|
|
|
— |
|
|
|
12 |
|
| |
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) investing activities
|
|
|
9,753 |
|
|
|
8,515 |
|
| |
|
|
|
|
|
|
| |
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
22,256 |
|
|
|
19,648 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
30,015 |
|
|
|
10,367 |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
52,271 |
|
|
$ |
30,015 |
|
| |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
| |
Federal income taxes paid
|
|
$ |
— |
|
|
$ |
1,571 |
|
See accompanying notes to combined financial statements.
99
PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS
Eagle Pacific Insurance Company (“EPIC”), Pacific
Eagle Insurance Company (“PEIC”), and PointSure
Insurance Services, Inc. (“PSIS”), which are
collectively referred to as “Predecessor,” were
purchased by Lumbermens Mutual Casualty Company
(“LMC”) on July 31, 1998 from Services Group of
America, Inc. in a transaction accounted for as a purchase
business combination.
EPIC and PEIC write both state act workers’ compensation
insurance and United States Longshore and Harborworkers’
Compensation insurance in 20 Western and Gulf Coast states. EPIC
is domiciled in the State of Washington and PEIC is domiciled in
the State of California. The three states with the largest
percentage of the Predecessor’s direct written premiums for
the nine months ended September 30, 2003 and the year ended
December 31, 2002 were California, Texas, and Alaska. The
majority of its business is written in California. PSIS is
engaged primarily in administrative and brokerage activities on
behalf of EPIC and PEIC.
On September 30, 2003, LMC sold PSIS and the renewal rights
and substantially all of the operating assets, systems and
employees of EPIC and PEIC to SeaBright Insurance Holdings, Inc.
(“SIH”). Since SIH acquired renewal rights and not the
in-force insurance contracts, the in-force insurance contracts
will remain with EPIC and PEIC until policy expiration or the
date of cancellation. Premium and loss obligations for the
policies remain with EPIC and PEIC. SIH has entered into
services agreements with LMC to handle claims and policy
administration for these policies.
|
|
| 2. |
Summary of Significant Accounting Policies |
The accompanying combined financial statements include the
accounts of EPIC, PEIC, and PSIS, wholly owned subsidiaries of
LMC. All significant inter-company transactions among these
affiliated entities have been eliminated in the combined
financial statements.
The preparation of combined financial statements requires
management of the Predecessor to make a number of estimates and
assumptions relating to the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the combined financial statements and
the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates. The
Predecessor has used significant estimates in determining the
unpaid loss and loss adjustment expenses, earned premiums on
retrospectively rated policies, and amounts related to
reinsurance.
Investment securities are classified as available for sale and
carried at fair value, adjusted for other-than-temporary
declines in fair value, with changes in unrealized gains and
losses recorded directly in other comprehensive income, net of
applicable income taxes. The estimated fair value for
investments in available for sale securities is generally based
on quoted market value prices for securities traded in the
public marketplace. A decline in the market value of any
available for sale security below cost that is deemed to be
other-than-temporary results in a reduction in carrying amount
to fair value. The impairment is charged to earnings and a new
cost basis for the security is established. To determine whether
an impairment is other-than-temporary, management considers
whether it has the ability and intent to hold the investment
until a market price recovery and considers whether evidence
indicating the cost of the investment is recoverable outweighs
evidence to the contrary. Evidence considered in this
100
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
assessment includes the reasons for the impairment, the severity
and duration of the impairment, changes in value subsequent to
year-end, and forecasted performance of the investment.
Mortgage-backed securities represent participating interests in
pools of first mortgage loans originated and serviced by the
issuers of securities. Premiums and discounts are amortized
using a method that approximates the level yield method over the
remaining period to contractual maturity, adjusted for the
anticipated prepayments. To the extent the estimated lives of
such securities change as a result of changes in prepayment
rates, the adjustment is also included in net investment income.
Prepayment assumptions used for mortgage-backed and asset-backed
securities are obtained from an external securities information
service and are consistent with the current interest rate and
economic environment.
Realized gains and losses, which arise principally from the sale
of investments, are determined on a specific-identification
basis.
Premiums and discounts are amortized or accreted over the life
of the related investment security as an adjustment to yield
using the call date of the security. Dividend and interest
income are recognized when earned.
|
|
|
d. Derivative Instruments and Hedging
Activities |
The Predecessor accounts for derivatives and hedging activities
in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 133, “Accounting for Derivative
Instruments and Certain Hedging Activities,” as amended,
which requires that all derivative instruments be recorded on
the balance sheet at their respective fair values.
The Predecessor held derivative instruments during the year
ended December 31, 2002 that were not designated as hedges
and as such, changes in fair value of those instruments were
recognized in current period earnings and were included as a
component of net realized gains (losses). The Predecessor held
no derivative instruments at December 31, 2002.
|
|
|
e. Cash and Cash Equivalents |
Cash and cash equivalents, which consist primarily of amounts
deposited in banks and financial institutions and all highly
liquid investments with maturity of 90 days or less when
purchased, are stated at cost.
Premiums receivable are recorded at the invoiced amount. The
allowance for doubtful accounts is the Predecessor’s best
estimate of the amount of probable losses in the
Predecessor’s existing premiums receivable. Account
balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery
is considered remote.
|
|
|
g. Deferred Policy Acquisition Costs |
Acquisition costs related to premiums written are deferred and
amortized over the periods in which the premiums are earned.
Such acquisition costs include commissions, premium taxes, and
certain underwriting and policy issuance costs. Deferred policy
acquisition costs are limited to amounts recoverable from
unearned premiums and anticipated investment income. The amounts
that are not considered realizable are charged as an expense
through amortization of deferred policy acquisition costs.
101
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
|
h. Property and Equipment |
Computer equipment, software, furniture and equipment, and
leasehold improvements are recorded at cost and depreciated
under the straight line method over their estimated useful
lives, which are three years for computer equipment and
software, five years for furniture and equipment, and the
remaining lease term for leasehold improvements. Depreciation
expense for the nine months ended September 30, 2003 and
for the year ended December 31, 2002 was $19,181 and
$88,079, respectively.
|
|
|
i. Goodwill and Other Intangible Assets |
Goodwill on the accompanying balance sheet represents the excess
of costs over fair value of assets associated with LMC’s
acquisition of the Predecessor.
As further described in note 17, the Predecessor adopted
the provisions of SFAS No. 142, “Goodwill and
Other Intangible Assets,” as of January 1, 2002. Under
SFAS No. 142, goodwill and other intangible assets
acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but are
instead tested for impairment at least annually in accordance
with the provisions for SFAS No. 142.
SFAS No. 142 also requires that intangible assets with
definite lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed
for impairment in accordance with SFAS No. 144,
“Accounting for Impairment or Disposal of Long-Lived
Assets.”
|
|
|
j. Impairment of Long-Lived Assets |
The Predecessor adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did
not affect the Predecessor’s financial statements.
In accordance with SFAS No. 144, long-lived assets,
such as property and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented in
the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the
appropriate asset and liability sections of the balance sheet.
Premiums for primary and reinsured risks are included in revenue
over the period of the contract in proportion to the amount of
insurance protection provided (i.e., ratably over the policy
period). Premiums are shown net of reinsurance. The portion of
the premium that is applicable to the unexpired period of the
policies in-force is not included in revenue and is deferred and
recorded as unearned premium in the liability section of the
balance sheet. Deferred premiums represent the unbilled portion
of annual premiums.
Earned premiums on retrospectively rated policies are based on
our estimate of loss experience as of the measurement date. Loss
experience includes known losses specifically identifiable to a
retrospective policy as well as provisions for future
development on known losses and for losses incurred but not yet
reported using actuarial loss development factors and is
consistent with how we project losses in general. For
retrospectively rated policies, the governing contractual
minimum and maximum rates are established at policy inception
and are made a part of the insurance contract. While the typical
retrospectively rated
102
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
policy has five annual adjustment or measurement periods,
premium adjustments continue until mutual agreement to cease
future adjustments is reached with the policyholder.
As of December 31, 2002, 42% of the Predecessor’s
direct business was from retrospectively rated policies.
Service income generated from various claims service agreements
with the Predecessor’s parent and other third parties is
recognized as income in the period in which services are
performed.
|
|
|
l. Unpaid Loss and Loss Adjustment Expense |
Unpaid loss and loss adjustment expense represents estimates of
the ultimate net cost of all unpaid losses incurred through the
specified period. Unpaid loss adjustment expenses are estimates
of unpaid expenses to be incurred in settlement of the claims
included in the liability for unpaid losses. These liabilities,
which anticipate salvage and subrogation recoveries and are
presented gross of amounts recoverable from reinsurers, include
estimates of future trends in the frequency and severity of
claims and other factors that could vary as the losses are
ultimately settled. Although it is not possible to measure the
degree of variability inherent in such estimates, management
believes that the unpaid loss and loss adjustment expenses are
adequate. The estimates are continually reviewed and necessary
adjustments are included in current operations.
The Predecessor protects itself from excessive losses by
reinsuring certain levels of risk in various areas of exposure
with affiliated and nonaffiliated reinsurers. Reinsurance
premiums, commissions, expense reimbursements, and unpaid loss
and loss adjustment expense related to assumed and ceded
business are accounted for on a basis consistent with those used
in accounting for original policies issued and the terms of the
reinsurance contracts. Premiums assumed from an affiliate are
reported as an addition to premiums written and earned. Premiums
ceded to other companies are reported as a reduction of premiums
written and earned. Reinsurance recoverables are determined
based on the terms and conditions of the reinsurance contracts.
On January 1, 1999 EPIC and PEIC entered into quota share
reinsurance agreements with LMC, their ultimate parent, whereby
EPIC and PEIC ceded to LMC 80% of the net retained liabilities,
after application of all external reinsurance, and 80% of
underwriting expenses for all policies written by EPIC and PEIC
from January 1, 1999 through December 31, 2002. The
unearned premiums on policies in force at December 31, 2002
were still subject, subsequent to December 31, 2002, to the
terms of the quota share reinsurance treaties.
On January 1, 1999, EPIC and PEIC entered into excess stop
loss reinsurance agreements with LMC, whereby LMC reinsured the
excess liability which may accrue to EPIC and PEIC by reason of
the net retained liability of EPIC and PEIC under the quota
share reinsurance agreements. This agreement applied to all
policies written by EPIC and PEIC from January 1, 1999
through December 31, 2002. The combined ratio needed to
exceed 115% on a paid basis before EPIC and PEIC were entitled
to any recovery under these agreements.
On January 1, 1999, EPIC and PEIC entered into retroactive
Loss Portfolio Transfer Reinsurance Agreements (LPT) with
LMC. Under the LPT agreements, EPIC and PEIC would cede to LMC
their net retained liability for losses for the policies and
losses with dates of accident on or before December 31,
1998 and LMC would assume 100% of the net retained liability
relating to those losses. Subsequent to January 1, 1999,
there has been adverse development of approximately $24,359,000
through December 31, 2002 on the transferred unpaid loss
and loss adjustment expense. At December 31, 2002, the
Predecessor has recorded a deferred gain of approximately
$6,682,000. The deferred gains are amortized using the
103
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
recovery method, which considers the actual recoveries at a
particular calculation date in relation to the total estimated
recoveries at that date. The amortization (accretion) related to
deferred gains of $131,000 and $(1,537,000) was considered other
income (expense) for the nine months ending September 30,
2003 and the year ended December 31, 2002, respectively.
The asset and liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities
are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse, net of any
applicable valuation allowances.
Comprehensive income encompasses all changes in
shareholder’s equity (except those arising from
transactions with shareholders) and includes net income and
changes in net unrealized investment gains and losses on
investment securities available for sale, net of taxes.
The combined cost or amortized cost, gross unrealized gains and
losses, and estimated fair value of investment securities
available for sale at December 31, 2002 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2002 | |
| |
|
| |
| |
|
Cost or | |
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Estimated | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
U.S. treasuries and government sponsored agency obligations
|
|
$ |
20,410 |
|
|
$ |
1,573 |
|
|
$ |
— |
|
|
$ |
21,983 |
|
|
Asset-backed securities
|
|
|
2,065 |
|
|
|
119 |
|
|
|
— |
|
|
|
2,184 |
|
|
Mortgage-backed securities
|
|
|
23,212 |
|
|
|
548 |
|
|
|
— |
|
|
|
23,760 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total fixed income securities
|
|
|
45,687 |
|
|
|
2,240 |
|
|
|
— |
|
|
|
47,927 |
|
|
Equity securities
|
|
|
8,518 |
|
|
|
— |
|
|
|
554 |
|
|
|
7,964 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total available-for-sale securities
|
|
$ |
54,205 |
|
|
$ |
2,240 |
|
|
$ |
554 |
|
|
$ |
55,891 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2002, the unrealized loss on temporarily
impaired investments totaled $554,239 for equity securities with
a fair value of $7,964,000. All equity securities were impaired
for less than one year. Temporarily impaired equity securities
are a result of market value changes and are expected to regain
the lost value with market shifts.
The Predecessor evaluated equity securities with market values
less than cost and has determined that the decline in value is
temporary. The Predecessor anticipates full recovery with
respect to these securities.
104
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
The combined cost or amortized cost and estimated fair value of
fixed income securities at December 31, 2002, by
contractual maturity, are set forth below. Actual maturities may
differ from contractual maturities because certain borrowers
have the right to call or prepay obligations with or without
call or prepayment penalties.
| |
|
|
|
|
|
|
|
|
|
| |
|
Cost or | |
|
Estimated | |
| Maturity |
|
Amortized Cost | |
|
Fair Value | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Due in one year or less
|
|
$ |
2,224 |
|
|
$ |
2,238 |
|
|
Due after one year through five years
|
|
|
10,416 |
|
|
|
11,163 |
|
|
Due after five years through ten years
|
|
|
6,574 |
|
|
|
7,191 |
|
|
Due after ten years
|
|
|
1,196 |
|
|
|
1,391 |
|
|
Securities not due at a single maturity date
|
|
|
25,277 |
|
|
|
25,944 |
|
| |
|
|
|
|
|
|
| |
Total fixed income securities
|
|
$ |
45,687 |
|
|
$ |
47,927 |
|
| |
|
|
|
|
|
|
The combined amortized cost of fixed income securities deposited
with various regulatory authorities was $12,655,152 at
December 31, 2002.
Net investment income consisted of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Fixed income securities
|
|
$ |
1,397 |
|
|
$ |
3,259 |
|
|
Equity securities
|
|
|
112 |
|
|
|
170 |
|
|
Cash & short term investments
|
|
|
323 |
|
|
|
136 |
|
| |
|
|
|
|
|
|
| |
Total gross investment income
|
|
|
1,832 |
|
|
|
3,565 |
|
|
Less investment expense
|
|
|
(97 |
) |
|
|
(127 |
) |
| |
|
|
|
|
|
|
| |
Net investment income
|
|
$ |
1,735 |
|
|
$ |
3,438 |
|
| |
|
|
|
|
|
|
Net realized gains and losses were included in revenue as
follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Fixed income:
|
|
|
|
|
|
|
|
|
| |
Gross gains
|
|
$ |
9 |
|
|
$ |
724 |
|
| |
Gross losses
|
|
|
— |
|
|
|
(886 |
) |
| |
|
|
|
|
|
|
| |
|
Total fixed income
|
|
|
9 |
|
|
|
(162 |
) |
| |
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
| |
Gross gains
|
|
|
5 |
|
|
|
— |
|
| |
Gross losses
|
|
|
— |
|
|
|
(753 |
) |
| |
Other-than-temporary declines in fair value
|
|
|
— |
|
|
|
(3,582 |
) |
| |
|
|
|
|
|
|
| |
|
Total equity
|
|
|
5 |
|
|
|
(4,335 |
) |
| |
|
|
|
|
|
|
| |
|
Net realized investment gains (losses)
|
|
$ |
14 |
|
|
$ |
(4,497 |
) |
| |
|
|
|
|
|
|
105
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
| 4. |
Fair Value of Financial Instruments |
Estimated fair value amounts, defined as the quoted market price
of a financial instrument, have been determined using available
market information and other appropriate valuation
methodologies. However, considerable judgment is required in
developing the estimates of fair value. Accordingly, these
estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of
different market assumptions or estimating methodologies may
have an effect on the estimated fair value amounts.
The following methods and assumptions were used by the
Predecessor in estimating the fair value disclosures for
financial instruments in the accompanying financial statements
and notes:
|
|
|
| |
• |
Cash and cash equivalents, premiums receivable, and accrued
expenses and other liabilities: The carrying amounts for
these financial instruments as reported in the accompanying
balance sheet approximate their fair values. |
| |
| |
• |
Investment securities: The estimated fair values for
available-for-sale securities generally represent quoted market
value prices for securities traded in the public marketplace.
Additional data with respect to fair values of the
Predecessor’s investment securities are disclosed in
note 3. |
Other financial instruments qualify as insurance-related
products and are specifically exempted from fair value
disclosure requirements.
Direct premiums written for the nine months ended
September 30, 2003 and the year ended December 31,
2002 were $68,402,211 and $94,407,482, respectively.
Premiums receivable consists of the following as of
December 31, 2002 (in thousands):
| |
|
|
|
|
|
Premiums receivable
|
|
$ |
8,799 |
|
|
Allowance for doubtful accounts
|
|
|
(105 |
) |
| |
|
|
|
| |
|
$ |
8,694 |
|
| |
|
|
|
The activity in the allowance for doubtful accounts for the nine
months ended September 30, 2003 and the year ended
December 31, 2002 are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at beginning of year
|
|
$ |
(105 |
) |
|
$ |
(253 |
) |
|
Additions charged to bad debt expense
|
|
|
— |
|
|
|
(80 |
) |
|
Write offs (recoveries) charged against allowance
|
|
|
(118 |
) |
|
|
228 |
|
| |
|
|
|
|
|
|
| |
Balance at end of year
|
|
$ |
(223 |
) |
|
$ |
(105 |
) |
| |
|
|
|
|
|
|
106
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
| 6. |
Property and Equipment |
Property and equipment are summarized as of December 31,
2002 as follows (in thousands):
| |
|
|
|
|
|
|
Computer equipment
|
|
$ |
1,354 |
|
|
Software
|
|
|
857 |
|
|
Furniture and equipment
|
|
|
907 |
|
|
Leasehold improvements
|
|
|
12 |
|
| |
|
|
|
| |
Total property and equipment
|
|
|
3,130 |
|
|
Less accumulated depreciation and amortization
|
|
|
(2,997 |
) |
| |
|
|
|
| |
Property and equipment, net
|
|
$ |
133 |
|
| |
|
|
|
Under reinsurance agreements, EPIC and PEIC cede various amounts
of risk to nonaffiliated and affiliated insurance companies for
the purpose of limiting the maximum potential loss arising from
the underlying insurance risks.
Effective October 1, 1998, the Predecessor retained the
first $500,000 of each loss occurrence and losses in excess of
$500,000 are 100% reinsured up to $20,000,000. Effective
June 1, 1999, the Predecessor entered into a reinsurance
agreement wherein the Predecessor retained the first $250,000 of
each loss occurrence and losses in excess of $250,000 are
reinsured up to $20,000,000. Effective October 1, 2000, the
Predecessor entered into a reinsurance agreement, wherein losses
in excess of $1,000,000 are 100% reinsured. Effective
April 1, 2001, Predecessor entered into a reinsurance
agreement, wherein the Predecessor retains the first $500,000 of
each loss occurrence; the next $500,000 of such loss occurrence
is 60% retained by the Predecessor after meeting a $1,500,000
aggregate deductible. Losses in excess of $1,000,000 are covered
under treaties previously discussed. Effective October 1,
2001, losses in excess of $1,000,000 are 100% reinsured up to
$20,000,000. All of these treaties are in run-off.
Effective October 1, 2002, EPIC and PEIC entered into
reinsurance agreements with nonaffiliated insurance companies
wherein EPIC and PEIC retain the first $500,000 of each loss
occurrence; the next $500,000 of such loss occurrence is 50%
retained by EPIC or PEIC after meeting a $1,500,000 aggregate
deductible. Losses in excess of $1,000,000 up to $5,000,000 are
100% reinsured with third party reinsurers. Losses in excess of
$5,000,000 are 100% reinsured under LMC’s internal
reinsurance treaties and Catastrophe Excess of Loss Treaty up to
a $315,000,000 limit. The upper limit on losses ceded prior to
October 1, 1998 is $49,500,000.
EPIC and PEIC also have separate maximum any one life
(MAOL) coverage through LMC with a $5,000,000 retention.
EPIC and PEIC also have quota share agreements with LMC. The
agreement calls for the net liability (liabilities retained by
EPIC and PEIC after application of all external reinsuring) to
be ceded to LMC with a 20% retention. Pursuant to the quota
share agreement, 80% of operating expenses of EPIC and PEIC are
also ceded to LMC.
Additionally, EPIC and PEIC have an excess stop loss reinsurance
agreement whereby LMC reinsured the excess liability which may
accrue by reason of the net retained liability of EPIC and PEIC
under the quota share agreement. The combined ratio must exceed
115% on a paid basis prior to any recovery under this contract.
107
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
Effective January 1, 1999, EPIC and PEIC entered into
retroactive Loss Portfolio Transfer Reinsurance Agreements
(LPT) with its ultimate parent company, LMC. The agreements
called for EPIC and PEIC to cede to LMC its net liability for
the losses for the policies and the losses for the reinsurance
assumed with dates of accident December 31, 1998 and prior
and for LMC to assume 100% of the net liability relating to
those losses. Simultaneous with the cession of the business
reinsured and in consideration of the business reinsured, EPIC
and PEIC transferred to LMC assets with an aggregate statutory
book value of approximately $98,774,887 and $12,182,947,
respectively. This payment represented 100% of unpaid loss and
loss adjustment expenses for EPIC and PEIC on the effective date
of the agreement. Although reinsurance makes the assuming
reinsurer liable to the insurer to the extent of the reinsurance
ceded, it does not legally discharge an insurer from its primary
liability for the full amount of the policy liability.
Subsequent to the date of the transaction the net liability for
losses reinsured increased. As a result, the net losses
recoverable by EPIC and PEIC exceed the amount originally paid
for the LPT. The amount by which the liabilities associated with
the reinsured policies exceed the amount paid for the LPT is
amortized into income over the estimated remaining settlement
period of the underlying claims using the recovery method. At
December 31, 2002, the deferred gains for the Predecessor
was $24,359,000. The effects of subsequent changes in estimated
or actual cash flows are accounted for by adjusting the
previously deferred amount to the balance that would have
existed had the revised estimate been available at the inception
of the reinsurance transaction, with a corresponding charge or
credit to income.
Effective January 1, 2003, EPIC, PEIC, and LMC, canceled
their quota share and stop loss reinsurance agreements for all
policies written by EPIC and PEIC on or after January 1,
2003. Policies with inception dates on or before
December 31, 2002 would continue under the terms of the
quota share agreements as long as the policy remained in-force.
Each of the companies received appropriate regulatory approval.
In order to expand in states where it was not licensed, EPIC
entered into reinsurance arrangements with LMC whereby LMC would
write business on behalf of EPIC in those states and EPIC would
assume that business from LMC.
|
|
| b. |
Reinsurance Recoverables and Income Statement
Effects |
Balances affected by reinsurance transactions are reported gross
of reinsurance in the balance sheet. Reinsurance recoverables
are comprised of the following amounts as of December 31,
2002 (in thousands):
| |
|
|
|
|
|
|
|
Recoverable from LMC:
|
|
|
|
|
| |
Assumed reinsurance recoverables
|
|
$ |
5,744 |
|
| |
Reinsurance recoverables on unpaid loss and loss adjustment
expenses
|
|
|
100,670 |
|
| |
Reinsurance recoverables on paid losses
|
|
|
— |
|
| |
Premiums receivable and other
|
|
|
(4,307 |
) |
| |
|
|
|
| |
|
Total reinsurance recoverables from affiliate
|
|
$ |
102,107 |
|
| |
|
|
|
|
Recoverable from external reinsurers:
|
|
|
|
|
| |
Reinsurance recoverables on unpaid loss and loss adjustment
expenses
|
|
$ |
34,233 |
|
| |
Reinsurance recoverables on paid losses
|
|
|
2,384 |
|
| |
|
|
|
| |
|
Total reinsurance recoverables from external reinsurers
|
|
$ |
36,617 |
|
| |
|
|
|
108
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
The effects of reinsurance on income statement amounts are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Reinsurance assumed:
|
|
|
|
|
|
|
|
|
| |
From LMC:
|
|
|
|
|
|
|
|
|
| |
|
Written premium
|
|
$ |
2,315 |
|
|
$ |
11,643 |
|
| |
|
Earned premium
|
|
|
5,795 |
|
|
|
10,375 |
|
| |
|
Loss and loss adjustment expenses incurred
|
|
|
1,924 |
|
|
|
3,936 |
|
| |
From external reinsurers:
|
|
|
|
|
|
|
|
|
| |
|
Loss and loss adjustment expenses incurred
|
|
|
(1,343 |
) |
|
|
133 |
|
|
Reinsurance ceded:
|
|
|
|
|
|
|
|
|
| |
To LMC:
|
|
|
|
|
|
|
|
|
| |
|
Written (returned) premium
|
|
|
(6,924 |
) |
|
|
77,536 |
|
| |
|
Earned premium
|
|
|
30,189 |
|
|
|
69,765 |
|
| |
|
Loss and loss adjustment expenses incurred
|
|
|
20,464 |
|
|
|
37,209 |
|
| |
|
Underwriting expenses and other income (expense)
|
|
|
1,736 |
|
|
|
7,459 |
|
| |
To external reinsurers:
|
|
|
|
|
|
|
|
|
| |
|
Written premium
|
|
|
11,002 |
|
|
|
9,447 |
|
| |
|
Earned premium
|
|
|
10,559 |
|
|
|
9,225 |
|
| |
|
Loss and loss adjustment expenses incurred
|
|
|
6,625 |
|
|
|
2,883 |
|
Management evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from
activities or economic characteristics of the reinsurers to
minimize its exposure to losses from reinsurer insolvencies. In
the event a reinsurer is unable to meet its obligations, the
Predecessor would be liable for the losses under the agreement.
109
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
| 8. |
Unpaid Loss and Loss Adjustment Expense |
Activity in unpaid loss and loss adjustment expenses is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance, beginning of year
|
|
$ |
153,469 |
|
|
$ |
166,342 |
|
|
Less reinsurance recoverables:
|
|
|
|
|
|
|
|
|
| |
From LMC
|
|
|
100,670 |
|
|
|
114,247 |
|
| |
From unaffiliated reinsurers
|
|
|
34,233 |
|
|
|
36,294 |
|
| |
|
|
|
|
|
|
| |
|
Total recoverables
|
|
|
134,903 |
|
|
|
150,541 |
|
| |
|
|
|
|
|
|
|
Net balance, beginning of year
|
|
|
18,566 |
|
|
|
15,801 |
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
26,895 |
|
|
|
13,324 |
|
| |
Prior years
|
|
|
(1,500 |
) |
|
|
(8,332 |
) |
| |
|
|
|
|
|
|
| |
|
Total incurred
|
|
|
25,395 |
|
|
|
4,992 |
|
| |
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
| |
Current year
|
|
|
4,283 |
|
|
|
3,398 |
|
| |
Prior years
|
|
|
3,706 |
|
|
|
(1,171 |
) |
| |
|
|
|
|
|
|
| |
|
Total paid
|
|
|
7,989 |
|
|
|
2,227 |
|
| |
|
|
|
|
|
|
|
Net balance, end of year
|
|
|
35,972 |
|
|
|
18,566 |
|
| |
|
|
|
|
|
|
|
Plus reinsurance recoverables:
|
|
|
|
|
|
|
|
|
| |
From LMC
|
|
|
87,677 |
|
|
|
100,670 |
|
| |
From unaffiliated reinsurers
|
|
|
37,889 |
|
|
|
34,233 |
|
| |
|
|
|
|
|
|
| |
|
Total recoverables
|
|
|
125,566 |
|
|
|
134,903 |
|
| |
|
|
|
|
|
|
|
Balance, end of year
|
|
$ |
161,538 |
|
|
$ |
153,469 |
|
| |
|
|
|
|
|
|
Unpaid loss and loss adjustment expense was reduced by
management in 2002 for 2001 and prior accident years. In periods
prior to 2002, the Predecessor wrote a large number of accounts
with smaller average premiums than the Predecessor’s core
book of business. There was an expectation that these accounts
were subject to a greater volatility of risk than the core book
of business and initial unpaid loss and loss adjustment amounts
were established reflecting this higher level of risk. An
actuarial evaluation was performed in 2002 for the 2002 and
prior accident years, which concluded that the actual loss
development on this business was not great as expected. This,
coupled with the more recent emphasis of writing larger, less
volatile accounts using stricter underwriting standards, led
management to decrease the unpaid loss and loss adjustment
expenses. Included in the reduction of unpaid loss and loss
adjustment expenses was approximately $7,001,000 relating to the
loss portfolio transfer, which resulted in a $7,001,000 decrease
in the deferred retroactive gain and recoverable from LMC.
110
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
|
|
| 9. |
Deferred Policy Acquisition Costs |
The following reflects the amounts of policy acquisition costs
deferred and amortized:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at beginning of year
|
|
$ |
1,422 |
|
|
$ |
903 |
|
|
Policy acquisition costs deferred
|
|
|
6,688 |
|
|
|
2,093 |
|
|
Amortization of deferred policy acquisition costs
|
|
|
(3,797 |
) |
|
|
(1,574 |
) |
| |
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
4,313 |
|
|
$ |
1,422 |
|
| |
|
|
|
|
|
|
During the periods presented, the Predecessor is included in the
consolidated federal income tax return of LMC as the common
parent corporation.
LMC has a written tax allocation agreement, approved by the
Companies, that provides for federal income taxes to be paid to
or recovered from LMC based on each subsidiary company’s
taxable income or taxable loss as if the subsidiary were filing
a separate federal income tax return. The following is a
reconciliation of the difference between the expected income tax
computed by applying the federal statutory income tax rate of
35% to income before income taxes and the total federal income
taxes reflected on the books for the nine months ended
September 30, 2003 and the year ended December 31,
2002:
| |
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Computed expected tax at 35%
|
|
$ |
2,349 |
|
|
$ |
2,207 |
|
|
Increase (decrease) in valuation allowance
|
|
|
(198 |
) |
|
|
949 |
|
|
Amortization of goodwill
|
|
|
— |
|
|
|
— |
|
|
Other
|
|
|
(155 |
) |
|
|
(138 |
) |
| |
|
|
|
|
|
|
| |
Total federal income taxes
|
|
$ |
1,996 |
|
|
$ |
3,018 |
|
| |
|
|
|
|
|
|
111
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to
significant portions of the net deferred federal income tax
asset/liability as of December 31, 2002 were as follows (in
thousands):
| |
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
| |
Deferred gain
|
|
$ |
2,338 |
|
| |
Unpaid loss and loss adjustment expense discount
|
|
|
1,235 |
|
| |
Unearned premium recognition
|
|
|
906 |
|
| |
Capital loss carryforward
|
|
|
273 |
|
| |
Other-than-temporary impairment
|
|
|
1,266 |
|
| |
Other
|
|
|
756 |
|
| |
|
|
|
| |
|
Total gross deferred tax assets
|
|
|
6,774 |
|
|
Less valuation allowance
|
|
|
949 |
|
| |
|
|
|
| |
|
Net deferred tax assets
|
|
|
5,825 |
|
| |
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
| |
Intangible assets
|
|
|
322 |
|
| |
Unrealized gains on marketable securities
|
|
|
590 |
|
| |
Deferred policy acquisition costs
|
|
|
497 |
|
| |
|
|
|
| |
|
Total deferred tax liabilities
|
|
|
1,409 |
|
| |
|
|
|
| |
|
Net deferred tax assets
|
|
$ |
4,416 |
|
| |
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. Based upon
the projections of future taxable income over the periods in
which the deferred taxes are deductible, management believes it
is more likely than not that the Predecessor will realize the
benefits of these deductible differences, net of the existing
valuation allowances at December 31, 2002. The amount of
the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
The Predecessor has established a valuation allowance to offset
deferred tax assets related to capital losses net of unrealized
gains on investment securities. The increase (decrease) in the
valuation allowance was $(198,000) for the nine months ended
September 30, 2003 and $949,000 for the year ended
December 31, 2002.
|
|
| 11. |
Statutory Net Income and Stockholder’s Equity |
EPIC and PEIC are required to file annual statements with state
regulatory insurance authorities prepared on an accounting basis
as prescribed or permitted by such authorities (statutory
basis). Statutory net income and capital and surplus
(stockholder’s equity) differ from amounts reported in
accordance with Standards of the Public Company Accounting
Oversight Board (United States), primarily because policy
acquisition costs are expensed when incurred, certain assets
designated as nonadmitted for statutory purposes are charged to
surplus, fixed-income securities are reported at amortized cost
or fair value based on their rating by the National Association
of Insurance Commissioners, policyholders’ dividends are
expensed as declared rather than accrued as incurred, income tax
expense reflects only taxes paid or
112
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
currently payable, and any change in the admitted net deferred
tax asset is offset to equity. Statutory net income and capital
and surplus are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
EPIC:
|
|
|
|
|
|
|
|
|
| |
Statutory net income (loss)
|
|
$ |
(2,279 |
) |
|
$ |
351 |
|
| |
Statutory capital and surplus
|
|
|
33,329 |
|
|
|
36,832 |
|
|
PEIC:
|
|
|
|
|
|
|
|
|
| |
Statutory net income (loss)
|
|
|
(863 |
) |
|
|
(913 |
) |
| |
Statutory capital and surplus
|
|
|
14,779 |
|
|
|
15,688 |
|
All stockholder dividends must be submitted for review to the
Insurance Commissioner’s office prior to distribution.
Dividends which exceed the greater of prior year net income or
10% of surplus or amounts in excess of earned surplus are
considered to be extraordinary and require an extended period of
review and approval by the Department of Insurance. During 2003
EPIC and PEIC could not pay more than $3.7 million and
$1.6 million, respectively, in shareholder dividends
without the prior approval of the regulators. Each insurance
company’s state of domicile imposes minimum risk-based
capital requirements that were developed by the NAIC. The
formulas for determining the amount of risk-based capital
specify various weighting factors that are applied to financial
balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by a ratio
of the enterprise’s regulatory total adjusted capital to
certain minimum capital amounts as defined by the NAIC.
Enterprises below specified trigger points or ratios are
classified within certain levels, each of which requires
specified corrective action. As of December 31, 2002, EPIC
and PEIC exceeded the minimum risk-based capital requirements.
EPIC leases certain office space for its regional offices under
agreements that are accounted for as operating leases. Lease
expense for the nine months ended September 30, 2003 and
the year ended December 31, 2002 totaled $131,190 and
$135,640, respectively. Future minimum payments required under
the agreements are as follows:
| |
|
|
|
|
| |
|
Minimum | |
| |
|
Rentals | |
| |
|
| |
|
2003
|
|
$ |
576 |
|
|
2004
|
|
|
507 |
|
|
2005
|
|
|
488 |
|
|
2006
|
|
|
468 |
|
|
2007
|
|
|
439 |
|
|
Thereafter
|
|
|
1,318 |
|
| |
|
|
|
| |
|
$ |
3,796 |
|
| |
|
|
|
|
|
| 13. |
Retrospectively Rated Contracts |
The Predecessor writes workers’ compensation for which the
premiums vary based on loss experience. The percentage of
premiums written on retrospectively rated contracts for the nine
months ending September 30, 2003, and for the years ended
December 31, 2002 and 2001 were 48.4%, 42.0%, and 45.8%,
respectively. Accrued retrospective premiums are determined
based upon loss experience on business
113
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
subject to such experience rating adjustment. Accrued
retrospective rated premiums are determined by or allocated to
individual policyholder accounts. Accrued retrospective premiums
and return retrospective premiums are recorded as additions to
and reductions from written premium, respectively. The
Predecessor had $5,667,060 accrued for retrospective premiums
and $2,715,913 for return retrospective premiums at
December 31, 2002.
At December 31, 2002, standby letters of credit totaling
$9,809,824 had been issued by EPIC for the benefit of several
unaffiliated insurance companies under the terms of certain
assumed reinsurance agreements. The letters of credit relate to
several programs that existed prior to LMC’s purchase of
EPIC. These letters of credit are reviewed and maintained
annually and serve as collateral for open claims under each
program.
The Predecessor maintains a defined contribution retirement plan
covering substantially all of its associates. The amount of
annual contribution is at the discretion of management.
Contribution expense for the nine months ended
September 30, 2003 and for the year ended December 31,
2002 was $122,979 and $100,231, respectively.
a. EPIC and PEIC have purchased annuities in
settlement of claims of which claimants are the payees. These
annuities have been used to reduce unpaid losses by $3,769,876.
Under a direct basis, EPIC and PEIC have a contingent liability
of $3,769,876 should the issuers of these annuities fail to
perform under the terms of the annuities. The contingent
liability after the effect of reinsurance is $0.
b. EPIC and PEIC are subject to guaranty fund and
other assessments by the states in which they write business.
Guaranty fund and other assessments should be accrued either at
the time of assessments or in the case of premium based
assessments, at the time the premiums were written, or in the
case of loss based assessments, at the time the losses are
incurred. EPIC and PEIC have accrued a liability for guaranty
fund and other assessments of $3,006,868. These amounts
represent management’s best estimates based on information
received from the states in which EPIC and PEIC write business
and may change due to many factors including EPIC’s and
PEIC’s share of the ultimate cost of current insolvencies.
c. Beginning December 20, 2002, EPIC and PEIC
and their parent, LMC, received lower claims-paying ability
ratings by all three major rating agencies. In 2003, LMC’s
ability to write new business and retain existing business was
substantially impacted because of its lower rating. This
condition could ultimately affect LMC’s ability to pay
losses ceded from EPIC and PEIC. As of June 10, 2003, EPIC
and PEIC were rated B (fair) and LMC was rated C++
(marginal) by A.M. Best Company.
d. The Predecessor is involved in various claims and
lawsuits arising in the course of business. Management believes
the outcome of these matters will not have a material adverse
effect on the Predecessor’s financial position.
|
|
| 17. |
Change in Accounting Principle |
In June 2001, the FASB issued SFAS No. 142,
“Goodwill and Other Intangible Assets.”
SFAS No. 142 supersedes Accounting Principles Board
Opinion No. 17, “Intangible Assets”, and requires
goodwill and other intangible assets that have indefinite lives
to no longer be amortized; however, these assets must be tested
at least annually for impairment. SFAS No. 142 also
requires an evaluation of existing acquired goodwill and other
intangible assets for proper classification under the new
requirements.
114
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
In addition, intangible assets (other than goodwill) that have
finite useful lives will continue to be amortized over their
useful lives; however, the amortization period of such
intangible assets will no longer be limited to 40 years.
The Predecessor adopted SFAS No. 142 effective
January 1, 2002 and, accordingly ceased amortizing amounts
related to goodwill starting January 1, 2002. The balance
of goodwill relates to the acquisition of the Predecessor by its
ultimate parent. In accordance with SFAS No. 142,
management was required to perform an assessment of whether
there was an indication that goodwill was impaired as of the
date of the adoption. To accomplish this, management was
required to identify its reporting units and determine the
carrying value of its reporting units by assigning assets and
liabilities, including the existing goodwill and other
intangible assets, to each reporting unit as of January 1,
2002. Management then determined the fair value of the
Predecessor’s reporting units and compared it to the
carrying amounts of the reporting units. To the extent the
carrying amounts exceeded the fair value, management was
required to perform the second step of the transitional
impairment test, to determine the implied fair value of the
reporting unit’s goodwill, as this would be an indication
that the reporting unit’s goodwill may be impaired. As a
result of this process, an impairment loss of $4,731,000 related
to goodwill associated with the EPIC and PEIC reporting units
was recognized upon adoption of SFAS No. 142. The
state licenses and trademark were purchased on July 31,
1998 and were being amortized on a straight-line basis over
40 years and 5 years, respectively. Upon initial
application of SFAS No. 142, the management reassessed
the useful lives of these intangible assets and determined that
the state licenses with a net book value at January 1, 2002
of $914,583 has an indefinite useful life because it is
expected to generate cash flows indefinitely. Management ceased
amortizing the trademark on January 1, 2002. The trademark
is deemed to approximate the original useful life of
5 years and the remaining balance of $5,833 will be
amortized during 2003.
The following is a reconciliation of reported net income
adjusted for adoption of SFAS No. 142:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Nine Months | |
|
|
| |
|
Ended | |
|
Year Ended | |
| |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Reported net income (loss)
|
|
$ |
4,716 |
|
|
$ |
(1,441 |
) |
|
Add back:
|
|
|
|
|
|
|
|
|
| |
Amortization of goodwill
|
|
|
— |
|
|
|
— |
|
| |
Goodwill impairment
|
|
|
— |
|
|
|
4,731 |
|
| |
Amortization of state licenses
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Adjusted net income
|
|
$ |
4,716 |
|
|
$ |
3,290 |
|
| |
|
|
|
|
|
|
As of December 31, 2002, the Predecessor has the following
amounts related to intangible assets:
| |
|
|
|
|
|
|
|
|
|
| |
|
Gross Carrying | |
|
Accumulated | |
| |
|
Amount | |
|
Amortization | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
| |
Trademark
|
|
$ |
50 |
|
|
$ |
44 |
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
| |
State licenses
|
|
|
915 |
|
|
|
— |
|
Aggregate amortization expense of intangible assets was $5,833
and $10,000 for the nine months ended September 30, 2003
and the year ended December 31, 2002, respectively.
115
PREDECESSOR
NOTES TO COMBINED FINANCIAL
STATEMENTS — (Continued)
On October 1, 2003, as a result of the policy renewal
rights and other assets being sold to SIH, EPIC and PEIC were
placed in runoff by LMC.
On December 31, 2003, EPIC was merged into another LMC
subsidiary, American Protection Insurance Company.
On August 31, 2004, PEIC was merged into another LMC
subsidiary, American Motorists Insurance Company.
116
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. |
None.
|
|
| Item 9A. |
Controls and Procedures. |
Under the supervision and with the participation of management,
including our Chief Executive Officer and our Chief Financial
Officer, we have carried out an evaluation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)). Based on that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of the
end of the period covered by this report to ensure that
information we are required to disclose in reports that are
filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the rules and forms specified by the Securities and
Exchange Commission.
|
|
| Item 9B. |
Other Information. |
We had no information that was required to be disclosed in a
report on Form 8-K during the fourth quarter of 2004, but
that was not disclosed.
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant. |
The following table sets forth information concerning our
directors, executive officers and key employees. All our
directors hold office for the remainder of the full term in
which the new directorship was created or the vacancy occurred
and until their successors are duly elected and qualified.
Executive officers serve at the request of the board of
directors.
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Positions |
| |
|
| |
|
|
|
John G. Pasqualetto
|
|
|
61 |
|
|
Chairman, President and Chief Executive Officer |
|
Richard J. Gergasko
|
|
|
46 |
|
|
Executive Vice President — Operations |
|
Joseph S. De Vita
|
|
|
63 |
|
|
Senior Vice President, Chief Financial Officer and Assistant
Secretary |
|
Richard W. Seelinger
|
|
|
45 |
|
|
Senior Vice President — Claims |
|
Marc B. Miller, M.D.
|
|
|
48 |
|
|
Senior Vice President and Chief Medical Officer |
|
Jeffrey C. Wanamaker
|
|
|
38 |
|
|
Vice President — Underwriting |
|
D. Drue Wax
|
|
|
54 |
|
|
Senior Vice President, General Counsel and Secretary |
|
James L. Borland, III
|
|
|
43 |
|
|
Vice President and Chief Information Officer |
|
M. Philip Romney
|
|
|
50 |
|
|
Vice President — Finance, Principal Accounting Officer
and Assistant Secretary |
|
Chris A. Engstrom
|
|
|
44 |
|
|
President — PointSure Insurance Services, Inc. |
|
J. Scott Carter
|
|
|
35 |
|
|
Director |
|
Peter Y. Chung
|
|
|
37 |
|
|
Director |
|
William M. Feldman
|
|
|
51 |
|
|
Director |
|
Mural R. Josephson
|
|
|
56 |
|
|
Director |
|
George M. Morvis
|
|
|
64 |
|
|
Director |
Set forth below is information concerning our executive officers.
John G. Pasqualetto has served as the chairman of our
board of directors since September 2004 and as our president and
chief executive officer and one of our directors since July
2003. He was formerly
117
president and chief executive officer of the Eagle Entities,
president of Kemper Employers Group and senior vice president of
the Kemper insurance companies, holding these positions
concurrently since joining Kemper in 1998.
Mr. Pasqualetto’s prior experience includes serving as
president of AIG’s workers’ compensation specialty
group, co-founding Great States Insurance Company, a
California-based specialty workers’ compensation company,
and holding executive positions with Argonaut Insurance Company
and the State Compensation Insurance Fund of California.
Mr. Pasqualetto has a B.A. from California State University
at Northridge.
Richard J. Gergasko has served as our executive vice
president since July 2003. He also served in this capacity and
as the head of underwriting and research and development at the
Eagle Entities from May 1999 until September 2003. Prior to
joining the Eagle Entities, Mr. Gergasko held a variety of
positions in the insurance industry, including underwriting vice
president of AIG’s workers’ compensation specialty
group, as well as various actuarial positions at Crum and
Forster, William M. Mercer, Inc. and MBA, Inc. Mr. Gergasko
holds a B.A. in Statistics from Rutgers College, is a Fellow of
the Casualty Actuarial Society and a Member of the American
Academy of Actuaries.
Joseph S. De Vita has served as our senior vice
president, chief financial officer and secretary or assistant
secretary since July 2003. From January 2003 until
June 2003, Mr. De Vita served as a consultant to the
Eagle Entities. From November 2000 until
December 2002, Mr. De Vita served as the vice
president and chief financial officer of Lifeguard, Inc., a
health plan provider based in California. Prior to November of
2000, Mr. De Vita served as an independent consultant.
Mr. De Vita started his career in the insurance industry in
1972 with INA Corporation (Cigna). In 1978, he joined Fremont
General Corporation as vice president of finance. In 1987,
Mr. De Vita co-founded Great States Insurance Company, a
specialty workers’ compensation insurer, with
Mr. Pasqualetto. Mr. De Vita has held executive
positions with managed care organizations, and began his
financial career with PricewaterhouseCoopers. Mr. De Vita
holds a B.A. in Accounting from St. Joseph’s University, an
M.B.A. in Finance from Drexel University, and is a member of the
American Institute of Certified Public Accountants.
Richard W. Seelinger has served as our senior vice
president — claims since July 2003. He served in
the same capacity with the Eagle Entities, which he joined in
2000. From 1985 through 1999, Mr. Seelinger held a series
of executive positions of increasing responsibility at Kemper
insurance companies, including workers’ compensation claims
officer. Mr. Seelinger holds a B.A. in History from Western
Illinois University.
Marc B. Miller, M.D. has served as our senior vice
president and chief medical officer since August 2004.
Since 1998, Dr. Miller has been an independent consultant
serving in various capacities for several businesses, including:
acting as vice president of customer relations for ExactCost,
Inc., a healthcare cost analysis technology company;
representing various foreign healthcare services, biotech,
medical device, and pharmaceutical companies in connection with
partnerships, investment and business development; acting as
medical director charged with revamping Orange County’s
Medical Services Indigents Program; and acting as medical
director advising on quality assurance and credentialing for
MedLink HealthCare Networks, Inc., a diagnostic managed care
organization. Dr. Miller also co-founded ConflictSolvers,
LLC, a start-up venture which develops dispute resolution
products, and held various positions with ConflictSolvers from
1998 until 2001, most recently serving as its chief executive
officer. Dr. Miller is Board certified in preventive
medicine, public health and medical management. Dr. Miller
holds a B.A. from Stanford University, an M.B.A. from Golden
Gate University, an M.P.H. from the University of California,
Los Angeles and an M.D. from Rush University.
Jeffrey C. Wanamaker has served as our vice
president — underwriting and regional manager for the
northwest region since July 2003. He served in the same
capacity at the Eagle Entities, which he joined in 1999. From
1989 to 1999, Mr. Wanamaker was employed by Alaska National
Insurance Company, where he underwrote most commercial lines and
ultimately specialized in accounts with a combination of state
act workers’ compensation, longshore and maritime
employment exposures. Mr. Wanamaker holds Bachelor of
Business Administration degrees in Finance and Economics from
the University of Alaska and
118
has earned the Chartered Property Casualty Underwriters and
Associate in Reinsurance professional designations.
D. Drue Wax has served as our senior vice president
and general counsel since January 2005. Prior to that, she,
through her law firm, represented us on various regulatory and
corporate issues. From 1998 through March 2004, she served
as senior counsel in the corporate legal department of the
Kemper Insurance Companies, where her responsibilities involved
regulatory and corporate work for the various Kemper
corporations, including the Eagle Entities and KEIC. Prior to
1998, Ms. Wax advised on insurance regulatory matters for
Davidson, Goldstein, Mandell & Menkes, and was an
associate in the Chicago office of Sidley & Austin. She
received her J.D. from Chicago Kent College of Law, and her B.A.
from Middlebury College.
Set forth below is information concerning our key employees.
James L. Borland, III has served as our vice
president and chief information officer since
November 2003. He served in the same capacity with the
Eagle Entities, which he joined in 2000. From January 1998
until the time he joined the Eagle Entities, Mr. Borland
served as the principal network analyst for PacifiCare Health
Systems. From December 1991 until January 1998,
Mr. Borland held several positions with Great States
Insurance Company. Mr. Borland holds a B.S. in Business
Management from Pepperdine University.
M. Philip Romney has served as our vice
president — finance and principal accounting officer
since November 2004. From February 2000 until October 2004,
Mr. Romney served as director of finance, controller and
assistant secretary for Eden Bioscience Corporation, a
biotechnology company in Washington. Prior to that,
Mr. Romney served in various positions (most recently as
deputy treasurer and senior manager, risk management and
treasury services) at Public Utility District No. 1 of
Snohomish County, Washington, a public water and electric
utility. Mr. Romney began his financial career with the
Seattle office of KPMG LLP. Mr. Romney holds B.S. and MAcc.
degrees from Brigham Young University and is a member of the
Washington Society of Certified Public Accountants.
Chris A. Engstrom has served as the president of
PointSure Insurance Services, Inc., one of our wholly-owned
subsidiaries, since February 2004. From May 2003 until
joining PointSure, Mr. Engstrom served as the Northwest
regional executive officer for Willis Group Holdings, a global
insurance broker, and from January 2001 until May 2003,
Mr. Engstrom served as the president and chief executive
officer of Willis Seattle. Prior to his tenure at Willis,
Mr. Engstrom spent 15 years with the Eagle Entities,
most recently as senior vice president. Mr. Engstrom holds
a B.A. from City University.
Set forth below is information concerning our directors, in
addition to Mr. Pasqualetto.
J. Scott Carter has served as a director since June
2003. Mr. Carter is a principal at Summit Partners, a
private equity and venture capital firm, where he has been
employed since July 2002. From 1999 to 2002, prior to joining
Summit, Mr. Carter was an investment banker with
J.P. Morgan. Mr. Carter received a B.A. from Texas
A&M University and an M.B.A. from the Darden School of
Business at the University of Virginia.
Peter Y. Chung has served as a director since June 2003.
Mr. Chung is a general partner and member of various
entities affiliated with Summit Partners, a private equity and
venture capital firm, where he has been employed since August of
1994. Mr. Chung also serves as a director of Sirenza
Microdevices, Inc., a designer and supplier of radio frequency
components, iPayment, Inc., a provider of credit and debit
card-based payment processing services to small merchants, and a
number of privately held companies. Mr. Chung received an
A.B. from Harvard University and an M.B.A. from Stanford
University.
William M. Feldman has served as a director since
November 2004. Mr. Feldman is the co-owner, chairman and
chief executive officer of Feldman, Ingardona & Co., a
registered investment advisor and securities broker/ dealer that
provides asset management and investment advisory services to
high net worth families and institutions. He has held these
positions since organizing the company in 1997.
119
Mural R. Josephson has served as a director since July
2004. Following his retirement as senior vice president and
chief financial officer of Lumbermens Mutual Casualty Company
and as an officer and director of certain affiliated entities
including the Eagle Entities, KEIC and PointSure in October
2002, where he served for approximately four years,
Mr. Josephson has served as a consultant to various
financial institutions. Prior to his role at Lumbermens,
Mr. Josephson retired as a partner at KPMG LLP after
28 years at the firm. Mr. Josephson also serves as a
director of UICI, a provider of health, life and related
insurance products to the self-employed, individual and student
insurance markets, and PXRE Group Ltd., which specializes in
property reinsurance. In addition, he has served as a director
of our insurance company subsidiary, SeaBright Insurance
Company, since February of 2004. Mr. Josephson is a
licensed Certified Public Accountant in the State of Illinois,
and is a member of the American Institute of Certified Public
Accountants.
George M. Morvis has served as a director since July
2004. Mr. Morvis is the founder, president and chief
executive officer of Financial Shares Corporation, a
Chicago-based consulting firm specializing in strategic
marketing, financial communications, and human resources
consulting. Prior to founding Financial Shares Corporation in
1974, Mr. Morvis was a director of public relations and
executive secretary for the Illinois Bankers Association.
Mr. Morvis serves on the board of directors of numerous
privately held companies. In addition, he has served as a
director of our insurance company subsidiary, SeaBright
Insurance Company, since February of 2004. Mr. Morvis holds
a degree in Journalism from the University of Illinois, Urbana,
an M.B.A. from The George Washington University, and is a
graduate of the Harvard Business School executive management
program.
Family Relationships
There are no family relationships between any of our executive
officers or directors.
Board Composition
Our amended and restated certificate of incorporation provides
that our board of directors shall consist of such number of
directors as determined from time to time by resolution adopted
by a majority of the total number of directors then in office.
Our board of directors currently consists of six members. Any
additional directorships resulting from an increase in the
number of directors may only be filled by the directors then in
office. The term of office for each director will be until his
successor is elected and qualified or until his earlier death,
resignation or removal. Elections for directors will be held
annually.
A majority of our board of directors is “independent”
as defined under the rules of the Nasdaq Stock Market.
Board Committees
We currently have an audit committee, a compensation committee
and a nominating and corporate governance committee. Each
committee consists of three persons. All of the members of our
audit committee, nominating and corporate governance committee
and compensation committee are “independent” as
defined by the rules of the Nasdaq Stock Market and, in the case
of the audit committee, by the rules of the SEC.
The audit committee is comprised of Messrs. Josephson
(Chairman), Feldman and Morvis. The audit committee oversees our
accounting, financial reporting and control processes and the
audits of our financial statements, including: the preparation,
presentation and integrity of our financial statements; our
120
compliance with legal and regulatory requirements; our
independent auditor’s qualifications and independence; and
the performance of our independent auditor. Our audit committee,
among other things:
|
|
|
| |
• |
has sole responsibility to retain and terminate our independent
auditor; |
| |
| |
• |
pre-approves all audit and non-audit services performed by our
independent auditor and the fees and terms of each engagement; |
| |
| |
• |
will appoint and oversee our internal auditor, and review the
scope and results of each annual internal audit, when such
internal auditor has been appointed; and |
| |
| |
• |
reviews our quarterly and annual audited financial statements
and related public disclosures, earnings press releases and
other financial information and earnings guidance provided to
analysts or rating agencies. |
Each member of the audit committee has the ability to read and
understand fundamental financial statements. Our board of
directors has determined that Mural R. Josephson meets the
requirements for an “audit committee financial expert”
as defined by the rules of the SEC.
The compensation committee is comprised of Messrs. Chung
(Chairman), Carter and Josephson. The compensation committee
oversees the administration of our benefit plans, reviews and
administers all compensation arrangements for executive officers
and establishes and reviews general policies relating to the
compensation and benefits of our officers and employees.
|
|
|
Nominating and Corporate Governance Committee |
The nominating and corporate governance committee is comprised
of Messrs. Morvis (Chairman), Carter and Chung. The
nominating and corporate governance committee’s
responsibilities include identifying and recommending to the
board appropriate director nominee candidates and providing
oversight with respect to corporate governance matters.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires all of our
executive officers, directors and persons owning more than 10%
of any registered class of our capital stock to file reports of
ownership and changes in ownership with the SEC. We did not have
a class of equity securities registered pursuant to
Section 12 of the Exchange Act until our initial public
offering in January 2005. Accordingly, no Section 16(a)
beneficial ownership reporting compliance issues arose during
our last fiscal year.
Code of Ethics
We have adopted codes of ethics that apply to our chief
executive officer, chief financial officer, principal accounting
officer and other employees. These codes are available on our
website at www.sbic.com and are available in print to any
stockholder who requests them. If we waive any material
provision of our Code of Ethics for Senior Financial Employees
or substantively change the code, we will disclose that fact on
our website within four business days.
|
|
| Item 11. |
Executive Compensation. |
Our compensation policies are designed to maximize stockholder
value over the long-term. Our policies provide management with
incentives to strive for excellence and link the financial
interests of management with those of our stockholders. The
level of incentive awards granted to members of our management
is based initially upon the performance of SeaBright Insurance
Holdings, Inc., which performance is tied to its calendar year
pre-tax operating profit, as approved by our board of directors
for the current budget. If those performance objectives are
achieved, the business performance of our
121
operating subsidiaries and the performance of the departments
supervised by members of our management are considered.
Summary Compensation Table
The following table sets forth the compensation for our Chief
Executive Officer and our other four most highly compensated
executive officers during the year ended December 31, 2004
and during 2003 from the Acquisition until December 31,
2003. These individuals are referred to as the “named
executive officers.”
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Long Term Compensation | |
| |
|
|
|
Annual Compensation | |
|
| |
| |
|
|
|
| |
|
Restricted | |
|
Securities | |
|
|
| |
|
|
|
|
|
Other Annual | |
|
Stock | |
|
Underlying | |
|
All Other | |
| Name and Principal Position |
|
Year | |
|
Salary(1) | |
|
Bonus(2) | |
|
Compensation(1) | |
|
Awards | |
|
Options | |
|
Compensation | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
John G. Pasqualetto
|
|
|
2004 |
|
|
$ |
313,793 |
|
|
$ |
201,965 |
|
|
$ |
9,000 |
(3) |
|
|
— |
|
|
|
— |
|
|
$ |
10,730 |
(4) |
| |
Chairman, President and
|
|
|
2003 |
|
|
|
79,655 |
|
|
|
— |
|
|
|
2,250 |
(3) |
|
|
— |
|
|
|
155,292 |
|
|
|
— |
|
| |
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Gergasko
|
|
|
2004 |
|
|
|
258,832 |
|
|
|
128,416 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,271 |
(5) |
| |
Executive Vice President
|
|
|
2003 |
|
|
|
64,708 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
77,646 |
|
|
|
— |
|
|
Joseph S. De Vita
|
|
|
2004 |
|
|
|
216,000 |
|
|
|
107,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,932 |
(6) |
| |
Senior Vice President,
|
|
|
2003 |
|
|
|
54,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
58,235 |
|
|
|
— |
|
| |
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
and Assistant Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Seelinger
|
|
|
2004 |
|
|
|
188,018 |
|
|
|
74,457 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,038 |
(7) |
| |
Senior Vice President —
|
|
|
2003 |
|
|
|
47,727 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38,823 |
|
|
|
— |
|
| |
Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey C. Wanamaker
|
|
|
2004 |
|
|
|
168,678 |
|
|
|
66,721 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,092 |
(8) |
| |
Vice President —
|
|
|
2003 |
|
|
|
41,331 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
58,235 |
|
|
|
— |
|
| |
Underwriting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
For 2003, includes compensation paid to the named executive
officers from September 30, 2003, the date of the
Acquisition, through December 31, 2003. |
| |
| (2) |
Includes cash bonus amounts earned in 2004 and paid on
March 11, 2005. |
| |
| (3) |
Automobile allowance. |
| |
| (4) |
Includes $1,733 paid for life insurance premiums and $8,997 in
profit sharing and 401(k) matching contributions. |
| |
| (5) |
Includes $1,424 paid for life insurance premiums and $8,847 in
profit sharing and 401(k) matching contributions. |
| |
| (6) |
Includes $1,192 paid for life insurance premiums and $7,740 in
profit sharing and 401(k) matching contributions. |
| |
| (7) |
Includes $1,040 paid for life insurance premiums and $7,998 in
profit sharing and 401(k) matching contributions. |
| |
| (8) |
Includes $933 paid for life insurance premiums and $7,159 in
profit sharing and 401(k) matching contributions. |
122
Option Grants in Last Fiscal Year
There were no stock options granted to our named executive
officers in fiscal year 2004.
Aggregated Option Exercises in the Last Fiscal Year and
Fiscal Year-End Option Values
No stock options were exercised in fiscal year 2004. The
following table sets forth information regarding unexercised
stock options held by named executive officers as of
December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of Securities | |
|
|
| |
|
Underlying Unexercised | |
|
Value of Unexercised | |
| |
|
Options at | |
|
In-the-Money Options at | |
| |
|
Fiscal Year End (#) | |
|
Fiscal Year End ($)(1) | |
| |
|
| |
|
| |
| Name |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
John G. Pasqualetto
|
|
|
38,823 |
|
|
|
116,469 |
|
|
$ |
153,739 |
|
|
$ |
461,217 |
|
|
Richard J. Gergasko
|
|
|
19,412 |
|
|
|
58,234 |
|
|
|
76,872 |
|
|
|
230,607 |
|
|
Joseph S. De Vita
|
|
|
14,559 |
|
|
|
43,676 |
|
|
|
57,654 |
|
|
|
172,957 |
|
|
Richard W. Seelinger
|
|
|
9,706 |
|
|
|
29,117 |
|
|
|
38,436 |
|
|
|
115,303 |
|
|
Jeffrey C. Wanamaker
|
|
|
14,559 |
|
|
|
43,676 |
|
|
|
57,654 |
|
|
|
172,957 |
|
|
|
| (1) |
There was no public trading market for our common stock as of
December 31, 2004. Accordingly, these values have been
calculated on the basis of the initial public offering price of
$10.50 per share, less the option exercise price,
multiplied by the number of shares of in-the-money options. The
initial public offering price is not necessarily indicative of
future price performance. An option is in-the-money if the fair
market value of the underlying shares exceeds the exercise price
of the option. |
Director Compensation
Directors who are also our employees receive no compensation for
serving as directors. Non-employee directors receive an annual
retainer in the amount of $10,000, and audit committee members
receive an additional annual retainer in the amount of $3,000.
Non-employee directors receive $1,500 for each in-person board
or committee meeting attended and $750 for each telephonic board
or committee meeting. In addition, the chair of the audit
committee receives an annual fee in the amount of $10,000, and
the chairs of the compensation committee and the nominating and
corporate governance committee receive an annual fee in the
amount of $5,000. We also reimburse all directors for reasonable
out-of-pocket expenses they incur in connection with their
service as directors.
Our directors are also eligible to receive stock options and
other equity-based awards when, as and if determined by the
compensation committee pursuant to the terms of the SeaBright
Insurance Holdings, Inc. 2005 Long-Term Equity Incentive Plan.
On March 24, 2005, our compensation committee approved an
arrangement pursuant to which certain of our non-employee
directors will receive an annual grant of 2,000 shares of
restricted stock and 4,000 stock options. Each stock option
granted will have an exercise price equal to 110% of the closing
price of our common stock on the date of grant, as reported on
the Nasdaq National Market. The restricted stock grants will be
subject to three-year cliff vesting, and the stock option grants
will vest over a three-year period with cliff vesting after the
first year and monthly vesting thereafter. In the event of a
change in control of us or upon the death or disability of the
participant, all restrictions relating to all outstanding
restricted stock grants will lapse and all stock option grants
will become fully vested and exercisable. Our compensation
committee may in its discretion determine to exclude one or more
non-employee director from receiving these equity grants in any
given year. Unless the committee determines otherwise, the
grants will be made each year on the date of our annual meeting
of shareholders. However, in 2005, the grants were made on
March 24, 2005. For 2005, William M. Feldman, Mural R.
Josephson and George M. Morvis are the non-employee directors
who received these equity grants.
123
Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
The following information summarizes the employment agreements
for our chief executive officer and each of the named executive
officers.
John G. Pasqualetto. Mr. Pasqualetto’s
employment agreement, as amended, provides for an annual base
salary of $313,793 and an annual incentive bonus in a target
amount of 65% of his base salary. Mr. Pasqualetto’s
salary and target bonus amount are subject to review by the
board for market and performance adjustments at the beginning of
each calendar year and may be adjusted after such review in the
board’s sole discretion. Mr. Pasqualetto may
participate in present and future benefit plans that are
generally made available to employees from time to time. If we
terminate Mr. Pasqualetto’s employment without cause
or if Mr. Pasqualetto terminates his employment for good
reason, each as defined in his employment agreement, he will be
entitled to receive his base salary and bonus (prorated to the
date of termination) payable in regular installments from the
date of termination for a period of 18 months thereafter.
Mr. Pasqualetto’s employment agreement provides that
he will be restricted from engaging in specified competitive
activities and from soliciting SeaBright’s employees,
customers, suppliers or other business relations for
18 months following the date of his termination.
Richard J. Gergasko. Mr. Gergasko’s employment
agreement provides for an annual base salary of $258,832 and an
annual incentive bonus in a target amount of 50% of his base
salary. Mr. Gergasko’s salary and target bonus amount
are subject to review by the board for market and performance
adjustments at the beginning of each calendar year and may be
adjusted after such review in the board’s sole discretion.
Mr. Gergasko may participate in present and future benefit
plans that are generally made available to employees from time
to time. If we terminate Mr. Gergasko’s employment
without cause, as defined in his employment agreement, he will
be entitled to receive his base salary (prorated to the date of
termination) payable in regular installments from the date of
termination for a period of 12 months thereafter.
Mr. Gergasko’s employment agreement provides that he
will be restricted from engaging in specified competitive
activities and from soliciting our employees, customers,
suppliers or other business relations for 12 months
following the date of his termination.
Joseph S. De Vita. Mr. De Vita’s employment
agreement provides for an annual base salary of $216,000 and an
annual incentive bonus in a target amount of 50% of his base
salary. Mr. De Vita’s salary and target bonus amount
are subject to review by the board for market and performance
adjustments at the beginning of each calendar year and may be
adjusted after such review in the board’s sole discretion.
Mr. De Vita may participate in present and future benefit
plans that are generally made available to employees from time
to time. If we terminate Mr. De Vita’s employment
without cause, as defined in his employment agreement, he will
be entitled to receive his base salary (prorated to the date of
termination) payable in regular installments from the date of
termination for a period of 12 months thereafter.
Mr. De Vita’s employment agreement provides that he
will be restricted from engaging in specified competitive
activities and from soliciting our employees, customers,
suppliers or other business relations for 12 months
following the date of his termination.
Richard W. Seelinger. Mr. Seelinger’s
employment agreement provides for an annual base salary of
$187,113 and an annual incentive bonus in a target amount of 40%
of his base salary. Mr. Seelinger’s salary and target
bonus amount are subject to review by the board for market and
performance adjustments at the beginning of each calendar year
and may be adjusted after such review in the board’s sole
discretion. Mr. Seelinger may participate in present and
future benefit plans that are generally made available to
employees from time to time. If we terminate
Mr. Seelinger’s employment without cause, as defined
in his employment agreement, he will be entitled to receive his
base salary (prorated to the date of termination) payable in
regular installments from the date of termination for a period
of 12 months thereafter. Mr. Seelinger’s
employment agreement provides that he will be restricted from
engaging in specified competitive activities and from soliciting
our employees, customers, suppliers or other business relations
for 12 months following the date of his termination.
Jeffrey C. Wanamaker. Mr. Wanamaker’s
employment agreement provides for an annual base salary of
$164,966 and an annual incentive bonus in a target amount of 40%
of his base salary. Mr. Wanamaker’s
124
salary and target bonus amount are subject to review for market
and performance adjustments at the beginning of each calendar
year and may be adjusted after such review in the board’s
sole discretion. Mr. Wanamaker may participate in present
and future benefit plans that are generally made available to
employees from time to time. If we terminate
Mr. Wanamaker’s employment without cause, as defined
in his employment agreement, he will be entitled to receive his
base salary (prorated to the date of termination) payable in
regular installments from the date of termination for a period
of 12 months thereafter. Mr. Wanamaker’s
employment agreement provides that he will be restricted from
engaging in specified competitive activities and from soliciting
our employees, customers, suppliers or other business relations
for 12 months following the date of his termination. Since
the execution of Mr. Wanamaker’s employment agreement,
the board of directors has adjusted Mr. Wanamaker’s
annual base salary to $169,915.
2005 Target Incentive Bonus Percentages
On March 24, 2005, our compensation committee approved
target incentive bonus percentages for our named executive
officers for our 2005 fiscal year. The target incentive bonuses
will be based on our performance during our 2005 fiscal year
taking into account GAAP earnings before federal income tax
and capital gains and losses. Payment amounts are based on
target amount percentages of base salary and personal objectives
that are set from time to time. The bonus amount payable will
range from zero to an amount twice the target amount percentage,
depending on the level of subject GAAP earnings and the
achievement of designated personal objectives. The incentive
bonus target percentages for our named executive officers for
our 2005 fiscal year are as follows:
| |
|
|
|
|
| |
|
Amount of Bonus | |
| |
|
Payable as % of | |
| |
|
Base Salary if | |
| Name |
|
Target Achieved | |
| |
|
| |
|
John G. Pasqualetto
|
|
|
65 |
% |
|
Richard J. Gergasko
|
|
|
50 |
% |
|
Joseph S. De Vita
|
|
|
50 |
% |
|
Richard W. Seelinger
|
|
|
40 |
% |
|
Jeffrey C. Wanamaker
|
|
|
40 |
% |
Compensation Committee Interlocks and Insider
Participation
No member of our compensation committee serves as a member of
the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of
our board of directors or compensation committee.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
The following table provides information concerning beneficial
ownership of our common stock as of December 31, 2004, by:
|
|
|
| |
• |
each of our directors; |
| |
| |
• |
each of our named executive officers as of December 31,
2004; |
| |
| |
• |
each person known by us to beneficially own 5% or more of our
outstanding common stock; and |
| |
| |
• |
all of our directors and executive officers as a group. |
The following table lists the number of shares and percentage of
shares beneficially owned based on 7,777,808 shares of
common stock outstanding as of December 31, 2004 (on an
as-converted basis) and 97,059 common stock options currently
exercisable or exercisable within 60 days of
December 31, 2004. The figures in the table assume the
conversion of each of our then-outstanding shares of preferred
stock
125
into 15.299664 shares of common stock, which conversion was
effected in connection with our initial public offering, and the
exercise of all stock options currently exercisable or
exercisable within 60 days of December 31, 2004. The
table also lists the applicable percentage of shares
beneficially owned based on 16,402,808 shares of common
stock outstanding upon completion of our initial public offering
in January 2005.
Beneficial ownership is determined in accordance with the rules
of the SEC, and generally includes voting power and/or
investment power with respect to the securities held. Shares of
common stock subject to options currently exercisable or
exercisable within 60 days of December 31, 2004, are
deemed outstanding and beneficially owned by the person holding
such options for purposes of computing the number of shares and
percentage beneficially owned by such person, but are not deemed
outstanding for purposes of computing the percentage
beneficially owned by any other person. Except as indicated in
the footnotes to this table, and subject to applicable community
property laws, the persons or entities named have sole voting
and investment power with respect to all shares of our common
stock shown as beneficially owned by them.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Beneficial Ownership | |
|
Beneficial Ownership | |
| |
|
Prior to the Offering | |
|
After the Offering | |
| |
|
| |
|
| |
| Name and Address of Beneficial Owner |
|
Number | |
|
Percentage | |
|
Number | |
|
Percentage | |
| |
|
| |
|
| |
|
| |
|
| |
|
Summit Partners(1)
|
|
|
7,649,827 |
|
|
|
98.4 |
% |
|
|
7,649,827 |
|
|
|
46.6 |
% |
|
Peter Y. Chung(2)
|
|
|
7,649,827 |
|
|
|
98.4 |
% |
|
|
7,649,827 |
|
|
|
46.6 |
% |
|
J. Scott Carter
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
John G. Pasqualetto(3)
|
|
|
62,537 |
|
|
|
* |
|
|
|
72,537 |
|
|
|
* |
|
|
Richard J. Gergasko(4)
|
|
|
37,771 |
|
|
|
* |
|
|
|
42,771 |
|
|
|
* |
|
|
Joseph S. De Vita(5)
|
|
|
33,683 |
|
|
|
* |
|
|
|
43,683 |
|
|
|
* |
|
|
Richard W. Seelinger(6)
|
|
|
21,180 |
|
|
|
* |
|
|
|
21,180 |
|
|
|
* |
|
|
Jeffrey C. Wanamaker(7)
|
|
|
23,054 |
|
|
|
* |
|
|
|
30,554 |
|
|
|
* |
|
|
William M. Feldman
|
|
|
— |
|
|
|
— |
|
|
|
1,800 |
|
|
|
* |
|
|
Mural R. Josephson
|
|
|
— |
|
|
|
— |
|
|
|
3,000 |
|
|
|
* |
|
|
George M. Morvis
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
* |
|
|
All directors and executive officers as a group (11 persons)
|
|
|
7,828,052 |
|
|
|
99.4 |
% |
|
|
7,866,352 |
|
|
|
47.7 |
% |
|
|
| (1) |
Represents (a) 2,032,560 shares of common stock held
by Summit Ventures V, L.P.; (b) 339,866 shares of
common stock held by Summit V Companion Fund, L.P.;
(c) 135,952 shares of common stock held by Summit V
Advisors Fund (QP), L.P.; (d) 41,553 shares of common
stock held by Summit V Advisors Fund, L.P.;
(e) 3,449,446 shares of common stock held by Summit
Ventures VI-A, L.P.; (f) 1,438,566 shares of common
stock held by Summit Ventures VI-B, L.P.;
(g) 71,740 shares of common stock held by Summit VI
Advisors Fund, L.P.; (h) 110,142 shares of common
stock held by Summit VI Entrepreneurs Fund, L.P.; and
(i) 30,002 shares of common stock held by Summit
Investors VI, L.P. (such entities collectively referred to as
“Summit Partners”). Summit Partners, LLC is the
general partner of Summit Partners V, L.P., which is the
general partner of each of Summit Ventures V, L.P., Summit
V Companion Fund, L.P., Summit V Advisors Fund (QP), L.P. and
Summit V Advisors Fund, L.P. Summit Partners, LLC, through a
five-person investment committee composed of certain of its
members, has voting and dispositive authority over the shares
held by each of these entities and therefore beneficially owns
such shares. Decisions of the investment committee are made by a
majority vote of its members and, as a result, no single member
of the investment committee has voting or dispositive authority
over the shares. Gregory M. Avis, Peter Y. Chung, Scott C.
Collins, Bruce R. Evans, Walter G. Kortschak, Martin J. Mannion,
Kevin P. Mohan, Thomas S. Roberts, E. Roe Stamps, Joseph F.
Trustey, Robert V. Walsh and Stephen G. Woodsum are the members
of Summit Partners, LLC and each disclaims beneficial ownership
of the |
126
|
|
|
shares held by Summit Partners. Summit Partners, L.P. is the
managing member of Summit Partners VI (GP), LLC, which is the
general partner of Summit Partners VI (GP), L.P., which is the
general partner of each of Summit Ventures VI-A, L.P., Summit
Ventures VI-B, L.P., Summit VI Advisors Fund, L.P., Summit VI
Entrepreneurs Fund, L.P. and Summit Investors VI, L.P. Summit
Partners, L.P., through a three-person investment committee
composed of certain of the members of Summit Master Company,
LLC, has voting and dispositive authority over the shares held
by each of these entities and therefore beneficially owns such
shares. Decisions of the investment committee are made by a
majority vote of its members and, as a result, no single member
of the investment committee has voting or dispositive authority
over the shares. Gregory M. Avis, Peter Y. Chung, Scott C.
Collins, Bruce R. Evans, Walter G. Kortschak, Martin J. Mannion,
Kevin P. Mohan, Thomas S. Roberts, E. Roe Stamps, Joseph F.
Trustey, Robert V. Walsh and Stephen G. Woodsum are the members
of Summit Master Company, LLC, which is the general partner of
Summit Partners, L.P., and each disclaims beneficial ownership
of the shares held by Summit Partners. The address for each of
these entities is 499 Hamilton Avenue, Palo Alto, CA 94301. |
| |
| (2) |
Consists of shares held by Summit Partners. Mr. Chung does
not have voting or dispositive authority over these shares and
disclaims beneficial ownership of these shares. |
| |
| (3) |
Includes options to purchase 38,823 shares of common
stock exercisable within 60 days of December 31, 2004. |
| |
| (4) |
Includes options to purchase 19,412 shares of common
stock exercisable within 60 days of December 31, 2004. |
| |
| (5) |
Includes options to purchase 14,559 shares of common
stock exercisable within 60 days of December 31, 2004. |
| |
| (6) |
Includes options to purchase 9,706 shares of common
stock exercisable within 60 days of December 31, 2004. |
| |
| (7) |
Includes options to purchase 14,559 shares of common
stock exercisable within 60 days of December 31, 2004. |
Equity Compensation Plan Information
The following table presents summary information about our
equity compensation plans at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(c) | |
| |
|
|
|
|
|
Number of Securities | |
| |
|
(a) | |
|
(b) | |
|
Remaining Available for | |
| |
|
Number of Securities | |
|
Weighted Average | |
|
Future Issuance Under | |
| |
|
to Be Issued Upon | |
|
Exercise Price of | |
|
Equity Compensation | |
| |
|
Exercise of | |
|
Outstanding | |
|
Plans (excluding | |
| |
|
Outstanding Options, | |
|
Options, Warrants | |
|
securities reflected in | |
| Plan Category |
|
Warrants and Rights | |
|
and Rights | |
|
column (a)) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders
|
|
|
491,508 |
(1) |
|
$ |
6.54 |
|
|
|
1,332,705 |
(2) |
|
Equity compensation plans not approved by security holders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
491,508 |
|
|
|
|
|
|
|
1,332,705 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Includes options granted under our Amended and Restated 2003
Stock Option Plan (the “2003 Equity Plan”). Does not
include options to purchase 298,351 shares of common
stock granted pursuant to our 2005 Long-Term Equity Incentive
Plan (the “2005 Equity Plan”) in January 2005 in
connection with our initial public offering. |
| |
| (2) |
Includes 1,047,755 shares authorized under the 2005 Equity
Plan, which was approved by our stockholders in December 2004,
and 284,950 shares authorized but unissued under the 2003
Equity Plan. Options to purchase 298,351 shares of
common stock that were granted under the 2005 Equity |
127
|
|
|
Plan in January 2005 have not been deducted from his number.
Following our initial public offering in January 2005, we
anticipate that all future option grants will be made under the
2005 Equity Plan, and we do not intend to issue any further
options under the 2003 Equity Plan. |
|
|
| Item 13. |
Certain Relationships and Related Transactions. |
We have entered into the following stock purchase agreements
with some of our stockholders and members of management.
Summit Partners Investors Stock Purchases
We entered into a stock purchase agreement with the Summit
Partners investors in connection with the Acquisition on
September 30, 2003. Pursuant to this agreement, the Summit
Partners investors purchased an aggregate of 450,000 shares
of our convertible preferred stock for an aggregate purchase
price of $45.0 million. We entered into a second stock
purchase agreement with the Summit Partners investors, as well
as certain members of our management, in June 2004 pursuant to
which the Summit Partners investors purchased an aggregate of
50,000 shares of our convertible preferred stock for an
aggregate purchase price of $5.0 million. Each share of
convertible preferred stock purchased under the stock purchase
agreements was converted into 15.299664 shares of common
stock upon the closing of our initial public offering in January
2005.
Executive Stock Purchase Agreements
We entered into executive stock purchase agreements with each of
John G. Pasqualetto, Richard J. Gergasko, Joseph S. De Vita,
Richard W. Seelinger and Jeffrey C. Wanamaker in September 2003
pursuant to which the executives purchased an aggregate of
4,250 shares of our convertible preferred stock for an
aggregate purchase price of $425,000. In June 2004, we entered
into (i) a stock purchase agreement with
Messrs. Pasqualetto, Gergasko, De Vita and Wanamaker, as
well as the Summit Partners investors, pursuant to which the
executives purchased an aggregate of 1,055.25 shares of our
convertible preferred stock for an aggregate purchase price of
$105,525, and (ii) separate executive stock agreements with
each of Chris A. Engstrom and James L. Borland III, pursuant to
which these key employees purchased an additional
560 shares of our convertible preferred stock for an
aggregate purchase price of $56,000. Each share of convertible
preferred stock purchased under the stock purchase agreements
was converted into 15.299664 shares of common stock upon
the closing of the initial public offering of our common stock
in January 2005.
|
|
| Item 14. |
Principal Accounting Fees and Services. |
The aggregate fees accrued for professional services rendered by
KPMG for fiscal years 2004 and 2003 were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Audit Fees
|
|
$ |
1,563,491 |
(1) |
|
$ |
234,010 |
|
|
Audit-Related Fees
|
|
|
— |
|
|
|
— |
|
|
Tax Fees
|
|
|
1,175 |
(2) |
|
|
15,245 |
(2) |
|
All Other Fees
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total Fees
|
|
$ |
1,564,666 |
|
|
$ |
249,255 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
Includes fees billed for work performed in connection with the
initial public offering of our common stock, which was completed
in January 2005. |
| |
| (2) |
Fees are related primarily to the review of our 2003 federal
income tax return and advice regarding the tax treatment of
certain matters related to the Acquisition and the deductibility
of interest expense related to tax exempt bonds. |
128
Audit Committee Pre-Approval Policy
The Audit Committee has adopted a policy for the pre-approval of
all audit and non-audit services provided by our independent
auditor. The policy is designed to ensure that the provision of
these services does not impair the auditor’s independence.
Under the policy, any services provided by the independent
auditor, including audit, audit-related, tax and other services,
must be specifically pre-approved by the Audit Committee.
The Audit Committee may delegate pre-approval authority to one
or more of its members. The member or members to whom such
authority is delegated shall report any pre-approval decisions
to the Audit Committee at its next scheduled meeting. The Audit
Committee does not delegate responsibilities to pre-approve
services performed by the independent auditor to management.
For 2004, all services provided by KPMG were pre-approved.
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
The following documents are being filed as part of this annual
report.
(a)(1) Financial Statements. The following financial
statements and notes are filed under Item 8 of this report.
| |
|
|
|
|
|
| |
|
Page | |
| |
|
| |
|
SeaBright Insurance Holdings, Inc. and Subsidiaries
|
|
|
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
68 |
|
| |
Consolidated Balance Sheets
|
|
|
69 |
|
| |
Consolidated Statements of Operations
|
|
|
70 |
|
| |
Consolidated Statements of Changes in Stockholders’ Equity
and Comprehensive Income (Loss)
|
|
|
71 |
|
| |
Consolidated Statements of Cash Flows
|
|
|
72 |
|
| |
Notes to Consolidated Financial Statements
|
|
|
73 |
|
|
Predecessor Combined Financial Statements
|
|
|
|
|
| |
Report of Independent Registered Public Accounting Firm
|
|
|
95 |
|
| |
Combined Balance Sheet
|
|
|
96 |
|
| |
Combined Statements of Operations
|
|
|
97 |
|
| |
Combined Statements of Changes in Stockholder’s Equity and
Comprehensive Income
|
|
|
98 |
|
| |
Combined Statements of Cash Flows
|
|
|
99 |
|
| |
Notes to Combined Financial Statements
|
|
|
100 |
|
(2) Financial Statement Schedules.
|
|
| |
SeaBright Insurance Holdings, Inc. and Subsidiaries |
Schedule II — Condensed Financial Information of
Registrant
Schedule IV — Reinsurance
Schedule VI — Supplemental Information Concerning
Insurance Operations
Schedule IV — Reinsurance
Schedule VI — Supplemental Information Concerning
Insurance Operations
129
All other schedules for which provision is made in the
applicable accounting requirements of the Securities and
Exchange Commission are not required or the required information
has been included within the financial statements or the notes
thereto.
|
|
| |
(3) Exhibits. The list of exhibits in the
Exhibit Index to this annual report is incorporated herein
by reference. |
130
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
Seabright Insurance
Holdings, Inc.
|
|
|
|
| |
By: |
/s/ John G. Pasqualetto
|
|
|
| |
|
| |
John G. Pasqualetto |
| |
Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated below on
March 28, 2005.
| |
|
|
|
|
| Signature |
|
|
| |
|
|
| |
|
Title |
| |
|
|
| |
/s/ John G. Pasqualetto
John
G. Pasqualetto |
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
| |
/s/ Joseph S. De Vita
Joseph
S. De Vita |
|
Senior Vice President, Chief Financial Officer
and Assistant Secretary
(Principal Financial Officer) |
| |
/s/ M. Philip Romney
M.
Philip Romney |
|
Vice President-Finance and Assistant Secretary
(Principal Accounting Officer) |
| |
/s/ J. Scott Carter
J.
Scott Carter |
|
Director |
| |
/s/ Peter Y. Chang
Peter
Y. Chang |
|
Director |
| |
/s/ William M. Feldman
William
M. Feldman |
|
Director |
| |
/s/ Mural R. Josephson
Mural
R. Josephson |
|
Director |
| |
/s/ George M. Morvis
George
M. Morvis |
|
Director |
131
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
SeaBright Insurance Holdings, Inc.:
Under date of March 22, 2005, we reported on the
consolidated balance sheets of SeaBright Insurance Holdings,
Inc. and subsidiaries as of December 31, 2004 and 2003, the
related consolidated statements of operations, changes in
stockholders’ equity and comprehensive income (loss), and
cash flows for the year ended December 31, 2004 and for the
period from June 19, 2003 (inception) through
December 31, 2003. In connection with our audit of the
aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedules
included in the annual report on Form 10-K. These financial
statement schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Seattle, Washington
March 22, 2005
S-1
SCHEDULE II — CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
SEABRIGHT INSURANCE HOLDINGS, INC.
CONDENSED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
ASSETS |
|
Cash and cash equivalents
|
|
$ |
126 |
|
|
$ |
160 |
|
|
Federal income tax recoverable
|
|
|
397 |
|
|
|
— |
|
|
Other assets
|
|
|
1,250 |
|
|
|
— |
|
|
Receivable from subsidiaries
|
|
|
— |
|
|
|
179 |
|
|
Investment in subsidiaries
|
|
|
58,219 |
|
|
|
45,771 |
|
| |
|
|
|
|
|
|
| |
Total assets
|
|
$ |
59,992 |
|
|
$ |
46,110 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
| |
|
Liabilities:
|
|
|
|
|
|
|
|
|
| |
Federal income tax payable
|
|
$ |
— |
|
|
$ |
161 |
|
| |
Accrued expenses and other liabilities
|
|
|
2,152 |
|
|
|
476 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
2,152 |
|
|
|
637 |
|
| |
|
|
|
|
|
|
| |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
| |
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Series A preferred stock, $0.01 par value;
750,000 shares authorized; issued and
outstanding — 508,265.25 shares at
December 31, 2004 and 456,750 shares at
December 31, 2003
|
|
|
5 |
|
|
|
5 |
|
| |
Undesignated preferred stock, $0.01 par value;
authorized — 10,000,000 shares at
December 31, 2004 and no shares at December 31, 2003;
no shares issued and outstanding at December 31, 2004 and
2003
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.01 par value; authorized —
10,000,000 shares at December 31, 2004 and
750,000 shares at December 31, 2003; no shares issued
and outstanding at December 31, 2004 and 2003
|
|
|
— |
|
|
|
— |
|
| |
Paid-in capital
|
|
|
50,831 |
|
|
|
45,670 |
|
| |
Accumulated other comprehensive income
|
|
|
— |
|
|
|
— |
|
| |
Retained earnings (accumulated deficit)
|
|
|
7,004 |
|
|
|
(202 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
57,840 |
|
|
|
45,473 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
59,992 |
|
|
$ |
46,110 |
|
| |
|
|
|
|
|
|
See report of independent registered public accounting firm.
S-2
SEABRIGHT INSURANCE HOLDINGS, INC.
CONDENSED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Period from | |
| |
|
|
|
June 19, 2003 | |
| |
|
|
|
(Inception) | |
| |
|
Year Ended | |
|
Through | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except income | |
| |
|
per share information) | |
|
Revenue:
|
|
|
|
|
|
|
|
|
| |
Income from subsidiaries
|
|
$ |
7,123 |
|
|
$ |
— |
|
| |
Net investment income
|
|
|
1 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
7,124 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
| |
Loss from subsidiaries
|
|
|
— |
|
|
|
211 |
|
| |
Other expenses
|
|
|
44 |
|
|
|
10 |
|
| |
|
|
|
|
|
|
| |
|
|
44 |
|
|
|
221 |
|
| |
|
|
|
|
|
|
| |
|
Income (loss) before federal income taxes
|
|
|
7,080 |
|
|
|
(221 |
) |
| |
|
|
|
|
|
|
|
Federal income tax expense (benefit):
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
(126 |
) |
|
|
(19 |
) |
| |
Deferred
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
(126 |
) |
|
|
(19 |
) |
| |
|
|
|
|
|
|
| |
|
Net income (loss)
|
|
$ |
7,206 |
|
|
$ |
(202 |
) |
| |
|
|
|
|
|
|
|
Fully diluted income per common share equivalent
|
|
$ |
0.98 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
Weighted average common share equivalents outstanding
|
|
|
7,387,276 |
|
|
|
|
|
| |
|
|
|
|
|
|
See report of independent registered public accounting firm.
S-3
SEABRIGHT INSURANCE HOLDINGS, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
AND COMPREHENSIVE INCOME (LOSS)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Retained | |
|
|
| |
|
Outstanding Shares | |
|
|
|
|
|
|
|
Earnings | |
|
Total | |
| |
|
| |
|
|
|
|
|
|
|
(Accumu- | |
|
Stock- | |
| |
|
Preferred | |
|
Common | |
|
Preferred | |
|
Common |
|
Paid-in | |
|
lated | |
|
holders’ | |
| |
|
Stock | |
|
Stock | |
|
Stock | |
|
Stock |
|
Capital | |
|
Deficit) | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at June 19, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(inception)
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(202 |
) |
|
|
(202 |
) |
| |
Sale of preferred stock
|
|
|
457 |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
45,670 |
|
|
|
— |
|
|
|
45,675 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
457 |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
|
|
45,670 |
|
|
|
(202 |
) |
|
|
45,473 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,206 |
|
|
|
7,206 |
|
| |
Sale of preferred stock
|
|
|
51 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,161 |
|
|
|
— |
|
|
|
5,161 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
508 |
|
|
|
— |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
50,831 |
|
|
$ |
7,004 |
|
|
$ |
57,840 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of independent registered public accounting firm.
S-4
SEABRIGHT INSURANCE HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Period from | |
| |
|
|
|
June 19, 2003 | |
| |
|
|
|
(Inception) | |
| |
|
Year Ended | |
|
Through | |
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities, net of effect of
acquisition:
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
7,206 |
|
|
$ |
(202 |
) |
| |
Changes in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
| |
|
Receivable from subsidiaries
|
|
|
605 |
|
|
|
(179 |
) |
| |
|
Federal income taxes payable
|
|
|
(558 |
) |
|
|
161 |
|
| |
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) operating activities
|
|
|
7,253 |
|
|
|
(220 |
) |
| |
|
|
|
|
|
|
|
Cash flows from investing activities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
| |
Investment in subsidiaries
|
|
|
(12,448 |
) |
|
|
(45,295 |
) |
| |
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(12,448 |
) |
|
|
(45,295 |
) |
| |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
| |
Proceeds from issuance of preferred stock
|
|
|
5,161 |
|
|
|
45,675 |
|
| |
|
|
|
|
|
|
| |
|
|
Net cash provided by financing activities
|
|
|
5,161 |
|
|
|
45,675 |
|
| |
|
|
|
|
|
|
| |
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(34 |
) |
|
|
160 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
160 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
126 |
|
|
$ |
160 |
|
| |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow activities:
|
|
|
|
|
|
|
|
|
| |
Increase in accrued liabilities incurred due to acquisition of
assets
|
|
$ |
— |
|
|
$ |
476 |
|
| |
Purchase price adjustment
|
|
|
771 |
|
|
|
— |
|
See report of independent registered public accounting firm.
S-5
SCHEDULE IV — REINSURANCE
SEABRIGHT INSURANCE HOLDINGS, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Percent of | |
| |
|
|
|
Ceded to | |
|
Assumed | |
|
|
|
Amount | |
| |
|
|
|
Other | |
|
from Other | |
|
|
|
Assumed | |
| |
|
Direct | |
|
Companies | |
|
Companies | |
|
Net | |
|
to Net | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Premiums
|
|
$ |
134,520 |
|
|
$ |
16,067 |
|
|
$ |
1,162 |
|
|
$ |
119,615 |
|
|
|
1.0 |
% |
|
Three Months ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Premiums
|
|
|
22,154 |
|
|
|
2,759 |
|
|
|
— |
|
|
|
19,395 |
|
|
|
— |
|
See report of independent registered public accounting firm.
S-6
SCHEDULE VI — SUPPLEMENTAL INFORMATION CONCERNING
INSURANCE OPERATIONS
SEABRIGHT INSURANCE HOLDINGS, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Loss and Loss | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Adjustment | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Expenses | |
|
|
|
|
|
|
| |
|
|
|
Unpaid | |
|
|
|
|
|
|
|
Incurred Related | |
|
Amortization | |
|
|
|
|
| |
|
Deferred | |
|
Loss and | |
|
|
|
|
|
|
|
to | |
|
of Deferred | |
|
Paid Loss | |
|
|
| |
|
Policy | |
|
Loss | |
|
Net | |
|
Net | |
|
Net | |
|
| |
|
Policy | |
|
and Loss | |
|
|
| |
|
Acquisition | |
|
Adjustment | |
|
Unearned | |
|
Earned | |
|
Investment | |
|
Current | |
|
Prior | |
|
Acquisition | |
|
Adjustment | |
|
Premiums | |
| |
|
Costs, Net | |
|
Expense | |
|
Premium | |
|
Premium | |
|
Income | |
|
Year | |
|
Year | |
|
Costs | |
|
Expenses | |
|
Written | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Year ended December 31, 2004
|
|
$ |
7,588 |
|
|
$ |
68,228 |
|
|
$ |
62,372 |
|
|
$ |
77,960 |
|
|
$ |
2,501 |
|
|
$ |
53,594 |
|
|
$ |
66 |
|
|
$ |
9,985 |
|
|
$ |
17,120 |
|
|
$ |
135,682 |
|
|
Three Months Ended December 31, 2003
|
|
|
1,936 |
|
|
|
29,733 |
|
|
|
16,262 |
|
|
|
3,134 |
|
|
|
309 |
|
|
|
3,024 |
|
|
|
— |
|
|
|
322 |
|
|
|
2,950 |
|
|
|
22,154 |
|
See report of independent registered public accounting firm.
S-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
SeaBright Insurance Holdings, Inc.:
Under date of September 14, 2004, we reported on the
combined balance sheet of the Predecessor as of
December 31, 2002, and the related combined statements of
operations, changes in stockholder’s equity and
comprehensive income, and cash flows for the nine months ended
September 30, 2003 and for the year ended December 31,
2002. In connection with our audits of the aforementioned
combined financial statements, we also audited the related
combined financial statement schedules included in the annual
report on Form 10-K. These financial statement schedules
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when
considered in relation to the basic combined financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in Notes 2(i) and 17 to the combined financial
statements, effective January 1, 2002, the Predecessor
adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets.
/s/ KPMG LLP
Seattle, Washington
September 14, 2004
S-8
SCHEDULE IV — REINSURANCE
PREDECESSOR
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Percent of | |
| |
|
|
|
Ceded to | |
|
Assumed | |
|
|
|
Amount | |
| |
|
|
|
Other | |
|
from Other | |
|
|
|
Assumed | |
| |
|
Direct | |
|
Companies | |
|
Companies | |
|
Net | |
|
to Net | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Nine Months Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Premiums
|
|
$ |
68,402 |
|
|
$ |
4,078 |
|
|
$ |
2,315 |
|
|
$ |
66,639 |
|
|
|
3.5 |
% |
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Premiums
|
|
|
94,407 |
|
|
|
86,983 |
|
|
|
11,643 |
|
|
|
19,067 |
|
|
|
61.1 |
% |
See report of independent registered public accounting firm.
S-9
SCHEDULE VI — SUPPLEMENTAL INFORMATION CONCERNING
INSURANCE OPERATIONS
PREDECESSOR
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Loss and Loss | |
|
|
|
|
|
|
| |
|
|
|
Unpaid | |
|
|
|
|
|
|
|
Adjustment Expenses | |
|
Amortization | |
|
|
|
|
| |
|
Deferred | |
|
Loss and | |
|
|
|
|
|
|
|
Incurred Related to | |
|
of Deferred | |
|
Paid Loss | |
|
|
| |
|
Policy | |
|
Loss | |
|
Net | |
|
Net | |
|
Net | |
|
| |
|
Policy | |
|
and Loss | |
|
|
| |
|
Acquisition | |
|
Adjustment | |
|
Unearned | |
|
Earned | |
|
Investment | |
|
Current | |
|
Prior | |
|
Acquisition | |
|
Adjustment | |
|
Premiums | |
| |
|
Costs, Net | |
|
Expense | |
|
Premium | |
|
Premium | |
|
Income | |
|
Year | |
|
Year | |
|
Costs | |
|
Expenses | |
|
Written | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Nine Months Ended December 31, 2003
|
|
$ |
4,313 |
|
|
$ |
161,538 |
|
|
$ |
40,657 |
|
|
$ |
36,916 |
|
|
$ |
1,735 |
|
|
$ |
26,895 |
|
|
$ |
(1,500 |
) |
|
$ |
3,797 |
|
|
$ |
7,989 |
|
|
$ |
68,402 |
|
|
Year ended
December 31, 2002
|
|
|
1,422 |
|
|
|
153,469 |
|
|
|
47,604 |
|
|
|
17,058 |
|
|
|
3,332 |
|
|
|
13,324 |
|
|
|
(8,332 |
) |
|
|
1,574 |
|
|
|
2,227 |
|
|
|
94,407 |
|
See report of independent registered public accounting firm.
S-10
EXHIBIT INDEX
The list of exhibits in the Exhibit Index to this annual
report is incorporated herein by reference.
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
3 |
.1 |
|
Amended and Restated Certificate of Incorporation of SeaBright
Insurance Holdings, Inc. (incorporated by reference to the
Company’s Form S-8 Registration Statement (File
No. 333-123319), filed March 15, 2005) |
| |
3 |
.2 |
|
Amended and Restated By-laws of SeaBright Insurance Holdings,
Inc. (incorporated by reference to the Company’s
Form S-8 Registration Statement (File No. 333-123319),
filed March 15, 2005) |
| |
4 |
.1 |
|
Specimen Common Stock Certificate (incorporated by reference to
Amendment No. 2 to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
November 22, 2004) |
| |
4 |
.2 |
|
Indenture dated as of May 26, 2004 by and between SeaBright
Insurance Company and Wilmington Trust Company (incorporated by
reference to the Company’s Registration Statement on
Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.1 |
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and John G. Pasqualetto
(incorporated by reference to Amendment No. 1 to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed November 1, 2004) |
| |
10 |
.2 |
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Richard J. Gergasko
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.3 |
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Joseph S. De Vita
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.4 |
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Richard W. Seelinger
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.5 |
|
Employment Agreement, dated as of September 30, 2003, by
and between SeaBright Insurance Company and Jeffrey C. Wanamaker
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.6 |
|
Amended and Restated 2003 Stock Option Plan (incorporated by
reference to Amendment No. 3 to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed December 8, 2004) |
| |
10 |
.7 |
|
2005 Long-Term Equity Incentive Plan (incorporated by reference
to Amendment No. 4 to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
January 3, 2005) |
| |
10 |
.8 |
|
Purchase Agreement, dated as of July 14, 2003, by and among
Insurance Holdings, Inc., Kemper Employers Group, Inc.,
Lumbermens Mutual Casualty Company and Pacific Eagle Insurance
Company (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.9 |
|
Amendment Letter to Purchase Agreement, dated as of
July 30, 2003, by and among Insurance Holdings, Inc.,
Kemper Employers Group, Inc., Lumbermens Mutual Casualty
Company, Eagle Pacific Insurance Company and Pacific Eagle
Insurance Company (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.10 |
|
Amendment Letter to Purchase Agreement, dated as of
September 15, 2003, by and among SeaBright Insurance
Holdings, Inc., Kemper Employers Group, Inc., Lumbermens Mutual
Casualty Company, Eagle Pacific Insurance Company and Pacific
Eagle Insurance Company (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10 |
.11 |
|
Escrow Agreement, dated as of September 30, 2003, by and
among Wells Fargo Bank Minnesota, National Association,
SeaBright Insurance Holdings, Inc. and Kemper Employers Group,
Inc. (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.12 |
|
Adverse Development Excess of Loss Reinsurance Agreement, dated
as of September 30, 2004, between Lumbermens Mutual
Casualty Company and Kemper Employers Insurance Company
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.13 |
|
Amended and Restated Reinsurance Trust Agreement dated as
of February 29, 2004 by and among Lumbermens Mutual
Casualty Company and SeaBright Insurance Company (incorporated
by reference to Amendment No. 1 to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed November 1, 2004) |
| |
10 |
.14 |
|
Commutation Agreement, dated as of September 30, 2003, by
and between Kemper Employers Insurance Company and Lumbermens
Mutual Casualty Company (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.15 |
|
Administrative Services Agreement dated as of September 30,
2003 by and among Kemper Employers Insurance Company, Eagle
Pacific Insurance Company and Pacific Eagle Insurance Company
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.16 |
|
Administrative Services Agreement dated as of September 30,
2003 by and among Kemper Employers Insurance Company and
Lumbermens Mutual Casualty Company (incorporated by reference to
the Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.17 |
|
Claims Administration Services Agreement dated as of
September 30, 2003 by and among Kemper Employers Insurance
Company, Eagle Pacific Insurance Company and Pacific Eagle
Insurance Company (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.18 |
|
Side Letter dated as of September 29, 2003 by and among
SeaBright Insurance Holdings, Inc., Kemper Employers Group,
Inc., Lumbermens Mutual Casualty Company, Eagle Pacific
Insurance Company and Pacific Eagle Insurance Company
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.19 |
|
Installment Promissory Note dated as of March 31, 2003 from
PointSure Insurance Services, Inc. to Eagle Pacific Insurance
Company, for $1,952,834.67 (incorporated by reference to
Amendment No. 1 to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
November 1, 2004) |
| |
10 |
.20 |
|
Amendment to Employment Agreement by and between SeaBright
Insurance Company and John G. Pasqualetto (incorporated by
reference to Amendment No. 2 to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed November 22, 2004) |
| |
10 |
.21 |
|
Stock Purchase Agreement dated as of September 30, 2003 by
and among SeaBright Insurance Holdings, Inc. and the persons
listed on the schedule of purchases thereto (incorporated by
reference to the Company’s Registration Statement on
Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.23 |
|
Registration Agreement dated as of September 30, 2003, by
and among SeaBright Insurance Holdings, Inc. and the persons
identified on the schedule of investors attached thereto
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.24 |
|
Executive Stock Agreement dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and John
Pasqualetto (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.25 |
|
Executive Stock Agreement dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Richard J.
Gergasko (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10 |
.26 |
|
Executive Stock Agreement dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Joseph De
Vita (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.27 |
|
Executive Stock Agreement dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Richard
Seelinger (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.28 |
|
Executive Stock Agreement dated as of September 30, 2003,
by and between SeaBright Insurance Holdings, Inc. and Jeffrey C.
Wanamaker (incorporated by reference to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.29 |
|
Executive Stock Agreement dated as of June 30, 2004 by and
between SeaBright Insurance Holdings, Inc. and Chris Engstrom
(incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.30 |
|
Executive Stock Agreement dated as of June 30, 2004 by and
between SeaBright Insurance Holdings, Inc. and James Louden
Borland III (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.31 |
|
Stock Purchase Agreement dated as of June 30, 2004 by and
between SeaBright Insurance Holdings, Inc. and each of the
purchasers named therein (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
10 |
.32 |
|
Form of Incentive Stock Option Agreement (incorporated by
reference to the Company’s Registration Statement on
Form S-1 (File No. 333-119111), filed
September 17, 2004) |
| |
10 |
.34 |
|
Tax and Expense Sharing Agreement dated as of March 12,
2004 by and among SeaBright Insurance Holdings, Inc., SeaBright
Insurance Company and PointSure Insurance Services, Inc.
(incorporated by reference to Amendment No. 1 to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed November 1, 2004) |
| |
10 |
.35 |
|
Workers’ Compensation and Employers Liability $500,000
Excess of $500,000 Per Occurrence Excess of Loss Reinsurance
Contract effective as of October 1, 2004 by and between
SeaBright Insurance Company and the Reinsurers identified
therein (incorporated by reference to Amendment No. 3 to
the Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed December 8, 2004) |
| |
10 |
.36 |
|
Workers’ Compensation and Employers Liability $4,000,000
Excess of $1,000,000 Per Occurrence Excess of Loss Reinsurance
Contract effective as of October 1, 2004 by and between
SeaBright Insurance Company and the Reinsurers identified
therein (incorporated by reference to Amendment No. 3 to
the Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed December 8, 2004) |
| |
10 |
.37 |
|
Workers’ Compensation and Employers Liability $5,000,000
Excess of $5,000,000 Per Occurrence Excess of Loss Reinsurance
Contract effective as of October 1, 2004 by and between
SeaBright Insurance Company and the Reinsurers identified
therein (incorporated by reference to Amendment No. 3 to
the Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed December 8, 2004) |
| |
10 |
.38 |
|
Workers’ Compensation $90,000,000 Excess of $10,000,000 Per
Occurrence Excess of Loss Reinsurance Contract effective as of
October 1, 2004 by and between SeaBright Insurance Company
and the Reinsurers identified therein (incorporated by reference
to Amendment No. 3 to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
December 8, 2004) |
| |
10 |
.39 |
|
Agency Services Agreement effective as of October 1, 2003
by and between SeaBright Insurance Company and PointSure
Insurance Services, Inc. (incorporated by reference to Amendment
No. 1 to the Company’s Registration Statement on
Form S-1 (File No. 333-119111), filed November 1,
2004) |
| |
10 |
.40 |
|
Floating Rate Surplus Note dated May 26, 2004 from
SeaBright Insurance Company to Wilmington Trust Company, as
trustee, for $12,000,000 (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description |
| | |
|
|
| |
10 |
.41 |
|
Side Letter dated as of September 28, 2004 by and among
SeaBright Insurance Holdings, Inc., SeaBright Insurance Company
and Lumbermens Mutual Casualty Company (incorporated by
reference to Amendment No. 1 to the Company’s
Registration Statement on Form S-1 (File
No. 333-119111), filed November 1, 2004) |
| |
10 |
.42 |
|
Form of Stock Option Award Agreement for awards granted under
2005 Long-Term Equity Incentive Plan (incorporated by reference
to Amendment No. 4 to the Company’s Registration
Statement on Form S-1 (File No. 333-119111), filed
January 3, 2005) |
| |
10 |
.43* |
|
Form of restricted stock grant agreement for grants under the
2005 Long-Term Equity Incentive Plan |
| |
21 |
.1 |
|
Subsidiaries of the registrant (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File
No. 333-119111), filed September 17, 2004) |
| |
23 |
.1* |
|
Consent of KPMG LLP |
| |
31 |
.1* |
|
Rule 13a-14(a)/15d-14(a) Certification (Chief Executive
Officer) |
| |
31 |
.2* |
|
Rule 13a-14(a)/15d-14(a) Certification (Chief Financial
Officer) |
| |
32 |
.1* |
|
Section 1350 Certification (Chief Executive Officer) |
| |
32 |
.2* |
|
Section 1350 Certification (Chief Financial Officer) |
