Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - CRM Holdings, Ltd. | c92520exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - CRM Holdings, Ltd. | c92520exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - CRM Holdings, Ltd. | c92520exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - CRM Holdings, Ltd. | c92520exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32705
CRM Holdings, Ltd.
(Exact name of registrant as specified in its charter)
Bermuda (State or other jurisdiction of incorporation or organization) |
Not Applicable (I.R.S. Employer Identification No.) |
|
PO Box HM 2062, Hamilton HM HX, Bermuda (Address of principal executive offices) |
Not Applicable (Zip Code) |
(441) 295-6689
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
Class | Outstanding at November 12, 2009 | |
Common Shares, $0.01 par value per share | 16,467,362 shares | |
Class B Shares, $0.01 par value per share | 395,000 shares |
TABLE OF CONTENTS
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54 | ||||||||
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54 | ||||||||
54 | ||||||||
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
CRM Holdings, Ltd.
Consolidated Balance Sheets
Consolidated Balance Sheets
Unaudited | ||||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Assets |
||||||||
Investments |
||||||||
Fixed-maturity securities, available-for-sale (amortized cost $300,020 and $308,607) |
$ | 309,454 | $ | 313,622 | ||||
Short-term investments |
9,261 | 113 | ||||||
Investment in unconsolidated subsidiary |
1,083 | 1,083 | ||||||
Total investments |
319,798 | 314,818 | ||||||
Cash and cash equivalents |
35,734 | 28,044 | ||||||
Restricted cash and cash equivalents |
874 | 2,000 | ||||||
Total cash and cash equivalents |
36,608 | 30,044 | ||||||
Accrued interest receivable |
2,491 | 3,184 | ||||||
Premiums receivable, net |
7,876 | 11,935 | ||||||
Reinsurance recoverable and prepaid reinsurance |
97,416 | 63,801 | ||||||
Accounts receivable, net |
3,050 | 3,065 | ||||||
Receivable for investments sold |
2,048 | 34 | ||||||
Deferred policy acquisition costs |
894 | 1,084 | ||||||
Current income taxes, net |
6,622 | 3,208 | ||||||
Deferred income taxes, net |
| 7,809 | ||||||
Goodwill and other intangible assets |
3,135 | 3,252 | ||||||
Prepaid expenses |
1,863 | 1,836 | ||||||
Other assets |
2,922 | 3,330 | ||||||
Total assets |
$ | 484,723 | $ | 447,400 | ||||
Liabilities and shareholders equity |
||||||||
Reserve for losses and loss adjustment expenses |
$ | 281,380 | $ | 245,618 | ||||
Reinsurance payable |
12,892 | 9,424 | ||||||
Unearned premiums |
12,648 | 13,090 | ||||||
Unearned management fees |
77 | 26 | ||||||
Long-term debt and other secured borrowings |
44,083 | 44,083 | ||||||
Payable for investments purchased |
18,861 | | ||||||
Other liabilities |
29,777 | 26,299 | ||||||
Total liabilities |
399,718 | 338,540 | ||||||
Common shares |
||||||||
Authorized 50 billion shares; $0.01 par value;
|
||||||||
16.5 and 16.2 million common shares issued and outstanding |
165 | 162 | ||||||
0.4 million Class B shares issued and outstanding |
4 | 4 | ||||||
Additional paid-in capital |
70,852 | 69,743 | ||||||
Retained earnings |
7,852 | 35,619 | ||||||
Accumulated and other comprehensive gain, net of tax |
6,132 | 3,332 | ||||||
Total shareholders equity |
85,005 | 108,860 | ||||||
Total liabilities and shareholders equity |
$ | 484,723 | $ | 447,400 | ||||
See Notes to Consolidated Financial Statements
1
Table of Contents
CRM Holdings, Ltd.
Consolidated Statements of Operations
Comprehensive (Loss) Income (Unaudited)
Consolidated Statements of Operations
Comprehensive (Loss) Income (Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousand, except per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Net premiums earned |
$ | 17,324 | $ | 24,504 | $ | 61,033 | $ | 98,040 | ||||||||
Fee-based management services |
902 | 1,806 | 3,636 | 5,598 | ||||||||||||
Investment income |
3,529 | 2,922 | 9,561 | 9,272 | ||||||||||||
Total revenues |
21,755 | 29,232 | 74,230 | 112,910 | ||||||||||||
Expenses |
||||||||||||||||
Losses and loss adjustment expenses |
17,193 | 19,841 | 52,081 | 61,230 | ||||||||||||
Policy acquisition costs |
3,663 | 3,935 | 11,638 | 15,203 | ||||||||||||
Fees paid to general agents and brokers |
412 | 534 | 1,598 | 3,473 | ||||||||||||
Selling, general and administrative expenses |
6,880 | 9,275 | 28,500 | 22,189 | ||||||||||||
Interest expense |
952 | 922 | 2,739 | 2,799 | ||||||||||||
Total expenses |
29,100 | 34,507 | 96,556 | 104,894 | ||||||||||||
(Loss) income from continuing operations before income taxes |
(7,345 | ) | (5,275 | ) | (22,326 | ) | 8,016 | |||||||||
Tax provision (benefit) from continuing operations |
8,313 | (2,352 | ) | 3,614 | (254 | ) | ||||||||||
(Loss) income from continuing operations |
(15,658 | ) | (2,923 | ) | (25,940 | ) | 8,270 | |||||||||
Discontinued operations |
||||||||||||||||
Loss from discontinued operations before income taxes |
(749 | ) | (1,307 | ) | (1,478 | ) | (6,008 | ) | ||||||||
Tax provision (benefit) from discontinued operations |
594 | (464 | ) | 349 | (1,997 | ) | ||||||||||
Loss on discontinued operations |
(1,343 | ) | (843 | ) | (1,827 | ) | (4,011 | ) | ||||||||
Net (Loss) Income |
$ | (17,001 | ) | $ | (3,766 | ) | $ | (27,767 | ) | $ | 4,259 | |||||
(Loss) earnings per share from continuing operations |
||||||||||||||||
Basic |
$ | (0.93 | ) | $ | (0.18 | ) | $ | (1.55 | ) | $ | 0.50 | |||||
Diluted |
$ | (0.93 | ) | $ | (0.18 | ) | $ | (1.55 | ) | $ | 0.50 | |||||
Loss per share from discontinued operations |
||||||||||||||||
Basic |
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.24 | ) | ||||
Diluted |
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.24 | ) | ||||
Net (loss) earnings per share |
||||||||||||||||
Basic |
$ | (1.01 | ) | $ | (0.23 | ) | $ | (1.66 | ) | $ | 0.26 | |||||
Diluted |
$ | (1.01 | ) | $ | (0.23 | ) | $ | (1.66 | ) | $ | 0.26 | |||||
Weighted average shares outstanding |
||||||||||||||||
Basic |
16,853 | 16,466 | 16,749 | 16,425 | ||||||||||||
Diluted |
16,853 | 16,466 | 16,749 | 16,425 | ||||||||||||
Comprehensive (Loss) Income |
||||||||||||||||
Net (loss) income |
$ | (17,001 | ) | $ | (3,766 | ) | $ | (27,767 | ) | $ | 4,259 | |||||
Other comprehensive gain (loss) |
||||||||||||||||
Gross unrealized investment holdings gains (losses) during
the period |
4,354 | (2,608 | ) | 6,221 | (3,279 | ) | ||||||||||
Less reclassification adjustment for gains included in net
(loss) income |
(1,058 | ) | (197 | ) | (1,801 | ) | (1,320 | ) | ||||||||
Income tax (provision) benefit on other comprehensive income |
(1,157 | ) | 948 | (1,620 | ) | 1,572 | ||||||||||
Total other comprehensive gain (loss) |
2,139 | (1,857 | ) | 2,800 | (3,027 | ) | ||||||||||
Total comprehensive (loss) income |
$ | (14,862 | ) | $ | (5,623 | ) | $ | (24,967 | ) | $ | 1,232 | |||||
See Notes to Consolidated Financial Statements
2
Table of Contents
CRM Holdings, Ltd.
Consolidated Statements of Cash Flows (Unaudited)
Consolidated Statements of Cash Flows (Unaudited)
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net (loss) income |
$ | (27,767 | ) | $ | 4,259 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating
activities |
||||||||
Depreciation and amortization |
586 | 1,380 | ||||||
Amortization of unearned compensation, restricted stock |
1,052 | 1,021 | ||||||
Amortization of premiums and discounts on available-for-sale investments |
1,191 | 412 | ||||||
Net realized gains on sale and impairment of available-for-sale investments |
(1,801 | ) | (1,320 | ) | ||||
Changes in deferred income taxes |
6,190 | 56 | ||||||
Changes in: |
||||||||
Accrued interest receivable |
693 | (402 | ) | |||||
Premiums receivable |
4,059 | (2,338 | ) | |||||
Reinsurance recoverable and prepaid insurance |
(33,615 | ) | (18,268 | ) | ||||
Accounts receivable, net |
15 | 2,142 | ||||||
Deferred policy acquisition costs |
190 | (1,496 | ) | |||||
Goodwill and other intangible assets |
| 196 | ||||||
Current income taxes, net |
(3,414 | ) | (3,506 | ) | ||||
Prepaid expenses |
(58 | ) | 510 | |||||
Other assets |
63 | (126 | ) | |||||
Reserve for losses and loss adjustment expenses |
35,762 | 38,891 | ||||||
Reinsurance payable |
3,468 | 12,356 | ||||||
Unearned premiums |
(442 | ) | 4,101 | |||||
Unearned management fees |
51 | (95 | ) | |||||
Other liabilities |
3,479 | 2,493 | ||||||
Net cash (used in) provided by operating activities |
(10,298 | ) | 40,266 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of available-for-sale investments |
(294,544 | ) | (313,706 | ) | ||||
Proceeds from sales of available-for-sale investments |
87,346 | 127,292 | ||||||
Proceeds from maturities of available-for-sale investments |
216,395 | 138,134 | ||||||
Net purchase, sales and maturities for short-term investments |
(9,148 | ) | 694 | |||||
(Increase) decrease in receivable for securities sold |
(2,014 | ) | 94 | |||||
Increase in payable for investments purchased |
18,861 | 10,862 | ||||||
Acquisition of intangible assets |
| (82 | ) | |||||
Purchases of fixed assets |
(134 | ) | (674 | ) | ||||
Disposals of fixed assets |
39 | 237 | ||||||
Payments on loans receivable, net |
| 3 | ||||||
Net cash provided by (used in) investing activities |
16,801 | (37,146 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Change in restricted cash and cash equivalents |
1,126 | | ||||||
Repayments under long-term debt and other secured borrowings |
| (1 | ) | |||||
Issuance of common shares employee stock purchase plan |
73 | 160 | ||||||
Retirement of common shares share-based compensation |
(12 | ) | (47 | ) | ||||
Net cash provided by financing activities |
1,187 | 112 | ||||||
Net increase in cash |
7,690 | 3,232 | ||||||
Cash and cash equivalents |
||||||||
Beginning |
28,044 | 34,286 | ||||||
Ending |
$ | 35,734 | $ | 37,518 | ||||
See Notes to Consolidated Financial Statements
3
Table of Contents
CRM Holdings, Ltd.
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Organization
CRM Holdings, Ltd. (CRM Holdings or the Company) is a Bermuda holding company and 100%
owner of CRM USA Holdings Inc. (CRM USA Holdings), a United States holding company, and Twin
Bridges (Bermuda) Ltd. (Twin Bridges), a Bermuda company. The Companys legal domicile is
Bermuda, the jurisdiction in which it is incorporated.
CRM USA Holdings has two principal subsidiaries, Compensation Risk Managers of California, LLC
(CRM CA), and Embarcadero Insurance Holdings, Inc. (Embarcadero). Embarcadero has one principal
operating subsidiary, Majestic Insurance Company (Majestic), and has one dormant subsidiary,
Great Western Insurance Services, Inc. (Great Western).
On May 6, 2009, Embarcadero sold its wholly-owned dormant subsidiary, Redhorse Insurance
Company, Ltd. (Redhorse), to CRM Holdings. On May 14, 2009, Redhorse merged with Twin Bridges as
the activities performed by Redhorse could be performed by Twin Bridges and there were no longer
good economic reasons for the continued separate existence of Redhorse.
CRM USA Holdings has two other subsidiaries, Compensation Risk Managers, LLC (CRM) and
Eimar, LLC (Eimar), neither of which has active business operations. The results of CRM and Eimar
are reported as discontinued operations effective September 8, 2008, as more fully described in
Note 2.
Former Co-Chief Executive Officers Severance
On March 13, 2009, Daniel G. Hickey Jr., resigned as the Companys Chief Executive Officer,
Chairman of the Board, and as a director and officer of the Companys subsidiaries. The Company
entered into a separation agreement with Mr. Hickey under which the Company (a) will make cash
payments of $3.3 million over the next three years; (b) immediately vested and distributed 46
thousand shares of restricted stock; and (c) will pay medical and life insurance benefits for up to
three years. The separation agreement prohibits Mr. Hickey from competing with the Company in the
California self-insured market until March 13, 2012 and from soliciting employees and customers
through March 13, 2011. In conjunction with Mr. Hickeys separation agreement, the Company recorded
$3.8 million of severance expense in the first quarter of 2009.
Previously, the Company recognized severance expense for Martin D. Rakoff, former Co-Chief
Executive Officer and Deputy Chairman of the Board who resigned December 19, 2006, over the term of
his non-complete/non-solicitation covenant, which expires December 2010. The Company accelerated
the recognition of Mr. Rakoffs severance expense and recorded the $1.5 million of remaining
severance payments in the first quarter of 2009. Due to the Companys decreased presence in the
self-insured group market and the current economic and regulatory environment, the Company
determined that there is not a significant ongoing economic benefit related to Mr. Hickeys and Mr.
Rakoffs non-compete/non-solicitation covenants. Accordingly, $5.3 million of severance expense
related to Mr. Hickeys and Mr. Rakoffs remaining severance payments was included in selling,
general and administrative expenses in the first quarter of 2009.
4
Table of Contents
CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies, Continued
Basis of Accounting and Principles of Consolidation
The interim consolidated financial statements included in this report have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) for interim
financial information and with the instructions to Securities and Exchange Commission (SEC) Form
10-Q and Article 10 of SEC Regulation S-X. The principles for condensed interim financial
information do not require the inclusion of all the information and footnotes required by GAAP for
complete financial statements. These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2008. The accompanying consolidated financial statements have not been
audited by an independent registered public accounting firm in accordance with the standards of the
Public Company Accounting Oversight Board (United States), but in the opinion of management, such
financial statements include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the Companys financial position and results of operations. The
results of operations and cash flows for the nine months ended September 30, 2009 may not be
indicative of the results that may be expected for the year ending December 31, 2009.
The interim consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. The results of the fee-based operations of CRM and Eimar are presented
as discontinued operations in the consolidated statements of operations. All significant
inter-company transactions and balances have been eliminated upon consolidation. Business segment
results are presented net of all material inter-segment transactions.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt
accounting policies and make estimates and assumptions that affect certain reported amounts and
disclosures. These estimates are inherently subject to change, and actual results may ultimately
differ materially from those estimates.
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 168,
The FASB Accounting Standard Codification and Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162 (FAS 168) which establishes the Accounting
Standards Codification (the ASC) and SEC interpretive releases
as the sources for authoritative GAAP. The ASC supersedes all existing non-SEC accounting and
reporting standards under GAAP effective July 1, 2009 and is effective on a prospective basis for
interim and annual reporting periods ending after September 15, 2009. The ASC is not intended to
change existing GAAP. The adoption of the ASC changed the Companys references to GAAP accounting
standards but did not impact the Companys financial condition and results of operations.
Reclassification
Certain prior period amounts have been reclassified to conform to the basis of presentation
used in 2009.
5
Table of Contents
CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies, Continued
Recent Accounting Pronouncements Not Yet Effective
In June 2009, the FASB issued new guidance on accounting for the transfers of financial
assets. The new guidance, which was issued as FASB Statement No. 166, Accounting for Transfers of
Financial Assets, an Amendment of FASB Statement No. 140, has not yet been adopted into the ASC.
The new guidance eliminates the concept of a qualifying special-purpose entity (QSPE), clarifies
and amends the derecognition criteria for a transfer to be accounted for as a sale, amends and
clarifies the unit of account eligible for sale accounting and requires that a transferor initially
measure at fair value and recognize all assets obtained and liabilities incurred as a result of a
transfer of an entire financial asset or group of financial assets accounted for as a sale.
Additionally, on and after the effective date, existing QSPEs must be evaluated for consolidation
by reporting entities in accordance with the applicable consolidation guidance. The new guidance
requires enhanced disclosures about, among other things, a transferors continuing involvement with
transfers of financial assets accounted for as sales, the risks inherent in the transferred
financial assets that have been retained, and the nature and financial effect of restrictions on
the transferors assets that continue to be reported in the statement of financial position. The
new guidance, effective for fiscal years beginning after November 15, 2009, affects financial asset
transfers occurring on or after the effective date. Early adoption is prohibited. The Company is
currently evaluating the potential impact, if any, of the adoption of the new guidance on its
financial condition and results of operations.
In June 2009, the FASB issued revised guidance on the accounting for variable interest
entities. The revised guidance, which was issued as FASB Statement No. 167, Amendments to FASB
Interpretation No. 46(R), has not yet been adopted into the ASC. The revised guidance amends the
consolidation rules applicable to a variable interest entity (VIE). In addition, the revised
guidance amends the rules governing the determination of whether an enterprise is the primary
beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a
qualitative analysis rather than a quantitative analysis. The qualitative analysis will include,
among other things, consideration of who has the power to direct the activities of the entity that
most significantly impact the entitys economic performance and who has the obligation to absorb
losses or the right to receive benefits of the VIE that could potentially be significant to the VIE
and requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE.
Previous guidance required reconsideration of whether an enterprise was the primary beneficiary of
a VIE only when specific events had occurred. Finally, the revised guidance requires enhanced
disclosures about an enterprises involvement with a VIE and is effective for fiscal years
beginning after November 15, 2009, and for interim periods within those fiscal years. Early
adoption is prohibited. The Company is currently evaluating the potential impact, if any, of the
adoption of the revised guidance on its financial condition and results of operations.
Note 2. Discontinued Operations
On September 8, 2008, the Company ceased operations of CRM and Eimar. Accordingly, the results
of operations of CRM and Eimar are reported as loss from discontinued operations in the
consolidated statements of operations and are excluded from our Fee-based Management Services
segment.
CRM no longer has self-insured groups under management in New York. The administration of the
claims for all of the New York self-insured groups was transferred to third party administrators
appointed by the New York Workers Compensation Board, and in accordance with the terms of a
settlement agreement entered into between CRM and the New York Workers Compensation Board, CRM
surrendered its third-party administrators license in New York on September 8, 2008. The Company
does not expect to derive any significant revenues from fee-based management services in New York
currently or in the future and does not expect to incur any significant ongoing operating expenses,
except for legal defense costs, in this component of fee-based management services.
Furthermore, the surrendering of CRMs administrators license prohibits CRM from actively
engaging in this business in New York.
In conjunction with the voluntary termination of the New York self-insured groups, the Company
has ceased the operations of Eimar, a provider of medical bill review and case management services,
as historically, the majority of Eimars business was derived from these New York self-insured
groups.
6
Table of Contents
CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 2. Discontinued Operations, Continued
Results for discontinued operations were as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues |
$ | 3 | $ | 517 | $ | (39 | ) | $ | 3,560 | |||||||
Expenses |
752 | 1,824 | 1,439 | 9,568 | ||||||||||||
Loss from discontinued operations before income taxes |
$ | (749 | ) | $ | (1,307 | ) | $ | (1,478 | ) | $ | (6,008 | ) | ||||
Medical bill review services for Majestic and certain self-insured groups managed by CRM CA
were performed by the Company until the medical bill review function was transitioned to a third
party medical bill review provider. This transition was completed in the third quarter of 2009.
For the three and nine months ended September 30, 2009, expenses primarily consisted of $0.8
million and $1.4 million, respectively, of legal defense costs related to the pending regulatory
proceedings and litigation described in Note 12.
Note 3. Earnings per Share
Basic earnings per share is calculated using the weighted average number of common and Class B
shares outstanding and excludes any dilutive effects of warrants, options and convertible
securities. As of September 30, 2009 and 2008, there were 461 thousand and 436 thousand restricted
shares outstanding, respectively, and no warrants, options or convertible securities outstanding
during the periods ended September 30, 2009 and 2008.
7
Table of Contents
CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 3. Earnings per Share, Continued
The following tables show the computation of the Companys earnings per share:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Amounts in thousands, except per share amounts) | ||||||||||||||||
Net (loss) income from continuing operations (Numerator Basic
and diluted earnings per share from continuing operations) |
$ | (15,658 | ) | $ | (2,923 | ) | $ | (25,940 | ) | $ | 8,270 | |||||
Net loss from discontinued operations
(Numerator Basic and diluted earnings per share from
discontinued operations) |
(1,343 | ) | (843 | ) | (1,827 | ) | (4,011 | ) | ||||||||
Net (loss) income allocated to common shares
(Numerator Basic and diluted earnings per share) |
(17,001 | ) | (3,766 | ) | (27,767 | ) | 4,259 | |||||||||
Weighted-average basic shares outstanding
(Denominator basic earnings per share) |
16,853 | 16,466 | 16,749 | 16,425 | ||||||||||||
Dilutive effect of unvested shares |
| | | | ||||||||||||
Weighted-average diluted shares outstanding (Denominator
diluted earnings per share) |
16,853 | 16,466 | 16,749 | 16,425 | ||||||||||||
Basic (loss) earnings per share from continuing operations |
$ | (0.93 | ) | $ | (0.18 | ) | $ | (1.55 | ) | $ | 0.50 | |||||
Diluted (loss) earnings per share from continuing operations |
$ | (0.93 | ) | $ | (0.18 | ) | $ | (1.55 | ) | $ | 0.50 | |||||
Basic loss per share from discontinued operations |
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.24 | ) | ||||
Diluted loss per share from discontinued operations |
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.24 | ) | ||||
Basic (loss) earnings per share |
$ | (1.01 | ) | $ | (0.23 | ) | $ | (1.66 | ) | $ | 0.26 | |||||
Diluted (loss) earnings per share |
$ | (1.01 | ) | $ | (0.23 | ) | $ | (1.66 | ) | $ | 0.26 |
Diluted earnings per share is calculated assuming conversion of dilutive convertible
securities and the exercise of all dilutive stock options and warrants using the treasury stock
method. For the three and nine months ended September 30, 2009, 461 thousand and 331 thousand
restricted shares, respectively, were excluded from the computation of diluted earnings per share
because their effects were anti-dilutive. For the three and nine months ended September 30, 2008,
436 thousand and 404 thousand restricted shares, respectively, were excluded from the computation
of diluted earnings per share because their effects were anti-dilutive.
8
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 4. Investments
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of the
Companys available-for-sale investments are shown in the tables below:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
As of September 30, 2009 | Cost | Gains | Losses | Fair Value | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Treasury securities |
$ | 63,600 | $ | 1,514 | $ | | $ | 65,114 | ||||||||
Government sponsored agency securities |
18,862 | 873 | | 19,735 | ||||||||||||
Obligations of states and political
subdivisions |
81,847 | 3,728 | 21 | 85,554 | ||||||||||||
Corporate and other obligations |
76,186 | 2,306 | 147 | 78,345 | ||||||||||||
Asset-backed obligations |
9,036 | 387 | | 9,423 | ||||||||||||
Mortgage-backed obligations |
50,489 | 794 | | 51,283 | ||||||||||||
Total investment securities,
available-for-sale |
$ | 300,020 | $ | 9,602 | $ | 168 | $ | 309,454 | ||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | ||||||||||||||
As of December 31, 2008 | Cost | Gains | Losses | Fair Value | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Treasury securities |
$ | 48,649 | $ | 2,576 | $ | | $ | 51,225 | ||||||||
Government sponsored agency securities |
41,143 | 1,400 | | 42,543 | ||||||||||||
Obligations of states and political
subdivisions |
102,189 | 2,553 | 462 | 104,280 | ||||||||||||
Corporate and other obligations |
48,634 | 623 | 1,258 | 47,999 | ||||||||||||
Asset-backed obligations |
9,054 | | 799 | 8,255 | ||||||||||||
Mortgage-backed obligations |
58,938 | 382 | | 59,320 | ||||||||||||
Total investment securities,
available-for-sale |
$ | 308,607 | $ | 7,534 | $ | 2,519 | $ | 313,622 | ||||||||
The amortized cost and estimated fair value of the Companys available-for-sale investments at
September 30, 2009 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.
September 30, 2009 | ||||||||
(Dollars in thousands) | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year or less |
$ | 34,081 | $ | 34,577 | ||||
Due after one year through five years |
129,227 | 134,659 | ||||||
Due after five years through ten years |
61,264 | 63,119 | ||||||
Due after ten years |
15,923 | 16,393 | ||||||
240,495 | 248,748 | |||||||
Mortgage and asset-backed |
59,525 | 60,706 | ||||||
Total investment securities, available-for-sale |
$ | 300,020 | $ | 309,454 | ||||
9
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 4. Investments, Continued
The following table sets forth the gross unrealized losses included in accumulated other
comprehensive losses as of September 30, 2009 and December 31, 2008 related to available-for-sale
fixed-maturity securities. The table segregates investments that have been in a continuous
unrealized loss position for less than 12 months from those that have been in a continuous
unrealized loss position for twelve months or longer.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
As of September 30, 2009 | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Obligations of states
and political
subdivisions |
$ | 6,447 | $ | 20 | $ | 101 | $ | 1 | $ | 6,548 | $ | 21 | ||||||||||||
Corporate and other
obligations |
7,972 | 7 | 2,063 | 140 | 10,035 | 147 | ||||||||||||||||||
Total investment
securities,
available-for-sale |
$ | 14,419 | $ | 27 | $ | 2,164 | $ | 141 | $ | 16,583 | $ | 168 | ||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
As of December 31, 2008 | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Obligations of states
and political
subdivisions |
$ | 7,496 | $ | 115 | $ | 3,868 | $ | 347 | $ | 11,364 | $ | 462 | ||||||||||||
Corporate and other
obligations |
17,227 | 815 | 3,324 | 443 | 20,551 | 1,258 | ||||||||||||||||||
Asset-backed obligations |
8,255 | 799 | | | 8,255 | 799 | ||||||||||||||||||
Total investment
securities,
available-for-sale |
$ | 32,978 | $ | 1,729 | $ | 7,192 | $ | 790 | $ | 40,170 | $ | 2,519 | ||||||||||||
There were 10 and 48 available-for-sale investments whose fair values were less than their
amortized cost at September 30, 2009 and December 31, 2008, respectively.
10
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 4. Investments, Continued
In April 2009, the FASB issued new guidance for the accounting for other-than-temporary
impairments. Under the new guidance, which is now part of ASC 320, Investments Debt and Equity
Securities, the Company is required to separate an other-than-temporary impairment of a debt
security into two components when there are credit losses associated with the impaired debt
security for which management asserts that it does not have the intent to sell the security, and it
is more likely than not that it will not be required to sell the security before recovery of its
cost basis. The amount of the other-than-temporary impairment related to other factors is recorded
in other comprehensive loss.
The Company is holding one fixed-maturity security issued by Lehman Brothers Holdings Inc.
(Lehman) that was determined to be other-than-temporarily impaired. In September 2008, the
Company recorded impairment charges on this investment as a result of Lehmans bankruptcy filing.
Consequently, the Company has determined that the other-than-temporary impairment was entirely due
to credit loss and the adoption of the new other-than-temporary impairment guidance did not result
in any cumulative-effect adjustment to the Companys beginning retained earnings at April 1, 2009
or any material impact on its financial condition or results of operations.
The Company regularly evaluates its fixed income securities to determine whether impairment
represents other-than-temporary declines in the fair value of the investments. Criteria considered
during this process includes but is not limited to:
| the current fair value as compared to the cost of the security; |
| degree and duration of the securitys fair value being below cost; |
| the Companys intent not to sell, or more likely than not be required to sell the
security for a sufficient time period for it to recover its value; |
| financial condition and near-term prospects of the issuer of the security, including
any specific events that may affect its operations or earnings; |
| credit quality and any downgrades of the security by a rating agency; and |
| nonpayment of scheduled interest payments. |
Part of the evaluation of whether particular securities are other-than-temporarily impaired
involves assessing whether the Company has both the intent and ability to continue to hold
securities in an unrealized loss position until recovery. Significant changes in these factors
could result in a charge to net earnings for impairment losses. Impairment losses result in a
reduction of the underlying investments cost basis. Impairment losses are included in realized
losses and are a component of investment income in the consolidated statements of operations.
In order to maximize after tax yields of the investment portfolio, the Company began
liquidating its municipal bond portfolio in the second quarter of 2009. Proceeds from the
liquidation are being reinvested in taxable fixed-maturity securities. As a result, the Company
recorded gross realized gains of $1.4 million for the nine months ended September 30, 2009.
Realized losses included $0.1 million of impairment charges related to municipal securities that
were determined to be other-than-temporarily impaired as the Companys intent is to sell its
remaining municipal bond securities.
The Company determined that the decline in fair value of its remaining available-for-sale
investments is temporary based on the Companys analysis of the securities, considering timing,
liquidity, financial condition of the issuers, actual credit losses to date, severity and duration
of the impairment and the Companys intent not to sell, or more likely than not be required to
sell, the securities for a sufficient period of time for anticipated recovery.
11
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 4. Investments, Continued
Based upon changes in the investment environment and in order to protect its capital adequacy,
the Company liquidated its equity securities portfolio during the second quarter of 2008. As a
result, for the nine months ended September 30, 2008, the Company recorded gross realized gains of
$3.2 million and gross realized losses of $2.2 million on the liquidation of its equity portfolio,
including losses on equity securities that historically were determined to be
other-than-temporarily impaired.
The sources of investment income from continuing operations were as follows:
Nine months ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Interest income on cash and cash equivalents |
$ | 54 | $ | 885 | ||||
Interest income on fixed-maturity securities |
8,339 | 7,554 | ||||||
Interest income on other investments |
70 | 70 | ||||||
Dividends |
| 242 | ||||||
Realized gains on investments |
2,052 | 4,382 | ||||||
Realized losses on investments |
(251 | ) | (3,062 | ) | ||||
Investment income before investment expenses |
10,264 | 10,071 | ||||||
Investment expenses |
(703 | ) | (799 | ) | ||||
Total investment income |
$ | 9,561 | $ | 9,272 | ||||
The Company had available-for-sale and short-term investments with a fair value of $181.0
million and $149.0 million, at September 30, 2009 and December 31, 2008, respectively, on deposit
with various regulatory agencies as required by law. At September 30, 2009 and December 31, 2008,
investments with a fair value of $0.8 million have been pledged as security under letter of credit
facilities to secure reserves assumed under third party ceded quota share agreements.
Note 5. Fair Value of Financial Instruments
In April 2009, the FASB issued new guidance related to the disclosure of the fair value of
financial instruments. The new guidance, which is now part of ASC 825, Financial Instruments,
requires disclosures about fair value of financial instruments in interim financial statements, as
well as in annual financial statements. The new guidance requires disclosure of fair value
information about financial instruments for which it is practical to estimate such fair value and
excludes certain insurance related financial assets and liabilities and all non-financial
instruments. The adoption did not have a material effect on the Companys consolidated financial
condition and results of operations.
Fixed-maturity securities Fair value disclosures have been categorized according to the
fair value hierarchy prescribed within the Fair Value Measurements section below.
Short-term investments, investment in unconsolidated subsidiary and cash and cash equivalents
The carrying values reported in the accompanying balance sheets for these financial instruments
approximate their fair value.
Premiums and accounts receivable and reinsurance payable The carrying values reported in
the accompanying balance sheets for these financial instruments approximate their fair value.
12
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 5. Fair Value of Financial Instruments, Continued
Long-term debt and other secured borrowings The carrying value and fair value of the
Companys long-term debt and other secured borrowings at September 30, 2009 were $44.1 million and
$31.8 million, respectively. The fair value was estimated based on the average accepted price of
successful tender offers for recent similar transactions of financial services companies.
Fair Value Measurement
Under the framework established in the fair value accounting guidance, fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability (i.e. the
exit price) in an orderly transaction between market participants at the measurement date.
The fair value guidance establishes a three-level hierarchy for fair value measurements that
distinguishes between market participant assumptions developed based on market data obtained from
sources independent of the reporting entity (observable inputs) and the reporting entitys own
assumptions about market participant assumptions developed based on the best information available
in the circumstances (unobservable inputs) and requires that the most observable inputs be used
when available. The hierarchy is broken down into three levels based on the reliability of inputs
as follows:
| Level 1 Valuation based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access. Since
valuations are based on quoted prices that are readily and regularly available in an
active market, valuation of these products does not entail a significant degree of
judgment. Financial assets utilizing Level 1 inputs include U.S. Treasury securities. |
| Level 2 Valuation based on quoted prices for similar assets or liabilities in
active markets; quoted prices for identical or similar assets or liabilities in
inactive markets; or valuations based on models where the significant inputs are
observable (e.g. interest rates, yield curves, prepayment speeds, etc.) or can be
corroborated by observable market data. Financial assets utilizing Level 2 inputs
include: U.S. government and agency securities; non-U.S. government obligations;
corporate and municipal bonds; and mortgage-backed securities. |
| Level 3 Valuations based on inputs that are unobservable and significant to the
overall fair value measurement. The unobservable inputs reflect the Companys own
assumptions about assumptions that market participants might use. The Company has no
Level 3 financial assets. |
The Company outsources its investment accounting services to a third party. The third party
uses nationally recognized pricing services to estimate fair value measurements for its
available-for-sale investment portfolio. These pricing services include FT Interactive Data, Hub
Data, J. J. Kenny, Standard & Poors, Reuters and the Bloomberg Financial Market Services. The
pricing services use market quotations for securities that have quoted prices in active markets.
When quoted prices are unavailable, other significant observable inputs are used, such as pricing
models or other financial analytical methods. To validate the techniques or models used by the
pricing services, the Company compares the fair value estimates to its perception of the current
market and challenges any prices deemed not to be representative of fair value.
13
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 5. Fair Value of Financial Instruments, Continued
The following table presents the level within the fair value hierarchy at which the Companys
financial assets are measured on a recurring basis at September 30, 2009:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
U.S. Treasury securities |
$ | 65,114 | $ | 65,114 | $ | | $ | | ||||||||
Government sponsored agency securities |
19,735 | | 19,735 | | ||||||||||||
Obligations of states and political subdivisions |
85,554 | | 85,554 | | ||||||||||||
Corporate and other obligations |
78,345 | | 78,345 | | ||||||||||||
Asset-backed obligations |
9,423 | | 9,423 | | ||||||||||||
Mortgage-backed obligations |
51,283 | | 51,283 | | ||||||||||||
Total investment securities, available-for-sale |
$ | 309,454 | $ | 65,114 | $ | 244,340 | $ | | ||||||||
In February 2008, the FASB issued new guidance for the accounting for non-financial assets and
non-financial liabilities. The new guidance, which is now part of ASC 820, Fair Value Measurements
and Disclosure (ASC 820), requires nonfinancial assets and nonfinancial liabilities that are
measured on a nonrecurring basis in periods subsequent to initial recognition to be classified and
disclosed based on the three level hierarchy described above. No triggering events occurred for the
nine months ended September 30, 2009 that would require additional disclosure prescribed by
applying the provisions of FAS 157 to nonfinancial assets and nonfinancial liabilities.
In April 2009, the FASB issued new guidance for determining when a transaction is not orderly
and for estimating fair value when there has been a significant decrease in the volume and level of
activity for an asset or liability. Under the new guidance, which is now part of ASC 820, if an
entity determines that there has been a significant decrease in the volume and level of activity
for the asset or the liability in relation to the normal market activity for the asset or liability
(or similar assets or liabilities), then transactions or quoted prices may not accurately reflect
fair value. In addition, if there is evidence that the transaction for the asset or liability is
not orderly, the entity shall place little, if any, weight on that transaction price as an
indicator of fair value. The adoption of the new guidance did not have a material effect on the
Companys consolidated financial condition and results of operations.
Note 6. Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are as follows:
Nine months ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of period |
$ | 1,084 | $ | 623 | ||||
Policy acquisition costs deferred |
||||||||
Ceding commissions |
(10,408 | ) | (2,933 | ) | ||||
Commissions |
10,949 | 11,433 | ||||||
Premiums and federal excise taxes |
2,772 | 3,111 | ||||||
Other |
8,135 | 5,088 | ||||||
11,448 | 16,699 | |||||||
Amortization of policy acquisition costs |
(11,638 | ) | (15,203 | ) | ||||
Net change |
(190 | ) | 1,496 | |||||
Balance at end of period |
$ | 894 | $ | 2,119 | ||||
14
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 7. Other Intangible Assets
In April 2008, the FASB issued revised guidance on determining the useful life of intangible
assets. The revised guidance, which is now part of ASC 350, Intangibles Goodwill and Other,
amends the factors that an entity should consider in determining the useful life of a recognized
intangible asset to include the entitys historical experience in renewing or extending similar
arrangements, whether or not the arrangements have explicit renewal or extension provisions. The
amendment may result in the useful life of an entitys intangible asset differing from the period
of expected cash flows that was used to measure the fair value of the underlying asset using the
market participants perceived value.
The Companys information technology other intangible asset represents the prepaid costs for
the outsourcing of its entity wide information technology function. The cost of the information
technology other intangible asset is amortized over its contractual life. Should the Company renew
or extend the term of the contract to outsource its entity wide information technology function,
costs incurred would be amortized over the term of the renewal or extension contract.
Note 8. Losses and Loss Adjustment Expenses
Activity in the reserve for losses and loss adjustment expenses is as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross liability beginning of period |
$ | 272,002 | $ | 208,865 | $ | 245,617 | $ | 188,848 | ||||||||
Less reinsurance recoverable |
(77,127 | ) | (37,401 | ) | (55,502 | ) | (35,488 | ) | ||||||||
Net liability at beginning of period |
194,875 | 171,464 | 190,115 | 153,360 | ||||||||||||
Incurred losses and LAE relating to: |
||||||||||||||||
Current year |
15,767 | 21,430 | 50,624 | 71,189 | ||||||||||||
Prior years |
1,426 | (1,589 | ) | 1,457 | (9,959 | ) | ||||||||||
Total incurred losses and LAE |
17,193 | 19,841 | 52,081 | 61,230 | ||||||||||||
Paid losses and LAE relating to: |
||||||||||||||||
Current year |
(5,659 | ) | (4,915 | ) | (9,758 | ) | (10,126 | ) | ||||||||
Prior years |
(12,549 | ) | (7,461 | ) | (38,578 | ) | (25,535 | ) | ||||||||
Total paid losses and LAE |
(18,208 | ) | (12,376 | ) | (48,336 | ) | (35,661 | ) | ||||||||
Net liability at end of period |
193,860 | 178,929 | 193,860 | 178,929 | ||||||||||||
Plus reinsurance recoverable |
87,520 | 48,809 | 87,520 | 48,809 | ||||||||||||
Gross liability at end of period |
$ | 281,380 | $ | 227,738 | $ | 281,380 | $ | 227,738 | ||||||||
As a result of changes in estimates of insured events in prior years, the Company had
unfavorable development of $1.4 million for the three months ended September 30, 2009, as compared
to $1.6 million of favorable development for the three months ended September 30, 2008. During the
three months ended September 30, 2009, unfavorable development of $2.8 million in our primary
insurance policy business was offset by favorable development of $1.5 million in our excess
insurance policy business.
For the nine months ended September 30, 2009, the Company had unfavorable development of $1.5
million as compared to $10.0 million of favorable development for the nine months ended September
30, 2008. During the nine months ended September 30, 2009, unfavorable development of $3.1 million
in our primary insurance policy business was offset by favorable development of $1.7 million in our
excess insurance policy business.
15
Table of Contents
CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 8. Losses and Loss Adjustment Expenses, Continued
During the nine months ended September 30, 2009, the Company changed its method of selecting
the point estimate for loss reserves associated with excess insurance policies written in New York.
Management historically established loss reserves on excess insurance policies at the actuarys
best estimate of expected outcomes for most assumed risks and at a higher, moderately conservative
level for risks originating from excess insurance policies issued to self-insured groups in New
York. Following the transfer of the claims administration of the New York self-insured groups, as
discussed above in Note 2, the new third party administrators changed the underlying methodology
used to establish reserves for losses and loss adjustment expenses which resulted in a significant
increase in case reserves. In light of the new reserving methodology being used by the third party
administrators of the New York self-insured groups, management determined that continuing to
establish reserves for risks originating from excess insurance policies issued to self-insured
groups in New York at a higher, moderately conservative level would lead to redundant reserves
associated with these risks. Consequently, management now establishes reserves for losses and loss
adjustment expenses originating from excess insurance policies issued to New York self-insured
groups at the actuarys best estimate. Favorable loss reserve
development in prior accident years and this change in reserving methodology resulted in the
recognition of favorable development from risks originating in New York for the three and nine
months ended September 30, 2009.
Note 9. Insurance Activity
The Companys financial statements reflect the effects of direct insurance and assumed and
ceded reinsurance activity. The activities of Majestic are included in the Primary Insurance
segment, and the activities of Twin Bridges are included in the Reinsurance segment. All
inter-company transactions are eliminated upon consolidation.
A summary of direct insurance and ceded and assumed reinsurance transactions in the affected
segment is as follows:
For the three months ended September 30, 2009 | ||||||||||||||||
Primary | ||||||||||||||||
Insurance | Reinsurance | |||||||||||||||
Segment | Segment | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Written premiums |
||||||||||||||||
Direct |
$ | 38,474 | $ | | $ | | $ | 38,474 | ||||||||
Assumed |
288 | 3,322 | (3,322 | ) | 288 | |||||||||||
Ceded |
(23,297 | ) | | 3,322 | (19,975 | ) | ||||||||||
Net written premiums |
$ | 15,465 | $ | 3,322 | $ | | $ | 18,787 | ||||||||
Earned premiums |
||||||||||||||||
Direct |
$ | 40,061 | $ | 1 | $ | | $ | 40,062 | ||||||||
Assumed |
289 | 3,211 | (3,211 | ) | 289 | |||||||||||
Ceded |
(26,238 | ) | | 3,211 | (23,027 | ) | ||||||||||
Net earned premiums |
$ | 14,112 | $ | 3,212 | $ | | $ | 17,324 | ||||||||
Losses and loss adjustment expenses |
||||||||||||||||
Direct |
$ | 33,651 | $ | (22 | ) | $ | | $ | 33,629 | |||||||
Assumed |
(71 | ) | 1,351 | (1,351 | ) | (71 | ) | |||||||||
Ceded |
(17,716 | ) | | 1,351 | (16,365 | ) | ||||||||||
Net losses and loss adjustment expenses |
$ | 15,864 | $ | 1,329 | $ | | $ | 17,193 | ||||||||
16
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 9. Insurance Activity, Continued
For the three months ended September 30, 2008 | ||||||||||||||||
Primary | ||||||||||||||||
Insurance | Reinsurance | |||||||||||||||
Segment | Segment | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Written premiums |
||||||||||||||||
Direct |
$ | 43,642 | $ | 179 | $ | | $ | 43,821 | ||||||||
Assumed |
51 | (474 | ) | 474 | 51 | |||||||||||
Ceded |
(26,708 | ) | | (474 | ) | (27,182 | ) | |||||||||
Net written premiums |
$ | 16,985 | $ | (295 | ) | $ | | $ | 16,690 | |||||||
Earned premiums |
||||||||||||||||
Direct |
$ | 42,484 | $ | 45 | $ | | $ | 42,529 | ||||||||
Assumed |
51 | 3,982 | (3,982 | ) | 51 | |||||||||||
Ceded |
(22,058 | ) | | 3,982 | (18,076 | ) | ||||||||||
Net earned premiums |
$ | 20,477 | $ | 4,027 | $ | | $ | 24,504 | ||||||||
Losses and loss adjustment expenses |
||||||||||||||||
Direct |
$ | 33,450 | $ | (81 | ) | $ | | $ | 33,369 | |||||||
Assumed |
44 | 1,955 | (2,001 | ) | (2 | ) | ||||||||||
Ceded |
(15,542 | ) | 15 | 2001 | (13,526 | ) | ||||||||||
Net losses and loss adjustment expenses |
$ | 17,952 | $ | 1,889 | $ | | $ | 19,841 | ||||||||
For the nine months ended September 30, 2009 | ||||||||||||||||
Primary | ||||||||||||||||
Insurance | Reinsurance | |||||||||||||||
Segment | Segment | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Written premiums |
||||||||||||||||
Direct |
$ | 117,266 | $ | 6 | $ | | $ | 117,272 | ||||||||
Assumed |
2,006 | 9,001 | (9,001 | ) | 2,006 | |||||||||||
Ceded |
(63,257 | ) | | 9,001 | (54,256 | ) | ||||||||||
Net written premiums |
$ | 56,015 | $ | 9,007 | $ | | $ | 65,022 | ||||||||
Earned premiums |
||||||||||||||||
Direct |
$ | 114,887 | $ | 97 | $ | | $ | 114,984 | ||||||||
Assumed |
2,007 | 7,693 | (7,693 | ) | 2,007 | |||||||||||
Ceded |
(63,651 | ) | | 7,693 | (55,958 | ) | ||||||||||
Net earned premiums |
$ | 53,243 | $ | 7,790 | $ | | $ | 61,033 | ||||||||
Losses and loss adjustment expenses |
||||||||||||||||
Direct |
$ | 98,567 | $ | (22 | ) | $ | | $ | 98,545 | |||||||
Assumed |
1,005 | 5,260 | (5,260 | ) | 1,005 | |||||||||||
Ceded |
(52,729 | ) | | 5,260 | (47,469 | ) | ||||||||||
Net losses and loss adjustment expenses |
$ | 46,843 | $ | 5,238 | $ | | $ | 52,081 | ||||||||
17
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 9. Insurance Activity, Continued
For the nine months ended September 30, 2008 | ||||||||||||||||
Primary | ||||||||||||||||
Insurance | Reinsurance | |||||||||||||||
Segment | Segment | Eliminations | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Written premiums |
||||||||||||||||
Direct |
$ | 128,186 | $ | 179 | $ | | $ | 128,365 | ||||||||
Assumed |
194 | 24,228 | (24,228 | ) | 194 | |||||||||||
Ceded |
(56,962 | ) | | 24,228 | (32,734 | ) | ||||||||||
Net written premiums |
$ | 71,418 | $ | 24,407 | $ | | $ | 95,825 | ||||||||
Earned premiums |
||||||||||||||||
Direct |
$ | 121,939 | $ | 176 | $ | | $ | 122,115 | ||||||||
Assumed |
194 | 24,981 | (24,981 | ) | 194 | |||||||||||
Ceded |
(49,229 | ) | (21 | ) | 24,981 | (24,269 | ) | |||||||||
Net earned premiums |
$ | 72,904 | $ | 25,136 | $ | | $ | 98,040 | ||||||||
Losses and loss adjustment expenses |
||||||||||||||||
Direct |
$ | 81,518 | $ | 27 | $ | | $ | 81,545 | ||||||||
Assumed |
126 | 12,023 | (12,098 | ) | 51 | |||||||||||
Ceded |
(32,461 | ) | (3 | ) | 12,098 | (20,366 | ) | |||||||||
Net losses and loss adjustment expenses |
$ | 49,183 | $ | 12,047 | $ | | $ | 61,230 | ||||||||
Reinsurance Coverage
Majestic purchases reinsurance to reduce its maximum potential loss on individual risks and to
protect against possible catastrophes. 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 fully obligated to indemnify the ceding company to the extent of the coverage ceded.
Excess of Loss Reinsurance. Majestic entered into a new excess of loss reinsurance treaty
program effective July 1, 2009. Majestics previous excess of loss reinsurance program was
terminated effective June 30, 2009. The new excess of loss reinsurance program covers losses
incurred between July 1, 2009 and the date on which the reinsurance agreements are terminated. The
excess of loss reinsurance program provides $69.5 million of reinsurance protection, per
occurrence, for workers compensation losses in excess of a $500 thousand retention limit. Majestic
retains liability for any amounts of losses and loss adjustment expenses that exceed $70.0 million
up to the applicable statutory limit. Majestic has 10 reinsurers providing coverage, including:
Axis Specialty Limited, Catlin Insurance Company, Dorinco Reinsurance Company, Endurance Specialty
Insurance LTD., Hannover Rueckversicherung AG, Flagstone Re Ltd., Munich Re America Corporation,
Tokio Millennium Re Ltd., Validus Reinsurance, Ltd., various Lloyds syndicates, and Twin Bridges,
the Companys Bermuda-based reinsurance subsidiary. Twin Bridges has a 2.75% participation level in
the excess of loss treaty for loss and loss adjustment expenses in excess of $2.0 million, per
occurrence, up to $5.0 million.
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 9. Insurance Activity, Continued
Reinsurance Coverage, Continued
Quota Share Reinsurance. Majestic entered into a 43% ceded quota share agreement effective
July 1, 2009, of which 80% was placed with participating reinsurers. The agreement is effective for
new and renewal primary insurance policies issued by Majestic on or after July 1, 2009 through June
30, 2010. Under this 43% ceded quota share agreement, the participating reinsurers assume their
pro-rata share of the first $500 thousand of losses and loss adjustment expenses from any single
occurrence under Majestics primary insurance policies and Majestic, in turn, cedes the applicable
percentage of premiums to the participating reinsurers. The agreement limits the ceded premiums on
primary workers compensation business written in New York to $10.0 million. The agreement allows
Majestic the option to decrease the percentage ceded to the participating reinsurers on the first
day of each calendar quarter, although the percentage cannot be reduced below 21.5%. The
participating reinsurers losses are capped at 130% of the premiums ceded by Majestic.
Majestic receives a 25% provisional ceding commission on all ceded premiums under the
agreement to cover Majestics costs associated with the policies, including dividends, commissions,
taxes, assessments and all other expenses other than allocated loss adjustment expenses. If
Majestics loss ratio is greater than 72.5%, then Majestics ceding commission decreases by 0.75%
for each 1% increase in Majestics loss ratio, with a minimum 22.0% ceding commission received at a
76.5% loss ratio. If Majestics loss ratio is less than 72.5%, then Majestics ceding commission
increases by 0.75% for each 1% decrease in Majestics loss ratio, with a maximum 27.25% ceding
commission received at a 69.5% loss ratio.
The quota share reinsurance agreement has been 80% placed with two participating reinsurers,
Aspen Re and Axis Specialty, Ltd. Aspen Re and Axis Specialty, Ltd. have each agreed to assume a
40% pro-rata share of the 43% ceded quota share agreement. The remaining 20% of the quota share
agreement was not placed with any participating reinsurers and Majestic remains responsible for
those losses.
In addition to the 43% ceded quota share agreement, Majestic entered into a 15% ceded quota
share agreement with Max Re, Ltd. (Max Re) effective July 1, 2009. Majestics previous 40% ceded
quota share agreement with Max Re effective July 1, 2008 was terminated effective June 30, 2009,
except as to policies in-force as of that date. Under the new 15% ceded quota share agreement, Max
Re assumes 15% of the first $500 thousand of losses and loss adjustment expenses from any single
occurrence under Majestics primary insurance policies and Majestic cedes 15% of the applicable
premiums to Max Re. The reinsurance agreement excludes coverage for workers compensation business
written by Majestic in New York. The agreement allows Majestic the option to decrease the
percentage ceded to Max Re on the first day of each calendar quarter, although the percentage
cannot be reduced below 5%. Max Res losses are capped at 150% of the premiums ceded by Majestic.
Majestic receives a 25.75% ceding commission on all ceded premiums to cover Majestics costs
associated with the policies, including dividends, commissions, taxes, assessments and all other
expenses other than allocated loss adjustment expenses. The agreement is effective for losses
incurred and premiums earned by Majestic for new and renewal primary insurance policies issued by
Majestic on or after July 1, 2009 through June 30, 2010.
Note 10. Income Taxes
CRM USA Holdings and its subsidiaries file federal income tax returns and income tax returns
in various state jurisdictions. Tax years 2004 through 2007 and 2003 through 2007 are subject to
examination by federal and state tax authorities, respectively. Tax years 2006 and 2007 are
currently being examined by the Internal Revenue Service (IRS). It is possible that the IRS audit
may result in additional payment.
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 10. Income Taxes, Continued
The Company recognizes deferred tax assets and liabilities for the future tax consequences
related to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Under the framework established in the income tax
accounting guidance, the Company is required to establish a deferred tax asset (DTA) valuation
allowance if it cannot determine, based on available evidence at the time the determination is
made, that it is more likely than not that some portion or all of the DTA will be realized. The
Company evaluated its DTA for recoverability using this approach and considered the relative impact
of negative and positive evidence, including historical profitability and projections of future
taxable income within the foreseeable future. In evaluating the need for a valuation allowance,
the Company estimated future taxable income based on business plans and ongoing tax planning
strategies. This process involved significant management judgment about assumptions that are
subject to change from period to period based on changes in tax laws or about assumptions between
our projected operating performance, our actual results and other factors.
Based on the accounting guidance, the Companys assumptions were limited to business
strategies which it can control. Given these limitations, the Company concluded that estimated
future taxable income and certain tax planning strategies no longer constituted sufficient positive
evidence to assert that it is more likely than not that the deferred tax assets would be realizable
in the foreseeable future. Consequently, the Company recorded a full DTA valuation allowance of
$12.0 million during the third quarter of 2009. Of this, $11.3 million was attributable to
continuing operations and $0.7 million was attributable to discontinued operations.
The income tax provision (benefit) differs from the amount computed by applying the U.S.
Federal income tax rate of 35% to income before taxes as a result of the following:
Nine months ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Dollars in thousands) | ||||||||
Theoretical Federal income tax from continuing
operations at statutory rate of 35% |
$ | (7,814 | ) | $ | 2,806 | |||
Valuation allowance |
11,342 | | ||||||
Tax-free Bermuda-domiciled loss (income) |
428 | (2,053 | ) | |||||
Tax-exempt investment income |
(708 | ) | (849 | ) | ||||
Share-based compensation |
382 | (13 | ) | |||||
Other |
(16 | ) | (145 | ) | ||||
Income tax provision (benefit) from continuing operations |
$ | 3,614 | $ | (254 | ) | |||
In accordance with its accounting policy, the Company recognizes interest and penalties
related to unrecognized tax benefits as a component of the provision for income taxes. The Company
did not incur any income tax related interest income, interest expense or penalties for the nine
months ended September 30, 2009 and 2008.
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 10. Income Taxes, Continued
Unrecognized Tax Benefits
The Company has analyzed its filing positions in the federal and state jurisdictions where it
is required to file tax returns, as well as the open tax years in these jurisdictions. The Company
believes that its income tax filing positions and deductions will be sustained upon audit and does
not anticipate any adjustments that will result in a material change to its financial position.
Therefore, no reserves for uncertain income tax positions have been recorded.
Note 11. Variable Interest Entity
The Company is a sponsor that has a significant variable interest in CRM USA Holdings Trust I
(Trust). In connection with the financing of the acquisition of Embarcadero on November 14, 2006,
CRM USA Holdings issued $36.1 million of junior subordinated debt obligations (Junior Debt) in
exchange for $35.0 million in aggregate proceeds from the sale of Trust capital securities and $1.1
million of Trust common securities. The capital and common securities of the Trust, totaling $36.1
million, representing undivided beneficial ownership interests in the assets of the Trust, have no
stated maturity and must be redeemed upon maturity of the corresponding series of Junior Debt
securities which are the sole assets of the Trust.
The common securities are held by CRM USA Holdings and represent 100% of the issued and
outstanding common securities of the Trust. They are reflected as an investment in an
unconsolidated subsidiary on the Companys balance sheet. CRM USA Holdings is not the primary
beneficiary of the Trust and does not consolidate its interest in the Trust as it does not have
adequate decision making ability over the Trusts activities. The Company and CRM USA Holdings
have guaranteed the repayment of the capital securities.
Note 12. Contingencies
Regulatory Proceedings
NY Attorney General Investigation
In March 2008, CRM was advised that the New York State Office of the Attorney General (NY
Attorney General) had commenced an investigation of CRM and had issued a subpoena for documents
related to CRMs administration of the Healthcare Industry Trust of New York (HITNY). Subsequent
NY Attorney General inquiries and requests for documents have indicated a focus on the Companys
initial public offering in December 2005.
In August 2009, the Company was advised that the NY Attorney General would seek testimony of
six current or former directors and officers of the Company and CRM. The Companys Board of
Directors has agreed to advance the reasonable expenses, including attorneys fees, incurred by
these individuals in connection with the NY Attorney Generals investigation.
The Company is cooperating fully with the NY Attorney Generals investigation. To the
Companys knowledge, the NY Attorney General has not commenced any civil or criminal actions
against the Company, CRM or any of its current or former directors or officers. The Company cannot
currently predict when the NY Attorney General will conclude its investigation, what, if any,
action may be taken by the NY Attorney General, or the effect any such action may have on our
business reputation, results of operations, financial condition or cash flows.
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 12. Contingencies, Continued
Regulatory Proceedings, Continued
New York State Department Insurance Inquiry
In June 2008, Majestic received a Call for Special Report and Documents Pursuant to Section
308 of the Insurance Law from the New York State Insurance Department. Among other items, the New
York State Insurance Department requested information related to Majestics loss reserving
practices and Majestics providing insurance to former members of the self-insured groups
previously managed by CRM as insureds of Majestic. In September 2009, Majestic received a further
request from the New York State Insurance Department requesting information related to CRMs
acquisition of Majestic and additional information related to Majestics issuance of workers
compensation policies in New York, including policies issued to previous members of the
self-insured groups managed by CRM. Majestic is cooperating fully with the New York State Insurance
Department. To Majestics knowledge, the New York State Insurance Department has not initiated any
proceedings against Majestic. The Company cannot currently predict when the New York State
Insurance Department will conclude its review, what, if any, actions may be taken by the New York
State Insurance Department, or the effect any such action may have on our results of operations,
reputation, financial condition, or cash flows.
New York State Workers Compensation Board Inspector General Investigation
On or about January 9, 2009, Majestics underwriting department received a subpoena from the
New York State Workers Compensation Board Office of the Fraud Inspector General. The subpoena
requested production of various documents related to the issuance of excess workers compensation
and general liability policies by Majestic to the Elite Contractors Trust of New York. On May 8,
2009, CRM Holdings and Twin Bridges received a subpoena from the New York State Workers
Compensation Board Office of Fraud Inspector General. The subpoena requested documents related to
quota share agreements and a novation agreement among Twin Bridges, New York Marine and General
Insurance Company and Majestic. The subpoenas were captioned In the Matter of Compensation Risk
Managers, LLC and were assigned Inspector General Case No. 38839. To CRMs knowledge, the Inspector
General has not commenced any action against CRM. The Company cannot currently predict when the New
York State Workers Compensation Board Office of Fraud Inspector General will conclude its review,
what, if any, action may be taken by the Office of Fraud Inspector General, or the effect any such
action may have on our business reputation, results of operations, financial condition or cash
flows.
Pending Litigation
The Company is involved in various pending litigation matters as described below. The Company
intends to vigorously defend each of these matters and any claims that may be later asserted by the
New York State Workers Compensation Board, the workers compensation self-insured groups or their
former members. If any matters are decided adversely to the Company, it may result in a material
adverse effect on our results of operations, financial conditions and cash flows. Each of these
matters is in a preliminary stage, and the Company cannot estimate what impact, if any, the
litigation may have on its business reputation, results of operations, financial condition or cash
flows.
H.C.F.A. Associates Corp. v. Compensation Risk Managers, LLC
On April 9, 2007, H.C.F.A. Associates Corp. and 17 related companies, all of which were
members or former members of HITNY, sued HITNY and CRM in New York State Supreme Court, Ulster
County, alleging, among other things, that HITNY and CRM failed to fulfill their obligations in
connection with providing workers compensation claims services. CRM answered the complaint,
denying the plaintiffs material allegations. This litigation is in its early stages. The court
established a discovery schedule on September 22, 2008, and discovery is currently proceeding.
22
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 12. Contingencies, Continued
Pending Litigation
Declaratory Judgment Action
On September 30, 2008, CRM received a copy of a letter addressed to its errors and omissions
insurance carrier from the New York State Workers Compensation Board (the WCB) indicating its
intention to initiate legal proceedings against CRM on behalf of eight self-insured groups
previously administered by CRM as it relates to CRMs actions while acting as the administrator and
broker of record for the eight self-insured groups. The WCB has indicated that it is investigating
CRMs administration of the self-insured groups, and CRM believes that the WCB will allege that CRM
breached certain duties to the self-insured groups and engaged in certain self-dealing and
deceptive practices.
In response to this letter, CRM filed an action on October 3, 2008 in the New York State
Supreme Court, Dutchess County, against the WCB and the eight self-insured groups, namely the
Healthcare Industry Trust of New York, Elite Contractors Trust of New York, Wholesale and Retail
Workers Compensation Trust of New York, Trade Industry Workers Compensation Trust for
Manufacturers, Real Estate Management Trust of New York, Transportation Industry Workers
Compensation Trust, Public Entity Trust of New York and the New York State Association of
Cemeteries Trust. Through this action, CRM is seeking a declaratory judgment that CRM did not
breach any duty to the eight self-insured groups and did not engage in any self-dealing or
deceptive practices. CRM is not currently seeking any monetary damages from the eight self-insured
groups, their respective boards of trustees or the WCB.
On May 18, 2009, the WCB filed a motion to dismiss CRMs complaint, which CRM opposed. On
October 18, 2009, the court granted the WCBs motion and dismissed CRMs complaint. CRM plans to
appeal the courts decision.
In connection with the motion to dismiss, the New York State Workers Compensation Board
advised CRM that it intends to commence a civil action against CRM and has entered into a retainer
agreement with a private law firm to pursue the claims. To date, CRM has not been served with any
lawsuit commenced by the WCB.
RBG Management Corp. et al. v. Compensation Risk Managers, LLC, et al.
In November 2008, RBG Management Corp., Red & White Markets, Inc., Doria Enterprises Inc. and
Graces Marketplace Inc., all of which were former members of the Wholesale Retail Workers
Compensation Trust of New York (WRWCTNY), sued CRM, WRWCTNY, certain current and former officers
and directors of CRM, the Board of Trustees of WRWCTNY, and S.A.F.E., LLC, which is the successor
third-party administrator for WRWCTNY, in the Supreme Court of the State of New York, New York
County. The lawsuit sought a declaratory judgment relieving the plaintiffs from any liabilities
owed in relation to their previous membership in WRWCTNY and damages arising from allegations that
the defendants breached their fiduciary duties to the plaintiffs by failing to maintain adequate
reserves and failing to properly determine an adequate level of reserves necessary to maintain the
solvency of WRWCTNY.
On March 12, 2009, CRM and the current and former officers and directors of CRM named in the
complaint filed a motion to dismiss or, in the alternative, to consolidate the action in New York
State Supreme Court, Dutchess County, with the declaratory judgment action described above. On
August 21, 2009, the court granted the motion to dismiss and dismissed the plaintiffs complaint
against CRM and the current or former officers and directors named in the complaint, with leave to
the plaintiffs to file an amended complaint within 30 days.
23
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 12. Contingencies, Continued
Pending Litigation, Continued
RBG Management Corp. et al. v. Compensation Risk Managers, LLC, et al., Continued
On October 27, 2009, the plaintiffs filed a motion requesting permission from the court to
serve an amended complaint on the grounds that plaintiffs were not able to determine their position
with regard to the litigation within the 30-day time frame. Plaintiffs proposed amended complaint
seeks damages, in an undetermined amount, from CRM arising from allegations that CRM breached its
fiduciary duties to the plaintiffs. The plaintiffs are seeking to bring the claim derivatively on
behalf of WRWCTNY. The proposed amended complaint does not name any current or former officer or
director of CRM. CRM has opposed the plaintiffs motion, and the motion is currently pending before
the court.
Erie County New York Trust Class Action Cases
FS Kids LLC, et al. v. Compensation Risk Managers, LLC. On November 24, 2008, FS Kids, LLC,
Mask Foods, Inc., Valu Home Centers, Inc., KBLM Foods, Inc., KDJB Foods, Inc., Gaige & Son Grocery,
Inc., TJs Market, Inc., BB&T Supermarkets Inc., BNR-Larson, LLC, and Gift Express of New York,
Inc., all of which were former members of WRWCTNY, on their own behalf and on behalf of all others
similarly situated, sued CRM in New York Supreme Court, Erie County. On August 26, 2009, the
plaintiffs filed an amended complaint seeking class action certification and alleging that CRM: (1)
breached its contract with WRWCTNY; (2) breached its duty of good faith and fair dealing owed to
WRWCTNY; (3) breached its fiduciary duties owed to WRWCTNY; (4) was negligent in administering
WRWCTNY; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7) should
indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking
damages arising from the plaintiffs joint and several liability for the deficit of WRWCTNY which,
as of September 30, 2007, was estimated at $19 million, and from any unpaid claims of the
plaintiffs injured employees in an amount presently undetermined. On September 14, 2009, CRM
filed a motion to dismiss the plaintiffs amended complaint. The motion is currently pending before
the court.
Armstrong Brands, Inc., et al. v. Compensation Risk Managers, LLC. On March 6, 2009,
Armstrong Brands, Inc., Metal Cladding, Inc., TREK, Inc., Petri Baking Products, Inc., Time Cap
Laboratories, Inc., Custom Coatings, Inc., GPM Associates, LLC, d/b/a Forbes Products, PJR
Industries, Inc., d/b/a Southside Precast Products, Lakeshore Metals, Inc. Duro-Shed, Inc., Tooling
Enterprises, Inc. Northeast Concrete Products, Inc., d/b/a Concrete Building Supply and Superior
Steel Studs, Inc., all of which were former members of Trade Industry Trust Workers Compensation
Trust for Manufacturers (the Trade Trust), on their own behalf and on behalf of all others
similarly situated, sued CRM in New York State Supreme Court, Erie County. The lawsuit seeks class
action certification and alleges that CRM: (1) breached its contract with the Trade Trust; (2)
breached its duty of good faith and fair dealing owed to the Trade Trust; (3) breached its
fiduciary duties owed to Trade Trust; (4) was negligent in administering the Trade Trust; (5)
engaged in deceptive business practices; (6) was unjustly enriched; and (7) should indemnify the
plaintiffs for any assessments that they may incur. The plaintiffs are seeking damages (a) arising
from the plaintiffs joint and several liability for the deficit of the Trade Trust which, as of
December 31, 2006, was estimated at $4.9 million, (b) from any unpaid claims of the plaintiffs
injured employees in an amount presently undetermined, (c) from potentially being liable for the
costs of liquidation charged or to be charged by the WCB, and (d) from fees paid by the plaintiffs
and the Trade Trust to CRM pursuant the service agreement between CRM and the Trade Trust. On
August 17, 2009, CRM filed a motion to dismiss the plaintiffs complaint. The motion is currently
pending before the court. On November 10, 2009, the plaintiffs filed an amended complaint alleging
substantially the same claims and damages as contained in their original complaint.
24
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 12. Contingencies, Continued
Pending Litigation, Continued
Erie County New York Trust Class Action Cases, Continued
Arlen Senior Contracting of Central Islip, LLC, et al. v. Compensation Risk Managers, LLC. On
August 18, 2009, Arlen Senior Contracting of Central Islip LLC, Anchor Building Maintenance Corp.,
Conifer Realty, LLC, Constanza Enterprises, Inc., Court Plaza Senior Apartments, L.P., John Wesley
Village II, Midland Management, LLC, Niagara River World, Inc., Plattsburgh Airbase Redevelopment
Corp., and Wen Management Corp., all of which were former members of the Real Estate Management
Trust of New York (the Real Estate Trust), on their own behalf and on behalf of all others
similarly situated, sued CRM in New York State Supreme Court, Erie County. The lawsuit seeks class
action certification and alleges that CRM: (1) breached its contract with the Real Estate Trust;
(2) breached its duty of good faith and fair dealing owed to the Real Estate Trust; (3) breached
its fiduciary duties owed to the Real Estate Trust; (4) was negligent in administering the Real
Estate Trust; (5) engaged in deceptive business practices; (6) was unjustly enriched; and (7)
should indemnify the plaintiffs for any assessments that they may incur. The plaintiffs are seeking
damages (a) arising from the plaintiffs joint and several liability for the deficit of the Real
Estate Trust which, as of December 31, 2006, was estimated at $1.6 million, (b) from any unpaid
claims of the plaintiffs injured employees in an amount presently undetermined, (c) from
potentially being liable for the costs of liquidation charged or to be charged by the WCB, and (d)
from fees paid by the plaintiffs and the Real Estate Trust to CRM pursuant the service agreement
between CRM and the Real Estate Trust. On October 20, 2009, CRM filed a motion to dismiss the
plaintiffs complaint. The motion is currently pending before the court.
70 Sheldon Inc., et al. v. Compensation Risk Managers, LLC. On August 20, 2009, 70 Sheldon,
Inc., Advance Relocation Storage, Inc., All County Bus, LLC, Alpha Services of Westchester, Inc.,
A. T. & A. Trucking Corp., B. Pariso Transport, Inc., Carmen M. Pariso, Inc., Covered Wagon Train,
Inc., Exclusive Ambulette Service, Inc. Ficel Transport, Inc., North Shore Ambulance and Oxygen
Service, Inc., Rivlab Transportation Corp., Woodland Leasing Co., Inc., all of which were former
members of the Transportation Industry Workers Compensation Trust (the Transportation Trust), on
their own behalf and on behalf of all others similarly situated, sued CRM in New York State Supreme
Court, Erie County. The lawsuit seeks class action certification and alleges that CRM: (1) breached
its contract with the Transportation Trust; (2) breached its duty of good faith and fair dealing
owed to the Transportation Trust; (3) breached its fiduciary duties owed to the Transportation
Trust; (4) was negligent in administering the Transportation Trust; (5) engaged in deceptive
business practices; (6) was unjustly enriched; and (7) should indemnify the plaintiffs for any
assessments that they may incur. The plaintiffs are seeking damages (a) arising from the
plaintiffs joint and several liability for the deficit of the Transportation Trust which, as of
December 31, 2006, was estimated at $6.1 million, (b) from any unpaid claims of the plaintiffs
injured employees in an amount presently undetermined, (c) from potentially being liable for the
costs of liquidation charged or to be charged by the WCB, and (d) from fees paid by the plaintiffs
and the Transportation Trust to CRM pursuant the service agreement between CRM and the
Transportation Trust. On October 20, 2009, CRM filed a motion to dismiss the plaintiffs complaint.
The motion is currently pending before the court.
Healthcare Industry Trust of New York, et al. v. Compensation Risk Managers, LLC, et al.
On November 2, 2009, HITNY and 89 of its former members filed a lawsuit in New York State
Supreme Court, Albany County against CRM, CRM USA Holdings, CRM Holdings, Majestic, Embarcadero,
Twin Bridges, Eimar, and certain current and former directors and officers of CRM Holdings. The
plaintiffs also named HITNYs former actuaries, auditors, trustees and brokers as defendants in the
lawsuit.
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 12. Contingencies, Continued
Pending Litigation, Continued
Healthcare Industry Trust of New York, et al. v. Compensation Risk Managers, LLC, et al., Continued
Plaintiffs are seeking damages from the defendants alleged failure to carry out their
respective contractual, common law and statutory obligations to the plaintiffs to provide
third-party administration and insurance services to HITNY. As against CRM, its affiliated entities
and directors and officers, the lawsuit alleges that: (1) CRM breached its contract with HITNY; (2)
CRM breached its duty of good faith and fair dealing owed to HITNY; (3) CRM breached its fiduciary
duties owed to HITNY; (4) CRM engaged in common law fraud during its administration of HITNY; (5)
CRM, its affiliated entities and directors and officers converted the assets of HITNYs members for
personal use; (6) CRM, its affiliated entities and directors and officers were unjustly enriched;
(7) CRM negligently misrepresented information relative to HITNY; (8) CRM committed fraud in the
inducement with respect to plaintiffs decision to join HITNY; (9) CRM and its directors and
officers engaged in deceptive business practices; (10) CRM, its affiliated entities and directors
and officers are alter egos of each other and should be liable for the debts, judgments and
liabilities of each other; and (11) CRM, certain of its affiliated entities, a current director and
a former officer committed a civil conspiracy in violation of the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. §1962(c) (RICO).
The plaintiffs are seeking damages (a) arising from the plaintiffs joint and several
liability for the deficit of HITNY which the plaintiffs estimate at $91 million, (b) from any
unpaid claims of the plaintiffs injured employees in an amount presently undetermined, (c) from
potentially being liable for other costs to be charged by the WCB, and (d) from fees paid by HITNY
to CRM and its affiliated entities. In addition, the plaintiffs are seeking treble damages for the
allegedly deceptive business practices and RICO claims.
To date, neither CRM nor any of its affiliated entities or directors or officers has been
served with the lawsuit.
Elite Contractors Trust of New York Claim.
In July 2009, the Company was contacted by an attorney representing the Elite Contractors
Trust of New York (ECTNY) in connection with the service agreement between CRM and ECTNY. ECTNY
believes that CRM has breached its service agreement with ECTNY by failing to provide claims
administration services through the closure of all claims and consequently owes damages to ECTNY.
CRM disagrees with ECTNYs assertions and intends to vigorously contest ECTNYs claim and any
subsequent litigation that may arise.
Note 13. Segment Information
The Company operates as four reportable segments, Primary Insurance, Reinsurance, Fee-Based
Management Services and Corporate and Other. As of September 30, 2008, the operations of CRM and
Eimar are no longer included in the Fee-Based Management Services segment and are classified as
discontinued operations. General corporate overhead expenses that were historically allocated to
CRM and Eimar have been reclassified to the Corporate and Other segment for the three and nine
months ended September 30, 2008.
The Company evaluates each segment based on primary insurance premiums earned, reinsurance
premiums earned, fees and commission income or investment income, as applicable, and expenses that
are associated with, and directly related to, each segment. The determination for the Primary
Insurance, Reinsurance and Fee-Based Management Services segments is based on the Companys
methodology for monitoring the performance of the primary insurance, reinsurance and self-insured
group business operations. The Corporate and Other segment reflects investment income, selling,
general and administrative expenses, investments, cash and cash equivalents and long-term debt that
are not allocable to the three operating segments. Accounting policies of the segments are the same
as those of the Company.
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 13. Segment Information, Continued
Premiums earned by the Primary Insurance segment for the three months ended September 30, 2009
and 2008, respectively, include $3.2 million and $4.0 million of earned premiums ceded to the
Reinsurance segment. Such ceded premiums reduce premiums earned in the Primary Insurance segment
and increase premiums earned in the Reinsurance segment. Ceding commission income reported in
underwriting expenses of the Primary Insurance segment for the three months ended September 30,
2009 and 2008, respectively, includes $0.7 million and $0.9 million from the Reinsurance segment.
Such amounts are reflected in underwriting expenses of the Reinsurance segment.
Investment income of the Reinsurance segment for the three months ended September 30, 2009 and
2008, respectively, includes $0.3 million and $0.4 million of interest income on funds withheld by
the Primary Insurance segment. Such amounts are reflected in interest expenses of the Primary
Insurance segment.
Included in income of the Fee-Based Management Services segment and underwriting expenses of
the Primary Insurance segment for the three months ended September 30, 2009 and 2008 are $0.2
million of commissions paid by Majestic to CRM CA for excess policies placed with Majestic on
behalf of the self-insured groups managed by CRM CA.
The following table sets forth the Companys revenues, expenses, income before taxes and total
assets from continuing operations by business segment. Total assets exclude $3.2 million and $4.5
million of assets from discontinued operations at September 30, 2009 and 2008, respectively.
For the three months ended September 30, 2009 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Primary | Management | Corporate | ||||||||||||||||||||||
Insurance | Reinsurance | Services | and Other | Eliminations | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Net premiums earned |
$ | 14,112 | $ | 3,212 | $ | | $ | | $ | | $ | 17,324 | ||||||||||||
Management fees |
| | 1,090 | | (188 | ) | 902 | |||||||||||||||||
Investment income |
3,493 | 307 | (4 | ) | 22 | (289 | ) | 3,529 | ||||||||||||||||
Total revenues |
17,605 | 3,519 | 1,086 | 22 | (477 | ) | 21,755 | |||||||||||||||||
Expenses |
||||||||||||||||||||||||
Underwriting expenses |
18,892 | 2,152 | | | (188 | ) | 20,856 | |||||||||||||||||
Operating expenses |
3,449 | 126 | 1,101 | 2,616 | | 7,292 | ||||||||||||||||||
Interest expense |
364 | | | 877 | (289 | ) | 952 | |||||||||||||||||
Total expenses |
22,705 | 2,278 | 1,101 | 3,493 | (477 | ) | $ | 29,100 | ||||||||||||||||
(Loss) income from
continuing operations
before taxes |
$ | (5,100 | ) | $ | 1,241 | $ | (15 | ) | $ | (3,471 | ) | $ | | $ | (7,345 | ) | ||||||||
Total assets |
$ | 483,550 | $ | 57,731 | $ | 3,591 | $ | 287,286 | $ | (350,996 | ) | $ | 481,522 | |||||||||||
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 13. Segment Information, Continued
For the three months ended September 30, 2008 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Primary | Management | Corporate | ||||||||||||||||||||||
Insurance | Reinsurance | Services | and Other | Eliminations | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Net premiums earned |
$ | 20,477 | $ | 4,027 | $ | | $ | | $ | | $ | 24,504 | ||||||||||||
Management fees |
| | 2,010 | | (204 | ) | 1,806 | |||||||||||||||||
Investment income |
2,779 | 491 | (2 | ) | 38 | (384 | ) | 2,922 | ||||||||||||||||
Total revenues |
23,256 | 4,518 | 2,008 | 38 | (588 | ) | 29,232 | |||||||||||||||||
Expenses |
||||||||||||||||||||||||
Underwriting expenses |
21,096 | 2,884 | | | (204 | ) | 23,776 | |||||||||||||||||
Operating expenses |
6,239 | 197 | 1,502 | 1,871 | | 9,809 | ||||||||||||||||||
Interest expense |
384 | | | 922 | (384 | ) | 922 | |||||||||||||||||
Total expenses |
27,719 | 3,081 | 1,502 | 2,793 | (588 | ) | 34,507 | |||||||||||||||||
Income (loss) from
continuing operations
before taxes |
$ | (4,463 | ) | $ | 1,437 | $ | 506 | $ | (2,755 | ) | $ | | $ | (5,275 | ) | |||||||||
Total assets |
$ | 430,567 | $ | 60,192 | $ | 5,079 | $ | 307,504 | $ | (357,024 | ) | $ | 446,318 | |||||||||||
Premiums earned by the Primary Insurance segment for the nine months ended September 30, 2009
and 2008, respectively, include $7.7 million and $25.0 million of earned premiums ceded to the
Reinsurance segment. Such ceded premiums reduce premiums earned in the Primary Insurance segment
and increase premiums earned in the Reinsurance segment. Ceding commission income reported in
underwriting expenses of the Primary Insurance segment for the nine months ended September 30, 2009
and 2008, respectively, includes $1.9 million and $5.9 million from the Reinsurance segment. Such
amounts are reflected in underwriting expenses of the Reinsurance segment.
Investment income of the Reinsurance segment for the nine months ended September 30, 2009 and
2008, respectively, includes $0.9 million and $0.7 million of interest income on funds withheld by
the Primary Insurance segment. Such amounts are reflected in interest expenses of the Primary
Insurance segment.
Included in income of the Fee-Based Management Services segment and underwriting expenses of
the Primary Insurance segment for the nine months ended September 30, 2009 and 2008, respectively,
are $0.4 million and $0.7 million of commissions paid by Majestic to CRM CA for excess policies
placed with Majestic on behalf of the self-insured groups managed by CRM CA.
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 13. Segment Information, Continued
The following table sets forth the Companys revenues, expenses, income before taxes and total
assets from continuing operations by business segment. Total assets exclude $3.2 million and $4.5
million of assets from discontinued operations at September 30, 2009 and 2008, respectively.
For the nine months ended September 30, 2009 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Primary | Management | Corporate | ||||||||||||||||||||||
Insurance | Reinsurance | Services | and Other | Eliminations | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Net premiums earned |
$ | 53,243 | $ | 7,790 | $ | | $ | | $ | | $ | 61,033 | ||||||||||||
Management fees |
| | 3,988 | | (352 | ) | 3,636 | |||||||||||||||||
Investment income |
9,257 | 1,133 | (13 | ) | 67 | (883 | ) | 9,561 | ||||||||||||||||
Total revenues |
62,500 | 8,923 | 3,975 | 67 | (1,235 | ) | 74,230 | |||||||||||||||||
Expenses |
||||||||||||||||||||||||
Underwriting expenses |
56,678 | 7,393 | | | (352 | ) | 63,719 | |||||||||||||||||
Operating expenses |
13,007 | 707 | 4,043 | 12,341 | | 30,098 | ||||||||||||||||||
Interest expense |
959 | | | 2,663 | (883 | ) | 2,739 | |||||||||||||||||
Total expenses |
70,644 | 8,100 | 4,043 | 15,004 | (1,235 | ) | 96,556 | |||||||||||||||||
Loss from continuing
operations before taxes |
$ | (8,144 | ) | $ | 823 | $ | (68 | ) | $ | (14,937 | ) | $ | | $ | (22,326 | ) | ||||||||
Total assets |
$ | 483,550 | $ | 57,731 | $ | 3,951 | $ | 287,286 | $ | (350,996 | ) | $ | 481,522 | |||||||||||
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CRM Holdings, Ltd.
Notes to Consolidated Financial Statements (Continued)
Note 13. Segment Information, Continued
For the nine months ended September 30, 2008 | ||||||||||||||||||||||||
Fee-Based | ||||||||||||||||||||||||
Primary | Management | Corporate | ||||||||||||||||||||||
Insurance | Reinsurance | Services | and Other | Eliminations | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||
Net premiums earned |
$ | 72,904 | $ | 25,136 | $ | | $ | | $ | | $ | 98,040 | ||||||||||||
Management fees |
| | 6,307 | | (709 | ) | 5,598 | |||||||||||||||||
Investment income |
8,204 | 1,587 | (5 | ) | 183 | (697 | ) | 9,272 | ||||||||||||||||
Total revenues |
81,108 | 26,723 | 6,302 | 183 | (1,406 | ) | 112,910 | |||||||||||||||||
Expenses |
||||||||||||||||||||||||
Underwriting expenses |
58,626 | 18,516 | | | (709 | ) | 76,433 | |||||||||||||||||
Operating expenses |
14,061 | 733 | 6,175 | 4,693 | | 25,662 | ||||||||||||||||||
Interest expense |
697 | | | 2,799 | (697 | ) | 2,799 | |||||||||||||||||
Total expenses |
73,384 | 19,249 | 6,175 | 7,492 | (1,406 | ) | 104,894 | |||||||||||||||||
Income (loss) from
continuing operations
before taxes |
$ | 7,724 | $ | 7,474 | $ | 127 | $ | (7,309 | ) | $ | | $ | 8,016 | |||||||||||
Total assets |
$ | 430,567 | $ | 60,192 | $ | 5,079 | $ | 307,504 | $ | (357,024 | ) | $ | 446,318 | |||||||||||
Note 14. Subsequent Events
In May 2009, the FASB issued new guidance for accounting for subsequent events. The new
guidance, which is now part of ASC 855, Subsequent Events, defines subsequent events as either
recognized (events that existed at the balance sheet date and therefore should be reflected in the
financial statements) or non-recognized (events that did not exist at the balance sheet date and
are not reflected in the financial statements; material non-recognized subsequent events should be
disclosed). The new guidance was effective June 15, 2009 and requires the Company to disclose the
date through which it has evaluated subsequent events and whether the date represents the date the
financial statements were issued or were available to be issued. The Company has evaluated
subsequent events through November 12, 2009, the date the financial statements were issued.
On October 13, 2009, the Contractors Access Program (CAP), one of the self-insured groups
managed by CRM CA, voted to voluntarily terminate active operations on January 1, 2010. CRM CA and
CAP will be working with the State of California to terminate and conclude the program in
accordance with State regulations.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS OF OPERATIONS |
In this report, we use the terms Company, we, us or our to refer to CRM Holdings and
its subsidiaries on a consolidated basis, unless otherwise indicated or unless the context
otherwise requires.
Cautionary Statement
This document contains forward looking statements, which include, without limitation,
statements about our plans, strategies and prospects. These statements are based on our current
expectations and projections about future events and are identified by terminology such as may,
will, should, expect, scheduled, plan, seek, intend, anticipate, believe,
estimate, aim, potential, or continue or the negative of those terms or other comparable
terminology. These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently anticipated or
projected. Although we believe that our plans, intentions and expectations are reasonable, we may
not achieve such plans, intentions or expectations.
The following are some of the factors that could affect financial performance or could cause
actual results to differ materially from estimates contained in or underlying our forward-looking
statements:
| the cyclical nature of the insurance and reinsurance industry; |
||
| premium rates; |
||
| investment results; |
||
| legislative and regulatory changes; |
||
| the estimation of loss reserves and loss reserve development; |
||
| reinsurance may be unavailable on acceptable terms, and we may be unable to
collect reinsurance; |
||
| the status or outcome of legal and/or regulatory proceedings; |
||
| the occurrence and effects of wars and acts of terrorism; |
||
| the effects of competition; |
||
| failure to retain key personnel; |
||
| economic downturns; |
||
| natural disasters; and |
||
| the reasons discussed under the heading Risk Factors in Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2008. |
You should carefully read this quarterly report, the documents that we reference herein and
the documents we have filed as exhibits, together with all other documents we have filed with the
SEC, with the understanding that our actual future results, levels of activity, performance and
achievements may be different from what we expect and that these differences may be material. We
qualify all of our forward looking statements by these cautionary statements. We undertake no
obligation to update any of the forward looking statements after the date of this report to conform
those statements to reflect the occurrence of unanticipated events, except as required by
applicable law.
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Overview
We are a provider of workers compensation insurance products. Our main business activities
include underwriting primary workers compensation insurance policies, underwriting workers
compensation reinsurance and excess insurance policies, and providing fee-based management and
other services to self-insured entities. We provide primary workers compensation insurance to
employers in California, Arizona, Florida, Nevada, New Jersey, New York, and other states. We
reinsure some of the primary business we underwrite and provide excess workers compensation
coverage for self-insured organizations. We provide fee-based management services to self-insured
groups in California.
We report our business in the following four segments: (1) primary insurance; (2) reinsurance;
(3) fee-based management services; and (4) corporate and other. Our primary insurance segment was
added with our acquisition of Embarcadero on November 14, 2006. Effective September 8, 2008, the
results of operations of our subsidiaries, CRM and Eimar, which historically were reported in the
fee-based management services segment, are reported as discontinued operations for all periods
presented.
Workers Compensation Insurance Market Conditions
Our business segments are affected by the trends of the workers compensation insurance
market. The workers compensation insurance market has historically fluctuated with periods of low
premium rates and excess underwriting capacity resulting from increased competition, followed by
periods of high premium rates and shortages of underwriting capacity resulting from decreased
competition. Our revenues have historically been generated primarily in California and New York.
Our Insureds Payroll Levels. Our primary insurance premiums are ultimately determined by the
policyholders aggregate payroll. In light of the current recession, during the end of 2008 and in
2009, we have seen a rise in unemployment in the U.S., and as a result, we are experiencing a
downward trend in the payroll levels of our insureds. Consequently, this downward trend in payrolls
has resulted in a downward trend of our net earned premiums. Until unemployment declines, we may
continue to experience a downward trend in our insureds payrolls and our net earned premiums. To
the extent that payroll levels on insureds policies continue to decline as a result of the
recession, our actual premiums earned may be less than expected.
Californias Premium Rates. The most recent market conditions suggest a stabilizing of the
workers compensation market in California. Prior to this, we had experienced a significant
downward trending in the premium rates charged by insurers based on the legislative reforms adopted
by California in 2003 and 2004.
In November 2007, the California Insurance Commissioner recommended that there be no overall
change in workers compensation advisory pure premium rates for policies written on or after
January 1, 2008. This was the first recommendation of no rate decrease by the California Insurance
Commissioner since the adoption of the reforms of 2003 and 2004. In May 2008, the California
Insurance Commissioner announced that stability in the workers compensation insurance marketplace
had eliminated the immediate need for an interim pure premium rate advisory for policies written on
or after September 30, 2008. In October 2008, the California Insurance Commissioner announced a 5%
increase in advisory pure premium rates for policies written on or after January 1, 2009, based on
rising medical costs and loss adjustment expenses.
In March 2009, the Workers Compensation Insurance Rating Bureau of California (WCIRB), an
industry-backed private organization that provides statistical analysis, submitted a pure premium
rate filing to the California Insurance Commissioner recommending a 23.7% increase in advisory pure
premium rates for policies written on or after July 1, 2009. The WCIRBs recommendation was based,
in part, on its evaluation of the industrys loss and loss adjustment expense experience as of
December 31, 2008. The WCIRBs recommendation was also based on expected cost increases arising
from two recent and significant Workers Compensation Board of Appeals decisions that affect the
2004 legislative reforms, although the cases are currently under reconsideration. On July 8, 2009,
the California Insurance Commissioner rejected the WCIRBs recommended rate increase, citing
evidence that self-insured employers have been able to reduce overall workers compensation costs.
The California Insurance Commissioners decision is advisory only and insurance companies may
choose whether or not to adopt the new rates.
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New Yorks Premium Rates. Workers compensation rates in New York have experienced significant
pricing pressure since the legislative reforms adopted in March 2007. Following almost two years of
relatively stable rates, in July 2007, the New York State Superintendent of Insurance ordered that
overall policyholders costs for workers compensation be reduced by an average of 20.5% effective
October 1, 2007. This 20.5% reduction included both changes in the workers compensation rates set
by the New York State Workers Compensation Board as well as a change to the New York State
assessment. The rate reduction was based upon an analysis of the impact of the reforms and market
trends associated with New Yorks 2007 Workers Compensation Reform Act signed into law in March
2007, which was intended to create a significantly less expensive system of workers compensation
in New York while increasing the weekly benefits paid to injured workers. In addition, in February
2008, New York State enacted related legislation that requires workers compensation insurers to
establish premiums based on loss cost multipliers instead of a mandated rate. In August 2008, it
was announced that workers compensation rates in New York would be reduced by an additional 5%
percent for 2009, bringing the total reduction to about 25% from the 2007 pre-reform rates.
Principal Revenue and Expense Items
Our revenues consist primarily of the following:
Primary Insurance Net Premiums Earned. Primary insurance premiums earned are the elapsed
portion of our net premiums written. Net premiums written is the difference between gross premiums
written and premiums ceded or paid to reinsurers. Gross premiums written are the sum of both direct
premiums and assumed premiums before the effect of ceded reinsurance. Included in ceded reinsurance
are reinstatement premiums, which represent additional premiums payable by Majestic to its
reinsurers to maintain reinsurance coverage purchased under its excess of loss reinsurance
contracts. These contracts generally contain provisions requiring Majestic to pay additional
premiums based on a percentage of ceded losses, or reinstatement premiums, in the event that
losses of a defined magnitude are ceded under such contracts. Under accounting rules, Majestic
establishes reserves for potential additional premiums and records such amounts once estimated
actuarial loss reserves exceed the defined limits. Assumed premiums are premiums received by
Majestic from an authorized state-mandated pool in connection with the involuntary assumptions of a
portion of the insurance written by the pool.
Premiums are earned over the terms of the related policies. At the end of each accounting
period, the portion of the premiums that are not yet earned is included in unearned premiums and is
realized as revenue in subsequent periods over the remaining terms of the policies.
Reinsurance Net Premiums Earned. Reinsurance premiums are earned over the terms of the related
policies. At the end of each accounting period, the portion of the premiums that are not yet earned
is included in unearned premiums and is realized as revenue in subsequent periods over the
remaining terms of the policies. These premiums are reported in our reinsurance segment.
Twin Bridges reinsurance premiums are assumed from Majestic under (1) a ceded primary quota
share agreement (primary quota share), where Twin Bridges assumes a percentage of the first $500
thousand of premiums of Majestics primary insurance policies in force; (2) a ceded excess quota
share agreement (excess quota share), where Twin Bridges assumes a percentage of losses in excess
of a self-insured retention up to per occurrence limits of Majestic excess insurance policies in
force; and (3) a ceded excess of loss treaty (excess of loss treaty), where Twin Bridges has a
percentage participation in Majestics excess of loss treaty.
Management Fees. Our fee-based management service revenues include management fees received
from the self-insured groups we administer and are for management and other services. Our fees are
based on a percentage of premiums paid by members to the groups we manage.
Investment Income. Our investment income is dependent upon the average invested assets in our
portfolio and the yield that we earn on those invested assets. Our investment yield depends on
market interest rates and the credit quality and maturity period of our invested assets. In
addition, we realize capital gains or losses on sales of investments and realize losses on
other-than-temporarily-impaired investments as a result of changing market conditions, including
changes in market interest rates and changes in the credit quality of our invested assets.
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Our expenses consist primarily of the following:
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses reflect our best
estimate, using various actuarial analyses, of ultimate losses and loss adjustment expenses, net of
any reinsurance recoverables that we expect to incur on each primary insurance and reinsurance
contract written. Actual losses and loss adjustment expenses will depend on actual costs to settle
our claims.
Policy Acquisition Costs. Policy acquisition costs consist principally of commissions, premium
taxes and certain underwriting and other policy issuance costs, including regulatory expenses,
related to the production of new and renewal business.
Fees Paid to General Agents and Brokers. Fees paid to general agents and brokers consist
primarily of commissions paid to general agents and brokers for binding the coverage of members in
the self-insured groups we manage.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
consist primarily of personnel expenses, professional fees and other operating costs.
Income Taxes. CRM USA Holdings and its subsidiaries are subject to U.S. federal, state and
local income taxes. CRM Holdings and Twin Bridges have each received an undertaking from the
Bermuda government exempting each company from all tax computed on profits or income, or computed
on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance
tax until March 28, 2016.
Reinsurance Coverage
Majestic purchases reinsurance to reduce its maximum potential loss on individual risks and to
protect against possible catastrophes. 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 fully obligated to indemnify the ceding company to the extent of the coverage ceded.
Excess of Loss Reinsurance. Majestic entered into a new excess of loss reinsurance treaty
program effective July 1, 2009. Majestics previous excess of loss reinsurance program was
terminated effective June 30, 2009. The new excess of loss reinsurance program covers losses
incurred between July 1, 2009 and the date on which the reinsurance agreements are terminated. The
excess of loss reinsurance program provides $69.5 million of reinsurance protection, per
occurrence, for workers compensation losses in excess of a $500 thousand retention limit. Majestic
retains liability for any amounts of losses and loss adjustment expenses that exceed $70.0 million
up to the applicable statutory limit. Majestic has 10 reinsurers providing coverage, including:
Axis Specialty Limited, Catlin Insurance Company, Dorinco Reinsurance Company, Endurance Specialty
Insurance LTD., Hannover Rueckversicherung AG, Flagstone Re Ltd., Munich Re America Corporation,
Tokio Millennium Re Ltd., Validus Reinsurance, Ltd., various Lloyds syndicates, and Twin Bridges,
the Companys Bermuda-based reinsurance subsidiary. Twin Bridges has a 2.75% participation level in
the excess of loss treaty for loss and loss adjustment expenses in excess of $2.0 million, per
occurrence, up to $5.0 million.
Quota Share Reinsurance. Majestic entered into a 43% ceded quota share agreement effective
July 1, 2009, of which 80% was placed with participating reinsurers. The agreement is effective for
new and renewal primary insurance policies issued by Majestic on or after July 1, 2009 through June
30, 2010. Under this 43% ceded quota share agreement, the participating reinsurers assume their
pro-rata share of the first $500 thousand of losses and loss adjustment expenses from any single
occurrence under Majestics primary insurance policies and Majestic, in turn, cedes the applicable
percentage of premiums to the participating reinsurers. The agreement limits the ceded premiums on
primary workers compensation business written in New York to $10.0 million. The agreement allows
Majestic the option to decrease the percentage ceded to the participating reinsurers on the first
day of each calendar quarter, although the percentage cannot be reduced below 21.5%. The
participating reinsurers losses are capped at 130% of the premiums ceded by Majestic.
Majestic receives a 25% provisional ceding commission on all ceded premiums under the
agreement to cover Majestics costs associated with the policies, including dividends, commissions,
taxes, assessments and all other expenses other than allocated loss adjustment expenses. If
Majestics loss ratio is greater than 72.5%, then
Majestics ceding commission decreases by 0.75% for each 1% increase in Majestics loss ratio,
with a minimum 22.0% ceding commission received at a 76.5% loss ratio. If Majestics loss ratio is
less than 72.5%, then Majestics ceding commission increases by 0.75% for each 1% decrease in
Majestics loss ratio, with a maximum 27.25% ceding commission received at a 69.5% loss ratio.
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The quota share reinsurance agreement has been 80% placed with two participating reinsurers,
Aspen Re and Axis Specialty, Ltd. Aspen Re and Axis Specialty, Ltd. have each agreed to assume a
40% pro-rata share of the 43% ceded quota share agreement. The remaining 20% of the quota share
agreement was not placed with any participating reinsurers and Majestic remains responsible for
those losses.
In addition to the 43% ceded quota share agreement, Majestic entered into a 15% ceded quota
share agreement with Max Re, Ltd. (Max Re) effective July 1, 2009. Majestics previous 40% ceded
quota share agreement with Max Re effective July 1, 2008 was terminated effective June 30, 2009,
except as to policies in-force as of that date. Under the new 15% ceded quota share agreement, Max
Re assumes 15% of the first $500 thousand of losses and loss adjustment expenses from any single
occurrence under Majestics primary insurance policies and Majestic cedes 15% of the applicable
premiums to Max Re. The reinsurance agreement excludes coverage for workers compensation business
written by Majestic in New York. The agreement allows Majestic the option to decrease the
percentage ceded to Max Re on the first day of each calendar quarter, although the percentage
cannot be reduced below 5%. Max Res losses are capped at 150% of the premiums ceded by Majestic.
Majestic receives a 25.75% ceding commission on all ceded premiums to cover Majestics costs
associated with the policies, including dividends, commissions, taxes, assessments and all other
expenses other than allocated loss adjustment expenses. The agreement is effective for losses
incurred and premiums earned by Majestic for new and renewal primary insurance policies issued by
Majestic on or after July 1, 2009 through June 30, 2010.
Critical Accounting Policies and Estimates
We have prepared a current assessment of our critical accounting policies and estimates in
connection with preparing our interim unaudited consolidated financial statements as of and for the
three and nine months ended September 30, 2009 and 2008. We believe that the accounting policies
set forth in the Notes to our Consolidated Financial Statements and Critical Accounting Policies
and Estimates in the Managements Discussion and Analysis of Consolidated Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008
continue to describe the significant judgments and estimates used in the preparation of our
consolidated financial statements. Effective June 15, 2009, we adopted the guidance on
Recognition and Presentation of Other-Than-Temporary Impairments related to recognizing credit
related other-than-temporary impairments on debt securities.
35
Table of Contents
Results of Operations
Consolidated Results
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Net premiums earned |
$ | 17,324 | $ | 24,504 | $ | 61,033 | $ | 98,040 | ||||||||
Fee-based management services |
902 | 1,806 | 3,636 | 5,598 | ||||||||||||
Investment income |
3,529 | 2,922 | 9,561 | 9,272 | ||||||||||||
Total revenues |
21,755 | 29,232 | 74,230 | 112,910 | ||||||||||||
Expenses |
||||||||||||||||
Losses and loss adjustment expenses |
17,193 | 19,841 | 52,081 | 61,230 | ||||||||||||
Policy acquisition costs |
3,663 | 3,935 | 11,638 | 15,203 | ||||||||||||
Fees paid to general agents and brokers |
412 | 534 | 1,598 | 3,473 | ||||||||||||
Selling, general and administrative expenses |
6,880 | 9,275 | 28,500 | 22,189 | ||||||||||||
Interest expense |
952 | 922 | 2,739 | 2,799 | ||||||||||||
Total expenses |
29,100 | 34,507 | 96,556 | 104,894 | ||||||||||||
(Loss) income from continuing operations
before income taxes |
(7,345 | ) | (5,275 | ) | (22,326 | ) | 8,016 | |||||||||
Tax provision (benefit) from continuing
operations |
8,313 | (2,352 | ) | 3,614 | (254 | ) | ||||||||||
(Loss) income from continuing operations |
(15,658 | ) | (2,923 | ) | (25,940 | ) | 8,270 | |||||||||
Loss from discontinued operations before
income taxes |
(749 | ) | (1,307 | ) | (1,478 | ) | (6,008 | ) | ||||||||
Tax provision (benefit) from discontinued
operations |
594 | (464 | ) | 349 | (1,997 | ) | ||||||||||
Loss on discontinued operations |
(1,343 | ) | (843 | ) | (1,827 | ) | (4,011 | ) | ||||||||
Net (Loss) Income |
$ | (17,001 | ) | $ | (3,766 | ) | $ | (27,767 | ) | $ | 4,259 | |||||
(Loss) earning per share from continuing
operations |
||||||||||||||||
Basic |
$ | (0.93 | ) | $ | (0.18 | ) | $ | (1.55 | ) | $ | 0.50 | |||||
Fully diluted |
$ | (0.93 | ) | $ | (0.18 | ) | $ | (1.55 | ) | $ | 0.50 | |||||
Loss per share from discontinued operations |
||||||||||||||||
Basic |
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.24 | ) | ||||
Fully diluted |
$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.24 | ) |
Consolidated Results of Operations Three Months Ended September 30, 2009 and 2008
Total Revenues. Consolidated total revenues decreased $7.5 million, or 26%, to $21.8 million
for the three months ended September 30, 2009, from $29.2 million for the three months ended
September 30, 2008. The decrease in total revenues was primarily due to a $7.2 million decrease in
our consolidated net premiums earned and
a $0.9 million decrease from our fee-based management services, which were offset by a $0.6
million increase in net investment income.
36
Table of Contents
Total Expenses. Consolidated total expenses decreased $5.4 million, or 16%, to $29.1 million
for the three months ended September 30, 2009, from $34.5 million for the three months ended
September 30, 2008. The decrease was primarily attributable to a $2.8 million decrease in selling,
general and administrative expenses in our primary insurance segment, and a $2.6 million decrease
in loss and loss adjustment expenses in our primary insurance and
reinsurance segments.
Loss from Continuing Operations before Taxes. Loss from continuing operations before taxes was
$7.3 million for the three months ended September 30, 2009, as compared to a $5.3 million loss from
continuing operations for the same period last year. The increase in loss from continuing
operations is primarily attributable to decreased operating profit in our primary insurance,
reinsurance and fee-based segments and increased selling, general and administrative expenses in
our corporate and other segment.
Provision for Income Taxes. We recorded income tax expense from continuing operations of $8.3
million for the three months ended September 30, 2009, compared to an income tax benefit of $2.4
million for the three months ended September 30, 2008. Our income tax expense includes the non-cash
full valuation allowance established in the third quarter of 2009 with respect to our net deferred
tax asset, somewhat offset by the net income tax benefit on taxable losses of our U.S. domiciled
subsidiaries that are included in continuing operations. CRM Holdings and Twin Bridges, our Bermuda
domiciled subsidiaries, are not subject to U.S. income taxation.
The income tax expense for the three months ended September 30, 2009 included a current tax
benefit of approximately $0.2 million, a deferred tax benefit of $2.9 million and an $11.3 million
non-cash valuation allowance on net deferred tax assets. For additional information concerning the
valuation allowance related to our deferred tax asset, see Part I. Financial Information Item
1. Financial Statements Note 10. Income Taxes. The deferred tax benefit of $2.9 million
included $3.0 million of net operating loss carry forward as well as the impact of temporary
differences from net loss reserves, unearned premiums reserves and deferred policy acquisition
costs being reported differently for financial statement purposes than for federal income tax
purposes.
The income tax benefit for the three months ended September 30, 2008 included a current tax
benefit of $1.8 million and a deferred tax benefit of $0.5 million. The current tax benefit was
primarily due to the tax impact of operating losses in our primary insurance segment and CRM USA
Holdings, offset by the tax impact of operating income of our fee-based management services
segment. The deferred tax benefit of $0.5 million was primarily due to temporary differences from
net loss reserves, unearned premium reserves and deferred policy acquisition costs being reported
differently for financial statement purposes than for federal income tax purposes.
Discontinued Operations. We recorded net losses of $1.3 million and $0.8 million on
discontinued operations for the three months ended September 30, 2009 and 2008, respectively. As of
September 8, 2008, we ceased to manage self-insured groups in New York and consequently stopped
providing fee-based management services to those self-insured groups. In addition, we ceased
providing medical bill review and case management services to self-insured groups and third party
clients. Accordingly, the results of CRM and Eimar, which were historically reported in the
fee-based management services segment, have been reclassified to discontinued operations. For the
three months ended September 30, 2009, we recorded $0.8 million of legal defense costs related to
the pending regulatory proceedings and litigation described in Part I. Financial Information
Item 1. Financial Statements Note 12. Contingencies and a $0.7 million deferred tax asset
valuation allowance as described in Part I. Financial Information Item 1. Financial Statements
Note 10. Income Taxes.
Net (Loss) Income. Consolidated net loss for the three months ended September 30, 2009 was
$17.0 million compared to $3.8 million for the three months ended September 30, 2008. The increase
in our net loss is principally attributable to the establishment of a deferred tax valuation
allowance and decreases in the operating results of our primary insurance, reinsurance, fee-based
management services and corporate and other segments.
Consolidated Results of Operations Nine Months Ended September 30, 2009 and 2008
Total Revenues. Consolidated total revenues decreased $38.7 million, or 34%, to $74.2 million
for the nine months ended September 30, 2009, from $112.9 million for the nine months ended
September 30, 2008. The
decrease in total revenues was due to a $37.0 million decrease in our consolidated net
premiums earned and a $2.0 million decrease in revenues from our fee-based management services
segment, which were offset by a $0.3 million increase in our net investment income for the nine
months ended September 30, 2009 as compared to 2008.
37
Table of Contents
Total Expenses. Consolidated total expenses decreased $8.3 million, or 8%, to $96.6 million
for the nine months ended September 30, 2009, from $104.9 million for the nine months ended
September 30, 2008. The decrease was primarily attributable to a $9.1 million decrease in loss and
loss adjustment expenses in our reinsurance segment, a $3.6 million decrease in policy acquisition
costs in our reinsurance segment and a $1.9 million decrease in fees paid to general agents and
brokers. These decreases were somewhat offset by $5.3 million in severance expenses related to our
former co-chief executive officers in our corporate and other segment and a $1.0 million increase
in the allowance for uncollectible premiums in our primary insurance segment for the nine months
ended September 30, 2009.
(Loss) Income from Continuing Operations before Taxes. Loss from continuing operations before
taxes was $22.3 million for the nine months ended September 30, 2009, as compared to income from
continuing operations before taxes of $8.0 million for the same period last year. The decrease in
income from continuing operations is primarily attributable to decreased operating results in our
primary insurance and reinsurance segments and increased selling, general and administrative
expenses in our corporate and other segment.
Provision for Income Taxes. We recorded income tax expense from continuing operations of $3.6
million for the nine months ended September 30, 2009, compared to a $0.3 million for the nine
months ended September 30, 2008. Our income tax expense includes the non-cash full valuation
allowance established in the third quarter of 2009, with respect to our net deferred tax asset,
somewhat offset by the net income tax benefit on taxable losses of our U.S. domiciled subsidiaries
that are included in continuing operations. CRM Holdings and Twin Bridges, our Bermuda domiciled
subsidiaries, are not subject to U.S. income taxation.
The income tax expense for the nine months ended September 30, 2009 included a current tax
benefit of $2.2 million, a deferred tax benefit of $5.6 million and an $11.3 million non-cash
valuation allowance on net deferred tax assets,. The deferred tax benefit of $5.6 million includes
$4.3 million of net operating loss carry forward as well as the impact of temporary differences
from net loss reserves, unearned premiums reserves and deferred policy acquisition costs being
reported differently for financial statement purposes than for federal income tax purposes.
The income tax provision for the nine months ended September 30, 2008 included a current tax
provision of $0.2 million and a deferred tax benefit of $0.1 million. The current tax provision was
primarily due to the tax impact of operating income in our primary insurance segment offset by the
tax impact of operating losses of CRM USA Holdings. The deferred tax expense was primarily due to
temporary differences from net loss reserves, unearned premium reserves and deferred policy
acquisition costs being reported differently for financial statement purposes than for federal
income tax purposes.
Discontinued Operations. We recorded net losses of $1.8 million and $4.0 million on
discontinued operations for the nine months ended September 30, 2009 and 2008, respectively. For
the nine months ended September 30, 2009, we recorded $1.4 million of legal defense costs related
to the pending regulatory proceedings and litigation as described in Part I. Financial Information
Item 1. Financial Statements Note 12. Contingencies and a $0.7 million deferred tax asset
valuation allowance described in Part I. Financial Information Item 1. Financial Statements
Note 10. Income Taxes.
Net (Loss) Income. Consolidated net loss for the nine months ended September 30, 2009 was
$27.8 million compared to net income of $4.3 million for the nine months ended September 30, 2008.
This primarily resulted from the establishment of a deferred tax valuation allowance, decreases in
the net income of our primary insurance and reinsurance segments and an increase in the net loss of
our corporate and other segment.
38
Table of Contents
Primary Insurance Segment
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Net premiums earned |
$ | 14,112 | $ | 20,477 | $ | 53,243 | $ | 72,904 | ||||||||
Investment income |
3,493 | 2,779 | 9,257 | 8,204 | ||||||||||||
Total revenues |
17,605 | 23,256 | 62,500 | 81,108 | ||||||||||||
Expenses |
||||||||||||||||
Losses and loss adjustment expenses |
15,864 | 17,952 | 46,843 | 49,181 | ||||||||||||
Policy acquisition costs |
3,028 | 3,144 | 9,835 | 9,445 | ||||||||||||
Selling, general and administrative expenses |
3,449 | 6,239 | 13,007 | 14,061 | ||||||||||||
Interest expense |
364 | 384 | 959 | 697 | ||||||||||||
Total Expenses |
22,705 | 27,719 | 70,644 | 73,384 | ||||||||||||
(Loss) income from continuing operations
before income taxes |
$ | (5,100 | ) | $ | (4,463 | ) | $ | (8,144 | ) | $ | 7,724 | |||||
GAAP Combined Ratio |
||||||||||||||||
Loss and loss adjustment expense ratio(1) |
112.4 | % | 87.7 | % | 88.0 | % | 67.5 | % | ||||||||
Underwriting expense ratio(2) |
45.9 | % | 45.8 | % | 42.9 | % | 32.2 | % | ||||||||
GAAP combined ratio(3) |
158.3 | % | 133.5 | % | 130.9 | % | 99.7 | % | ||||||||
(1) | The loss and loss adjustment ratio is calculated by dividing losses and loss adjustment
expenses by net premiums earned. |
|
(2) | The underwriting expense ratio is calculated by dividing the total of policy acquisition
costs and selling, general and administrative expenses by net premiums earned. |
|
(3) | The GAAP combined ratio is the sum of the loss and loss adjustment expense ratio and the
underwriting expense ratio. |
Primary Insurance Segment Results of Operations Three Months Ended September 30, 2009 and 2008
Net Premiums Earned. Net premiums earned decreased $6.4 million, or 31%, to $14.1 million for
the three months ended September 30, 2009, from $20.5 million for the three months ended September
30, 2008. Of this decrease, $6.3 million is attributable to primary insurance policies and $0.1
million is attributable to excess insurance policies.
Geographically, our net premiums earned were:
Three Months Ended September 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
California |
$ | 9,177 | 65 | % | $ | 11,331 | 56 | % | ||||||||
New York/New Jersey |
4,454 | 32 | % | 8,053 | 39 | % | ||||||||||
Others |
481 | 3 | % | 1,093 | 5 | % | ||||||||||
Total |
$ | 14,112 | 100 | % | $ | 20,477 | 100 | % | ||||||||
39
Table of Contents
The $6.3 million decrease in net earned premiums on primary policies was in part attributable
to reduced payroll levels of our insureds in California and underwriting actions taken on our New
York primary insurance business, both of which reduced net earned premiums in the third quarter of
2009 as compared to 2008. In addition, part of the decrease in net earned premiums on primary
policies was a result of two external third party quota share agreements effective July 1, 2009,
whereby Majestic ceded approximately 47% of its applicable premiums to third party reinsurers for
the three months ended September 30, 2009 as compared to the three months ended September 30, 2008,
where Majestic ceded 40% of its applicable premiums to a third party reinsurer.
Earned premiums within the quarter were also reduced by $3.1 million of estimated
reinstatement premiums. Reinstatement premiums represent a non-cash expense for additional ceded
premiums that may be due to reinsurers on Majestics excess of loss treaty that expired June 30,
2009. The current reinstatement premium accrual is based on the actuarys estimated ultimate
losses, while the exact amount of reinstatement premiums will depend on ultimate paid losses above
$500,000 that occurred during the applicable treaty year.
Net Investment Income. Net investment income increased $0.7 million, or 26%, to $3.5 million
for the three months ended September 30, 2009, from $2.8 million for the three months ended
September 30, 2008. This increase was primarily attributable to higher net realized gains on our
available-for-sale portfolio. During the three months ended September 30, 2009, we recorded $0.8
million of net gains resulting from the liquidation of our municipal bond portfolio as described in
Item 1. Financial Statements Notes to Consolidated Financial Statements Note 5. Investments,
as compared to $0.2 million of net realized gains during the three months ending September 30,
2008.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses decreased $2.1
million, or 12%, to $15.9 million for the three months ended September 30, 2009, from $18.0 million
for the three months ended September 30, 2008. This decrease was primarily attributable to the
third party quota shares that were in place for the three months ended September 30, 2009 whereby
Majestic ceded approximately 47% of the first $500 thousand of losses and loss adjustment expenses
to third party reinsurers under Majestics primary insurance policies. For the three months ended
September 30, 2008, Majestic ceded 40% of the first $500 thousand of losses and loss adjustment
expenses to third party reinsurers under Majestics primary insurance policies.
In our primary insurance segment during the three months ended September 30, 2009, Majestic
experienced $2.0 million of net unfavorable development on prior accident years as compared to $1.2
million of net favorable development on prior accident years for the three months ended September
30, 2008. For the three months ended September 30, 2009, adverse development of $2.4 million in
our primary insurance policy business and $0.1 million of amortization expense related to the
difference between the fair value of losses and loss adjustment expenses for the three months ended
September 30, 2009 as compared to their stated value on the date of the acquisition of Majestic,
was offset by $0.5 million favorable development in our excess insurance policy business.
Prior year unfavorable development on primary insurance policies of $2.4 million for the three
months ended September 30, 2009 was predominantly from California accident year 2008 and from the
business assumed from the National Council on Compensation Insurance, Inc. (NCCI) residual New
Jersey market pool. Losses in Majestics excess workers compensation business experienced
favorable development of $0.5 million as losses above the self-insured retentions have not emerged
as expected.
Within the three months ended September 30, 2008, Majestic recorded a $1.2 million decrease in
its prior year estimated cost of settling claims as a result of favorable loss cost trends in
California that resulted from the legislative reforms that were enacted in 2004. In addition,
losses in Majestics excess workers compensation business developed better than expected, as losses
above the self-insured retention did not emerge as expected.
The losses and loss adjustment expense ratio for Majestic for the three months ended September
30, 2009 was 112% as compared to 88% for the three months ended September 30, 2008. Excluding prior
year development, Majestics losses and loss adjustment expense ratio was 98% for the three months
ended September 30, 2009 and 93% for the three months ended September 30, 2008. The current year
losses and loss adjustment expense ratio was higher in 2009 as a result of an increase in losses
and loss adjustment expenses for the 2009 accident year in California and the effects of reduced
net earned premiums. Majestics net earned premiums were reduced by: (1) lower average prices for
premiums earned in the three months ended September 30, 2009 as compared to the same period of the
prior year; (2) reinstatement premiums that reduced net earned premiums as described in Primary
Insurance Segment Results of Operations Three Months Ended September 30, 2009 and 2008 Net
Premiums Earned; and (3) the completion of premium audits which resulted in a return of premiums
to policyholders.
40
Table of Contents
We have established loss reserves for our primary insurance segment at September 30, 2009 that
are based upon our current best estimate of loss costs. Loss reserves do not represent an exact
calculation of liability, but instead represent managements best estimates, generally utilizing
actuarial expertise and projection techniques, at a given accounting date. Reserves for losses and
loss adjustment expenses are estimates and are inherently uncertain; they do not and cannot
represent an exact measure of liability. The methods for making such estimates and for
establishing the resulting reserves are continually reviewed and updated, and any adjustments are
reflected in current operations. For additional information regarding our reserves for losses and
loss adjustment expenses, our processes for establishing the reserves and the risks associated
therewith, see our Annual Report on Form 10-K for the year ended December 31, 2008 under the
headings Item 1. Business Primary Insurance Segment Reserves for Losses and Loss Adjustment
Expenses, Item 1A. Risk Factors Our loss reserves are based on estimates and may be inadequate
to cover our losses, and Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies and Estimates Reserve for Losses and Loss
Adjustment Expenses.
Policy Acquisition Costs. Policy acquisition costs remained unchanged at $3.0 million for the
three months ended September 30, 2009. Higher regulatory expenses on policies underwritten in New
York and assumed under the New Jersey NCCI pools were offset by lower premium taxes as a result of
lower net earned premiums.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
decreased $2.8 million, or 45%, to $3.4 million for the three months ended September 30, 2009, from
$6.2 million for the three months ended September 30, 2008. Of this decrease, $1.9 million was
attributable to lower general corporate overhead expenses allocated from our corporate and other
segment to the primary insurance segment, as described below in Corporate and Other Segment
Results of Operations Three Months Ended September 30, 2009 and 2008, and $1.1 was attributable to
lower bad debt expense in the three months ended September 30, 2009. This was somewhat offset by
higher professional and consulting fees for the third quarter of 2009 as compared to 2008. The
underwriting expense ratios for our primary insurance segment for both the three months ended
September 30, 2009 and 2008 were 46%.
Interest Expense. Interest expense remained relatively unchanged at $0.4 million for the three
months ended September 30, 2009 as compared to the three months ended September 30, 2008.
Loss from Continuing Operations before Income Taxes. Loss from continuing operations before
income taxes attributable to the primary insurance segment for the three months ended September 30,
2009 was $5.1 million, compared to $4.5 million for the three months ended September 30, 2008. This
increase is principally attributed to lower net earned premiums, somewhat offset by decreases in
selling, general and administrative expenses and losses and loss adjustment expenses.
Primary Insurance Segment Results of Operations Nine Months Ended September 30, 2009 and 2008
Net Premiums Earned. Net premiums earned decreased $19.7 million, or 27%, to $53.2 million for
the nine months ended September 30, 2009, from $72.9 million for the nine months ended September
30, 2008. Of this decrease, $18.9 million is attributable to primary insurance policies and $0.7
million is attributable to excess insurance policies.
Geographically, our net premiums earned were:
Nine months Ended September 30, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
California |
$ | 32,899 | 62 | % | $ | 43,926 | 60 | % | ||||||||
New York/New Jersey |
17,906 | 34 | % | 26,138 | 36 | % | ||||||||||
Others |
2,438 | 4 | % | 2,840 | 4 | % | ||||||||||
Total |
$ | 53,243 | 100 | % | $ | 72,904 | 100 | % | ||||||||
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Table of Contents
The decrease in net earned premiums for the nine months ended September 30, 2009 as compared
to September 30, 2008 is partially attributable to the factors discussed above in Primary
Insurance Segment Results of Operations Three Months Ended September 30, 2009 and 2008 Net
Premiums Earned. In general, more premiums were ceded to reinsurers under quota share agreements
in each quarter of 2009 as compared to 2008. Majestic ceded premiums to external and affiliate
reinsurers in 2009 as compared to 2008 shown as follows:
2009 | 2008 | |||||||
Quarter ended March 31, |
||||||||
Max Re I (1) |
40 | % | 0 | % | ||||
Aspen/Axis (2) |
0 | % | 0 | % | ||||
Total External Quota Share % |
40 | % | 0 | % | ||||
Twin Bridges |
5 | % | 40 | % | ||||
Total Quota Share % |
45 | % | 40 | % | ||||
Quarter ended June 30, |
||||||||
Max Re I (1) |
40 | % | 0 | % | ||||
Aspen/Axis (2) |
0 | % | 0 | % | ||||
Total External Quota Share % |
40 | % | 0 | % | ||||
Twin Bridges |
5 | % | 5 | % | ||||
Total Quota Share % |
45 | % | 5 | % | ||||
Quarter ended September 30, |
||||||||
Max Re II (3) |
13 | % | 40 | % | ||||
Aspen/Axis (2) |
34 | % | 0 | % | ||||
Total External Quota Share % |
47 | % | 40 | % | ||||
Twin Bridges |
5 | % | 5 | % | ||||
Total Quota Share % |
52 | % | 45 | % | ||||
(1) | Max Re I quota share was effective July 1, 2008 through June 30, 2009. |
|
(2) | Aspen/Axis quota share is effective July 1, 2009 through June 30, 2010. The cession
percentage reflects the 80% placement with Aspen Re and Axis under the 43% quota share
agreement. |
|
(3) | Max Re II quota share is effective July 1, 2009 through June 30, 2010. The cession
percentage approximates the 15% quota share agreement exclusive of premiums underwritten in
New York. |
The impact of these quota share agreements, reinstatement premiums, reduced payrolls, and non
renewal of certain risks in New York resulted in lower primary insurance net earned premiums for
the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.
The principal factors contributing to lower net earned premiums on excess policies were a reduction
in both policy count and reported payrolls.
Net Investment Income. Net investment income increased $1.1 million, or 13%, to $9.3 million
for the nine months ended September 30, 2009, from $8.2 million for the nine months ended September
30, 2008. This increase was attributable to increased fixed-income and short-term investment
holdings which resulted in higher investment income and higher net realized gains on our
available-for-sale portfolio for the nine months ended September 30, 2009 as compared to September
30, 2008.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses decreased $2.3
million, or 5%, to $46.8 million for the nine months ended September 30, 2009, from $49.2 million
for the nine months ended September 30, 2008.
42
Table of Contents
In our primary insurance segment during the nine months ended September 30, 2009, Majestic
experienced $1.8 million of net unfavorable development on prior accident years as compared to $6.2
million of net favorable development on prior accident years for the three months ended September
30, 2008. Adverse development of $2.3 million in our primary insurance policy business was
somewhat offset by $0.5 million of favorable development in our excess insurance policy business for
the three months ended September 30, 2009.
Unfavorable development of $2.3 million on primary insurance policies for the nine months
ended September 30, 2009 was predominantly from California accident year 2008 and from the business
assumed from the NCCI residual New Jersey market pool.
Losses in Majestics excess workers compensation business experienced favorable development of
$0.5 million as losses above the self-insured retentions have not emerged as expected and a change
in the method used to select the point estimate for loss reserves associated with excess insurance
policies written in New York. Management historically established reserves for losses and loss
adjustment expenses at the actuarys best estimate of expected outcomes for most assumed risks and
at a higher, moderately conservative level for risks originating from excess insurance policies
issued to self-insured groups in New York. Following the transfer of the claims administration of
the New York self-insured groups, as discussed above in Note 2, the new third party administrators
changed the underlying methodology used to establish reserves for losses and loss adjustment
expenses which resulted in a significant increase in case reserves. In light of the new reserving
methodology being used by the third party administrators of the New York self-insured groups during
the first quarter of 2009, management determined that continuing to establish reserves for risks
originating from excess insurance policies issued to self-insured groups in New York at a higher,
moderately conservative level would lead to redundant reserves associated with these risks.
Consequently, management now establishes reserves for losses and loss adjustment expenses
originating from excess insurance policies issued to New York self-insured groups at the actuarys
best estimate. Favorable loss reserve development in prior accident years and the change in
reserving methodology resulted in favorable development from risks originating from the New York
self-insured groups. This favorable development was somewhat offset by unfavorable development in
risks originating from the California self-insured groups and excess policies underwritten in
Florida.
For the nine months ended September 30, 2008, Majestic recorded $6.2 million of favorable
development as a result of favorable loss cost trends in California that resulted from the
legislative reforms that were enacted in 2004, and included data that suggested that both paid
losses and incurred losses were trending favorably.
The losses and loss adjustment expense ratio for Majestic for the nine months ended September
30, 2009 was 88% as compared to 68% for the nine months ended September 30, 2008. Excluding prior
year development, Majestics losses and loss adjustment expense ratio was 85% for the nine months
ended September 30, 2009 and 76% for the nine months ended September 30, 2008. The current year
losses and loss adjustment expense ratio was higher in 2009 as a result of an increase in losses
and loss adjustment expenses for the 2009 accident year in California and the effects of reduced
net earned premiums. Majestics net earned premiums were reduced by: (1) lower average prices for
premiums earned in the nine months ended September 30, 2009 as compared to the same period of the
prior year; (2) reinstatement premiums that reduced net earned premiums as described in Primary
Insurance Segment Results of Operations Nine Months Ended September 30, 2009 and 2008 Net
Premiums Earned; and (3) the completion of premium audits which resulted in a return of premiums
to policyholders.
We have established loss reserves for our Primary Insurance segment at September 30, 2009 that
are based upon our current best estimate of loss costs. Loss reserves do not represent an exact
calculation of liability, but instead represent managements best estimates, generally utilizing
actuarial expertise and projection techniques, at a given accounting date. Reserves for losses and
loss adjustment expenses are estimates and are inherently uncertain; they do not and cannot
represent an exact measure of liability. The methods for making such estimates and for
establishing the resulting reserves are continually reviewed and updated, and any adjustments are
reflected in current operations. For additional information regarding our reserves for losses and
loss adjustment expenses, our processes for establishing the reserves and the risks associated
therewith, see our Annual Report on Form 10-K for the year ended December 31, 2008 under the
headings Item 1. Business Primary Insurance Segment Reserves for Losses and Loss Adjustment
Expenses, Item 1A. Risk Factors Our loss reserves are based on estimates and may be inadequate
to cover our losses, and Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies and Estimates Reserve for Losses and Loss
Adjustment Expenses.
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Policy Acquisition Costs. Policy acquisition costs increased $0.4 million, or 4%, to $9.8
million for the nine months ended September 30, 2009, from $9.4 million for the nine months ended
September 30, 2008. Higher regulatory expenses on policies underwritten in New York and assumed
under the New Jersey NCCI pools were offset by lower premium taxes as a result of lower net earned
premiums.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
decreased $1.1 million, or 8%, to $13.0 million for the nine months ended September 30, 2009, from
$14.0 million for the nine months ended September 30, 2008. This decrease was primarily
attributable to $2.2 million decrease in the general corporate overhead expenses allocated from our
corporate and other segment to the primary segment in the three months ended September 30, 2009, as
described below in Corporate and Other Segment Results of Operations Nine Months Ended September
30, 2009 and 2008. This decrease was somewhat mitigated as the nine months ended September 30,
2008 included the reversal of $1.0 million of prior year guarantee fund assessments. The
underwriting expense ratios for our primary insurance segment for the nine months ended September
30, 2009 and 2008 were 43% and 32%, respectively.
Interest Expense. Interest expense increased $0.3 million to $1.0 million for the nine months
ended September 30, 2009, from $0.7 million for the nine months ended September 30, 2008. Increased
balances provided by third party reinsurers and Twin Bridges as collateral for unpaid ceded
liabilities under reinsurance agreements resulted in higher intercompany interest expense for the
nine months ended September 30, 2009 as compared to September 30, 2008.
(Loss) Income from Continuing Operations before Income Taxes. Loss from continuing operations
before income taxes attributable to the primary insurance segment for the nine months ended
September 30, 2009 was $8.1 million, compared to income from continuing operations before income
taxes of $7.7 million for the nine months ended September 30, 2008. The decrease in net income to
net loss for the nine months ended September 30, 2009 as compared to September 30, 2008 is
principally attributed to lower net earned premiums, somewhat offset by lower loss and loss
adjustment expenses and decreased selling, general and administrative expenses.
Reinsurance Segment
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Net premiums earned |
$ | 3,212 | $ | 4,027 | $ | 7,790 | $ | 25,136 | ||||||||
Investment income |
307 | 491 | 1,133 | 1,587 | ||||||||||||
Total revenues |
3,519 | 4,518 | 8,923 | 26,723 | ||||||||||||
Expenses |
||||||||||||||||
Losses and loss adjustment expenses |
1,328 | 1,889 | 5,238 | 12,046 | ||||||||||||
Policy acquisition costs |
824 | 995 | 2,155 | 6,470 | ||||||||||||
Selling, general and administrative expenses |
126 | 197 | 707 | 733 | ||||||||||||
Total Expenses |
2,278 | 3,081 | 8,100 | 19,249 | ||||||||||||
Income from continuing operations before
income taxes |
$ | 1,241 | $ | 1,437 | $ | 823 | $ | 7,474 | ||||||||
GAAP Combined Ratio |
||||||||||||||||
Loss and loss adjustment expense ratio(1) |
41 | % | 47 | % | 67 | % | 48 | % | ||||||||
Underwriting expense ratio(2) |
30 | % | 30 | % | 37 | % | 29 | % | ||||||||
GAAP combined ratio(3) |
71 | % | 77 | % | 104 | % | 77 | % | ||||||||
(1) | The loss and loss adjustment ratio is calculated by dividing losses and loss adjustment
expenses by net premiums earned. |
|
(2) | The underwriting expense ratio is calculated by dividing the total of policy acquisition
costs and selling, general and administrative expenses by net premiums earned. |
|
(3) | The GAAP combined ratio is the sum of the loss and loss adjustment expense ratio and the net
underwriting expense ratio. |
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Table of Contents
Reinsurance Segment Results of Operations Three Months Ended September 30, 2009 and 2008
Net Premiums Earned. Net premiums earned decreased $0.8 million, or 20%, to $3.2 million for
the three months ended September 30, 2009, from $4.0 million for the three months ended September
30, 2008. The decrease was primarily due to a $0.7 million reduction in net premiums ceded from
Majestic to Twin Bridges under Majestics excess quota share agreement. Reduced premiums under
management of the of the self-insured entities in California and excess policies underwritten in
Florida were offset by additional earned premiums in New York as a result of final payroll audits
of expired policies.
Net Investment Income. Net investment income decreased $0.2 million, or 37%, to $0.3 million
for the three months ended September 30, 2009, from $0.5 million for the three months ended
September 30, 2008. The decrease was primarily due to a lower yield on cash and cash equivalents
and funds provided to Majestic for unpaid ceded liabilities under reinsurance agreements for the
three months ended September 30, 2009 as compared to the same
period last year.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses decreased $0.6
million, or 30%, to $1.3 million for the three months ended September 30, 2009, from $1.9 million
for the three months ended September 30, 2008. The decrease was primarily due to lower assumed
losses on lower earned premiums as described above in Reinsurance Segment Results of Operations
Three Months Ended September 30, 2009 and 2008 Net Premiums Earned and a favorable development
of prior year estimated loss and loss adjustment expenses in the third quarter of 2009 as compared
to the third quarter of 2008.
During the three months ended September 30, 2009, Twin Bridges experienced $0.6 million of net
favorable loss development on prior accident years. Similar to the favorable development
experienced by Majestic on excess insurance policies, Twin Bridges experienced $0.9 million of
favorable development on risks assumed from Majestic under the excess quota share agreement. In
addition, favorable loss reserve development of $0.3 million resulted from favorable loss cost
trends arising out of Twin Bridges participation on Majestics excess of loss treaty. This
favorable development was somewhat offset by $0.6 million of unfavorable loss reserve development
on losses Twin Bridges assumed under the primary quota share agreement for California accident year
2008.
For the three months ended September 30, 2008, Twin Bridges recorded $0.4 million of favorable
loss reserve development. Since Twin Bridges had limited historical experience, losses on excess
policies were estimated based on industry data. Because of lower than industry average number of
reported claims and other relevant business factors, we considered it appropriate to establish
reserves at the actuarys best estimate of expected outcomes for assumed risks originating in
California, and at a higher, moderately conservative level for risks in other states. This
determination resulted in Twin Bridges recognizing favorable development related to prior years in
the three months ended September 30, 2008.
The losses and loss adjustment expense ratio for Twin Bridges for the three months ended
September 30, 2009 was 41% compared to 47% for the three months ended September 30, 2008. Excluding
prior year development, Twin Bridges losses and loss adjustment expense ratio was 59% for the three
months ended September 30, 2009 and 57% for the three months ended September 30, 2008.
Policy Acquisition Costs. Policy acquisition costs decreased $0.2 million, or 17%, to $0.8
million for the three months ended September 30, 2009, from $1.0 million for the three months ended
September 30, 2008. The decrease was primarily due to lower net earned premiums described above in
Reinsurance Segment Results of Operations Three Months Ended September 30, 2009 and 2008 Net
Premiums Earned. Policy acquisition costs, as a percentage of net earned premiums, were unchanged
for the three months ended September 30, 2009 as compared to September 30, 2008.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses
decreased $0.1 million, or 20%, to $0.2 million for the three months ended September 30, 2009, from
$0.3 million for the three months ended September 30, 2008. The decrease is primarily due to lower
professional fees related to actuary and audit expense. The underwriting expense ratios for our
reinsurance segment were 30% for the three months ended September 30, 2009 and for the three months
ended September 30, 2008.
Income from Continuing Operations before Income Taxes. Income from continuing operations
before income taxes attributable to the reinsurance segment decreased $0.2 million, or 14%, to $1.2
million for the three months ended September 30, 2009 as compared to the same period last year.
Decreases in net earned premiums and investment income were offset by decreases in losses and loss
adjustment expenses, policy acquisition costs and selling, general and administrative expenses.
Reinsurance Segment Results of Operations Nine Months Ended September 30, 2009 and 2008
Net Premiums Earned. Net premiums earned decreased $17.3 million, or 69%, to $7.8 million for
the nine months ended September 30, 2009, from $25.1 million for the nine months ended September
30, 2008. The decrease was primarily due to a $9.3 million decrease in net premiums ceded from
Majestic to Twin Bridges under the primary quota share agreement, a $6.3 million decrease in net
premiums ceded from Majestic to Twin Bridges under Majestics excess quota share agreement and a
$1.7 million decrease in net premiums ceded from Majestic to Twin Bridges under Majestics excess
of loss treaty for the nine months ended September 30, 2009 as compared to 2008.
Of the reduction in net premiums under the primary quota share agreement, $8.5 million is
attributable to a reduction in net premiums ceded from Majestic to Twin Bridges in the first
quarter of 2009. Under the primary quota share agreement, Twin Bridges assumed 5% of applicable
premiums, after excess reinsurance, from Majestic for the three months ended September 30, 2009 and
assumed 40% of applicable premiums, after excess reinsurance, from Majestic for the three months
ended September 30, 2008. The remainder of the decrease in net premiums under the primary quota
share is attributable lower policy premiums at Majestic as described above in Primary Insurance
Segment Results of Operations Nine Months Ended September 30, 2009 and 2008 Net Premiums
Earned.
In addition, net premiums earned under the excess quota share agreement were $6.3 million
lower for the nine months ended September 30, 2009 as compared to 2008. Of this reduction, $4.3
million is due to reduced premiums under management of the self-insured entities in California and
excess policies underwritten in Florida and $2.0 million is attributable to the 2008 first quarter
closure of the New York self-insured groups formerly managed by CRM.
Net premiums ceded from Majestic to Twin Bridges under Majestics excess of loss treaty also
decreased $1.7 million for the nine months ended September 30, 2009 as compared to 2008. This
decrease is attributable to a decrease in Twin Bridges participation when the treaty renewed July
1, 2008.
Net Investment Income. Net investment income decreased $0.5 million, or 29%, to $1.1 million
for the nine months ended September 30, 2009, from $1.6 million for the nine months ended September
30, 2008. The decrease was primarily due to a reduction in investment holdings as a result of a
distribution of capital to its parent company, somewhat offset by investment income earned on
higher balances of funds provided as collateral to Majestic for unpaid ceded liabilities for the
nine months ended September 30, 2009 as compared to September 30, 2008.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses decreased $6.8
million, or 57%, to $5.2 million for the nine months ended September 30, 2009, from $12.0 million
for the nine months ended September 30, 2008.
During the nine months ended September 30, 2009, Twin Bridges experienced $0.4 million of net
favorable development on prior accident years as compared to $3.8 million of favorable development
for the nine months ended September 30, 2008.
Similar to the favorable development experienced by Majestic on excess insurance policies,
Twin Bridges experienced $1.2 million of favorable development arising from the excess quota share
agreement. This favorable development was somewhat offset by $0.7 million of unfavorable loss
reserve development on losses Twin Bridges
assumed under Majestics primary quota share agreement covering California accident year 2008
and $0.1 million unfavorable development on losses Twin Bridges assumed under Majestics excess of
loss treaty.
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For the nine months ended September 30, 2008, Twin Bridges recognized $3.8 million of
favorable development on prior accident years. Since Twin Bridges had limited historical
experience, losses on excess policies were estimated based on industry data. Because of lower than
industry average number of reported claims and other relevant business factors, Twin Bridges loss
reserves were established at the actuarys best estimate of expected outcomes for assumed risks
originating in California, and at a higher, moderately conservative level for risks in other
states. This determination has resulted in Twin Bridges recognizing favorable development related
to prior years in the nine months ended September 30, 2008.
The losses and loss adjustment expense ratio for Twin Bridges for the nine months ended
September 30, 2009 was 67% compared to 48% for the nine months ended September 30, 2008. Excluding
prior year development, Twin Bridges losses and loss adjustment
expense ratio was 72% for the nine
months ended September 30, 2009 and 63% for the nine months ended September 30, 2008.
Policy Acquisition Costs. Policy acquisition costs decreased $4.3 million, or 67%, to $2.2
million for the nine months ended September 30, 2009, from $6.5 million for the nine months ended
September 30, 2008. The decrease was primarily due to lower net earned premiums described above in
Reinsurance Segment Results of Operations Nine Months Ended September 30, 2009 and 2008 Net
Premiums Earned. Policy acquisition costs, as a percentage of net earned premiums, were unchanged
for the nine months ended September 30, 2009 as compared to September 30, 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
remained relatively unchanged at $0.7 million. Selling, general and administrative expenses at
Twin Bridges are fixed in nature and not sensitive to changes in premium volume. The underwriting
expense ratios for our reinsurance segment were 37% and 29% for the nine months ended September 30,
2009 and 2008, respectively.
Income from Continuing Operations before Income Taxes. Income from continuing operations
before income taxes attributable to the reinsurance segment for the nine months ended September 30,
2009 was $0.8 million compared to $7.4 million for the nine months ended September 30, 2008. This
decrease was principally attributable to lower net earned premiums assumed from Majestic, somewhat
offset by related decreases in loss and loss adjustment expenses and policy acquisition costs.
Fee-Based Management Services Segment
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Management fees |
$ | 1,090 | $ | 2,010 | $ | 3,988 | $ | 6,307 | ||||||||
Investment expense |
(4 | ) | (2 | ) | (13 | ) | (5 | ) | ||||||||
Total revenues |
1,086 | 2,008 | 3,975 | 6,302 | ||||||||||||
Expenses |
||||||||||||||||
Fees paid to general agents and brokers |
412 | 534 | 1,598 | 3,473 | ||||||||||||
Selling, general and administrative expenses |
689 | 968 | 2,445 | 2,702 | ||||||||||||
Total Expenses |
1,101 | 1,502 | 4,043 | 6,175 | ||||||||||||
(Loss) income from continuing operations
before income taxes |
$ | (15 | ) | $ | 506 | $ | (68 | ) | $ | 127 | ||||||
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Fee-Based Management Services Segment Results of Operations Three Months Ended September 30,
2009 and 2008
Revenues from Fee-Based Management Services. Revenues from fee-based management services
decreased $0.9 million, or 46%, to $1.1 million for the three months ended September 30, 2009, from
$2.0 million for the three months ended September 30, 2008. The decrease in revenues was
principally attributable to a reduction in the number of self-insured groups under management,
lower payrolls of the self-insured groups currently under management and lower contribution rates
being charged to the members. Approximately 65%, 19% and 9% of the decrease was due to lower
revenues form our self-insured groups covering contracting, auto dealer and healthcare industries,
respectively.
Effective March 1, 2009 the Preferred Auto Dealers Self-Insured Program voluntarily terminated
active operations. On October 13, 2009, the Contractors Access Program (CAP) voted to
voluntarily terminate active operations on January 1, 2010. CRM CA will be working with the State
of California and the self-insured groups to terminate and conclude the programs in accordance with
State regulations.
Fees Paid to General Agents and Brokers. Fees paid to general agents and brokers decreased
$0.1 million, or 23%, to $0.4 million for the three months ending September 30, 2009 from $0.5
million for the three months ended September 30, 2008. This decrease is primarily due to the
reduction of related revenues from fee-based management services described above in Fee-Based
Management Services Segment Results of Operations Three Months Ended September 30, 2009 and 2008
Revenues from Fee-Based Management Services.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
decreased $0.3 million, or 29%, to $0.7 million for the three months ended September 30, 2009, from
$1.0 million for the three months ended September 30, 2008. The decrease was primarily due to
decreased payroll and related expenses and lower sales, advertising and marketing expenses and
professional fees.
Loss from Continuing Operations before Income Taxes. Results of operations for the fee-based
management services segment before income taxes were break even for the three months ended
September 30, 2009 as compared in income from continuing operations before income taxes of $0.5
million for the three months ended September 30, 2008. This was primarily due to a decrease in
selling general and administrative expenses and fees paid to general agents and brokers, somewhat
offset by decreased fee-based management services revenues.
Fee-Based Management Services Segment Results of Operations Nine Months Ended September 30, 2009
and 2008
Revenues from Fee-Based Management Services. Revenues from fee-based management services
decreased $2.3 million, or 37%, to $4.0 million for the nine months ended September 30, 2009, from
$6.3 million for the nine months ended September 30, 2008. The decrease in revenues was principally
attributable to a reduction in the number of self-insured groups under management, lower payrolls
of the self-insured groups formerly and currently under management and lower contribution rates
being charged to the members. Approximately 46%, 25% and 21% of the decrease was due to lower
revenues from our self-insured groups covering contracting, auto dealer and healthcare industries,
respectively.
Fees Paid to General Agents and Brokers. Fees paid to general agents and brokers decreased
$1.9 million, or 54%, to $1.6 million for the nine months ending September 30, 2009 from $3.5
million for the nine months ended September 30, 2008. This decrease is primarily due to $1.6
million of expense being recorded in fees paid to general agents and brokers during the second
quarter of 2008 which was related to the settlement of the Cornerstone litigation. For a further
discussion of the Cornerstone litigation, see Notes to Consolidated Financial Statements Note
20. Contingencies in Item 8 of our Form 10-K for the fiscal year ended December 31, 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
decreased $0.3 million, or 16%, to $2.4 million for the nine months ended September 30, 2009, from
$2.7 million for the nine months ended September 30, 2008. The decrease was primarily due to
decreased payroll and related expenses and lower sales, advertising and marketing expenses.
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Loss from Continuing Operations before Income Taxes. Loss from continuing operations for the
fee-based management services segment before income taxes was $0.1 million for the nine months
ended September 30, 2009, as compared in income from continuing operations before income taxes of
$0.1 million for the three months ended September 30, 2008. Decreases in fees paid to general
agents and brokers and selling, general and administrative expenses were offset by decreased
fee-based management services revenues.
Corporate and Other Segment
Corporate and Other Segment Results of Operations Three Months Ended September 30, 2009 and 2008
Net Investment Income. Net investment income of approximately $0.1 million remained relatively
unchanged for the three months ended September 30, 2009, as compared to the three months ended
September 30, 2008.
Interest Expense. Interest expense remained unchanged at $0.9 million for the three months
ended September 30, 2009, as compared to the three months ended September 30, 2008.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased by $0.8 million, or 40%, to $2.6 million for the three months ended September 30, 2009,
from $1.9 million for the three months ended September 30, 2008. The increase was principally due
to a $1.9 million reduction in allocated general corporate overhead expenses to the primary
insurance segment. General corporate overhead expenses allocated to the primary insurance segment
in the third quarter of 2009 were reduced as Majestic paid a quarterly dividend to CRM USA in that
same period. Majestic did not pay dividends for the three months ended September 30, 2008. This
increase was somewhat offset by lower payroll and related expenses associated with our former
co-chief executive officers, and reduced professional fees for the three months ended September 30,
2009 as compared to the same period last year.
Corporate and Other Segment Results of Operations Nine Months Ended September 30, 2009 and 2008
Net Investment Income. Net investment income decreased $0.1 million for the nine months ended
September 30, 2009, as compared to the nine months ended September 30, 2008. This decrease was
primarily due to a reduction in investment holdings for the nine months ended September 30, 2009 as
compared to 2008.
Interest Expense. Interest expense decreased $0.1 million, or 5%, to $2.7 million for the nine
months ended September 30, 2009, as compared to $2.8 million for the nine months ended September
30, 2008. This decrease is attributable to a lower floating interest rate on Embarcaderos senior
debt obligations.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
increased $7.6 million to $12.3 million for the nine months ended September 30, 2009, from $4.7
million for the nine months ended September 30, 2008.
The increase was primarily due to $5.3 million of severance expense related to the March 2009
resignation of our former chief executive officer and the acceleration of the recognition of
severance payments related to the resignation of our former co-chief executive officer.
Previously, we recognized severance expense for our former co-chief executive officer, who resigned
in December 2006, over the term of his non-complete/non-solicitation covenant, which expires
December 2010. Due to our decreased presence in the self-insured group market and the current
economic and regulatory environment, we determined that there is not a significant ongoing economic
benefit related to our former co-chief executive officers non-compete/non-solicitation covenant.
Accordingly, we recorded the severance expense related to our former co-chief executive officers in
the first quarter of 2009.
In addition, selling, general and administrative expenses increased for the nine months ended
September 30, 2009 as compared to 2008 due to a reduction in allocated general corporate overhead
expenses from the corporate and other segment to the primary insurance segment. These general
corporate overhead expense allocations were reduced by $2.2 million in the third quarter of 2009 as
described above in above in Corporate and Other Segment Results of Operations Three Months Ended
September 30, 2009 and 2008 Selling, General and Administrative Expenses.
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Table of Contents
Investment Portfolio
We invest the funds made available by our insurance and reinsurance subsidiaries capital and
the net cash flows from operations, with the objective to earn income and realized gains on
investments. At September 30, 2009, our investment portfolio, including short-term investments and
cash and cash equivalents, totaled $356 million, as compared to $345 million at December 31, 2008.
The following table shows the fair market values of various categories of our available-for-sale
investment portfolio, the percentage of the total market value of our invested assets represented
by each category and the tax equivalent yield to maturity based on the fair market value of each
category of invested assets as of the dates indicated:
As of September 30, 2009 | As of December 31, 2008 | |||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
Fair | of | Fair | of | |||||||||||||||||||||
Description of Securities | Value | Total | Yield | Value | Total | Yield | ||||||||||||||||||
U.S.
Treasury and government sponsored agency securities |
$ | 84,849 | 27 | % | 2.9 | % | $ | 93,768 | 30 | % | 3.5 | % | ||||||||||||
Obligations of states and political subdivisions |
85,554 | 28 | % | 4.8 | % | 104,280 | 33 | % | 5.0 | % | ||||||||||||||
Corporate and other obligations |
139,051 | 45 | % | 4.8 | % | 115,574 | 37 | % | 5.0 | % | ||||||||||||||
Total investments, available-for-sale |
$ | 309,454 | 100 | % | 4.3 | % | $ | 313,622 | 100 | % | 4.5 | % | ||||||||||||
The following table shows the ratings distribution of our fixed-income portfolio by Standard
and Poors rating as a percentage of total market value as of the dates indicated:
As of September 30, | ||||||||
Rating | 2009 | |||||||
(Dollars in thousands) | ||||||||
AAA |
$ | 157,279 | 51 | % | ||||
AA |
81,079 | 26 | % | |||||
A |
64,597 | 21 | % | |||||
BBB |
5,861 | 2 | % | |||||
Other |
638 | 0 | % | |||||
Total fixed-maturity securities |
$ | 309,454 | 100 | % | ||||
We regularly evaluate our investment portfolio to identify other-than-temporary impairments in
the fair values of the securities held in our investment portfolio. When, in the opinion of
management, a decline in the fair value of an investment below its cost or amortized cost is
considered to be other-than-temporary, such investment is written-down to its fair value. If we do
not intend or are unable to hold the other-than-temporarily impaired investment, the amount
written-down is recorded in earnings as a realized loss on investments. If we do not have the
intent to sell the security, and it is more likely than not that it will not be required to be sold
before recovery of its cost basis, we separate the other-than-temporary impairment into two
components credit losses and losses attributed to other factors. The amount of the
other-than-temporary impairment related to credit losses is recorded in earnings as a realized loss
on investments. The amount of the other-than-temporary impairment related to other factors is
recorded in other comprehensive loss.
We consider various factors in determining whether a decline in the fair value of a security
is other-than-temporary, including:
| how long and by how much the fair value of the security has been below its cost; |
| the financial condition and near-term prospects of the issuer of the security,
including any specific events that may affect its operations or earnings; |
| our intent not to sell, or more likely than not be required to sell the security for
a sufficient time period for it to recover its value; |
||
| any downgrades of the security by a rating agency; and |
| nonpayment of scheduled interest payments. |
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In order to maximize after tax yields of the investment portfolio, we began liquidating our
municipal bond portfolio in the second quarter of 2009. Proceeds from the liquidation are being
reinvested in taxable fixed-maturity securities. As a result, we recorded gross realized gains of
$1.4 million for the nine months ended September 30, 2009. Realized losses included $0.1 million of
impairment charges related to municipal securities that were determined to be
other-than-temporarily impaired as the Company intent is to sell its remaining municipal bond
securities.
The fair value guidance creates a common definition of fair value, establishes a hierarchy for
determining fair value that emphasizes the use of observable market data whenever available and
requires expanded disclosures as described in more detail in Note 5 of the Notes to our
Consolidated Financial Statements under Item 1. We outsource investment accounting services for our
available-for-sale investment portfolio to a third party. Through this third party, we use
nationally recognized pricing services to estimate fair value measurements for our investments.
These pricing services include FT Interactive Data, Hub Data, J.J. Kenny, Standard & Poors, Reuters
and the Bloomberg Financial Market Services. The pricing services use market quotations for
securities that have quoted prices in active markets. When quoted prices are unavailable, the
pricing services use significant other observable inputs that are more subjective, such as pricing
models or other financial analytical methods. To validate the techniques or models used by the
pricing services, we compare the fair value estimates to our perception of the current market and
will challenge any prices deemed not to be representative of fair value.
Liquidity and Capital Resources
We are a holding company and our operating subsidiaries are the primary source of funds for
our operations. We have two primary concerns in managing our liquidity. First, we need to ensure
that there is adequate cash available in the insurance subsidiaries to pay claims. Second, we need
to ensure that our holding companies, CRM Holdings, CRM USA Holdings and Embarcadero, which have no
operating revenues, all have adequate cash to service their debt obligations and to pay income
taxes and other expenses. The management of capital resources is primarily concerned with ensuring
that there is adequate capital to operate our insurance business within the criteria imposed by
regulatory requirements and with the criteria used by rating agencies to assign financial strength
ratings.
Liquidity
Liquidity is a measure of a companys ability to generate sufficient cash flows to meet the
short- and long-term cash requirements of its business operations. The liquidity requirements of
our business have been met primarily by funds generated from operations, asset maturities and
income received on investments. We believe that our future liquidity needs will be adequately met
from these sources.
Majestic and Twin Bridges, our insurance and reinsurance subsidiaries, generally create
liquidity because insurance and reinsurance premiums are collected prior to disbursements for
claims which may take place many years after the collection of premiums. Collected premiums may be
invested, prior to their use in such disbursements, and investment income provides additional cash
receipts. In periods in which disbursements for claims and benefits, current policy acquisition
costs and current operating and other expenses exceed operating cash receipts, cash flow is
negative. Such negative cash flow is offset by cash flow from investments, principally short-term
investments and maturities of longer-term investments. The exact timing of the payment of claims
and benefits cannot be predicted with certainty.
Our insurance subsidiaries, Majestic and Twin Bridges, maintain portfolios of invested assets
with varying maturities and a substantial amount of short-term investments to provide adequate cash
for the payment of claims. At September 30, 2009, short-term investments and fixed maturity
investments maturing within two years amounted to $64.1 million and $2.5 million in Majestic and
Twin Bridges, respectively. These securities provide adequate sources of liquidity for the expected
payment of our loss reserves in the near future. We do not expect to sell securities to pay our
policy liabilities as they come due.
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CRM USA Holdings had access to a revolving credit facility with KeyBank under which CRM USA
Holdings was entitled to borrow up to $2 million. KeyBank terminated the revolving credit facility
on March 18, 2009. We have not replaced this revolving credit facility but may seek to do so in the
future.
Consolidated Cash Flows. Net cash used in operating activities was $10.3 million for the nine
months ended September 30, 2009 as compared to net cash provided by operating activities of $40.3
million for the nine months ended September 30, 2008. The decrease in cash was primarily due to
decreases in consolidated net income and increases in our reinsurance recoverable and reinsurance
payable, a result of the external quota share agreements.
Net cash provided by investing activities was $16.8 million for the nine months ended
September 30, 2009 as compared to net cash used in investing activities of $37.1 million for the
nine months ended September 30, 2008. The increase in cash was primarily due to proceeds received
from maturities of available-for-sale investments, somewhat offset by purchases of
available-for-sale investments.
Net cash provided by financing activities increased $1.0 million to $1.1 million for the nine
months ended September 30, 2009, as compared to $0.1 million for the nine months ended September
30, 2008. The increase was primarily attributable to an increase in restricted cash and cash
equivalents on deposit with various regulatory agencies as required by law.
Capital Resources
In our insurance and reinsurance subsidiaries, Majestic and Twin Bridges, cash and liquid
investments are required to pay claims and expenses, but the amount of capital in our insurance and
reinsurance subsidiaries and our financial strength ratings influence how much premium we can
write.
Majestic has been assigned an insurer financial strength rating of A- (Excellent) by A.M.
Best. Twin Bridges has been assigned an insurer financial strength rating of B++ (Good). A.M.
Best assigned a negative outlook to the ratings. A.M. Best reaffirmed these ratings on August 10,
2009. Our competitive position is partly determined by these financial strength ratings and
therefore we could be affected by a reduction in these ratings. These ratings reflect A.M. Bests
opinion of our financial strength, operating performance and ability to meet obligations. If an
independent rating agency downgrades or withdraws either of our ratings, we could be severely
limited or prevented from writing any new insurance or reinsurance contracts, which would
significantly and negatively affect our business. Insurer financial strength ratings are based upon
factors relevant to policyholders and are not directed toward the protection of investors.
In securing its A- rating from A.M. Best, Majestic purchased quota share reinsurance
coverage and ceded premiums and losses under the agreements as described above in Reinsurance
Coverage and Results of Operations Primary Insurance Segment Primary Insurance Segment
Results of Operations Nine Months Ended September 30, 2009 and 2008. Majestics purchase of quota
share reinsurance was based, in part, on A.M. Bests concern over limited capital being readily
available. Under quota share reinsurance, the reinsurer accepts a pro rata share of the insurers,
or ceding companys, losses and an equal share of the applicable premiums. The reinsurer also pays
the ceding company a fee, known as a ceding commission, which is usually a percentage of the
premiums ceded. Quota share reinsurance allows the ceding company to increase the amount of
business it could otherwise write by sharing the risks with the reinsurer. The effect of the quota
share reinsurance on the ceding company is similar to increasing its capital which is the principal
constraint on the amount of business an insurance company can prudently write.
We are currently exploring ways to enhance our capital position so that we can reduce or
completely eliminate the need for quota share reinsurance arrangements without jeopardizing our
financial strength ratings from A.M. Best. Our explorations are at the preliminary stage and we
cannot determine whether or when additional capital will be available to us or what the amount,
form or cost of the capital will be. If capital is available, it could involve substantial
dilution to existing stockholders. Furthermore, we believe that our ability to raise additional
capital will be adversely affected until there is greater clarity with respect to the pending
regulatory matters and litigation as described above in Part 1. Financial Information Item 1.
Financial Statements. Note 12 Contingencies. If we cannot maintain or obtain adequate
capital to manage our business strategy, our business, results of operations and financial
condition would be materially and adversely affected.
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Our common shares are currently traded on the Nasdaq Global Select Market under the symbol
CRMH. Our common shares could be delisted from the Nasdaq Global Select Market if we fail to meet
any of the continued listing standards of the Nasdaq Global Select Market. These continued listing
standards include specifically enumerated criteria, including a $1.00 minimum closing bid price. On
November 10, 2009, we received a Nasdaq Staff Deficiency Letter indicating that we fail to comply
with the minimum bid price requirement for continued listing on the Nasdaq Global Select Market as
set forth in Marketplace Rule 5450(a)(1). For additional information and the risks associated with
the Nasdaqs notice, see Item 1A. Risk Factors Our common shares could be delisted from the
Nasdaq Global Select Market if we fail to continue to meet all applicable Nasdaq Global Select
Market requirements below.
Contractual Obligations
All of our outstanding financing obligations are included in the Consolidated Financial
Statements and accompanying notes contained in Item 1. The table below sets forth the amounts of
our contractual obligations, including interest payable, at September 30, 2009:
Payment Due by Period | ||||||||||||||||||||
Less than | More Than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Contractual Obligations |
$ | 9,152 | $ | 5,377 | $ | 3,375 | $ | 400 | $ | | ||||||||||
Long Term Debt Obligations(1) |
137,705 | 3,484 | 6,968 | 6,968 | 120,285 | |||||||||||||||
Operating Lease Obligations |
29,461 | 4,049 | 5,971 | 4,911 | 14,530 | |||||||||||||||
Retrospective Premiums(2) |
306 | 306 | | | | |||||||||||||||
Reinstatement Premiums |
3,107 | | | | 3,107 | |||||||||||||||
Gross Loss and Loss Adjustment
Reserves(3) |
284,992 | 59,915 | 85,063 | 47,513 | 92,501 | |||||||||||||||
Total Contractual Obligations |
$ | 464,723 | $ | 73,131 | $ | 101,377 | $ | 59,792 | $ | 230,423 | ||||||||||
(1) | This amount includes interest payable on our long-term debt obligations. For a further
discussion of the applicable interest rates, see Liquidity and Capital Resources Capital
Resources in Item 7 of our Form 10-K for the fiscal year ended December 31, 2008. |
|
(2) | Retrospective premiums are an estimate of the amounts that would be paid to policyholders if
losses incurred under these policies perform as currently anticipated. |
|
(3) | Our gross loss reserves exclude $3.9 million of GAAP fair value purchase accounting
adjustments. Our loss reserves do not have contractual maturity dates and the exact timing of
the payment of claims cannot be predicted with certainty. However, based upon historical
payment patterns, we have included an estimate of when we expect our loss reserves (without
the benefit of any reinsurance recoveries) to be paid. As more fully discussed in Item 1. of
our Form 10-K for the fiscal year ended December 31, 2008 under the headings Business
Primary Insurance Segment Reserves for Losses and Loss Adjustment Expenses and Business
Reinsurance Segment Reserves for Losses and Loss Adjustment Expenses, the estimation of
losses reserves is based on various complex and subjective judgments. Actual losses paid may
differ, perhaps significantly, from the reserve estimates reflected in our financial
statements. Similarly, the timing of payment of our estimated losses and benefits is not fixed
and there may be significant changes in actual payment activity. The assumptions used in
estimating the likely payments due by period are based on our historical claims payment
experience and industry payment patterns, but due to the inherent uncertainty in the process
of estimating the timing of such payments, there is a risk that the amounts paid in any such
period can be significantly different than the amounts disclosed above. |
Off-Balance Sheet Transactions
Other than the VIE described in Part 1. Financial Information Item 1. Financial Statements
Note 11. Variable Interest Entity, we have no off-balance sheet arrangements or transactions
with unconsolidated, special purpose entities.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in the Companys market risk components since December 31,
2008.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
For the quarter ended September 30, 2009, we conducted an evaluation, under the supervision
and with the participation of the Companys Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period
covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are effective (i) to ensure that
information required to be disclosed in reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission rules and forms; and (ii) to ensure that information
required to be disclosed in the reports that the Company files or submits under the Exchange Act is
accumulated and communicated to our management, including the Companys Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
See Regulatory Matters and Pending Litigation in Part 1. Financial Information Item 1.
Financial Statements. Note
12 Contingencies above, which is incorporated by reference in
this Item 1, for litigation and regulatory disclosure.
ITEM 1A. | RISK FACTORS |
You should carefully consider the risks described in our Annual Report on Form 10-K for the
year ended December 31, 2008, and the risks described in other filings with the SEC, together with
all of the other information included in this quarterly report. The risks and uncertainties are not
the only ones facing our company. If any of the risks actually occurs, our business, financial
condition or operating results could be harmed. Any of the risks described 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, as
discussed above under the heading Part I. Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
The following risk factor is intended to update and supplement, as applicable, the risk
factors contained in our Annual Report on Form 10-K for the year ended December 31, 2008, to
reflect material developments that occurred during the quarter ended September 30, 2009:
Risks Related to Our Common Shares
Our common shares could be delisted from the Nasdaq Global Select Market if we fail to continue to
meet all applicable Nasdaq Global Select Market requirements.
Our common shares are currently traded on the Nasdaq Global Select Market under the symbol
CRMH. Our common shares could be delisted from the Nasdaq Global Select Market if we fail to meet
any of the continued listing standards of the Nasdaq Global Select Market. These continued listing
standards include specifically enumerated criteria, including a $1.00 minimum closing bid price.
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On November 10, 2009, we received a Nasdaq Staff Deficiency Letter indicating that we fail to
comply with the minimum bid price requirement for continued listing on the Nasdaq Global Select
Market as set forth in Marketplace Rule 5450(a)(1). The letter gives us notice that the bid price
of our common shares has closed under $1.00 for the last 30 consecutive business days. The
notification does not result in the immediate delisting of our common shares from the Nasdaq Global
Select Market.
In accordance with Marketplace Rule 5810(c)(3)(A), we have until May 10, 2010 to regain
compliance with the minimum closing bid price requirement. To regain compliance, the closing bid
price of our common shares must meet or exceed $1.00 per share for at least ten consecutive
business days. The letter states that the Nasdaq staff will provide written notification that we
have achieved compliance with Rule 5450(a)(1) if at any time before May 10, 2010, the bid price of
our common shares closes at $1.00 per share or more for a minimum of 10 consecutive business days.
If we do not regain compliance by May 10, 2010, Nasdaq will provide written notification to us
that our common shares will be delisted. At that time, we may appeal Nasdaqs delisting
determination to a Nasdaq Listing Qualifications Panel. Alternatively, we may apply to transfer the
listing of our common shares to the Nasdaq Capital Market if we satisfy all criteria for initial
listing on the Nasdaq Capital Market, other than compliance with the minimum bid price requirement.
If such application to the Nasdaq Capital Market is approved, then we may be eligible for an
additional grace period. Our common shares could also be traded in the over-the-counter market on
an electronic bulletin board established for unlisted securities, such as the Pink Sheets or the
OTC Bulletin Board.
Any delisting could adversely affect the market price of, and liquidity of the trading market
for, our common shares, our ability to obtain financing or raise capital, and could result in the
loss of confidence by investors, market makers, reinsurers, rating agencies and employees.
ITEM 6. | EXHIBITS |
Exhibit | ||||
Number | Description | |||
10.1 | Employment Agreement, dated as of May 5, 2009, between the Company and James J.
Scardino. Incorporated by reference to Exhibit 10.1 to the amended Current Report on
Form 8-K/A filed on September 4, 2009. |
|||
*31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act |
|||
*31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act |
|||
**32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
**32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith |
|
** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements 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.
CRM Holdings, Ltd. | ||||
/s/ James J. Scardino
|
||||
Chief Executive Officer |
Dated: November 12, 2009
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